Bitfarms (BITF): A Crypto Winter Survivor Positioned to Bounce Back

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Bitfarms Ltd. (NASDAQ: BITF) is one of the largest bitcoin mining companies in the world, with its operational hash rate accounting for approximately 2% of the global bitcoin network. While the stock peaked in 2021, reaching a peak market value of over $1.5 billion, the setup here has been a disaster with stocks losing over 90% in 2022 amid falling prices Bitcoin (BTC-USD). With hindsight, it is clear that the expectations of the company and the industry in general have taken a step forward.

That being said, Bitfarms holds its place as a survivor with the operation moving forward and, in our opinion, one of the best names in this highly speculative segment. Its business model as a “self-miner” by not relying on outsourced hosting or even offering mining services to other parties has proven to be an advantage as these steps have led to high-profile bankruptcies among other industry players.

There is no easy turnaround for Bitfarms which now depends on a sustained rise in the price of Bitcoin for its long-term success. Nonetheless, we can point to some encouraging fundamentals, including continued mining growth and positive operating cash flow, even in the current price environment. A relatively large balance sheet position of cash and BTC dispels any solvency concerns, meaning BITF will remain relevant for the foreseeable future.

BITF Key Metrics

We mentioned that Bitfarms is a self-miner, which means the company builds the data centers where its Bitcoin mining machines are located. This strategy contrasts with others in the industry that have taken an alternative route by contracting with third-party hosting providers like what Marathon Digital Holdings, Inc. (MARA) has done or even the more ambitious model of playing both sides by mining and offering mining as a service which has been the death sentence of Core-Scientific (CORZ).

In the case of MARA, the company’s hosting provider “Compute North” went bankrupt amid soaring energy prices as a cost coupled with Bitcoin’s decline led to a collapse in demand for its services. MARA had partnered with Compute North for the development of new projects, with the disruptions representing a setback for its expansion plans. Core-Scientific, once considered a “blue chip” industry given its scale, has also been crushed by extreme energy prices at its Texas facilities, though it was the large debt that ultimately drove the company to file Chapter 11 this month.

In this regard, Bitfarms benefits from its vertical integration by focusing on setting up and managing its production facilities while avoiding hosting agreements. Currently, the company has 10 sites in Canada, the United States and Latin America that source renewable energy, primarily through hydroelectric power purchase agreements.

Company IR

The latest update indicated that the company is on track to operate 188MW of power through the end of 2022, implying a Bitcoin mining hash rate capacity of 5.0 exahash vs. 4 .4 PE/s in November. The result is almost double the Bitfarms operation presented at the end of 2021. In the third quarter, the company installed its last delivery of 7,000 “MicroBT Whatsminers” mining rigs which added around 0.8EH/s.

Company IR

On the other hand, even though Bitfarms produced 1,515 BTC in Q3, up 21% from Q2 and up 45% YoY, momentum could not escape the sharp decline in BTC price. Third-quarter revenue at $32.3 million was down from a peak of $58.4 million in the fourth quarter of 2021, which was at the peak of the Bitcoin cycle.

Company IR

An important point here is that Bitfarms reported a third-quarter Bitcoin production cost of $9,400 BTC, which has climbed 18% since the end of last year. Part of this reflects the difficulty of the escalation network as well as the low volatility in energy and forex. The figure was down 5% from the second quarter on the basis of some operational efficiencies with the mixing of production in lower cost sites. Management notes that it remains among the cheapest producers among publicly reporting miners.

The biggest benefit is that the underlying mining business remains profitable while acknowledging that the margin above break-even has tightened. Q3 Adjusted EBITDA of $10.2 million and a 31% margin was down from the Q4 2021 high of $40.3 million and a 68% margin. This trend largely explains the poor stock price performance, with BTC prices above $50,000 in 2021 a completely different reality in terms of potential profitability.

Company IR

The company ended the third quarter with $36 million in cash and 2,064 BTC on the balance sheet, forming its total liquidity to $76 million at the end of the period against $86 million in total long-term debt. One of the strategies employed to deal with the ongoing expansion efforts has been to regularly sell off its Bitcoin production and part of its holdings as a method to generate cash as part of its funding strategy.

In the second quarter, Bitfarms was able to negotiate an agreement with suppliers to postpone the delivery of certain equipment to 2023 and payment terms taking into account changing market conditions. However, the plan is to go ahead with the construction of facilities in Quebec, Canada, Argentina and Paraguay. On that note, some logistical challenges with importing equipment into Argentina are delaying some deployments in 2022, but management is particularly excited about opportunities for growth in the country as well as in neighboring Paraguay as low-income mining jurisdictions. cost.

Company IR

The latest update from November’s operational report is that Bitfarms sold 400 BTC during the month from its holdings and mined 453 during the period, generating $14.6 million in proceeds while repaying $10 million in debt related to loans and equipment purchases. The 1,664 BTC reported as of November 30 represents an approximate value of $27.5 million at current market value. Keep in mind that this is all in the context of a company with a current market value of around $100 million.

What’s next for Bitfarms

There is no reason to beat around the bush, Bitfarms and the entire Bitcoin mining industry will need BTC prices to recover and ideally return to all-time highs at some point in the future. Whether in 2023 or several years from now, the other side would be a scenario where BTC crashes or even goes to zero among the most pessimistic or skeptical crypto predictions.

The appeal of BITF is simply that we believe it could outperform the rising Bitcoin market price as a direct leveraged play in digital assets. Assuming a rise in Bitcoin prices, we would also expect BITF to take advantage of the momentum as sentiment improves, adding to some level of valuation multiple expansion.

At the current level of monthly BTC mining production for Bitfarms, averaging around 475 BTC per month, the annualized rate approaching 5,700 implies a revenue potential of almost $100 million, at the current market price. By this measure, stocks are trading at approximately 1x forward sales.

Simply put, a positive $1,000 change in the BTC market price can add an additional $5.7 million to annual revenue. A scenario in which BTC rallies towards $25,000 would result in a 50% increase in revenue, with operating leverage supporting significantly higher Adjusted EBITDA.

Conversely, mining revenues would be proportionally reduced on falling BTC prices, with operating losses exploding, particularly if BTC approaches the company’s cost of production. The other dynamic to consider is that over time the difficulty of the network increases, which means that the value of Bitfarms hashrate mining capacity will gradually dilute. This means that the company will either have to keep increasing its capacity faster than the network, or rely on the price of BTC to increase significantly, sooner rather than later.

Again, there are many moving parts and BITF will need the combination of luck and continued execution for the long term strategy to work. Going forward, operating margins may improve as facilities under development come online, while infrastructure investment needs tend to decline.

Company IR

We’ve been Bitcoin bulls and last wrote about the sector’s losses this year, including the collapse of “crypto-alts” like Terra coins (LUNC-USD), and bankruptcies among exchanges, including including “Celsius Network”, Voyager Digital (OTCPK: VYGVQ), and the latest “FTX” scandal could mark a cyclical capitulation. The benefit of Bitcoin is that it emerges stronger by cementing its position as the “gold standard” of crypto, largely immune to the fraud or manipulation seen in smaller tokens.

In hindsight, it is clear that there was too much exuberance and speculative money in the sector, even if there is evidence that the long-term view of Bitcoin as an alternative asset and reserve of digital wealth is alive and well.

It is telling that BTC has been trading in a relatively tight range over the past few months. One interpretation of this apparent stabilizing floor is that it is progressing in the first stage towards a rebound. A broader market recovery in 2023, including a view that the “tech” and high-growth segments are gaining momentum, could open the door for Bitcoin to outperform the upside.

On the downside, Bitcoin would also like to be exposed to a further deterioration in the macroeconomic outlook leading to a new wave of volatility in financial markets. A break below $15,000 in the near term as a significant level of technical support would likely trigger an accelerated decline in selling.

Looking for Alpha

Final Thoughts

As bad as BITF’s trading action is, we feel the fundamental value has been discounted beyond the underlying trends. In our view, with a bullish outlook on Bitcoin, BITF is well positioned to rebound as rising Bitcoin prices further strengthen its financials.

Bitcoin and the crypto sector remain high risk with a very real possibility of another lower leg for a number of reasons. Within this group, Bitcoin miners have earned the distinction of absolute market gutter after a disastrous 2022 forcing a reassessment of the industry’s long-term viability.

Nonetheless, we view the potential rise in Bitfarms as an attractive risk-adjusted return opportunity. The stock can function as a small position with a larger diversified portfolio. In terms of tracking points, monthly production levels are the key to monitor in the next balance sheet update.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these actions.

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