Odyssey Marine Exploration: Watching The Detective

| About: Odyssey Marine (OMEX)

"Disinformation is intentionally false or inaccurate information that is spread deliberately. It is an act of deception and false statements to convince someone of untruth. Disinformation should not be confused with misinformation, information that is unintentionally false." - Wikipedia

"Today, we are publishing our findings to date for the benefit of OMEX stockholders." Ryan Morris, 10/31, "Do Investors Know What Lies Beneath the Surface?"


Meson Capital's campaign to drive Odyssey Marine Exploration Inc. (NASDAQ:OMEX) to zero through deceptive and misleading "research" continues. Meson (Ryan Morris) has produced three new documents since the original short report was published on 10/31. These pieces can be found here , here , and here. This summary will highlight weaknesses in Ryan Morris's new arguments and will examine some of his past claims as well. While it won't seek to refute each of his numerous allegations, it will attempt to establish that a recognizable pattern of selective disclosure emerges from Mr. Morris's work. This may help the reader recognize these patterns in the claims not directly addressed here. In short, we will investigate the "investigator."

Odyssey is the most successful historic shipwreck salvage firm in the world. As Morris has pointed out a number of times, almost every other public competitor in the industry has failed. Odyssey's continued survival and its record-setting recoveries are the result of the extraordinary skill and experience of its people. Odyssey finds and recovers significant value on the ocean floor that others cannot, and the data that OMEX has compiled is without parallel. This success has engendered ill-will from both less successful competitors, and from a small cadre of archaeologists who take issue with the firm's methods of earning a return on its investment. Ryan Morris feeds on these people as they offer up their bitter resentment in the form of half-truths which Morris repackages and distributes as "investigative" research.

This report details the following points from Meson Capital's campaign of distortion:

  1. Doubtful contracts exist on Nazi blockade runners - Odyssey has the contracts with either the German government or private cargo owners.
  2. Marine Maritime Org. HMS Victory investigation - An "investigator" without established jurisdiction or established rules.
  3. The black eye from the Black Swan Ruling - US Government's involvement impacts ruling
  4. Why the questionable subsidiaries? - DNA's directors are required per Panama regulatory framework.
  5. Gairsoppa Contract and Auditor doubts - Tender spells out Gairsoppa reimbursement in black & white. Auditors have clean bill of health from PCAOB.
  6. Oceanica worth zero - Oceanica worth significantly more than zero. A large, high quality phosphate concession.

We also detail several factual inaccuracies in Morris's work:*

  1. Auditor is under investigation - FWG has never been investigated.
  2. CEO claims company is running out of cash - CEO never said company will run out of cash.
  3. John Morris is a full-time consultant - Morris is not a full-time consultant, hasn't worked for the company since 2010.
  4. Neptune only closes 10% of offering - Neptune didn't close only 10%. Closed on amount required.
  5. UNESCO prohibits historic salvage - UNESCO allows historic salvage
  6. OMEX's valuation on Neptune based on $3.5mn raise - OMEX valuation of Neptune based on disclosed $20mn material investment.

While the market generally understands that Morris's research is false and misleading, the stock continues to trade at lows. Many shareholders have lost faith in a management team which is prohibited from commenting on some of its most promising businesses and assets for regulatory reasons, and to maximize shareholder value. This circumstance helps enable a short case that has become self-fulfilling, as a low stock price begets concerns that the company is no longer able to access equity markets which would be necessary to repair a "hole" in the company's balance sheet. The truth is that the company will regain credibility and calm fears by delivering cash to shareholders - there is no "hole." We believe this will happen soon. With an asset the size of Oceanica, management will have many financing options from which to choose. We will see additional evidence of this in coming weeks as Mako will likely exercise some or all of its options to buy Oceanica stock at a $250mn valuation.

As you read this report you will undoubtedly wonder why I've neglected to mention certain falsities and omissions of pertinent fact from Morris's work. Understand that my objective is to establish a pattern, not to make an exhaustive listing. The following pages detail a sampling of the deception in Morris's "research."

*My reference to "we" in this note means a small group of independent asset managers who exchange research on OMEX.


"How can one have a contract on Nazi German cargo?" -Ryan Morris, "Do Investors Know What Lies Beneath the Surface? Part 2"

"A credible source inspired us to ask some very pointed questions to Odyssey related to the commodity shipwreck opportunity." -Ryan Morris, "Do Investors Know What Lies Beneath the Surface? Part 2"

So, we're all interested to learn Odyssey's response when you asked them these questions. What did they say? Had you asked management these questions (as you suggested you would), your questions would have been answered. This course of action, however, would have prohibited you from publishing misleading research which is why you decided against it.

It sounds like the, "experienced salvage industry veteran" who was whispering doubts in Ryan Morris's ear about Odyssey's commodity wreck contracts has an axe to grind. Yet, the arguments he attempts to make are as full of holes as the blockade runners he references resting on the bottom of the ocean. Could it be that this "veteran" was unable to secure a contract for certain vessels because the contracts went to Odyssey instead?

As Morris notes in his report, Odyssey has promised shareholders that the company would secure rights to cargo before undertaking future salvage missions. Following the Black Swan rulings, the company wanted to be absolutely certain it was never compelled to forfeit future salvages due to a court ruling. Would the company be so reckless as to publicly lie about its intentions? OMEX must know more about salvage law and salvage contract negotiation than any company on this planet, would they have made a "mistake" as big as the one Morris implies?

Morris's source relies on the idea that OMEX is contracting to salvage Nazi blockade runners and he implies that it may be impossible to obtain a salvage contract on cargo from a Nazi-owned ship. Let's assume that he's correct, and blockade runners are the target. There are two problems with the reasoning behind his analysis:

  1. If these ships were carrying cargo owned by the Nazi government, then that government's successor in interest would be the current German government (this is spelled out in German law). Odyssey could have a contract with the current German government and this "veteran" would not have access to this information.
  2. Second, some blockade runners were not owned by the government, nor were their cargoes all owned by the government. Odyssey could be contracting to salvage blockade runners with private entities.


"By utilizing the UK Freedom of Information Act, we have confirmed that there is an active government investigation in the UK regarding OMEX's activities at the HMS Victory site where they may have acted without a license or prior consent from the UK Secretary of State for Defence." Ryan Morris, "Snatching Defeat From The Jaws of Vicotry: HMS Freedom Of Information Act UK"

We can shed additional light on the situation by being less selective with facts than Mr. Morris. Odyssey was granted permission by the then owner of the HMS Victory wreck, the UK's Ministry of Defence (NYSE:MOD), to recover a cannon from the site in 2008 in order to confirm identification of the ship. Odyssey stated that, "all activities at the site have been conducted in accordance with protocols agreed with MOD and Royal Navy officials." At that time, footage was shot, which later appeared on the Discovery Channel, that showed a human skull at the site. It is not clear from the film that Odyssey's activities were responsible for exposing the skull, or if the skull was exposed prior to the removal of the cannon.

None of that really matters, however. OMEX was authorized to make the recovery and proceeded according to plan under the rules established. A timeline will help readers understand how the events unfolded.

Summer of 2008 - Odyssey recovers cannon from HMS Victory. Film is shot that includes pictures of skull.

February 8, 2009 - Discovery Channel "Treasure Quest" Victory Special airs in the United Kingdom showing footage that includes skull.

November 12, 2009 -- The Marine and Coastal Access Act was established. Note that this is the act that Meson believes OMEX violated.

April 1, 2010 -- The Marine Management Organisation (MMO) was formed.

Late 2011 - Odyssey performs reconnaissance work at HMS Victory site, takes pictures. OMEX Doesn't remove or disturb HMS Victory or contents. Discovery shoots another picture of a skull that was unearthed by bottom trawlers or tidal impact.

February, 2013 - Discovery Channel airs "Silver Rush" series which contains images of the skull shot approximately one year earlier.

October, 2013 - Independent publishes article claiming that the MMO is "investigating allegations" that OMEX explored HMS Victory without a license.

I asked OMEX management for a summary of their interactions with the MMO during the period in question. Here's what they had to say:

21 July, 2011: Odyssey proactively contacted the MMO to advise them that we were engaged in continued exploration of HMS Victory (1744), and asked if there were any licensing requirements or guidelines in place which would affect our activities.

26 July, 2011: Odyssey received an official response from MMO that stated:

"Marine Management Organisation are still working towards producing a definitive description of licensable activities, charges and processes. Once this has been approved internally the intention is to make the information available to the diving community and other interested parties via our website and press releases in relevant communications. Once I am able to do so, I will send you an update to confirm the situation"

8 August, 2012: The first communication from MMO updating the situation with reference to the guidelines was received by the Maritime Heritage Foundation (NYSE:MHF). It stated that the MMO had discussed the Victory with the MOD and then referred the MHF to the licensing guidelines. However, this was not very helpful because the MMO letter referred to the April 1, 2011 guidelines, the same guidelines which we were told required additional clarification in July 2011.

Nevertheless, in an abundance of caution, and until we received further clarification on licensing guidelines, no activities requiring MMO licensing were conducted by Odyssey at the Victory site after receipt of that communication in August 2012.

Odyssey is still awaiting independent confirmation on MMO jurisdiction with reference to the site, and once the Secretary of State for Defence has approved the archaeological excavation of the site, Odyssey plans to cooperate with the MMO, if required under the law.

In any case, the jurisdictional issues are not clear at this time because the MMO regulations specifically state that if another government agency has jurisdiction over a project, the MMO does not have any jurisdiction and MMO licensing is not required. Regarding the Victory site, the effect of the jurisdiction of the Receiver of Wreck and MOD over the site and how that may apply to the MMO's jurisdiction has not yet been clarified.

So, allegations are being investigated that Odyssey ran afoul of rules that were established after the alleged (but unproven) infraction occurred, by an organization that didn't even exist when the act was undertaken, and which apparently has not yet established jurisdiction over the wreck site. If the investigation pertains to the second skull (more likely) the picture is only more cloudy as OMEX didn't touch the site during this reconnaissance mission, and no evidence has been supplied to the contrary.

Morris begins with a conclusion that OMEX is in the wrong and then seeks out evidence to prove that point. With such a narrow focus, it only makes sense that he would miss many of the most pertinent facts which put the situation into proper context.

"I am something of an idealist" Ryan Morris, public comment on Value Investors Club


Meson repeatedly refers to the negative ruling in the Nuestra Senora de las Mercedes (Black Swan) case in an effort to undermine management's credibility. In particular, Morris pays heed to a harsh rebuke the company received at the hands of Judge Steven Merryday in Merryday's September 2013 ruling. Yet, Morris fails to disclose a couple crucial facts that occurred around this case which cast doubt on the impartiality of the US government, and its agents, when it comes to the case of the Black Swan.

First, diplomatic cables made public by Wikileaks appear to show that the US government offered to surreptitiously help Spain in its case against OMEX. The US gave Spain's lawyers special assistance and access to confidential information regarding OMEX in exchange for Spain's help in reclaiming a valuable painting held in Spain, obtained by the Nazi party in World War II, and claimed by a US citizen. Second, the Executive Branch of the US government filed an amicus brief in the Black Swan case, "changing its previous position and supporting Spain in the "Black Swan" case by setting forth a re-interpretation of the language in the Sunken Military Craft Act (SMCA) to allow government owned vessels on commercial missions to enjoy sovereign immunity." (Odyssey website)

When the federal government secretly moves to cut deals with a foreign nation at the expense of OMEX, changes the rules of the game on salvaging government owned ships on commercial missions during the trial, files an amicus brief in the case, and sends DOJ attorneys to the trial in an effort to support the other side, you know the deck is stacked against the firm. It would not take much imagination at all to suspect that active federal government involvement in this case at very high levels might influence the case's tone.


"Panama does NOT require local directors" Ryan Morris, "Do Investors Know What Lies Beneath the Surface? Part 2"

Meson raises a number of questions about the use of Panamanian subsidiaries. In particular, Ryan Morris is troubled by DNA's use of nominee directors "with known ties to financial frauds." OMEX has stated that these directors are "employees of the law firm used to set up the entity to satisfy Panama's regulatory framework." Most investors, familiar with OMEX and this issue, understand that nominee directors are a standard offering at international law firms. These directors are used for a number of reasons including helping with logistics, saving money, preserving confidentiality for competitive reasons, and satisfying regulatory requirements. Morris, however, is dissatisfied with the answer so he speaks with a Panamanian attorney and visits various websites to learn more.

Following his research, Morris concludes that, "contrary to what Odyssey has publicly announced, local Panamanian directors are NOT required on Panamanian listed entities." Either Mr. Morris is confused about what Odyssey said, or he is feigning ignorance with the intent of planting more doubt in the minds of shareholders. Mark Gordon, COO of OMEX, did not claim that local directors were required to form Panamanian entities, rather he said that they were needed to satisfy the country's regulatory framework.

Panama regulations stipulate that an entity have a minimum of three directors. Theoretically, if your entity was formed with a single shareholder, you would then have to find other directors to fill the void. If your law firm offered nominee directors, you would likely take them up on the offer. I'm not certain that DNA has only one shareholder, but this is one possibility, and it offers a reasonable explanation to Gordon's comments.

"Commencing in 2013, OMEX has begun disclosing opaque offshore subsidiaries in the Bahamas." Ryan Morris, "Do Investors Know What Lies Beneath the Surface?"

"Enron used numerous opaque corporate structures to hide their business dealings and secretly move cash." Ryan Morris, "Do Investors Know What Lies Beneath the Surface?"

Ryan Morris doesn't seem to be very familiar with the operations of mining companies. This is surprising in that he was, until recently, Chairman of an oil and gas outfit (Lucas Energy (NYSEMKT:LEI)). He suggests that because OMEX had recently created five subsidiaries it is comparable to Enron (in fact, he uses Enron's name twenty times in his report, just to make sure we all get the point).

Are foreign held subsidiaries unique to OMEX in the world of mining? Of course not. On quick inspection we found that US-based Newmont Mining (NYSE:NEM) had somewhere in excess of 200 foreign subsidiaries. Does this mean Newmont is 40 times the fraud that OMEX is with only five foreign subsidiaries? How about BHP Billiton (NYSE:BBL), with around 300 foreign subsidiaries? What about Rio Tinto (NYSE:RIO) which appears to have so many subsidiaries it can't fit them all in its filing? Maybe the rampant use of subsidiaries in this industry doesn't imply rampant fraud and corruption? Maybe it's indicative of the fact that there are often legitimate business and tax purposes for setting up these small entities within larger companies?

It's easy to be confused when it comes to dealing with rules around foreign entity creation, nominee directors, tax treaties, and foreign mining concession ownership requirements. It's understandable that Ryan Morris would not have an easy time with all of this. I know that I didn't. What is more difficult to comprehend is how Morris could jump to absurd conclusions without digging deeper to understand the issues, without even attempting to speak with the people who set up the entities in which he has such great interest. It is clear that Morris doesn't want the truth, he doesn't want the facts, he wants to swindle shareholders out of their holdings with scary PR.

"We fundamentally want the same thing that anyone long OMEX stock wants" -Ryan Morris, "Do Investors Know What Lies Beneath The Surface?"


"The Smoking Gun" Ryan Morris, "Odyssey Marine's Smoking Gun: SS Gairsoppa Contract Facts from A UK Government FOI

Morris claims to have the smoking gun in his latest report. The issue centers around which expenses are reimbursable under OMEX's salvage contract with the UK government. This determines net salvage value. Morris believes OMEX is pulling the wool over its investors' eyes, claiming to be reimbursed from gross salvage proceeds when this is not the case.

Morris quotes directly from the salvage contract in making his assertion, but fails to carefully read all of the documents supplied per his FOI request.

  1. He misses the following language in Odyssey's original tender "The ten percent (10%) would be based on the adjusted value of the cargo after all expenses associated with the search and salvage have been incorporated" (emphasis mine).
  2. He then fails to see the first item in the contract Award Letter which states that the original tender letter was accepted (implying that the original tender is the official document minus any changes acknowledged in the Award Letter).
  3. Nor does he mention that in the FOI response he is specifically told, "As mentioned in the previous letter the personal and commercial information in these documents has been redacted…"
  4. He also misinterprets the Condition of Contract's language to indicate that it named all expenses included in custody and disposal. In fact, it only names expenses associated with the disposal of the salved cargo. OMEX most likely requested that the cost recovery provisions under "custody" be kept confidential.

A careful and objective review of the documents would have helped Mr. Morris avoid publishing this embarrassing report.

If that guffaw isn't bad enough, Morris proceeds to level a vicious tirade against OMEX's auditor, Ferlita, Walsh, Gonzalez, and Rodriguez, (FWG) which looks even more unfounded and reckless than the Gairsoppa "smoking gun." Comparing FWG to Bernard Madoff's audit firm, Morris notes that FWG is small, has audited OMEX since inception, and also audited Seahawk Deep Ocean Technology. He then cites two deficiencies in FWG's most recent inspection. Morris concludes, "No prudent director should reasonably rely on the Ferlita firm in light of these red flags."

FWG has done nothing to deserve this. The firm has an excellent track record with the PCAOB. It is examined regularly and has never had a single disciplinary proceeding brought against it. The fact that Odyssey has remained with FWG since its inception speaks to the high quality work that FWG performs.

Ryan Morris understands that virtually every auditor receives deficiencies during their regularly scheduled inspections. In fact, he states, "yes many auditors have deficiencies" in the comment section of his note. He ought to know, the firm for which he served as Chairman and holds a majority stake, Lucas Energy , retains a small audit firm, Hein and Associates LLP which has received numerous deficiencies (h/t Antelope2) at the hands of the PCAOB. Not wanting to needlessly bring negative attention to that firm (which is probably made up of good, hard-working people), I will not quote the inspection report, but I will note that it sounds much more ominous than the inspection report concerning OMEX's FWG.

Morris would prefer that OMEX sign on with a "first-class" auditor. We looked at a couple inspection reports for "first-class" auditors Ernst & Young, and Grant Thornton, and found far more deficiencies in their inspections than in FWG's.

So, tell us Mr. Morris, if no "prudent" director should rely on FWG, and FWG seems to have had less trouble than Hein and Associates, are you admitting to your own imprudence as a director at LEI? Alternatively, do you concede that attacking FWG, a firm with an outstanding track record as an auditor, was in excessively poor taste? You handle other people's livelihoods with a callousness and lack of decency that many people find highly offensive. You appear to have lost control.

We believe shareholders should not rely on statements made about the supposed "fair value" of the Neptune or Oceanica assets until Odyssey submits all of its records to a competent, nationally recognized auditor for review. Ryan Morris, "Odyssey Marine's Smoking Gun: SS Gairsoppa Contract Facts from A UK Government FOI

(Note that both Neptune and Oceanica are carried at a "fair value" of zero on OMEX's consolidated statements)

Deception Case #6: OCEANICA

"We believe OMEX's new business of undersea mineral exploration is a pipedream and worth zero." Ryan Morris, "Do Investors Know What Lies Beneath the Surface?"

The research team with which I work has done a tremendous amount of due diligence around Oceanica. Odyssey has disclosed very little about this asset, but there is enough information available in the public sphere that most analysts have been able to figure out the "what" and "where" of Oceanica. We believe Oceanica is a large, high quality phosphate body off the coast of Baja, Mexico.

We spent months gaining an understanding of this asset and its strategic importance. Our research relied upon public records, public research, OMEX ship location data, conversations with Baja phosphate experts, research analysts, industry newsletters, and commentary from comparable companies. It is this research that led us to conclude that this was the single most compelling reason to own Odyssey Marine stock. We find sufficient evidence to conclude this is indeed a world class asset, and that Odyssey's stake in this asset is currently worth multiples of the company's market capitalization. Further, once this asset is de-risked, we believe that even higher multiples will be attributed to the asset.

When we saw Morris's rudimentary treatment of this tenement in his second report, we were somewhat surprised by how little Ryan Morris knew. He compares the asset and the proposed mining operation to that of Nautilus Minerals (even showing a picture of a Nautilus-like operation). In reality, Oceanica's phosphate operation would be drastically different than Nautilus's Seafloor Massive Sulfide (SMS) mine (outside the fact that both are under water). He authoritatively declares Oceanica "not economically viable" based on a comparison with Innophos's costs on a nearby claim. Yet, Morris has no idea of Oceanica's cost model, nor of the quality of Oceanica's ore, which will likely be the most important determinant of economic viability. Morris seems to believe that because the Innophos license is in the same general area as Oceanica's, and Innophos chose not to develop its claim, Oceanica's license must therefore be uneconomic. We would caution readers to be very careful handling that analysis. It seems to imply a proportionately even distribution of minerals around the Earth's surface, an idea that is quite suspect.

We believe seabed phosphate mining is technically feasible, economically viable, and one of the most environmentally friendly forms of mining available. Below is more detail supporting each of these three points.

Oceanica Technical Feasibility

The process of seabed phosphate mining is not terribly complicated or difficult. It does become more challenging as depths increase. It involves dragging a dredging (or jetting) tool across the targeted area, pumping bottom sand up to a vessel where the ore is filtered from the matrix, then pumping the remaining sand from the vessel back to the seabed from where it came. The net impact is that the seafloor bottom is lowered by a few inches.

Thousands of dredging operations are underway around the globe right now, improving beaches and harbors. Undersea mining operations currently use dredges to extract aggregates and diamonds from the bottom of the sea. This presentation given by Royal Boskalis indicates that phosphate mining by dredge is feasible. Royal Boskalis would know -- the company is a multinational leader in the field of subsea dredging operations ($5bn in revenue annually). The presentation pertains to a project Boskalis has undertaken for a New Zealand company, Chatham Rock Phosphate (CRP.nz) (my fund is a shareholder). Notably, the Chatham operation will take place at a depth of ~400 meters in a notoriously rough patch of ocean. Boskalis likes the Chatham project economics enough that it took a 20% stake in the company. Based on overlaying the position of OMEX's Dorado Discovery while working in the Baja area onto geologic maps, we believe Oceanica will be mining at depths of ~100 meters. Our discussions with experts in the field indicate that the Oceanica asset will not be a technically difficult recovery.

Oceanica Economic Viability

To get a good read on the economic viability of the Oceanica asset, an investor needs an appreciation for both the unit costs and unit revenue potential. Of course OMEX isn't able to help us with this exercise, so we need to look elsewhere for data. We have two sources to help approximate costs. Phosmex, a small private company that took the first offshore phosphate license in the Baja area in 2007, believed they could extract rock phosphate at a cost of between $17 and $18 per ton. Their data is a bit dated, so the costs could have risen somewhat since these figures were used. Phosmex was going to mine an area closer to shore, at depths of approximately 100 feet, so their concession was fairly shallow. Oceanica's costs should be higher than Phosmex's.

Chatham Rock is going to mine at a depth of approximately 400 meters, roughly four times the depth of our estimate for Oceanica. Chatham believes their costs will run at approximately $80/ton. Note that this is an "all-in" cost as Chatham's dredging partner would shoulder all of the operational and capital expenses. It would essentially sell the rock to Chatham at approximately $80.

Our guess is that a midpoint between Phosmex's estimate and Chatham's estimate is appropriate due to the specifics around the Oceanica deposit. We ran this idea past a couple people who have experience working with dredging companies and they agreed that this was a logical, if imprecise estimation. It would imply a cost per ton of roughly $50.

Rock phosphate prices have been trending downward for the last several months. In November rock phosphate was quoted at $108/ton, down from $165 in May. This is for 70% BPL (Bone Phosphate of Lime) which equates to roughly 32% grade P2O5 diphosphorus pentoxide, FOB in Casablanca Morroco.

Pricing rock phosphate is complicated. The quoted prices serve more as a directional reference than anything else. Not only is grade taken into account but so are levels of impurities such as cadmium, iron, uranium, and others. Prices also reflect where the supply originates, the level of reserves behind the supply, and the security of the supply. Shipping costs can be very important as well. Chatham Rock CEO, Chris Castle, estimates the cost to ship one ton of rock phosphate to New Zealand from Morocco at $75/ton, adding 70 percent to the $108 purchase price.

Where does this leave us with respect to Oceanica and the price that this operation might receive for its Phosphate? Oceanica is strategically very well positioned in a market that is running low on incremental local phosphate sources.

"The U.S., with 1.4 billion tons (phosphate), is close to running out. You can see why agronomists are starting to get worried." Yale, environment 360

Large integrated fertilizer companies such as Mosaic (NYSE:MOS) are increasingly sourcing rock phosphate from places such as Saudi Arabia, as North American sources are inadequate. In addition, Mexico imports roughly 2 million tons of phosphate per year from Morocco, yet Mexico is using only half the amount of fertilizer per acre of arable land versus what we use in the United States. Mexico also has a massive trade imbalance with China and many see the Mexican agricultural industry as key to remedying the situation. Based on the strategic nature of this deposit, as well as our estimate of the ore's grade, we conservatively estimate that OMEX could sell the rock at approximately $90 - $100/ton as an independent supplier. They could demand higher prices were they to partner with a large integrated fertilizer company, or try to move up the food chain into processed products.

Earlier this year, Mosaic invested $1bn for a 25% stake in a Saudi Arabian phosphate venture. That program is estimated to produce 3.5mn tons of phosphate for a period of 30 to 35 years. We believe that the Oceanica claim may be quite a bit larger than this venture in Saudi Arabia, and it has the advantage of being closer to home for the North American integrated fertilizer producers.

We believe that Oceanica will not only be economically viable, but it will be very profitable. At approximately $50/ton, the mine's cost structure would be competitive with some of the largest and most profitable in the world. The attractive economic nature of the prospect has already been confirmed by Mako resources at $125 million and is likely to be confirmed at a level twice as high in a few weeks. Mako has the option to buy 7mn shares in Oceanica from OMEX at $2.50 before year end or the options will expire. We believe Mako will exercise all or part of its option, confirming a higher value for Oceanica.

Oceanica Environmentally Benign

Each and every human activity undertaken has an impact on the environment. Some are more harmful than others, so we constantly weigh the positives and negatives involved in each to put them into context and understand whether or not society will allow them. The human race requires minerals to survive. In fact, the demand for various minerals increases each year with population and industrialization growth. We are currently mining the vast majority of our minerals from terrestrial sources. The problem is that we've depleted many of these sources over hundreds of years. As a result, the minerals that remain are ever more difficult to extract. Greater difficulty usually means more expense and a larger carbon footprint factor into extraction. Canada's oil sands are a perfect example.

Mining phosphate in the US has become a difficult and environmentally unfriendly exercise. Terrestrial mining of phosphates usually means strip mining, and the removal of vast quantities of overburden. Not only does this destroy the natural surroundings, but the rock needs to be cut or dug out of the ground in a capital intensive, carbon-heavy process. Yet the phosphate is needed to feed the world's population, so we tolerate the terrestrial mining.

By contrast, subsea phosphate mining is relatively environmentally friendly. The overburden doesn't need to be removed because it's seawater. The phosphate rock is intermixed in a sand matrix and is easily extracted using filters or hydrocyclone equipment. Subsea phosphate mines don't go very deep (30 cm in Chatham's case), and they replace the sand they've removed.

Seabed mining of phosphates has an impact on the immediate area. Any small organisms in the sand that is mined are likely to be destroyed (as they would be in a terrestrial operation). This is why mining phosphate in fish breeding grounds, where fish lay eggs is not ideal. A seabed phosphate project in Namibia was just put on moratorium for this very reason (or at least in part). Seabed mining will also induce a certain level of turbidity in the water despite the fact that the unused sand is piped back to the ocean floor. Chatham Rock has spent around $10 million to understand and model the environmental impact of its project. The company has scientific evidence that the impact of the turbidity is minimal, that the impact zone of the turbidity will hardly extend beyond the boundaries of its concession. Further, miners usually allow for strips of untouched, fallow ground where they mine so that organisms can recolonize the mined floor over a couple years.

Many currently sanctioned subsea commercial activities are much more destructive to the environment than phosphate mining. Dredging is undertaken all over the world to clear channels, fight onshore erosion, mine aggregates, and expand beaches without special regard to the habitat below. Some of these operations even spray the unused sand back into the water rather than piping it to the bottom. Offshore oil and gas mining has an infamous track record with the environment. Fishermen trawl vast portions of the seabed with weighted equipment, causing turbidity and destruction - moreover, they do so year after year, never giving the habitat a chance to reclaim itself. A phosphate mine would pass over an area one time only. Further, even if all economic subsea phosphate deposits were mined, they would likely comprise an area far less than one percent of the ground trawled by fishermen who have no environmental permits.

Meson alleges that, "In fact, the only "world-class" aspect we were able to find related to Oceanica is that it overlaps a world class tourist destination known for sport fishing, surfing and whale watching - activities that would be severely disrupted by underwater phosphate mining." Yet, based on AIS data, we believe that Oceanica is much too far offshore to impact most of these activities. We believe the company would operate some twenty to thirty miles offshore (where concentrations are highest) regardless of the fact that its concession may extend closer to shore. The Gray Whale breeding grounds are in the shallow lagoons at the edge of the ocean, and the whales migrate close to shore for navigation purposes. In addition, gray whales feed primarily in the shallow waters of the Arctic at depths of 30-50 feet. The phosphate operation would produce some acoustic interference that might distract whales, but because the whales would be over twenty miles away there wouldn't be meaningful impact. Surfers, grey whales, and sea turtles all appear to be safe from serious ramifications. Sport fishermen would have to navigate around the Oceanica vessel.

We believe that seabed phosphate mining can be among the most benign forms of mining practiced on the planet if it is accomplished with proper environmental controls in an area that is not environmentally sensitive. Seabed phosphate mining can help feed billions of people and grow massive quantities of plants which thrive on the process of cleaning carbon dioxide from the air we breathe. Seabed phosphate from Baja would largely replace high cadmium rock from Morocco, meaning the potential for fewer impurities and a lower carbon footprint from shipping. Forward-thinking environmentalists who do their homework will embrace seabed phosphate mining. They will understand that our society will always have a need for phosphate; the question will then be whether we extract it from terrestrial or ocean sources. It is obvious that the seabed source can be vastly less costly to the environment than the terrestrial version if accomplished with care.

Oceanica Control

One final aside regarding Oceanica. It appears that this summer, when OMEX management entered the Securities Purchase and Option Agreement with DNA, they had something on their minds. With OMEX trading at $3.40/share ($270mn market cap) management was worried about someone using the "backdoor" to steal Oceanica from underneath them by buying OMEX on the cheap. Look at the wording of this agreement between the two parties:

(NYSE:G) Appointment of Proxy. DNA hereby irrevocably constitutes and appoints Enterprises as its attorney-in-fact and proxy, with full power of substitution and resubstitution, to cause three million of the Shares (excluding the Purchased Shares and the Option Shares) or the equivalent number of other Equity Securities derived therefrom held by DNA, the Restricted Equity Shares, to be counted as present at any meeting of the holders of Equity Securities of Oceanica and to vote the Restricted Equity Shares at any such meeting, however called, and to execute consents in respect of the Restricted Equity Shares as and to the extent determined by Enterprises in its sole and absolute discretion. THIS PROXY AND POWER OF ATTORNEY IS IRREVOCABLE AND COUPLED WITH AN INTEREST. DNA hereby revokes all other proxies and powers of attorney with respect to the Restricted Equity Shares that it may have heretofore appointed or granted, and no subsequent proxy or power of attorney shall be granted. Notwithstanding any provision of this Agreement to the contrary, this proxy and power of attorney shall terminate, and be of no further force or effect, after a Change in Control of Odyssey has occurred.

Section 5.4. Successors; Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted transferees and assignees. Neither this Agreement nor any interest herein may directly or indirectly be transferred or assigned by any Party, in whole or in part, without the written consent of the other Party; provided, however, that Enterprises may effect any such assignment to any affiliate of Odyssey, but any such assignment shall not relieve Enterprises of its duties and obligations contained in this Agreement.

This purchase agreement is all about OMEX retaining control of Oceanica. In it, Omex is given proxy control over three million DNA shares, and is given the option of purchasing one million shares so that they can retain voting control over the entity. By inserting the language bolded above, OMEX prevents someone from buying the company to gain control of Oceanica. The fact that they felt the need to use this language tells us management felt threatened about the idea of a hostile deal at a premium to the market price of $270 million. What does that say about how much value they attribute to Oceanica? What does it say about today's price of $150 million?

Neptune Inc. and Seabed Mining

Seabed mining for precious and rare earth metals is still in early stages. When you think about the fact that approximately two-thirds of the earth is covered with water and has not been mined, and the fact that the geology underwater should be similar to that above water, then it makes sense that we will find very interesting opportunities on the sea floor.

Much like the early days of terrestrial mining, the ore on the bottom of the sea will be picked off the seafloor surface easily, and at very high levels of concentration. Though deep sea mining appears technically feasible, and commercially viable, whether or not contracts are struck and environmental approvals made remains to be seen. There is much value to be shared from the deposits, the minerals are in high demand, and the operations can be run in a way that does not cause widespread destruction of the underwater environment. It is likely that we will be mining seafloor surface mineral deposits before long.

There is good reason for investor excitement around Neptune Inc. and Nautilus Minerals (NUS.to). When offshore oil and gas first started in earnest in the 1940s and 50s, few thought it would amount to much. Can you imagine if at that point a single firm had secured the rights to the Gulf of Mexico or the North Sea? That is effectively what Neptune and Nautilus have done. There are certain areas in the South Pacific which contain a large portion of the seafloor's concentrated precious and rare earth metals. These two companies have massive tenements that include much of these valuable ore bodies.

There are a handful of investors who were early in believing that seabed mining would be successful. There were limited investment vehicles available to these investors. So, it's no surprise that many of these investors own stakes across the few existing seabed mining entities to which they have access. My guess is that they will be richly rewarded for being early, but that it will take time, and the industry's progress will continue to come in fits and starts.


"…most people have taken issue with the lackluster nature of your work. While highlighting a fraud and exposing corporate malfeasance are indeed laudable goals, your desire to be an "idealist" may be better explored in a forum where the end goal isn't to simply turn a profit for oneself. In short, your aspirations are belied by your actions." -Mrsox977, Responding on VIC to Ryan Morris's claim that his OMEX "research" is driven by idealism.

"Ryan Morris asks a lot of questions for a guy who doesn't ask any questions" -Anonymous

If you sense a pattern in Ryan Morris's work, you are not alone. He repeatedly launches viciously aggressive attacks on OMEX with the goal of destroying the company and reducing its stock price to zero, then supports his wild contentions with an overwhelming quantity of misleading, selective, and weak evidence. It's almost as if Morris's strategy is to throw enough unfounded junk out about the company such that the volume of allegations alone will weigh down OMEX's share price. It's a strategy that has proven successful.

One irony in all of this is that Morris seems more of a PR man than a stock analyst. He attracts an astounding level of media attention for a manager of small fund, adeptly uses the media to amplify his viewpoints, makes sensationalist claims throughout his reports complete with colors, large font points, and pirate pictures, and makes a concerted effort to publicly distribute his "research" on a website that blares "The Truth About Odyssey" in large, bolded letters. The hypocrisy in this, of course, is that it is exactly the kind of behavior for which he frequently rebukes Odyssey Marine.

Morris repeatedly admonishes OMEX CEO, Greg Stemm, for his PR focus. Morris notes in a public comment, "this whole thing just seemed so wrong to me and I am something of an idealist…..I just hope the company starts being more transparent instead of PR stuff." Quoting Mark Twain, Morris chides the company, "Never let the facts stand in the way of a good story." He repeatedly quotes Judge Steven Merryday's Black Swan ruling against Odyssey, "Odyssey's cynically deploying a few random nodes of truth to the end of evading the acknowledgement of an over-arching and regnant truth." Yet, after reading Meson's four reports, the reader is left with a feeling that if anyone is guilty of avoiding pertinent information and cynically deploying selective facts, it is Ryan Morris.

Three times in his second report, Morris declares victory over OMEX claiming that the company corrected "ZERO" factual misstatements in his first report during the November 5th conference call. While Morris is absolutely correct that the company didn't speak directly to any of the lies in Morris's report (they focused on the bigger picture distortions), this doesn't mean there weren't any. The company may not have chosen to drop to this level of detail due to the limited timeframe of its conference call, but we have more time to explore the issue here.

It turns out that Ryan Morris made repeated mischaracterizations of fact (a.k.a. lies) in an attempt to mislead and intimidate investors with his PR reports. We'll look at a few cases from Meson's original report below.

Factual Inaccuracy #1

"FWG [Ferlita, Walsh & Gonzalez P.A.] has also been investigated numerous times by the Public Company Accounting Oversight Board (the organization that audits auditors)" (Page 59).

This is patently false. Ferlita, Walsh, Gonzalez & Rodriguez, P.A. (OMEX's accountant) has never been investigated by the PCAOB according to the PCAOB's website (and according to a Partner with FWG) and has never had any disciplinary proceedings brought against it. The firm is examined regularly by the PCAOB, and has passed each of its examinations. There is a significant difference between an investigation and a regularly schedule examination or inspection, but this truth was inconvenient to Mr. Morris. His intent was to scare shareholders into believing that Odyssey's small audit firm had been in trouble numerous times with its regulator, and he would not allow facts to get in the way of the story he aimed to tell. Please reference this link for more detail on FWG's history with the PCAOB.

Factual Inaccuracy #2

"The CEO has publicly stated they do not have enough cash to operate through the end of 2014" (page 3).

There is simply no record of management ever making this statement. Morris references a quote made by CEO, Greg Stemm, who said that the company will have enough cash at the end of 2013 to, "put us in position to fund our scheduled exploration and recovery activities through this year and most of 2014." This is substantially different than stating the company will run out of cash. It is logical to assume that funding OMEX's operations will generate revenue from services and salvage operations, as it has historically. Revenue will increase cash balances (to the extent they don't increase receivables). Thus, even if one were to believe that OMEX were to be unprofitable in 2014 and to produce net outflows of cash from operations, it doesn't follow that the company would necessarily run out of cash.

Mr. Morris's version of the CEO's factual statement was deceptive and inflammatory - it intended to scare shareholders. Telling investors that the CEO had publicly and definitively declared a need to raise cash just as the stock was declining precipitously, Morris was able to induce panic selling. Morris twisted words around to send the stock lower so that he might gain personally. He intended to force the company's stock into a downward spiral due to a lack of access to equity markets, and the prospect of suffering from the dilutive financing provisions with respect to its convertible debt. Notably, Mr. Morris omits the balance of the quote in which Greg Stemm says, "This is by far the best strategic position Odyssey has ever enjoyed and it has opened up some outstanding opportunities for us."

Factual Inaccuracy #3

"John Morris is a full time consultant for OMEX paid $325,000 per year" (page 16).

The fact is that John Morris (not related to author, Ryan) is not a full-time consultant for OMEX, nor is he paid $325,000 per year. Again, this is a lie. John Morris (a founder of OMEX who left the firm after being diagnosed with cancer) hasn't worked for the company, or been paid by the company since the end of 2010. Ryan Morris backs up his claim with a reference to filings made in 2007 and 2008 which are clearly out-of-date. Ryan Morris aims to mislead investors into thinking that Odyssey continues to pay John Morris despite the fact that he is not directly involved in the company. He wants to establish that the company fosters a culture of cronyism, is wasteful with shareholder capital, and generally cannot be trusted.

Factual Inaccuracy #4

"Neptune Minerals, Inc. announced that it would receive $35mn in investment but could only close $3.5mn from one investor" (page 35).

Neptune (a holding of OMEX) never made such an announcement. Morris references a Form D, filed with the SEC. Yet, the form he references is a notification of an offering. It states securities that the company is authorized to make available on offer. It doesn't aim to represent an outcome of an offering, nor does it announce an intention to raise a specified amount. In other words, it's impossible to tell from a Form D how many shares a company is trying to sell, or how many it ultimately sold. Mr. Morris's statement implied that the company was only able to raise 10% of what it sought, and therefore the price at which these securities were sold was not an adequate representation of the value of the underlying security. Since the value of the underlying security is highly meaningful to Odyssey shareholders, this would represent a material concern to them. Morris also wanted to leave the impression that Neptune had difficulty convincing investors to invest. He intentionally gave investors the impression that Neptune had publicly announced very poor results from an offering when, in fact, they had not.

Factual Inaccuracy #5

"The "UNESCO Convention on the Protection of the Underwater Cultural Heritage" is an international agreement that, among other things, prohibits the sale of underwater treasure for profit from any shipwreck over 100 years old" (page 24).

The UNESCO convention does not prohibit the sale of treasure recovered from shipwrecks older than 100 years. It specifically states that recovered goods can by bought and sold if a prohibition would prevent a legitimate archaeological excavation. Mr. Morris aimed to make the point that Odyssey had no prospect of continuing to salvage historic shipwrecks over 100 years old. This would be a significant problem were it true, as this is one of OMEX's operating businesses. Once again, however, his facts are not facts. See http://www.shipwreck.net/gsarticle12.php

Factual Inaccuracy #6

"So based on a recent $3.5mm capital raise that appears to be 90% below expectations for Neptune Minerals, Inc., OMEX extrapolates a $100 million valuation for their stake" (page 35).

Mr. Morris first makes the false claim that the $3.5mn capital raise was 90% below expectations (discussed earlier), he then goes on to state, as fact, that management extrapolated a $100mn valuation on the asset based on the $3.5mn fundraising. Yet, Neptune had raised $17mn at that valuation and this information was available in public filings (http://biz.yahoo.com/e/130808/omex10-q.html). This information clearly informed management's claim. Mr. Morris's intention was to mislead investors into believing that management of Odyssey Marine was claiming a $100mn valuation for their stake in Neptune based on a small, undersubscribed offering (that he also implied was funded in a non-arms-length transaction, which is untrue). The truth was that the financing was 4-5x larger than Mr. Morris claims in his report and we have no way of ascertaining whether the financing was undersubscribed. Further, the financing was not connected to OMEX.

Inspecting the Inspector Summary

Had Ryan Morris made a single misstatement of fact or omitted one important piece of information we could argue that it was simply a mistake. Yet, due to the repetitive pattern of misstated and omitted material fact, and Mr. Morris's financial motivation, I do not believe these were innocent mistakes. Importantly, these mistakes are not randomly distributed "for" and "against" Odyssey. In each instance of deception, Mr. Morris's objective is to paint a very unflattering and sometimes criminal picture of his target, Odyssey Marine Exploration. His intent is to deceive shareholders of Odyssey Marine Exploration into thinking that he has undertaken complete and objective due diligence and has uncovered very serious problems with the firm.

"Never let the facts stand in the way of a good story." -Ryan Morris quoting Mark Twain, "Do Investors Know What Lies Beneath the Surface? Part 2"


The strategy which Morris and other shorts employ in the case of OMEX is standard fare. They've found a target they believe has a hole in its balance sheet, and needs access to equity markets to insure its survival. The fact that the company relies on a small "death spiral" convert makes it all the more attractive. The idea is to keep the stock under pressure so that the company's supply of oxygen, the equity markets, is cut off and the stock goes to zero. The shorts have struck gold in that this company must, in the interest of shareholders and regulatory requirements, remain quiet regarding certain of its most promising businesses and assets at this point. That the company which Morris condemns for being nothing more than a PR machine is now under the gun due to its quiet reticence speaks volumes to the misguided nature of the short case.

Odyssey won't run out of cash. They've never had as much cash on the balance sheet as they do today, and the firm simply has too many levers to pull with which to add cash. With an asset the size of Oceanica, OMEX will not have trouble finding myriad sources of funding. Even were Mako to allow its options to expire unexercised (a circumstance I find unlikely but attractive as a long-term shareholder), Odyssey will have no need to access equity markets, nor will it have liquidity problems. Not only could the company further monetize Oceanica, but I'm guessing it will take on more services work in the first half of the year. Project financing alternatives also remain available, and the company will monetize commodity wrecks in the second half.

Though shareholders have demonstrated time and again that each of Meson's important claims is false, OMEX continues to trade at lows. My belief is that the short case, as misguided and deceptive as it is, has effectively undermined the market's confidence in OMEX management. As such, the only path to higher share prices for OMEX is through the restoration of management's credibility. Nothing that I or anyone else writes can accomplish this, so I don't anticipate a rebound in the stock based on this or any other article. OMEX shares will only recover and hit new highs when management demonstrates credibility by continuing to deliver cash to shareholders. That cash may come from operations, asset monetization, and services work. We should get another measure of this success in the coming weeks.

Disclosure: I am long OMEX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The Author has obtained all information herein from sources he believes to be accurate and reliable. However, such information is presented "as is," without warranty of any kind - whether express or implied. The Author makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. All expressions of opinion are subject to change without notice, and the Author does not undertake to update or supplement this report or any information contained herein.