Ned Goodman’s rebellion won’t take Formation

VANCOUVER — Shareholders and a Supreme Court judge stymied an attempt by 17% shareholder Dundee (DC-T) to install new management and block an asset sale at Formation Metals (FCO-T), after a disagreement over how the cobalt-focused company should proceed in the face of weak cobalt prices and challenging financing conditions. 

Formation has been pushing its Idaho Cobalt project towards production for years. In 2009 the company was given a green light to build a mine at the site, which is 45 km west of Salmon in east-central Idaho. Plans called for concentrate from the mine to be processed at Formation’s nearby copper and precious metals refinery, known as the Big Creek hydrometallurgical complex. 

Formation bought the refinery in 2004 and had pulled profits from it by processing third-party concentrates on contract. Once it started building its Idaho Cobalt mine, Formation expected to expand the refinery to accommodate cobalt concentrate. However, low cobalt prices kept deferring the start of mine construction. In addition, the loss of a primary customer recently rendered the refinery uneconomic. 

That was how Formation started 2013: with a money-losing refinery and a construction-ready cobalt project, but no money to build it. It was not for lack of effort that Formation needed more development capital. Instead, the main culprit was the price of cobalt. 

In mid-2008 the metal fetched more than US$45 per lb. However, by early 2009 the global recession had reduced that price to just $14 per lb. A year-long recovery moved cobalt back above US$20 per lb. in 2010, but by early 2013 the specialty metal was again worth just $13. 

The mine planned for Idaho Cobalt should be able to produce a pound of the metal for just US$7.73, so the project remained theoretically viable throughout. However, Formation needed development capital, and that kind of pricing uncertainty makes investors uneasy. 

Formation spent several years trying to arrange mine financing, with mixed results. As of late 2012 Formation seemed to be optimistic it would secure the needed funds, because it started earthworks and other early stage construction activities at the site. The company expected to be in production by early 2014.

In May, everything changed. Just when the market expected underground development to begin, Formation deferred any further work at Idaho Cobalt. It said weak cobalt prices and risk-adverse financiers had made “financing costs unattractive for further development.” 

In the same breath, CEO Mari-Ann Green said Formation would shift its focus to its Big Creek refinery, where it would work to increase cash flows. Though the deferment of construction at Idaho Cobalt was significant, neither bit of news drew much attention.

The next announcement, though, drew a lot of attention from an unhappy investor. A month after deferring work at Idaho Cobalt, Formation announced a deal to sell the Big Creek refinery for $9 million. 

Green described it as a strategic decision: the $9 million would enable Formation to erase its debts and provide cash to seek other opportunities. As for Idaho Cobalt, Formation said internal studies concluded a stand-alone facility would be better suited to process concentrate from the mine than the planned retrofit of Big Creek. 

Formation said selling the refinery was not expected to have a significant impact on the future development of Idaho Cobalt. Formation also said it tried to secure new business for the refinery but determined it would have to spend more than $10 million on upgrades — money the company did not have. 

Four days later the backlash began. Dundee challenged the decision to sell Big Creek, calling the deal “improvident and not in the best interest of Formation and its shareholders.”  Dundee filed a petition in the B.C. Supreme Court seeking determination that the refinery deal required shareholder approval, since it would represent a sale of substantively all of the company’s significant assets. 

Dundee publicly withdrew its support for Green and Formation president Scott Bending. A few days later Dundee nominated two outside candidates to replace Green and Bending on the board at the company’s upcoming AGM.

It’s no surprise Dundee is upset about its investment in Formation: Over 18 months the firm spent $18.7 million to acquire 15.5 million Formation shares, at an average cost of $1.20 per share. Today shares are worth just 9.5¢ and the company’s market capitalization of $8.6 million represents less than half of what Dundee alone invested. 

Dundee argued that Formation’s management failed to deliver on its promises to build a mine at Idaho Cobalt for US$138.7 million, a sum that Dundee says Formation had already secured in mid-2011. Dundee said Formation promised that, once the mine was built, the company would be solid economically.

“Current management represented that completion of the mine, mill and refinery would make Formation Metals the leading primary producer of cobalt in North America, supplying a growing industry with ever-increasing demand for the metal,” said Ned Goodman, Dundee’s president and CEO. “To date the project is neither complete nor producing, the industry is not growing and cobalt demand has declined. Furthermore, management has now discontinued construction of the cobalt mine and has purported to sell the refinery [without which the company might not be able to operate the mine] at a price we believe is imprudent and without shareholder approval.”

Dundee also accused Formation management of enriching themselves at the expense of shareholders through excessive compensation and of establishing contracts with “extremely generous termination and change of control benefits,” both of which Dundee said indicate a “disturbing lack of concern for shareholder interests.”

Goodman said the dissident director candidates would cancel the refinery deal, undertake a review of the management structure of the company and complete a strategic review of Formation’s options with respect to Idaho Cobalt.

Formation’s management was having none of it. First off, Formation’s vice-president of corporate communications, Rick Honsinger, said the idea of a strategic review is nothing new.

“Of course we have [already done that],” Honsinger said. “And the sale of the refinery was actually one of the moves that came out of our strategic review and one that we’re making to benefit shareholders.”

Formation said Dundee’s claims are without merit. 

“Dundee, in what appears to be a spiteful campaign, is attempting to blame management for the decline in world commodity pricing, the world financial crisis and its devastating effect across the entire mining sector,” Green said in a release. “Dundee’s assertions are riddled with contradictions and false claims yet they want to replace Formation’s strategic plan with a ‘we’ll figure it out — trust us’ strategy.”

Formation said the refinery is a non-core asset and therefore the sale does not require shareholder approval. Moreover, the company said Dundee’s plan would have removed Formation’s two most experienced executives from the board and replaced them with questionable characters. 

One of the Dundee nominees was Paul Carroll, who Formation pointed out was on the board of Hollinger when Conrad Black and others were removed as directors. According to Formation, Carroll and the other
remaining directors awarded themselves compensation packages so generous that they attracted media attention and were later challenged in court for being excessive and unwarranted. 

The other Dundee nominee was David Christie, who Formation argues has no prior experience as a public company director.

“What I can tell you is that we firmly and strongly believe that management has the best interests of its shareholders at heart,” Honsinger says. “We’ve been with this a long time, we’re all retail shareholders ourselves, and we want to see this through to the end. And we are just unsure of the other nominees’ intentions.”

On June 20 Supreme Court Justice Arne Silverman dismissed Dundee’s petition to block the refinery deal. The next day at Formation’s AGM shareholders re-elected Green and Bending, rejecting Dundee’s dissident nominees.