How to invest in sunken treasure; Salvage stocks offer high returns, but big RISK

How to invest in sunken treasure; Salvage stocks offer high returns, but big
risk
National Post
Thursday, May 31, 2007
Page: FP8
Section: Financial Post Investing
Byline: Peter Hodson
Column: View from the Street
Source: Financial Post
One of the side effects of being a portfolio manager is that you are constantly on the lookout for new investment
opportunities. At the mall, I look at which stores have the most customers; in crowds, I look for signs the new
Blackberry is being adopted; in restaurants, I watch for signs of creeping inflation due to labour costs and raw
materials shortages; at the movies, I wonder about sunken treasure.
As Pirates of the Caribbean: At World’s End steamrolled across North America last week, I found myself
considering the investment opportunities that might be connected to the movie.
The obvious link is the Walt Disney Co., the owner of the flick. Or perhaps Cineplex Galaxy Income Fund, which
stood to profit from my overpriced popcorn. Disney (DIS/NYSE) is up 5% year-to-date; Cineplex (CGXu/TSX) is up
31% in 2007 — not bad returns, but not quite close to finding a treasure chest of gold.
Turns out that 2007 has been a pretty decent year for sunken treasure seekers, both stock market and otherwise.
Case in point, Odyssey Marine Exploration Inc. (OMR/AMEX), a $312.8-million company. OMR specializes in
shipwreck search, recovery and marketing. The stock has surged 135% this year.
On May 18, OMR announced it had recovered the biggest collection of silver and gold coins ever salvaged from a
shipwreck. Code-named “Black Swan,” the company has not disclosed the identity of the shipwreck, nor divulged
its exact location. Believed to be a colonial-era shipwreck near the English Channel, Odyssey says it discovered
the wreck in conformity with salvage law and the Law of the Sea Convention, beyond the territorial waters or legal
jurisdiction of any country.
OMR says it has recovered more than 500,000 coins from the shipwreck, and some media speculation has put the
value of the discovery at more than $500- million. Considering the smaller size of the company in relation to that
figure, it is no wonder why the stock has soared.
But there are a few cautionary notes: First, while OMR acknowledges the number of coins, their value cannot be
accurately determined yet. In addition, a discovery of that many coins would likely drive coin prices down if all
were offered for sale.
Clearly, though, the discovery is significant, and massive. Like any significant resource discovery, I would expect
now that all sorts of players will come out of the woodwork claiming the discovery is theirs and not Odyssey’s.
Of course, no analyst bothers to follow the company, but Fortress Investment Group owns 10% of the company.
There is even a Pirates of the Caribbean connection: OMR has confirmed it is in discussions with Disney on a
number of projects.
Another shipwreck company whose shares, at least, have struck gold this year is Sovereign Exploration
Associates International Inc. (SVXA/OTC). This company, with a $15-million market cap), is in my opinion a lot
riskier. Still, Sovereign’s stock has soared 104% this year, despite the company still being unprofitable. SVXA is
searching for the Fantome Fleet — specifically the HMS Fantome, a British Navy brig sunk off the coast of Nova
Scotia in 1814.
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The HMS Fantome is believed to have been carrying coins and artifacts looted from what later became the White
House and the U.S. Treasury when the British burned the U.S. capitol in 1814.
It sunk 30 km southwest of Halifax. As might be expected from such an historic wreck, the salvage operation is in
dispute from numerous parties, with England claiming ownership. As such, Sovereign Exploration in 2007 plans to
explore for two different ships. The company claims one, which sunk in the 1700s, carried $100-million worth of
silver.
Canada, too, has had some companies searching for underwater treasure. However, from a stock-market
perspective, your investment would have, effectively, walked the plank.
Visa Gold Exploration was the most notable Canadian shipwreck exploration company. It was salvaging a
brigantine vessel called the Palemon, which ran aground off Cuba in 1839. Visa enjoyed some stock-market
success, and in its exploration efforts was successful in bringing up artifacts from the Palemon. However, unlike
Odyssey, its treasure wasn’t all that exciting. The company, in one press release in June, 2001, praised the finding
of an “ancient olive oil jar, completely intact” — not exactly the stuff of pirate legends. Visa collapsed amid an
insider trading scandal in 2005 and has delisted.
Perhaps the most successful and stable salvage company is Premier Exhibitions Inc. (PRXI/ NASDAQ), formerly
RMS Titanic Inc. A U.S. federal Court granted Premier salvor-in-possession rights to the wreck of the Titanic in
1994. After conducting numerous expeditions recovering 6,000 artifacts from the ship, it went on city tours to
display them to the public. It then parlayed this success into other exhibitions, most notably the BODIES
exhibition, featuring whole and partial human body displays.
Premier, a US$408.4-million company, is profitable, with forecasted earnings of US68¢ per share this year. Its
stock is up 117% in 2007 year and up close to 150% over the past 52 weeks. Still, it’s unlikely to do much future
shipwreck salvage work, seemingly preferring above-water cash-paying customers to chasing high risk dreams of
underwater riches.
peter@sprott.com
– – -
– Peter Hodson is a senior portfolio manager at Sprott Asset Management. He, his firm or its clients may hold
positions in the securities mentioned.
Illustration:
• Black & White Photo: Neil Dobson, AFP, Getty Images / Odyssey Marine Exploration’s remotely operated vehicle is hoisted from the
seabed after recovering coins from a Colonial period shipwreck. Odyssey says it has recovered more than 500,000 coins from the wreck,
but columnist Peter Hodson says their value can’t yet be determined, and he expects all sorts of players will come out of the woodwork
and claim the discovery is theirs.
• Chart/Graph: FPInfomart, National Post / ODYSSEY MARINE EXPLORATION.
Idnumber: 200705310044
Edition: National
Story Type: Business; Column
Length: 886 words
Keywords: HISTORIC SHIPS; SALVAGE; STOCKS
Illustration Type: P C
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