* Investor appetite seen strong for mid-tier gold miners * Mergers to fill void between large-caps and minnows * Newcrest, Lihir dominate field that has 25 listed gold co.s By Denny Thomas and James Regan SYDNEY, June 25 (Reuters) - Australia's smaller gold miners are showing an urge to merge in an effort to bulk up and court investment funds that are being drawn to the sector due to the soaring bullion prices. At least two sub-A$500 million mining deals have been tabled in the past few weeks and investment bankers and analysts are counting on more to come. The bankers, who had direct knowledge of some potential deals, did not wish to be identified as the negotiations were confidential. "There's movement afoot in the smaller end of town and a recognition that now is the time to act," said DJ Carmichael & Co mining analyst James Wilson. U.S. dollar-denominated gold has capitalised on uncertainties caused by the financial crisis, rising as much as 24 percent since January. In Australian dollars, gold's ascent is even more impressive, leaping as much as 34 percent. The jump in prices of the metal and strong growth prospects of the miners are inviting growing attention from investors. A survey this month by accountants Deloitte showed a handful of minnow-sized miners are gaining momentum on the back of their prospects. It singled out Centamin Egypt whose capitalisation ballooned A$608.7 million, or 56.7 percent, in May. The problem, however, is the vast majority of the 25 gold miners in Australia are small and have a market value of less than A$1 billion, making it near impossible for most fund managers to invest in them because of liquidity concerns. 'CONSTRAINT' Companies want investment funds as shareholders as they tend to be long-term investors and their involvement boosts the profile of the business. "For large investors, there is a bit of a constraint in the Australian market," said Steve Robinson, a fund manager with Alleron Investment Management. "Size does become an issue." Alleron manages about A$1 billion in Australian shares, including Lihir Gold Ltd , the second-biggest listed gold miner in the nation. For institutions in Australia without mandates to invest in global shares, Newcrest Mining Ltd and Lihir are the only routes to gain exposure to big gold stocks. Newcrest, the biggest listed gold firm, has a market value of about A$14 billion and Lihir A$7 billion. Centamin and Sino Gold Mining Ltd -- each about one-tenth the size of Newcrest -- are distant thirds. The rest of the stocks are valued under A$1 billion, with an average capitalisation of around A$200 million. There used to be more choices, including Normandy Mining, Gold Fields and Delta Gold, but these were acquired earlier this decade by international companies with overseas stock listings. Companies eager to fill that void want to gobble up smaller mines to create size. In April, Avoca Resources Ltd launched an unsolicited scrip bid for Dioro Exploration NL in hopes of immediately taking annual gold output to a quarter-million ounces from 180,000. "The institutions can buy what they want but if there was a larger Australian gold company that would bridge the gap, then they would be a lot more attracted to that," Rohan Williams, CEO of Avoca Resources, told Reuters. "If we succeed, we would be expecting a re-rating," Williams said. Other deals have followed. Catalpa Resources this week agreed to a merger with smaller peer Lion Selection's gold assets. The combination, which would create a gold producer with output of about 130,000 ounces a year, sent the shares in both companies sharply higher and immediately achieved one objective of the union: a revaluation of Lion Selection's gold assets. But size alone may not cut it. "Putting mines together to create a bigger company does not necessarily solve all problems," said Neil Boyd-Clark, a fund manager at Fortis Investment Partners. "What you want to do is put assets together that can do a better job than they could separately," said Boyd-Clark, who helps manage A$4 billion in Australian shares, but doesn't own gold mining stocks. ($1=A$1.25) (Editing by Muralikumar Anantharaman)

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