M&A activity continues to pick up in the mining space, as small miners Rio Alto Mining Ltd. and Sulliden Gold Corp. Ltd. are teaming up in an all-stock deal that combines similar assets located next door to each other.

It is a sensible deal from a strategic standpoint. But for Rio Alto, it did not come particularly cheap.

Vancouver-based Rio Alto agreed to pay a 43% premium for Sulliden, which values the company at roughly $300-million and is well above its net present value, according to analysts. But Rio chief executive Alex Black promised investors he would create value out of the transaction “by performing.”

“A big proportion of my net worth is in Rio Alto,” he said on a conference call.

“I’m not going to screw around with my investment and put that at jeopardy by making stupid decisions. This is a great decision for me as a shareholder, and therefore for every shareholder.”

Rio Alto owns the La Arena gold mine in Peru, where it has proven to be a highly capable operator. Just 30 kilometres away, Sulliden is trying to develop the Shahuindo project. Mr. Black claimed the two projects are virtually carbon copies of each other, as they have similar geology and use similar mining and processing methods. That means there should be plenty of synergies.

“The end company will be not only a mid-tier producer, but it will also have lower costs because of the synergies between the two groups,” said Stan Bharti, the co-chairman of Sulliden and a well-known Canadian mining magnate.

The biggest challenge for any junior miner these days is to generate investor interest in your stock. By striking this deal, both Rio Alto and Sulliden hope they will get a re-rating and separate from the pack of forgotten mining stocks. The combined company expects to have gold production of roughly 300,000 ounces a year once Shahuindo is running smoothly. The mine should pour its first gold in late 2015 or early 2016.

The transaction is another sign that miners are eager to do deals this year, following a big lull from mid-2012 through 2013. M&A activity slowed because falling commodity prices put major stress on the sector, but it is back on the upswing as companies look for ways to build value. Large miners have targeted smaller ones because of an attractive valuation gap, while smaller firms are getting together in order to build scale and make it easier to raise capital and develop challenging projects.

The most high-profile deal so far this year is the joint takeover of Osisko Mining Corp. by Yamana Gold Inc. and Agnico-Eagle Mines Ltd. which came after a heated takeover battle. Barrick Gold Corp. and Newmont Mining Corp. tried to negotiate a friendly mega-merger, but talks fell apart amid personality clashes.