(Oct 23): Dragon Group International saw a fillip of trading interest this past week after the company said on Oct 19 that it would acquire a mining company in a reverse takeover.
The announcement about the RTO came out of the blue. But the real surprise was perhaps that there wasn’t a bigger reaction from the market.
Dragon Group is proposing to acquire 100% of a Seychelles-incorporated company called Coeur Gold Armenia for $500 million from one George Howard Richmond.
According to the term sheet, Dragon Group will pay $200,000 cash as a deposit and issue 2.499 billion new shares at 20 cents each to the vendor. These new shares will amount to about 88% of Dragon Group’s enlarged number of shares.
Coeur Gold Armenia holds “controlling interests” in two Armenian companies called Vayk Gold and Vardani Zartong, which in turn hold mining exploration rights in Armenia in respect of gold, silver, antimony and copper.
According to the term sheet, the price tag for Coeur Gold Armenia is contingent on the valuation of its assets by a “qualified valuer” being at least $500 million.
Shares in Dragon Group were trading at four cents before the announcement. They hit a high of six cents immediately after the announcement, and then quickly fell back to 4.5 cents currently.
Dragon Group, which was once called Flextech Holdings, distributes electronic components and test consumables as well as supplies semiconductor equipment. It currently has a market capitalisation of $15.7 million.
For 1HFY2017, the company reported a loss of US$1.4 million ($1.9 million) on revenue of just US$749,000. As at June 30, it had a net asset value of 1.6 US cents a share.
Clearly, an acquisition as large as Coeur Gold Armenia could dramatically change its fortunes. So, why wasn’t there a bigger reaction in Dragon Group’s share price?
One reason might be that there has been disturbing news in the market in recent months about other mining stocks, which might have coloured the market’s view of the risks associated with these companies.
Last month, ISR Capital said Behre Dolbear Australia had put a valuation of US$25 million to US$75 million on a tantalum concession it was trying to acquire in Madagascar. Two other valuers had said the Madagascar concession was worth more than US$1 billion. ISR Capital engaged Behre Dolbear Australia to produce a third valuation after the Singapore Exchange raised questions about the first two valuations.
Also, in July, The Edge Singapore broke a story about how an undisclosed agreement made by the major shareholder of Alliance Mineral Assets when the business was in its infancy led to a legal dispute that resulted in him losing a big chunk of his shares.
Another possible reason for shares in Dragon Group not reacting more strongly to news of the mining RTO deal is that the company had announced other corporate deals in prior months, and its shares were actually already elevated.
Notably, in August, the company said its subsidiary EoCell would sell a 40% stake to a strategic investor for US$20 million, which valued the enlarged EoCell at US$50 million. EoCell designs, develops and sells “next generation” lithium-ion batteries.
Dragon Group, which holds a 40% interest in the enlarged EoCell, saw its shares close at 4.5 cents on Aug 11, the day after the announcement.
Prior to that, the stock had been trading below two cents.
Dragon Group is also on the SGX Watch-list, which could eventually lead to a de-listing.
On June 5, it was placed on the Watch-list for breaching the minimum trading price rule, that is, maintaining a stock price of at least 20 cents and a market capitalisation of at least $40 million.
Dragon Group had already been placed on the Watch-list on March 4, 2015, on the financial criterion of posting pre-tax losses for three consecutive years. It failed to remove itself from the Watch-list by the deadline of March 3, 2017. It has since been given an extension for one year to March 3, 2018.
So, will the RTO of Coeur Gold Armenia mark a new beginning for the company? That remains to be seen. However, the RTO will see no change in Dragon Group’s top management.
One of the “conditions precedent” is that Dragon Group signs a service agreement with its chairman and CEO Michael Loh Soon Gnee for a minimum of five years. According to Dragon Group’s last annual report, the company is 40.98%-owned by ASTI Holdings. Loh is chairman and CEO of ASTI, and holds a direct and deemed interest of 19.89% in the company, according to its last annual report.
Richmond, vendor of Coeur Gold Armenia and soon-to-be major shareholder of Dragon Group, expressed confidence in the RTO and the listed company’s management in a statement this past week. “This is an attractive offer from Dragon Group, given the valuable underlying assets and high growth potential businesses of Dragon Group. We have full confidence in the business acumen of Dragon Group chairman and CEO Michael Loh, and that he will be able to drive Coeur Gold Armenia’s mining businesses post completion with great success.”