By Richard Gill, CFA

A brief update from crypto miner Argo Blockchain (ARB) has revealed that the company mined 337.5 Bitcoin or Bitcoin Equivalent (BTC) during the month of February, a 37% increase compared to January. On the back of rising crypto prices during the month, revenue growth was markedly higher at 56%, giving total revenues of £2.54 million. Income was generated at a mining margin of 50.5%, a level which Argo continues to consider amongst the most efficient in the market.

In other matters, the target of growing the mining estate to c.17,000 operating machines before the end of Q1 2020 has been met ahead of schedule. This comes after Argo installed an additional 10,000 Bitmain Antminer T17s since the start of 2020, amounting to a total investment of £7.44 million. This brings the installed and operational mining capacity to 665 petahash (PH).

Building on this, Argo has announced a further expansion of capacity, having ordered an additional 1,000 Bitmain Antminer S17+ machines, at a total cost of £1.17 million, with the investment expected to be entirely funded from internally generated cash flow. The new hardware is expected to be delivered and installed by the end of April and will bring Argo’s total BTC mining capacity to around 730 PH, an increase of c.10%. The new investment is part of the company’s maintenance capex to retain its technology lead and to prepare for the halving of the Bitcoin mining reward which is expected in May.

Assessment

These are a positive set of monthly figures from Argo, with the increase in mining revenues coming from a higher number of mining machines being in operation, combined with a rise in the Bitcoin price in February. BTC started the month at c.$9,400, peaked at c.$10,500, before coming back down at the end of the month in line with most other major global assets.

Argo has delivered its 17,000 machines ahead of time and on budget, to create one of the world’s largest and most efficient cryptomining mining companies. It is also good to see that further new machines are being ordered as older units can become unprofitable over time as mining difficulties increase so need to be periodically replaced.

While reaching a three month high of 7.4p in mid-February shares in Argo have come back down with the rest of the market to currently trade at 5.65p. Our financial model shows that Argo now trades on an earnings multiple of just over 3 times our 2020 forecasts. More pertinently however, the earnings multiple, incredibly, turns negative on an ex-liquid assets basis as we forecast cash + crypto to exceed the current market cap by the 2020 year end. To further illustrate the value here, the current market cap of £16.6 million is a discount of 26% to net assets of £22.4 million as at 30^th June 2019 – a figure which doesn’t incorporate an additional 8 months of profitable crypto mining operations. Looked at another way, with a mining margin of 54% this translates into just under £15m per annum of NET CASH INFLOW being generated with a bitcoin price of around $10,000. At 5.6p, the shares thus trade on a proforma price to cash of a shade over 1 times – a level that frankly defies belief. This then leaves the NAV in for free. If this does not get a potential acquirer slidng the rule over them we do not know what will.

As per the recent analysis in our 5 Picks for 2020 report our stance remains resolutely at Conviction Buy and we expect the company to look at addressing this valuation disjoint during H1 2020 through a dividend implementation.

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• Argo Blockchain