Argo Blockchain - a speculative buy? Gary Newman reviews...

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At first glance Argo Blockchain (ARB) seems to be very different to the type of companies that I normally cover within the natural resources sector, but the actual economics of the business isn’t all that dissimilar. Whilst I cover quite a few mining companies in my articles, they are normally extracting a physical commodity whilst Argo is a very different type of miner as what it is producing is cryptocurrencies, such as Bitcoin, and instead of using machinery to dig holes in the ground it uses a network of computers to produce them.

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I’m certainly not going to pretend that I understand all aspects of the mining side of things, nor do I think that you need to. One of my friends has a son who is a student studying computer sciences, and I know that he saved up to buy the hardware necessary to ‘mine’ crypto coins, and now makes relatively small amounts of money by doing so, although it is quite a slow process. Argo appears to be doing exactly the same but on a much larger scale, and for anyone who wants exposure to cryptocurrencies, but on a much less volatile basis than directly investing in crypto themselves and without the need to fully understand them – not to mention the security of not having to worry about someone stealing all of your coins or an exchange going bust or being hacked – I would suggest that companies like Argo actually offer a leveraged play on crytpos. In much the same way that a conventional mining company would do with whatever commodity they happen to produce. Like with any other miner, success all comes down to the price of the commodity compared to what it costs to actually extract it, along with the longevity of the project and at what point it becomes too difficult to mine it economically.

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I view the mining of cryptocurrency in exactly the same way, with the main risks currently being a further pullback in the value of things such as Bitcoin – which has been incredibly volatile and now trades at around the $7,300 area – alongside the potential for the cost of mining it increasing, and the price of electricity in the location where the mining operation is being carried out plays a big part in that. You also have risk from the fact that there is only a finite amount of these cryptocurrencies, and it will become progressively harder and more time intensive to mine the same amount of coins as time goes by. The upside comes from how profitable the operation is currently, the potential growth in output, and the possibility of the price of Bitcoin and other cryptos rising. Argo has been growing rapidly, and recently announced that it now has 7,000 Bitmain S17 Antminer machines operating. It also released an RNS announcing that it had changed an existing order for new machines and had doubled the number from 5,000 to 10,000, as well as switching it from the S17 model to the T17, which should increase output per machine. That is going to cost the company $9.5 million, but it has already paid a deposit of more than $6.5 million, and the remainder will be funded from existing cash balances, and are expected to be online by the end of Q1 2020. This is obviously quite a large investment for the company, but if we look at the new machines which began production in late May, those had already produced enough cryptocurrency to pay for themselves by early November. Once these new machines are installed it is expected that they will increase mining capacity by around 240%, so that shows the sort of growth that the business has currently – of course though, you also have to consider whether it will be possible to maintain that going forwards, but even if it plateaued it should still be very profitable and is yet to be factored into the market valuation of the company, which currently stands at around £19 million, with a share price of 6.4p on the ask.

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Geographical location of the mining facility plays a big part, as by far the biggest operating cost is the price of electricity. The Argo facility is in Quebec, which has some of the lowest power costs in the world and the company uses renewable hydroelectricity to keep these costs low. There is of course always a risk that those costs could rise in the future and put a serious dent in the profitability of the operation, but currently those costs are about as low as they can get. That is all great and gives some background into how the business operates, but like any mining operation it largely comes down to the financials. The latest quarterly update, for the three months up to the end of September, showed a 75% increase in revenues to £3.63 million, and with a mining margin of 73%, which by the standards of this industry is high. To put that into context, for the first half of the year it achieved revenue of £2.93 million – which was up by 283% compared to whole of 2018, rather than. Just a six month period – with a gross profit of £1.74 million, and a net profit of £940,000. That in itself is quite unusual for a company of this size, and comes partly as a result of its ability to reduce it admin costs - compared to the much higher levels those have been in the past – to around £105,000 per month. Of course, it needs to continue to keep those costs low, plus due to previous retained losses it didn’t pay any tax on the profit for that period, but that will change in the future – although, again, for a company of this size it is fairly unusual to have a profit to pay tax on in the first place! Argo is also in a position whereby its Net Asset Value more than supports its market cap, and unlike so many that you see, this is in the form of tangible assets rather than being mostly intangibles.

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Although you do have to consider the fact that these assets mainly consist of the value of its computer equipment, and were it ever to reach a stage where its operations were no longer profitable, that might imply that the crypto mining boom was over and at that point the machines wouldn’t realise that sort of value. At first glance the current liabilities, with trade payables of over £13 million, don’t look that healthy, compared to net assets, but that is largely as a result of the machines that it has on order as part of its expansion, and at that time it had more than £5.6 million in the bank. It certainly isn’t something I would have any concerns about. My only other real concern would be the longevity of the business – although it is likely that something else would come along anyway as crypto isn’t going to just disappear – as although on paper it looks incredibly cheap using metrics such as PE and PEG ratios, that only becomes the case for investors if the business lasts for long enough to continue generating these sort of profit levels to more than pay back the level that the market is valuing it at currently i.e. how many years does it take to generate EPS equivalent to the current share price. In conclusion, I think that the current share price offers a good speculative buying opportunity, especially if you are bullish on cryptocurrencies like Bitcoin longer term. I’ve mentioned concerns over the potential longevity of mining these coins, but given the rate of revenue growth that it is achieving at the moment, I certainly see that as a risk worth taking. Once the rapid growth and expansion phase starts to slow down and there is less need for intensive Capex, then I would also expect to see this company start to pay a dividend. I've always avoided cryptocurrency myself, but Argo has got my interest and I may even end up taking a small position in the shares myself.

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Filed under: Argo Blockchain, Carson Block, Woodford, Eddie Stobart Logistics, TechFinancials

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