Submitted by Frank Rollins as part of our
Another day, another
share purchase by Barry Honig in Continental Resources Group (
). As readers of
my Trefis column
know, I have been following the unsung story of activist investor
Barry Honig and his quirky yet eye-boggling investing track record.
For example, I couldn't help but notice his investment in MGT
Capital Holdings (NYSE AMEX: MGT) on October 22 when it was trading
in the $3s.
Within two weeks, it's doubled.
Par for the course, apparently. Anyway, today, I noticed his
purchase of another massive block CRGC, a non-operational company.
This caused me to rethink my original assumption regarding the
"arbitrage opportunity" between Continental Resources Group and
Pershing Gold (
). I wrote about this arbitrage rumor on September 27th, and I must
admit that it was overly simplistic.
The arbitrage opportunity is not as obvious as "CRGC is worth
80% PGLC." There is some truth to it, but I sincerely apologize for
downplaying this complex opportunity. To make up for this mistake,
I decided to undertake the task of completing this article:
The Definitive Explanation of the Relationship Between CRGC and
I hope that this clears the air regarding my irresponsibly abridged
Here, at last, is the truth. (Oh, and by the way, since the time
I wrote that article, Barry Honig has invested an additional half
million dollars into CRGC. Keep that in mind as you read.)
Not a Merger, After All
I will analyze the agreement (not merger) between PGLC and CRGC
in order to clarify what is happening between the two companies. I
will specifically describe the asset purchase agreement between
PGLC and CRGC, the amended registration statement PGLC filed with
the SEC on October 3, 2012, and what CRGC shareholders can expect
in the future.
On July 21, 2011, CRGC entered into an agreement to sell CRGC's
assets to PGLC (formerly known as Sagebrush Gold Ltd.) as part of a
plan to liquidate CRGC. On July 22, 2011, PGLC and CRGC entered
into an asset purchase agreement to sell the entirety of CRGC's
assets and liabilities in exchange for PGLC common stock.
Under the agreement, PGLC agreed to issue eight shares of PGLC
common stock for every ten (10) shares of CRGC's common stock
outstanding. (This is the origin of the simplistic "CRGC is worth
80% PGLC" rumor.) As a result, PGLC delivered 76,095,214 shares of
its Common Stock to CRGC. These shares are to be distributed to
CRGC's shareholders at liquidation.
Since the PGLC common stock was not registered with the SEC,
PGLC agreed to file a registration statement for the common stock
issued to CRGC so that all CRGC shareholders can freely trade their
shares on the public market. This registration statement was to be
filed with the SEC the later of 1) thirty days after the closing
the Asset Sale or 2) after CRGC delivered to PGLC its audited
financial statements for the fiscal year ended March 31, 2011.
So finally, on October 3, 2012, PGLC filed the (quite detailed)
registration statement and is now waiting for the SEC to approve
it. The SEC is currently reviewing the request and will respond to
PGLC directly with any questions. Importantly, investors should
realize that the registration statement covers a total of 92
million shares: the 76,095,214 shares of common stock issued to
CRGC, as well as additional shares issued to other companies and
What CRGC Shareholders Can Expect
Initially, as of July 22, 2011, CRGC held approximately 67% of
the total issued and outstanding stock of PGLC from receiving the
76,095,214 PGLC shares. As a result, PGLC was treated as a
majority-owned subsidiary of CRGC.
However, PGLC has subsequently issued additional common stock
and CRGC's holding has been diluted. CRGC's 76,095,214 now
represents a minority interest in PGLC. Specifically, as of
December 31, 2011, CRGC original shareholders held about 53%
interest in PGLC. During 2012, additional PGLC common stock was
issued, diluting further CRGC's portion in PGLC. As of the October
3, 2012 registration statement, the 76,095,214 shares held by CRGC
for its shareholders represent just 30% of PGLC's common stock. As
a result, PGLC is no longer considered a majority-owned subsidiary
In the likely event that the registration statement is deemed
effective by the SEC (they rarely deny such requests) and CRGC
distributes the 76,095,214 shares to its shareholders, CRGC
shareholders collectively will hold a 30% or less minority stake in
So, the deal is in progress and the paperwork is being
processed. PGLC has already issued the shares that will be
distributed to CRGC shareholders, so
PGLC shareholders will not be diluted
when (again, previously-issued) PGLC shares are registered with the
SEC and then simply distributed to CRGC shareholders.
CRGC is not worth 80% PGLC- yet. CRGC owns 76,095,214
non-freely-trading shares of PGLC, which represents 29.65% of
PGLC's issued and outstanding common stock. Put another way, CRGC
has 95,119,018 shares outstanding currently, yet it owns 76,095,214
issued-yet-not-freely-trading shares of PGLC.
So, because CRGC and PGLC are still independently trading on the
open market, any outside investor can buy 100 shares of CRGC and,
if they hold through the SEC's approval of the registration
receive 80 shares of PGLC. That is the arbitrage opportunity. Like
any arbitrage opportunity, there is risk, which is why CRGC is not
trading at 80% the price of PGLC. The gap between the "fair value"
of both stocks is the arbitrage gap.
There you have it. Believe what you will about the approval of
the SEC and the stability of PGLC's price until the time at which
CRGC will receive freely-trading shares of PGLC. If you have
doubts, however, you might want to look at the insider purchases of
Barry Honig, who has never sold a share in PGLC nor CRGC and
clearly has no doubt about their long-term prospects.
Follow my other articles about Barry Honig
here on Trefis