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The Green River Intrinsic Value fund is a relatively concentrated, long/short equity strategy. The fund seeks long-term absolute returns investing in deeply mispriced securities which are identified through a careful process of methodical fundamental research and due diligence.
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  • FOIA Request Confirms Victory Project Moving Forward At MMO

    A brief update regarding the status of the HMS Victory (1744) rescue.

    The Marine Management Organisation (MMO) has indicated, through a FOIA response, that the Maritime Heritage Foundation (NYSE:MHF) is currently arranging for public notices to be placed regarding the HMS Victory marine license application.

    The public consultation period is open, and the documents supporting the application are available on the MMO website.

    Based on language from the MMO, it appears that the process will end 28 days after MHF posts public notice.

    The MMO was involved in the project planning process along with the MOD and DCMS. If the agency had objections to the project, and the archaeological work that will be required, they would have raised these issues during the planning sessions.

    We still don't know when the official reinstatement from the MoD will come. Yet, with MHF stating that reinstatement is coming, and with MHF proceeding with the marine license application, it would seem that the wheels are turning.

    Tags: OMEX
    Jun 23 2:47 PM | Link | 10 Comments
  • A Response To Meson's Latest Attack On OMEX

    Morris has it all wrong again. He accuses Odyssey Marine of ramping up its PR machine to attract shareholder capital with false claims of hope around SS CA and Oceanica. Yet rational and balanced investors have concluded, ironically, that it is Morris who is guilty of trying to manipulate shareholders with deceptive PR.

    What Ryan Morris's work lacks in analysis, it makes up in strength of conviction. Do you remember when he told us "The CEO has publicly stated they do not have enough cash to operate through the end of 2014" or "FWG [Ferlita, Walsh & Gonzalez P.A.] has also been investigated numerous times by the Public Company Accounting Oversight Board (the organization that audits auditors)" or "Underwater Phosphate mining has never been completed in history" or "We believe Oceanica is not viable and worthless" or "John Morris is a full-time consultant." He's made so many utterly definitive, yet factually incorrect statements, it's hard to decide which examples to quote. Still, he repeats the same tricks over and again, hoping each time that the market will believe his slanted story.

    Odyssey has done nothing to warrant Morris's latest high conviction tirade. While Morris claims that the company has put it's PR-distortion techniques into overdrive, the truth is that OMEX simply issued a press release saying they'd been selected to salvage the SS CA. That's it. The end. The company never made claims about any gold on the SS Central America - whether it be passenger or Army gold. Read the press release and judge for yourself.

    Morris claims that Craig Hallum "reported speculative and unsubstantiated data that the ship may contain a secret shipment of army gold worth as much as $500 million." But Craig Hallum made not a single mention of army gold in its report.

    My blog seems to be the primary catalyst for Morris's outburst, yet this blog was an honest attempt at a balanced accounting of what might be found in the SS CA debris field. The blog clearly acknowledges the inherent uncertainty involved in the salvage; "I believe OMEX will ultimately net somewhere between $25 and $100mn from the excavation, but the range of possible outcomes runs from zero to north of $500mn." I also noted that the existence of the Army shipment "remains controversial," and that "the worst case scenario is that there is no gold to be recovered." There was nothing definitive in my wording, and it was all backed by legitimate sources. Morris, on the other hand, shows no doubt about the outcome, stating, "there is clearly little to no treasure left aboard." How's that for conviction?

    The Receiver doesn't have as much conviction as Morris, but does seem better placed to give us an estimate as to what might be onboard the SS CA. That Receiver was quoted estimating that $93,000 worth of commercial gold and between $250,000 and $1,280,000 worth of passenger gold lay in the wreckage (1857 values). The small amount of commercial gold, which equates to roughly 4,650 oz. might be worth anywhere between $6mn and $16mn if it's in the form of ingot, more if it's in the form of coinage. The passenger gold would be worth roughly $60mn at the low end and $320mn at the high end of the Receiver's estimate, assuming that 90% of passenger gold was in the form of coin.

    Despite Morris's assertions to the contrary, none of us knows how much gold is still in the wreckage of the SS CA. There's good reason to assume rescued passengers carried very little to no gold with them when they left the SS CA. When the Marine (which carried the bulk of rescued passengers) was rescued by a tug, the SS CA passengers couldn't even come up with the five-hundred dollar fee (25 double eagle coins) to pay the tug's captain (they eventually scraped together just $300). The Marine's captain noted, "that everyone had left what money they had on the sinking steamer" (Kinder pg. 197). Bob Evans, Chief Historian for Columbus Exploration, spent his career doing excruciatingly detailed work understanding the SS CA and its passengers. He felt that passenger gold likely approximated the commercial shipment. Yet Ryan Morris believes he knows better based on his few days undertaking a, "detailed analysis of the life boats and the 150+ people who were able to evacuate SS Central America safely."

    Though it may be a bit of a long-shot, we can't dismiss the possibility that the Army cache may be on board. Dr. Charles Herendorf, Professor Emeritus of Oceanography at The Ohio State University, and former Chief Scientist with Columbus Exploration was on board the ship with Thompson during each of the three years they conducted salvage operations. Dr. Herendorf also holds a copy of the 1971 letter from the Center of Military History which acknowledges the Army shipment. BTW, this isn't a brief memo. It's a long, detailed letter which notes how this gold shipment was boxed, what the boxes looked like, and where it might be found.

    Professor Herendorf explained that there would have to be a very thorough excavation to access the area where he believes the gold would lie. He reiterated that Columbus Exploration only looked at five percent of the wreckage in any detail during the three year excavation, so there is much work left to be done. It's also worth noting that Judge Kellam awarded Columbus Exploration 100 percent of this Army gold, should it be recovered, in his 1996 ruling (Kinder pg. 505).

    Regardless, the fact is that we can only make guesses. It's pointless to argue how much gold will be recovered because none of us knows the correct answer. Yet for Morris to declare that someone is definitively wrong based on his one-sided, circumstantial evidence displays an enormous amount of arrogance. Rather than get into a tit-for-tat, I'm content to let the salvage speak for itself. We'll have our answer in a few months.

    On the subject of Oceanica, Morris again displays an embarrassing lack of understanding:

    "Oceanica's initial assay results further appear to be far worse than even we had imagined with <20% P2O5 concentrations. The gross tonnage is less important in mining, the quality of the ore is key to the economics. We understand <20% P2O5 concentrations would be considered "waste clay" and the standard grade is 32-33% P2O5 for much less expensive on-shore mining."

    The 18.5% to 20.1% average grades that describe Oceanica are some of the best that you'll find among modern-day mining endeavors. Look at the $4bn Wa'ad Al-Shimal project in which Mosaic just invested $1bn. This "world-class" mine will produce grades between 17% and 19.6%. Mosaic invested in a smaller high-grade mine in Bayovar, Peru where grades were said to range between 12% and 18%. That mine was valued at $1bn. Arianne Phosphate is starting a mine with an average grade of 7.1%. That mine has an NPV of $1.9bn, but capital and operating costs are so high that there's little room for equity value. Eagle Star Minerals noted its "high-grade phosphate" drilling results in Chile where they characterized high grade mineralization as 10% or greater P2O5 concentrations.

    Morris is obviously deeply mistaken in portraying 18-20% rock as "waste clay." It's true that Phosphate rock can be found in higher concentration (though usually in older mines), but it is also actively mined in much lower concentrations. Perhaps he is confused because most mines characterize their tonnage in a standard concentration format (roughly 32%) as they will beneficiate the raw rock to that level before selling it.

    One top industry consultant, with whom I exchanged emails, was quick to characterize Oceanica as a 300Mt project at 32% grade (19%/32% = 59% * 505Mt). If we assume a price/ton of $100, not allowing for the fact that phosphate has had a major rally in the last few months (finished products up as much as 33% off the bottom), this would equate to approximately $30bn in sales over the project's lifetime. Further, because this project is likely to be low-cost, the equity value could be substantial. This said, I believe that ultimately Oceanica will prove to be quite a bit larger than 505Mt.

    The last point regarding Oceanica is that Ryan Morris is likely less qualified to assess the viability of the resource than the independent Qualified Person (QP) who signed Oceanica's preliminary assessment. According to Wikipedia, a Mineral Resource is, "a concentration or occurrence of material of intrinsic economic interest in or on the earth's crust in such form, quality and quantity that there are reasonable prospects for eventual economic extraction." So, the QP is making a statement about not only the size and grading of the deposit but also to the likelihood of its economic viability. How many mineral assessments has Ryan Morris authored as a QP? Morris's statements that the project is worthless and not viable carry an abundance of conviction but precious little weight.

    Disclosure: I am long OMEX.

    Mar 13 9:30 AM | Link | 5 Comments
  • Odyssey Marine Exploration And The SS Central America

    Odyssey Marine Exploration announced yesterday that the company was selected to conduct an archaeological excavation of the SS Central America, known widely as the "Ship of Gold." OMEX investors are now trying to put this news into perspective and understand the potential financial ramifications. I believe OMEX will ultimately net somewhere between $25 and $100mn from the excavation, but the range of possible outcomes runs from zero to north of $500mn.

    The SS Central America was first located and excavated by a group led by Tommy Thompson in the late 1980's. Thompson successfully extracted approximately two to three tons of coins, ingot, and dust, but was limited by technology, investor concerns, and legal battles, and was unable to complete the excavation and recovery.

    Though Thompson was an outstanding marine engineer who was meticulous with respect to the science and archaeology involved in the excavation, he didn't run his business very well. His investors never got a good accounting of the enterprise's finances, and they were ultimately left out in the cold despite a very successful recovery. Some of Thompson's investors and contractors brought lawsuits against him. After failing to show up in court on a number of occasions, a warrant was issued for Thompson's arrest. He is currently a fugitive.

    Needless to say, if anyone knows how much gold remains with the SS Central America, it's Thompson as well as his Chief Scientist/Historian, Bob Evans, and Ira Kane, court appointed receiver for Thompson's investors. Each of these parties believes there is significant value yet to be recovered.

    1. This article references Thompson's claim that an additional 18 tons of gold may be buried amongst the debris.
    2. Bob Evans, Chief Scientist for the original recovery authored an article where he notes," A great deal of treasure remains on the shipwreck site." He estimates that tens of thousands of gold double eagles lay in the wreckage.
    3. The Receiver's Plan filed with the Franklin County Court states, "Based on credible historical evidence, our research experts have determined that there remain sufficient amounts of Down Treasure in the S. S. Central America and its debris field to justify a further recovery effort commencing in the 2014 season."

    Depending on the source, the SS Central America carried between two and twenty tons of gold when she sank. Newspapers at the time cited a commercial shipment of somewhere in the range of $1.2 to $1.6mn of gold bound for east coast banks - this implies two or two-and-a-half tons of gold. Since this is the only semi-official record, it explains why some articles state that two or three tons of gold was onboard.

    This commercial gold is what Thompson excavated when he salvaged the site several times in the late '80s and early '90s. According to Bob Evans, they were successful in retrieving 532 ingots and 7,500 gold coins with a total weight of somewhere around two tons. In a research note yesterday, Mike Malouf at Craig Hallum noted that there may still be a small portion of this commercial load that was left on the bottom because it was difficult to reach. It is now much easier to recover due to advances in technology.

    The passengers also carried gold. According to Bob Evans, you can assume that the passengers carried gold roughly equal in amount to the commercial shipment, mostly in the form of coins. This implies somewhere around 61,000 oz. of coins (less if some gold was in ingot or dust form) in the debris and wreckage (assuming a low-end value of $1.2mn in passenger gold at $20/oz. in 1857). Much of that gold is likely to be in the form of $20 double eagles (1 oz.) which were a popular form of currency in San Francisco at the time.

    For conservatism's sake, let's assume Odyssey can only recover half of the passenger gold. Let's also assume that this gold all takes the form of coinage. Roughly 30,000 oz. of coins might be worth $150-$240mn in a wholesale transaction. This assumes a price of $5k to $8k per ounce. Many of the coins will likely be '56 and '57 double eagle $20 pieces. You find these coins retailing generally between $8k and $15k depending on condition. As a check on this calculation, note that OMEX was able to sell SS Republic coins wholesale at around $5k per coin, but many of these coins were $10 pieces.

    The commercial and passenger gold represent the high probability portion of the recovery. Yet these sources account for only four to five tons of gold, while various articles and a book claim that there were around twenty tons of gold aboard. The difference is explained by the inclusion of a "secret" shipment of Army gold that was said to be aboard the mail ship, destined for Eastern bank vaults to strengthen reserves.

    This "secret" shipment was verified by the military, following the information's declassification, in a letter from the Center of Military History (CMH) dated April 2, 1971. Yet the existence of this shipment remains controversial. An inquiry was made to the Center of Military History in 1984 as to the authenticity of the original letter and CMH responded that it had no information about the ship and could not authenticate the letter. I have subsequently heard from a marine historical expert that the original letter is signed by the correct authority at CMH, and that CMH does not believe the letter to be forged. I haven't confirmed any of this with CMH.

    Another angle to consider when trying to assess the probability that this "secret" shipment exists comes from the history books. The SS Central America's demise has been referred to as a key catalyst in sparking the panic of 1857. Economic historian, Bray Hammond, believed that up to twenty percent of bank reserves were aboard the ship when it went down, stressing an already highly-distressed banking system. It's hard to imagine Hammond was referring to a $1.2mn shipment of commercial gold as making up twenty percent of the banking system's reserves. As this paper notes, reserves in the form of specie in New York City banks alone equaled over $11mn in 1857. It's equally hard to imagine that a nation-wide panic was sparked by the loss of $1.2mn in gold reserves. On the other hand, a loss of over $10mn of gold could have put a real stress on the system (15 tons = 480,000 oz. @ $20/oz. = $9.6mn + commercial load).

    Regardless of whether the Army gold exists amongst the wreckage of the SS Central America, Odyssey will likely find sufficient gold to make the excavation worthwhile. If the cache of Army gold is present, however, it would provide substantial upside to the base case. Fifteen tons of gold bars is worth over $600mn at current spot prices. Of course, these gold bars would likely fetch a premium to current spot prices due to their historic relevance. According to this story from a couple years ago, an ingot from the first SS Central America excavation was expected to be sold at auction for around $3,500/oz. If the Army gold were sold at wholesale rates of half this amount, it would imply $840mn worth of gold. Add this to the passenger gold and you can see the potential for a salvage worth north of $1bn as a "best case" scenario. This would translate to $500mn to Odyssey if we assume a 50% split (Mike Malouf used 50% in his note yesterday, but the company has yet to confirm).

    The worst case scenario is that there is no gold to be recovered. The likelihood that Thompson or someone else re-salvaged the site after the fact is not high, but is a possibility. Of note, however, deep sea salvaging equipment is a specialized field with few players. If someone were to build the capability to do this work, word would have probably gotten around in the equipment and salvage community. In addition, it's very difficult to do an excavation of this magnitude and not be noticed while on the water - Tommy Thompson found this out the hard way twenty-five years ago.

    If the passenger gold and the "secret" shipment exist, why weren't they excavated by Thompson? The answer is that the wreckage site is vast, Thompson's robot had limited functionality, and time was limited. The commercial gold was the easiest cache to find, and it was massive, so it took an enormous amount of time to excavate. The situation was exacerbated by the fact that Thompson went about the documentation of the recovery in a time-consuming, meticulous fashion. Because of the limited functionality of the robot, even some gold that was in sight couldn't be recovered. Thompson didn't have the technology or time to do a full excavation where he would have combed through silt for loose coins and unearthed parts of the wreckage to see what lay underneath.

    The SS Central America represents a low risk opportunity for OMEX that may bring high rewards. The salvage will be less costly and time consuming than most excavations. The company knows exactly where the wreck is so they don't have to spend time searching. They would also likely have access to all of Thompson's information about the site including pictures and diagrams. This means they'll likely know where to look and where not to look within the wreckage. Further, because they are doing contract work for an organization that has already settled the legal battles surrounding the treasure (including battles around the "secret" shipment) there are unlikely to be any legal obstacles.

    Despite all the bad press, legal issues, and mounting ugly evidence against Thompson, what he achieved twenty-five years ago is remarkable. He led the way in the use of science and technology to make deep sea salvage recoveries when few thought it was possible. Moreover, he did it using fantastic creativity while under a very tight budget. No one will argue the fact that Thompson did incredibly high-class work in the excavation, recording, and documenting of the wreck site.

    It's not surprising that Columbus Exploration wanted to carry on that tradition by contracting with an organization that is known for its significant technological feats (recovering SS Gairsoppa silver from three miles deep), its important and numerous wreck finds, its extensive library of scientific contributions, its conservation laboratory, and its expertise in the sale of recovered treasures. Odyssey Marine has distinguished itself in the field of deep sea archaeological salvage, and the company is enjoying promising new opportunities as a result.

    While Odyssey has been accused of being overly promotional in the past, the surprising SS Central America announcement provides further evidence of the company's new focus on under-promising and over-delivering. The transition to being quiet and guarded with information has been a difficult one for shareholders -- it has certainly left the company vulnerable to illegal and manipulative short attacks. All the same, investors may now begin to see the benefits of this new strategy. This announcement may give some short sellers pause as they consider what other game-changing developments may sneak up on them out of the deep blue sea.

    Disclosure: I am long OMEX.

    Tags: OMEX
    Mar 04 9:47 AM | Link | 22 Comments
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