Description

OMEX shares are not very liquid, so this is mostly suited for PAs. Further, this is a binary investment so should be sized accordingly. If you’re still reading, this is an opportunity to make 6x your investment in just a few months (or even 100x using options). The downside is at least 70% and potentially 100%. I believe the probabilities are skewed to the upside. This is a timely idea so forgive my brevity, but I will link to resources of additional info.

Odyssey Marine Exploration (OMEX) is a deep ocean exploration company focusing on mining deep ocean minerals. The company has several projects but the entire thesis (and the future of the company) hinges on a NAFTA litigation against the Mexican government.

Background on the litigation

It is important to note I’m not a lawyer and I have no expertise in these complicated legal proceedings.

Back in 2012, the company received a 50-year concession to exclusively explore and develop the Don Diego phosphate deposit in the Pacific Ocean off the coast of Mexico. After concluding this is a world class deposit, the company had plans that included dredging the sea floor to mine the deposit. In order to move forward with its plans, the company had to obtain an environmental permit from the government of Mexico.

The permit was denied by the Ministry of Environment after 1.5 years of reviewing the request. Based on testimony of an insider from the ministry, the permit was ready to be approved, when the secretary, Rafael Pacchiano Alaman, decided to step into the process and instructed the scientific team to find a reason to deny the request on whatever grounds they can find. Important to note that the secretary had no scientific training.

The reason for the ultimate denial was that the mine would hurt the sea turtle’s population. However, all scientific accounts and experts opined that sea turtles don’t live this deep in the ocean, that OMEX’s planned to take actions to protect the turtles, and that previously approved permits for other companies were much more damaging to this population. Or in summary – there were no scientific grounds for the denial.

Next, OMEX appealed this decision to a Mexican court (TFJA) which in 2018 unanimously annulled the ministry’s decision stating it was arbitrary and unfounded and must be based on evidence. The court had no authority to issue the permit, so they ordered the ministry to review the request again. The secretary again ordered to deny the request with no reasonable basis.

In September 2020 OMEX filed the first memorial against Mexico, after filing a notice of intent as under chapter 11 of NAFTA early as January 2019. The NAFTA tribunal would need to decide whether one of the NAFTA investment protections has been breached. The protections include:

• Fair and equitable treatment.
• Prohibition against indirect expropriations.
• Prohibition against treatment no less favorable than that it accords to its own investors, in like circumstances.

Reviewing the court filings by OMEX reveals that OMEX has several witnesses from within the Ministry of Environment, including the persons in charge of actually writing the denial, all corroborate OMEX’s version. On the other hand, Mexico’s response is quite weak with no witnesses from within the ministry.

OMEX is seeking a $2.7B award that includes interest on the damages. The damages are based on DCF of the mining project had it seen light and using commodity pricing at that time. The valuation matches a similar exercise completed in real time by a major bank indicating it is reasonable.

The NAFTA trial was held between January 24^th and 28^th behind closed doors and a final decision is pending. Based on historical NAFTA cases, management estimates a decision to be rendered during Q2 2022. It is my understanding that the NAFTA decision cannot be appealed (or at least that appeals are denied from being heard in almost all cases).

The following material is helpful to gain more info on this:

• OMEX first memorial (September 2020) -http://icsidfiles.worldbank.org/icsid/ICSIDBLOBS/OnlineAwards/C8573/DS15772_En.pdf
• Mexico’s counter-memorial (February 2021) - http://icsidfiles.worldbank.org/icsid/ICSIDBLOBS/OnlineAwards/C8573/DS16273_En.pdf
• OMEX’s reply to Mexico (June 2021) - http://icsidfiles.worldbank.org/icsid/ICSIDBLOBS/OnlineAwards/C8573/DS16745_En.pdf
• A recap of the memorials by Green River Asset Management – https://greenriverassetmanagement.wordpress.com/

Litigation Funding

Drumcliffe provided $20M of litigation funding to the company. The lawyers for OMEX are Cooley. In an award by the court, Drumcliffe would receive 4x what they invested plus 1% for each million dollars of investment. That said, in a settlement they would only be entitled to a 50% IRR on their investment. This provides an incentive to OMEX to settle, which is probably why in September 2021 Drumcliffe bought more than $5M worth of equity. Given that this is after OMEX filed their reply to Mexico, I would say this is another vote of confidence in the case by those who know it best.

During the recent turmoil in the public markets, and considering this is a micro-cap with a lot of debt – I would expect to see the share price decimated. That didn’t happen so apparently someone sees this disconnect in valuation and is accumulating. It wouldn’t surprise me if this is the litigation funders.

Valuation and Investment Strategy

The capital structure of the company is quite complicated with ~50M of debt that is in default and can also be converted to shares in one way or another. OMEX also doesn’t outright owns the Opco (ExO) and this ownership will change depending on the outcome as ExO owes money to OMEX, and that debt can be converted as well to increased ownership of the Opco. The following waterfall describes two scenarios:

I believe there is a higher then 50% probability that OMEX will receive a large payout based on the merit of the case which will result in one of the above scenarios (or something in between). That said, in case of a loss or a low value win, it is likely that the shares of OMEX will lose most or all of their value. Thus, the shares virtually have the same characteristics of options. This led me to look into the options of OMEX, as there seems to be a clear (and quick) timeline for a resolution here.

The JUN 17^th ’22 $11 Call (priced at $0.25) and the SEP 16 ’22 $11 Call (priced at $0.60) seem attractive to me as can be seen below:

This is a lottery ticket, but it seems to be the best priced one I've seen in awhile.

Catalyst

Litigation outcome.