Can Riot Platforms Survive Crypto Winter With Bitcoin Production Rising?

Riot Platforms (NASDAQ: RIOT), formerly Riot Blockchain, is one of the most advanced Bitcoin mining companies from a profitability standpoint (I’ve covered this firm many times in the past, and you can filter my entire coverage history here.complete with crypto scams and industry commentary).

It’s been a tough year for Riot shareholders. The spike has decimated cryptocurrency stocks, and there is no sign of a bottom in sight. Despite significant PR and legislative commentary in the past, cryptocurrency companies can still be viewed as small companies because they typically produce one product, and for Riot, that product is Bitcoin. With the complexity and shiny object syndrome surrounding Bitcoin, it is sometimes easy to forget that Bitcoin miners operate in the same way as rare earth miners, as they collect tokens at low prices and distribute them at profitable prices. According to this dynamic, the price movement for miners is determined by the price of the cryptocurrency, which explains what happened with Riot. The stock has fallen off a cliff despite clear signs of domestic progress.

Earnings and Production Update

In December 2022, Riot produced 659 bitcoins, which is 26% more than the previous month and 55% more than December 2021.

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The company earned $4.9 million in energy credits during the month, which equates to about 290 bitcoins using the December 2022 weighted average daily closing price of $16,967. The company strategically implements its energy strategy to reduce energy costs. A summary of the strategy can be found below:

Riot sold 600 bitcoins in December, netting about $10.2 million and holding about 6,952 bitcoins as of December 31, 2022. Forced selling or selling at unfavorable prices is often a red flag for Bitcoin mining companies like Riot, but in the context of a cryptocurrency bear market, it’s understandable to see some liquidation at this point. Investors should be well aware of the risks to mining companies in this environment by now, so future sales are unlikely to be met with any sensational price action.

Moving to the fleet, Riot deployed an additional 16,128 S-19 series miners, increasing hash rate capacity to an all-time high of 9.7 EH/s. However, some of the company’s operations at its Rockdale facility were affected by severe winter weather in Texas, affecting approximately 2.5 EH/s of total hash rate capacity. Riot expects to deploy a total of 89,708 miners with a hash rate capacity of approximately 9.9 EH/s and to ship an additional 5,130 S19 series miners in January 2023. Interestingly, Riot continues to invest heavily. his navy. At this point, companies are selling tokens at a loss, and many miners have mining costs around the ten thousand dollar mark. It’s worth noting that spreading fixed costs like management and real estate across multiple miners will help margins, but it requires a lot of capital, and companies have to balance that benefit with the risks of illiquidity if Bitcoin prices remain depressed for a long time.

In its latest third-quarter earnings call, Riot reported total revenue of $46.3 million, compared to $64.8 million in the same period in 2021. This decrease is primarily due to the decrease in Bitcoin production as a result of the company’s power strategy and the stock market’s business. A 49% drop in the market price of Bitcoin. This is a trend we have seen with some large miners.

The company earned $13.1 million in power outage credits in the third quarter of 2022, compared to $2.5 million in the same period in 2021. It produced 1,042 bitcoins in the third quarter of 2022, compared to 1,292 in the same period of 2021. The company’s mining revenue was $22.1 million in the third quarter of 2022, compared to $53.6 million in the same period in 2021. Its data center deployment revenue was $8.4 million in the third quarter of 2022, compared with $11.2 million in 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 produced 6,766 Bitcoins during that period. Investors will want to keep an eye on the cash balance going forward as these depressed Bitcoin prices and high production costs begin to conspire to affect the company’s balance sheet. We can see that the recent sales combined with the previous dilution have greatly improved the company’s liquidity position.

Riot has always done a relatively good job of managing its cash balance and liquidity position. This has led some analysts to call it the best choice in Bitcoin mining. It is important to note that despite superior capital controls, Bitcoin mining companies are fundamentally the same business and they cannot sustain long-term depressed prices. The company had 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 in 2021.

Cheap Manufacturer

So the earnings show that Riot is actually showing some clear signs of progress despite the massive cryptocurrency crash, and a lot of that is down to their operational prowess. We’ve seen production disruptions seriously impact other companies’ targets, but Riot has always seemed happy to continue building its fleet despite a massive drop in industry-wide profitability. Many analysts have painted a picture of doom and gloom due to the losses and tough headlines, but Riot is a little different. Riot is what you call a low-cost miner; that is, they can manage their direct costs of Bitcoin production better than many other firms. In the early Bitcoin mining boom, many producers’ direct costs hovered around $10,000, and they were able to quickly sell their tokens on the market at 3-5 times the open market price to finance other business expenses. Since then, the cost of energy has gone through the roof, and many miners have become more adept at managing indirect costs because they have limited control over energy rates. This is where Riot sets itself apart from the rest. Despite the increase in energy costs, Riot was able to improve direct mining costs from $15,250/BTC to just $11,346/BTC.

At the time of writing, Bitcoin was trading at ~$17,000. This means that the company still has room to contribute to indirect costs at current prices. It is important to emphasize that this is by no means a comfortable situation for investors or shareholders.

As difficulty levels continue to rise, we’ll see direct costs naturally increase, holding all other things constant (discussed in more detail here ). Also, for this level of profitability to occur, the company would need to significantly increase the size of its fleet, which would likely require more money than Riot could reasonably afford. They also have to hope that their competitors refrain from doing so, or Bitcoin’s network hashrate will drop off a cliff.

Judgment

I’ve long been a fan of buying sinks in mining companies and waiting for the bitcoin rally to unwind, but this time I feel different. The industry has faced a wave of defaults, and lawmakers may use Bitcoin miners as scapegoats for investor losses. I see Riot as one of the best companies in the industry, but the 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 slowdown. The risk of further losses or dilution will remain high for the long term, but I remain bullish on Riot. I rate the stock as a speculative purchase.