CIFR - Cipher Mining: Low On Cash And Time

2023-09-28 11:49:26 ET

Summary

• Cipher Mining has grown mining capacity from 2.8 EH/s at the end of December to 6.8 EH/s at the end of August.
• The company has one of the lower breakeven costs by my calculations but is running low on cash and has a $250 million shelf that is largely untouched.
• With 7 months until the halving, I think other miners will benefit more from a rise in BTC's price between now and the end of 2024.

When I last covered Cipher Mining ( CIFR ) in March, it was the fastest growing Bitcoin ( BTC-USD ) mining operation in the public markets. At $2.33 per share, I initiated coverage with a hold and noted that I wanted to see some additional quarters of performance before considering a share purchase. Like most of the public mining equities, CIFR roughly doubled between early-June and mid-July 2023.

Since the summer-spike in the public miners, CIFR has retraced the entire run and is right back where it was when I last covered it. With two quarters in the books since that article, I think it's worth looking at Cipher once again to see how the company's business has developed.

Q2 Earnings

In the last quarter, Cipher Mining reported $31.2 million in revenue against $15.9 million in cost of revenue for a gross profit of $15.4 million.

Operating expenses came in at $34.4 million and the company's operating income was ($19.0) million for the quarter. This was by no means the worst quarter for the company from a negative net income standpoint but it was a sequential decline in operating income versus Q1. In the quarter, Cipher mined 1,259 BTC and had a modest stack of 417 BTC at the end of June.

Source: Cipher Mining, author's calculations

Adding costs of revenue and total opex vs the quarterly mining production can help give a reasonable estimate for what the company's breakeven bitcoin price might be. Rounding up, we get a $40k breakeven BTC price for Cipher Mining. Based on my estimates, this would put Cipher in the same ballpark as companies like CleanSpark ( CLSK ), Bitfarms ( BITF ), and HIVE Digital Technologies ( HIVE ). However, Cipher had very little cash left on the balance sheet at the end of June:

Compared to the companies mentioned above, Cipher has the lowest cash position of the group and also appears to have the smallest BTC stack of the bunch as well at the end of August.

August Production

At the end of August, Cipher disclosed 6.8 EH/s but guided for 7.2 EH/s in September as the company completes its buildout at its Odessa facility. With global hash rate still grinding higher even as the price of BTC remains pinned to $26,000, the economics of mining continues to be under quite a bit of pressure.

In July and August, Cipher was able to mine just 775 BTC combined. That represents a 14% drop versus the first two months of Q2. To be fair, keeping up with global hash rate is a challenge that is felt industry-wide. Furthermore, Cipher did benefit from 28 BTC equivalent and 45 BTC equivalent in power sales in July and August.

Source: Company filings, analyst's calculations

At the end of the month, Cipher held 519 bitcoin but has generally lagged similarly sized peers in aggregate BTC stack growth and by percentage since the end of the second quarter.

The ATM

All of this is getting to the elephant in the room which is the company's $250 million shelf that has only just started being tapped. On the Q2 call, management noted just $2.7 million of that shelf has been drawn from:

We utilized the ATM for the first time this quarter and issued approximately 978,000 shares at an average fair market value of $2.78 was $2.7 million net of issuance fees. We believe the ATM is a useful tool which we can access in the right market conditions and for the right growth opportunities

On one hand, it's unfortunate that Cipher wasn't able to hit that ATM in July when the share price was over $5. But it is at least worth mentioning that they were able to sell shares at a 20% premium to where the stock is currently valued.

The Clock Is Ticking

We are now a little under 7 months away from the bitcoin halving event as of article submission. At that time, the reward from mining will drop from 6.25 BTC per block to 3.125 BTC per block. If hash rate and the price of BTC remain constant, it will effectively equate to a 50% reduction in revenue for all miners overnight.

It should go without saying, but past performance is not indicative of future returns. However, the price of BTC has historically ripped to a new all-time high within 6 to 10 months following a halving. But this mechanism continuing again following the next halving in April is likely dependent on demand for BTC remaining constant. That is far from a certainty in the current interest rate environment.

One of the variables that is completely different this time around is the current cost of capital. While it is absolutely fair to point out that bitcoin's price rallied during 2017 when Jerome Powell's Fed was last raising interest rates, a 5% Fed funds rate is probably a different animal. Also, Bitcoin was still largely viewed as a joke by most of the mainstream financial pundits back in 2017. While there are certainly those who still believe Bitcoin is a joke, the market has matured significantly since the 2017 cycle top and TradFi entities like BlackRock ( BLK ) are now trying to enter the space with a spot ETF.

Summary

If you believe Bitcoin is finding a floor through what has been a months-long consolidation between $25,000 to $30,000, CIFR may be a somewhat safe bet after getting cut in half since July. I take that view because the miner equities generally move higher when BTC moves higher and they historically rally to a larger degree than the underlying.

However, even in that environment, I think there are other mining equities that will outperform CIFR if BTC does indeed make a sustained move higher into the $30k area. I don't personally hold CIFR, but I wouldn't rule it out entirely if management can efficiently raise capital through the shelf offering without diluting shareholders to the degree that we've seen some of the other miner equities dilute. But in my view, Cipher is running low on both cash and time. So for now, I'm maintaining my "hold" call even though other analysts may skew more bullish.

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