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Bitcoin Mining Consolidation, More Bankruptcies Expected, Analysts Say

Mining

blockworks.co 07 November 2022 19:24, UTC
  
Reading time: ~6 m

A range of bitcoin miners are set to report third quarter results in the coming days as several companies in the mining sector are struggling to cope with financial pressures.

Marathon Digital, Stronghold Digital Mining and Hut 8 Mining are among the companies in the space set to host earnings calls this week.

While analysts are not necessarily expecting big pronouncements of bankruptcies or acquisitions during industry players’ upcoming calls, they will be listening for how mining executives intend to navigate the current environment.

“I’m always listening for cues on expectations — company-specific and industry-specific — and specific companies’ moves to address their expectations,” Kevin Dede, senior technology analyst at HC Wainwright & Co. told Blockworks.

Industry watchers told Blockworks earlier this month that miner consolidation is imminent, as some of the larger miners in the space could look to scoop up struggling companies and their assets.

But Lucas Pipes, managing director at B. Riley Securities, said miners in a solid financial situation are still likely to take a wait-and-see approach.

“They want to make sure they’re all secured and shored up and build that treasure chest to the extent they can,” he said. “Are you going to have exceptions to this rule? Yeah, you might.”

Keeping bitcoin mining rigs humming during crypto winter

Core Scientific revealed in filings last month it was considering bankruptcy, and Argo Blockchain followed by saying a potential capital injection of $27 million it was expecting had fallen through.

“The space is distressed,” Pipes said. “There’s no other way of putting it.”

Dede added that as it becomes harder to raise money in public markets, miners are being forced to purge assets.

Core Scientific said Monday that it sold 2,285 bitcoins at an average price of $19,639, as proceeds totaled roughly $45 million. The company held 62 BTC and about $32 million in cash, as of Oct. 31.

Core Scientific and Argo Blockchain have not yet listed earnings call dates.

Iris Energy is also in financial distress. The Australia-based bitcoin miner said in an SEC filing last week that it can generate $2 million in monthly gross profit by mining bitcoin, while monthly principal and interest repayments on its debt stands at $7 million.

Bom Shin, vice president of corporate finance at Iris Energy, told Blockworks last week that the company’s debt is structured within a number of special-purpose vehicles (SPVs), which had a market value worth about 35% less than its principal loans outstanding as of September’s end.

The company was engaged in ongoing discussions with its unnamed lender, Shin added.

Iris Energy said that if it is unable to restructure the loans, two of its SPVs would have to default on the loans, which would likely result in the lenders foreclosing on the mining rig collateral, according to a Nov. 3 research note by Compass Point Research and Research analysts Chase White and Joe Flynn.

The analysts added that while Iris Energy’s stock price dropped following the news — and that the company may have a hard time getting equipment-backed financing in the future — they believe the company will be in a better financial situation after its negotiations with its lenders.

“We believe the market misunderstands the implications of the situation, which we see as a potentially significant positive for [Iris] that will allow it to continue to operate without the burden of expensive debt,” White and Flynn said.

In addition to the more recent struggles in the space, crypto mining data center operator Compute North filed for bankruptcy in Texas in September.

Dede said he expects it will take a bit more pressure before more bankruptcies and consolidation take shape.

“You can expect to see some suffering for a while, I think,” he added. “I’m in no position to say how long this bear market lasts, but people who are running these companies should position themselves to endure a lengthy one.”

The space’s potential acquirers could wait to buy

Marathon Digital posted a net loss of $192 million during the second quarter and is set to report its third quarter earnings on Tuesday at 4:30 p.m. ET.

The company said on Nov. 2 that it added about 32,000 miners last month to raise its hashrate to roughly 7 exahashes per second (EH/s). It also produced a record 615 bitcoins in October, increasing its total holdings to 11,285 BTC.

Marathon seeks to hit roughly 13 EH/s by the end of 2022 and 23 EH/s by mid-2023, Marathon CEO Fred Thiel told Blockworks.

Thiel said last month that Marathon would keep an eye on cheap assets from struggling miners. He noted that the company could look to purchase a hosting site, for example, if such a buy made strategic sense.

Riot Blockchain is another company that has expressed interest in acquisitions, as CEO Jason Les called his firm one of the segment’s “best-positioned acquirers.”

The company produced 509 bitcoins in October and held 6,825 BTC, as of Oct. 31. It seeks to reach 12.5 EH/s during the first quarter of 2023. Riot has a special meeting of stockholders set for Nov. 17.

Frank Holmes, executive chair of HIVE Blockchain Technologies, told Blockworks in September that his firm would be evaluating buys of equipment, and potentially mining firms, over the next six months.

Cleanspark said on Nov. 1 that it acquired 3,843 units of Antminer S19J Pro bitcoin mining machines for $5.9 million. The machines appeared to have come from Argo Blockchain, which reported selling the same number of S19J Pro units last week.

Pipes said though he believes “we’re getting close” to seeing more mergers and acquisitions in the space, there are often relatively few operational synergies to take advantage of.

He added that Riot is likely in the best financial situation of any miner, while Marathon is also in a position to take advantage of opportunities. But, he noted, those companies may want to focus on their ambitious hashrate targets.

“I think it’s first things first — execute on the existing growth plan before you take precious capital to add in more growth that may not be as attractive as what you have planned for anyways” Pipes said.

Other miners to keep an eye on

After Marathon’s earnings call on Tuesday, Stronghold Mining and Hut 8 Mining are scheduled to host their own on Wednesday at 5:00 p.m. ET and Thursday at 10:00 a.m. ET, respectively.

Canada-based miner Bitfarms is set to report its third quarter results on Nov. 14 at 11 a.m. ET

Stronghold said last week that it eliminated all outstanding principal — totaling about $67 million — under its equipment financing agreements with NYDIG and The Provident Bank.

Stronghold CEO Greg Beard said in a statement that the company was rapidly deleveraging its balance sheet and enhancing liquidity to pursue acquisitions of bitcoin miners at attractive prices. Stronghold had roughly $30 million of liquidity in cash and bitcoin, as of Nov. 1.

Meanwhile, Hut 8 Mining produced 299 bitcoins in October to raise its holdings total to 8,687 BTC. Its installed hashrate capacity was 3.07 EH/s at the end of the month.

Hut 8 CEO Jaime Leverton said during Blockworks’ Digital Asset Summit in September that acquisitions are not necessarily the best thing in the current market environment, as the company can buy new machines at attractive prices.

Bitfarms, which resorted to selling bitcoin earlier this year, mined 486 BTC in October and sold all of it.



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