Hut 8 Mining: Ethereum Equipment Purchase Likely Bid To Boost Valuation

On March 26, Hut 8 Mining Corp. (TSX: HUT) agreed to purchase US$30 million of NVIDIA Corporation’s new crypto mining-specific graphics processing units, also called Cryptocurrency Mining Processors (CMPs). The purchased CMPs, which have an aggregate operating capacity of 1.6 Terahash per second (TH/s) and will be delivered this summer, will allow Hut 8 to expand into mining for other digital currencies such as Ethereum. One TH/s is a trillion hashes per second.

The likely reason that Hut 8 purchased the NVIDIA chips is more for appearance reasons than substance. After all, this purchase of 1.6 Th/s of computing capacity represents just 0.00015% of its overall installed mining power of 1.073 Exahash per (EH/s). One EH/s is a million trillion hashes per second.

However, other crypto miners like Hive Blockchain Technologies Ltd. (TSXV: HIVE), that have allocated some mining capacity to digital currencies other than Bitcoin, have been accorded higher stock valuations than miners like Hut 8 and Bitfarms Ltd. (TSXV: BITF) which have been almost exclusively focused on Bitcoin.

The table below shows the huge disparity between Hut 8 and Bitfarms versus Hive (the three largest Bitcoin miners listed on TSX) in terms of enterprise value (EV) to potential revenue run rate. Hut 8 may hope the CMP purchases (plus perhaps more in the future) prompts investors to ascribe an EV-to-hashrate valuation similar to that assigned to Hive’s stock.

Estimated Mid-March 2021 Operating Hash Rate, in EH/s 0.965 1.073 0.653
Current Global Bitcoin Mining Market Share (A) 0.6% 0.6% 0.4%
Hash Rate Goal By Year-End 2021, in EH/s (B) 3.0 1.513 1.763
Possible Global Bitcoin Mining Market Share at Year-End 2021 if the Goal is Achieved 1.5% 0.8% 0.9%
Expected Annualized Bitcoin Awards Based on Current Hash Rate 2,134 2,373 1,444
Assumed Bitcoin Price, in US Dollars $56,400 $56,400 $56,400
Annualized Revenue, Based on Current Hash Rate, US$ Millions $120 $134 $81
Stock Market Value, in US$ Millions $432 $808 $1,148
Net Debt, in US$ Millions $22 ($63) ($9)
Enterprise Value, in US$ Millions $454 $745 $1,139
EV-to-Current Annualized Revenue Run Rate 3.8 5.6 14.0
Bitcoin Mining Capacity Information for Selected Canadian-Listed Miners
(A) The current global Bitcoin mining capacity is around 171 EH/s.
(B) Bitfarms expects to reach a hashrate of more than 8.0 EH/s by year-end 2022.

4Q 2020 and Full-Year 2020 Earnings

Last week Hut 8 reported 4Q 2020 earnings results. The company reported a second consecutive modest quarterly operating loss, and its operating cash flow flipped to a small positive during this period. However, the stock market is more focused on its potential future revenue run rate, as discussed above.

Probably the most important recent financial developments were:

  • 1) the company’s January 2021 equity raise of $77.5 million, which in turn allowed the company to repay all its debt later that month; and
  • 2) Hut 8’s ownership position of 3,000 Bitcoin as of February 21, 2021 (per its presentation slides). This holding is worth US$169.2 million at current prices and equates to 21% of its stock market valuation.
(in thousands of Canadian dollars, except for shares outstanding) 4Q 2020 3Q 2020 2Q 2020 1Q 2020 4Q 2019
Operating Income ($1,530) ($841) $2,460 ($5,388) ($11,599)
Operating Cash Flow $1,629 ($486) ($969) ($1,466) $5,691
Cash, Including Digital Assets $104,778 $43,223 $45,300 $28,216 $29,313
Debt – Period End $25,757 $27,006 $27,583 $28,700 $26,039
Shares Outstanding (Millions) 97.2 96.7 96.7 90.5 90.4

The shares of Hut 8 and other cryptocurrency miners have soared over the last six months, matching or even outpacing Bitcoin’s ascent. If the price of Bitcoin were to reverse lower, the shares of the miners would likely reverse as well.

Hut 8 Mining enjoys a generous stock market valuation for a company which just posted its first positive quarterly cash flow results in a year; investors value the company – really all crypto miners – on projected strong 2021 results. Given this investor mindset and investors’ decisions to ascribe stronger valuations to miners which allocate some capacity to digital assets other than Bitcoin, Hut 8’s decision to purchase state-of-the-art equipment to engage in such mining could boost its stock market valuation.

Hut 8 Mining trades at $9.00 on the TSX Venture Exchange. Hive Blockchain and Bitfarms trade at $4.14 and $6.30, respectively, on the TSX Venture Exchange.

Information for this briefing was found via Sedar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.