UPDATE 3-Kinross to buy Aurelian in friendly C$1 bln deal

(Adds comments from Kinross CEO, analysts)

By Cameron French

TORONTO, July 24 (Reuters) - Kinross Gold Corp (K.TO: Quote, Profile, Research) will buy Aurelian Resources Inc (ARU.TO: Quote, Profile, Research) for just over C$1 billion ($990 million) in a friendly deal that will give the Canadian mid-tier gold miner ownership of the big Fruta del Norte gold discovery in Ecuador, the companies said on Thursday.

With an inferred resource of 13.7 million ounces of gold and 22 million ounces of silver Fruta del Norte is considered one of the world's largest gold deposits.

However, work at the site has been halted since Ecuador froze mining in April as it rewrites its mineral laws, and uncertainty surrounding the project contributed to a 9 percent drop in Kinross' share price after the deal was unveiled.

"From a strategic prospective, this is right across the plate for us. It's in a country where we've been operating on the exploration side for a couple of years," Kinross Chief Executive Tye Burt said in an interview.

"This mining mandate in Ecuador has put some uncertainty around the future of the mining regime there, but we think the signs are positive that it's trending in the right direction," he said.

Aurelian's concessions have been suspended since April after a government-run assembly banned exploration and revoked hundreds of concessions to bring order to a sector that has suffered from sometimes violent clashes between anti-mining communities and companies' workers in southern Ecuador.

Dozens of foreign mining companies exploring for precious metals in the Andean country are anxious for details of the new mining law. But worries about conditions that could be placed on miners have kept valuations low.

The hit to Aurelian, whose shares were down 93 percent from their early-April levels as of Wednesday's close, made the asset more attractive to Kinross, which has said it was on the lookout for development projects.

STEEP PREMIUM, BUT LOW BID?

Kinross will offer Aurelian shareholders 0.317 of a Kinross common share, plus 0.1429 of a warrant, which valued the bid at C$8.20 per Aurelian common share, based on a 63 percent premium of Aurelian's 20-day volume-weighted average.

Kinross's shares were down 9 percent on Thursday, bringing the value of the offer to C$6.91 a share, taking into account an assumed value of 92 Canadian cents per warrant.

Haytham Hodaly, an analyst at Salman Partners, attributed the sell-off to a combination of uncertainty about the Ecuador mining laws and the dilutive impact of a 47 million share issue that Kinross announced as part of the deal.

Shares of Aurelian surged C$2.10, or 47 percent to C$6.55 on the Toronto Stock Exchange.

However, some analysts said the deal may undervalue the company, whose value could rise sharply depending on the details of the new mining law, they said.

"Aurelian management are accepting what I consider to be a low bid for the company," said Mark Turner, a Peru-based analyst with Hallgarten and Company.

Burt and Aurelian Chief Executive Patrick Anderson said they are confident that the country is moving "in the right direction" and they do not expect any "substantial" surprises in the mining law.

Kinross said it will need to see the new mining law and complete its own technical studies before setting a timetable for getting permits, mine development and operations. Aurelian had planned to start operations in 2013, mining 3,000 tonnes a day, Anderson said.

Kinross has also agreed to buy 15 million Aurelian shares on a private placement basis at C$4.75 per share, for a total of about C$71 million, to help develop Fruta de Norte. The private placement is not conditional on the success of the takeover.

The deal is subject to a C$42 million break fee. The warrants being offered expire in five years with a C$32 exercise price. Both companies are based in Toronto. ($1=$1.01 Canadian) (Additional reporting by Susan Taylor, Alonso Soto and Jennifer Kwan; Editing by Frank McGurty)