26 Jun 2022

Survival of the fittest: Which public bitcoin miners are the best prepared to survive the bear market?

The public bitcoin miners are fighting to survive the ruthless bear market. The weakest will die, but the survivors will rise from the ashes stronger than ever. This article analyzes which miners are the best prepared for the fight.
public miners - monthly operating cash flow
Source: Investor relations resources, CoinMetrics
Chaos is unfolding in the crypto industry, as bitcoin's price drop has led to contagion effects that have caused the downfall of several overleveraged market participants, like Celsius and Three Arrows Capital. Many speculate that the weakest public bitcoin mining companies will suffer next.Most bitcoin mining stocks have already plummeted more than 50% YTD, and some, like Stronghold and Terawulf, have seen almost 90% of their value shaved off. Still, things can get a lot worse as bitcoin mining companies keep feeling the pressure from four angles:
  1. Lower bitcoin price -> Less valuable block reward.
  2. Increased difficulty -> More energy is required to mine bitcoin.
  3. Rising energy prices -> Higher bitcoin production costs.
  4. Rising interest rates and decreased investor interest -> Higher costs of capital.
These four forces are compressing margins, lowering cash flows, and making it more difficult for miners to raise capital. As I show in this article, the bitcoin mining cash flows have plummeted more than 80% from the November 2021 peak. At this time, bitcoin mining was a super-profitable endeavor, which led the public miners to make massive expansion plans requiring investments of billions of dollars.The plummeting operating cash flows and unwelcoming state of capital markets will make it challenging for these companies to scramble together the cash needed for their upcoming investments in new machines or loan repayments. Some miners may either go bankrupt or have parts of their assets purchased for cents on the dollar by stronger ones.In this article, I analyze eight public mining companies' cash flows and balance sheets to determine who is best positioned to use this bear market to plant the seeds required to become the winners of the next bull market. I measure their strengths based on direct bitcoin production cost, operating cash flows, and balance sheets.
Who has the lowest direct bitcoin production cost?
The direct bitcoin production cost is essential as it impacts a miner's operating cash flow and determines when a miner is forced to turn off machines. It is determined by the electricity price and the energy efficiency of a miner's machines. Other variable costs exist, but electricity generally makes up more than 80%. Therefore, I only use the electricity cost and ignore additional variable costs.
Public miners - direct BTC production cost
Source: Investor relations resources
The chart above shows eight public mining companies' direct bitcoin production costs. We see that Stronghold has a direct bitcoin production cost of only $3,600, meaning they have high cash flow margins even at the current depressed bitcoin price. Stronghold is vertically integrated and owns two power plants with bitcoin mining operations behind the meter. The company fuels its power plants with coal refuse built up over decades of coal mining in Pennsylvania. Their fuel is basically free, and they also receive government subsidies for cleaning up the waste coal, giving them the lowest bitcoin production cost in the industry.Argo has the second-lowest bitcoin production cost at $3,900. According to their latest investor presentation, the company's new facility in West Texas has access to electricity at $20 per MWh. In addition, Argo's machines are very energy efficient. Its new facility is immersion-cooled, which can further increase the efficiency of the machines, but I haven't taken these potential efficiency gains into the calculation.Of our eight mining companies, Bitfarms has the highest direct bitcoin production cost of $8,500. The Canadian company doesn't have access to as cheaply priced electricity as most other public miners and has a less efficient machine park than average.Bitcoin production cost winners: Stronghold and ArgoBitcoin production cost losers: Bitfarms and Hut8
Who has the strongest cash flow?
Cash is king in a bear market. The miners with the most substantial operating cash flows are best positioned to pay upcoming expenses, such as machine deliveries or debt payments.The chart below shows the current monthly revenue, costs of revenue, and the resulting operating cash flow. These numbers are estimated based on the current bitcoin production capabilities at the current bitcoin price, without considering future increases in hashrate. There are two reasons why I haven't considered future increases in hashrate. Firstly, most of these miners have historically overestimated their abilities to get hashrate online, and their current liquidity situation also leads some to cancel or delay expansion plans. Secondly, the present, non-increasing cash flow shows the worst-case scenario, which is the point of this analysis.
public miners - monthly operating cash flow
Source: Investor relations resources, CoinMetrics
Core Scientific has the highest operating cash flow coming in each month. Their monthly revenue of $33 million generates $16.6 million in cash flows after the direct costs. Core Scientific is a massive company with a self-mining capacity of 9.2 EH/s, and their scale gives them very high cash flows.Argo has the lowest monthly operating cash flow of only $4 million. Still, due to their meager bitcoin production cost, they have an excellent direct margin of 77%.The absolute operating cash flow gives a company substance and the ability to pursue special opportunities. Still, giants like Core Scientific have larger cash outflows to pay for investments than smaller players like Argo. Therefore, we should consider these miners' upcoming machine and debt payments.Some miners have huge machine orders scheduled for delivery during the coming months that require payments. In addition, some have been financing their machines with loans collateralized with the miners' machines or bitcoin. As the bitcoin price and the machine prices fall, the miners must deposit more collateral. Bitfarms, for example, had sizeable bitcoin collateralized loans, forcing them to liquidate a large chunk of their bitcoin holdings recently.The chart below shows the public miners' remaining machine payments in 2022, both payments related to the upcoming deliveries of machine orders and upcoming payments related to their machine financing deals.
Public Miners - remaining machine payments in 2022
Source: Q2 2022 financial reports
We see that some of these companies have hundreds of millions in remaining machine payments in 2022. Marathon has the most, with $260 million, resulting from their plans to increase hashrate from the current 3.9 EH/s to 23.3 EH/s by early 2023. Marathon has been notoriously slow in getting their machines online, and I don't expect them to be any faster now. A large share of these machines scheduled for delivery in 2022 will likely join Marathon's thousands of machines sitting in storage rooms and collecting dust.If Marathon cannot immediately plug in the machines as they are delivered, the massive upcoming machine payments will drain them of liquidity. Still, the company has a lot of cash on hand, so they might be able to escape this challenging situation.Riot is also relentlessly expanding, with around $190 million remaining machine payments in 2022 as the company plans to increase its hashrate from 4.6 EH/s to 12.6 EH/s by January 2023. Unlike Marathon, Riot has historically, for the most part, followed their hashrate expansion schedules. The company also has a massive 700 MW newly constructed data center with room for the upcoming miner deliveries. Therefore, I'm confident that Riot can plug in the machines and generate cash flow.Naturally, the bigger companies will have larger upcoming machine payments than the smaller ones. To analyze the relative liquidity situation irrespective of company size, I divide the remaining machine payments in 2022 by the aggregated operating cash flows out the year in the chart below.
remaining machine payments in 2022 relative to current operating cash flow
Source: Q2 2022 financial reports
Not only does Marathon have the absolute highest remaining machine payments in 2022, but it's also the highest relative to their current operating cash flow. Marathon's $260 million remaining machine payments in 2022 are 6.2 times more than their aggregated operating cash flow out the year, based on a monthly operating cash flow of $7.1 million.As mentioned, if Marathon cannot plug in these machines as they arrive, they will suffer a massive drain of liquidity as they have to pay for the arriving machines without corresponding cash flow. If they get into this situation, which I believe they will, their liquidity will be drained by the machine payments, and they will most likely need to sell most of their bitcoin or dump their machines on the market.Due to Core's enormous cash flows, the company only has 1.5 times as large machine payments to make in 2022 relative to their operating cash flows. This number is based on the current operating cash flow and doesn't consider a future increase in cash flow. In addition, Core has historically been good at plugging in their machines upon arrival.Argo is the only bitcoin miner that should be fully able to pay for its remaining machine deliveries in 2022 with current operating cash flows. The company has been relatively conservative in its expansion plans, making it well-positioned to take advantage of special opportunities that may arise as the bear market drains the liquidity of other miners. Still, Argo's upcoming machine payment in 2022 is just an estimate based on their machine deposits since I couldn't find this information in their investor relations resources.Marathon and Riot will not be able to pay for their upcoming machine deliveries with their cash flows alone and must either raise more money or use the liquidity on their balance sheet. Cash flow winners: Argo and Core ScientificCash flow losers: Marathon and Riot
Who has the most robust balance sheet?
In the previous section, we looked at the liquidity situation of the public mining companies based on the incoming operating cash flows relative to upcoming cash outflows. Here, we will analyze the miners' balance sheets to determine their current liquidity situation.
Public miners - debt to equity ratio
Source: Q2 2022 financial reports, Yahoo Finance
We first look at the debt-to-equity (D/E) ratio. CleanSpark has practically no debt as its debt relative to equity is only 0.1. Riot follows in second place with a D/E ratio of 0.2. Since debt is the riskiest means of financing, these companies have low risk on their balance sheets and are in very low danger of having to declare bankruptcy.On the other end of the spectrum sits Stronghold, with a D/E ratio of 4.7, which is exceptionally high for a bitcoin miner. Bitcoin mining is risky and should therefore primarily be financed with equity. Stronghold has such a high D/E ratio not only because of its debt but because its stock has fallen 95% since its all-time high, leading the equity to be valued at only $38 million.Core Scientific also has a high D/E ratio of 2.1. The remaining machine payments chart shows that Core has a high machine collateralized debt, a precarious debt. Machine prices have halved in 2022, and I expect them to continue falling. As their collateral keeps dropping in value, Core must continuously post higher amounts of collateral for these loans.
Public miners - quick ratio
Source: Q2 2022 financial reports, May production updates (BTC holdings), CoinMetrics (BTC Price)
To determine the strength of a company's balance sheet, we must also look at the liquidity of the company's assets relative to its short-term obligations. The quick ratio shows the value of a company's most liquid assets divided by the current liabilities. A bitcoin miner's most liquid assets are its cash and cash equivalents and bitcoin holdings.Marathon has an abnormally high quick ratio of 17.4. The company has massive bitcoin holdings, a lot of cash, and low current liabilities. As explained, Marathon has terrible operating cash flows relative to future machine payments. Still, they have about $260 million of cash and cash equivalents or bitcoin sitting on the balance sheet that can be used to pay for the upcoming machine payments. Marathon may be one of the weakest bitcoin mining companies from a purely operational perspective, but its balance sheet is solid.Balance sheet strength winners: Marathon and Riot BlockchainBalance sheet strength losers: Stronghold and Core Scientific
Most of the public bitcoin mining companies are struggling. Their current operating cash flows are not nearly enough to pay for their upcoming machine deliveries, and the current state of the capital markets makes it difficult for them to raise equity or debt. Several companies will get into a liquidity squeeze that will force them to liquidate parts of their assets. In the midst of every crisis lies great opportunity, as the best-capitalized miners will be able to buy the struggling miners' assets cheaply.I believe that Argo is currently the bitcoin miner in the best financial condition. Argo has a strong balance sheet with little debt and strong operating cash flows relative to upcoming machine payments. Argo also has the second-lowest direct bitcoin production cost in the industry.The weakest miner based on this analysis is Marathon. Marathon has a strong balance sheet with loads of cash, but their massive upcoming machine payments will quickly drain their balance sheet. Therefore, I believe the company will be forced to liquidate most of the bitcoin on their balance sheet or sell their machine orders to other miners.Bear market winner: ArgoBear market loser: Marathon
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