BitMine Immersion Technologies (OTCMKTS: BMNR) stands out from the pack of Bitcoin miners in terms of value, technology, and efficiency. If Bitcoin mining was all science and no art was involved, it's highly unlikely that small miners would be able to survive and profit without some sort of competitive edge. The art form for BMNR lies in the operation of the Bitcoin mining business and that is what separates them from the pack. Long gone are the days of buying some machines, putting them in a warehouse, and turning on the cash spigot. Bitcoin mining is a complicated business with a lot of moving parts where the experience of the manager makes all the difference. Investors in BMNR are going to be happy to learn that the CEO of BMNR has positioned the company for both growth and profitability.
Bitcoin Mining has matured over the past 5 years and has weathered a consolidation phase that pushed out most of the hobbyists and mom and pop operators. What is left is a number of large privately held and publicly held Bitcoin miners operating farms on a commercialized scale. Many investors may not realize that the top 5 miners have huge operating losses yet they trade at revenue multiples that average 17X. The private miners have more of a focus on profitability as they need to continuously upgrade their fleet of mining machines to stay competitive.
Bitcoin miners are measured by their combined hash rate but the efficiency of their operations is what sets them apart. The mining machines need access to cheap power to run, and the efficiency of the miners is measured by joules per terahash (j/TH). Joules per terahash is a function of the type of machine and what generation of processor it has and how many hours of usage it has on it.
These variables are the primary determinants of profitability, but on the operational side there are a number of factors that can boost or trim profitability. There is a big business in just optimizing the upgrade cycle of the machines and ordering new machines and disposing of the old ones. The challenge is balancing all this with waning and waxing lead times on new equipment while hoping that the price of Bitcoin behaves in accordance with the operations planning. There are also trading operations that hedge the mining risk. These variables pale in comparison to the efficient management of the cash flow.
Bitcoin Halving Favors Efficient Miners
The Bitcoin halving occurred on April 18, 2024 and it had far reaching implications with respect to Bitcoin mining operations. For example, if a Bitcoin miner was producing 10 BTC in a day before the halving event, the same machines after the halving would only produce 5 BTC. This move squeezes out inefficient operators who now have to expend almost double the amount of power to get the same payout. Some operators will be forced to shut down operations until the price of Bitcoin increases. This will lead to less miners in the market and create a scarcity of new supply allowing the price of BTC to eventually increase. This move favors the efficient operators that can operate in low margin environments.
Focusing on Efficiency
One of the primary selling points of BMNR is its thoughtful move as their name implies into immersion technology. The company is able to get an extra 20% more performance out of their machines by immersing them in cooling oil instead of being air cooled. This process which has been around since 2016 is a much more effective method of heat transfer. Riot Blockchain (NASDAQ: RIOT) is one of the larger bitcoin miners that use the immersion process which is why they have the best level of efficiency compared to their peers. RIOT also has some of the lowest costs of electricity at $.029/kWh.
The company also has astutely been able to control its cash flows. They have a program that leases their machines avoiding the large initial outlay of capital to buy machines. This helps them rapidly scale their business without the need to raise additional capital. They accomplish this by selling forward a good portion of their future revenues based on the hash rate of their machines. This enables revenue generation at a much faster rate and ultimately translates into a great market valuation based on their revenue growth.
Access to cheap power is another essential ingredient of a successful Bitcoin mining operation. The company's machines in Trinidad are currently operating between $.03 to $.06 per kWh. The Paigos Texas facility is operating at $.057 while the Kentucky facility enjoys $.03 per kWh from the Tennessee Valley Authority.
Ideal Corporate Structure - Low Float
BMNR is primarily (40%) owned by John Kelly, the CEO and his digital investing fund which has put over $5.0 million into the company via a fixed rate convertible pfd in August 2022. The terms were units that consisted of $1.25 stock, a $2.00 warrant and a $5.00 warrant. In terms of debt, there are no convertible notes, just related party notes and notes receivable. The company is cost efficient with a corporate overhead of $20,000 monthly and none of that goes to paying salaries. The company has a $33 million market capitalization with just under 50 million in the O/S and only 3.2 million in the float, which makes it a low float play.
The financials show that the cash of roughly $350,000 is roughly in balance with the accounts payable. Factoring in account the equipment and crypto the company has an equity on the books of $5.0 million. All the debt on the balance sheet is related-party and owed to the CEO. The IDI fund run by the CEO has $1.75 million of debt. The company is on OTCQX and has plans of uplisting to the NASDAQ later this year.
Consolidation Play
Many of the small NASDAQ Bitcoin miners are scraping by trying to survive as the Bitcoin halving has put huge pressure on their operating margins. These companies are going to need to do deals fast, and that represents a consolidating opportunity for a company with efficient technology like BMNR. Then there are the private Bitcoin miners that want to go public to access the capital market that is getting multiples of revenue, but the process of completing a form 10 registration to go public is time consuming and risky. For these reasons BMNR is in a position to execute a number of accretive transactions with privately held minders given the market environment. The former CFO of CLSK is currently on the board of BMNR.
Bitcoin Cycles
Bitcoin has been trading in a very predictable pattern that centers around the halving events. Each event had been followed by a bullish price movement then a lengthy correction and consolidation before the next move. This chart depicts the cycles. Now that the halving is in the rearview mirror the newly constrained supply of Bitcoin production is going to lead to an increase in the underlying price of Bitcoin which will translate into greater profitability for the most nimble of Bitcoin mining operators.
Investment Summary
Bitcoin miners trade on a multiple of revenues. The top 5 Bitcoin miners are still recording losses to the tune of hundreds of millions of dollars yet investors are still flocking into those names understanding that Bitcoin prices move in cycles and then the next phase will be bullish for the price of Bitcoin and the miners who have positioned themselves for efficiency. BMNR trades at a multiple of 6 times projected revenue and represents one of the most undervalued Bitcoin miners in the market. There are a number of private Bitcoin miners looking to go public and BMNR could be the ideal vehicle to consolidate a number of these players. The company is also uniquely managed for profitability, which makes it rare among the publicly traded stocks. Most publicly traded Bitcoin mining companies have had to continually dilute in order to keep their mining fleet relevant. BMNR has found a better operating model that optimizes cash flow, employs immersion technology with the optimal mix of efficient machines, coupled with cheap electric costs to create a growing revenue stream on the verge of profitability. BMNR is the right stock at the right time with the right strategy and the right management team. Investors should expect a doubling or tripling of multiple expansion as the company executes its business plan.
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