Quick Pitch: Odyssey Marine Exploration (OMEX)
Upcoming Litigation Award
OMEX is currently in the final stages of its NAFTA litigation against the Mexican government with an award announcement set to be revealed in Q1’24. If the company wins and the award is anywhere within the range of the filed claims, OMEX shares will be a multi-bagger. If the Mexican government prevails, OMEX is a donut. The odds seem to be in OMEX’s favor, but the award amount is uncertain. Thus, this is an option like bet with a catalyst in the coming months.
A brief background on the pending litigation: Since 2014, Mexican regulators have repeatedly denied OMEX an environmental permit for its world-class phosphate deposit (Don Diego mine) located off the coast of Mexico. Eventually, in 2019, OMEX’s subsidiary, which owns the project, filed a NAFTA tribunal claim, asserting that permit rejection by regulators was solely driven by political reasons and lacked any scientific grounds. The gross claim ranges from $1.4bn (without interest) to $3.1bn (including accrued interest), compared to the current market cap of $60m. Several arguments suggest OMEX is likely to win, including a ruling by the Mexican that annulled regulator’s environmental permit rejection, deeming it unfounded. For more background on the litigation case please refer to this write-up on VIC from Mar 2022 and Green River Asset Management’s blog from Sep 2021 (the latter includes a detailed analysis of why OMEX is very likely to win this arbitration). The final hearing took place in May’22, and closing arguments were submitted in Sep’22.
Since early 2022, OMEX’s share price has halved, reflecting dilutive financings to fund operations/litigation as well as investor fatigue due to the extended tribunal decision timeline. During this time there were minimal/no updates neither from the company nor the tribunal (aside from the note of brief delay due to Covid).
That is changing now. The setup is finally approaching the finish line and OMEX’s main shareholders/litigation funders have just injected fresh funds into the case. Here is the latest:
- In Oct’23, OMEX received a letter from ICSID (the administering body for the litigation) stating that “the Tribunal is well advanced in the drafting of the Award and expects to issue the Award in the first quarter of 2024”. Not only is this a strange choice of words (does it mean OMEX won arbitration?), but also marks the first time that either the tribunal or OMEX’s management has publicly announced a specific timeline. Although it might seem that the tribunal’s decision is long overdue, the timeline so far is quite close to the 425-day average it has historically taken ICSID arbitration to reach the decision (counting from the final hearing date).
- In early December, OMEX announced a new debt financing agreement ($6m) with a group of parties, including its largest shareholders FourWorld Capital Management (owns 14%) and Two Seas Capital (10%). As part of the financing package, the parties were also given out-of-the-money warrants to purchase 1.6m shares, with exercise prices of $4.25 and $7.09 (vs $3.0 today). The two hedge funds appear to be highly experienced in the litigation space. Two Seas focuses exclusively on litigation investments, while Four World invests in event-driven situations, with a focus on tax, legal and regulatory catalysts. OMEX’s litigation funder, Drumcliffe, also participated in the latest round through its buyout fund DP Special Opportunities. The investment from these firms shortly before the expected tribunal decision seems to be a strong vote of confidence in OMEX’s litigation prospects.
- Then going back a bit, in Sep’23 the company approved a special bonus to its employees payable upon a successful NAFTA arbitration outcome. The bonus will depend on the net proceeds received by Odyssey and might “equal up to 250% of each eligible employee’s salary”.
- In Mar’23, OMEX reached an agreement with its legacy debtholder, AHMSA, a Mexican steel company, to eliminate its debt in exchange for cash and common shares. Prior to the agreement, OMEX was in default on the debt and had pledged all of its shares in the phosphate project to AHMSA. Even in a successful litigation outcome, this might have led to new disputes given AHMSA’s shady history. So the agreement seems to have removed a major overhang which had previously been one of the key risks to the thesis.
So how large of an award can investors expect?
Figuring out the potential upside here is a bit of a guesswork. As Green River said “We don’t know whether the ultimate award will be $500 million or $3 billion”. The litigation claim (as of Sep’22) is at $1.355bn (without interest) or $3.138bn (with 13.95% annual interest) or $1.065bn and $2.468bn after Mexican taxes respectively. These values are mostly derived based on DCF valuation of the Don Diego mine to which OMEX was denied the permit, i.e. foregone value that OMEX was not able to earn. OMEX owns 65%-70% ExO subsidiary that would receive the award (stake varies due to convertible debt owed by ExO).
Below is a pay-off waterfall from VIC pitch (Mar’22) with rather optimistic award amounts. Today’s fully diluted share count is around 34.6m, comprised of 20m outstanding + another 14.5 from options and warrants. The exercise of these derivatives would bring in a total of $60m in cash. Adjusting the table below for the new figures results in a $12.6-$23.6 value per OMEX share. That’s materially above the current prices, but for my uneducated eye, these seem to be very aggressive award amounts, which might be difficult to collect from the Mexican government.
OMEX also has $242m in federal NOLs and $88m in foreign income NOLs – these could at least partially shelter the company from the US tax burned on the award.
Let’s reverse engineer the same calculation – what kind of award would be required for OMEX net proceeds to be worth the current price of $3/share? At this level, there would be no dilution from options/warrants as these have exercise prices of $3.35-26.4/share. With 20m share count, litigation funding of $185m, and assuming zero US taxes due to NOLs, the award would need to come at $310m after Mexican taxes or $440m gross.
I am using $185m for ‘Litigation Funding’ and any other ExO subsidiary-related costs, as that seems to be the minimum expense based on the info derived from the Sep’23 8k. I am assuming the $200m award mentioned below is after any Mexican taxes, as in the claim OMEX argues that no taxes should be charged on the award.
…the aggregate net cash payments received by Odyssey, after payment of or reservation of cash for all legal and other expenses, including litigation financing for the Arbitration, and all of ExO’s outstanding liabilities, equal at least $10 million. Odyssey has estimated that the amount of a monetary award or settlement amount would need to be at least $200 million for this condition to be satisfied.
Given that OMEX would most probably trade at a discount to the net proceeds figure due to potential collectability issues and unclear capital allocation strategy going forward, the actual probability-weighed award that the market is currently discounting is probably closer to $600m. That is half of OMEX’s claim before any interest accruals.
Interestingly, the new bonus plan requires “net payments to Odyssey equal at least $400 million” for the employee bonuses to reach 250% salary levels. This amount of net proceeds to OMEX would be approximately equal to the base case in the table above. Hard to tell if this is something that management realistically expects or if this is a blue-sky scenario.
So that’s the bet:
- Multibagger – if OMEX wins and the award is somewhere in between the $1.4bn – $3.1bn that the company claims.
- Breakeven – if OMEX wins and the gross award is around $600m.
- Zero – if OMEX loses or if the award is $300m or less.
The catalyst appears to be around the corner – we will most likely see a significant share price movement in one direction or another upon the announcement of the award over the next couple of months.
Why permit denial was unlawful and why OMEX is likely to win?
- Initially, Mexican Secretariat of Environment and Natural Resources (SEMARNAT) was ready to approve the project before the ministry’s eventual decision to deny the environmental permit for the Don Diego mine. Two witnesses from SEMARNAT have claimed that they found no environmental concerns.
- In 2018, a Mexican court (TFJA) annulled the ministry’s decision to deny the permit, claiming it was unfounded. The ruling was unanimously in favor of OMEX. But SEMARNAT still refused to grant the permit.
- Court filings show that OMEX has had several witnesses from SEMARNAT who agreed that the rejection was due to political reasons rather than any scientific grounds.
- SEMARNAT has previously approved several comparable projects with seemingly worse environmental concerns/lower risk mitigation efforts. These include ESSA Project, Laguna Verde Project, Sayulita Project, Veracruz Project, Matamoros Project, Santa Rosalia Project.
Several other points
- Even if OMEX prevails in the litigation, enforcing the award against Mexico could be challenging and time-consuming.
- Aside from the pending NAFTA arbitration case, OMEX holds several exploration-stage subsea mineral projects. Apart from SG&A expenses, a substantial portion of the company’s cash burn (net losses of $5.7m in Q2’23 and $10.9m in Q1’23) have come from operational and research costs associated with its deep-sea mineral exploration projects. For valuation purposes, I assume these have zero value.
- OMEX’s management has an 8% stake (or 5% on a fully diluted basis), currently valued at $4.8m. This compares to the $2m in total compensation that the top three executives received in 2022.
- While these stats are not likely to impact the chances of OMEX win, a glance at claims against Mexico under UNCITRAL arbitration rules (the same as in the Odyssey litigation) shows that out of 10 resolved disputes since 2010, only two rulings were in favor of the investor, with five decisions in favor of Mexican state (the remaining 3 were discontinued).
Thanks for the idea. Though, unless I am missing something, I wouldn’t read anything into the “Award” language; Tribunal ‘awards’ are just decisions disposing of the case – it is still called an award if the findings are in favor of the defendant. https://icsid.worldbank.org/procedures/arbitration/convention/award/2022
Thanks for pointing this out. Did not really believe the mention of ‘award’ was indicative of a win, but good to have clarity on this.
Thanks for bringing this up again. You mention that in a favorable ruling for OMEX, getting the award may be challenging and time-consuming. I’m curious what the ramification to Mexico might be if they refused, or delayed payment through some means. I know you’ve been writing about this for a number of years, have cited this concern before, and compared this case to multiple other NAFTA cases. Did you come across any instances of NAFTA arbitration awards being delayed/withheld by Mexico, in the two instances above, or any other countries?
This one has really got me interested, thanks for the great write-up.
Do you know what the largest NAFTA award has ever been? Want to see if these possible amounts have ever even been seen in the past.
Responding to Dexsa’s and BKGal’s questions.
Did some more digging and below are precedent claims against Mexico that ended with rulings in favor of the investors within NAFTA’s framework, sorted from the highest award to the lowest:
– Cargill v. Mexico: $77m awarded vs $124m claim. The tribunal awarded Cargill in 2009. Both parties eventually settled in 2013 at undisclosed terms.
– Corn Products v. Mexico: $58m vs $325m. The tribunal granted the award in 2009 and the payment was made in 2011.
– Lion v. Mexico: $47m vs $99m. Mexico was ordered to pay the award in 2021. The payment still appears to be pending.
– ADM v. Mexico: $34m vs $100m. The award was granted in 2007. I have not been able to confirm if the payment was already made.
– Metalclad v. Mexico: $17m vs $90m. The award was granted in 2000 and the payment was made in 2001.
– Feldman v. Mexico: $1m vs $30m. The award was granted in 2002. I have not been able to confirm if the payment was already made.
See details here https://investmentpolicy.unctad.org/investment-dispute-settlement/country/136/mexico/investor
All of these are sub-$100m and I did not manage to find any historical ICSID cases against Mexico that would be of a comparable size to the current OMEX claim. This reduces the chances of a multi-billion dollar payout. There also seem to have been no NAFTA tribunal litigations against other NAFTA member countries, i.e. US and Canada, that resulted in awards exceeding $100m (see links below).
https://www.iisd.org/system/files/publications/compensation-treaties-best-practicies-en.pdf (p. 41-43)
https://policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2010/11/NAFTA%20Dispute%20Table.pdf
However, while ICSID awards against Mexico have been below $100m, cases against other countries have resulted multi-billion dollar ICSID awards. Top 5 largest awards:
– Hulley Enterprises v. Russia ($91.2bn claimed, $40bn awarded in 2014)
– ConocoPhillips v. Venezuela ($30.3bn, $8.5bn, 2019)
– Veteran Petroleum v. Russia ($18.7bn, $8.2bn, 2014)
– Tethyan Copper v. Pakistan ($8.5bn, $4.1bn, 2019)
– Union Fenosa Gas v. Egypt ($3.2bn, $2bn, 2018)
Taken from https://www.iisd.org/system/files/publications/compensation-treaties-best-practicies-en.pdf
When it comes to award enforceability, beyond the ICSID tribunal litigations, Mexico has faced five ICSID arbitration cases that resulted in decisions favoring investors, with awards spanning from $5m to $40m. While public information regarding whether/when Mexico paid these amounts is limited, an article from 2015 (https://www.vonwobeser.com/images/PDF_news/PDF_articles/2015/Enforcement_of_Investment_Treaty_Arbitration_Awards_Mexico.pdf) states the following:
“To the best of the author’s knowledge, Mexico has complied with all investment treaty arbitration awards that have been rendered against it.”
“Enforcement actions against Mexico have not been necessary so far, as the country has voluntarily complied with all awards made against it.”
However, one noteworthy case is Talsud v. Mexico where the government applied income tax withholding when paying the compensation awarded to investors. The investor subsequently initiated litigation against this determination before Mexican courts.
So overall, while there seems to be somewhat limited historical evidence suggesting so, there is a risk that Mexico might attempt to postpone or avoid payment of the award (if any), particularly given that the OMEX award might turn out to be the largest arbitration claim against Mexico by far.
Great find from Magallanes. It’s also interesting that he states, “Mexico is not subject to the international obligations imposed by Articles 53 and 54 of the ICSID Convention regarding the enforcement of arbitral awards” even if it hasn’t been a problem in the past. Probably worth highlighting too that none of the awards tend to be for the full amount requested and all but one award is ~half or less of the claim.
Dt, do you mind elaborating on how you arrive at 22m for debt repayment and how you are looking at indebtedness more broadly here?
Is it Total Loans payable (~40m)-lit financing (~24m)+the new issuance (6)= 22 ?
Yes, that is how I looked at it. $24m of loans are litigation funding within the subsidiary, so that would be deducted from any award already at the ExO subsidiary (i.e. within the litigation funding expenses in the table). The $22m refers to hold-co level debt only.
Any thoughts on what sparked the jump yesterday afternoon? I’m not seeing anything.
I have not seen anything either, so not sure what is driving OMEX price. The only recent fillings are of insiders selling some of their converted options at around $3/share. No new developments were reported under ISCID system either.
As shares are up almost 50% without any news, I am using this opportunity to take some risk off the table.
it was written up by two other newsletters
Previously announced strategic financing (that I participated in) was finalized. This has been a favorite long of mine, but I was unable to discuss it until after that deal was done.
Chris, a couple of questions:
1) Any thoughts on the potential size of the award? How realistic is the expectation of a $1bn-$3bn award? Past ICSID awards were materially below the levels requested by OMEX.
2) What kind of payout waterfall structure do you see here? i.e. gross award vs net proceeds for OMEX equity holders.
I am very confident of liability and far less certain on the award (hence notes/warrants as well as equity). $1 billion realistic; $3 billion aspirational.
Too late to initiate a position here?
The risk/reward is not as attractive as it was at $3/share. The stock is up 50% without any news, just because the setup was more widely publicized. As I noted in my comment at the end of December, I have used this opportunity to materially reduce my position.
However, if the award turns out to be $1bn+ (which would be a very large award in comparison to past ICSID cases), OMEX could easily be a multi-bagger from the current levels. So all depends on the eventual size of the award, which anyone can only guess at the moment.
thanks
Does anyone know how they are claiming $1.4bn in damages (pre-interest) when they sold a 15% stake in Oceanica in 2013 for $15m? (The concession to mine Don Diego was granted in 2012). Also, how come market cap was never worth more than $250-300m after the concession was granted, event though they had other businesses in there? I’m sure the DCF shows $1.4bn but I wonder if the arbitrators consider where the markets and acquirers actually priced the business?
Maybe in 2013-2014 the market thought the environmental approval was unlikely and therefore discounted the company by 80%…. but I’m skeptical of that
https://www.marketscreener.com/quote/stock/ODYSSEY-MARINE-EXPLORATIO-26390911/news/MAKO-Resources-LLC-completed-the-acquisition-of-15-stake-in-Oceanica-Resources-S-de-R-L-from-Od-39133146/
ICSID recently informed OMEX that the final decision regarding their case against the Mexican government under Chapter Eleven of the North American Free Trade Agreement is expected in Q2 2024.
https://www.bamsec.com/filing/119312524063703?cik=798528
thx for the writeup and the interesting comments. After readfing it all, imho odds are for OMEX to “win” but get awarded only a small fraction (10-30%) of the claims made. $600 million might already be pretty generous an assumption.
I don’t see any compelling reson to gamble on this.
With the recent drop in share price today, OMEX is now ~$3.80, closer to the original entry at the time of this pitch. Even though today’s price is still higher than the initial entry, the fundamentals of this set up don’t seem to have changed. And arguably, even though the share price is higher than the initial entry, options prices for Q2 are the cheapest yet. Options, via a straddle or strangle, may be the best way to play this given the binary nature of the outcome i.e. the award amount isn’t enough to matter and the stock crashes or the award is multiples of OMEX’s market cap,
OMEX’s pending NAFTA litigation against the Mexican government appears to be coming to an end. This week, the company received a letter from the ICSID (the administering body for the litigation), stating that the tribunal’s award is “in the process of being translated.” The exact date of the decision announcement is yet to be provided. OMEX’s share price has jumped by 6% on the news and is now up 69% from the initial write-up levels. However, if the company wins and the award is anywhere within the range of the filed claims ($1.4bn without interest, $3.1bn including accrued interest), there could still be significant upside left in OMEX shares from the current levels.
The current price of $5.3/share implies an award of >$900 million gross.
And I believe dt’s “actual probability-weighed award that the market is currently discounting” must be even higher (>$1.2 billion?). (I assume dt is using a 27% haircut, based on the $440 and $600 million numbers mentioned).
For the stock to double from here, we would probably need an award of >$1.8 billion gross?
yup, I arrive at similar figures if we assume that after the award the stock will continue to trade at a large discount to the theoretical book value pro-forma for the award (due to collectability and lack on clarity of how the potential proceeds would be used).
hi @dt,
in your weekly update, you said “The prolonged silence is quite concerning, particularly when it seems that management’s only remaining task is to translate and announce the decision. ”
I don’t think it’s the management who is tasked with translating the award documents.
I think the NAFTA Tribunal is doing it and the is responsible for any delay.
It’s possible that they have to translate all supporting documents (not just the short award letter) into Spanish, and possibly French as well (because it’s NAFTA, and Canada is officially bilingual).
What’s concerning me more is that during the June 13 Fireside chat with CEO, returning capital to shareholders seemed to be on the bottom of his capital allocation priority list:
“While OMEX is considering a wide range of potential outcomes of the NAFTA tribunal’s decision, a monetary damages award would substantially improve its capital position, allowing it to fund internal growth and expansion, provide capital to support its current portfolio companies, and potentially add new projects to the portfolio, as well as potentially return capital to shareholders through a special
dividend or share repurchases, depending on the size of the award.
There may also be an opportunity for OMEX to proceed with or monetize its investment in the offshore phosphate resource in question depending on the outcome”
It’s also very possible that “translate” has some other intended meaning for them. I can’t imagine needing to literally translate it to other languages is the issue. They may have meant some other technical term or steps that must be taken to finalize the award and simply worded it poorly.
I don’t have access to the following article, but from what’s described in the abstract it looks like “translation” is quite a complex and important area in ICSID proceedings.
[Translation and Interpretation in ICSID Proceedings]
Abstract: Translation and interpretation are an integral part of international dispute resolution. With 158 Member States to the ICSID Convention, ICSID proceedings are no exception. It is rare for any ICSID proceeding to be completely unilingual.
Rather, issues of translation, interpretation and the linguistic compatibility of arbitrators, counsel, experts and other actors in ICSID proceedings arise often, sometimes with a substantive impact on the outcome of the case and are thus central to the dispute resolution services that ICSID provides.
In this practice note, we provide:
(Section I) an overview of the ICSID framework on procedural languages, translations and interpretations;
(Section II) a summary of investment arbitration decisions in which translation and interpretation issues have had a substantive impact on the outcome of the proceedings; and
(Section III) practical advice on addressing translation and interpretation needs in ICSID proceedings. Annexed to this note is a Checklist for Multilingual Proceedings.
Yes, I have mistyped it. Intended to say that “ICSID’s only remaining task is to translate and announce the decision” instead of this being management’s task.
Anything worth updating here? My old price alert just went off so it looks like we retraced all the way.
Copying in OMEX update from the latest weekly SSI newsletter:
“The prolonged silence on the award size is quite concerning, particularly when it seems that ICSID’s only remaining task is to translate and announce the decision. As a result, the stock price has dropped by 40% over the past two months. At current levels, the implied gross award stands at around $600m, assuming OMEX continues to trade at a 30% discount to its pro-forma book value. This is substantially below the claim value, which ranged from $1.4bn (excluding interest) to $3.1bn (including accrued interest). If the award falls anywhere close to this range, the upside could be substantial. While the recent sell-off might present an interesting opportunity, my limited experience with litigations suggests that prolonged silence after an award decision is rarely a positive sign.”
Award to be announced on Sept 17th, it looks like.
https://archive.fast-edgar.com/20240912/AU2ZQ22EZC2RT9ZZ27232ZYK7TU7ZZ22Z862/
Stock up 20% on this? Wasn’t it obvious that the award will be announced eventually? Very surprised by this move.
As for the upside – the award will need to come at around $1bn+ for OMEX shareholder to realize any upside from the current levels (I assume OMEX will continue to trade at a substantial discount to the award value).
What probability would you assign the award coming in at $1bln+?
Wondering if someone can help me out with US tax. For base case, (Value-nol) x 25% = us tax? (492.8-242) x.25% =/=71.93
Dexsa — taxes are complicated here; we don’t know if award will be awarded in Mexico or the US. US preferable. We have offsetting US NOLs.
panda — 1 in 3.
OMEX is down roughly 90% as the company announced a “win” in its NAFTA arbitration case against Mexico. The International Centre for Settlement of Investment Disputes (ICSID) awarded Odyssey $37.1m plus interest, recognizing that Mexico breached its NAFTA obligations. The award is net of Mexican taxes, and Odyssey expects to use the proceeds to satisfy litigation financing obligations.
226 million shares of OMEX have changed hands today, which is 11 times shares outstanding of 20.6 million.
Yesterday’s turnover was 28 million shares.
Normally, >100k was already an relatively active day for OMEX.
Any of you guys know if OMEX can/plans to appeal the decision?
OMEX announced it as a ‘win’ so I doubt they would willing to appeal the decision.
It is not appealable. ICSID decisions are final
I have seen on some message boards based on reading this article that some think the company is now doomed because it did not get at least $300million. And the article doesn’t really make clear on lesser amounts. Now that we know the $37.1million is there anymore insight about where this really leaves them financially? Are they actually a “Donut” now or just have to carry on and did a bit of rebuilding and focus on their core business?
So OMEX holds interests in several exploration-stage subsea mineral projects, including stakes in companies like CIC Limited and Ocean Minerals, both focused on deep-sea mineral exploration. Additionally, OMEX retains a 40% interest in proceeds from its legacy shipwreck business, having recently received a $9m payment from this business. However, revenues remain volatile, and OMEX has historically burned through cash, so there’s little reason to believe this trend will change. So it seems valuation support from the business side is close to zero.
The company also has a history of shareholder dilution, having doubled its outstanding shares over the past 3-4 years. Following a 90% drop in its share price, the market cap stands at around $24m, but the company has a working capital deficit of nearly $30m:
Can they raise capital at this point? I doubt it.
But shorting such nano-cap seems very risky. Borrow fees have surged to over 70% following the recent price drop, and shares available for borrowing have also decreased. This could easily become a short squeeze target or borrow might simply disappear.
https://www.bamsec.com/filing/95017024093873?cik=798528
Can this be a potential short opportunity?
Not much is left after repaying litigation financing.