Have Mustadio in Chapter 4. After Bervenia, go to the mining town of Gollund. At the tavern, read the "Rash of Thefts" rumor. Go to the merchant city of Dorter. At the tavern, read the "A Call for Guards" rumor. When you leave the city, a battle will start. Win the battle with Balthier's help, and he will join you.