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The management takeover of a junior miner by an elite group of investors – a move that raised eyebrows over the size of severance payments – won’t go ahead unless a key condition is met, leaving retail shareholders exposed to considerable risk.

Last week, Toronto-based Caldas Gold Corp. announced that a syndicate that includes former Goldcorp Inc. executives Ian Telfer and David Garofalo, as well as Yamana Gold Inc. founder Peter Marrone and well-known financier and stock promoter Frank Giustra, are set to invest $38-million in the junior as part of an $85-million share sale.

Earlier this year, Caldas was spun out of Toronto-based Gran Colombia Gold Corp. Its chief asset is a small underground mine in Colombia called Marmato. Caldas hopes to expand production considerably in the next few years with proceeds from the financing. A new management team and board of directors are set to be put in place, with Mr. Telfer as chairman and Neil Woodyer, a former head of Leagold Mining Corp., as chief executive. Shares in Caldas, which were trading at $1.97 before the announcement, have risen more than 20 per cent since then.

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But the deal won’t happen at all if Caldas doesn’t get a 20-year extension on its mining permit for Marmato, which is set to expire late next year. Furthermore, even if the company obtains the extension, the new investors can walk away if they don’t like the terms of the royalty agreement with the government.

“If the economics are not [favourable], then I do believe they have the chance to say no to the deal,” Caldas chief financial officer Mike Davies said.

While retail shareholders would likely be hit hard if the financing falls through, the prospective shareholders are protected, as their entire investment would be refunded in that scenario. The disclosure of the conditions of the financing was in last week’s news release – but in small print.

Mr. Davies said the company gave ample disclosure about the conditions and added it is up to every investor to do their own due diligence. He also played down any notion the permit extension won’t be forthcoming and insisted the terms will likely be acceptable to the new shareholders.

“It’s a when, not an if. It’s essentially 100 per cent going to happen,” he said, adding he expects approval by the end of the year.

While Colombia is blessed with rich mineral endowments, the South American country has a long history of political upheaval and violence centred on the drug trade. The situation has improved considerably in recent years, after a peace deal between the government and rebels, but the country continues to grapple with deeply embedded social problems, including abject poverty and the displacement of millions of people during decades of conflict.

Some international gold companies have successfully navigated the considerable challenges there. China’s Zijin Mining Group Co. Ltd. recently put its Buritica mine, formerly owned by Canadian company Continental Gold Inc., into operation.

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But others have stumbled. Last year, residents of a central Colombian community voted overwhelmingly against a proposal for a major new gold mine by South Africa’s AngloGold Ashanti because of environmental concerns.

Caldas’s proposed underground expansion for Marmato is located near a major river and a large community, which means the environmental impact is likely to be scrutinized closely.

The Caldas transaction was already controversial because it involves change-of-control payments of US$8.8-million. The payments are comparable with those for outgoing executives of Teranga Gold Corp., which recently agreed to sell itself to a competitor for $2.44-billion – about 10 times Caldas’s current stock market valuation.

“Whether it’s those numbers, or even my own, it’s an awful lot of money. There’s no two ways around it,” said Richard Young, the outgoing CEO of Teranga, of Caldas’s change-of-control payments.

Paul Gryglewicz, a senior partner with Global Governance Advisors, said the deal falls short on a number of governance aspects, including a new arrangement around stock options previously granted to Caldas management.

In a typical change-of-control scenario, outgoing executives are usually subject to tighter time frames to exercise options, sometimes as little as 90 days. However, Caldas’s outgoing management team will be allowed to exercise options until March, 2025. Additionally, their options are set to vest right away, giving them the fullest opportunity to pick the most opportune windows to profit.

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“They shouldn’t get the benefit of an accelerated vest and the 2025 expiry. They should get [one or the other],” Mr. Gryglewicz said.

“They’ve structured this more favourable to the management team in this particular case.”

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