As we relayed here when pressing for the appointment of new Directors to Argo Blockchain, the famous John Maynard Keynes line – “when the facts change, I change my mind sir, what do you do?” springs to mind once again – this time on our part. We were not a believer in crypto for the fundamental reason that with all linen (paper) currency there is the power of a Government to tax to underpin its value. With crypto, there is no such underpinning, merely the collective belief in its value (which one could apply to Gold we concede).
We have been wrong on the price of Bitcoin (BTC) in recent months but remained long of Argo Blockchain due to the cash backing and value play. The price movement in Bitcoin (the principal currency that Argo is now mining for the company’s own account) has been nothing short of spectacular, rising from approx $3,000 to (at the time of writing) @ $11,000. There has been conjecture on a number of fronts as to the price rise but for the purpose of the value arbitrage highlight per here, this is of no consequence to us – we are happy to accept the move at face value!
And so, as per the header, we highlight what we believe to be a unique value arbitrage opportunity in Argo on the recent price move in BTC and the fundamental asset backing of the shares.
Based on the company’s most recent statements detailing the cash position, this was stated on the 31th March as £15m. Management has since revealed a £1.7m equipment spend in the RNS of 8 May and in the 3 June update an additional £2.85m spend on hardware for mining. In the 3 June update however it was revealed that the £1.7m spend on equipment was delivered early and so we can assume that the company has caught, somewhat fortuitously, the upswing in Bitcoin prices on a larger mining scale this last few weeks. We thus assume a round figure of £10m cash being left on the balance sheet now adjusting for further company operating costs over the last 10 weeks.
From the year end accounts we note that the Company is due £834,000 from Mirabaud. If I were Edwards I’d simply issue a Stat Demand and wind up order against them for the money and so we will add this cash receipt back in as ultimately likely to be received. The company also stated £2.45m of hardware assets on the balance sheet. Adding the £4.55m hardware spend in recent months to this and applying a conservative 20% depreciation charge gives current hard asset (mining infrastructure) value of £6m. Clearly there is value in these assets too given HIVE’s share swap with Argo at a significant premium to the then share price in May – the strategic rationale for this was mining capacity. Trade and other receivables are a shade over £2m.
The company reconfirmed its EBITDA cash breakeven operations expectation for the 2H of this year too and so we can assume no further cash backing depletion with effect from next month based on management’s statements. Indeed in the 3 June RNS Mike Edwards relayed the following – “Notwithstanding any material change in trading conditions, Argo also expects its results for the second quarter of 2019 substantially to exceed its previous guidance.”
The company stated that they expected to generate 420 BTC (Bitcoins) by end Q2. At a price of $11,000 this equates to approx £3.7m.
Finally, we add the value of the HIVE stock swap to the NAV breakdown which at Friday’s closing price equates to CAD$7.83m or £4.63m. The company in turn will be issuing @ 44m shares to HIVE and so the share count will rise to @ 337m shares.
Adding the cash and asset values together thus results in a current NAV that we estimate as £27.16m. Post the approval for the increased share issuance this equals 8p per share.
Aside from the asset backing story however we believe that the HIVE stock swap is likely to be a platform for a potential consolidation of the two companies given that this many industry experts believe is likely to be the next evolution of the crypto space story. Bearing in mind that HIVE set a price of 11.6p for Argo shares (& with less mining capacity at the time and the crypto backdrop rather less buoyant than now), we see this level as a floor for any acquirer. Once HIVE resolve their dispute with Genesis we would be surprised not to see some type of corporate activity between the two companies – after all what else would have been the reason behind the stock swap?
Net conclusion then is that if you have missed the recent Bitcoin rally (as we did) then the listed crypto miners that remain at discounts to real asset value with material mining capacity backing give you a second chomp at the bit. Consolidation on the horizon in the space provides a second layering to the cake. At 7.2p we continue to believe the shares will shortly trade up to the HIVE swap level of 11.6p absent a renewed collapse in Bitcoin prices. Indeed, should Bitcoin run back towards the old highs the Argo listing price of 16p could be in sight, particularly given Frank Timis’ hoovering up of stock at lower levels in the 1st quarter thus tightening the share float. Buy.
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