Odyssey Leads Investors On Treasure Hunt

By Stephen D. Simpson, CFA | September 29, 2011 AAA

Sell-side analysts desperate to add a little flair to dry research reports will try to spice things up by talking about "hidden treasure," "deep dives," or "plumbing the depths". Well, there is a company that actually does all of that. Odyssey Marine Exploration (Nasdaq:OMEX) is primarily in the business of finding and salvaging wrecked ships and it may be one of the strangest companies that trades on U.S. exchanges.

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What They Do
Odyssey Marine operates several simultaneous and overlapping businesses. The core of what the company does is the use of advanced underwater technologies to find, characterize and salvage shipwrecks - often ships from the Age of Sail that sank with ample amounts of gold or silver on board. That is not all that the company does, though. Odyssey Marine also assists in more conventional salvage and recovery operations, conducts deepwater mineral exploration projects, and operates a museum exhibit that highlights some of the artifacts that the company has recovered from shipwrecks.

What's New
Investors may already suspect that this is a highly news-driven story and they would be right. Unfortunately, this is a story where the news can cut both ways. At present, the company is wrangling in court with the Spanish government over the rightful ownership of the 17 tons of gold and silver coins and artifacts found in the wreckage of the Nuestra Senora de las Mercedes - a Spanish galleon that sank in 1804. Spain has claimed, and U.S. courts have thus far supported, that it was a military ship and therefore protected by law from treasure hunters.

If Odyssey can get a reversal on appeal in its favor, it could be worth upwards of $500 million to the company. That said, maritime and salvage law is complicated and the outcome is uncertain.

On a more positive note, the company has just announced the confirmation of the discovery of the SS Gairsoppa - a British ship that was torpedoed in 1941 carrying 7 million ounces of silver. While the company will be splitting this with the British government (with the Brits getting 20%), the haul could still be worth upwards of $225 million (and possibly more, as collectors will often pay premiums above the metal value for coins or bullion that can be tied to specific ships or wrecks).

A Different Play on Metals
Although there is some value to cannons and other nautical memorabilia, Odyssey is in some ways like a permanently prospecting mining company. That gives it some of the upside in gold and silver prices that investors find in ETFs like SPDR Gold Shares (NYSE:GLD) and iShares Silver Trust (NYSE:SLV), but clearly quite a bit more risk than in those ETFs or conventional miners like Barrick Gold (NYSE:ABX) or Newmont Mining (NYSE:NEM).

There's also a possible upside kicker from the deep-sea mining angle. Underwater mining is not really a major factor yet in the world, though diamond giant DeBeers does exploit offshore African sediments for diamonds. There is thought to be major potential to find deposits of precious metals and more conventional metals like zinc or cobalt, and while the environmental concerns are very real, and if companies like Neptune Minerals and Nautilus Minerals find some success, maybe major players like Rio Tinto (NYSE:RTP) or BHP Billiton (NYSE:BHP) will look to follow.

Of course, Odyssey Maritime doesn't have the ocean to itself. Major shipping companies like Maersk have the resources and equipment to run salvage operations as well (though typically with more mundane targets in mind), and insurance companies will frequently contract with private salvage teams to try to locate lucrative wrecks. Moreover, it's not impossible to imagine that companies like Cal-Dive (NYSE:DVR), Oceaneering (NYSE:OII) or Transocean (NYSE:RIG) could get involved if undersea mining exploration really becomes a meaningful opportunity.

The Bottom Line
Is Odyssey Maritime right for your portfolio? It's a small company (below $250 million in market cap) with minimal analyst or institutional support and no history of profitability or cash flow generation. At a minimum, it is an extremely risky and speculative play - sure, there are plenty of wrecks out there to salvage, and likely hundreds of millions of dollars of gold and silver laying on the ocean floor, but finding these ships is not easy, recovering the treasure is not easy, and fighting in court for the right to keep it is not easy.

It would be absurd to try to talk about a model or fair value here. This is quite literally an investment in a treasure hunting expedition. Accordingly, it's a gamble and not an investment. That said, who cares? Investing is certainly a serious and sober endeavor, but there is also room for fun and flights of fancy. So long as people don't expect a stake in Odyssey Maritime to pay for the kid's tuition or their retirement, there's nothing wrong with the occasional punt on a speculative (if somewhat romantic) idea. (For additional reading, take a look at Investing In The Metals Markets.)

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