Despite the run-up in prices for bullion, the small cap gold space has been a disappointment for investors. And for those who own Aurelian Resources Inc., the ongoing development of new mining laws in Ecuador has made things much worse.

Fortunate for them, Aurelian received a $1.2-billion friendly all-stock takeover offer from Tier 1 producer Kinross Gold Corp. that sent shares of the junior miner up more than 40% on Thursday. And Aurelian may have more room to run if a bidding war emerges as some analysts are predicting.

“We believe that Kinross’ bid will be the start of a bidding war for one of the most coveted undeveloped gold deposits in the world,” Michael Gray, analyst at Genuity Capital Markets told clients. He suggested that Kinross must have “sufficient in-country intelligence” to convince them to jump the gun with a bid in light of Ecuador’s political uncertainty. The new mining laws are expected to be revealed soon.

Wendell Zerb at Canaccord Adams called the chances of a rival offer “moderate” at roughly 50% given Fruta del Norte’s high profile and high quality. The analyst suggested Barrick Gold Corp. and Newmont Mining Corp. as the most likely candidates.

“We feel that a partial cash bid would be preferable for Aurelian shareholders, given that under the terms of this proposed deal, they would still be subject to political risk in Ecuador through their ownership of Kinross shares,’ he told clients.

Although other producers are interested in Aurelian’s Fruta del Norte project, which is Ecuador’s largest gold deposit with 13.7 million ounces of gold and 22.4 million ounces of silver, the uncertainty of the restructuring of the country’s mining laws will likely scare many others off, said Michael Curran at RBC Capital Markets. As a result, the analyst told clients that there appears to be a low probability of a competing bid.

The government of Ecuador’s new mining mandate was revealed in April, 2008 and its forced Aurelian to suspend its drilling activities. On July 18, Aurelian said a draft law was completed after finding a previous version “reasonable.”

Why then, would an Aurelian shareholder not wait for a recovery in the share price pending the new draft legislation, Credit Suisse analyst Anita Soni asked.