Having followed Odyssey Marine Exlporation (OMEX) for the last 4 years, we were attracted to the company by the transformation of both their business and funding model via the Dorado Resources and the Robert Fraser deals. The company is again transforming from a biotech-like entity, requiring perpetual capital and "the big hit," to a resource and IP driven company. What is unique about this company is that there is outsized risk/reward given the value of the mutually exclusive imbedded call options on the company's numerous concurrent initiatives - disclosed and undisclosed.
A look at the imbedded options in Odyssey Marine's equity (Market Capitalization of $257M) :
- Odyssey has $1B dollars worth of gold and silver in its recovery pipeline between the SS Gairsoppa, SS Mantola, and the HMS Victory. After all payouts on salvage agreements, these two recoveries are worth between $4-5/share, assuming the projections on the cargo, based on the mix between bullion on the Gairsoppa and coins on the Victory. The bullion is liquid and can be sold into the market. The coins have to be pieced out into the collectors market over time. Odyssey has a plan for this, in order to maximize value, and anticipates a premium over the spot price of roughly 5x.
- There is still the potential for the Supreme Court to hear the Black Swan case. Based on the agreement with the U.K. on the Gairsoppoa salvage (and now the Victory), the probability that the Supreme Court hears the Black Swan has improved in our view. While the past two court rulings have gone against Odyssey, it is worth noting neither court claimed jurisdiction over the salvage. We estimate a salvage agreement on the Black Swan to have an NPV of $6/share. Will it happen? Not likely, but it is a Black Swan (sorry).
- One analyst covers the stock. He has had the right call on the stock ever since it traded below $1 following being punted from the Russell Index. However, he has never assigned value in his published notes to the Dorado (now Neptune Minerals) stake. We view this as worth $2/share currently and eventually worth multiples of the current market cap. If we were to see an IPO or publicized private placement of Neptune in 2012 - this would be worth $7/share based on a multiple of the price of the last placement at $12 (Odyssey's CEO disclosed this at the January Noble Financial Conference). Additionally, if a global miner took a strategic position in the business, similar to Anglo American's stake in Nautilus Minerals (Canadian) - Neptune could turn out to be very significant to Odyssey shareholders.
- We believe the Merchant Royal is one of the Robert Fraser deals that the company has been working on for some time. If you follow the Odyssey Explorer via AIS, you can see that it has been working in the area where the MR was believed to go down. Similarly, we anticipated the Gairsoppa find using the ship's location. The Merchant Royal has a NPV of $3-$5/share.
Sum of the Options: $20
1. Garisoppa/Victory: $4
2. Black Swan settlement: $6
3. Neptune Minerals: $7
4. Merchant Royal: $3
Discounted by 80%: Equity value of $4
Discounted by 50%: Equity value of $10
Assign probabilities and add these options up however you'd like, but given that these are not the only catalysts for the company - the Bear case appears dim from here.