By Richard Gill, CFA
Crypto miner Argo Blockchain (ARB) has announced a brief but positive update on trading for the three months to September 2019. The third quarter saw revenues of £3.63 million generated from its cryptocurrency mining operations, up 75% from Q2 2019, with mining margins for the period of c.73%. Margins were down from c.80% seen in H1 following a rise in mining difficulty and network hash rates, and a softening in the Bitcoin price. Nevertheless, Argo continues to be one of the most efficient miners in the industry.
As announced in mid-September, Argo now has 6,000 machines in production, with another c.6,000 (currently on order) on track to be installed before the end of the year. No specific details were given on the period end cash/crypto balance but Argo commented that during the quarter it adopted a policy to exchange its mined Bitcoins into fiat currency on a regular basis to avoid additional exposure to Bitcoin pricing. Chairman Mike Edwards, added, “We are delighted with the mining results in Q3 which, together with strong cash management, have helped us to maintain a robust balance sheet.”
The three months from 1st July to end September saw a stabilisation of crypto prices following the strong rally seen in Q2. The Bitcoin price slipped from a high of $12,000 in early July, continued to trade around $10,000 for much of the quarter, before ending the period at around $8,250. In this context it is very encouraging that Argo grew revenues by 75% against some tough comparative Q2 figures.
The continuing high margins remains testament to the efficiency of the company’s operations, driven by its long-term, low-cost energy contract with GPU.One, low operating cost base and expertise in configuring hardware infrastructure. Also, we believe as one of the largest shareholders that it is very important to note that mined crypto is being converted into cash. The company us effectively banking its profits rather than holding on and being exposed to falls in the Bitcoin price. The current valuation does not reflect this key element of the company’s strategy in our opinion, namely that the shares should not fall commensurate with the bitcoin price if there is further weakness given the cash backing but yet on the upside, given the company’s de facto industry leading efficiency mining basis, there is a positive double whammy.
While Bitcoin prices remain off recent highs Argo continues to derive high margins at current prices and will see further growth in Q4 as the recently ordered machines are delivered and become operational. During H1 the company committed to purchases of £18 million worth of mining gear which, as stated in the Q3 update, puts it on track to have an installed base of c.12,000 mining machines by the end of 2019, representing a total hashing capacity of 505 petahash. The additional 50MW of power capacity agreed in recent months with GPU.One will allow Argo to run up to 15,000 more mining machines concurrently, taking its total Bitcoin mining capacity from 505 petahash, to 1.36 exahash, which would make Argo the largest publicly listed crypto miner in the world.
Argo shares currently trade at 8.35p, up from 7.05p since we re-initiated coverage on 8th August but down from recent highs of 11p. There remains some way to go before our first (yield based) price target of 14.62p is met. As time goes on and the company delivers on our forecasts we see our 31.33p per share earnings multiple plus liquid assets based valuation as being more appropriate – of course assuming that Bitcoin prices follow our model. Upside potential to our forecasts and target price comes from filling the newly received capacity from GPU.One. Further blue-sky upside potential comes should Argo’s valuation rise in line with its efficiency ratio against peers, with our calculation of 73.71p being some ten times the current price.
Returning to the bitcoin to cash conversion and the comments by CEO Mike Edwards as per HERE in our recent interview with him we note the point about the distributable reserves moving to a positive position in the very near term. We expect that following this either a dividend or share buy back policy will be brought into play which will be taken extremely positively by the market.
Should the market not realise these values in the short-medium term we continue to maintain the belief that Argo is likely to be an acquisition target for a listed peer, especially given the higher efficiency of its operations. Accordingly we retain our stance of Conviction Buy.
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