Canada-based gold miner Rio Alto Mining has signed a binding letter of agreement to merge businesses with Sulliden Gold.

As per the deal, Rio Alto’s La Arena gold oxide mine and sulphide copper-gold deposit will merge with Sulliden’s scalable Shahuindo gold development in Cajabamba, Peru.

Based on the feasibility study conducted on Shahuindo in September 2012, Sulliden discovered that it would produce around 85,000oz of gold a year at an estimated ten year mine life and cash costs of around $550 per ounce.

The merger will create a new mid-tier gold entity, SpinCo, which will have a production capacity of around 300,000oz of gold a year, while maintaining low cash costs.

Rio Alto CEO and president Alex Black said the transaction represents a logical combination for Rio Alto, given the complementary nature and proximity of their respective operations.

"We are looking forward to expanding upon the excellent work completed to date by the management team of Sulliden and believe the development of Shahuindo leverages our core strengths as an organisation and is analogous in many respects to our La Arena mine, which was built on-time and on-budget and has continuously out-performed expectations," Black said.

As part of the merger deal, Rio Alto will buy each of Sulliden Gold’s outstanding common shares for 0.525 of a single Rio Alto common share. The entire transaction will be worth C$300m ($274.9m).

However, Sulliden shareholders will receive 0.10 of a common share in SpinCo for each of Sulliden common share.

SpinCo will hold Sulliden’s 100% stake in the East Sullivan Property in Val-d’Or, Québec.

The new entity will be provided with around C$25m ($22.9m), which will be provided entirely in cash or as C$15m ($13.7m) in cash and as C$10m ($9.1m) in common shares of Rio Alto.

Following completion of the deal, shareholders of Rio Alto and Sulliden will own a respective 52% and 48% stake in the merged entity.

Sulliden co-chairman and founder Stan Bharti said: "Sulliden management and insiders plan on completing a non-brokered private placement of up to C$10m in equity of SpinCo, concurrent with the completion of this transaction."

Black added: "This acquisition positions Rio Alto on solid footing with material current production, substantial growth and a significant resource base able to support a long operating mine life."

Sulliden CEO and co-chairman Peter Tagliamonte said: "Our shareholders will receive a substantial premium, as well as a meaningful ownership position in Rio Alto and all the benefits that come along with that, as La Arena continues its track record of out-performance and the Shahuindo project is developed into the high-quality mining operation that we envisioned."