agnormarkThe fastest growing public Bitcoin (BTC-USD) miner by production capacity is currently Cipher Mining (NASDAQ:CIFR). The company has quickly scaled a mining operation over the last several months and is now one of the leaders in the public Bitcoin mining space by several key metrics. Cipher Mining became a public company through a SPAC merger with Good Works Acquisition Corp back in 2021. At the time, the company had a valuation of $2 billion with plans to use cash from the merger to grow out a Bitcoin mining operation.
Having now been 2 years since the SPAC merger was announced and over a year since it was completed, Cipher has become the third largest Bitcoin miner by market cap – though with a 75% reduction to the original $2 billion merger announcement valuation. In this article, we’ll look at the production growth, treasury strategy, and point out some things to keep an eye on.
Production & Capacity Guidance
As mentioned, Cipher Mining has very quickly scaled a mining operation over the last few months. Capacity at the end of February was 5.2 EH/s. This rapid increase in mining capacity since November has propelled Cipher into the top 5 public miners by production capacity as of last month:
BTC Production Trend (Company filings)
With 398 Bitcoin produced in the month of February, Cipher now produces more Bitcoin each month than Bitfarms (BITF), HIVE Blockchain (HIVE), and Hut 8 Mining (HUT). While EH/s growth has been strong since getting the company’s Odessa site online, Cipher has guided a somewhat conservative approach to scaling from here relative to what has been brought on in the last 3 months.
Cipher anticipates a total potential hash rate of 8.2 EH/S this year, which would come primarily from its Bear and Chief operating sites. In the earnings call earlier this week, CEO Tyler Page gave insight into the strategic approach going forward and offered rationale for why the company hasn’t jumped on faster expansion despite machine acquisition opportunities being available:
However, given volatile market conditions, we want to be mindful of not overextending ourselves. So we will continue to evaluate expansion in light of market conditions. This near-term opportunity for growth with strong built-in unit economics but without operational spending commitments is one that few if any of our competitors have and demonstrate Cipher’s continued approach to look for low-risk opportunities.
Some of the opportunities the company says it has declined to move on involved credit terms that were unfavorable and acquisitions of businesses that have fundamental flaws.
Treasury Strategy
One of the things that I look at each month is the net change in the Bitcoin balances for each publicly traded miner. While selling down BTC positions isn’t always indicative of a company that is in trouble financially, I do view ‘stacking’ as a positive sign. In the event that BTC goes up substantially, the value of the assets the company has in treasury will increase as well and those spikes in BTC price can be used to opportunistically raise more cash without diluting shareholders.
BTC in Treasury January 2023 February 2023 Mo/Mo Cipher Mining 424 465 9.7% Riot Platforms (RIOT) 6,978 7,058 1.1% Bitfarms 405 405 0.0% Marathon Digital (MARA) 11,418 11,392 -0.2% Hut 8 9,274 9,242 -0.3% HIVE Blockchain 2,430 2,365 -2.7% Argo Blockchain (ARBK) 115 101 -12.2% Bit Digital (BTBT) 971 697 -28.2% CleanSpark (CLSK) 301 100 -66.8%
Source: Company releases
In February, Cipher had the largest percentage change in BTC HODL – increasing nearly 10% from January. The nominal increase was just 40 Bitcoin, or about 10% of Cipher’s February production, which indicates a balanced approach to BTC treasury as the company is selling most of the monthly production to pay expenses while holding some for price increase optionality. This optionality is important because the company could potentially have to raise cash soon and has a couple different levers it can pull to bring in fresh money.
Risks to Consider
In the company’s earnings report from earlier this week, it disclosed a little under $12 million on cash at the end of December, though that figure has increased to $16.4 million at the end of February as Cipher has been able to use BTC sales to fund operations. In the event the company needs funding, which I view as likely if the price of Bitcoin reverses lower, there is a $250 million shelf that Cipher has yet to draw from:
During the conference call, Page was pretty clear that the shelf would be tapped if it made sense to do so from an operational expansion perspective. The example the CEO gave involved the immediate use of equity offering cash to scale capacity at Odessa.
However, the 2023 economic viability of Bitcoin mining is still up in the air and depends on the price of Bitcoin to a significant degree. If the price of Bitcoin does indeed fall back down below the $20k area for a sustained period of time, Cipher may need to hit the shelf for opex given the $41.1 million total operating expenditure over the last half year. Cipher’s SG&A expense was more than six times revenue in Q4-22 and CFO Ed Farrell indicated on the call that the run rate from the second half of 2022 could be a reasonable expectation for 2023. This run rate is probably fine at $25k BTC, it’s much less fine at $20k BTC.
And this gets us to the expenses. Cipher reported production costs of $5,143 in electricity per Bitcoin at its Alborz site and $6,293 in electricity per Bitcoin at its Bear and Chief sites. This is outstanding compared to peers, but we don’t have clarity on what the electricity cost is at Odessa and that’s where the majority of the mining has taken place so far this year:
Site BTC Mined YTD Cipher Owns Odessa 770 770 Alborz 186 91 Bear & Chief 111 54
Source: Cipher Mining
I think it’s also important to mention that Alborz, Bear, and Chief are joint ventures with WindHQ LLC and Cipher owns roughly half of the Bitcoins that have been mined at those sites year to date. This means 84% of Cipher’s Bitcoin that has been mined in 2023 has come from Odessa and this is the site that we don’t yet have electrical expense clarity.
Summary
While I think Cipher is interesting, I’m waiting a bit before I consider opening a position. I’m a bit concerned by the company’s non-operating expenses and I want to see what that looks like following a quarter with operations that are more reflective of current production levels. There is no doubt the electricity costs the company disclosed at Alborz, Bear, and Chief would be industry-leading but I still think it’s a little too early to be in this one. I would only be selling CIFR shares if you think the price of Bitcoin is about to go down. Short of that, Cipher stock is a hold.
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