All information in here are our own estimates, which have been based on numbers released by the company. Particularly, we have relied upon the monthly updates of the company NOT double counting rig purchase numbers – we have not verified this with the company. These are only estimates and should not be relied on for investment decisions – please do your own research. We hold shares in the company.
Argo Blockchain floated as a mining-as-a-service business in 2018. This meant it originally ran mining ‘computers’ (or ‘rigs’) to mine crypto currencies on behalf of others. It raised £25m in July of 2018. In February of this year it adjusted its strategy from MAAS to just using its own rigs to mine crypto assets itself, due to the downturn in crypto prices.
It mines Bitcoin, as well as 4 other ‘Alt-Coins’. Mining coins means to complete ‘confirmation’ work on any transfer of a coin from one wallet to another on the blockchain. What does this mean? Lets run through how it works at a bank
- When a bank moves money from one account to another, the bank or banks in question act as custodian to the money and do the transfer between themselves on your behalf.
- Because the banks interact with each other all the time and plan to in the future (they play iterative games, in the phraseology of game theory) so there is inherent trust and good faith amongst parties.
- This means that a request to transfer can be done same day, due to a mix of systems (eg BACS / Faster Payments) but also more importantly, trust under-pinning both parties’ interactions with each other.
However, in crypto, there is no custodian to your currency and no (guaranteed) underlying iterative game playing amongst holders of the currency. So how are transfers facilitated?
- The blockchain seeks to rule out any requirement for ‘trust’, and they achieve this via proof-of-work or proof-of-stake protocols. Without going in to too much detail, this means that any request to transfer a coin from one wallet (read, bank account) to another needs to be verified across the blockchain.
- This means that someone (a ‘miner’) must look back through the blockchain record (an open source record of every coin transfer ever) to confirm that the ‘wallet’ from which a coin is moving from (or has been requested to move from), does indeed have that value of coin in it.
- Then, assuming the miner positively verifies that the account has that value of currency in it, a miner will note the transfer of the coin from sending wallet to the receiving wallet on the blockchain.
- This all requires computing power (eg energy) and miners perform this task, thus the blockchain requires miners!
Blockchains provide rewards to miners for performing this task in the form of the currency. This is what Argo does – it verifies transactions on the blockchain and is then rewarded by the blockchain for doing so in the form of the crypto currency.
Since listing, ARB has posted one set of results which were very poor, however, being a start-up that was expected.
Interestingly, it received a requisition notice in April of this year from First Investments Holding Limited. This led to an EGM (though it ended up being postponed indefinitely) and a deal done between the company and the requisitioner, including the provision of enterprise level MAAS to First Investments Holding Ltd and the resignation of one of the Argo directors.
The following RNS is very interesting in providing a defence of and detail on the new strategy.
So, ignoring the politics, the position of the business (mainly) is that it currently mines BTC for shareholders.
In April of this year it was marginally profitable (on a cash basis) monthly. In May, after acquiring a number of mining rigs and an improved BTC price, it jumped in profitability. It has been providing monthly updates since. Below outlines the cash costs of the business as we see it and expect it to develop, based on the forecasts given. The key line is the number of rigs in use, which dictates capacity.
| Apr-19 | May-19 | Jun-19 | Jul-19 | Q3 | Q4/Later | |
| BTC Price in Forecast (£) | 3,935 | 7,146 | 9,014 | 9,014 | 9,014 | 9,014 |
| Monthly Revenue (£k) | 220 | 685 | 1,199 | 1,395 | 2,987 | 4,267 |
| Monthly Cash Cost (£k) | 215 | 280 | 350 | 362 | 629 | 899 |
| Monthly Cash Profit (£k) | 5 | 405 | 849 | 1,033 | 2,358 | 3,368 |
| Margin | 2% | 59% | 71% | 74% | 79% | 79% |
| # of Rigs | 2,025 | 2,809 | 3,269 | est7,000 | est10,000 | |
| Est mined BTC a month | 56 | 96 | 133 | 155 | 331 | 473 |
Please note in the above table, we have used company data for rigs & bitcoin price to estimate the revenue and other numbers – this differs slightly from the actual numbers reported in trading updates, but gives us confidence that our forecast is reasonably accurate. The difference in revenue is likely due to the phasing of rigs coming online (i.e. the above table assumes all come online at beginning of month, which is not the case).
The change in the mix of rigs (and the increased BTC price since April) is driving an increase in the cash margin to the business, as the new rigs being purchased are of an improved efficiency. We have, based on the rigs being installed, forecast what we expect the business to achieve over a year based on 2 different forecast run rates.
| Q3 Run Rate | 2019 YE | ||
| Gross Margin (cash) | 28,295 | 19,472 | |
| Overheads | 5,000 | 5,000 | Estimated, 4m in last YE accounts |
| EBITDA | 23,295 | 14,472 |
What is missing, is the depreciation. Taking the business’s assessment of a 3-year useful life, we would estimate depreciation charges for the year to be as follows=
| Date of Purchase | Cost, £k | Months to YE | Charge | |
| c/f | 2,457 | 12 | 819 | |
| End of Q1 | 1,300 | 9 | 325 | |
| End of Q2 | 4,550 | 6 | 758 | |
| End of Q3 | 5,454 | 3 | 455 | 4th July announcement |
| End of Q4 | 5,454 | 1.5 | 227 | 4th July announcement |
| 2,584 |
We also note that the following statement from the company
Based on current market prices and mining difficulty rates, Argo expects to achieve a less than 4 month Return on Investment (ROI) on its current Antminer Z11 miners and a below 4.5 month ROI on its existing Antminer S17 hardware. This means the Company will have recouped the cost of almost all the mining rigs operational in Q2 by the end of Q3.
Doing our own very quick corroboration, we think this appears to stack up – though may assess it as slightly higher due to not taking a machine specific revenue / efficiency.
| Latest purchase (July annualised) | ||
| Cost per Rig £k | 2.18 | |
| Rev per Rig monthly £k | 0.43 | Company level estimate |
| Margin per Rig £k | 0.34 | Company level estimate |
| Payback, months | 6.47 |
Summarising it all, we would assess, based on an expected Q4 run rate, that the P&L will look as follows.
| Q4 Annualised | |
| Rev | 51,207 |
| COGS | 10,785 |
| GM | 40,421 |
| 79% | |
| Admin Costs | 5,000 |
| Depreciation | 6,405 |
| Operating Profit | 29,016 |
| 57% |
We would therefore forecast a high level of profitability on an annualised basis from Q4.
The main issues remain
- Double operational leverage of the balance sheet BTC and the mining BTC – though surely that’s why you invest in a crypto miner!
- Cash cost margin declining (excl BTC price). The biggest risk is undoubtedly energy, but coverage seems good here given the close partnership with the supplier – https://polaris.brighterir.com/public/argo_blockchain/news/rns/story/x288d7x
- Execution risk – the business still needs to install the rigs and keep a watchful eye over its crypto assets, which can be hacked
- The ‘halvening’ – at some point mid next year (depending on how quickly the blockchain continues to operate) the reward posted for completing a mining exercise will halve. This means, the actual underlying reward for the efforts will decrease in halve in BTC terms. This genuinely will cut revenue in half if prices remain the same. We expect prices to rise from here to accommodate this, but it’s a little like trying to review a global cost / production curve in oil – if you’re near the bottom of the stack, you can make money/outlast the competition whilst others fail (and maybe enjoy a rise in price – as mining profitability is (we think) an important influencer of price, though not the exclusive determinant). We have not assessed this in detail, and expect the most prudent approach would be to rate the stock on a low EV/EBITDA or PE for this reason.
Valuation – given both 1) ramp up execution risk and 2) the general uncertainty about the business model (both actual and market perception) we would not expect the business to be rated particularly highly currently. We would forecast somewhere around 2x to 4x forecast EBITDA based on the Q4 run rate, which would provide up to a 300% upside from here.