Dragon Mountain: A dollar for 87 cents

Buying a company for less than its cash in the bank is an attractive idea

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published March 27, 2012 2:14 pm AEDT

Dragon Mountain Gold Limited (ASX: DMG) shares are currently trading at 51.5 cents after rising over 77% since October 2011. The company announced on the 7^th November 2011 that it had sold all of its holdings in its Lixian Gold Project in China, with DMG's proceeds being approximately $150m.

With the company's current market capital standing at $133m, and cash on its books of $151.6m (as at 31 Dec 2011), the market is valuing the company's shares at less than the cash the company has on its books.

With 256.97m shares on issue, cash represents 59 cents per share.

Cash likely to be paid out

Even better for shareholders, management have stated their intention to distribute the majority of the proceeds of the sale to shareholders. Dragon Mountain has advised that it is still receiving legal and taxation advice as to the amount of the distribution, and the most appropriate time and manner to make the distribution to shareholders, so as to give the best possible result. With no franking credits available, the dividend would be unfranked.

Other assets

At current prices, shareholders are basically getting the rest of the company's assets for free. Although, with $2m of liabilities and $24m in trade and other receivables, the company doesn't have much in the way of other assets. The $24m represents an unsecured loan to a minority shareholder, Kostar Investments Pty Ltd.

Dragon Mountain also holds some mining licences at Urumqi in North Eastern China, although they don't appear to be worth much.

The Foolish bottom line

It remains to be seen whether management will follow through with their plans to distribute cash to shareholders. With no other assets, management may be tempted to make acquisitions with the funds instead.

Still, the idea of buying 59 cents in cash for 51.5 cents – and getting the rest of the company thrown in for free – is something I like.

If you are looking for more ASX investing ideas, look no further than "The Motley Fool's Top Stock for 2012." In this free report, Investment Analyst Dean Morel names his top pick for 2012…and beyond. Click here now to find out the name of this small but growing telecommunications company. But hurry – the report is free for only a limited period of time.

More reading

Motley Fool contributor Mike King owns shares in Dragon Mountain. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.