CleanSpark: Lower Energy Costs And Discounted Mining Equipment Are Potential Tailwinds

CleanSpark (NASDAQ:CLSK) is an fascinating play on a rebound in Bitcoin (BTC-USD) costs that ought to profit from discounted mining gear and decrease vitality prices. Traders can think about a starter place however could also be higher off ready till after the corporate does a secondary providing earlier than getting extra aggressive.

Firm Profile

CLSK is a Bitcoin miner. In truth, the one cryptocurrency it mines is Bitcoin. Earlier than being within the Bitcoin mining house, it supplied vitality expertise options to industrial and residential clients. Nonetheless, it discontinued that enterprise in 2022.

The corporate entered the Bitcoin mining house via its acquisition of ATL in December 2020. It then acquired a further knowledge middle, selecting up a second one in August 2021, a 3rd knowledge middle and mining gear in August 2022, and a fourth knowledge middle and mining gear in October 2022. It additionally has a co-location settlement with Coinmint.

The corporate owns and operates its amenities and doesn’t lease mining house to different mining corporations or personal people. Its main website sits on 16.35 acres situated in Sandersville, Washington County, Georgia. Coinmint’s facility in New York additionally hosts a few of its miners.

CLSK will promote the Bitcoin it mines occasionally to assist its operations and to fund strategic development. It doesn’t take part in common Bitcoin buying and selling, nor does it hedge its Bitcoin holdings. The corporate says it doesn’t use a selected components or program to promote its Bitcoin and as an alternative depends on administration analyzing forecasts and monitoring the market in real-time.

Alternatives

As a holder of Bitcoin, one of many largest positives for CLSK can be a rebound within the worth of Bitcoin. The cryptocurrency has nosedived from its 2021 highs of over $67,000 to fall to underneath $16,000. The worth of Bitcoin has since rallied to over $23,000. Any return to Bitcoin’s highs can be a giant driver for CLSK’s inventory.

For Bitcoin miners, some of the vital metrics is its hashrate. The corporate describes this as “a measure of the computing and processing energy and velocity by which a mining pc mines and processes transactions on the Bitcoin community.”

In crypto mining, a blockchain community generates an alphanumeric code referred to as a hash that mining computer systems should guess. The hashrate measures the variety of guesses a miner’s pc makes per second to unravel for the hash. The extra guesses per second, the extra seemingly a miner is to guess the hash and obtain, on this case, a Bitcoin.

In easier phrases, the hashrate is how shortly a set of computer systems can guess a random code to obtain a Bitcoin. The extra computing energy a miner has, the extra guesses per second it will probably generate and thus the extra Bitcoin it will probably earn via this course of. The extra Bitcoins which might be mined, although, the harder the codes develop into and extra computing energy is required to keep up the identical hashrate.

CSLK has completed a extremely good job of accelerating its hashrate and noticed a pleasant intra-quarter leap in This fall. On its This fall earnings name, CEO Zachary Bradford mentioned:

“We had 63,700 machine hashing as of December 31. Our fleet was working at a median effectivity of about 31 watts per terahash. For perspective, we perceive a few of our friends are available in at over 40 watts per terahash. Our fleet is tremendously environment friendly. Most of our machines come from BITMAIN’s S19 sequence, and we’ve began to accumulate extra XPs. The standard of the machine tells solely a part of the story. Our immersion cool facility has allowed us to check the bounds of over and underneath clocking as we leverage software program and firmware to optimize efficiency. We’re additionally testing extra software program optimization methods for our air cooled fleet, which we count on to permit us to carry underneath and overclocking capabilities to all of our campuses. This optimization will put together us to remain forward of the curve when halving happens in 2024.”

CLSK additionally has a possibility to proceed to reap the benefits of a distressed marketplace for mining gear. Whereas some miners have needed to unload mining gear for money, earlier this month CLSK was in a position to buy 20,000 model new Antminer S19j Professional+ (PLUS) models at a 25% low cost from the producer. The brand new machines are anticipated so as to add 2.44 EH/s to the corporate’s current 6.6 EH/s of Bitcoin mining computing energy, bringing it as much as 9 EH/s.

The corporate credit utilizing a proprietary mining mannequin as a bonus, permitting it flexibility and the power to manage its personal infrastructure and assets. On its earnings name, Bradford mentioned:

“The key to our development has been our proprietary mining mannequin. There are various totally different mining fashions on the market, from asset-light on one aspect via proprietary mining on the opposite. Within the asset-light mannequin, machines are owned by the corporate, however cared for and run by internet hosting corporations that additionally take a lower of the income. This mannequin introduces much less management over an organization’s future through the corporate is uncovered to the dangers and uncertainties of third events, their potential to construct amenities, procure energy, function the equipment and importantly, keep solvent. We consider increased returns are constantly generated by actively taking part within the mining course of. Distinction that with proprietary mining, miners like CleanSpark that function virtually completely as proprietary miners can train vital better management over their very own destinies. We consider this provides us a major edge.”

Decrease vitality costs are one other actually huge constructive. Pure fuel costs have nosedived, which ought to assist decrease general vitality prices and be good for CLSK and different miners. Power costs weighed on CLSK in FY23, and it sounds from what administration mentioned on its This fall earnings name that the corporate may look to lock in long-term vitality costs now that the market has turned decidedly decrease. As you possibly can see from the chart, nat fuel costs soared in 2022, however have plunged thus far in 2023. Most electrical energy within the U.S. is generated from pure fuel.

Dangers

The largest danger to CLSK isn’t surprisingly the value of Bitcoin. Whereas the professionals and cons of Bitcoin and the place it will definitely commerce may be argued, the one factor that’s simple is that the cryptocurrency’s worth is risky. Thus, not surprisingly, the inventory costs of crypto miners, together with CLSK, may also be fairly risky as nicely.

Whereas CLSK has completed a very good job growing its hashrate, it additionally lowered its 2023 year-end projections from 22.4 EH/s to 16 EH/s. One of many huge causes is that the corporate had a partnership with Lancium the place it will add 6.6 EH/s of capability this 12 months. Nonetheless, the corporate mentioned on its This fall name and in its earnings launch that the undertaking is trying uncertain and on the very least has been pushed again into subsequent 12 months. Thankfully, the corporate has mentioned it has no capital presently tied up within the undertaking.

The corporate additionally carries some debt and simply purchased $32.3 million in new gear, which can add to its leverage, not less than briefly. It expects to spend between $210-280 million in CapEx this 12 months. To pay for that, the corporate on its This fall name mentioned that it plans to situation shares, which can dilute shareholders. Bradford mentioned the corporate plans to ask for the authorization to supply between 100-300 million shares at its subsequent annual assembly. With its inventory nicely off its highs, which may not be one of the best transfer.

Conclusion

For those who’re a Bitcoin bull, I believe CLSK is an fascinating play. The miner ought to significantly profit from decrease vitality prices and depressed mining gear prices. Its stability sheet is in fairly fine condition, however the firm goes to massively dilute shareholders because it seems to be to proceed to develop and scale.

Simple arithmetic says that at CapEx of $250 million and the inventory buying and selling at round $2.50, it must situation 100 million shares if it needed to pay for all its CapEx through a share providing. The corporate presently has solely 78 million shares excellent. That mentioned, its enhance in share depend needs to be at a bit much less (2.3x) than the two.4x enhance in its 2023 year-end hashrate.

Throw in much-reduced vitality costs and a possible rebound in Bitcoin costs, and the transfer to lift capital to extend its hashrate is smart. The decrease quantity it has to spend on CapEx to achieve its projected year-end 2023 hashrate or the upper its share worth (much less dilution), the higher for the corporate.

I believe speculative buyers can look to take a starter place, however I would wait till after the corporate points fairness to get extra aggressive.