When you try to boot a VM with libvirt and cloud-init provisioning, libvirt will make a initial .iso file to be provided during the VM booting process.
This .iso file is created wherever the main volume for the VM is created (storage-pool-path/cloud-init-data.iso).

Fog-libvirt sets iso_dir for all VMs to '/var/lib/libvirt/images' as the default location to fetch the cloud-init .iso.
Foreman will try to use this directory when creating the VM as the location for cloud-init.
However, that may not be right if the storage-pool is not the default one. In my case, I run my libvirt VMs from an external hard-drive, so Foreman needs to understand the iso_dir will be the external hard-drive storage pool, not the default /var/lib/libvirt/images.

Fix is simple, just set iso_dir during the VM creation process.