Bitfarms: Investors Ignore Low-Cost Power Purchase Agreement in Argentina

On April 19, Bitfarms Ltd. (TSXV: BITF) announced that it had finalized an attractive power purchase agreement with a utility-grade private power producer in Argentina. Under the accord, Bitfarms can purchase up to 210 megawatts (MW) of power over an eight-year period.

Over the first four years of the deal, the electricity purchase price will be US$0.022 per kilowatt-hour (kwh), one of the lowest rates available to any Bitcoin miner in the world. During the rainy season, Bitcoin miners in China reportedly purchase hydro-generated power at a cost of around US$0.027 per Kwh, a price which is considered to be about the lowest currently available worldwide. (Non-rainy season power in China is priced at more than US$0.03 per Kwh.)

The extremely positive financial implication of this electricity purchase accord – which financial markets have largely ignored to this point – can be determined via several steps:

First, 210 MW of electric capacity is sufficient to power 55,000 new-generation Bitcoin mining computers. In early March, Bitfarms agreed to buy 48,000 such devices from MicroBT, a leading mining computer manufacturer based in China. The computers would increase Bitfarm’s mining hashrate, or computing capacity, by about 5.0 Exahash per second (one million trillion hashes per second, or EH/s). The devices will be delivered to Bitfarms beginning around January 2022; all deliveries are expected to be made by December 2022. According to Bitfarms, a “substantial portion” of these new computers will be used in its Argentina facility.

Second, Bitfarms’ cash breakeven cost of mining at the Argentina facility, when it employs the new fleet of miners powered by electricity at this US$0.022/Kwh rate, is around US$4,125 per Bitcoin mined. Bitfarms’ breakeven cost in its Quebec facilities is around US$7,500 per Bitcoin mined.

Third, Bitfarms’ Argentina facility, if it contained all state-of-the-art mining equipment and drew the maximum 210 MW of contracted power, could generate annual run-rate operating cash flow of US$550 million. This cash flow is predicated on Bitcoin pricing of US$55,000 and a Bitcoin network hashrate of 200 EH/s, about a third above current levels. Bitfarms’ Argentina data center could potentially begin operations in early 2022 after a local construction company builds and installs the necessary electrical interconnection, high-voltage electrical lines and transformers required.

Bitcoin Network Hashrate Assumed (Current Hashrate is 156 EH/s)200EH/s
Max. Hashrate of Argentina Facility If All New Mining Equip. Draws 210 MW of Power 5.7EH/s
% That Argentina Facility Would Represent of the Total Bitcoin Network Hashrate2.850%
Number of Bitcoin Awarded Per Block, Awarded Every 10 Minutes6.25Bitcoin
Average Transaction Fees Per Block1.00Bitcoin
     Total Bitcoin Awarded Every 10 Minutes7.25Bitcoin
Daily Block Reward – Systemwide1,044Bitcoin/day
Number of Bitcoin That Argentina Facility is Expected to be Awarded Per Day29.754Bitcoin/day
Bitcoin Spot Price, US$$55,000
Expected Revenue Per Day, in US$$1,636,470
Power Consumption210MW
Average Electricity Price Per Kwh, in US$$0.022per Kwh
Daily Electricity Cost, in US$$110,880
Cash Mining Profit Per Day, in US$$1,525,590
Annualized Cash Mining Profit, in US$ millions$557

Finally, and to be conservative, if we assume that Bitfarms were to realize only about one-third of this annualized cash flow in 2022, and if we discount this cash flow back to today’s time frame using a 25% discount rate, the present value of just the potential 2022 incremental Argentina cash flow could be around C$185 million, or fully 45% of Bitfarms’ current enterprise value of about C$405 million.

Low-Cost Power Purchase Agreement is Itself Quite Valuable in Bitcoin Mining Industry

Earlier this month, Riot Blockchain, Inc. (NASDAQ: RIOT), a highly valued (US$3.25 billion market cap) U.S.-based Bitcoin miner, reached an agreement to acquire Rockland, Texas-based Whinstone US, Inc. for a combination of cash and stock worth US$651 million. Whinstone’s chief attribute is that its site has an attractive long-term purchase power agreement for up to 750 MW of electric power capacity, 300 MW of which is currently developed. Electricity consumption comprises perhaps 75% of the operating costs of a Bitcoin miner. (Other costs include hardware capital expenditures, bandwidth, wages, rent, insurance, as well as the costs of debt and equity.)

Bitfarms’ planned Argentina Bitcoin mining facility could generate significant incremental cash flow for the company beginning next year. Investors have seemingly not yet factored in the magnitude of this additional cash flow in relation to the company’s market valuation.

Bitfarms Ltd. last traded at $4.48 on the TSX Venture Exchange.

Information for this briefing was found via Sedar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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