Two Major Players Consolidate. Start of a New Trend? 👬

PLUS CleanSpark's earnings, natural gas prices and mining

February 10, 2023

Welcome to the first edition of our weekly digest/newsletter

This is the Block Green team. We wanted to summarize some of the big events from this week and we will continue doing this on a weekly basis. Subscribe to get it straight in your inbox.

Here's what happened in the world of mining this week:

  • US-Canadian merger of equals 🤝

  • CleanSpark released Q1 earnings 💵

  • Natural gas prices effect on miners 🐄

  • We summarized Braiins latest debt report 📚

Cumulative inscriptions on the Bitcoin Blockchain since the introduction of Ordinals, Jan 20, 2023. Nearly doubled from yesterday to today 🖼

Hut8 + USBTC Mega-Merger 🇨🇦🤝🇺🇸 

The merger of equals between Hut8 and USBTC was announced Tuesday.

  • Hut 8 and US Bitcoin will merge to form Hut 8 Corp.

  • The merger was received with skepticism as the share price slumped more than 18% since the 7th of February.

  • The new company will have 5.6 EH/s of self-mining and access to 825MW across six sites in Southern Alberta, Ontario, Texas, NY and Nebraska.

  • The merged firm would also be focused on economic mining and diversifying the company’s revenue streams. There would also be an increased focus on adopting the best ESG practices.

Hut8 is abandoning the HODL strategy - Jaime Leverton, CEO Hut 8:

"During the interim period, we plan to cover our operating costs through a combination of selling the Bitcoin we mine, selling from our stack and/or exploring various debt options, as agreed under the terms of the Business Combination Agreement. Upon a successful close of the Transaction, we will take the opportunity to carefully review and determine our go-forward treasury strategy.”

While there has been consolidation observed in the bear market it has mostly been distressed asset acquisitions:

  • US Bitcoin recently bought bankrupt Compute North's 50% share of a 280MW wind power facility in Texas.

  • CleanSpark bought a 36MW facility and 3,400 machines in Georgia for $25 million in Aug 2022.

Gary Vecchiarelli, CFO, CleanSpark:

“We are still buyers in this market, and our strategy has not changed,” he added, before stating that “we don't feel compelled to go out and have to do M&A. But obviously, if we see a good deal, we'll take advantage of that.”

CleanSpark mined 1,531 BTC in Q1 🔵 

CleanSpark released their earnings for Q1 2023, share price down more than:

  • CleanSpark said it will continue to buy mining assets in 2023 in order to meet its growth plans.

  • While it will keep scooping up machines on the spot market, it is also considering future contracts.

  • Revenue, however, decreased 25% from the same period last year, falling to $27.8 million. Its adjusted EBITDA decreased to $1.4 million.

  • The company posted a net loss of $29 million ($14.5 million profit last year) for the quarter ending in December, beating analyst estimates.

  • In today's report, CleanSpark shared that they had mined 1,531 BTC in Q1, a 132% increase over the same prior year period.

CleanSpark Analysis 🔬 

This analysis will lack peer comparisons due to CleanSpark Q1 2023 disclosures from other mining companies. Please skip if you prefer a light read.

Liquidity

CleanSpark has been a constant seller on a daily basis. Still, they kept a small portion of their production on hand. From Q2 to Q4 2022 the miner decreased its Bitcoin exposure to most liquid assets (Cash & Equivalents + Bitcoin + Derivative + Debt Securities).

At the end of December 2022, bitcoin holdings represent 46.8% of most liquid assets. An increase of +45.22% from Q4 2022 and -45.08% on YTD.

Interestingly this change in cash position in Q1 2023 comes from the decline in the volume of liquidity more than a relative increase of bitcoin. Reaching a year-low in liquid assets at $8.25 million. It can be due to the completion of the Mawson data center and a payment deposit on miner orders.

Debt

The current ratio comparing the weight of current assets to current liabilities has significantly decreased in Q1 2023. This change originates from both an increase in current liability from Q4 2022 +18% and a significant fall in current assets -58% mainly driven by the lower level in liquid assets. However liquid assets only represent 40% of the current assets, the remaining is primarily constituted of inventory (30% of current assets).

In this same vein, we can study the Debt to Equity-ratio (here it includes total liabilities but the idea remains the same). Conversely, to the Current Ratio, the D/E is much healthier financially speaking. Despite a slight decrease on a quarterly basis, CleanSpark remains historically qualitative regarding this ratio. It comes from a low amount of debt from inception combined with a growing value of equity (Q4 2022 vs Q1 2023 +5.7% & +8.4% YTD).

Mining Fleet improvements

CleanSpark was able to execute strategic growth acquisitions on data centers to increase its rack space.

Significant Events

CleanSpark announced a future deal with Lancium in Texas to host some of their miners with an agreement of 200MW and a potential of 500MW in the medium term. Diversification and a new source of revenue for CleanSpark.

CleanSpark paid $0.06/KWh in the last quarter (on a weighted average). A rise in their energy price underlined in their cost of revenues and reduced gross profit from 43.4% in Q4 to 26.6% in Q1 2023.

Sliding Gas Prices Offer Relief For Bitcoin Miners 💨 

The recent trend of declining natural gas prices has had a positive impact on Bitcoin mining. CoinDesk's article provides a detailed analysis of how this trend is expected to continue and its potential effects on the Bitcoin mining sector.

Bitcoin Miners Surface for Air as Sliding Natural Gas Price Provides Cost Relief

Energy producers finally have incentives to work with bitcoin miners.

https://www.coindesk.com/business/2023/02/09/bitcoin-miners-surface-for-air-as-sliding-natural-gas-price-provides-cost-relief/

  • The trend of lower natural gas prices is expected to continue, which will likely result in further cost savings for Bitcoin miners.

  • The cost savings from lower natural gas prices may lead to a rise in the number of Bitcoin miners.

Second Part of Drew Armstrongs Credit Markets Summary (It's Worth a Read) 💸 

A report covering considerations for borrowers and lenders alike, the effect of leverage on mining returns, and a discussion on how the future of the market might look.

Debt Capital Markets in Bitcoin Mining (Part 2) | Braiins

In Part 1 of this series, we reviewed the history of debt in bitcoin mining, examined key principles of debt, and looked at some of the most common structures available to bitcoin miners. Now that we understand the landscape, we will take a look at the considerations for borrower and lender alike, the effect of leverage on mining returns, and discuss how the future of the market might look.

https://braiins.com/blog/debt-capital-markets-in-bitcoin-mining-part-2

Key Considerations For Financial Participants

  • Syndication - backend financing, buying larger firms could lead to unnecessary risk-return premiums like Original Issue Discounts and Origination targets that could lead to excessive leverage

Key Considerations For Miners

  • Capital Efficiency, OID, Covenants, Warrants, Hedging Requirements, Firmware and Tech

  • Capital Efficiency - Cost of Capital and Debt Service Ratio are paramount. Upfront OID’s are 1%-3% which were employed in ASIC lending. It does make the loan more attractive to outside investors.

  • Debt Service Ratio - Must be monitored by Treasury Management Team

  • Covenants - Operational Covenants often become a cumbersome issue to the miner

  • Warrants - Potentially dilutive and detrimental to the stock price (or equity value) especially if there is heavy short interest.

  • Firmware and Advanced Cooling Technology - Simple is a good thing. However miners must be allowed the opportunity to optimize their operations by any means necessary. Let miners run their businesses. Immersion cooling and overclocking remain a primary concern for lenders and allocators

Short Comings of ASIC-Backed Debt

  • ASIC Liquidity, Host Capacity, Volatility, Correlation, Collateral

  • On-chain collateral should theoretically lower the cost of capital

“The quest for interest rate arbitrage could also give an advantage to would-be-miners from other industries that have lower cost of capital. For example, an energy super major has far more debt products available to them at a lower cost of capital. Energy companies could use this to their advantage if and when they enter into bitcoin mining in earnest.”

  • Hash rate financing and streaming would be a perfect solution - Time will tell

..sounds like Block Green got mentioned 💚:

"One debt-like product that might play a role is hash rate-based financing. While the market has yet to settle on one dominant structure, the crux of hash rate financing is that miners should be able to sell their future production similar to other commodity producers. The benefit is twofold:1. Hash rate financing is non-dilutive (similar to debt)2. Such products can also allow miners to hedge some of their future production"

Market Data 🌎

  • This Bitcoin Mining Map gives a visual representation of the distribution of Bitcoin mining activities across the world. The map provides a view of the decentralization of the Bitcoin network and the geographical distribution of hashrate.

Bitcoin Mining Map - Bitcoin Network Data on a World Map

A map of the world filled with data from the Bitcoin network, including mining pool locations, latest blocks, and network performance.

https://chainbulletin.com/bitcoin-mining-map/

  • Luxor release another country report about Paraguay, check out the series covering also covering Sweden and Norway.

Bitcoin Mining Around the World: Paraguay

Paraguay is a rising leader in Latin America's Bitcoin mining industry.

https://hashrateindex.com/blog/bitcoin-mining-around-the-world-paraguay/