By Jonathan Spicer and Susan Taylor

TORONTO/OTTAWA, April 8 (Reuters) - Undervalued and vulnerable, Canada's junior gold miners are frustrated and more likely than ever to band together or sell out.

With a paucity of big gold discoveries in recent years and several hefty projects stalled by red tape, they could easily become fodder for larger rivals who are anxious to replace production while bullion floats near $1,000 an ounce.

On the other side of the equation, struggling amid the credit crunch and investor caution, the juniors might look to create their own solutions rather than wait for the arrival of a large, wealthy suitor.

"Some (juniors) would love nothing more than to have a senior come and take them away. But I do see some other examples of companies trying to ... consolidate and grow," said Chief Executive David Watkins of Nevada-focused junior, Atna Resources <ATN.TO>.

"A lot of companies are starting to realize they can't do it on their own."

Gold stocks have seen boom times before, most recently in the mid-1990s, but few can recall a rush that has left juniors so starkly behind. However, small miners with properties in or near production are poised to turn things around and eventually profit from the recent boom.

Faced with tepid internal growth, Atna said in November it was buying Colorado-based Canyon Resources for about C$25 million ($24.7 million) in order to gain two advanced projects.

A week ago, small-cap Peak Gold <PIK.V> said it would merge with Canadian peers New Gold <NGD.TO> and Metallica Resources <MR.TO> in a C$1.4 billion deal to form an intermediate miner with the liquidity they hope will attract investors.

"Bigger is better, and this is a great way for three small companies to jump ahead in line," said Bob Gallagher, who will head the bulked-up miner. "Junior gold miners are going to see the need to join forces."

The news gave a lift to the three juniors, whose shares had been listless over the past year even as spot gold <XAU=> roared to record highs.

Mid- and large-cap miners, meanwhile, have been flying high. The American Stock Exchange's gold bugs index <.HUI> of largely unhedged producers, including some of the world's top gold firms, is up about 17 percent in the past six months.

Analysts say lagging junior valuations reflect thin trade and increasingly conservative investors.

"Why is the price of gold going up? It's going up because of fear. People are concerned about subprime issues and credit (so) they put their money in gold as a safe bet for currency," said Tony Ker, CEO of explorer Gryphon Gold <GGN.TO>.

"If they're scared, why would they put their money in a highly speculative junior exploration company?"

APPETITE FOR OUNCES

Senior producers, grappling with painstakingly slow development and soaring costs, are keen to feed their appetite. But many are taking a wait-and-see approach on some big deposits that are either mired by permit problems, environmental protests or politics.

Canada's Crystallex International <KRY.TO> is one stuck in a regulatory no-man's land. It won a contract in 2002 to develop Las Cristinas, one of Latin America's biggest gold reserves, but said recently it has "absolutely no" idea when the Venezuelan government will award permits.

Aurelian Resources' <ARU.TO> large Fruta del Norte deposit is stalled as Ecuador mulls new mining laws.

And last week, U.S.-based Newmont Mining <NEM.N> said it was increasingly difficult to find large deposits -- a pressing issue for the world's No. 2 gold producer, which burns through its reserves at a rate of 10 ounces each minute.

With the majors failing to replace the ounces they produce, they "may be better off acquiring companies with one or more late-stage development projects, rather than funding existing early-stage projects all the way through development," RBC Capital Markets analysts said last week.

At a minimum, miners on the hunt will consider targets with at least 1 million ounces, analysts say, but 5 million ounces would be sure to attract attention.

The number of global mining deals shot up 69 percent to 1,732 last year, but the value of the acquisitions rose only 18 percent, according to PricewaterhouseCoopers. That suggests consolidation is gathering steam, particularly among juniors.

While the gold price has nearly doubled over the past year, Gryphon's Ker said the shares of juniors have dropped 30 to 50 percent.

"Eventually," he said, "people will start seeing that (gap) as an opportunity to get into position, because somewhere down the road the resources that are being mined have to be replaced. And the juniors are usually one of the best bets."

($1=$1.01 Canadian) (Reporting by Jonathan Spicer and Susan Taylor; Editing by Rob Wilson) ((jonathan.spicer@reuters.com; +1-416-941-8104; Reuters Messaging: jonathan.spicer.reuters.com@reuters....