Earnings season is now underway for publicly listed companies, with quarterly earnings from Bitcoin miners showing just how difficult Q4 2022 was.
Just 12 months ago, CleanSpark (CLSK), Hive Blockchain (HIVE) and Iris Energy (IREN) reported significant profits (Net Income) of $14.1 million, $57.8 million and $60.4 million, respectively. Now each reports significant losses.
The impairment in Bitcoin price–down 65% since its all time high–and ASIC miner prices, along with the continued increase in mining difficulty and inflationary increases caused by global macroeconomic factors and the war in Ukraine, have had a significant impact on earnings during the final quarter of 2022. Moreover, the Ethereum Merge in September 2022 further greatly reduced numerous miners revenue streams., while steadily increasing their Bitcoin hash rate to 3.0 EH/s.
In this piece, we’ll tackle a few stand out metrics including the cost to mine a Bitcoin, balance sheet strength, Enterprise Value and production.
Cost of mining a Bitcoin
The ‘cash costs’ in Bitcoin production generally include the direct costs of energy and site costs, plus the operational costs such as general and administrative costs, e.g. salaries, legal and professional fees. This provides a good understanding of whether the company, even during a bear period, can still produce Bitcoin and cover all the necessary cash costs that are required to be made.
Of the three miners covered here, only Hive Blockchain reports an ‘operating cash profit’ for each Bitcoin produced. Interestingly, both CleanSpark and Iris Energy actually have lower energy costs per coin than Hive Blockchain, but significantly higher operating expenses.
Watch: Controlling Risk with Hive Blockchain
Balance Sheet: Current Ratio
If you take a first look at the balance sheets of CleanSpark, Hive Blockchain and Iris Energy, you will discover that all three have relatively strong positions, each with significant amounts of net assets (Assets - Liabilities). However, on further inspection there are a couple of points to note.
The current ratio is a snapshot at a given point in time, used to evaluate a company's ability to pay its short-term obligations, i.e. those current assets that can be liquidated in the next 12 months to cover the obligations that are due within the same period. There is no real ‘norm,’ however, there have been a recent number of high profile companies in this industry that have had to apply for Chapter 11 protection or arrange new debt repayment schedules with their lenders.
If you consider the current ratio for CleanSpark, it highlights that they currently have $21 million in current assets, which appears on first look to be an insufficient level of current assets to cover their short term liabilities of $42 million. It should be noted that they are currently producing 600-700 Bitcoin per month and have over $427 million in net assets on the balance sheet, more than adequate to alleviate any short term concerns.
Both Hive Blockchain and Iris Energy have stronger short term liquidity with both companies currently having more than twice the amount of current assets on the balance sheet to meet their short term obligations.
Iris Energy has greatly improved its financial position in the last few weeks. The company was unable to reach a restructuring agreement with its lender, NYDIG LLC, and defaulted on $112.2 million of equipment loans (capital and Interest) held by two special-purpose vehicles (SPV). The mining rigs leveraged against these loans were producing insufficient cash flow to cover the debt, which eventually led to the company handing over all the associated assets to the lender.
Iris Energy have also recently announced that they have entered into an agreement to utilize the remaining Bitmain prepayments to acquire new miners without any additional cash outlay, and, in doing so, will increase their self-mining capacity from 2.0 EH/s to 5.5 EH/s over the coming months, effectively debt free.
Enterprise Value
The Enterprise Value (EV) is a metric that not only considers the Market Capitalisation (MCAP) of a company, but also the company’s debt and cash holdings. This provides the investor a more complete view of the company’s health and its ability to pay off debts. In simple terms the MCAP is the value of the company, whereas the EV is effectively what it might cost.
EV = Market Capitalization less cash and cash equivalents + debt
If you consider CleanSpark, the EV of $247 million is higher than the MCAP ($228 million) because there is more debt on the balance sheet than cash or cash equivalents. However, when you consider that there is $427 million of net assets on the balance sheet, either valuation is significantly lower than the real value of the assets.
Hive Blockchain has a lower EV of $222 million than its MCAP of $234 million, but has a significantly lower amount of net assets in the company, currently $141 million. Iris Energy, having recently reduced its debt position to zero, has the best ratio of EV to net assets, effectively providing $0.42 of EV for every $1 of assets.
Production
These three miners, along with Bitfarms (BITF), have consistently utilized their monthly Bitcoin mining operations at the highest levels in terms of Bitcoin mining achieved by EH/s when compared to the rest of North American listed miners. The most recent quarter has seen no change.
All three companies were able to increase their hash rate growth over the last quarter, with CleanSpark achieving a 57% increase in operational hash rate, Iris Energy achieving 41% and Hive Blockchain 18%.
Summary
Although all three companies have reported losses, there are still some positive takeaways from these results.
Hive Blockchain has continued to lead the way as it did during the previous 18 months, with the best monthly productivity by EH/s and the company with the lowest cost base for producing Bitcoin.
CleanSpark have taken advantage of the bear cycle and the reduction in prices for the latest generation of miner machines and grown its hash rate by 57% in the last quarter alone to 6.6 EH/s placing them in the top tier with the likes of Marathon Digital (MARA) and Riot Platforms (RIOT). They have an aspirational growth target of 16.0 EH/s by the year end and providing the price of Bitcoin continues its current trend, the probability and likelihood would appear to be increasing.
Iris Energy, have successfully navigated the debt markets, taking the company from a position where it had in excess of $110m in debt to a future operational hash rate of 5.5 EH/s in the coming months, debt free. They have also successfully agreed with Bitmain to utilize the outstanding prepayments on account to buy more machines, without any future financial commitment, and replace those recently handed back to NYDIG.
