Dragon Mountain: A dollar for 87 cents

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

a woman

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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 7th 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.

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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

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