Medoro, local union clash over Frontino

According to Medoro Resources (MRS-V) the battle for the rights to the Frontino gold mine in central Colombia is over.

The Toronto-based company says it has signed an agreement with the legally appointed liquidator of the mine, Luis Fernando Alvarado, to acquire the project for US$200 million.

Controversy has been swarming around the prized asset because of opposition to the proposed deal by the workers’ union at the site.

The Mining and Energy Industry Workers’ Union claims ownership of the project and has stated publicly that it does not want to sell.

The union, which says its ownership claim is based on a deed signed in 2003, and a Supreme Court ruling from 1969, wasted little time in re-affirming its position after Medoro made its purchase announcement.

“On behalf of the owners of Frontino Gold Mines, we want the world to know that we will never accept any such agreements with Medoro,” the union’s release reads.

It goes on to state that only a general assembly of the current creditors can make decisions in regards to Frontino Gold Mines’ assets.

“It is very clear that Mr. Luis Fernando Alvarado Ortiz (the liquidator), is neither a creditor nor an owner of Frontino Gold Mines and therefore has no right to make decisions,” the union statement reads.

Unfortunately for the union, Colombian law does not work that way, according to Peter Volk, general counsel to Medoro.

“Under Colombian law, much like in Canada, when a company goes into liquidation, a liquidator is appointed to find the best deal for various stakeholders,” Volk explains.

In the case of Frontino, Medoro’s offer of $200 million stood as the only acceptable offer, and importantly, represents the government’s best chance of getting off the hook for the large liabilities the mine has in connection with pensions owed to former workers.

That aspect, as well as the deal’s social commitments and its allowing workers’ equity participation, were the key issues highlighted by the Colombian government itself in its press release which came down firmly in favour of Medoro securing the mine.

“The closing of this transaction clears the way for a better future for more than three thousand families in the municipalities of Segovia and Remedios whose livelihoods depend on gold mining,” the government statement reads.

For its part, the union not only denies the authority of the liquidator and the current management at Frontino, but also the authority of the government itself.

And while, from a legal standpoint, things don’t look promising for the union, some of its more disgruntled member could still make things difficult on the ground for Medoro if relations are not soothed over.

To help mitigate against such issues, the deal announced by Medoro comes with a guarantee to offer jobs to all of the 1,600 locals currently working at the mine. The jobs will be guaranteed for one year from the date of closing.

Beyond that, Volk says the company will have to rely on its ability to build a good reputation in the community once it takes over, thus isolating those that are opposed.

To help it do so, Medoro will have to rely in part on the same resource that proved so effective in winning the bid for the mine in the first place — its access to capital.

Thanks in part to a large equity financing completed last year, Medoro is flush with cash. And provided that the agreement for Frontino holds, that cash has allowed it to secure one of Colombia’s dusty jewels.

The Frontino license covers 28.7 sq. km of land near the city of Segovia– roughly 220 km north of Medellin.

The mine has been in production for over 150 years and has turned out 4.5 million oz. of gold during that time but it has done so using rather crude mining techniques.

Made up of three distinct underground mines — El Silencio, Providencia and Sandra K– the dire financial position the mine operators found themselves in meant there was only enough capital to keep Providencia in production. That mine managed to produce 44,000 oz. gold last year from 450 tonnes of ore per day with an average head grade of 8 grams gold per tonne.

Along with closing El Silencio and Sandra K in 2004, which is when the liquidator came in, any thoughts of an exploration program had to be abandoned as well owing to the cash crunch.

Indeed, no exploration drilling has been done at the project since 1989 — something Medoro plans to correct as soon as it can.

With the purchase set to close in four months, Medoro will work on the project immediately.

As part of its due diligence it says it will finish a National Instrument 43-101 compliant resource within the allotted time.

Also tied to the deal is an arrangement for Medoro to sell half of Frontino to a group headed by one of its founding members and former member of Medoro’s board, Serafino Iacono.

Iacono’s group will pay 50% of Medoro’s purchase price to earn the interest and will also fund 50% of all costs going forward. Medoro, however, will serve as the operator.

The closing of the deal for the mine will also see Iacono secure a $4-million success fee for his integral role in negotiating the acquisition of the mine.

Iacono is known for his ability to get deals done in South America — particularly in Venezuela and Colombia. He was the former chief executive of Bolivar Gold, which sold its Choco 10 gold mine to Gold Fields (GFI-N, GOF-L) and also was behind Pacific Rubiales Energy’s (PRE-T) recent market success on the back of oil assets he helped secure in Colombia.

If the deal closes in four months time, Medoro will catapult itself into the position of a leading gold producer in Colombia.

The company’s flagship project, however, will continue to be its Marmato gold project where it has spent considerable effort over the last few years consolidating the notoriously gold-rich but bifurcated property.

Marmato currently boasts 7.5 million oz. gold in the measured and indicated categories and a further 2.2 million oz. gold in the inferred category and is host to the Mineros underground mine which turns out roughly 25,000 oz. gold per year.