By Richard Gill, CFA

Argo Blockchain (ARB) has announced results for the six months to June 2019 this morning, the company’s first since its change of strategy in February this year. The headline figures showed revenues growing by 283% to £2.93 million as the company turned to mining cryptocurrencies for its own book and as the Bitcoin price rose strongly over the period. Mining revenues were £2.77 million with the residual income coming from the company’s now closed services. Importantly, these results only include 4 months where the company was mining for its own account the average bitcoin price over this period was only above the company’s all in mining costs of @ $3,000 per coin as compared to in excess of $10,000 per coin now. Additionally, the new mining rigs were not on stream. As per our full note HERE the pro forma profits estimates we expect (subject to the bitcoin price of course) to put these figures in the shade.

As previous alluded to, a reduction in the cost base following the launch of the new strategy has resulted in a 35% fall in the annual mining cost base. Total admin costs for the first half were down from £3.73 million in FY 2018 to just £0.63 million as the listing cost dropped out. This helped the company to post a maiden pre-tax profit of £0.95 million, against a loss of £4.12 million for the year to December 2018.

On the balance sheet, Argo held just over £3 million worth of cryptoassets at the period end, based on a BTC price of $10,817. Net cash equivalents (excluding cryptocurrency) amounted to £5.6 million, down from £16 million six months previously, reflecting the ramp up in investment in mining infrastructure.

Argo looks well placed for further growth as we progress through H2 2019, with 5,000 machines in production at the end of June. During H1 the company committed to purchases of £18 million worth of mining gear which puts it on track to have an installed base of more than 12,000 mining machines by the end of 2019, representing a total hashing capacity of 505 petahash. Argo confirmed that current trading progresses well as Bitcoin prices remain firm.

Also, as we previously reported, in August the company signed a new multi-year agreement with data centre provider GPU.One, increasing access to clean electricity six-fold to 64 megawatts (MW), up from 9.5MW a year ago and 14MW at the end of June. The additional 50MW of power will allow Argo to run up to 15,000 more mining machines concurrently, taking its total Bitcoin mining capacity from 505 petahash, to 1.36 exahash, which would currently make Argo the largest publicly listed crypto miner in the world.

Since our previous update Argo has also announced that 1,000 Bitmain Z11 Antminer machines, which went into production in early May 2019, have already achieved a 100% payback on their investment, with the company well ahead of schedule to recoup the cost of the 2,267 S17 Antminer machines purchased in April and May of 2019 which have been in production since May and June.

In addition, the company’s proposed tie up with Canadian listed miner HIVE Blockchain has been ended by mutual agreement. This follows Argo’s significant hardware investment and a fall in the HIVE share price which would have significantly diluted Argo shareholders given an equity swap was part of the proposed deal.

Align Assessment

While Argo management were criticised by some parties for abandoning the previous Mining as a Service (MaaS) strategy, these results vindicate the decision to mine crypto for its own book. Compared to the end of 2018, Argo is now making significant margins on its activities, has a markedly lower cost base and, with the announced infrastructure investments, looks very well placed for further growth in the rest of 2019 and into 2020.

Argo shares currently trade at 10.15p, up from 7.05p since we re-initiated coverage on 8th August. There is still some way to go however before our first (yield based) target of 14.62p is met. As time goes on and the company delivers on our forecasts we see our 31.33p per share earnings multiple plus liquid assets based valuation as being more appropriate – of course assuming that Bitcoin prices follow our model. Upside potential to our forecasts and target price comes from filling the newly received capacity, as discussed in our last update. Further blue-sky upside potential comes should Argo’s valuation rise in line with its efficiency ratio against peers, with our calculation of 73.71p being some seven times high than the current price.

Should the market not realise these values in the short-medium term we maintain our belief that Argo is likely to be an acquisition target for a listed peer, especially given the higher efficiency of its operations. Accordingly we retain our stance of Conviction Buy.

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• Argo Blockchain