Iris Energy: The Fair and Renewable Play on Bitcoin (NASDAQ: IREN)

alvarez

basic thesis

Anyone who has followed my writing knows that I am not a fan of most bitcoin and other crypto plays. To the extent that anyone wants to get in touch with cryptocurrencies, I believe companies like Coinbase (COIN) and MicroStrategy (MSTR) are horrendous and inefficient avenues with poor business models, sketchy balance sheets, and poor management teams.

I have a generally healthy skepticism about bitcoin (BTC-USD), no surprise for a man of value and credit. That said, if the first rule of investing is “don’t lose money” and the second is “don’t forget rule #1”, the third is “be humble and open-minded.” A lot has been thrown at bitcoin and is still around.

Since I don’t intend to give up my short views on COIN and MSTR, a long on the other side is almost necessary. Fortunately, Iris Energy is a play on bitcoin with good core economics, a solid balance sheet, top-notch management and asset flexibility to protect against downside.

Iris Energy (NASDAQ: IREN) is the largest Nasdaq-listed bitcoin miner to use 100% renewable energy. It provides an attractive “data center” exposure to the bitcoin theme by combining:

• Leading high-efficiency data centers designed and built in-house
• Low cost, operation powered by excess renewable energy.

These properties lead to approximately $200m of high margin eg annual mining profits (revenue minus mining pool fees) and low estimated power costs ($0.045/kWh based on current BC operations) in the current market. Together these advantages mean a strong balance sheet ($55m cash, no debt) and significant expected cash generation on top of a low-risk growth opportunity.

iris bitcoin mining assets

Iris Energy currently has three operating sites in British Columbia, Canada (Canal Flats, Mackenzie and Prince George) and a recently completed site in Childress, Texas, which currently produces 5.5 Exa hashes/second (or 180MW). Supports computing power. For the uninitiated, you can find an explanation of axa hash and hashrate at Here,

Iris Energy builds and operates its own proprietary data centers, providing long-term security and operational control over its assets. The company’s facilities are regularly ranked among the most efficient in the industry in terms of uptime.

The company recently announced an additional plan for a 1.0 EH/s near-term expansion at its Childress site without raising additional capital. This would make Iris the fourth largest self-miner in the world.

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Iris Energy Advantage

Iris Energy has used 100% renewable energy since its inception. The company targets markets with low-cost, excess renewable energy where its operations can help solve energy market challenges (for example contributing to lower electricity prices in regulated energy markets such as British Columbia or providing intermittent Reducing loads to support regulated energy markets with high penetration of renewables (such as Texas).

This strategy not only gives Iris affordable energy, but also helps mitigate potential regulatory and/or political risks associated with its operations.

Iris Energy’s cost of electricity for its BC operations until March 2023 was ~$0.045/kWh (or ~$11.5k per bitcoin versus the current spot price of ~$26k/coin at the time of this writing). Importantly, the Company’s electricity costs in BC are reviewed and fixed on a 12-month basis, bringing certainty to its projects.

The company recently disclosed that as part of BC Hydro’s annual rate review, the total unit cost of electricity was expected to increase by ~2% for the fiscal year beginning April 1, 2023 (ie ~ an increase of $0.001/kWh).

There is also low risk and near-term growth opportunities at the Company’s Childress site (potential expansion capacity of 600MW).

It has also made significant upfront investments in key infrastructure (such as a 600MW bulk power substation and the first 100MW primary substation) that provide it with the ability to rapidly and efficiently scale beyond the company’s initial 20MW data center.

The Childress Site Bulk Power Station is connected to the ERCOT grid, allowing real-time access to energy market prices. To fully utilize that connection, the company has an integrated proprietary data center design with engineering and technology that rapidly adapts to changing power demand, cooling systems and miner loads – effectively maximizing cost per kWh does.

Childress Power Optimization (Iris Energy Q1 Presentation)

significant cash generation and margin

The company’s capacity of 5.5 EH/s could generate strong cash flow in the current market with upside benefits for rising bitcoin prices. I will also note here that Iris Energy has a non-HODL strategy (it liquidates all bitcoins mined daily). This strategy provides low risk, “cash flow” exposure to bitcoin.

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Iris plans to add an incremental capacity of 1.0 EH/s of miners at its Childress site in Texas, which will obviously increase the number above. Childress currently has an operating capacity of 20MW with near-term plans to add an additional 20MW. The company estimates that the 1.0EH expansion will require ~$35mm of CapEx spending. Given that the company has $55mm in cash and strong operating cash flow, it can fund its near-term expansion without additional capital. Most other miners like Marathon (MARA) do not have this capability.

Furthermore, management has repeatedly spoken that any future growth capex will have to be increased almost on day one. Therefore, I would assume that should growth opportunities arise that cannot be funded internally, the same accretion constraint would apply to any debt and/or equity funding.

assessment and compass

Iris Energy is favorably positioned against its listed peers across key metrics, including:

• Power Source (100% Renewable Energy)
• geographic diversification
• Efficiency (BTC mined per EH/s installed).

Despite these advantages, the company continues to trade at a material discount to its peers on both an EV/EH and EV/EBITDA basis, which vary widely between comps.

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Management

Unlike COIN, whose management is in a tussle with the SEC, and MSTR, whose management is running away from a garbage software business by throwing a crazy leveraged Hail Mary at bitcoin, Iris Energy is led by an experienced management team with impressive results. Have track record. Having completed tens of billions of energy and infrastructure projects globally, renewable energy, infrastructure and digital assets have made breakthroughs. The company’s founders, board and management own approximately 23% of the company’s shares, fostering a long-term alignment of interest.

risk

The main risk with any cryptocurrency-tied company is the decline in the values ​​of the coins. I believe Iris mines bitcoin profitably as low as ~$18,000/coin.

However, because Iris has such modern and energy-efficient operations, it could convert those facilities to other uses, such as data centers, if bitcoin prices drop significantly below $20,000 and stay there. Management has never given concrete numbers on what that change would cost, but the balance sheet should give them the flexibility to use the alternative. Another option may be to sell your facilities to another company for use as a data center. Another risk is that it goes against what the company has signaled about accretion versus blended equity. Any equity (or debt for that matter) that was seen as dilutive (short or long term) could drag the stock down. Ultimately, I think management is highly unlikely to go for a hybrid offering of any kind, but miners often need capital and a potential offering that is diluted or may be considered is a risk worth considering. Everyone should know.

conclusion

As I said at the beginning of this piece, my main issue with cryptocurrencies is finding a proper way to invest in them. In my opinion, Iris Energy offers an attractive outlook. It has a liquid, net-cash balance sheet and a significant real asset base, which in my estimates generates cash flow mining bitcoin below ~$18,000/coin.

The company’s flagship high-efficiency data center and renewable energy strategy are key differentiators from its listed peers, as is its ability to convert to data centers if bitcoin mining disappears. The imminent installation of the company’s 6.5 Eh/s capacity at Childress and a low-risk near-term growth opportunity (600 MW of potential expansion capacity) are also positive catalysts.

I think Irene can easily double from here and probably even more when one looks at the comps’ valuations. This is an excellent long against Coinbase and MicroStrategy or other miners. That said, all positions in cryptocurrencies are inherently extremely volatile and speculative. Consider the volatility of stocks as well as the lack of testing of cryptocurrencies’ long-term value before making any investments, long or short, in bitcoin and bitcoin.

Editor’s Note: This article features one or more microcap stocks. Please be aware of the risks associated with these shares.

source: seekingalpha.com