CIFR - Core Scientific: Gears Up For Bankruptcy Emergence (Rating Upgrade)

2024-01-18 01:40:39 ET

Summary

• Core Scientific's emergence from bankruptcy is anticipated this month, positioning the company for a comeback and market visibility.
• The company mined the most Bitcoin among public mining companies in 2023, demonstrating resilience and operational efficiency.
• The oversubscription of Core Scientific's $55 million Equity Rights Offering underscores stakeholders' trust in the company's restructuring strategies.

My last coverage of Core Scientific ( OTCPK:CORZQ ) in October focused on the company’s restructuring plans and its revamped mining activities. Though undergoing Chapter 11 bankruptcy proceedings, CORZQ was not left out in the Bitcoin momentum of Q4 last year. CORZQ jumped ~102% in Q4, in a similar trend with most crypto-exposed stocks like Marathon Digital ( MARA ), Riot Platforms ( RIOT ), and Cipher Mining ( CIFR ). One of the highlights of the last article was Core Scientific’s plan, as part of its chapter 11 proceedings , to buy 27,000 new and more efficient Bitmain S19J XP 151 TH Bitcoin miners for about $77 million, in a deal facilitated by cash and Core Scientific’s equity. Core Scientific has recently been granted court approval for the purchase agreement of the Bitmain 27,000 S19J XPS, which will provide a total hash rate of 4.1 exahashes (EH/s).

As the Bitcoin halving event approaches hardware and infrastructure scaling for better competitive advantage post-halving, when the main source of revenue for miners (BTC block rewards) will be cut in half, is paramount for miners. Each miner has its set of approaches to scaling and efficiency, each presenting its own unique edge.

Strategically bracing for the halving, Marathon Digital is working to expand its hash rate, targeting 30% growth in its energized hash rate this year, and aiming to reach 50 EH/s in the next one to two years. CleanSpark has been growing its Bitcoin holding and is also working on increasing its mining capacity right in time before the halving, with a soon-to-be-completed 150MW facility underway in Sandersville, Georgia, and a very recent purchase of 12 EH/s of S21 miners for $193 million. Cipher Mining is adding 7.1 EH/s to its hash rate with the purchase of 37,396 latest-gen Bitmain T21 mining rigs. And Riot Platforms recently purchased 66,560 MicroBT M66S miners for $290.5 million. In essence, every miner is positioned for the quadrennial halving event.

Though Core Scientific is currently going through a Chapter 11 process, the miner and blockchain computing data center provider is still actively planning for the upcoming Bitcoin halving, like its peers. Despite the current challenges, the company is working to adjust its strategies, hoping to get back to solvency in the near term (hopefully this month). Investors seem to be showing confidence in the company's restructuring strategies, evident in the oversubscription of its $55 million Equity Rights Offering ((ERO)). The company has garnered investor confidence by demonstrating a commitment to its restructuring strategies, exemplified by the full repayment of its Debtor-In-Possession (DiP) financing in December.

With that being said, Core Scientific’s current appeal as an investment lies in its positioning for the anticipated post-halving crypto bull market. A look at the latest figures reported in the December and Full Year 2023 Production and Operations Updates shows that Core Scientific self-mined an average of 38 BTC per day in 2023 with its self-mining energized hash rate of 16.9 EH/s. COQZQ produced a total of 1,177 self-mined BTC and 449 colocation BTC in December. Aside from Core Scientific's own mining operations (self-mining fleet), the company also offers data center colocation services to miners who host rigs at Core Scientific’s data centers. Core Scientific currently hosts about 51,000 colocation rigs, which represents about a quarter of the total Bitcoin miners Core Scientific operates. The total self-mined Bitcoin produced in 2023 was 13,762 BTC.

How Does Core Scientific Stack Up to Peers

Core Scientific mined the most Bitcoin among public Bitcoin mining companies in 2023, mining 13,762 BTC. MARA stands in second place with 12,853 BTC mined, while CleanSpark ( CLSK ) mined 7,391 in third place. The fact that Core Scientific mined the most Bitcoin among public Bitcoin mining companies in 2023, despite undergoing bankruptcy proceedings, suggests resilience and operational efficiency. For creditors and stakeholders, Core Scientific's mining success could be seen as a positive signal. It suggests that the company is generating revenue and actively contributing to its financial standing.

Due to the need for immediate liquidity, Core Scientific currently sells its mined Bitcoin; hence, the company has reduced exposure to a potential cryptocurrency market upside and Bitcoin’s near-term price appreciation. This is in contrast to miners like MARA, HUT, and RIOT (the top three Bitcoin holders among public mining companies) who have the flexibility to strategically monetize their Bitcoin holdings to generate cash flow for reinvesting in mining operations and other ventures.

Risks

As emphasized in every Seeking Alpha article covering a Bitcoin miner, mining stocks possess inherent volatility risks because they are highly influenced by the price movement of Bitcoin. Following Bitcoin's Q4 momentum in anticipation of the now-approved spot Bitcoin ETFs, crypto-exposed stocks recorded impressive gains. These stocks are currently seeing some price correction. Mining stocks are expected to exhibit high beta, especially as the halving event approaches and traders and investors speculate on potential changes in supply and demand dynamics.

Takeaway

While Core Scientific might not seem like an immediate favorite among mining stocks due to its lack of Bitcoin on the balance sheet, CORZQ could be an attractive choice for investors seeking to diversify their mining stock portfolio. Just yesterday, Core Scientific's reorganization plan received approval from a US bankruptcy court, and its emergence from bankruptcy is anticipated this month, paving the way for a relisting on Nasdaq, which positions the company strategically for a great comeback (into the halving event) and market visibility. The anticipated reduction of approximately $1 billion from Core Scientific's debt balance, covering the total debt disclosed in the latest financial statement, implies the potential for zero debt upon emergence from bankruptcy. This bodes well for the company's financial outlook moving forward.

Under the terms of the Plan, shareholders (as of the anticipated record date of January 23, 2024) will receive shares of the Company’s new common stock and warrants, constituting approximately 60% of the Company’s new equity (following exercise of the warrants issued to existing shareholders and including new shares issued as part of the equity rights offering). Assuming the cash exercise of all applicable warrants, and the cash is used to pay down debt, the Company’s existing debt would be paid in full, a reduction of approximately $1 billion from its debt balance prior to the Plan.

Core Scientific press release

In light of these positive developments, I am revising the rating for CORZQ from a "sell" to a "hold", as it is evident the company will be out of bankruptcy soon, and the moves the company has made toward mining fleet, hash rate, and Bitcoin production expansion align with the growth projections highlighted in its post-emergence plans .

For further details see: