2023-09-12 06:17:51 ET
Summary
- In August, Riot Platforms generated nearly $32 million in energy credits through power curtailment amid scorching Texas heat.
- The curtailment strategy is possibly helping the company's bottom line at the cost of public opinion.
- Mining economics remain poor, and Riot Platforms needs a much higher BTC price to operate at breakeven.
- However, if you're bullish on BTC, RIOT will likely be an outperformer to the upside as it was in the first half of 2023.
Since my last article covering Riot Platforms ( RIOT ), we have quite a bit of new data to assess. While I am bullish on Bitcoin ( BTC-USD ) long term and by extension a handful of Bitcoin proxies like Riot Platforms, I was more cautious in my last Seeking Alpha piece covering Riot due to poor mining economics and a recent surge in share price that I didn't want to chase.
After a 40% selloff since that article, the time might be right to look at two months of fresh production data, the company's second quarter earnings performance, and the Texas energy crisis where Riot Platforms now finds itself to be a defendant via the court of public opinion.
Q2 Earnings
For the 3 months ended June, Riot Platforms generated $76.7 million in revenue against $64 million in cost of revenue and $91.6 million in total operating expenses. This resulted in an operating loss of $78.9 million.
Q3-22 | Q4-22 | Q1-23 | Q2-23 | TTM | |
---|---|---|---|---|---|
Cost of Revenues | $42,700,000 | $57,000,000 | $63,100,000 | $64,000,000 | $226,800,000 |
Total Opex | $48,500,000 | $91,800,000 | $76,500,000 | $91,600,000 | $308,400,000 |
BTC Mined | 1,047 | 1,689 | 2,110 | 1,775 | 6,621 |
Breakeven Price | $87,106 | $88,099 | $66,161 | $87,662 | $80,834 |
Source: Riot Platforms, Analyst's calculations
Given the 1,775 BTC that were mined in the quarter, I'm calculating the company's breakeven price at close to $88k when adding cost of revenue and total opex. However, when adjusting for the income from interest and investments, realized gains from BTC sales, and power curtailment credits, Riot's quarterly net loss was down to just $27.7 million in Q2-23:
From a total performance perspective, Q2-23 was Riot's best quarter since Q1-22 when Bitcoin was trading between $35-45k. The company's power credits strategy is something that has become more meaningful in recent months.
July and August Production
Over the last several months, we've seen a notable decline in the amount of BTC that Riot has been mining. After averaging 681 BTC between December and May, Riot's BTC production has continued to decline sequentially from June through August:
August's 333 BTC mined was the lowest number for Riot since July 2022 even as EH/s capacity has grown from under 5 to nearly 11. Of course, these recent declines in monthly production have been largely by choice.
In my late-July article, I mentioned the record heat in Texas, where Riot operates. That heat didn't dissipate in August. The temperatures actually got so bad last month, that Riot had its largest combined month ever from the power credit and demand response categories at roughly $31.7 million. The company did so well selling back energy in August, that Bitcoin mining only accounted for 21.4% of Riot's performance in August:
(millions) | BTC Mining | Power Credits | DR Credits | % From Mining |
---|---|---|---|---|
May 2023 | $16.5 | $0.5 | $2.3 | 85.5% |
June 2023 | $10.6 | $8.4 | $1.6 | 51.2% |
July 2023 | $12.1 | $6.0 | $1.8 | 60.8% |
August 2023 | $8.6 | $24.2 | $7.4 | 21.4% |
Source: Riot Platforms
From a BTC-equivalent standpoint, Riot's power/DR credit haul in August was comparable to mining an additional 1,136 Bitcoin. This, again, is arguably one of the clearest indicators we have of how bad the current mining economics are for Riot and its peers.
August Performance | BTC Equivalent | Revenue/Credits | Per BTC Mined |
---|---|---|---|
BTC Sales | 300 | $8,600,000 | $28,667 |
Power/Demand Response | 1,136 | $34,700,000 | $30,546 |
Source: Riot Platforms, Analyst calculation
At $8.6 million in revenue from selling 300 BTC at an average of $28.7k, selling the energy back for $34.7 million instead was comparable to mining BTC at a nearly $2,000 premium. This is theoretically bad for Bitcoin because it disincentives network validation by one of the largest miners in the industry. But beyond the interesting economics of Riot's system, Riot's power credits are also creating potential issues philosophically with the broader public.
Power Credit Controversy?
Right or wrong, Riot's ability to benefit from curtailment has become a bit of a lightning rod in the court of public opinion. Shortly after Riot's August production update, CNBC published an article that led to a nearly immediate response from the company:
In particular, on September 6, 2023, CNBC published a story titled Texas paid bitcoin miner Riot $31.7 million to shut down during heat wave in August . Unfortunately, this sensational and inaccurate headline has caused confusion, which we would like to dispel. In August, Riot provided over 84,000 megawatt hours of energy to the market in Texas to reduce overall demand, lower consumer prices, and stabilize the grid during a heat wave. This ensured that consumers did not experience disruptions during extreme temperatures.
In scanning some of the comments from Twitter/X and even from articles here on Seeking Alpha , one of the main critiques appears to be that companies like Riot are "hoarding" energy for what many view to be a wasteful activity. While this is by no means a new or unique criticism of Bitcoin mining, I think it is worth noting that there may still be political risk for public miners if there is a larger push to ban proof-of-work crypto mining in various jurisdictions. In my personal view, it's less likely that a proof of work ban would come in a place like Texas, but these are things mining company investors should be considering nonetheless.
The Coming Halving
The larger issue though may still be the poor economics of simply using the energy to mine Bitcoin. Bitcoin mining continues to be near all-time lows, and the ability to profitably mine BTC is only going to get worse in the not-too-distant future:
We're roughly 7 months from the next Bitcoin halving. The result of which will be a 50% reduction in the block reward from mining newly issued Bitcoin. Following that event, the mining space will see revenue trimmed in half overnight if the price of BTC and/or the transaction fee market remains at their current levels.
Investor Takeaways
My fundamental view on RIOT is unchanged. When I covered the company in late July, I said I was not buying the rip. Now that the shares are 40% lower from where they were when that article was published, you could talk me into getting slightly more aggressive with a DCA strategy. I think anything under $10 is probably a reasonable starting point if you're looking to build a RIOT position.
Though there are obvious risks with this company; notably poor mining economics, high breakeven price, and the propensity to dilute shareholders, Riot still has one of the biggest HODL stacks in the business and a large capacity for production if the price of BTC justifies keeping the machines on. If BTC goes up considerably from here, RIOT will likely outperform many of its peers as it did from January through July 2023 with Bitcoin was rebounding.
For further details see:
Riot Platforms Stock: The Heat Is On