On July 18th, Odyssey Marine Exploration (NASDAQ:OMEX) announced that it had delivered 48 tons of silver from the wreck of the SS Gairsoppa (4700 meters below the surface) to a smelter in the United Kingdom for processing and sale. Surprisingly, this exciting news sent the stock down almost 10% on the day, as it had surged at the close on the 17th due to the promising movements of the company's salvage vessel into a British port: investors, it seems, had expected just a little more. However, I remain convinced that the market doesn't understand Odyssey very well, and that its handling of today's news is yet another manifestation of that fact.
The decline following the news came for two primary reasons, which are closely related:
1. The company brought in only 48 tons of silver. Many, myself included, originally took the movement of the Seabed Worker into Bristol, a port on the UK coast relatively far from the Gairsoppa site, as a sign that the company had finished its work early (90 days were slated for the recovery, starting June 1st). With the expected haul put optimistically at 200 tons, the market reaction begins to make more sense, and much of the buying on the 17th was likely based on this premise. Instead, however, Odyssey elected to combine a required crew change with a partial delivery of the cargo, a slightly less positive event than was initially assumed.
2. The company has not found evidence of the uninsured silver the Gairsoppa is believed to have been carrying. Just as important as the amount of cargo recovered, however, was its composition. The 200 tons of silver figure is based on an optimistic, but not unrealistic, interpretation of conflicting historical documents, some of which list the Gairsoppa as carrying 3 million ounces of silver, insured by the government, and others which list her as carrying nearly 7 million ounces. Odyssey theorizes that the disparity represents an unrecorded and uninsured government cargo (during World War Two, when the Gairsoppa sank, the government insured vessels under "war risk insurance,") and thus would have had no reason to officially insure one of its own cargoes. However, Odyssey stated when announcing the find that upon inspection the serial numbers of recovered serial bars show no deviations from the insured cargo, meaning no evidence of the government silver has been found yet. Odyssey has mentioned that it will search other cargo holds for the silver, but it is certainly discouraging that after 45 days on the site no sign of the second cargo is to be found.
While these points show why the market reacted so negatively to what many would see as positive news, I believe this market reaction misses the bigger picture. The recent development has three massive positive impacts on Odyssey, two of which the market seems to be implicitly overlooking:
1. Capital. It has been said that searching for shipwrecks is like standing in a cold shower and tearing up $100 bills, and though Odyssey is showing that it isn't as futile as many presume the cash reference is spot on: this is an expensive business, and since the roughly $50 million in proceeds from the S.S. Republic salvage of 2003 ran out Odyssey has turned to various funding sources including multiple dilutive offerings and unadvantageously termed project financing agreements. However, from what we know now it is very reasonable to expect that Odyssey will successfully recover all 3 million insured ounces of cargo from the Gairsoppa as well as the 600,000 insured ounces known to be aboard the SS Mantola. The complexities of the industry make estimating cash proceeds difficult, but at $26.42 per ounce (NYSEARCA:SLV), subtracting total project costs of roughly $15 million, the British government's share of 20% and then a $15 million payment contingent on success owed from financing arrangements leaves Odyssey with roughly $40-50 million in cash, a hefty payday good for years of additional salvage work, especially since the operating costs of the company's flagship Odyssey Explorer are being covered by a Charitable Trust as it excavates the HMS Victory (more on that later). That estimate ignores possible refining costs, because I assume they will be largely if not totally offset by the higher margin sales of collectibles crafted from the ship's silver. This is a crucial step for the company, which has long been in search of the financing bridge needed to finance an expansion of its business plan and operations.
2. Reputation. Since the sting of losing the Black Swan treasure to Spain, Odyssey has sought to rework its business model by seeking wrecks only after having explicit government permission and a signed salvage contract. The Gairsoppa and Mantola shipwrecks were the guinea-pigs for this new model, and given their apparent success (if not to shareholders' high hopes), the prospects for future deals with other governments are now considerably brighter. For what it is worth, Odyssey has mentioned that it is in advance level negotiations with several unnamed governments, and that news could come as early as sometime this summer on additional projects. With a successful find (and, sometime in Q3, a check written to the British Government), Odyssey is now the clearly established leader in this type of operation with a proven track record, which should help the company ink new deals with governments around the world, providing a pipeline of low-risk recoveries that only Odyssey will be in contention for.
3. Technology. This recovery is record breaking in both complexity and scope, involving precision steel cuts and removal of hundreds of tons of water-logged tea 4700 meters below the surface (one of the deepest private recoveries ever), recovering dozens of tons of previous metal. The technology is state-of-the-art, and Odyssey, for the foreseeable future, is the only company with the capability and experience to perform intensive operations at this depth. This is crucial because while storied treasures remain in shallow waters undiscovered, for the past five decades increasingly sophisticated salvage techniques have reached much of the low hanging shipwreck fruit. Odyssey's tech-edge gives it the ability to recover hundreds of shipwrecks that no one could before, opening up a massive new market for its salvage services. Estimates of the potential value locked away at these depths are difficult to make, but it is certainly measured in billions, and with governmental cooperation Odyssey stands poised to remain busy recovering precious cargoes for years to come.
The market reaction to Odyssey's find seems to miss points 2&3 for now, but that may not last long. When Odyssey announces other government contracts and begins its next wave of shipwreck finds and recoveries, expect the market to finally recognize that it is witnessing the birth of a new business model and industry, one which balances high fixed costs with even higher, far more variable rewards, and one which, crucially, has only one company.
This represents only one aspect of Odyssey's three pronged business model, however. The other two are the company's commercial archaeology and deep-ocean mining business. Its archaeological platform, the Odyssey Explorer, is currently excavating the remains of the HMS Victory, a first-rate ship of the line which sank in 1744, in the English Channel. This, too, is a breakthrough for Odyssey, as it is proving that its techniques and team can perform cutting edge underwater archaeology, something skeptics have claimed is impossible for for-profit organizations. The agreement Odyssey has signed entitles it to full reimbursement for its costs, as well as 50-80% of the estimated values of the artifacts it recovers. A good base estimate for this additional is roughly $15-20 million dollars (mostly from the wreck's 80 bronze cannon), but historical records indicate the ship could be carrying tens of thousands of gold coins worth potentially billions of dollars. I've always viewed this as a long-shot, but at a recent press conference Odyssey's management seemed very excited that they had identified "significant quantities of non-ferrous metals" on the site using 3-D scanning technology (their excitement seems to imply that these signatures match what would be expected from a deposit of gold coins, but that is speculation), making it seem like a very distinct possibility that they are currently excavating one of the most valuable treasures of all time. Many contentious issues lie between Odyssey and a payday even if the treasure is recovered (the charitable trust has no hope of raising the money to pay Odyssey for the treasure in cash if it is recovered, meaning it may have to sell some of the coins to finance the operation, a thought which has the archaeological community in Britain and worldwide up in arms), but the important fact to note is that yet another element of Odyssey's business model is about to be validated. By the end of the summer, they will be the undisputed experts at excavating 16th, 17th and 18th century shipwrecks at undivable depths, opening up enormous opportunities once their archaeological work is revealed to be up to and beyond current standards for precision and professionalism. With evidence growing that shipwrecks are a fragile resource ravaged by trawlers and time, Odyssey's model could play a crucial role in preserving and recovering priceless time capsules scattered across the seafloor.
The last, and most unsung fact of Odyssey's business is its deep ocean mining portfolio. Using a vessel (the Dorado Discovery) on long-term charter, Odyssey's team has performed survey and inspection work for two different deep ocean mining start-ups, Neptune Minerals and Chatham Rock Phosphate, earning equity stakes now worth more than $80 million dollars based on recent transactions. The growth potential for this space is huge, and again Odyssey is on the cutting edge (Neptune is one of two private first-movers in the space). Though these assets are not a focus of the company, they have the potential to dwarf shipwrecks on a revenue and profits basis in the long run as the Earth runs out of minerals, especially silver , gold (NYSEARCA:GLD) and copper(NYSEARCA:JJC), which are abundant in deposits left behind by underwater vents.
In short, Odyssey is at the forefront, virtually unchallenged, of three new industries: deep-ocean bullion salvage, commercial archaeology, and deep-sea mining, and the recently revealed silver recovery will give the company the fiscal, reputational and technological edge it needs to execute its business plan across all three fronts. With the tail risk of a Gairsoppa recovery failure (and likely bankruptcy or restructuring) now eliminated, this company is valued at far less than the sum of its parts, and will now likely enrich shareholders with the non-ferrous fruits of the sea for years to come. This is still a speculative investment, of course, at least for the next few years, but since the company's success is relatively uncorrelated to the broader market and macro conditions it is a useful tool for diversification with massive upside potential. Take a look, due your own due diligence, post what you find in the comments section, and happy trading!
Additional disclosure: This is a speculative investment, and investors should do their own due diligence and know that they invest at their own risk. There are multiple risk factors for Odyssey, which are listed in their SEC filings and should be read by all investors before initiating a position.