Seeking Alpha27 Oct 2021 12:18
Data centre operator and crypto miner Argo Blockchain (OTCQX:ARBKF) continues a period of underperformance and I continue to have concerns about the relationship between its share price and the price of Bitcoin. However. I also think there are some positive moves in the business strategy which in the long-term could help support a more stable stock price. I also think it’s now much clearer how the company can be profitable in hard currency terms not simply the amount of crypto on the balance sheet. Accordingly I am moving my rating to neutral.
Argo Isn’t Simply Stockpiling Crypto
It’s worth noting that the company has now started selling some of its crypto subject to market conditions, so it is not simply stockpiling the crypto it mines indefinitely.
I think that can be positive if it times its sales well, although what competitive advantage it has in doing that versus other crypto market participants I can’t see. But it also raises questions about how to value Argo. So far its valuation has been partly based on the idea that it is building a stockpile of crypto. But that accounts for only a small part of its valuation. At the end of September, for example, the company held 1836 Bitcoin or BTC equivalent, which at current value is worth around £85m ($117m), versus Argo’s market cap of £648m ($892m). If the ongoing sale of some of its crypto causes Argo to be valued in a way which disaggregates the market value of its crypto holdings from the rest of its operations, I think that could be negative for the Argo share price. Does the market cap of over half a billion pounds which doesn’t pertain to its holdings, for example, really put a fair value on the company’s asset base which amounts to some data centres and mining capability? On its balance sheet as at the end of June included in last month’s share prospectus, after all, recorded £140m of assets, and £54m of liabilities. That’s quite a gap.
From a bullish perspective, the current asset base enables it to mine at a rate that produced a pre-tax profit in the first half of £10.7m. If it continues to ramp up its mining capacity and crypto prices are constant or improve, the second half results should be even stronger. Nonetheless, if we take the crypto stockpile out of the equation (with its concomitant value) there is still a gap between the company’s market valuation and its earnings potential, in my view. Currently, if earnings are maintained and the assets are assigned their full balance sheet value, the prospective P/E ratio is around 24x. If crypto valuation goes up and/or the company brings more mining capacity online (as it plans) that could fall. That would bring it closer to what I regard as an attractive valuation. But it still doesn’t get around what I see as a key problem with Argo, which is that it is seen as a play on crypto and has no control over crypto pricing. If it keeps selling rather than stockpiling crypto, that could become less of a problem over time in my view
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