Please note that all the discussion and price references of the stock, bitcoin, cash on hand, network difficulty rate are for January 23rd 2022 when this idea was orignially sumbitted to VIC.

Digihost Technology Inc. is a bitcoin miner with structural cost and infrastructure advantages that trades at a material discount to its replacement value along with material discount to its peer group on EV/EBITDA and EPS basis.

Despite the recent decline in price of Bitcoin, the company is at an enviable spot to have a very profitable 2022. As of December 31st 2021, the company’s hash rate is 415PH and the plans are to ramp this number up in next few months to 1.2 EH (almost triple the current hash rate) The company already received approximately 6500 (gradually will be installed during January and February) of 10,000 MicroBt M30S Whatsminers as of the end of Dec 31st and it should receive 3500 of the 3600 remaining during the January and February. On top of this , the company is finalizing the electrical infrastructure in the power plant that is currently under the contract in upstate New York

Digihost at a glance-

Digihost has all of the characteristics that I believe are important on a strong risk/reward set up. To summarize:

1) High insider ownership (The Ceo Michel Amar, along with his family and related entities owns approximately 30% of outstanding shares). His last transaction was to purchase shares at materially higher prices than today 11 months ago. He spent approximately $2.6 mil for 506,666 units (split adjusted) for approximately $5.2 per unit vs. $3.08 share price today.

2) Trading below replacement value (Despite the recent drop in Bitcoin price, each one of the 10,000 MicroBt M30S Whatsminers are worth approximately 70-80$ TH for 6-9 month future delivery and around $100 TH for immediate delivery in scale. If a party would only like to buy small quantities, the price goes up to 120$-130$ TH with multiple out of stocks. Given that the miners are pushing out 88 TH if one would like to buy them for immediately the value would be around $100,000,000 (approximately $115 per TH at 88 THS yields to $10,000 per each one times 10,000)

3) To further support the replacement value argument, as of December 31st 2021, the company has approximately $33 million of Bitcoin, Etherium and Cash on hand. With the recent drop this value is around $25 million.

4) The company has invested significant amount on electrical infrastructure to get the organization be able to ramp up significant revenue growth. For the sake of conservatism, i am assigning 0 value to this. In real world, there are massive bottlenecks of electrical infrastructure so this is truly a very conservative position.

5) In summary, if one would like to replicate the company’s cash, bitcoin, etherium and miner position it would have to spend approximately $125 million ($5 a share vs $3 where the stock is trading now). Again this does not include millions of dollars spent on electrical infrastructure and real bottlenecks on time lines.. This also does not include the older machines that contributed to approximately 300 Petahash (there is certainly value here as these were the only operational miners as late as Q2-Q3 and they were still very profitable. For the sake of conservative replacement value, I am assigning 0 value to this

6) The company has signed a hosting partnership with another public company (BTBT) and this agreement can be very lucrative with little to no capital investment by DIgihost and it is a very smart way to grow with high returns and low risk on invested capital by leveraging the electrical infrastructure.

7) Ceo’s salary is $1 a year.

Normally a 40% discount to replacement value exist in declining business fundamentals and destruction of replacement value environments. However the opposite is true for Digihost. So let’s look at what this year 2022 may look like for the company.

In order to make my point on strong margin of safety, i am going to use very conservative assumptions

1) I am assuming current bitcoin price for the entire year approximately $35,000 If an investor believes Bitcoin will trade lower, there are multiple ways to pair trade including selling naked calls on BITF (bitcoin futures etf and buying out of money BITF for protection).

2) I am assuming the network difficulty to increase 50% at the end of the year and Digihost to catch up with throughout the end of the year after company installs 1.2 EH by the end of Q1 (please note this is a conservative assumption on declining bitcoin price environment) For example, with the recent drop of bitcoin price, most of the S7 and S9 antminers became unprofitable. These old technology miners have higher power consumption and approximately 1/7 of revenue generation for each hour of operation. Given it is estimated that approximately 25% of entire worlds’ hash rate is still running with this 6-7 year old technology, it is highly likely that these miners will be turned off in the coming days unless Bitcoin price rallies. Bitcoin block awards are constant until a halving event occurs which means the remaining companies with new technology will be earning even more bitcoin awards which will be mitigating the price drop. The perfect example of this is publicly traded miner’s very strong margin and profitability increase during the summer 2021 when China banned bitcoin mining. This is the most misunderstood part of economics of miners by the investment community. For the vertically integrated miners that have strong structural cost and scale advantages mining is very profitable even in declining bitcoin price environments because the output of bitcoin is same but it is shared my less miners at points of declining price environment as the cost disadvantaged ones need to turn their miners off.

3) Currently network difficulty is 177 EH. What this means is if the network difficulty stays the same in next month or so (this is likely as the new mining orders will be offset by unprofitable s7 and s9’s being turned off) Digihost will produce approximately 1.2/177 EH which is 68 basis points of world production everyday. As of today the entire mining value of the worlds’ miners per day is $30.1 million which means approximately 204k revenue per day for Digihost. This will yield to $74.5 million revenue for 2022 for Digihost at current Bitcoin prices. Please note that another conservative assumption is made here which is Digihost will grow or decline consistent with the overall network hash rate after the initial installations are made which is very conservative given the company’s growth history.

4) A MicroBT M30S at 4 cents per KWh will cost $1171.74 to run at full capacity for the full year. Also with today’s network difficulty and bitcoin price will yield to $5318.27 per miner per year revenue. So a very quick back of the envelope of 10,000 MicroBt’s show that Digihost will generate $53 mil of revenue, $11.7 mil power cost and $41.3 mil profit before G&A in 2022. Taking into account $2 million a quarter last disclosed G&A I estimate that the company will earn $25.8 million in EBITDA for the year. Please note that this is just the back of the envelope on 880 Petahash out of 1200 Petahash (1.2 EH). The other 320 Petahash should yield approximately 21 million in revenue. Given that we have a good understanding on the actual power cost of these machines (look at Q2 2021 when the company was running just the old equipment a $1.8 mil cost should yield to $7.2 mil annual cost and therefore adding an additional 14 million EBITDA) This will bring my estimate for the year 2022 to $39.8 mil in EBITDA for the year.

5) None of these numbers include the potential upside from further growth in Hashrate vs. Network hashrate or the hosting agreement the company has with BTBT (BTBT was one of the companies that were pushed out of China due to Bitcoin mining ban and got into an agreement with Digihost whereas BTBT provides the miners and Digihost provides upsells power and shares percentage of profits). Needless to say this is a great way to leverage the infrastructure of Digihost and it is very low risk with high return as it involves profit share.

So to summarize, by paying $3.08 for a share of Digihost, an investor would be valuing the company approximately $75 million with $50 million Enterprise value. We believe $50 million is less than half of what would be required to put this infrastructure today (mining farm in Buffalo, powerplant in upstate NY and its electrical infrastructure improvements and $100 million value for 10,000 MicroBT miners (i am not including the other miners that company has in this numbers nor the value of hosting agreement)

So by purchasing shares of Digihost, an investor will be paying $50 mil EV which is less then 50% of its replacement value and it will also be paying approximately 1.2 times EV/ EBITDA of $39.8 million projected EBITDA (comp group is mid to high single digits even with recently compressed multiples) We believe a very conservative valuation should be 5 times EV/EBITDA of this year (2022) plus cash (keeping the cash and digital assets constant at $25 million at the end of the year, despite the cash generation the company will also invest in growth) $225 million value or $9 a share (approximately 200% from where the stock is trading today). It is also important to remember that these numbers after Bitcoin price just went down 50%. If the Bitcoin price were to bounce back there will be not only material improvements in profitability but also multiple expansion.

Consider this upside scenario of $60,000.For illustration 68 basis points of the entire network hashrate production at $60,000 bitcoin price will bring $55 million mining revenue or $360,000 a day or $132 mil a year of revenue to Digihost and with $8 million G&A and 18.9 mil power cost one can see how EBITDA of $39.8 million can scale to over $100 million (remember the power cost and G&A will not be increasing as the miners will be fully installed and producing) In this price environment, the multiples on EBITDA will be much closer to high single digits if not double digits potentially making the Enterprise value $1 billion or $40 stock (vs. current price of $3.08)

Also on the downside scenario, the company needs to cover $26.9 million on power and G&A costs so if the bitcoin price dropped to approximately $12,000 from $35,000 and the network hash rate remained the same(very conservative since there will be a lot of miners in the network that run on older equipment that will be unprofitable at this level and need to be plugged off) the company will be still breaking even.

Catalyst

1)The company recently uplisted to Nasdaq. Other than one old stale report, there is no sell side coverage. With the inclusion to Nasdaq we expect the company to attract more coverage

2) The company is working to present on Wall Street conferences. Up to this point they have not presented in any major forum.

3) By the end of Q1 2022 (in 2 months) the company should triple its revenues. Once the company files their year end report and then subsequently Q1 2022, I believe the algos and fundamental investors will start picking this stock up

4) Potential stabilization of Bitcoin price. As a value investor there is a benefit of using numbers that just got cut in half from 3 months ago.