Just over a year ago I covered a ‘mining’ share as a speculative buy, and it was very different to the natural resources companies that I normally cover, as it was mining Bitcoin rather than any metal or other commodity. But from what I could see, similar principles could be applied, and on that basis Argo Blockchain (ARB) got my attention, as it was increasing its mining capacity via investment, and there seemed to be plenty of upside potential from Bitcoin itself, which had slumped all the way back to $7,300. At the time the share price was 6.4p, and although it has had a rough ride since then – as most companies did at the height of Covid – it has proven to be a share that was worth holding onto as the shares are now trading at more than 36p to sell.
The main reason for a latest rise appears to be a big rise on the far less liquid OTCPK market in the US, where trading recently commenced and where we’ve seen big rises since on relatively low volumes traded. The company is about to be listed on the generally slightly more liquid OTCQB market once it achieves a full listing in the coming days. I am always suspicious of big rises on AIM shares where that is triggered by a sudden spike on an OTC market, as generally the larger, more liquid AIM market tends to lead, rather than follow, in terms of any share price movements. And even more so over the Christmas period when a lot of people are away from the markets and we sometimes see short-lived, disproportionate price movements. So that makes me still more inclined to bank a profit as I see an increased chance of a pullback, despite the fact that Bitcoin has also performed strongly in recent days and is now trading at around the $26,700 level – it will be interesting to see if that rise is maintained once the markets are back to normal in the New year after the holiday period.
There is no doubt that the revenue figures for the company are impressive with £1.48 million of mining revenue generated during November, at a margin of 57%, and its mining capacity stood at 16,000 machines and 645 petahash rate (plus 280 megasols of equihash) – compared to £1.2 million and a margin of 40% during October. It also held 178 Bitcoin and equivalents, worth around £4.75 million. Although if we look back a year to when I initially covered the company it had just generated £3.63 million in mining revenue for the three months up to the end of September 2019, and mining margin was much higher at 73% - during that period Bitcoin had traded in the $8,000-9,000 range for most of the time. So it is definitely worth noting that although Bitcoin has risen dramatically, the revenue from mining it hasn’t shown such a steep uplift for Argo. If we look back at the interim results for the first half of 2020, Argo generated revenue of £11.12 million and mined 1,669 Bitcoins, via its 18,000 machines and 730 petahash capacity, resulting in a net pre-tax profit of £520,000. Those accounts also showed that hosting costs had risen to almost £6.8 million for the six months, and with a further £2.9 million charged for depreciation in the value of its mining equipment.
My concern here has always been whether the company will generate sufficient net free cash flow from its operations to actually return any of that money to investors via a dividend, or whether it will continue to be swallowed up in the purchase of new machinery to enable it to maintain mining rates at a sufficient level – during 2019 alone it spent over £18 million on purchasing new mining equipment, for instance. This is even more pertinent, given that it will become increasingly more difficult to mine Bitcoin as time goes by, and the profitability of doing so will likely decrease. So I would argue that if most of your free cash flow is having to be spent on trying to maintain your monthly mining output, that limits the value of the company to investors – a good analogy (in simplistic terms and comparable to a market I tend to follow more closely) would be an actual mining company with ever decreasing mineral grades the closer to the end of mine life that it gets, and with increasing cash cost per unit, along with high levels of sustaining capital investment being required. Of course, a lot will come down to where the Bitcoin price goes in the coming months and years, and whether that outweighs the increasing costs of mining it, but I see far more risk than reward from a market cap of around £105 million and so can’t see any good reason to continue holding the shares at this level.
Filed under: Argo Blockchain, ShareProphets share tips of year, St James House, The High Street Group
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