Canadian gold producer Gammon Gold Inc (GAM.TO) (GRS.N) said it proposed to buy smaller rival Capital Gold Corp (CGC.TO) (CGLD.OB) for about $150.5 million in stock to gain access to its El Chanate gold property in Sonora, Mexico.

Gammon Gold said it will issue 0.1028 of its shares for each Capital Gold share held, valuing the company at 76 cents a share. The offer is at a premium of 20.6 percent to Capital Gold's closing share price Wednesday on the OTC bulletin board.

The companies are expected to sign a definitive deal by March 31 and both parties have agreed to the payment of a $4 million break fee to the other party under certain circumstances.

Following the acquisition, Capital Gold's Chief Operating Officer and director, John Brownlie, will become a director of Gammon Gold.

On Thursday, shares of Gammon Gold closed at C$9.59 and Capital Gold's stock closed at 81 Canadian cents on the Toronto Stock Exchange. (Reporting by R. Manikandan in Bangalore, Editing by Dinesh Nair) ((; within U.S.             +1 646 223 8780       ; outside U.S.             +91 80 4135 5800       ; Reuters© Thomson Reuters 2009 All rights reserved