Argo blockchain (OTCQX: ARBKF) We have announced the results for the first quarter of this week and are changing rapidly. Meanwhile, the current deterioration in cryptocurrency pricing raises challenges for the company’s business model.
Moved from Bearish stance In Argo before July last year Neutral Last October, and now to “purchase”. This reflects the dramatic improvement in business fundamentals over the past year and the change in valuation due to the 54% drop in Argo’s share price from the last bearish part of July 2021.
New facility should increase business potential
The company has recently focused on building a large new facility in Texas. The facility went live this month. Argo plans to increase the hash rate to 5.5 EH / s by the end of 2022, subject to the delivery of the machine. This is compared to last year, which started with 645 petahash and increased to 1,605 petahash, or 1.6 EH / s. Therefore, capacity should more than double last year and more than triple this year.
But that’s only part of the plan for the new facility. In the end result, the company says the hash rate is expected to increase significantly over the next few years to over 20 EH / s.
The company is showing off its high mining profitability (1st quarter margin is 76%), which should be a plus in the case of investment. However, there are some questions about the cost of building, equipping, and operating a new Texas facility. For example, in November, “Disclosure of inside information“, The company revealed it
In a statement on the outlook, Argo representatives said the total cost of building and assembling an 800 MW mining facility in Texas could be between US $ 1.5 and US $ 2 billion.
As we continue to point out, many factors are important to total cost, especially the extent to which the company ultimately decides to develop the facility (although it operates at the margins reported by the company). If you can, why not fully develop it?) But that’s a huge expense for a company with a current market capitalization of $ 300 million. The company issued a senior note in November to raise cash, which was only $ 40 million, which I still consider to be a disciplinary rate of 8.75%. Therefore, there are some challenges as to what the ultimate contribution of the Texas facility will be.
Bearish Note from Boatman Capital (Report) HereThe company believes it has made a large payment to its Texas site and also points out the dilution of shares Argo has given to shareholders. When it comes to dilution, this is definitely a wise way for companies to take advantage of the significant rise in stock prices over the past few years. If we can raise money and put it into a much larger, profitable model, rising stock prices have more potential than alleviating the dilutions we’ve seen so far. But in the ever-changing world of cryptocurrency mining, that’s a big deal. It’s also worth remembering that if you want to raise something like a total of $ 1.5-2 billion as the total possible cost, you’ll need more debt. Dilutive of issued and / or more shareholders is inevitable.
From a risk perspective, it seems very often that a company’s plans rely on one facility. This can be a significant risk if the facility is destroyed, inactive, or shut down unexpectedly for any reason.
Profitability has dropped significantly
In the first quarter, the company saw a significant drop in profitability compared to the same period last year. This was mainly driven by changes in cryptographic ratings. It is also worth noting that the increase in expert and general and administrative expenses also contributed to the slide. I think it’s part of the cost of expansion. In my view, the important thing to note here is the effect of crypto prices on the reported profits.
However, the impact of crypto price fluctuations will only be apparent if the company sells some of its holdings. In that statement, the company didn’t say anything about crypto price fluctuations. As of the end of March, it was explained that there was an equivalent of 2,700 Bitcoin and that it had sufficient liquidity.
I don’t know if “sufficient liquidity” is completely beneficial. There is no doubt about liquidity, but reducing the expansion plan will change the way we look at it. A cash balance of about $ 11 million does not seem to be enough to carry out all of the company’s plans for Texas facilities without increasing cash, such as selling coins, issuing shares, and developing debt markets.
Rating looks attractive
Argo’s stock has fallen 56% over the past year, while Bitcoin’s valuation has fallen 32%.
The risks and costs associated with the new facility will continue to weigh on investor sentiment. However, given the company’s proven mining capabilities and new facilities that have increased the potential for mining, the current market capitalization of $ 300 million seems to me a good value.
Much of the valuation is clearly dependent on Bitcoin pricing, and unless it recovers, Argo may continue to trade cheaply. But last year’s mining profit was $ 74 million. Even the more standard income measure came in at $ 46 million. The increase in mining capacity should mean that the company will mine more cryptos this year (and beyond) with attractive mining margins.
Its value depends on the price of the cryptocurrency, but when it returns to last year’s level, the current P / E will be in the mid-single digits, even without considering the positive impact on mining volume from new facilities. Become. Not only will crypto prices recover to last year’s levels, but above that, the expected P / E will be even lower.
Cryptographic prices are clearly a big risk. But if you accept that risk, I think Argo’s assessment now looks attractive.