When doing any ground level miner comparisons, CleanSpark (NASDAQ:CLSK) immediately jumps out for its high level of production relative to its market capitalization. Of the eight largest and producing, Nasdaq listed Bitcoin (BTC-USD) miners, CleanSpark is solidly in fourth in deployed, operational and producing hash rate. However, among these peers it is last in market capitalization, primary because it is punished for having the lowest level of retained digital assets on its balance sheet.
On Tuesday, the company announced that it has now surpassed 4 EH/s of hash rate, a 30% increase in less than one month. Hash rate is the measure of computational capacity a miner applies to a crypto-network, such as Bitcoin, that uses a proof-of-work consensus mechanism to secure its platform. Put simply, miners are rewarded a share of a set amount of Bitcoins depending on the percentage of the total network hash rate they are able to supply. Bitcoin's total network hash rate averaged about 225 EH/s over the past month. So in round terms, CleanSpark with its 4 EH/s has about a 1.75% share and should be producing over 15 Bitcoins per day.
Going under the hood beyond the low level of Bitcoin holdings, CleanSpark is relatively strong in a few key areas. The company has a competitive cost structure, a strong capital expense strategy and a regulatory moat provided by its renewable energy focus. The article below considers these operational strengths and their adjacent risks. It tries to answer if CleanSpark should be on the watchlist of miners to receive increased allocations if inflation subsides and the Federal Reserve pivots to a less hawkish stance.
But our peers have shown that sometimes the number of machines you have, it doesn't matter unless you have a plug to plug it in. So we are going a plug first approach on our infrastructure and we are very confident that the spot market will serve us well.
CEO Zach Bradford, Fiscal Q3 2022 Results - Earnings Call, 8/9/2022
CleanSpark is enabling growth in their total network hash rate share through power supply acquisitions in Georgia. The company's now reiterated guidance from August is for about 5 EH/s of hashing capacity by year-end. And this likely does not include another 1.4 EH/s from the latest acquisition of a facility in Sandersville. So, CleanSpark is basically doubling its capacity from the end of the second calendar quarter, a time from which the total network growth has somewhat flattened. And importantly, the growth trajectory steepens in 2023 with a notable increase through hosting with Lancium in Texas.
As additional power capacity at the new facilities comes online, CleanSpark primarily plans to equip the locations through the spot market, which now has significantly depressed pricing. This is possible because the fall in Bitcoin prices has caused price protections to kick in on some of the company's rig contracts and the remaining commitments in this area are a relatively minimal $2 million. Not having a high quantity of higher priced and less priced protected equipment contracts is a tactical advantage CleanSpark has over a number of the peers.
CleanSpark has recently purchased some high-end MicroBT equipment and some high-end Bitmain S19 XPs, but generally is looking to acquire earlier models from the S19 Series. These earlier models have a stronger ROI and are efficient, though it should be noted they are less efficient than the XPs. The XPs would perform well in a lower Bitcoin price environment and will possibly have a determinative advantage post the next halving in 2024.
However, for now ROI is making the decision, as explained by Bradford:
...the XPs being delivered from Bitmain... its $50 a terahash for their August delivery... So to put that in perspective, the XPs are about 33% more efficient in output. They currently are costing about 100% more than an S19J Pro on the spot market. So for us, we measure that delta. So we are very interested in acquiring XPs, but we will always measure the return on investments on that machine.
CEO Zach Bradford, Fiscal Q3 2022 Results - Earnings Call, 8/9/2022 (link above)
As mentioned above, CleanSpark is low debt but also has a relatively low amount of digital currency holdings compared to peers. At the end of the calendar second quarter, CleanSpark had total liabilities of about $34 million and just over $10 million in digital assets. This compares to Marathon Digital (MARA) at the other end of the spectrum, with about $850 million in liabilities and $200 million in digital assets.
From my perspective, some crypto investors may be overvaluing the crypto holdings of the miners. These holdings are often looked on as more of an earning asset because of expected price appreciation, or at least in a vacuum relative to debt. Allocation to miners should be because their earnings are naturally leveraged to underlying prices of the digital currencies, and should be held for that reason, not for the direct currency holdings. This is especially true if the perception of "large" holdings means one is paying a premium for the actual exposure or discounting the associated debt carried.
It is also unnatural to use no current income to fund current operations and solely rely on share and debt issuance for all expenses. For a summary, consider Bradford's added color during the last earnings call:
While this summer, the industry was rocked by headlines of public miners liquidating their Bitcoin holdings, we were able to stay true to our long-held course of selling a portion of our Bitcoin to fund our growth in operations, which we have done since the early days of 2021.
CEO Zach Bradford, Fiscal Q3 2022 Results - Earnings Call, 8/9/2022 (link above)
The chart below compares costs per mined Bitcoin for CleanSpark, Bitfarms (BITF) and HIVE (HIVE). The data is from the second calendar quarter and has been adjusted to remove non-cash costs. These comparisons were chosen because all three have high efficiency operations with similar scales. Note Bitfarms is my top pick among the large, western miners, but I have a sell rating on HIVE because of the large exposure to The Merge on Ethereum.
|Adjusted Operating Costs/Coin||Adjusted Costs & Expenses/Coin|
Bitcoin is squarely in the crosshairs of the anti-crypto faction in Washington. With a focus on Bitcoin mining, a recent executive branch report on the climate implications of crypto-assets called for the minimization of GHG emissions and environmental justice impacts from crypto-assets. If mitigation of impacts cannot be limited through actions such as DOE efficiency requirements, the report even suggested a ban.
...the Administration should explore executive actions, and Congress might consider legislation, to limit or eliminate the use of high energy intensity consensus mechanisms for crypto-asset mining.
Climate and Energy Implications of Crypto-Assets in the United States, whitehouse.gov, 9/2022
However, it is likely CleanSpark will be partially insulated from eventual miner regulations and associated costs because of its high clean energy usage. The graphic below shows the breakout of their facilities and their renewable components. Note their co-location capacity is primary from a wind and solar project in Texas. The four owned locations are in Georgia, which has a large nuclear supply component. Interestingly, Georgia Power is the first in the U.S. to expand its nuclear footprint in three decades.
Compared to its peers, CleanSpark is fairly priced relative to its hash rate share. This hash capacity has a short but strong history of low cost, reliable, and growing production. While Bitcoin is receiving scrutiny from regulators, CleanSpark has a partial moat against regulation because of its large proportion of renewable energy supply. The company's tactics on developing power sources before locking in mining equipment purchases has proven cost effective. And while CleanSpark is being downgraded by investors for lacking a strong HODL strategy, this discount may shrink as investors realize the value in using production rather than debt to fund operations and growth.
Over the past five months I have been surprised by the Fed's willingness to react forcefully and repeatedly to drive up rates in the combat against entrenched energy inflation. My constant assessment after each new step was that the majority of tightening was then priced into expectations. This has obviously proved incorrect.
Until there is a decided turn in inflation and signaling from Fed members that the target rate for the federal funds will remain below the current projection of 4.75% in 2023, one cannot advocate increased allocations to even the top picks among the Bitcoin miners. So despite the relatively strong fundamentals, CleanSpark is currently a hold with all eyes on Friday's August PCE data.
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Disclosure: I/we have a beneficial long position in the shares of BTC-USD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.