Riot platforms (NASDAQ:RIOT), formerly Riot Blockchain, is one of the leading bitcoin mining companies from a profitability standpoint (I’ve covered this company many times in the past, and you can filter my full coverage history herecomplete with crypto cheat sheets and industry commentary).
It’s been a tough year for Riot shareholders. The strong crypto selloff has battered the stock, and there is no sign of bottom in sight. Despite significant public relations and legislative commentary in the past, crypto mining companies can still be considered small businesses in that they typically produce a product, and for Riot, that product is Bitcoin. With the complexity and shiny object syndrome surrounding Bitcoin, it’s sometimes easy to forget that Bitcoin miners basically operate the same way as rare earth miners in that they store tokens at low prices. and distribute them at favorable prices. Due to this dynamic, price action for miners is largely determined by the price of the crypto token they are mining, which explains what happened with Riot. The stock fell off a cliff despite clear signs of progress internally.
Earnings and Production Update
In December 2022, Riot produced 659 bitcoins, a 26% increase from the previous month and 55% more than its December 2021 production.
|Company||Type||January||December||November||October||September||AVERAGE over 3 months|
The company earned $4.9 million in energy credits during the month, which equates to approximately 290 bitcoins using the December 2022 weighted average daily closing price of $16,967. The company has strategically implemented its energy strategy to reduce energy costs. A summary of the strategy can be found below:
Riot sold 600 bitcoins in December, generating net proceeds of approximately $10.2 million, and held approximately 6,952 bitcoins as of December 31, 2022. Forced or underpriced sales are often red flags for bitcoin mining companies like Riot, but against the backdrop of a crypto bear market, it’s understandable to see a sell-off at this point. Investors should now be well aware of the risks for mining companies in this environment, so further selling is unlikely to be met by sensational price action.
Moving on to the fleet, Riot deployed an additional 16,128 S-19 series miners, taking its hash rate capacity to a new all-time high of 9.7 EH/s. However, some of the company’s operations at its Rockdale facility suffered damage from severe Texas winter weather, which impacted approximately 2.5 PE/s of its total hash rate capacity. Riot plans to have a total of 89,708 miners deployed with a hash rate capacity of approximately 9.9 PE/s, with shipments of an additional 5,130 S19-series miners expected to be received in January 2023. interesting that Riot continues to invest heavily in its fleet. At this point, companies are selling tokens at a loss and many miners have mining costs hovering around the ten thousand dollar mark. It is critical to note that spreading fixed costs such as administration and real estate across many miners will help margins, but this is extremely capital intensive, and companies need to balance this benefit against illiquidity risks if prices of Bitcoin remain depressed for an extended period.
During the recent third quarter earnings call, Riot reported that the company had total revenue of $46.3 million, compared to $64.8 million in the same period of 2021. The decline was primarily due lower bitcoin production resulting from the company’s energy strategy and a 49% drop in the market price of bitcoin. This is a trend we see in some of the biggest miners.
The company earned $13.1 million in curtailment credits in Q3 2022, compared to $2.5 million in the same period of 2021. It produced 1,042 Bitcoin in Q3 2022, compared to 1,292 in the same period in 2021. mining revenue in the third quarter of 2022 was $22.1 million, compared to $53.6 million in the same period in 2021. Its data center hosting revenue was 8 $.4 million in the third quarter of 2022, compared to $11.2 million for the same period in 2021.
The company had $369.8 million in working capital and $255.0 million in cash as of September 30, 2022, and it produced 6,766 bitcoins during that time. Investors will want to pay close attention to the cash balance going forward as these depressed Bitcoin prices and high cost of production begin to take effect on the company’s balance sheet. We can see that recent sales as well as previous dilution have greatly improved the company’s liquidity position.
Riot has always managed its cash balance and liquidity position relatively well. This lead to some analysts making it the top pick in the Bitcoin mining space. It is important to note that despite superior capital controls, Bitcoin mining companies are basically the same business and cannot sustain depressed prices over the long term. The company recorded a net loss of $14.9 million in the third quarter of 2022, compared to a net loss of $47.3 million in the same period of 2021.
low cost producer
So, the earnings suggest that Riot is actually showing clear signs of progress despite the massive crypto meltdown, and much of that is down to their operational prowess. We’ve seen production disruptions seriously impact other companies’ goals, but Riot has always seemed happy to continue growing its fleet despite the massive industry-wide drop in profitability. Many analysts painted a gloomy picture because of the losses and the hard headlines, but Riot is a little different. Riot is what you call a cheap miner; that is, they are able to manage their direct costs of producing Bitcoin better than many other companies. At the start of the Bitcoin mining boom, many producers had their direct costs hovering around the $10,000 mark, and they could quickly sell their tokens on the market for 3-5 times more than on the open market to fund other business expenses. Since then, the cost of energy has skyrocketed and many miners have become more adept at managing these indirect costs, as they have limited control over energy tariffs. This is where Riot stands out from the rest. Despite rising energy costs, Riot managed to improve its direct mining costs by $15,250/BTC for just $11,346/BTC.
At the time of writing, Bitcoin was hovering at a price around $17,000. This means that the company still has room to contribute non-direct costs at current prices. It is important to stress that this is by no means a comfortable situation for investors or shareholders.
As difficulty rates continue to rise, we will naturally see the direct costs increase (discussed in more detail here), holding all other things constant. Additionally, for profitability to have a chance to occur at this level, the company would need to significantly increase the size of its fleet, which would likely require more cash than Riot can reasonably access. They also have to hope that their competitors avoid doing the same or that the Bitcoin network hashrate falls off a cliff.
I’ve been a longtime fan of wash buying on mining companies and waiting for the eventual unloading of the Bitcoin rally, but this time it’s different. The industry has been hit by a wave of defaults, and lawmakers could use Bitcoin miners as a scapegoat for investor losses. I see Riot as one of the best companies in the industry, but this industry is struggling right now. I’m a long-term bitcoin bull, but I have concerns about whether some mining companies will make it to the other side of this downturn. The risk of more losses or dilution will likely remain elevated for the extended future, but I continue to remain bullish on Riot. I value the stock as a speculative purchase.