Per RBC: "Stranger than fiction – testing a pivot to BTC" November 9, 2021
Conifex Timber Inc.
Stranger than fiction – testing a pivot to bitcoin
Our view: Conifex reported Q3 results that were modestly above our
forecast due to higher-than-expected lumber pricing. Going forward, the
two key value driversfor Conifex will be: 1)the success ofthe contemplated
bitcoin mining operations; and 2) the impact of various BC provincial
government policies on fiber supply. If the bitcoin operations could be
as profitable as management expects, we see significant upside vs. the
current price. However, we await for more clarity on profitability/returns
before building in upside to our valuation. We see upside in the standalone
business going forward and reiterate our Outperform rating.
Key points:Reiterating our $3.00 price target – Our price target is based on a blended ~6.0x EV/EBITDA multiple on our trend EBITDA (85%) of $25MM and our
2022E EBITDA (15%) of $30MM.
Q321 EBITDA above our forecast – Conifex reported EBITDA of $3.3M,
above our forecast of $2.0MM and consensus of $1.9MM. The betterthan-expected result was largely attributable to a higher lumber price/
mix that was partially offset by lower-than-expected lumber shipments.
Management noted that the lower q/q production was attributable to the
two-week curtailmentin August, which was necessitated by record-high log
costs and the collapse in lumber prices.
Bitcoin mining? Yes, actually – Conifex, in partnership with the Tsay Keh
Dene First Nation, intends to host ~3 megawatts of bitcoin mining capacity
on a trial basis. Management noted that the relatively cool climate, the
availability of affordable and renewable power from BC Hydro, and the
large property size relative to the site are ideally suited to hosting data
center or crypto mining operations. The initial capital outlay is expected
to be modest. If successful, Conifex expects that a full ~$30MM facility
could generate ~$10–15MM of EBITDA per year. According to Hut 8 Mining,
bitcoin mining profitability is primarily a function of controlled (hash rate,
electricity costs, and expenses) and uncontrolled (bitcoin price, block
reward, network hash rate, etc.) variables. For more details on bitcoin/
cryptocurrency, click here for an RBC primer.
Management outlook – Lumber production is expected to increase, as
Q4 operating rates are expected to improve q/q to~88% (vs. 67% in Q3).
Conifex also anticipates that shipments will increase q/q as the inventory
position is unwound. In addition, fewer shipments are expected to be
offshore in Q4. In sum, Q4 operating results are expected to be largely
flat q/q. The company is awaiting more specific information on the BC
government’s proposed old growth logging deferral before assessing its
impact on the business; we believe that deferrals would be negative, but
in our view there is a good chance that Conifex would be able to work
with First Nations to continue operations given that it operates the only
remaining mill in Mackenzie.
Moving forward with Substantial Issuer Bid – Conifex expects to offer to
purchase up to 4 million common shares at a price of $2.25/share, which
represent ~9.1% of the total number of common shares outstanding.