1/ For those interested in bitcoin miners, I had a call with @bigsuey IR of Hut 8 $HUT which was very constructive. I have a follow-up call with the CFO next week so will post up any clarification points but for now, the key takeaways are:
2/ $HUT's recent capital raise fully funds their buildout to 6 EH. They did have a C$500 shelf stock offering filing but recent raise plus earlier one now means that's nearly fully used up (big contrast to $BITF who have their entire C$500 ATM shelf overhanging).
3/ I was curious why they suddenly went from no big miner purchase announcements despite peers announcing big deals and what changed their mind mid this year and there were a few observations: a) CEO Jaime Leverton only took over in December 2020 and so took some time to do…
4/ …internal work on strategy, restructuring quietly in-house during Spring etc, b) they take a balance-sheet first thoughtful approch to upgrading equipment having lived through a crypto winter and experienced the downsides of paying top whack for miners that then become…
5/ …worth a fraction of what you paid for them as the cycle turns. They took advantage of the big fall in rig pricing post Chinese miner crackdown (rig prices temporarily went down from $90-100 per TH/s to $20-30 per TH/s).
6/ They are clearly very excited about the new site and the power price deal with Validus of C$2.7c per KWh, the lowest in the industry. This deal is for 100MW but there is potential capacity for 2.2GW at this new site.
7/ I asked about timing of their commitments given all the delays the industry is experiencing and they were "pretty confident" they are able to meet the stated goals (3 EH by year end 21 and 6 EH by mid 22).
8/ Interesting tidbit - I wondered how they were claiming to be the only MicroBT certified repair shop in Canada when $BITF had made the same claim earlier this year - $BITF lost the deal and $HUT now have that exclusive relationship.
9/ The biggest positive for me was re margins and I hope to get more clarity on this post my upcoming call with the CFO.
10/ But they were very clear that a) their gross mining margin of 57% is not comparable with peers's 70%+ range as theirs includes all associated costs while peers only include cost of electricity in theirs and b) most importantly, $HUT margins are going to go up very…
11/ …meaningfully as the new equipment (which is much more efficient) comes online.
12/ They actually have a bunch of older equipment not being used right now which is profitable but they could get up to 3.3-3.7 EH if there was a supply chain crunch preventing new equipment from arriving just by plugging in the old equipment they have sitting there (once the…
13/ …new power capacity at the new site comes onstream).
Other points of interest: transformers are on a 55 week delay - fortunately $HUT placed their orders in June when there was availability. This is a big bottleneck for peers.
Other points of interest: transformers are on a 55 week delay - fortunately $HUT placed their orders in June when there was availability. This is a big bottleneck for peers.
14/ Other bitcoin miners put out huge mining order announcements, often for machines they have not bought but just put down $500 per machine deposit which just gives them a place in the queue, which is vulnerable if competitor comes in and offers more.
15/ $HUT keen to be blue chip miner in the space, run it conservatively, only announce actual paid for miners.
16/ Re recent equity raise, they were very excited with the roster of investors, confident people will be excited to see some of the names in the 13Fs (included one legendary name at least).
17/ My back of envelope earnings power calculation: If I look at this as generating 6 EH by mid 22, at which point say they have 9,000 BTC HODL on the b/sheet. Then assume a network hash rate of 235 EH at that point (which assumes we go from 138 EH now to 300 EH end 2022).
18/ Using today's BTC price of $44k, and applying a 15x PE to the earnings on top of a BTC b/sheet asset worth US$396m I'd get a Canadian dollar share price of C$26 per $HUT share. Using a BTC price of $100k I'd get a share price of C$62 per share.
19/ One can debate the merits of using a PE multiple to value a highly cyclical asset, albeit one with enormous growth through the cycle, but I find it a helpful frame of reference. In summary, I still see a very attractive risk-reward in here for $HUT.
What could upset that?
What could upset that?
20/ If the chip shortages and transformer delays can be overcome and US capital markets make enough capital available then we could see a supply glut which spikes the network hash rate.
21/ Bitcoin prices could fall enough to materially downshift miners' economics from very profitable to unprofitable.
22/ With chip shortages looking set to continue until end 22 at the very earliest and with the other infrastructure bottlenecks (transformer delays etc) the next couple of years looks to be a particularly favourable period for bitcoin miners.
23/ After that and leading into the 2024 halving the cycle picture will need careful monitoring. Thanks for reading. END.
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