Pender International Inc. (fka PNDR)

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Pender - a penny stock that shouldn’t be a penny stock

From the inaugural issue of the Hidden Gems newsletter, we read that “a classic hidden gem is a great, but as of yet unknown company just waiting to be discovered. These are typically small companies, which by sheer virtue of their smallness haven’t yet garnered Wall Street’s attention”. I’m starting with this quote not because I think Pender International qualifies as a Hidden Gem. It doesn’t. (For one thing, it doesn’t yet generate cash.) Rather, I want to stress the point that when looking for investments, small can be a very good thing.

They don’t come much smaller than Pender International (OTC BB:PNDR.OB). It’s a penny stock with a market cap of $5.5 million at today’s close of $0.095. While The Motley Fool does not encourage investing in penny stocks (with good reason), I’m going to show that Pender’s real value is on the order of $200 million. That is, it’s a penny stock that shouldn’t be a penny stock.

If you look Pender up on EDGAR, you’ll see that its SIC code is 5020 – Wholesale-Furniture & Home Furnishings. That’s because the business plan developed in 2002 was to import high-end furniture from Mexico for sale in the United States and Canada. But that didn’t work out and in July 2004 the Company entered business as a merchant bank, with the objective of acquiring undervalued small-to-medium size advanced stage companies that require strong management and capital to bring their operations to profitability. (If this sounds weird, it gets even weirder.)

Pender is registered in Delaware, but it’s run by Canadians and its business address is in Markham, Ontario. (Herein, dollars are United States dollars unless noted with CAD for Canadian dollars.) The company, now a merchant bank, began a program to delineate acquisition targets in mid-2004 with a plan to build a broadly diversified portfolio of core holdings. On July 9, 2004, the Company acquired 100% of the stock of IMM Investments, an Ontario corporation, from KJ Holding, also an Ontario Corporation, by issuing unregistered common shares of Pender in exchange for 100% of the issued and outstanding stock in IMM. IMM owns approximately 14.4% of the stock of Armistice Resources, a Canadian gold mining company. IMM also holds warrants that (if exercised) would increase IMM's position in Armistice to approximately 25.2% of the outstanding stock of Armistice. The fair value of IMM assets at the time of the acquisition was $1.5 million, but PNDR paid only $600,000 (meaning there was negative goodwill —an interesting concept).

This gold property is located in the Virginiatown area 40 km east of Kirkland Lake, in northeastern Ontario. The identified mineral resource (see the geologist’s report via the link at the bottom of this post) is approximately 201,001 tons at 0.378 oz. of gold per ton (assuming a dilution factor of 10% and a cut-off of grade of 0.20 oz. Au/ton). At $420 per ounce, the currently identified gold resource of 76 thousand ounces is potentially worth about $32 million. The report also indicates that it is probable that other mineralized lenses will be found on the Armistice property. The property is immediately adjacent to the former Kerr Addison Mine, which produced approximately 12 million ounces of gold during its 58-year operating life. Underlying the Armistice property at a depth of 2,200 feet below surface and extending to a depth of at least 5,600 is the Kerr formation, which it is geologically identical to, and is of similar length and width and attitude to the exposure on the Kerr Addison mine property.

Sounds like a good deal for Pender. The problem, however, is that the vertical production shaft that extends to a depth of 2,290 feet below the surface, and approximately 6,000 feet of underground workings, were filled with water. At the time, Pender did not have sufficient capital to further develop the project and so the stock sat at $0.30 until October 14 last year.

Then something strange happened. In the absence of any news whatsoever, the share price took off, peaking at $11.35 on November 18. The full story is documented in the Ontario Securities Commission’s Statement of Allegations (see the link below). What happened was the CEO — now the ex-CEO — teamed up with a guy who had already been convicted of at least 103! counts of fraud to pump the stock using four different bank accounts that the two of them controlled. (The ex-CEO’s partner in crime took steps to conceal his true identity when dealing with the accounts, including using the alias “Michael Douglas”!) Their plan worked just great, except that they got caught. Their hearing is scheduled for June 29.

Those guys are gone and a new CEO was appointed on January 16. Things have now changed and this is no longer a sleazy Canadian gold mining stock. Trust me.

When Pender acquired IMM, the owner of IMM, Kalano Jang, became a 36% owner of Pender and Jang’s son, Karlson Jang, became Chairman of Pender. Karlson Jang is the Chief Operating Officer with Trillion Financial Group, one of the largest financial and investment agencies in North America. He oversees a business with over 900 agents across Canada and with written business of over CAD $5 billion in 2003. He has also acted as an Internal Analyst with ABNAMRO Asset Management. Jang is a financial heavyweight in the Asian community in Canada (a big community) and last month he raised new money for Pender. Read the press release via this link — this is the most important document in this story.

http://www.penderinternationalinc.com/news/?link=3&doc_id=25&doc_type=0&PHPSESSID=a71c7e...

What Jang managed to do is arrange an equity line of financing for $250 million with five investor groups. From the press release: The terms of the agreement permit the drawdown of funds upon five days notice, on an as needed basis by Pender. Each drawdown amount is to be converted into registered common shares at a conversion price of not less than $4.00 per share. The agreement is non-cancelable and provides the syndicate with first right of refusal on all financing required by the Company up to $250 million. If the equity line is fully drawn, Pender will be required to issue approximately 62.5 million shares.

The current share price is $0.10, yet the syndicate will have its funds converted to shares at $4.00 per share. There are currently 57.5 million shares outstanding. If Pender uses the full $250 million, it will issue an additional 62.5 million shares, so the number of diluted shares outstanding is 57.5 + 62.5 = 120 million. At $0.10 per share, the value of the company based on diluted shares outstanding is currently $12 million. But it has $250 million in equity financing, which, fully diluted, represents $2.08 per share.

(Brief pause for this to sink in.)

What this means is that in terms of value alone — i.e., regardless of the return on investments that the company is able to achieve with the $250 million — this is a twenty-bagger. Well, not quite. The company has estimated its operating expenses for 2005 to be $8 million, so the amount available for investments in 2005 is really $242 million.

This estimate of value is based only on assets and ignores Pender’s potential for growth. The syndicate has currently assigned a value to Pender of $4.00 per share. This value is equivalent to Pender achieving an annual return on investment of about 12–15% and the share price having a PE that reflects the ROI — e.g., investments of $242 million * ROI of 14% * PE of 14 / 120 million shares = $3.95. Applying the range of ROI to the value of Pender’s investments at the end of each year and a PE will give a range of estimates of the potential share price in future years. Suffice it to say that on the basis of the projects that have been developed by Pender since mid-2004, the syndicate expects the share price to appreciate well beyond the $4.00 level in due course, which is why it agreed to the deal in the first place.

(Another brief pause.)

So, what is Pender going to do with the $250 million?

First, they’re going to spend $3 million in 2005 to dewater the Armistice mine, and according to the press release of April 18, this should be completed by the end of May, after which they will contract for bulk sampling and additional mine development work.

Here’s what someone on the PNDR board at Market Millionaires (see link below) stated about the mine: “As mentioned earlier, i've lived with the gold mine since conception, been to the bottom several times, touched the veins... if anything juices PNDR it will be the mine; it is already built and it will be in limited production when de-watering and rehab is completed (end of summer?)...”

On February 16, Pender announced that it has entered into an agreement to purchase 100% of the issued and outstanding shares of Montebello Development in exchange for restricted common stock. Montebello Development is developing Salchi Bay Development -- a 25-acre ocean front resort in Huatulco, Mexico. Pender intends to begin construction next week and anticipates completion of 12 private villas by the end of this year. Thereafter, we anticipate an additional 48 units to be completed in 18 months. The property is located on a 1.5-mile private beach on a secluded bay less than 20 minutes drive from Huatulco International Airport. Huatulco is one of the newest and fastest growing resort areas in Mexico. Pender will spend about $30 million to develop Salchi Bay.

On April 7, Pender announced that it has entered into a definitive agreement to purchase the Sheraton Fallsview Hotel and Conference Center, and adjacent undeveloped land, for a purchase price of $116 million. The complex is located in Niagara Falls, Ontario and was purchased because of its significant upside potential and the opportunity for Pender to add significant value. Pender is considering the addition of a second hotel tower consisting of 500 rooms as well as a 35,000 sq. ft. convention centre. The Company has contracted SF Partnership to complete a feasibility study on the proposed expansion. Furthermore, discussions are underway with two major contractors for the construction of the new tower and convention centre. The John Daly designed eighteen hole, championship golf course is scheduled to commence operations on May 1. Pender anticipates that the opening of the golf course will attract a significant number of golfers and their families, which are anticipated to substantially increase hotel occupancy. Adjacent to the golf course is substantial undeveloped land capable of supporting the development of 200 residential building lots. Pender expects to develop these lots over the next several years. See the link to the hotel’s website below.

And here’s what someone else on Market Millionaires had to say about the hotel and the deal with Pender: “Well, my curiousity got the best of me. I was over in Canada yesterday and today buying a race horse (I train them) and since I have watched my investment in PNDR fall from .15 to .09 or so, i thought before I picked up the horse I would swing over to the Sheraton Fallsview Hotel & Golf Complex, stay the night, and check things out. Ya never know with penny stocks. Btw here is their website for the hotel including pics. So I pulled in and wow!!! It was beautiful. I mean just beautiful. Very impressed with the outside viewing. Great area, luxury accomadations, beautiful golf coarse, nice homes and condos all around it, just breathtaking to say the least. So me being a skeptical person decided to see if anyone around there had heard of Pender and about the purposed sale. First person i talked to was the guy at the front desk, and he didnt offer too much except to say that he knows it is in the process of being sold. Talked to a baggage guy next and he offered up all kinds of info about the hotel, the amenities etc. In his words he said " for the money you won't find a better place to stay with the luxuries you get" or something to that effect. Very nice and chatty guy. So I got checked in and had dinner at Stanleys pub and grill located inside the hotel. Had a great burger and 3 beers , and started hitting on the server lol. Hottie. By the time I left the grill I not only had her digits, but she told me that her mom also worked at the hotel as a manager of some type and she called her up and asked a few questions about which I wanted answered. She 100% verified that it is Pender buying the hotel and surronding land area, and that there were rumors of a bunch of new hirings going around due to the fact that they were going to build a new tower and conference room. Sounded VERY excited about things and her job. When I checked out I asked the lady at the desk how business was going and she said that things are picking up now bigtime now that the weather is warming, (in fact they are already booked solid for half the summer) and that even the winter was good due to the influx of skiers. Sounded very happy that the golf course was going to be opening soon and had a bunch of converntioners coming in just for that…”

On April 21, Pender announced that it has entered into negotiations and expects to enter into an agreement within the next 10 days to purchase additional property located approximately ten minutes from the Sheraton Falls View Hotel. The additional property includes an 18-hole, professional golf course designed by Reese Jones. Approvals are also in place for 350 condominium units as well as a 350-suite hotel facing the Wetland River.

So, in addition to the Armistice mine, they’re spending the $250 million primarily on large real estate development projects. The current management is well placed for these activities. The new CEO founded and sold a successful construction company, with over 100 employees. Now he’s sitting on the other side of the table, representing the developers when they hire the contractors to build the hotel tower, convention center, the residences, the villas on the beach, etc. The new CFO is from De Havilland and Bombardier, both well-known Canadian companies.

Now, the questions remains, Why is the stock still trading at a price that reflects only a part interest in a flooded gold mine? There are a few possibilities.

First, this being a penny stock, one has to consider that the announcement of the $250 million in non-cancelable equity financing is fraudulent. This is conceivable. But this is a public company operating under procedures established by law. If this announcement turns out to be fraudulent, then investors (myself included) will be unleashing their lawyers on these guys. At the least, Jang, Sr., risks losing his interest in the Armistice mine, which is worth several million dollars.

But, in this case, fraud is extremely unlikely. Read the press releases, and the posts on the Raging Bull message board (see link below) from people who have done their own due diligence, and you will see that the Fallsview Hotel deal is indeed happening, that the SF Partnership is indeed doing a feasibility study to further develop the hotel, that the mine is being dewatered, etc. Pender has access to the $250 million and is now spending it.

There is some concern that the Fallsview deal has not yet been finalized. Pender announced that it would close by May 1, but it would appear that they were too optimistic. This is a big transaction and each party has to do their due diligence, then the lawyers get involved, then if there are any issues, it goes back to the parties, then back to the lawyers, etc. Still, while the delay was not entirely unexpected, it is nonetheless worrisome. Once finalization of the deal is announced, which may be a matter of weeks (or even days), we can expect that the share price will pop.

Another factor to consider is that when Pender has issued the 62.5 million shares in return for the $250 million, the syndicate will own 52% of the company. The 36% share currently owned by Jang, Sr., will be reduced to 17%. Together, Jang and the syndicate will own 69% of the company and will be able to do what they want with it. But even if they decide to take it private, they will still have to pay market value to the other shareholders, so this eventuality, in itself, isn’t impacting the share price.

The most likely reason for the current share price is that almost nobody knows about Pender. Or, if they know about it, this being a penny stock, they trade it solely on the basis of technicals, regardless of fundamentals. Or, if they know about the fundamentals, they’re still spooked by the pumping scam that happened last November. In this regard, the following email from the company was posted on Market Millionaires on April 14: “Primarily, there is a lack of market awareness in the success that Pender International, Inc. is having. Our company is working very hard to create the necessary market awareness to support shareholder value. We anticipate significant news will be out with regards to Armistice and our other investment projects over the next 4-6 weeks.” So the company is aware of the problem and it even hired two private analysts to publish reports. (The reports are objective summaries of the facts, but paying analysts to give buy recommendations may have done more harm than good.)

The $250 million equity line of financing was only announced on April 13, just over a month ago, so this is still a new story. If the story is true, then, as a value play, it’s a no-brainer and there’s a good chance that this will be a multi-bagger in the near term.

But then again, it is possible that we might inadvertently be ignoring something important, so there’s also a chance it will be worth zero. The facts indicate otherwise, but that’s the risk you take with penny stocks.