June 17, 2013

Dear Fellow Shareholder:

As you know, Formation Metals Inc. (“Formation”) is under attack by a dissident shareholder, Dundee Corporation (“Dundee”). At the upcoming meeting on Friday June 21, 2013 we ask for your support to re-elect the current directors for the ensuing year. Your board and management team have a clear and realistic vision that we believe puts Formation in the best position to create long-term shareholder value.

Dundee, in what seems 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. Your highly qualified and experienced board and management team have been through tough times before and have successfully managed economic turnarounds — and are doing the same now. However, Dundee is attempting to halt the execution of our strategy, remove the two most experienced executives from the board and replace them with candidates who lack the credentials or the track record to guide Formation through this difficult time. 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. They have no plan at all, outside of preventing a non-dilutive injection of significant cash to the treasury by attempting to block the sale of a money losing operation, while considering permanently divesting your company of its core asset, the Idaho Cobalt Project.

Formation’s Track Record With Market Challenges

All junior mining companies face similar challenges in finding a prospect, managing it through exploration, development, scoping, pre-feasibility, bankable feasibility, permitting, construction and finally into production. Mining is a long lead-time business and permitting alone can take 7-10 years. As a result, all junior mining companies are capital intensive and operate at a loss until they reach production. Along the way, we all are very much exposed to world demand, world commodity prices and the availability and cost of raising the necessary capital. Formation is no different in facing these fundamental challenges. We have shown tremendous achievements in light of these challenges. We have the absolute right asset — the only primary cobalt deposit in the US with the US representing 60% of the demand for high purity cobalt. We have taken the company from a grass roots prospect through to construction, which is now fundamentally prepared for the exciting pre-production phase of underground development.

Your current management has a track record for weathering storms with strong recoveries; for example, in October 2008 the fall of Lehman Brothers resulted in our high yield note debt financing having no market at the same time as our cobalt project permit was overturned. This resulted in us being unable to market the debt financing prospectus. However, by the middle of 2009, under the stewardship of your management and board Formation had recovered to a share price of $2.60. At that time we began to bear witness to the onset of the world financial crisis; however, again your management and board acted and the share price reached the $2.60 level by the end of 2010.

Now, we face a third more prolonged crisis, brought on by U.S and Eurozone debt, financial market equity selloffs, uncertain financial markets and weakened commodity prices. But as always, the markets are cyclic and will recover. As such, your current management is focused on preserving its core asset, and is taking decisive action to ensure a strong treasury. This will allow your Company to not only survive, but also take advantage of opportunities in these weak markets.

When Formation completed the first stage of financing the construction of its Idaho Cobalt Project in March of 2010, it successfully raised $80 million at $1.50 per share when cobalt prices were trading over US$20 per pound and the market for raising capital was attractive. Since that time cobalt prices have fallen to a low of about US$10.50 per pound along with many other commodities which has constrained access to capital for all junior resource companies. Unfortunately this has negatively impacted not just our stock price but stock prices across the sector as a whole. To add fuel to the fire, Formation was heavily weighted in institutional shareholders who have steadily been liquidating their equity positions. Dundee has obviously figured out an alternative agenda for themselves as they have used this turmoil to increase their share position as recently as November 2012.

So what is the right strategy when facing such market conditions? Based on our experience, exactly what we are executing on:

  • Put major capital intensive projects temporarily on hold;
  • Look for opportunities to strengthen the balance sheet by divesting non-core assets;
  • Constrain costs and conserve cash;
  • Reduce debt carrying costs;and
  • Remain flexible so that when the market turns we can resume with what is fundamentally an excellent project.

In addition, Formation has also ensured a strong free cash position by taking active and aggressive steps to preserve its cash position through a number of cost cutting measures including:

  • Significant total compensation reductions;
  • Eliminating positions at the head office, refinery and operations offices in Salmon;
  • The negotiation of the reduction of outstanding payables;
  • Downsizing Formation’s head office-space; and
  • The cancellation of all non-essential outsourced consulting.

Having managed the company for over two decades, management has overcome several financial crises and has ALWAYS come out on top. Recent articles from Minesite.com covering the proposed sale of the refinery and Formation’s future prospects state:

“When combined with the redemption of a US federal stimulus loan in the spring, which freed up US$9.5 million that was being held as collateral while simultaneously erasing US$44.5 million of debt, the asset sale will leave the company totally debt free, after the repayment of a US$5 million convertible debenture.”

“Management has successfully monetized a non-core asset significantly de-risking the company as a whole in these trying economic times. They’ve proven themselves to be quick on their feet and decisive in their actions while responding to the unprecedented financial meltdown and erosion of metals prices which have plagued the industry.”

“So, with the Idaho Cobalt Project ready to become the only primary cobalt producer in North America, Formation’s flagship project could soon present an even more compelling argument for investment and development.”

Dundee’s Confused Assertions

Formation’s management and board is, and has always been, fully committed to listen and take input in the best interests of all its shareholders. This includes Dundee with whom we have had a number of discussions regarding their concerns. In fact, since their initial investment in 2010, we had a standing offer to Dundee for two seats on Formation’s board reflecting their position as our largest shareholder. Dundee has never followed up on the two board seat offer but has now commenced a public campaign seeking the same two seats. In that campaign, Dundee makes a barrage of complaints and accusations, liberally mixing partial facts, contradictory statements, opinion and speculation. Yet, they also support all of Management’s resolutions for the meeting. One is forced to ask, what is their true motivation?

Instead of a strategic plan executed by highly experienced mining executives, Dundee’s so called “plan” involves asking you to trust them to figure something out. They want you to believe that they can somehow defy market fundamentals. Don’t let Dundee’s rhetoric influence your vote. By looking at what they are really saying, one readily sees the inaccuracies and false information:

  • Dundee asserts that: “In our view the mine, mill and refinery are the wrong project at the wrong time in the wrong place”. However they believe disposing of the sunshine refinery which is a non-core asset is a wrong decision. The truth is that the cobalt mine is where the high purity cobalt is and located in the largest cobalt consuming country. Where would Dundee move it? Not even Dundee can move a proven mine deposit. The only thing that has changed is cobalt prices. When Dundee invested in your Company, cobalt was trading in the US$20 – $21 per pound range compared to a low of US$10.50 per pound which is now is on the rebound as per the chart below. Formation cannot control world cobalt prices and neither can Dundee. The chart below illustrates Dundee’s incorrect claims and fallacious arguments.

  • Dundee says “In our view the cobalt mine was barely economic from the beginning and is certainly not economic now”. Cobalt prices are outside our control but we have acted in the right strategic manner. Compare this to Dundee’s vague plan to “figure it out”.
  • Dundee wants to “cancel” our sale of the Sunshine precious metals refinery claiming the sale price is depressed and/or “turn it into a profitable enterprise”. The facts are that this is a non-core asset for the cobalt project. The decision to sell is the right one and a profitable one. The proposed sale of the refinery to certain entities that are associated or affiliated with Waterton Global Resource Management, Inc. for US$9 million, if completed, will serve to strengthen the Companies treasury. In addition, Formation has received an unsolicited proposal from Sunshine Silver Mines Corporation to purchase the subsidiary of Formation that owns the refinery and certain other assets for US$12.0 million. We have also determined that it would be better to build a purpose built, stand-alone cobalt refinery going forward than to retro-fit the Sunshine facility. That determination was made over a year ago as was reflected in the Company’s July 12, 2012 news release where it announced “the engineering and procurement of a dedicated, continuous process hydrometallurgical circuit to process cobalt concentrate” would better serve the Idaho Cobalt Project.

    Your Dedicated Team of Experienced Directors

    Formation’s nominees include our CEO and President, both of whom are founders with intimate knowledge of the business. They have brought the company from nil in 1988 to a fully environmentally permitted project in the construction stage, all while enduring several tough environments. They have navigated through harsh economic times before and are doing it again now. They commit 100% of their time solely on Formation and are not conflicted or distracted by having seats on multiple boards. Not only does your current management and board have the right strategy for success, we also have the right team to execute strategic decisions in these challenging times facing the mining industry. Over half of your board has hands-on company management experience in building successful resource companies. In comparison, who are the dissident’s nominees?

    David Christie claims to be a Professional Geoscientist with the Association of Professional Geoscientists of Ontario. However, the APGO website does not reflect this. More importantly, Mr. Christie does not appear to have any experience at the board or management level of any junior mining companies and the challenges that come with it.

    Paul Carroll is a lawyer with deep ties to Dundee. Mr. Carroll has been involved with a number of controversial public company situations, including Hollinger Inc. His recent junior mining experience has been a seat on a junior mining company (Energy Fuels Inc.) that has seen a constant erosion of shareholder value throughout his term. With all due respect to his legal expertise, law firm experience is not what the Company needs to guide it through this tough market and to project completion. Mr. Carroll also serves as Chairman of the board for War Eagle Mining Company Inc., another junior mining company. Let’s see how well those have fared with Mr. Carroll on board during this resource market crisis:

    Re-Elect Your Current Board of Directors
    Vote Your White Proxy

    Dundee supports all of the resolutions at this meeting; they just want to replace our CEO and President. By supporting your incumbent directors you are voting for an experienced leadership team that has built a fundamentally viable asset from scratch. We managed the company through harsh economic conditions before and are executing on a plan to do it again. Dundee has launched a barrage of complaints and accusations, liberally mixing partial facts, contradictory statements, opinion and speculation. At the end of the day Dundee has put forward NO PLAN other than to spend company money on reviews in order to figure out a plan. Moreover, they are asking you to support nominees that lack the experience and credentials to take Formation forward. Their current aggressive tactics against all Formation directors have also cost our shareholders valuable time and very considerable amounts of cash that we are focused to preserve.

    Re-elect your CEO and President. Vote your WHITE proxy today. Regardless of how many shares you own it is imperative that you vote your WHITE proxy in order to keep Formation on track. Discard any blue proxy forms which you may receive from Dundee.

    Shareholders are urged to vote before the deadline of Wednesday, June 19, 2013 at 10:00pm (Pacific Time).


    If you have any questions or need assistance in voting your proxy, please call Kingsdale Shareholder Services Inc. at 1-866-229-8214 (toll free) or 1-416-867-2271 (collect calls accepted), or by email at [email protected]

    No matter how many shares you own, your vote is crucial.

    Thank you for your continued support as we move forward to a bright future.\


    Mari-Ann Green
    Chairman & CEO
    Formation Metals Inc.