Earnings Review for CleanSpark, Hive Digital and IREN

It’s the financial reporting season and the North American publicly listed Bitcoin mining companies are starting to submit their quarterly earning updates for the period of October 1st, 2023 to December 31, 2023.  

This article covers the first three Bitcoin mining companies to release their results: CleanSpark (CLSK), Hive Digital (HIVE) and IREN (IREN).

Changes to the Accounting Treatment of Crypto Assets

The Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) 2023-08 on December 13, 2023, focusing on the accounting treatment and disclosure requirements for crypto assets.  With an estimated 26 million US investors (14%) holding crypto assets, and the recent approvals of 11 Bitcoin ETFs, the new standard could actually attract more investors by accurately reflecting crypto economics.

CleanSpark

After a solid year in 2023, it was no surprise CleanSpark’s quarterly earnings were also stellar.  Having reached a hashrate of 10 EH/s by the end of 2023, albeit the original target was 16.6 EH/s, the company has since increased this to 14.6 EH/s at the time of writing, with a further 1.6  EH/s coming on shortly.  With further sites recently purchased in Mississippi and Georgia and the expansion of the Dalton site underway, the company expects to achieve their target of 20 EH/s by mid 2024.

In the last 3 months of 2023,the company mined 2,020 Bitcoin equating to $74 million of revenues, providing an overall Net Income or Profit of $25.9 million or $0.14 per share, a much improved result when compared to the net loss of $29 million in the previous quarter. Careful examination of the accounts highlighted that the company chose to adopt the FASB rules on crypto allowing them to receive a $36 million gain.

Power costs continued to fall quarter on quarter with CleanSpark incurring an average cost of 4c kWh, helping to achieve a gross margin of nearly 61%.  Operating costs also saw reductions in professional fees (24%) and General and Administrative (G&A) costs (35%) helped by the scale of growth and efficiency.

Hive Digital

Hive Digital also saw improvement in their quarterly numbers although they did report a net loss of $6.95 million or $0.08 per share.  The company mined 830 bitcoin in the quarter for a total revenue of $30.1 million at an average of $36,283 per Bitcoin.  The change in taxation rules on energy in Sweden where the company has 29% of the mining operations impacted their gross margin, achieving 37.7%.

In terms of cash operating costs, Hive Digital has expended only $4.37 million, representing 14.5% of total expenditures. The company takes pride in its commitment to maintaining these costs at the lowest possible level, consistently ranking among the North American miners with the lowest percentage of G&A costs.

The High Performance Computing (HPC) division achieved revenues of $1.1 million, during the reporting period, exceeding its initial monthly target of $250,000. It is now poised to escalate this figure to $250,000 per week by the close of 2024. To facilitate this growth, the company plans to acquire an additional 96 Nvidia 100 chips, supplementing the substantial inventory of GPU chips obtained during its Ethereum mining operations.

IREN

IREN (formerly known as Iris Energy) achieved a net loss of $5.2 million or $0.07 per share during the reporting period. In the last quarter of 2023, The company mined 1,144 Bitcoin, achieving $42 million in revenues, with a gross margin in excess of 60%, aided by their energy strategy, utilized at their Childress site in Texas.

The company has made initial payments for miners to increase their hashrate from 6.2 EH/s to 11 EH/s and are scheduled to pay a further $48 million within 12 months of the reporting date. IREN has also made a further 10% non-refundable deposit of $12.8 million as a down payment in relation to the hardware purchase option to acquire up to 48,000 Bitmain T21 miners (9.1 EH/s) at a price of $14/TH.  If fully exercised, this will take their total hashrate to 20 EH/s by the end of 2024.

IREN have also increased their commitment in HPC by announcing on February 14, 2024 the additional purchase of 568 of NVIDIA’s latest-generation artificial intelligence (“AI”) H100 GPUs for $22 million. This purchase takes their total GPU chip investment to $32 million, and combines well with their already announced  commencement of a cloud service with leading AI company, Poolside AI SAS.

Cost to mine a Bitcoin

One of the most important metrics to consider ,as we approach the next halving in less than 8 weeks time, is the cost to mine a Bitcoin, after which, the cost to mine each Bitcoin will effectively double, as mining rewards drop from 6.25 Bitcoin to 3.125 Bitcoin per block.    

For this exercise, the total direct and operating cash costs have been included.  The largest cost a Bitcoin miner will incur is the energy cost. It’s imperative that Bitcoin mining companies are constantly seeking ways to reduce this cost especially as each halving approaches.  Both CleanSpark and IREN achieved a gross mining margin in excess of 60%.

Hive Digital’s energy costs were higher for reasons already covered, but their strength in recent years has been to keep their operating costs to a minimum, representing 14.5% of revenues, with CleanSpark achieving 16.1% and IREN were considerably higher at 32.9%, highlighting some significant legal and professional fees over the past 3 months when compared to the same 3 months in 2022.

The overall cash cost to produce a Bitcoin for CleanSpark was $20,202, which places them in great shape, as the halving approaches. Hive Digital with $27,884 and IREN at $26,741 have more work to do, because as the current Bitcoin price approaches $57,000 and without any further increase, this would barely be sufficient to cover their cash costs post the halving.

However, when we consider that all three miners are receiving significant orders for the latest  efficient Bitmain S21 ASIC miners, the cost to mine should start to significantly reduce, with more efficient machines.  There is also an expectation that a considerable amount of the global hashrate will cease, post halving, as the less efficient miners, or those companies with higher energy costs will inevitably have to switch off first, when it becomes unprofitable to mine. Should this come to pass, it could provide more opportunity for the more efficient and low energy cost miners to produce more Bitcoin, as the mining difficulty starts to reduce.  

Balance Sheet strength

Another area for important consideration is the strength of the Balance Sheet.  The current ratio is a financial metric used to measure a company's short-term liquidity, specifically its ability to meet its short-term obligations with its short-term assets, i.e. within a period of 12 months. A number higher than 1.0 provides sufficient cover.

CleanSpark has made great strides to improve this metric over the last few quarters and currently has $4.29 of current assets for every $1 of current liabilities, planned during the next 12 months. With Hive Digital having $3.51 and IREN with $3.38, for every $1of their debt, all three miners have more than sufficient cover to meet their financial obligations over the immediate future.  The ratio is used by investors, creditors, and analysts to gauge a company's liquidity position and its ability to weather short-term financial challenges.

Debt Ratio

The debt ratio measures the proportion of a company's assets financed by debt. Calculated by dividing total debt by total assets, it indicates financial leverage and risk. A higher ratio suggests greater reliance on debt financing, potentially leading to increased financial risk.

All three companies have relatively low amounts of debt, and  it’s understandable when you consider the cost of debt in the current economic climate, and the impact that debt had in the Bitcoin mining space during 2022.  IREN has less than 1% of debt on their balance sheet, with CleanSpark at 2% and Hive Digital at 18%.

Enterprise Value (EV)

Enterprise value (EV) offers a more comprehensive view of a company's true value compared to market capitalization. EV considers a firm's market capitalization but also includes debt, cash, and other factors, providing a clearer picture of its financial health.

This metric can be used when comparing companies in the same industry and when you consider this metric you can also look at the hashrate and determine a value per hashrate the lower the figure, the better the value.

When you compare the 3 miners, in terms of value by current hashrate, CleanSpark has a value of $210 per TH/s, Hive Digital with $74 TH/s and IREN at $76 TH/s.  In terms of using future hashrate, and mining companies may well be valued on future growth, CleanSpark has $95 per TH/s Hive Digital at $37 TH/s and IREN, if the company takes the option and achieves 20 EH/s will have a value of just $25 TH/s

Mining companies are required to grow their hashrate and at least keep in line with the increase in Global hashrate, otherwise they fall away from the pack.  To grow hashrate, the majority of the North American miners are utilizing two of the three main levers available.  The issuance of debt is not as popular over the last couple of years due to the financial cost and the impact caused to some miners as the Bitcoin price fell during 2022.  Therefore, to achieve growth, miners can sell their Bitcoin produced or raise capital through selling equity, known as dilution.

These three companies have been using a mixture of selling Bitcoin (IREN sells all its production to cover operational and capital expenditure) and using the share offerings to fund their growth strategy.   For all three companies, this form of dilution has been provided via use of an ‘At The Market’ (ATM) offering, which generally requires shareholder advance approval.  

As can be seen from the table, CleanSpark has continued to use this method to great effect to grow hashrate, selling a further 37.9 million shares, representing 24% of the company in the period since  September 30, 2023.  Hive Digital have sold 14.6 million (17%) over the same period and IREN has sold a total of 36.9 million shares (55%) since June 30, 2023 - IREN only currently reports earnings every 6 months.

Summary

During this earnings period, these three mining companies experienced an improved financial  position, when compared to their previous quarter earning performance, buoyed by the surge in Bitcoin price.

They were each able to produce one Bitcoin at a cash cost that aligned within the prevailing Bitcoin price, providing a profit margin, whilst, at the same time, maintaining a robust balance sheet and pursuing their expanded growth strategies.