The crypto winter has arrived. At a recent price of $20,444, Bitcoin (BTC-USD) is trading less than a third off its 52-week high. Bitcoin miners have faced lower margins due to the combination of low Bitcoin prices and high energy prices. To a recent price of $4.55, Argo Blockchain (NASDAQ:NASDAQ: ARBK) is trading within 25% of its 52-week high. This article examines Argo Blockchain PLC 8.75% Senior Notes Due 2026 (NASDAQ:NASDAQ: ARBKL). ARBKL baby bonds now yield 12.2% and trade at just 72 cents on the dollar. This article positively explains why income investors should consider ARBKL and also provides a discussion of the main risks.
What is ARBKL?
ARBKL is a $25 unsecured baby bond with a generous coupon of 8.75% maturing on 11/30/2026. Quarterly interest payments of 54.7 cents are paid on 01/31, 04/30, 07/31 and 10/31 to registered holders on 01/15, 04/15, 07/15 and 10/15. ARBK is headquartered in England and trades in London as well as on NASDAQ. For US investors, there is no withholding tax on interest payments ARBKL
ARBKL can be tracked at par $25 from 11/30/2025 and will mature on 11/30/2026. See prospectus for more details. At a recent price of $18.10, ARBKL is trading at a 12.2% cash yield and a 28% discount to par. ARBKL is a small issue with just 1.6 million shares outstanding ($40 million face value). The average daily trading volume is only around 3,000 shares. Use limit orders and be patient when trading.
1. Strong liquidity
Strong liquidity is always an important consideration for high yield investors. This is especially true given recent volatility in major markets as well as the price of Bitcoin. Since the Second Quarter 2022 Earnings Report, ARBK had total current assets of $167 million compared to current liabilities of just $65 million for a very healthy current ratio of 2.6X. Current assets included cash of $9 million and holdings of Bitcoin and other digital currencies valued at $28 million.
2. Debt is well covered by assets
As of the second quarter of 2022, ARBK had total assets of $304 million, compared to total liabilities of just $139 million. ARBKL and other debts are well covered by assets.
3. 1.6X interest coverage
Interest was fully covered even with very low Bitcoin prices. Q2 2022 Adjusted EBITDA was $3.2 million, compared to interest expense of $2.0 million. Note that interest charges will drop significantly in Q3. The debt has increased temporarily in Q2 2022 due to a new loan to finance the purchase of mining equipment:
Secured up to $70.6m (£56.3m) in additional funding from NYDIG secured by select Bitmain S19J Pro machines at Helio.
Bitcoin sales (including a significant reduction in long-term bitcoin holdings) were used to reduce debt. This NYDIG debt was reduced to $22 million at the end of the second quarter, with a further reduction to just $6.7 million at the end of July.
4. Access to capital
Even with recent weakness in ARBK common stock, ARBK’s market capitalization is still around $200 million. Additional capital could easily be raised by selling shares if needed. A capital increase would reduce the risk for creditors. For the 6 months ended 06/30/2022, share sales generated only 116K of cash. Stock sales can sometimes be an important source of cash. Equity sales generated $50 million for the 6 months ended 06/30/2021.
5. Excellent Green Credentials
Including carbon credits, ARBK had net negative carbon dioxide emissions in 2021. Their Bitcoin mining sites in Quebec use electricity generated from hydroelectric power. Their new location in Texas is powered primarily by excess wind power. See their 2021 Sustainability Report for more details. ARBK is a member of the UNFCCC’s Climate Neutral Now initiative and claims to be the first climate-positive cryptocurrency miner. This is an important consideration for all investors given the recent regulatory direction on reducing the climate impact of Bitcoin mining.
6. Low electricity costs
ARBKL has low electricity costs in Quebec (mostly hydro) of about 4 cents per kwh and is targeting long-term electricity costs in Texas (mostly wind) of about 3 cents per kWh. Having multiple mine sites in different regions helps reduce risk. Spot electricity prices can sometimes increase even at selected locations for historically low electricity rates. The August 2022 Operational Update showed that mining margins were squeezed in Texas due to unusually high electricity rates:
In August 2022, West Texas spot electricity prices averaged nearly $0.09 per kWh, nearly three times the August average price of previous years.
7. Technology leader
ARBK is a technology leader. They use state-of-the-art immersible cooling systems to reduce energy costs and equipment wear. ARBK deploys new Intel® BlockscaleTM ASIC chips in custom proprietary machine designs. ARBK recently received a contract for host equipment against another Bitcoin miner in exchange for 25% of their mining profits. This type of contract award illustrates the value of their new facility at Helios Texas.
8. Hedging reduces risk
Bitcoin price has been very volatile. Fortunately, ARBK managed to hedge to reduce risk. As noted in the second quarter earnings report:
In response to the difficult market environment, we adapted our cash management strategy. Throughout the period, we regularly sold Bitcoin, using derivatives to achieve a higher realized price than simply selling in the market. In Q2 2022, we sold Bitcoin at an average realized price of around $28,500, achieving hedge gains above $1,500 per Bitcoin.
9. Experienced management team
See the company’s September investor presentation for more details. ARBK has grown significantly since its IPO in 2018 as a Bitcoin mining company. Management has grown the business with a focus on low costs, technical leadership and a strong balance sheet. ARBK has also been a leader in the movement towards sustainable Bitcoin mining.
10. 2.1X interest coverage even under adverse conditions
ARBK is an investor-friendly company that provides monthly operational updates. The August 2022 Update reported that ARBK mined 235 Bitcoins in August and generated $5.23 million in mining revenue. Mining margins fell from 37% in July to just 20% in August due to high electricity costs in Texas (see point 6). Keep in mind that mining margin excludes non-cash costs such as mining equipment depreciation costs.
Even with this very difficult combination of low Bitcoin prices and unusually high spot electricity prices, ARBKL interest payments are still covered. If these harsh August conditions persisted for a full quarter, the quarterly operating margin would be ($5.23 million X 3 X 20%) = $3.1 million. Given the recent debt reduction (see point 3), quarterly interest charges are expected to be approximately $1.5 million going forward for 2.1X coverage.
But what if the margins are temporarily further reduced? Fortunately, ARBK has strong liquidity (see point n°1) and access to capital (see point n°4). ARBK would survive a period of even tighter mining margins depending on its coverage, current liquidity, and ability to sell stocks and/or other assets.
What are the major risks?
See page 120 of ARBK Annual Report for a more detailed discussion of the risks. I have briefly highlighted some of the major risks here. Even with a strong balance sheet and hedge, ARBK would be hurt if the price of Bitcoin drops significantly for an extended period. As stated in point 9 above, ARBK would not fully cover the interest charges with Bitcoin at $10,000. Although ARBK is already a leader in sustainable Bitcoin mining, it could still be impacted by new US or Canadian regulations in this area. Ethereum is migrate from a “Proof-of-Work” system to a “Proof-of-Stake” system. Such a pass seems very unlikely for Bitcoin, but would negatively impact ARBK and other Bitcoin miners if this happens.
Despite recent volatility in the crypto sector, high yield investors should consider ARBKL for its 12.2% yield and potential capital gains. ARBKL baby bonds have less risk and volatility than equity stocks such as ARBK common stock. ARBK is well established as a Bitcoin miner. They stand out for their low mining costs, state-of-the-art technology and leadership on ESG issues.