Iris Energy (NASDAQ: IREN) is one of the smallest market cap Bitcoin (BTC-USD) miners in the equity market, with a market cap of just $246 million. Iris is smaller than most other publicly traded miners despite exahash levels installed:
|Bit Farms||(BITF)||3.9||$336 million|
|Iris Energy||IREN||3.7||$246 million|
|digital marathon||(MARA)||3.2||$2.2 billion|
|Hut 8 Mining||(HUT)||3.0||$397 million|
Sources: Iris Energy, Seeking Alpha on 09/15/22
In my last cover of Iris Energy, my article focused on land ownership, institutional holdings and the profitability of miners more broadly in the industry. In this article, we will examine Iris’ annual update, current balance sheet, production/exahash trends, and regulatory risk facing North American mining operations.
Miners always move in tandem
What’s fascinating about publicly traded miners is how different the patterns can be. For example, Marathon Digital and Riot Blockchain (RIOT) are among the largest Bitcoin mining operations, but they have radically different infrastructure models, with one being vertically integrated and the other hosting-based. Despite these differences, the two companies show similar performance in the stock market. Iris Energy and Hut 8 Mining (HUT) have similar price points from a capitalization perspective, but they have radically different cash strategies. Despite these big differences, all of these stocks move in tandem with each other and with Bitcoin.
In the case of Iris and Hut 8, performance since Bitcoin’s recent cycle low on June 18 is nearly identical. Iris is down 71% while Hut is down 73%. Each of these stocks lags Bitcoin’s performance, but the only one that should likely lag as well is Hut 8. Iris sells out every month while Hut 8 takes the “HODL” approach. For this reason, Hut 8 should theoretically outperform most of its peers when the price of Bitcoin increases. Hut 8 should theoretically underperform most of its peers when the price of Bitcoin drops; as it is now. Since the market largely treats all of these stocks equally, I think this presents an opportunity to allocate more to Iris Energy if you think Bitcoin’s price won’t rise drastically in the short term. term.
Over the past few days, investors have received Iris Energy’s latest quarterly earnings figures and production results for August. During the company’s conference call, CEO Daniel Roberts said a cumulative figure of 3.7 PE/s was activated at the end of August thanks to the Prince George site coming online. . For the month of August, live generation at Iris was 2.2 p.e./s – a massive increase from the average p.e./s of previous months.
Given the large increase in PE/s, it is no surprise that Iris’ BTC production also increased significantly from July with 301 BTC mined versus 154 the previous month. Due to the additional EH/s we can expect to see in September, monthly BTC production for Iris is expected to eclipse 500 BTC for the current month given the efficiency we have seen so far from the Iris mining.
The company claims 137 BTC produced per EH/s. This would make it the most efficient miner in the industry. While these numbers are truly impressive and show strong execution by the company, I want to point out that despite the efficiencies compared to its peers, the company’s average cost per BTC tends to be a little higher than last year.
|Quarterly average||BTC Energy Cost|
Source: Company announcements. *Only two of the full three months in Q3
While the third quarter so far sees a decline in the energy expenditure required to produce a bitcoin, it is worth mentioning that this general trend has been higher even though the price of the coin itself has fallen significantly. This is bad news for margins and one should be careful in the future. Especially if electricity costs continue to be an issue more broadly.
The profitability of mining in space is still near two-year lows. That said, combining Iris’ more efficient production compared to its peers and the strategy of selling monthly production rather than holding cash, it’s unlikely that Iris will have to shut down the machines unless regulators tell us. put more pressure from regulators to stop PoW mining completely.
Forward Exahash Guidance
While the company’s energized mining footprint gains have been solid over the past month, the company is planning even more online capacity in the coming months. Iris Energy forecasts 4.7 PE/s by the end of the fourth quarter – this is up from the initial guidance of 4.2 PE/s. The company also sees 6 PE/s in 2023.
If the company can achieve this goal, it will be able to mine more than 800 Bitcoins per month in 2023 when 6 PE/s is reached. This would make it one of the largest producers in the industry and achieve a very rapid ramp up in this production.
Financial performance/balance sheet
With Bitcoin’s price declining year-to-date, we are now seeing two sequential declines in quarterly revenue. At the end of the second quarter, Iris recorded a turnover of 16.2 million dollars for a production cost of 3.8 million dollars. While still a terrific margin, it shows the second consecutive quarterly decline in gross profit:
Notably, there was a fairly significant increase in administration expenses quarter over quarter, from $3.8 million to $7.0 million. Amortization increased from $2.3 million last quarter to $3.8 million. After a quarterly decline from Q4 to Q1 in total operating expenses, Q2 saw an increase of $12.5 million to $21.1 million. This resulted in a sharply negative operating result of $8.6 million.
While these expenses are a bit off the page, Roberts said on the conference call that the company’s overhead costs are more attributable to the growth of the company’s operations. On the balance sheet, I think things are looking pretty good at the end of the second quarter:
|Total current assets||$201.5||$160.3|
Source: Alpha Research, Millions
At the end of the quarter, the company had $110 million in cash, of which $76 million will be used to achieve 6 PE/s. But again, this ability to exahash will be used to realize production returns rather than keeping BTC on the balance sheet. This operation should generate a large cash flow provided that the price of Bitcoin does not collapse completely.
Aside from the price of a Bitcoin falling near or below the mining cost, I think the biggest risk to Iris Energy’s success is regulatory. I think the successful transition of Ethereum (ETH-USD) from proof-of-work to proof-of-stake is going to put some pressure on bitcoin developers to do the same given the narrative that the Bitcoin mining is not environmentally friendly.
Given that Bitcoin now represents 94% of the proof-of-work mining market, BTC mining is going to be in the crosshairs and we are already seeing sentiment from the White House Office of Science and Technology Policy that the administration lends pay attention to the environmental impact of PoW mining. While Iris Energy would certainly argue that the company is an environmentally friendly operation, nuance can sometimes be overlooked in favor of politics when it comes to regulators. Mining restrictions in Iris Energy’s North American mining footprint could theoretically come under fire if the United States and other G7 nations decide to ban or heavily restrict crypto mining.
Those who have followed my work or are active subscribers to the Blockchain Reaction service probably know where I stand on Hut 8 Mining. It’s part of my portfolio because I think it will work very well if Bitcoin goes up. But I also really like Iris Energy because the company’s approach to cash is the exact opposite. I think exposure to both ideas is the right way to play in the bitcoin mining space. Especially in a Bitcoin bear market.
I think it makes a lot of sense to buy the miners that are efficient and less forced to have a cash strategy that might not work. Miners who use production to finance their operations and who have low mining costs are theoretically the last to turn off the machines if the bear market worsens. So far, Iris Energy has shown strong execution and forecast overdelivery. Even if it’s treated like every other mining stock so far, the longer the bear lasts, the more time is on Iris Energy’s side if it can keep producing while its peers go bankrupt or dilute. . IREN is a ticker in which I evolve during the crypto winter.