Description

Crypto Mining reminds me of the movie The Jerk and the Optigrab. The Optigrab was a device that prevented glasses from sliding down one’s nose and caught instant fame before blowing up

given in the movie it made users cross-eyed.

There are plenty of unfriendly aspects to crypto mining: large capex with a very short life (3 years), unstable bitcoin prices, and high fixed costs, which lead to unpredictable and fraught risk spreads between the cost to mine and the commodity price realized. On April 16th a halving will occur cutting the current payout by -50% which is roughly 90% of current revenue. So land grab on capacity to offset this. 

We believe that simply turning electricity and capital equipment into a massive arbitrage opportunity to mine digital currency with a good spread is not a sustainable business. It’s not so much that it is not possible to have spurts of success, but we believe the risks are overwhelmingly unattractive and highly unlikely to generate much free cash flow over the short, medium, and especially long term. MARA, a $5.5 billion EV increased their revenue by 50% for just $178 million or 2% of the EV. Or bought a company on Dec 19th at roughly 1x sales and Mara is valued at 13x.  Someone is off in the valuation here. We don't believe there is much to like with this model given a capital equipment life of only 3 years, feast/famine business model given energy, and erratic commodity/bitcoin prices. Since 2020, these dynamics have led MARA to issue $1.2 billion in shares to fund a business that has burned $1.2 billion in cash from operations. The possible lone bright spot is since 2020 in cash from investing MARA has had an aggregate gain marked to market (this is using the current $42,800 price) or $250 million in bitcoin over the last 3+ years or roughly $1.10 per share. It would be fine to pay this type of multiple if there was a massive spread between cost to mine and bitcoin prices but that is NOT the case. My thesis is that this is the best of times, and it is not that great. 

• MARA has an Exahash computing ability of 23 EXA which 1 Exa currently pulls 50 BTC or 1100-1200 per month (best of times now)  
• Let's say MARA doubled Exahash which is their goal over 18-24 months + April Halving -50% this is possibly a 14,400 annual BTC producer
• If stable this could be $550-600 million annual revenue business
• Sell side analyst for 2024 has EBITDA- CAPEX is $53 million with Cash from ops -$200 million EBITDA + $183 million and CAPEX $130 million. 

I see several scenarios

1. Halving drives BTC prices to $50-60K+ with cost to mine for best going from $15K to $30K and holding the current spread (we think could lead to +10% to +30% in the shares) 
2. Halving BTC stays $35k-$50K with best-in-class mining $30K (we think this could lead to -33% or more drop in the shares)
3. Halving BTC and BTC falls back under $35K with best-in-class mining cost at $30K (we think this could lead to -50% or more drop in the shares)

Point 1: “HALVING” "reduction by half"->  In 115 days, Bitcoin mining will get A LOT harder as a “halving” will take place in April 2024 which will drop Bitcoin rewards by -50% from 6.25 to 3.125. The last halving occurred in 2020 from 12.50 to 6.25. MARA revenue is 88% dependent on Bitcoin mining.

Mara Dec 5^th press release last sentence:

“In anticipation of the next Bitcoin network halving, the Company continues to build liquidity on the balance sheet to capitalize on strategic opportunities, including industry consolidation.”

"Every halving forces miners not playing that game at a high enough level to get washed out," said William Szamosszegi, CEO of mining company Sazmining.

https://www.reuters.com/technology/cryptoverse-bitcoin-miners-make-money-ahead-halving-2023-11-14/#:~:text=The%2030%2Dday%20average%20of,as%20in%20its%202021%20heyday.

Halving hardly seems bullish for the Crypto mining industry, we will see in 115 days. 

Point 2: Having: Best of times, before halving....best in class to see mining costs double? 

This is worth a read: 

https://cointelegraph.com/news/bitcoin-halving-efficient-btc-mining-costs-30k

Point 3:  Generate Capital Acquisition was Acquired for $458K per megawatt and Mara is valued at $5 million per megawatt. It's a commodity business and the spread between private market and public market is not 10x. 

Decemeber 19th MARA/Generate Capital Deal: https://ir.mara.com/news-events/press-releases/detail/1335/marathon-digital-holdings-enters-definitive-agreement-to

Despite this $180 million transformational deal that lifts capacity by 55%, sell-side analysts yawned increasing the price target by $1 per share to $11.75 per share vs. $27. 

Point 4: Accounting at Mara in our opinion looks like a three-ring circus on the cash flow statement. After looking taking a look it strikes me in a word: scary. I believe it should be on par with Oil and Gas E&P industry in that mines a commodity that creates boom-bust cycles and is probably worth 10x EBITDA and EBITDA is .75 cents per share. 

• Cash from Ops: -$317 million
• Cash from Investing +$179 million gain on the appreciation of BTC (MARA owns 14K BTC worth $600 million or 10% of market cap or $2.60 per share in BTC)
• Cash from Financing $428 million from issuance of shares at $11 (since 2020: MARA has issued $1.3 billion in stock)
• Ugly accounting would be generous averaged per year $375 million in asset write-downs/restructuring last 2 years 

Point 5: Spreads in 115 days will become much tougher and the industry will likely come under pressure 

https://www.coindesk.com/business/2023/12/08/bitcoin-halving-is-poised-to-unleash-darwinism-on-miners/

Point 6: Given the Boom/Bust cycle + short CAPEX lifespan

There is always new and very cheap capacity in the never-ending computing arms race. 

Companies get distressed and sell cheap

Established companies constantly spending on New CAPEX

It only requires capital, nothing is really proprietary...which leads to high levels of cyclicality. 

Compare 2020-Current

https://www.blockchain.com/explorer/charts/difficulty

Mara 2020-Current: 

Golden Triangle of Bitcoin Mining:  

https://www.solunacomputing.com/blog/golden-triangle/

FAIR VALUE 

I would estimate fair value is likely somewhere in the $6-15 range

Applied a series of DCF going as high as 40% free cash flow margins and different multiples...I struggle to get much above $15

Applying the December 19^th deal terms to Mara-> MARA paid $178 million to add 56% to capacity. This is $458,000 per megawatt. Mara has 1000 megawatts, this implies a private market value of $500 million + $800 million cash and Bitcoin or $6 per share.

Mara paid 1x sales for the Generate Capital business will add $175 million in revenue or +50% to Mara's current revenue. Mara is valued at 13x revenue. No seriously. 

  DISCLAIMER: This does not constitute a recommendation or offer to buy or sell this stock. We may buy shares or sell shares at any time without notice. The statements herein are the beliefs and opinions of the author. In addition, the statements herein are provided for informational purposes only. Furthermore, the graphics/charts are provided for illustrative purposes only and should not be relied on to make an investment decision. The author makes no representation or warranties to this work.   

RISKS: 

Bitcoin rockets higher.

Meme investors run this from 13x sales to 20-30x sales

People are crazy and don’t care about financial results only technical patterns

Becomes a consolidation platform in a downturn and adds value through M&A 

Catalyst

A lousy industry given many moving parts that has shown difficulty extracting attractive economics over time

April 16th 100% odds of a -50% mining payout cut on mining awards which is 88% of revenue. Mara/industry is in land grab to increase capacity. 

Sell-side analysts understand this with price targets -60% below current prices, Retail meme investors don't understand nor care. 

100x EBITDA-CAPEX for Historically very tough business, narrow spreads, commodity business, and very messy accounting