In part one of this series, I noted that the street is pricing public bitcoin mining companies as if they were on the edge of bankruptcy.
And that is true for a lot of companies in this sector, but not for ALL of them.
Today we look at three bitcoin mining companies that may or may not survive the current nuclear winter in crypto, but if they do…have a chance to boom in 2019:
Fortress Blockchain (FORT-TSXV) is the blue-chipper of the bunch (relatively speaking of course.)
Their flagship facility has all-in cost of 4 cents a kilowatt, one of the lowest in the industry.
This mean they are still cash-flow positive with bitcoin priced below $4000, and won’t start to lose money unless bitcoin drops below $3500.
But, even if they start to lose money, they have cash in the bank:
“As at September 30, 2018 the Corporation had cash on hand of $10,610,967 and digital currencies worth $25,487 (June 30, 2018: $9,181,127 in cash and $1,024,455 in digital currencies);
The share value of the Corporation’s cash and digital currency holdings, after deducting liabilities, as at September 30, 2018 is $0.15 per share based on 71,177,984 outstanding Fortress common shares (the “Net Liquid Asset Value”).
This Net Liquid Asset Value does not include the asset value of the Flagship Facility or S9 ASIC Miners owned by the Corporation”
Taken from interim filling on SEDAR, November 28th, 2018
Yesterday the stock price of Fortress Blockchain closed at 14 cents.
DMG Blockchain (DMGI-TSXV) is a company that I have been writing about for almost a year now. It’s one of the largest bitcoin miners in Western Canada…or was planning to be, upon completion of their mammoth 80-megawatt facility at the end of October.
At present, it’s capacity is sixty megawatts. That means, it could accommodate up to 34 thousand Antminer S9 mining rigs, which could collectively mine 8300 bitcoin a year (if mining difficulty stays the same).
At today’s prices, those bitcoin could be worth $30 million USD. The market cap of DMGI today is only $10 million CDN.
So what is the problem? Well, the all-in cost of producing those bitcoins does not leave enough profit to buy the mining rigs to get mining in the first place.
That shouldn’t be an issue as the original business model was to allow other miners to rent facility space, aka mining as a service (MAAS).
But the current crypto-meltdown means nobody wants to lease the space. At present, DMG has only announced one customer who has signed up for one 7 megawatt contract (financial terms were not provided).
If bitcoin has a serious rally, then expect the capacity of the mining facility to fill up in a hurry. But if bitcoin stays below the $4k level, then mining contracts will be hard to come by.
DMG has not released third quarter financials at present, but interim filings on August 28th said that the company had $18 million.
If the company has burned through $8 million in cash since September, then it’s current trading at cash in the bank.
When financials come out in January and there is less than $10 million in the bank and no new contracts have been signed, I would expect the stock price to drop further.
DMG Blockchain closed yesterday at 14 cents.
By far the riskiest of the three (if you weren’t seeing enough risk on your plate already) would be Cryptostar (CSTR-TSXV).
It is currently trading between one and two CENTS a share on the Toronto Venture Exchange. With 200 million shares out, that gives it a market cap of $2-4 million CAD.
Interim financials released on November 28th show cash holdings as of September 30th to be $793,454. It’s safe to assume that at present the company has no cash in the bank.
For three months ended September 30, 2018, the company mined $3,877.994 of bitcoin. This quarter, that number will be WAY down.
The all-in operating cost of Cryptostar’s mining operations is just under seven cents per kilowatt.
At today’s bitcoin price of slightly less than $4000, the company is barely cash-flow positive.
One or two more months of sub-$4000 prices, and Cryptostar is a goner, unless they secure more financing.
Cryptostar closed for the weekend at a penny-and-a-half.
Now before we look at why we would possibly throw money at any of these companies, let’s look at all the reasons to NOT throw our money away.
Of these three companies, one is barely making money, one is most likely burning cash, and the last one is out of cash and will not make it unless market conditions improve.
All of these stocks are illiquid, with less than $100K daily trading volume.
None of these stocks have analyst coverage (as far as I know). None of these stocks will be recommended by any broker anytime soon.
The market cap for DMGI and FORT is around $10 million, and for CSTR it’s less than $4 million.
That means only retail money will buy these stocks.
So why even look at them?
In one word: asymmetry.
For these stocks to go DOWN anymore, they would have to trade for less than cash in the bank. In the case of Cryptostar, it’s already trading as if it were an empty shell company.
Yes, they could all go to zero, but in the case of DMG Blockchain, that wouldn’t happen for months yet, and in the case of Fortress Blockchain, it has at least another year of cash to keep it alive.
So what happens if bitcoin goes up?
If bitcoin goes up just a little bit more and stays there ($4500), all these companies are cash-flow positive.
If bitcoin goes up a LOT, let’s say doubles from its current price, then all these companies will post stunning turnarounds.
You will see price-to-earning ratios below five, maybe below three.
DJ
Editor’s note: Nothing of which I write should be construed as financial advice. Yes, I own shares in all three companies mentioned
