By Richard Gill, CFA

Shares in Mining as a Service (MaaS) provider Argo Blockchain (ARB) slipped back yesterday despite the company announcing further progress on its ambitious growth plans. Argo listed on the Official List of the LSE on 3^rd August, raising £25 million to develop a global datacentre management business facilitating cryptocurrency Mining as a Service (MaaS).

The latest news is that the company is beginning to ramp up its mining capacity on a new technology platform to support the mass roll-out of its mining-as-a-service products later this month. Hardware for the expansion is on order and expected to arrive shortly at the company’s two data centres in Quebec, Canada. Upon installation, it will boost Argo’s capacity to support 3,000 new subscribers, a more than seven-fold increase from its existing installed capability.

The new platform is expected to be installed and ready for the onboarding of new subscribers from late September, in line with plans set out in Argo’s IPO prospectus. Argo retains a waiting list of more than 50,000 potential users for its MaaS services.

The enlarged capacity will complement existing infrastructure based on GPU systems and follows recent new advances in ASIC (Application Specific Integrated Circuit) server technology. An ASIC is a type of semiconductor used in purpose-built computing hardware for the mining of cryptocurrencies, and until recently were only capable of mining a limited number of cryptocurrencies, notably Bitcoin.  However, recent advances in ASIC architecture now allow an algorithm to be used for mining multiple altcoins, delivering more choice for miners and improved efficiency and enabling the mining of alt-currencies at scale.

Other benefits of the new platform include up to 7 times improvement in hashrate processing efficiency over the best available GPU hardware, reduced capital expenditure as more efficient processing requires less hardware, significantly lower electricity consumption & energy costs and potentially lower cash burn and improved cash-flow. Argo will be one of the first MaaS companies in the world to deploy this new ASIC technology, which will allow greater flexibility in introducing a wider range of cryptocurrencies to add to its current offerings of Bitcoin Gold, Ethereum, Ethereum Classic and Zcash.

Since its IPO Argo has also announced the signing of a multi-year agreement with GPU.One, a leading Canadian data centre hosting company specialising in GPU-based server technology, providing 9.5MW of clean energy. Under the deal Argo will lease two data centres in Quebec with the capacity to service over 150,000 subscribers.

The contract, which is for an initial three years with an option to extend by a further two, includes the supply of hydroelectricity at a price of CAD $0.038 (US$0.03) per kilo-watt hour (kWh). With this agreement Argo has arranged enough leased space, at the cheapest electricity costs available, to handle its first two years of business plans in Canada, with both centres expected to become operational by October this year.

Comment

Mike Edwards, President and co-founder of Argo, has described the new ASIC technology platform as, “…a potentially game-changing development…”, and we agree. The higher efficiency and lower costs it brings provides upside to margins, and therefore to our recently published forecasts, with the ability to mine further cryptocurrencies potentially attracting additional subscribers. While it is still early days in Argo’s business plan, the company has been making steady progress since IPO, with developments in line with targets set out in its prospectus. As a reminder, in the first year of operations Argo is looking to have mining capacity to serve approximately 31,752 customers, rising to c.140,000 in year 2.

Shares in Argo have slipped from the IPO price of 16p to the current 10.5p, capitalising the company at c.£31 million. We put this largely down to falls in the prices of cryptocurrencies over the past few months. This is a key risk for Argo, as demand for its MaaS offerings from customers may be affected by such movements as the level of return subscribers can make is linked to cryptocurrency prices. However, demand for MaaS services remains, reflected in Argo’s large waiting list.

As per our initiation of coverage note, we have a profit multiple based valuation of 38.12p for Argo shares. With the shares currently trading at 10.5p this implies potential upside of 263%. We therefore retain our stance of Conviction Buy.

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