The Definitive Explanation of the Relationship Between PGLC and CRGC

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Submitted by Frank Rollins as part of our contributors program .

Another day, another 1.6 million share purchase by Barry Honig in Continental Resources Group ( CRGC ). 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 ( PGLC ). 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 PGLC Shares. I hope that this clears the air regarding my irresponsibly abridged article.

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 individuals.

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 of CRGC.

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 PGLC.

Conclusion

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 statement, 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 .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: CRGC , GG , MGT , NEM , PGLC

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