Summary CLSK will match MARA and RIOT in terms of end-of-year mining capacity while being priced at a quarter of their valuation. We estimated this expansion will come at the cost of 24% shareholder dilution. The 24% shareholder dilution is sufficiently compensated with a 200% and 470% upside when Bitcoin returns to near all-time high and $100k respectively. CLSK's shares outstanding have tripled over the past 2 years hence upside potential could be limited. Introduction This season, we're going to thoroughly review and update our previous theses for Bitcoin miners in our watchlist in anticipation of a potential 2024 Bitcoin bull market . So far we've updated our thesis on Marathon Digital Holdings ( MARA ) and Riot Platforms ( RIOT ). We found that both RIOT and MARA are expanding and are on track toward their respective 2023 year-end guidance. However, both RIOT and MARA failed to offer us sufficient upside to give a buy recommendation due to their current market caps. Our analysis on CleanSpark ( CLSK ) has sparked our interest and we think it should spark yours too. Here's why. On track to Becoming One of the Sector's Largest Although CLSK revised its 2023 guidance from 22.4 EH/s to 16 EH/s, CLSK remains on track to becoming one of the sector's largest in 2023. CLSK is realizing its 2023 guidance to increase mining capacity to 16 EH/s. This puts CLSK in between the 2 Bitcoin mining giants, RIOT (12.5 EH/s) and MARA (23 EH/s). More importantly, CLSK (market cap - $428mil) is priced at only a quarter of RIOT's ($1.84bn) and MARA's ($1.57bn). This suggests that CLSK has a lot of upside potential (market cap). Table 1 illustrates CLSK's expansion progress from 2021Q1 to 2023Q1. Table 1. CLSK's Expansion Progress QR Built-up Hash Rate (EH/s) 2023Q1 6.7 (or 8.7 if in-transit/installed included) 2022Q4 6.2 2022Q3 4.16 2022Q2 4 2022Q1 2.4 2021Q4 1.9 2021Q3 1.3 2021Q2 0.82 2021Q1 0.33 Source: Author Dilution May Not Be An Issue In the Near Term As of 2023Q1, CLSK has 6.7 EH/s of mining capacity or 8.7 EH/s if machines being shipped are included. This implies CLSK needs to expand another 7.3 EH/s to get to the guided 16 EH/s. However, CLSK lacks the balance sheet to support this growth. As of 2023Q1 , CLSK has $10.35mil cash and only $42.7mil prepaid to Bitcoin mining machine vendors. With reference to MARA's and RIOT's balance sheets, this amount of capital is expected to be insufficient to expand 7.3 EH/s. Table 2 illustrates the amount of capital required to get to 15 EH/s. Table 2. Relationship between MARA's Capital Level and Mining Capacity Growth QR Built-up hash rate Cash ($mil) Prepaid ($mil) 2023Q1 11.5 EH/s (15.4 EH/s installed) $124 $69.5 2022Q4 7.0 EH/s (9.1 EH/s installed $103.75 $528.8 2022Q3 5.7 EH/s $55.34 $735.5 2022Q2 3.9 EH/s $86.4 $830.2 2022Q1 3.9 EH/s $118.5 $635 2021Q4 3.5 EH/s $268.5 $500.5 2021Q3 2.7 EH/s $32.9 $203.3 2021Q2 2.09 EH/s $170.6 $121.6 2021Q1 1.46 EH/s $204.4 $129 According to CryptoPotato , MARA spent close to $900mil to acquire 78,000 of Antminer S-19 XP in 2021. Assuming each S-19 XP costs $3,259 and has 0.00014 EH/s of mining capacity, $169mil is required to increase capacity by 7.3 EH/s. Although the prices of different mining machines may differ, CLSK still has to raise about $100mil (estimate). Given CLSK's current market cap, we estimate that CLSK is going to increase its outstanding shares by at least another 24% (= $100mil cash / $428 market cap) or to 120mil shares (which exceeded its 2022Q4 100mil shares authorized). Hence, CLSK has already laid the foundation in 2023Q1 to raise this level of capital to fund its 7.3 EH/s capacity. CLSK has tripled its authorized shares from 100mil to 300mil: In the 2023 Annual Meeting of Stockholders held in March 2023, the Company's stockholders approved an amendment to the Company's Articles of Incorporation to increase the number of shares of common stock authorized for issuance from 100,000,000 to 300,000,000. This event occurred shortly after CLSK tripled its outstanding shares from 33.88mil to 97mil in 2 years, bringing outstanding close to the previous 100mil authorized shares. Referring to Table 3, it is observable that CLSK had also doubled its authorized shares from 50mil to 100mil in 2021. Considering this, CLSK has increased its authorized shares 6 folds . Table 3 illustrates CLSK's historical outstanding shares and authorized shares over the past 2 years. Table 3. CLSK's historical outstanding shares and authorized shares QR((CY)) Shares Outstanding Authorized 2023Q1 96,950,555 300,000,000 2022Q4 71,743,930 100,000,000 2022Q3 55,661,337 100,000,000 2022Q2 41,300,241 100,000,000 2022Q1 41,290,587 100,000,000 2021Q4 41,474,062 100,000,000 2021Q3 37,395,945 100,000,000 2021Q2 34,697,943 50,000,000 2021Q1 33,874,152 50,000,000 Source: Author CLSK's cash flow statements also tell the same tale (Figure 1). Payments on miners (including deposits) are funded by proceeds from equity offerings. (On a side note, CLSK is operating cash flow positive , which is a good thing). In CLSK's defense, CLSK wasn't the "only culprit for pulling off this stunt". RIOT has also recently doubled its authorized shares from 170m to 340m citing " greater flexibility to pursue value-creative opportunities" just when its outstanding shares also got near its authorized shares (Table 4). All-in-all, authorized shares used to mean the ceiling of maximum shareholder dilution. But in this capital-intensive business of mining Bitcoin, it seems that the practice of increasing authorized shares and constant shareholder dilution is a common practice. Author, CLSK Author, CLSK Table 4. RIOT's Historical Shares Outstanding QR Shares Outstanding (mil) 2023Q1 167 2022Q4 167.75 2022Q3 167.3 2022Q2 148 2022Q1 117.3 2021Q4 116.75 2021Q3 97.2 2021Q2 95.95 2021Q1 84.12 Source: Author Why 24% Dilution Might Not Be A Major Issue? Firstly, CLSK's mining efficiency is consistently efficient. CLSK's all-in mining cost per BTC is consistently in the $30,000's (Table 5). CLSK's 2023Q1 all-in mining cost is $33,276 (= [$21.35mil Depreciation + $22.1mil Cost of Rev + $4.3mil General Admin + $3.75mil Professional Fees + $9.75 Payroll + $1mil Interest] / 1,871 Bitcoins mined). This is rather impressive because CLSk is yet to enjoy the MARA and RIOT's level of economic of scale. Table 5. The Historical All-in Mining Cost Per Bitcoin of CLSK, MARA, and RIOT Q ((CY)) CLSK MARA RIOT 2023Q1 $33,276 $32,100 $46,200 2022Q4 $30,500 $44,400 $53,000 2022Q3 $35,627 $91,200 $55,000 2022Q2 $37,600 $81.683 $35,300 2022Q1 $42,800 $31,700 $30,800 Source: Author Secondly, CLSK (market cap - $428mil) is trading below its adjusted net asset value ($441mil, Table 6). Therefore, we can say that CLSK is currently undervalued. Theoretically, if we're buying CLSk at its current valuation, we can liquidate CLSK at a profit. Comparatively, Bitcoin has to trade above $67,915 and $50,737 to justify RIOT's and MARA's current valuation respectively. At $50,737, our model value CLSK at $650mil, suggesting a 52% potential upside from the current market cap. At $67,915 per Bitcoin, our model value CLSK at $1.27bn, suggesting a potential 200% upside from the current market cap. At $100,000 Bitcoin, our model suggests a potential 470% upside. Table 6. CLSK's Historical Adjusted Net Asset Value QR Cash ($mil) PP&E ($mil) Bitcoin Reserve Bitcoin Value @$27k Deposits ($mil) Adjust Total Assets ($mil) Total Liability ($mil) Adjust NAV 2023Q1 10.35 440 196 5.292 42.7 498 57.7 441 2022Q4 2 434.8 228 6.156 11.8 455 59.7 395 2022Q3 20.5 377 594 16.038 20.4 434 48.6 385 2022Q2 2.66 322.2 594 16.038 31.9 373 34.2 339 2022Q1 1.9 276 420 11.34 70 359 23.9 335 2021Q4 5.2 198.5 633 17.091 125.7 346 24 322 2021Q3 18 137.6 627 16.929 88 261 11.75 249 2021Q2 22.2 64.75 301.4 8.1378 122.855 218 15.7 202 2021Q1 157.2 14.86 115.2 3.1104 45.5 221 8.9 212 Source: Author Verdict: Putting Everything in Context In this article, we established our thesis that CLSK is likely on the brink of another 24% shareholder dilution to meet its end-of-year 16 EH/s guidance. However, CLSK's potential 200% upside (if and when Bitcoin returns to near all-time high) can compensate for the 24% shareholder dilution. Since we expect Bitcoin to return to its all-time high by April 2024 and $100k before April 2025, this is a massive opportunity Bitcoin optimists wouldn't want to miss. On the flip side, CLSK's upside potential could be negated by dilution. Note that an increase in market cap does not equate higher share price. Historically, CLSK's shares outstanding tripled over the 2 years, which could nullify most of CLSK's upside potential suggested by our model. Although we expect only about 24% dilution to fund CLSK's expansion, dilution could be far worse if Bitcoin does not recover back to its all-time high as we expected and persistently trade below CLSK's total mining cost per Bitcoin. The lawsuits against Coinbase ( COIN ) and Binance also act as headwind to Bitcoin's price.
