Medoro To Buy Colombia Goldfields

Medoro Resources (MRS-V) has exploration properties in Mali and Venezuela but wants to diversify its assets and reduce political risk. Colombia Goldfields (GOL-T, CGDF-O) is exploring the historic Marmato Mountain gold district on the eastern edge of the Western Cordillera of the Colombian Andes, but is cash poor and can’t do it on its own.

The circumstances suggest a marriage of convenience could be in store. Under an agreement of arrangement, which is still subject to regulatory and shareholder approval, Medoro is proposing to issue 29.3 million shares and 940,720 warrants to stockholders of Colombia Goldfields in exchange for its 104.5 million outstanding shares.

The share exchange ratio is 0.28 of a share plus 0.009 of a consideration warrant of Medoro for each share of Colombia Goldfields. Each full warrant is exercisable at 50¢ into one Medoro share for a two-year term.

If the deal is approved, Colombia Goldfields’ shareholders will own about 25% of Medoro.

Colombia Goldfields must have reached agreements with its key creditors on the repayment of its outstanding debt and accounts payable, however, before the agreement can move ahead.

At the end of March, Colombia Goldfields said it was reviewing strategic alternatives, had terminated all but essential personnel in its Toronto and Medellin offices, and suspended additional drilling. It was unable to make its interest payments in the fourth quarter of 2008 on its short-term promissory note with Global Resource Fund.

For the financial year ended Dec. 31, 2008, Colombia Goldfields posted a loss of US$60.2 million or US64¢ per share, up from its 2007 loss of US$14.6 million or US21¢ per share. At the end of the year, shareholder equity was US$7 million, compared with US$51.1 million a year earlier. The company’s working capital deficiency rose to US$19.1 million at the end of 2008 from US$3.7 million at the end of 2007.

“They are cash-poor and in order to survive, they probably needed to do some sort of deal,” says Peter Volk, Medoro’s general counsel and secretary. “I don’t speak for them but I suspect they would have liked to do it on their own but I don’t think they were at that point any longer, so they needed a partner.”

Volk notes that Medoro recently raised US$6 million in a private placement — evidence if Colombia Goldfields needed any — of its ability to put cash on the table.

Marmato is known locally as Golden Mountain and is believed to have been mined by locals for more than 500 years. The area, however, has seen little modern exploration or development until recently. Colombia Goldfields is convinced of the potential to discover multimillion-ounce gold deposits in the district.

The company has completed about 46,000 metres of core drilling at Zona Alta. The first 12,130 metres of drilling, as well as 1,170 metres of crosscuts and 504 metres of underground sampling, was used to prepare an initial resource calculation at the end of May last year totalling 2.6 million oz. gold contained in 75.8 million tonnes averaging 1.05 grams gold per tonne at a cutoff grade of 0.3 gram gold per tonne.

Colombia is targeting bulk tonnage, low-grade gold and silver deposits at Marmato that are potentially amenable to open-pit mining and recovery by milling and cyanide leaching or by heap leaching.

The Marmato project is roughly 80 km south of the city of Medellin and is accessible via the Pan American Highway.

Volk notes that Colombia is getting more and more attention on the gold front and that Medoro would rather be at the head of that curve than behind it.

He also emphasizes Colombia’s free trade and pro-business environment under President Alvaro Uribe and his government’s efforts to re-establish security in the country. Uribe has made combating insurgents a priority of his government, as well as the eradication of illicit crops, and has managed to create a sense of public security in the country that did not exist before, Volk argues. He has also taken steps to protect oil and natural gas pipelines from illegal armed groups.

“Colombia was always a very good place to do business but there were security concerns,” Volk explains. “But security concerns — because of the sweeping changes that the government has made — are much less. . . Colombia is determined to establish that they are not this narco-terrorist state that everyone still thinks they are from back in the 1980s, and that instead, they are a modern, civilized economy and society and that the government works hard to make sure conditions are appropriate for doing business.”

In Venezuela, Medoro holds a 100% interest in the Lo Increible 4A and 4B properties in the El Callao area of Bolivar state, made up of two adjacent mining contracts covering a total of 22.2 sq. km.

Currently, the company is negotiating with the Venezuelan People’s Power Ministry of Environment to get permits required to start exploitation activities.

Lo Increible’s three key prospects are La Cruz, La Sofia and El Tapon. The database used to produce the mineral and resource estimate was comprised of some 581 drill holes, representing about 90,000 metres of drilling.

An estimate from April this year demonstrated a measured and indicated resource of 13.4 million tonnes grading 2.2 grams gold for 940,000 oz.

In addition, there is an inferred resource of 840,000 tonnes grading 3.3 grams gold for 90,000 oz. gold. These resources were estimated using a cutoff of 0.5 gram gold, apart from a deep, high-grade zone at La Cruz, which has the potential to be exploited by underground mining, and which has been reported using a cutoff grade of 4 grams gold.

Medoro has about a US$4-million exploration budget for 2009. That money will be spent on additional targeted drilling, metallurgical test work and environmental management costs, as well as on a feasibility report. The company believes that Lo Increible will be mined first as an open-pit operation using contract miners and contract milling.

Last year, Medoro reported a net loss of US$14 million or 17¢ per share compared with a net loss of $1.5 million or 3¢ per share in 2007. The increase in net loss ($12.5 million) was largely due to a write-down of properties in Mali ($10.7 million), an increase in operating costs of $900,000, an increase in foreign exchange loss of $4.7 million and an increase in future income tax recovery of $3.9 million.

As of March 31, Medoro had cash and short-term investments of $1.3 million and no debt.

At presstime, Medoro traded at 15¢ per share. The company has a 52-week trading range of 3-28¢ with 88.78 million shares outstanding.

Colombia Goldfields traded at 6¢ per share. It has a 52-week trading range of 1-83¢ with 104 million shares outstanding.