| Financial Highlights:
Earlier this morning, Fortress Blockchain reported Q2 revenues of $1,353,976, which includes $986,253 recorded from the mining of digital currencies. Only using the revenues recorded from operations, we can deduct direct power and all other operational costs of $245,381 to yield mining operating profits of $740,872, which is being referred to Gross Mining Margin (GMM) (a non-IFRS measure). The GMM Yield is 75% in this depressed BTC environment.
From the GMM, we can further deduct all other costs excluding interest, taxes, depreciation and amortization to arrive at $234,337, or, a 24% EBITDA yield on revenues of digital currencies. This measure is derived from the June 30 BTC spot price of $6,381/BTC. This is an incredibly impressive measure for a new and growing company's first full quarter of operations. This provides an annualized run-rate at current capacity of approximately $937k, all else unchanged. The current capacity is running at 2 MW and 18.9 Petahash (PH) per second, which we will touch back on further in this report once we look into the EV/PH multiple of Fortress.
On the balance sheet, please note how cash and cash equivalents are separated from the digital assets they hold from mining operations. This is significant because BTC and BCH are digital currencies in their own rights and can easily be justified as cash and cash equivalents. If we sum these together, we arrive at ~$10.2 million. We can further add in the additional BTC and BCH that have been mined since Q2 to arrive at a real-time adjusted C&CE balance of around $10.66 million CAD, or, .15/share of Fortress common stock.
Therefore, our first major fundamental signal that expresses deep value is the fact FORT opened at it's immediately liquid adjusted C&CE balance. Given there is no significant long term debt on the books, FORT opened with an Enterprise Value of approximately $15,000 (basically, nil). As the trading session wore on and investors identified the company being priced at bankruptcy (which it clearly shouldn't be), the Enterprise Value slowly began to creep up with price. As of the final print of the opening day ($0.16/share), FORT's market capitalization is $11.39 million, resulting in a Enterprise Value of $727,615 CAD.
In order to put Enterprise Value into comparable and understandable terms, we must use it in conjunction with our previously calculated annualized EBITDA figure of $937k. EV/EBITDA is one of the most widely used ratios to determine the value of a company, and is often used because it is capital-structure neutral and debt agnostic, meaning it is meaningful in comparative studies across various debt levels. Now, despite admitting that we are not fans of "rule of thumb" paintbrush strokes of multiples across sectors and companies of different sizes and scope, we can still use empirical studies to roughly gauge what an 'acceptable' multiple would be in today's market, for the sake of conservatism.
As per a recent report published in equities.com, Canada, on average, experiences EV/EBITDA multiples of between 9-12x. The lower quartile has a cutoff of 5.77x. In our opinion, we can use a 5x multiple as a fair and conservative barometer of fair value for a cryptominer in Q3/2018. As of the final print of yesterday's trading ($0.16/share), Fortress' EV/EBITDA came in at 0.78x. What is even more astounding is that the EBITDA run-rate is assuming FORT remains at their current 2 MW capacity and does not engage any of the expansion opportunities that are in front of them and funded. This is the second instance that the fundamentals illustrate an undervalued share price.
Used purely as a barometer on current operations, the current takeover value of Fortress Blockchain is less than the annualized EBITDA run-rate without factoring in any increase to the price of Bitcoin, or, factoring in any expansion of mining capacity. This should paint a very clear picture of the return to risk at this level for investors.
In keeping the valuation topic front and center, let's switch to the single most important valuation tool for a crypto miner: Enterprise Value to Petahash per second (EV/PH), which we have explained in numerous previous write-ups that are available upon request. After surveying all of the publicly traded cryptominers, the EV/PH multiple ranges between 0.5x to 3.6x across the industry, with the average being 1.9x, on a current-operation basis. On a funded basis, this range moves to 0.3x to 2.5x, with the industry average being 1.3x.
Fortress' EV/PH as at the closing price of yesterday's trading ($0.16/share), given an EV of $727,615 and a current PH of 18.9, barely takes a reading with a 0.03x. To reach the low-end EV/PH multiple of 0.5x, Fortress would garner a EV of $9.45 million. Given C&CE remains unchanged, we can add it back to this EV to return a market capitalization of ~$20 million CAD, or, $0.28/share. This is the third instance where value shines through the fundamentals.
At this point, we will refrain from entertaining price scenarios that exist if Fortress moved to a median or even high-end multiple valuation, which we strongly believe it deserves based on the fact it truly is the pound for pound most profitable cryptominer available. We also aren't entertaining the scenarios of expansion, which include immediate opportunities as there are 66.2 PH of capacity available and fully funded, with 9 MW & 100 MW facilities in deep stages of due diligence. These scenarios are pure upside and absolutely not priced into the current market price, in our opinion.
Finally, it must be re-iterated that all of these fundamentals are a result of the extreme low cost environment of the current operations, which include industry low direct power costs of $0.026/kwhr, a PUE of between 1.02-1.05, and a resulting approximated break-even mining price of $2,500/BTC on an operational cost basis.
Outlook:
By all accounts this is a very rare, deep value opportunity that removes firm specific risk and market risk to a large degree. All returns from expansion are not being priced in at the current valuation, nor are any revaluation gains if BTC increases from these levels.
BTC remains the 'crypto of choice' as it recently reached its highest market share in the digital currency space since its creation. It is still the dominant digital currency of choice. It is not the "Napster of cryptocurrencies", as has been commonly debated. Rather, it is the "Gold of digital currencies", with an embedded store of value characteristic within the structure of Bitcoin, provided it remains a medium of exchange.
For any investor who views Bitcoin a mainstay in our global picture for the foreseeable future, Fortress provides an incredible value proposition that is not pricing in any appreciation in the underlying currency, or, expansion in the mining operations. Furthermore, the abundance of fiat currency on the books under cash and cash equivalents will be used to tackle optimal growth strategies in the near term.
We will be pleased to update shareholders on the evolution of these metrics and fundamental concepts as the story unfolds. Best,
Thesis Team |