CleanSpark Tops 2023 Bitcoin Watch List Despite Texas Turmoil (CLSK)

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akinbostanci/E+ via Getty Images

There’s a lot to like about CleanSpark (NASDAQ:NASDAQ:CLSK). Simply put, the company’s enterprise value is low relative to its profitable and operational share of the Bitcoin (BTC-USD) network’s total hash rate. This is true both on a past and forecast basis. Excluding disputed liquidity Core Scientific (CORZ), in November CleanSpark remarkably had the highest Bitcoin production of any major publicly traded US and Canadian miner. Although its bitcoin holdings are extremely small, CleanSpark has a relatively strong balance sheet with an enviable debt to EBITDA ratio. On a fundamental level, CleanSpark represents value, but macroeconomic factors, including interest rate uncertainty and the current energy crisis, confine its stock to the top of my watch list at the moment.

The article below details CleanSpark’s production outlook, including recent negative news from Lancium. The somewhat dynamic picture of platform and energy costs will be covered. It also takes into account the company’s attractive and arguably strong balance sheet and funding strategy. In conclusion, I will look to next year and the possible peak in interest rate expectations as well as a moderation in the energy crisis and increasing price certainty.

As a precursor to the discussion, consider the chart below from Riot Blockchain (RIOT) and FactSet. The chart uses current market data and average analyst estimates to show company values ​​versus projected EBITDA. Note Argo Blockchain (OTCQX:ARBKF) and Core Scientific were excluded due to their distress situations. So when you fairly adjust market capitalization for cash and debt, and then compare that to expected earnings, Riot and CleanSpark represent value.

riotblockchain.com/investors/company-information/presentations

CleanSpark Projected Growth in Owned Sites

CleanSpark led miners lower by 17% on Thursday after its earnings announcement and a substantial reduction in its 2023 calendar hash rate projection. CleanSpark has a partnership with Lancium, a clean energy campus developer in Texas, and had planned to deploy 6.6 PE/s of capacity by mid-2023 in their new hosting facilities. The outcome of the project is now uncertain and the deadline has been pushed back by at least six months. CleanSpark has lowered its forecast from 22.4 PE/s for the end of 2023 to 16 PE/s. It is important to note that CleanSpark does not have any deposits with Lancium.

cleanspark.com

The shaded green area above represents hosted exahashes; note that its total is expected to decrease in the last quarter of 2023. The four locations named below, and in blue and purple above, are all in Georgia. Interestingly, Georgia has a large nuclear supply component and Georgia Power is the first in the United States to expand its nuclear footprint in the past three decades. Growth and expansion are coming in Washington and Sandersville, which were newly acquired in the last fiscal year.

cleanspark.com

In August, I wrote an article titled: Does Riot Blockchain’s Strategy Beat Marathon Digital’s? The article explained how Riot was transitioning to a vertically integrated housing and power infrastructure while Marathon Digital (MARA) used an asset light strategy relying on hosting providers. Of course, Marathon’s plan has proven problematic with continued delays and even the notable bankruptcy of its partner Compute North, where large deposits are at risk. Although not discussing the probable suspension of the Lancium partnership is a good thing, in general it has proven better for large miners to limit dependency on hosting partners as well as entanglements related to provision of hosting services themselves.

Image of the CleanSpark platform and energy costs

CleanSpark has no ongoing commitments for mining equipment and is seeking approximately 95,000 miners to fill the Washington and Sandersville expansions. CleanSpark currently has high-end MicroBT equipment and high-end Bitmain S19 XPs. But they are usually looking to acquire earlier models of the S19 series such as the S19j Pros which have a strong return on investment.

By not locking up equipment contracts before getting power, CleanSpark is able to take advantage of the current market disruption and acquire rigs at a substantial discount to its peers. This discount is probably 50-75% in many cases.

What we’re seeing right now from a platform pricing perspective is that we’re seeing buying opportunities continue to persist among teens. And we’re expecting – and what I mean teens is in dollars per terahash between $11 and $19 and most on the lower end depending on whether the units are on the state side or not . What we anticipate is that we expect there will be a lot of inventory available, especially in the first six months of next year.

CEO Zach Bradford, Fourth Quarter 2022 Earnings Call, 12/14/2022

On the energy cost front, the situation is more worrying. For the fourth quarter, electricity prices on a weighted average basis were above $0.05 per kWh. Revenue cost, which is primarily the energy component, was $13,500 per bitcoin, compared to $11,000 for all of FY2022. For reference, other cash costs, such as overhead and administrative, add another $6,000 to $7,000 per piece.

These increased energy costs not only reduce margins, but also have an effect on production. While uptimes were still above 90% in the fourth quarter of the fiscal year, electricity pricing spikes led to some reduction in low-efficiency equipment.

Balance sheet, financing strategy and dilution

Since September 2022 (cleanspark.com)

In part, CleanSpark has a relatively clean track record due to its Bitcoin retention strategy. Bradford explains:

Since October of last year, we have used our Bitcoin to fund our operations and growth, and it has made a big difference for us. For example, our average sell price per bitcoin in fiscal year 2022 was over $35,000 worth of bitcoin.

CEO Zach Bradford, Fourth Quarter 2022 Earnings Call, 12/14/2022 (link above)

Keeping debt to earnings low is one of the keys for large-cap mining companies to survive the current cycle. The recent debt-related liquidity problems of Core Scientific provide some evidence of this importance. Again, Bradford explains:

Our ability to mine Bitcoin efficiently and profitably during a bear market is a direct reflection of our disciplined operations and low leverage.

CEO Zach Bradford, Fourth Quarter 2022 Earnings Call, 12/14/2022 (link above)

But going forward, CleanSpark’s growth will require substantial dilution. The company recently filed for a refresh of its shelf offering and expects to sell up to $500 million of common stock in one or more public offerings over the next three years. It is my understanding that the capital expenditures for the builds in Washington and Sandersville still require $70 million in funding and by my calculations the rig purchases discussed above will be approximately another $140 million.

We make acquisitions within a specific ROI range because we expect them to be accretive to shareholders over the long term. This decision allows us to maneuver in a bear market while strengthening our operations and establishing a platform for growth.

CEO Zach Bradford, Fourth Quarter 2022 Earnings Call, 12/14/2022 (link above)

Final Thoughts: Interest Rates and Energy Pricing

Before going from a hold to a buy recommendation for CleanSpark, I look at two metrics. First, have we peaked and stabilized terminal rate expectations for the fed funds rate? Interest rate sensitive assets like tech stocks, as well as digital assets including Bitcoin, cannot begin to rally in an environment where this expectation is continuously changing.

Consider the chart below from recent projection documents provided by the FOMC and other Fed members after the December meeting. The height of the bars represents the number of participants projecting a given fed funds rate at the end of 2023, see right side for scale. The dotted line shows their September projections. In the chart below, note the substantial shift in expectations.

federalreserve.gov

I want these projections to stabilize or move down (to the left) before we fully deploy the new funds allocated to digital assets. The next summary of the Fed’s economic projections will not be released until March 22. But the CME has a more comprehensive “FedWatch Tool” which monitors market expectations in real time. When you follow the link, note the tabs for each different meeting month next year, that one can track changes over time at the bottom, and that there are differences in market expectations for the Fed and the Fed’s own projections. There will always be short-term fluctuations, but over time it is necessary for these probabilities to stabilize rather than continually increase (to the right).

cmegroup.com

The seconds indicator relates to the energy price picture. Looking ahead, from the March earnings report for the Q4’22 calendar, we can again calculate the cost of revenue per bitcoin. Look for any moderation from the $13,500 discussed above, possibly on lower energy prices from the third calendar quarter.

CleanSpark is currently monitoring natural gas prices at the Henry Hub for its models. Natural gas prices are forecast to fall by a dollar per million Btu in the spring.

cmegroup.com

A reversal is important; consider the following from Bradford.

…we are actively working to secure agreements to guarantee lower long-term rates across all of our locations. And that’s what we want to bring to the table in this process is our buying power combined with three of the four cities in which we operate, coming through MEAG.

And we expect the right time to get the best rates to be the same time we start to see the drops. So we’re sort of aiming for a spring period to make some of these moves.

CEO Zach Bradford, Fourth Quarter 2022 Earnings Call, 12/14/2022 (link above)

So to sum up the conclusion, I’m still in a waiting pattern for CleanSpark. The company’s production fundamentals and financing strategy are sound, but the macroeconomic factors surrounding interest rates and energy prices are unresolved. I expect a sustained pivot in expectations for the peak in the fed funds rate, along with some assurance that CleanSpark energy costs are contained and capture any price reversal.

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