Summary CleanSpark has lowered their 22.4 EH/s guidance for year-end 2023 to 16 EH/s. Riot Blockchain estimated CleanSpark's forecasted 2023 EV/EBITDA multiple would be an industry best 2.3x. CleanSpark's average sale price per Bitcoin in fiscal 2022 was over $35,000. In fiscal Q4 the cost of revenues per Bitcoin, which is primarily the energy component, were $13,500. This compares to $11,000 for the full fiscal year. There is much to like about CleanSpark (NASDAQ: CLSK ). Put simply, the company's enterprise value is low relative to its profitable and operating share of the total Bitcoin ( BTC-USD ) network hash rate. This is true on both a past and estimated forward basis. Excluding the liquidity challenged Core Scientific ( CORZ ), in November CleanSpark remarkably had the highest Bitcoin production of all the large, publicly traded U.S. and Canada miners. Though its Bitcoin holdings are extremely low, CleanSpark has a relatively strong balance sheet with an enviable debt-to-EBITDA ratio. On a fundamental level CleanSpark represents a value, but macro factors, including interest rate uncertainty and the ongoing energy crisis, are confining its stock to the top of my watchlist for now. The article below details CleanSpark's production outlook, including the recent negative Lancium news. The somewhat dynamic rig and energy costs picture will be covered. It also considers the company's interesting, and arguably solid, balance sheet and financing strategy. As a conclusion, I will look ahead to next year and the possible peak in interest rate expectations as well a moderation in the energy crisis and growing certainty around prices. As a precursor to the discussion, consider the graphic below from Riot Blockchain ( RIOT ) and FactSet. The graphic uses current market data and average analyst estimates to show enterprise values sized against projected EBITDAs. Note Argo Blockchain (ARBKF) and Core Scientific were excluded because of their distressed situations. So when one fairly adjusts market cap for cash and debt and then compares that to expected earnings, Riot and CleanSpark represent a value. riotblockchain.com/investors/company-information/presentations CleanSpark Projected Growth At Owned Locations Off 17%, CleanSpark led the miners down on Thursday following its earnings announcement and substantial cut to its calendar 2023 hash rate projection. CleanSpark has a partnership with Lancium, a developer of clean energy campuses in Texas, and had planed to deploy 6.6 EH/s of capacity by mid-2023 at their new hosting facilities. The completion of the project is now doubtful and the timeline is pushed out at least six months. CleanSpark has lowered their 22.4 EH/s guidance for year-end 2023 to 16 EH/s. Importantly, note that CleanSpark does not have deposits with Lancium. cleanspark.com The green shaded area above represents hosted exahash; note its total is expected to decline in the final quarter of 2023. The four named locations show below, and in blues and purple above, are all in Georgia. Interestingly, Georgia has a large nuclear supply component and Georgia Power is the first in the U.S. to expand its nuclear footprint over the past three decades. Growth and expansion are coming at both Washington and Sandersville, which were newly acquired over the last fiscal year. cleanspark.com In August I wrote a piece titled: Is Riot Blockchain's Strategy Beating Marathon Digital's? The article discussed how Riot was moving to a vertically integrated housing and power infrastructure while Marathon Digital ( MARA ) was using an asset light strategy reliant on hosting providers. Of course, Marathon's plan has proved problematic with continued delays and even the notable bankruptcy of partner Compute North, where substantial deposits are at risk. While not arguing the likely shelving of the Lancium partnership is a good thing, in general it has proved better for the large cap miners to limit reliance on hosting partners as well as the entanglements of providing hosting services themselves. CleanSpark Rig And Energy Costs Picture CleanSpark has no outstanding commitments for mining equipment and is in the market for about 95,000 miners to fill the Washington and Sandersville expansions. CleanSpark currently has some high-end MicroBT equipment and some top-of-the-line Bitmain S19 XPs. But they are generally looking to acquire earlier models from the S19 Series such as the S19j Pros that have a strong ROI. By not locking in equipment contracts prior to securing power, CleanSpark is able to take advantage of the current market disruption and acquire rigs at a substantial discount to their peers. This discount is likely 50-75% in many cases. What we're seeing right now from a rig pricing point of view is we are seeing buying opportunities continue to persist in the teens. And we do expect to -- and what I mean teens, it's in the dollars per terahash anywhere from $11 to $19 and most of that on the low end, depending on if the units are state side or not. What we are anticipating is we're anticipating there to be plenty of inventory available, especially over the first six months of next year. CEO Zach Bradford, Fiscal Q4 2022 Results - Earnings Call , 12/14/2022 On the energy costs front, the situation is more concerning. For the fourth quarter power prices on a weighted average basis were over $.05 per kWh. Cost of revenues, which is primarily the energy component, were $13,500 per Bitcoin, this compares to $11,000 for the full fiscal 2022 year. For reference, other cash costs, such as general and administrative costs, represent another $6000-$7000 per coin. These increased energy costs are not just cutting into margins but also have an effect on production. While uptimes were still over 90% in fiscal Q4, power pricing peaks did cause some curtailment on lower efficiency equipment. Balance Sheet, Financing Strategy and Dilution As of September 2022 (cleanspark.com) In part, CleanSpark has a relatively clean balance sheet because of their Bitcoin retention strategy. Bradford explains: Since October last year, we've used our Bitcoin to fund our operations and growth, and that has made a big difference for us. For example, our average sale price per Bitcoin in fiscal 2022 was over $35,000 of Bitcoin. CEO Zach Bradford, Fiscal Q4 2022 Results - Earnings Call , 12/14/2022 (link above) Maintaining low debt relative to earnings is one key for the large cap miners in surviving the current cycle. Core Scientific's recent debt related liquidity issues somewhat prove 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 debt leverage. CEO Zach Bradford, Fiscal Q4 2022 Results - Earnings Call , 12/14/2022 (link above) But going forward, CleanSpark's growth is going to require substantial dilution. The company recently filed to refresh their shelf offering and plans sell up to $500 million of common stock during one or more public offerings over the next three years. My understanding is that the capital expense on the buildouts at Washington and Sandersville still require $70 million in funding and by my calculation the rig purchases discussed above will be an additional ~$140 million. We make acquisitions within a specific ROI range, because we expect them to be accretive to the shareholders in the long run. This move allows us to maneuver through a bear market while strengthening our operations and establishing a platform for growth. CEO Zach Bradford, Fiscal Q4 2022 Results - Earnings Call , 12/14/2022 (link above) Final Thoughts: Interest Rates And Energy Pricing Before moving from a hold to a buy recommendation for CleanSpark, I am looking to two indicators. First, have we reached a peak and stabilization of expectations for the terminal rate for the federal funds rate? Interest rate sensitive assets like tech stocks, as well as digital assets including Bitcoin, can't begin to recover in an environment where this expectation continually shifts up. Consider the chart below from the recent projection materials provided by the FOMC and other Fed members following the December meeting. The height of the bars represents the number of participants projecting a given year-end 2023 federal funds rate, see right side for the scale. The dotted line shows their September projections. In the chart below note the substantial shift up in expectations. federalreserve.gov I am looking for these projections to stabilize or shift down (to the left) before fully deploying new funds allocated to digital assets. The next Summary of Economic Projections from the Fed will not be out until March 22nd. But the CME has a "FedWatch Tool" that is more complete and follows market expectations real-time. When following the link, note the tabs for each different meeting month next year, that one can track the changes over time at the bottom, and that there are differences between the markets expectations for the Fed and the Fed's own projections. There will always be fluctuations short-term, but over time it is necessary for these probabilities to stabilize rather than continually move up (to the right). cmegroup.com The seconds indicator relate to the energy pricing picture. Looking ahead, from the March earnings report for calendar Q4'22 we can again compute the cost of revenues per Bitcoin. Look for any moderation from the $13,500 discussed above, possibly on lower energy prices compared to the calendar third quarter. CleanSpark is actually watching natural gas pricing at the Henry Hub for its models. Forecasts have natural gas prices reversing a dollar per million Btu in the Spring. cmegroup.com A reversal is important; consider the following from Bradford. ... we are actively working on securing agreements to lock in lower rates from a long-term point of view across all of our sites. And that's what we want to bring to the table in this process is our combined purchasing power with three out of the four cities we operate in, being through, through MEAG. And we expect the right time to lock in the best rates is going to be the same time that we start to see the declines. So we're kind of aiming for a springtime period to make some of those moves. CEO Zach Bradford, Fiscal Q4 2022 Results - Earnings Call , 12/14/2022 (link above) So to summarize the conclusion, I am still in a holding pattern for CleanSpark. The company's production fundamentals and financing strategy are strong, but macro factors surrounding interest rates and energy pricing are unresolved. I am waiting for a sustained pivot in expectations for the peak of the federal funds rate, as well as some assurances CleanSpark's energy costs are contained and they are capturing any reversal in pricing.
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