Fabled Silver Gold Corp T.FCO

Jennings Capital issues buy recommendation

[Einherjar]

Initiating Coverage:  On the Cusp of Becoming the Only Producer of High-Purity Cobalt in the U.S.A.

• § Summary – We are initiating coverage on Formation Metals Inc., a Canadian junior mineral exploration and development company, whose key assets include a 100%-owned cobalt property in Idaho, U.S.A., and a 100%-owned hydrometallurgical complex situated  approximately 200 miles from the cobalt mine site.  The mine is fully permitted and fully financed (subject to obtaining a letter of credit to raise US$77 million in stimulus bonds).  The first of three construction phases is completed, and production is targeted to commence in Q2/12.
• § Cobalt is classified as a critical metal by the European Union and deemed a strategic metal by the United States Government. High purity cobalt is vital to the aerospace industry and used in the manufacturing of rechargeable batteries and as catalysts for the petroleum and chemical industries.  Approximately 76,000 tons of refined cobalt was produced globally in 2010, representing an estimated market value of US$3 billion.  Two grades of cobalt have quoted prices: 99.3% and 99.8%.  High purity cobalt exceeds 99.99%, with extremely low impurities, and is very difficult to produce.
• § Formation’s Idaho Cobalt Project has four key advantages over existing operations, which also act as substantial barriers for new entrants:
  • Low Cost Producer: Our model indicates that Formation’s average cash cost to produce high-purity cobalt is approximately US$6.00 per pound net of by-product credits.
  • Location: Formation will be the only cobalt producer in the U.S.A. and one of a handful of high-purity, superalloy grade cobalt producers in the world.  The U.S.A. accounts for approximately 60% of global high-purity demand.
  • Ownership of an Existing, Fully Permitted Hydrometallurgical Facility: Formation purchased its facility for US$1.2 million, and retrofitting is estimated to cost US$2 million versus the replacement cost of approximately US$75 million.  Adding a new building and equipment for cobalt purification would cost approximately US$50 million.
  • Cobalt Deposit Containing Very Few Impurities: The property is a unique, primary cobalt deposit with few impurities.
• § Valuation – We are initiating coverage on Formation Metals Inc. with a SPECULATIVE BUY recommendation and 12-month target price of C$2.60. Our target price is based on an equal blend of: (1) NAVPS of C$2.35; and (2) a 6.0x multiple applied to our 2013 CFPS estimate of US
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