Eldorado bid for Frontier puts spotlight on Perama Hill gold project

VANCOUVER — The board of Frontier Pacific Mining (FRP-V) is recommending that shareholders reject an unsolicited takeover bid from Eldorado Gold (ELD-T, EGO-A) valued at about $148 million, or $157 million on a fully diluted basis.

Frontier’s largest shareholder, Dundee Precious Metals, has already agreed to tender 41.942 million shares, or about 25.5% of Frontier’s outstanding common shares, to the Eldorado offer scheduled to expire June 17, 2008. Frontier’s directors and officers and “certain significant shareholders” representing about 39.3% of the outstanding shares have indicated that they won’t support the Eldorado offer.

Eldorado announced its bid to acquire Frontier Pacific on April 21, and offered 0.122 of an Eldorado share and a fraction of a cent in cash for every common share of Frontier Pacific. The price represents a 28.6% premium based on the closing prices of the companies on April 18, and a 35.5% premium based on their 10-day volume-weighted average share prices to that date.

Frontier has filed a circular recommending that shareholders reject the offer on the grounds that it is “opportunistic” and “significantly undervalues” the company and its flagship Perama Hill gold project in Greece.

The Frontier board based its recommendation on the advice of a special committee of independent directors and its financial and legal advisers. The company notes that it is engaged in discussions with other parties interested in pursuing alternative transactions “superior” to the Eldorado bid.

Frontier has other active projects, notably a uranium exploration joint venture with Solex Resources (SOX-V) in Peru, yet has spent years slowly but steadily advancing the Perama Hill project situated in hilly terrain 30 km northwest of Alexandroupolis in northwestern Greece. The sparsely populated region has no operating gold mines, yet has a gold-mining history dating back to the times of Alexander the Great.

The Perama Hill deposit was discovered in 1995 by Bureau de Recherches Geologiques Minieres (BRGM) of France, and in 1999 was the subject of a detailed feasibility study as a proposed open-pit mine that would exploit 11 million tonnes of oxide material grading 3.71 grams gold and 8.3 grams silver per tonne. The project has changed hands over the years as this and other BRGM assets were acquired by Normandy Mining, which in turn was eventually acquired by Newmont Mining (NMC-T, NEM-N). But development of Perama Hill was ultimately brought to a halt by the anti-mining aftershocks of a cyanide tailings spill in Romania, coupled with low metal prices of the early 2000s.

Frontier President Peter Tegart says he became interested in the project in the fall of 2003, a period in which the prospect of permitting a mine in Greece seemed next to impossible. “We liked it because it was one of the few projects around that had positive economic returns, even at US$320 gold.”

Frontier acquired the Newmont-controlled Greek company holding the Perama Hill project for about $12 million in late 1994. While the deal worked out to about US$10 per ounce of gold in the ground, Tegart says raising capital proved to be an extreme challenge, particularly after the Greek subsidiary of TVX Gold had been forced into bankruptcy because of relentless problems permitting and operating its gold and base-metal mining ventures in Greece.

“We knew public opinion for gold mining was almost totally negative at the time, with maybe 10% support at best,” Tegart says.

Frontier raised the money to conclude the deal, which took almost a year to be approved by the government of Greece. The company then worked on completing the environmental impact statement (EIS) and related studies required by various government ministries. During all this, the company spent several years communicating directly with the few hundred villagers near the gold deposit. Key components of this initiative are educating residents about mining, implementing a “locals-only” hiring policy and developing training programs and sustainable projects in the region.

“Support for the project is very strong now,” Tegart says, adding that the company has also completed the EIS and related permitting documents. The overall surface footprint of the proposed mine, including processing facilities and tailings areas, is less than 2 sq. km.

The oxide resources at Perama Hill were brought into compliance with National Instrument (NI) 43-101 disclosure standards in early 2004, and presently contain 1.36 million oz. gold within 11.7 million tonnes averaging 3.62 grams (3.73 grams uncut) gold and 8.2 grams silver.

Frontier expects to have a bankable feasibility study in hand in July, but in light of the recent takeover bid, has requested and received an expedited review of the project’s sulphide resource potential.

Based on a gold price of US$625 per oz. and a 2.0 gram cutoff grade, Scott Wilson Mining Roscoe Postle Associates estimated the open-pit sulphide resource as “excellent,” with potential ranging from 1.5 million tonnes averaging about 6 grams gold to 2.5 million tonnes averaging approximately 5 grams gold per tonne. This includes a gently dipping zone of continuous high-grade sulphide mineralization immediately below the oxide gold mineralization, which has “moderate” potential estimated at 1 million tonnes averaging about 8 grams gold per tonne.

The underlying feeder zone is believed to be too small to support an underground bulk-mining operation, with potential in a range of about 50,000 to 300,000 tonnes averaging 10 grams to 20 grams gold. This status is based on drilling to date and could change as more drill data become available.

Eldorado, meanwhile, says it is pleased by the “positive reception” of its offer from shareholders of both companies.

“This offer has presented Frontier Pacific with a significant premium for their shares and an attractive opportunity to join with an emerging mid-tier gold producer that will have a leading competitive position within the Aegean region and possess the financial and technical capabilities to successfully permit and develop the Perama Hill project,” stated President Paul Wright.

Eldorado currently operates the newly reopened Kisladaq gold mine in Turkey, the Tianjianshan gold mine in China, and is developing the Efemcukuru gold project and Vila Nova iron ore project in Turkey and Brazil, respectively.

The company produced 67,234 oz. gold at an average cash cost of US$213 per oz. in the latest quarter ended March 31, and reported net income of $20.7 million, compared with $12.6 million in the first quarter of 2007.