"He who sells what isn't his'n, must buy it back or go to prison." -Jesse Livermore in Reminiscences of a Stock Operator
A new paradigm has emerged in the global markets as high levels of government debt and fiscal deficits are causing policymakers to scramble to find new solutons to cut costs and generate revenue. While this theme may be damaging to the global economy, it is the optimal scenario for the shipwreck excavation business.
Governments seem to be increasingly aware of the opportunity to partner with Odyssey Marine (OMEX) to find and excavate shipwrecks laden with gold and silver. Odyssey has already been successful in striking potentially huge deals on projects like the HMS Sussex and the SS Gairsoppa, and I believe that the flow of activity will accelerate in the coming period.
With gold and silver prices near all-time highs, an extensive backlog of valuable advanced stage shipwreck projects, a strong cash balance to pursue these projects, and several major catalysts on the horizon, I believe that Odyssey Marine Exploration is set to soar.
I will provide a brief overview of the company for those that don't know it and will lay out a series of catalysts (which the company has publically disclosed). Success in one or more of these upcoming catalysts could send the stock significantly higher. Oh, one other thing: There are now approximately 11.4 million shares of this stock short out of a total share count of 72mm.
Odyssey is in the business of searching for deep water valuable shipwrecks. It has been at it for 17 years and has invested over 100 million in technology, infrastructure and operations. The company possesses a top notch team consisting of expertise in world class archeology (you can view such from past footage from the Discovery Channel show Treasure Quest). The market opportunity is enormous, with UNESCO estimating over 3 million shipwrecks at the bottom of the ocean. Odyssey maintains a proprietary database of over 600 "high value" targets which its classifies as any wreck with cargo - usually gold and silver - worth over 50mm. Some of the top wreck sites are believed to contain billions of gold and silver.
So what does the company have in its pipeline? From a filing the company disclosed on a recent road show, Odyssey specifically referenced "5 potential recoveries over the next 12-18 months".
1) SS Gairsoppa: This is a British cargo steamer enlisted in the service of the UK for the Ministry of War Transport during WWII. The boat was torpedoed by a German U-boat in 1941 in the North Atlantic while reportedly carrying a significant amount of silver bullion. Public documents suggest the cargo contains approximately 7mm ounces of bullion. Odyssey was awarded the exclusive salvage award for the cargo by the UK Government Dept for Transport. Note that it is well documented where the German's torpedoes were launched from, so it should be a fairly easy search. If the search is successful, Odyssey receives 80% of the value of the recovered cargo. The actual search has already commenced. Odyssey is currently in the target area searching for this site and could find the Gairsoppa any day.
With silver trading at $40, 7mm ounces of bullion would gross $280mm and at their 80% take, OMEX shareholders could earn $224mm, or over $3.00 per share (the stock is currently at $2.45). Keep in mind that bullion is much quicker to monetize than silver shipwreck coins, so there would be zero issues with its ability to monetize it (it could sell it at the London Metals Exchange in a heartbeat. Also note that Odyssey has a 110mm NOL on its balance sheet).
2) HMS Victory Project: The HMS Victory was lost in 1744 under the command of Admiral Sir John Balchin. The Victory was the mightiest and most technically advanced vessel of her age. She was lost during a fierce storm. Odyssey announced the discovery in early 2009 and has been working closely with the UK government for a more comprehensive agreement. It is noteworthy that the UK and Odyssey have a long-standing positive relationship dating back over years (in addition to the Gairsoppa, it also has a signed deal for the HMS Sussex). The UK government has already granted Odyssey 80% salvage for a bronze cannon recovered from the site. Based on that, combined with its strong relationship, I believe that Odyssey is in a strong position to potentially work further on this site. In terms of the potential cargo, see pages 37-39 of this document (pdf).
3) Shantaram project: Odyssey executed agreements in 2010 with clients of Robert Fraser Partners (RFP, a UK based firm). Odyssey got paid upfront for work on a specific targeted wreck and in return RFP investors share in some of the back-end proceeds, if successful. In general, Odyssey's ownership is minimum 50%. There are specific "phases" of the project work, with: a) being "search", and b) "verification". In a recent public filing, Odyssey said " based on preliminary results, there is evidence suggesting that at least one of the target shipwrecks has been located." Shantaram is currently in the verification phase.
Considering that RFP investors had to pay an additional $2mm for this next phase, and are privy to the information about the details, it is safe to say that there is a strong likelihood that Odyssey might have found the specific target. On its recent slide deck (attached above), Odyssey mentions "potential recovery in 2H 2011" as well as "high value cargo reported aboard".
4) Enigma Project: This project has a similar structure as Shantaram and is also in the "verification" phase. Odyssey also talks about "potential recovery in 2H2011" as well as "high value cargo reported aboard".
5) Black Swan Ruling: Back in 2007, Odyssey found the Black Swan and recovered 594,000 coins weighing 17 tons (I have seen the coins first-hand and they are definitely real!). On the news, Odyssey's stock shot up to $9 and at the time, the wreck was estimated in the press to be worth over 500mm (this is when silver was around $14). Spain contested this wreck and a few years ago won the first round in court. Odyssey is in the appeal process and oral arguments were heard on May 23, 2011. I could have a totally separate write-up on the merits of this case and why I believe Odyssey has a chance of winning the appeal. However, I think most market participants do not think it will win and as a result there isn't much built into the current stock price. Hence enormous upside optionality…
1) HMS Sussex: The HMS Sussex was a UK warship. Odyssey believed to have found the site but operations to verify the wreck are on hold given the contentious relationship with Spain. Odyssey found this site years ago and had signed a comprehensive deal with the UK government. The site is in Gibralter waters and given the Spain controversy, there are no plans to work on this anytime. However it is an asset. The Sussex is reportedly one of the most valuable wrecks out there, with reports of 10 tons of gold. Don't even get me started about the potential value to OMEX should this project ever commence. I am assuming zero for now but one day who knows…
2) Neptune Minerals: Odyssey owns 33% of this private company. Neptune seeks to commercialize mineral deposits from the ocean floor (given Odyssey's core expertise of search on the ocean floor this makes a lot of sense). Neptune holds the second largest tenement position in the Southwest Pacific "Ring of Fire" area - approximately 80,000 sq km as well as tenements off of New Zealand and Japan. These seafloor massive sulfide deposits (sms) contain high concentrations of gold, copper, zinc and silver. The closest comp is publically traded Nautilus Minerals which current has a market cap of 480mm. There is an explosive amount of interest in deep sea mining. Countries such as China, Japan and India have all recently expressed their interest in this burgeoning industry, certainly fueled by soaring metals prices. Neptune is separately funded and will not be a cash drain at all for Odyssey. Given Neptune's strategic tenement position coupled with explosive interest in this industry, I would expect Neptune's value to continue to rise.
The current perception and consensus of Odyssey's business model is that even if the company does find wrecks, it will be very hard to keep them. That consensus arose from the mental extrapolation of the loss of the Black Swan case to Spain. However I strongly disagree.
- The majority of wrecks that Odyssey is targeting are purely "Merchant" wrecks as opposed to "Sovereign Immune" wrecks (property of a government). It's only the Sovereign Immune wrecks that Odyssey is forced to strike a deal with a government. With Merchant wrecks, Odyssey deals with potential claimants but historical salvage awards usually give the finder 90%. Most Merchant wreck findings don't have a long drawn out legal process such as the Black Swan. The Black Swan was the exception, not the standard.
- Odyssey does incredible archaeology and runs a first class operation when it comes to "preserving cultural heritage".
- Odyssey has a long-standing positive relationship with the UK.
- The current global fiscal crisis presents an enormous opportunity to partner with Odyssey…
Given the horrific state of government finances, especially in Europe, why wouldn't governments start to see Odyssey as an "enabler"? Meaning, in a win-win situation, Odyssey would work with them. Odyssey would pay all the expenses and search for valuable government wrecks. If found, Odyssey would perform world class archeology and preserve any significant culture. The cargo would be split 50/50 and Odyssey would even market and sell the coins for the government. Such could be an enormous windfall especially for a country that is in fiscal dire straits (i.e. Spain). There are countless valuable Spanish wrecks in the vicinity of billions. Billions would go a long way in fixing its huge debt levels. Why wouldn't Spain partner with Odyssey in a proactive fashion? Odyssey would preserve and hand deliver as much cultural heritage as Spain wants.
Also, in the process, hand them over a big fat check worth billions. What is the point of leaving a wreck site, even if "famous" at the bottom of the ocean? So the "culture" just sits there? Don't you think the citizens of Spain (or any other country) would a) want to actually "view" and "appreciate" the culture and b) pay less taxes by having an improved fiscal situation? I never understood why culture ministers say "we need to keep these shipwreck sites "in situ" to preserve culture" - what does that mean? Not to mention that there is a high likelihood that the shipwreck site will be torn apart by fishing trawlers etc...
I predict that one day, hopefully soon given the worsening global fiscal crisis, there will be an about face from countries such as Spain and they will embrace the Odyssey model. When that day comes, look out above…
Thoughts on the Stock
In my opinion, there is a huge inefficiency right now in OMEX's stock price. Given that a) this is a small cap that only one analyst covers, and b) current consensus is that it will not win a Black Swan ruling, the market is clearly not giving it much credit for any of these future opportunities. It is clearly a "show me" situation. However the problem with that is if investors wait until Odyssey actually "shows them", they will have to pay a much higher price (especially with over 11mm shares sold short).
Do I think Odyssey will "show us? " Given its rich pipeline, I feel very strongly that it will. The key is that currently the company is funded well through early 2012 (approximately 20mm of cash on the balance sheet) so there will be no additional dilution anytime soon. Success with any of these 5 catalysts will completely change the nature of the stock.
What is the risk/reward in the stock? Even if the company were to lose a Black Swan appeal, I don't see much downside in the stock. After all, the other handful of projects will be front and center on investors' minds, especially the Gairsoppa - the company could announce a find within weeks.
On the other hand, what if OMEX actually surprises and wins the appeal ? If the stock shot up to $9 back in 2007 when silver was $14, what would it do now when silver is $40? Don't you then think that the market (on a forward basis) will become increasingly excited about these other projects and perhaps start to build in a real probability of success? What if Odyssey hits two out of these five catalysts? Or five out of five? If all of a sudden, OMEX has several hundred million or perhaps even a billion of cargo in its possession, could the market not only value that but give it an additional 500mm of enterprise value? It would be self-funded and would have a proven track record of success (so people would actually believe it's a real business model).
In addition, it has a rich pipeline of wrecks to go after given the market opportunity combined with tremendous barriers to entry to its business. If someone gave me 100mm tomorrow to replicate this business I wouldn't stand a chance. Odyssey has been at it for 17 years, has developed cutting-edge technical know how and has a proprietary database generated from an intense research process.
With gold and silver rising to new highs, I expect any success to be incredibly well received. A lot of success, and we will be visiting the shorts in prison.
Disclosure: Author holds a long position in OMEX