Odyssey Marine: A Multi-Year Bull Market In The Making

| About: Odyssey Marine (OMEX)

For the first time in years, the balance of power in OMEX's stock has shifted to the longs. At the time of my initial write-up (8/11/11, $2.48), the short interest stood at 11.4mm shares out of approximately 74mm. At the time of my last write-up, (5/23/12, $2.68) the short interest had increased to 13.6mm shares. Today, despite the recent stock's rise to $3.82, the short interest has actually risen to over 15mm shares.

Given the stock's recent large move, one would have expected that part of the up move to be associated with shorts covering their now under water positions. On the contrary, the fact that the short interest has increased to a staggering 15mm shares indicates that this move has been fueled by fresh outright buying. Clearly, people are catching on to the significant short and medium term value drivers for the stock. Admittedly, this latest short interest data was as of 6/15/12 however I view it as a win/win. Should the next release show a decline in the short interest then it would clearly indicate that the shorts are "in motion" covering and with such a large # of shares to buy there will be no where for the stock to go but up. On the other hand, an unchanged or higher short interest would just serve as future buying power and create a large underlying bid to the stock.

Just like a game of chess, the odds have now swung massively to Odyssey's favor. In the short-term, Odyssey has 2 major moves that, should either be successful, could be checkmate for the shorts. The Gairsoppa project (see previous write-up for full details) is in full swing and we could potentially hear something within the next 30 days. A 7mm ounce silver bullion recover would add approximately NET $2.00 per share to Odyssey's balance sheet and would forever shift the fundamentals of the business. Dilutive offerings would be a thing of the past, and alas the market would appropriately value Odyssey's rich future opportunity into the market cap. After all, any company that constantly needs to tap the capital markets is always disproportionately punished. Who wants to invest in front of future dilutions? That's been the painful story for years. Yes the company always had great prospects however the share count had steadily risen as the company had spent money to build its pipeline/business. It's no different than a biotech company constantly tapping the markets to build its pipeline in the hopes of a drug finally "hitting". Once that drug hits, there is then a massive revaluation higher, part of which is attributed to the stabilization in the share count and hence a solid base from which one can build in and value future prospects.

If one waits for that "drug" to hit, i.e. a Gairsoppa recovery, he will surely have to pay a much higher price for the business, especially when you throw in the exorbitant short position. My simple analysis would put the stock's floor at a minimum price of $5.00. It's would be net cash position of $2.00, its stake in Neptune Minerals worth $1.00 (this is a conservative estimate), and a minimum $2.00 for future business prospects (i.e. enterprise value). This $5.00 estimate gives no consideration for the Victory project, which also is underway. If one were to appropriately factor in the odds of a Victory recovery of 100,000 oz. of gold coins then the numbers get much larger. After all, should the Victory succeed we are talking values net to Odyssey ranging anywhere from $4.00 to double digits. Doesn't it make sense for the stock to factor in some probability of success? Odyssey has been steadily at work in the Channel for months and its becoming clear to most that this project is for real. Using a conservative $2.00 estimate for a Victory success would then yield a $7.00 stock. Should Odyssey actually succeed with both projects, in my opinion the stock would blow thru the roof. The numbers would be staggering. I don't even want to conjecture such an analysis here, however rest assured you will see future analysis at this site should this come to fruition.

The bigger picture is that success on just one of these projects should dramatically shift the market's perception. Over the past decade, Odyssey has spent over 100mm in building this business. There is so much accumulated intellectual capital instilled here that the barriers to entry are huge. You simply can't throw a ton of money at this business and hope to be successful. Odyssey's proprietary database and know how is second to none. They have their sites on close to a hundred high-value wrecks which once they prove out the "proactively work closely with government" model, other governments could jump on board. It will soon be clear that the value proposition for a country is win/win. Win for the Government as it gets much needed revenue handed to it at zero cost (Odyssey sells any cargo and shares % with Government). Win for the Government as it gets to keep its "culture" and its citizens can stare at it all day long in a museum. The alternative is having the culture sit at the bottom of the ocean where no one can appreciate it and regardless it will likely be torn up over time by fishing trawlers. The only one hurt here are the old school archeologist's who maintain a steadfast "belief" that all culture should remain at the bottom of the ocean. In my humble opinion, I believe that they maintain this view because they don't like the idea of being disenfranchised by some "shipwreck" company. Odyssey is in essence in the business of archeology as well and actually does incredible work. Hopefully we'll all get to see their true capabilities on future Discovery Channel episodes, which are currently filming operations.

Regardless, keeping shipwrecks and culture buried on the ocean floor now comes at a very steep price to a country. In essence by keeping a shipwreck down there a government might be making a few "culture ministers and archeologist's" happy but everyone needs to know that such is coming at a huge cost. Would the citizens really support that? What purpose does a culture minister serve anyway by leaving "culture" at the bottom of the ocean? I am obviously being a bit satirical here however if one really boils it down to its core, it's actually a fascinating concept. Bottom line is that citizens and governments need to truly understand that the opportunity cost of not pulling up wrecks has gotten very expensive given high metal prices. Hats off to the UK government for truly understanding this. I predict success this season will be an enormous tipping point that will unleash other deals with other countries. Under that scenario, Odyssey would then not only have a strong balance sheet but a perceived "open-ended" opportunity with a large backlog of work in front of it. My $2.00 of future enterprise value would quickly be replaced with a number closer to $5.00 plus.

With a war chest of cash and/or bullion value, Odyssey could start playing off its front foot. In the past, it had shied away from riskier projects, (despite huge potential pay-offs), for fear of burning too make cash. They have always been forced to run a tight ship for fear of the cash burn. The landscape would dramatically change. In the deep sea mining business for example there is a tremendous opportunity for Odyssey. It has quietly become a top player in this burgeoning space with its investments in Neptune Minerals and Chatham Rock Phosphate. There are countless other investment opportunities. Moreover, success with the Gairsoppa wreck could open up an entirely new playing field for them in the modern commodity wreck space. The overall market opportunity is just too large to ignore and with a potentially strong balance sheet, Odyssey would be perfectly positioned to capitalize. Perhaps all this is why director David Saul recently exercised 90,000 shares of $2.25 warrants despite them not expiring for quite some time, obviously a show of short-term confidence.

Like in chess, investing is all about looking multiple steps down the road. I feel as if Odyssey has the chessboard covered and the bearish position is a weak one. I'm sympathetic to the skeptical view, however I strongly feel that the dynamics are quickly shifting. Some proven success this season should go a long way in significantly brightening the long-term outlook.

Disclosure: I am long OMEX.