Formation Metals (FCO.TO) has released the results from an updated PEA on its Cobalt project in Idaho, USA. The initial capital expenditures are almost $150M, but as the project would produce almost 3 million pounds of cobalt per year (on average) at a cash cost of less than $5/lbs, it has its merits despite a 4 year payback period.
The after-tax NPV8.5% is almost $115M based on a cobalt price of $14.5/lbs and a cobalt sulfate price of $19.5/lbs. Using a 6.5% discount rate (which is acceptable for a mining-friendly region), the after-tax NPV would increase to almost $140M.
The real potential at the Idaho Cobalt project lies in the sunk costs and the leverage to the cobalt price. The company had already spent $65M on the project’s mine development and processing plant before the project was placed on care and maintenance in 2013, and these costs have NOT been deducted yet from the initial capex estimate of $147M. This means that if half of the amount previously spent on developing the asset could be taken into consideration, the remaining capex drops to $115M, and the after-tax NP6.5% would increase to $175M. On top of that, Formation Metals offers an interesting leverage on the cobalt price. For every $2.5/lbs increase in the cobalt price, the pre-tax cash flow increases by $7.5M.
But let’s not forget Formation has tried to build the project before and had to place it on care and maintenance. This updated PEA looks better and definitely more robust, and as there’s a new management team in place, we are willing to give them the benefit of the doubt.
> Click here to go to Formation’s new website
Disclosure: The author has no position in Formation Metals. Please see our disclaimer for current positions.
