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Argo Blockchain: Valuation Starting To Make More Sense – Seeking Alpha

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Data centre operator and crypto miner Argo Blockchain (ARBK) has had a good 2021 and I am becoming more optimistic about its longer-term outlook after a quietly transformational year.
Over the course of the first half of 2021, the company’s mining improved notably. In the past few months, they have moved downwards again although still remain markedly above where they started the year.
BTC chart
Chart calculated and compiled by author using data from company announcements
I expect Argo to resume its upward trajectory in terms of mining success, in coming months.
As of the end of last month, the company added an additional 310 PH/s to its total capacity. That brings its total mining capacity to 1.605 EH/s. A $40m net debt issue last month was intended to help fund, among other things, setting up a new Texas mining facility as well as possible acquisitions of, or investments in, suitable businesses. I think that should help the company ramp up mining capacity. The Texas facility is currently being constructed. The company estimates that once the facility is complete, its hashrate capacity will increase to approximately 3.7 Exahash, versus 1.075 at the end of the third quarter of 2021. The timing for this is not clear – while the machines are due to start being delivered in the second quarter of 2022, that doesn’t mean that the machines will all be installed and fully operational in that quarter. Nonetheless, Argo as a company moves quickly. So, if the facility comes online smoothly, then at some stage next year I expect Argo’s mining capacity to more than triple compared to the current level. That is without any additional bolt-ons, but given its fundraising, the company now has more potential to buy extra data centres and bolt-on capacity fast if something comes on the market it finds attractive.
The company’s past three-month average of monthly mining capacity at the end of the third quarter was around 180. If it increases that in line with the increase in mining capacity, that could be around 620 bitcoin or equivalent per month by the end of next year, even without any improvement in mining efficiency. That’s around £22.6m of additional bitcoin or equivalent per month, which on an annualised rate is around £272m of crypto mined. There will be additional costs in running the new machines and data centre, but Argo has been improving its cost efficiency markedly. Its mining margin last month was around 86%.
Against that, the company’s current market cap of around £440m looks cheap. It’s less than two years of earnings at that mining margin, ignoring for now any other costs, if the new capacity leads to an equivalent scale up in productivity. That’s an “if”, as the finite number of crypto to be mined could lead to diminishing returns. That said, with countries such as China banning the activity, competition may be less fierce in the next year or two than it was before. On that basis, I think Argo looks undervalued.
One of the things I like about the direction the company has taken this year is its new strategy of sometimes selling down some of its crypto holdings from time to time. This converts crypto from a theoretical balance sheet asset into hard cash.
Whether or not this is seen as positive depends on one’s perspective about crypto valuation, in my view. If one believes that crypto will increase in value in future, the prospect of selling it now may seem unattractive. That could be negative for the Argo valuation. However, I continue to see crypto as a form of valuation. On that basis, converting at least some of it to cash reduces the risk of a price fall, in exchange for missing out on any future price rise.
However, to date, the amount of crypto the company has sold seems to have been limited. That said, there has been a noticeable, ongoing difference across this year between the sum of a monthly holding and the following month’s mining results, and the following month’s monthly holding. So it may be that Argo has been more active in selling (or buying) crypto than is commonly realised.
BTC (or equivalent) mined
BTC (or equivalent) owned
Source: table compiled by author using data from company announcements
Sometimes this difference is fairly small – in July, for example, the company mined 225 bitcoin or equivalent, which added to its end of June holdings would have made for 1,493 but it reported holding 1,496. But at other times, the difference is starker. In October, for example, the company mined 167 bitcoin or equivalent. Added to its holdings at the end of September, that would make for 2,003, but in fact, it reported a holding of 2,128.
My surmise from this is that the company has been active in trading crypto at various points across the year. If that continues, it could lead to a substantial cash inflow (or outflow). While I personally see value in converting crypto to cash, not all investors feel the same way. One risk of such an approach is that the valuation of the company may be closely linked to the current market value of crypto, perhaps reducing the valuation premium attached to the company’s proven mining ability and expansion potential.
For the first time, I now think Argo looks undervalued. On that basis, I am now changing my rating on the shares to bullish.
However, I see considerable risk here. The ramp-up may not produce the results hoped for, as more capacity doesn’t automatically lead to proportionately better results (though, all other things being equal, hopefully, it would do). Crypto pricing can be volatile and is critical to the company’s profits. If crypto plunges (or even goes to zero) that could be catastrophic for Argo’s business model.
Recognising those risks, however, I am now bullish on Argo.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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