Summary CLSK should benefit greatly from lower energy prices as nat gas prices have nosedived. The company has also been able to take advantage of discounted mining equipment to add more computing power. For Bitcoin bulls, CLSK is an interesting speculative bet. CleanSpark ( CLSK ) is an interesting play on a rebound in Bitcoin (BTC-USD) prices that should benefit from discounted mining equipment and lower energy costs. Investors can consider a starter position but may be better off waiting until after the company does a secondary offering before getting more aggressive. Company Profile CLSK is a Bitcoin miner. In fact, the only cryptocurrency it mines is Bitcoin. Before being in the Bitcoin mining space, it provided energy technology solutions to commercial and residential customers. However, it discontinued that business in 2022. The company entered the Bitcoin mining space through its acquisition of ATL in December 2020. It then acquired an additional data center, picking up a second one in August 2021, a third data center and mining equipment in August 2022, and a fourth data center and mining equipment in October 2022. It also has a co-location agreement with Coinmint. The company owns and operates its facilities and does not lease mining space to other mining companies or private individuals. Its primary site sits on 16.35 acres located in Sandersville, Washington County, Georgia. Coinmint's facility in New York also hosts some of its miners. Company Presentation CLSK will sell the Bitcoin it mines from time to time to support its operations and to fund strategic growth. It does not participate in regular Bitcoin trading, nor does it hedge its Bitcoin holdings. The company says it does not use a specific formula or program to sell its Bitcoin and instead relies on management analyzing forecasts and monitoring the market in real-time. Opportunities As a holder of Bitcoin, one of the biggest positives for CLSK would be a rebound in the price of Bitcoin. The cryptocurrency has nosedived from its 2021 highs of over $67,000 to fall to under $16,000. The price of Bitcoin has since rallied to over $23,000. Any return to Bitcoin's highs would be a big driver for CLSK's stock. Yahoo Finance For Bitcoin miners, one of the most important metrics is its hashrate. The company describes this as "a measure of the computing and processing power and speed by which a mining computer mines and processes transactions on the Bitcoin network." In crypto mining, a blockchain network generates an alphanumeric code called a hash that mining computers must guess. The hashrate measures the number of guesses a miner's computer makes per second to solve for the hash. The more guesses per second, the more likely a miner is to guess the hash and receive, in this case, a Bitcoin. In simpler terms, the hashrate is how quickly a set of computers can guess a random code to receive a Bitcoin. The more computing power a miner has, the more guesses per second it can generate and thus the more Bitcoin it can earn through this process. The more Bitcoins that are mined, though, the more difficult the codes become and more computing power is needed to maintain the same hashrate. CSLK has done a really good job of increasing its hashrate and saw a nice intra-quarter jump in Q4. On its Q4 earnings call, CEO Zachary Bradford said: "We had 63,700 machine hashing as of December 31. Our fleet was running at an average efficiency of about 31 watts per terahash. For perspective, we understand some of our peers come in at over 40 watts per terahash. Our fleet is tremendously efficient. Most of our machines come from BITMAIN's S19 series, and we have started to acquire more XPs. The quality of the machine tells only part of the story. Our immersion cool facility has allowed us to test the limits of over and under clocking as we leverage software and firmware to optimize performance. We are also testing additional software optimization techniques for our air cooled fleet, which we expect to allow us to bring under and overclocking capabilities to all of our campuses. This optimization will prepare us to stay ahead of the curve when halving occurs in 2024." Company Presentation CLSK also has an opportunity to continue to take advantage of a distressed market for mining equipment . While some miners have had to unload mining equipment for cash, earlier this month CLSK was able to purchase 20,000 brand new Antminer S19j Pro+ ((PLUS)) units at a 25% discount from the manufacturer. The new machines are expected to add 2.44 EH/s to the company's existing 6.6 EH/s of Bitcoin mining computing power, bringing it up to 9 EH/s. The company credits using a proprietary mining model as an advantage, allowing it flexibility and the ability to control its own infrastructure and resources. On its earnings call, Bradford said: "The secret to our growth has been our proprietary mining model. There are many different mining models out there, from asset-light on one side through proprietary mining on the other. In the asset-light model, machines are owned by the company, but cared for and run by hosting companies that also take a cut of the profits. This model introduces less control over a company's destiny via the company is exposed to the risks and uncertainties of third parties, their ability to build facilities, procure power, operate the machinery and importantly, stay solvent. We believe higher returns are consistently generated by actively participating in the mining process. Contrast that with proprietary mining, miners like CleanSpark that operate almost exclusively as proprietary miners can exercise significant greater control over their own destinies. We believe this gives us a significant edge." Lower energy prices are another really big positive. Natural gas prices have nosedived, which should help lower overall energy costs and be good for CLSK and other miners . Energy prices weighed on CLSK in FY23, and it sounds from what management said on its Q4 earnings call that the company might look to lock in long-term energy prices now that the market has turned decidedly lower. As you can see from the chart, nat gas prices soared in 2022, but have plunged so far in 2023. Most electricity in the U.S. is generated from natural gas. EIA Risks The biggest risk to CLSK is not surprisingly the price of Bitcoin. While the pros and cons of Bitcoin and where it eventually trade can be argued, the one thing that is undeniable is that the cryptocurrency's price is volatile. Thus, not surprisingly, the stock prices of crypto miners, including CLSK, can also be quite volatile as well. While CLSK has done a good job increasing its hashrate, it also lowered its 2023 year-end projections from 22.4 EH/s to 16 EH/s. One of the big reasons is that the company had a partnership with Lancium where it would add 6.6 EH/s of capacity this year. However, the company said on its Q4 call and in its earnings release that the project is looking doubtful and at the very least has been pushed back into next year. Fortunately, the company has said it has no capital currently tied up in the project. The company also carries some debt and just bought $32.3 million in new equipment, which will add to its leverage, at least temporarily. It expects to spend between $210-280 million in CapEx this year. To pay for that, the company on its Q4 call said that it plans to issue shares, which will dilute shareholders. Bradford said the company plans to ask for the authorization to offer between 100-300 million shares at its next annual meeting. With its stock well off its highs, that might not be the best move. Conclusion If you're a Bitcoin bull, I think CLSK is an interesting play. The miner should greatly benefit from lower energy costs and depressed mining equipment costs. Its balance sheet is in pretty good shape, but the company is going to massively dilute shareholders as it looks to continue to grow and scale. Simple math says that at CapEx of $250 million and the stock trading at around $2.50, it would have to issue 100 million shares if it wanted to pay for all its CapEx via a share offering. The company currently has only 78 million shares outstanding. That said, its increase in share count should be at a bit less (2.3x) than the 2.4x increase in its 2023 year-end hashrate. Throw in much-reduced energy prices and a potential rebound in Bitcoin prices, and the move to raise capital to increase its hashrate makes sense. The lower amount it has to spend on CapEx to reach its projected year-end 2023 hashrate or the higher its share price (less dilution), the better for the company. I think speculative investors can look to take a starter position, but I'd wait until after the company issues equity to get more aggressive.
Coinbase Adds DRIFT to Its Roadmap
