By Richard Gill, CFA
Bitcoin miner Argo Blockchain (ARB) has taken a 25% stake in crypto venture capital and technology company Pluto Digital Assets for c.£1 million, becoming its lead investor. Pluto invests in, incubates and advises digital asset projects based on decentralised technologies (DeTech), decentralised finance (DeFi) and networks such as Ethereum and Polkadot. It also supports the operation of proof-of-stake networks by staking and operating validator nodes. Argo believes that this investment complements its leading position in the Bitcoin and proof-of-work consensus mechanism.
This investment at 3p per share, as part of an investment round of £2.5 million, was satisfied entirely by the contribution of Argo’s holding of 75,000 Polkadot (DOT) cryptocurrency, which were originally purchased in Q1 2019 at a cost of just $75,000. As part of the terms of the investment, Argo has negotiated substantial anti-dilution protections including the option to retain its 25% stake through future funding rounds, either via new Argo shares or cash. Argo will also receive 1 warrant per share purchased, exercisable at 6p for two years.
Pluto seeks to democratise participation in cryptocurrency markets and the blockchain space, with its senior leadership team having a wealth of experience in establishing successful cryptocurrency and blockchain ventures. Some of the most notable projects they have invested in include the YOP Platform and Protocol, a highly anticipated DeFi project launched on the leading IDO platform Polkastarter. YOP is backed by leading crypto VCs and supported by some of the most influential names in crypto, and has increased by over 1,800% since listing in January 2021.
The news comes after the recent monthly update which revealed that Argo had it best month ever in January in terms of revenue and profits, with £2.48 million revenue generated at an average margin of c.71%. Also, as previously alluded to, Argo has signed a Share Purchase Agreement with its Canadian data centre provider GPU.one for the strategic purchase of two data centres in Quebec which house a portion of Argo’s cryptocurrency mining equipment. Subject to a number of conditions, the purchase is expected to close in the coming weeks, to be funded out of Argo’s existing deposits with GPU.one and a small cash consideration.
This is a shrewd bit of business from Argo, with the £1 million investment effectively bought for c.£55,000 following the contribution of its DOT holding, which rose significantly in value. Pluto has said that it is in preparation for a listing on the London Stock Exchange later this year, so with the current excitement surrounding cryptocurrencies there could be a significant uplift in value not so far in the future. Argo’s increased cash flow in recent months has allowed it to become more opportunistic at looking at investments like this, and we expect the company to continue to seek more of these kind of opportunities.
With Bitcoin once again pushing the $40,000 mark ($39,050 as we write) Argo shares currently trade at 98.5p, off highs of 125.5p seen in early January. We conservatively decided to TAKE PROFITS on the shares at 79p after they surged ahead of our target price of 21.14p – our model used somewhat conservative assumptions given the volatility of Bitcoin.
However, with Bitcoin continuing to maintain near record highs Argo still looks to have a good year ahead of it. To illustrate, we take our financial model and plug in a flat $39,000 BTC price for the rest of the year, add in the new shares from January’s £22.4 million private placement and make various assumptions about the new machines planned to be bought with these funds. All other assumptions, including a 5% monthly rise in BTC difficulty, are kept the same. These new numbers would justify a target price of 89.2p assuming a 50% dividend payout ratio for 2021 at a 5% yield. As yet we have no forecasts for 2022 but note that the company will enjoy a full year of the increased mining capacity, as well as any other benefits from its recent investments. As ever, the shares remain highly exposed to movements in the Bitcoin price, both to the upside and the downside.
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