Hut 8 Mining Corp.

Hut 8 Mining Corp. (TSX: HUT) is a cryptocurrency mining company with industrial-scale bitcoin mining operations in Canada.

Key Updates:

• Insiders are selling the stock: In the last couple of months, insiders are continuously selling the stock despite a soaring price, which raises the concern about the group’s prospect.

• Leading momentum indicator showing possible price consolidation: On the weekly and monthly price chat, HUT shares are trading in a steep overbought zone as its shares are up approximately 140% in a month over period. 14-day RSI is in neutral zone but tilted mostly towards the oversold territory.

• Collaboration with Genesis Global Capital: On January 06, 2020, the company announced the opening of a Bitcoin (BTC) Yield Account in collaboration with Genesis Global Capital, a company providing a single point of access for digital asset markets. The above agreement would enable the company to earn at a 4% rate of return on its BTC Holdings.
• Management Update: Recently, the company announced the appointment of Sue Ennis as Head of Investor Relations.
• Industry advantages: Bitcoin has a universal appeal, and the value remains indispensable irrespective of its geographical presence. Moreover, the value of the bitcoin does not depend upon any Government’s fiscal measures or any monetary changes done by the central banks. A bitcoin operates through the mathematical algorithm and is secured by cryptography and trades throughout the day.

Q3FY20 Financial Highlights:

• HUT announces its quarterly results, wherein the company posted revenue of CAD 5.754 million, significantly lower from CAD 26.749 million in the previous corresponding period (pcp). The decline was primarily attributed to lower bitcoin production combined with higher network hash rate.
• The group reported mining loss of CAD 2.11 million, as compared to a mining profit of CAD 15.39 million in Q3FY19. The decline was primarily attributed to a significant decline in the revenue, partially offset by a lower site operating costs (CAD 7.871 million versus CAD 11.353 million in pcp).
• The company posted its net operating loss of CAD 0.84 million, compared to CAD 3.69 million in the Q3FY19. The improvement was aided by a gain from the revaluation of digital assets amounting CAD 5.577 million, as compared to a loss from revaluation of digital assets of CAD 10.050 million in pcp.
• Net loss stood at CAD 0.90 million, as compared to a net loss of CAD 5.188 million in Q3FY19.                         

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The fluctuation in the Bitcoin are subjected to complex calculations, which are hard to understand by the common people and hence, trading in such currencies may lead to a loss in the fair value.

Stock Recommendation:

Despite a weak quarterly revenue, the stock of HUT is trading near the upper band of its 52-weeks trading range of CAD 4.38 and CAD 0.51. The company’s operations remain highly volatile in nature, due to the fluctuations in the bitcoin value and slide in production by the bitcoin miners. Though the stock witnessed a stellar run in the recent past, a lot of insider selling in the past couple of months raises a concern. Further, the group reported weak revenue number and is loss-making at the operating level. On the valuation front, the stock is available at EV to Sales multiple of 8.7x, which is more or less in line with the Industry median of 9x on Trailing Twelve Months (TTM) basis. Since the company operates in cryptocurrency mining, there might be some upside in the stocks, but considering the aforementioned facts, we prefer to remain on the sideline. Hence, we recommend a ‘Watch’ stance on the stock of at the closing price of CAD 3.91 on January 06, 2020.

HUT Daily Technical Chart (Source: Refinitiv, Thomson Reuters) 

Galaxy Digital Holdings Ltd

Galaxy Digital Holdings Ltd (TSX: GLXY), formerly Braymer Pharmaceuticals Inc, is a Canada-based diversified, multi-service merchant bank dedicated to the digital assets and blockchain technology industry.

Recent Developments

On December 16, 2020, Galaxy Digital Holdings Ltd. announced that its affiliate, Galaxy Digital Capital Management LP would serve as the sub-advisor to the CI Galaxy Bitcoin Fund, a closed-end investment fund listed on the Toronto Stock Exchange and managed by CI Global Asset Management, one of Canada's largest investment management company. The Fund's bitcoin would be priced based on, and the Fund's Net Asset Value would be calculated using, the Bloomberg Galaxy Bitcoin Index ("BTC"), which measures the performance of a single bitcoin traded in US Dollars.

Key Highlights

• Strong rally in bitcoin and equity assets benefited GLXY: A firm rally in the bitcoin has sent GLXY shares higher on the exchange, as the company has a significant investment position in the bitcoin. Also, the company has an investment position in the equities as well, which has rallied a lot after March 2020 free fall.
• RSI Hovering in Overbought Zone: The leading momentum indicator 14-day RSI is hovering in an overbought zone at 76 on the daily price chart, while, on the weekly price chart the 14-day RSI is at 90, which implies that after ~105% price surge in a month over period, the stock is due for a price consolidation.
• Stretched Valuation: From the TTM Price-to-Book Value ratio standpoint, GLXY shares are trading at a multiple of 2.73x, which implies ~ 57% premium against the industry average LTM Price-to-Book value multiple of 1.73x.
• Insiders Selling: Between November and December 2020, strong insider selling has been taken place in the stock. However, the price has significantly soared up post that. But insiders selling especially in case of small cap stocks raises concern.

Insider Selling. Source: Refinitiv (Thomson Reuters)

Financial Highlights: Q3FY20

Source: Company Filing

• For the three months ended on September 31^st, 2020, the company’s reported income stood at CAD 28.75 million vs a net loss of 0.83 million reported in the same period of the previous financial year. The income was driven by a CAD 10.45 million net realized gain on the digital assets, and CAD 15.81 million gain on the investments, partially offset by derivative losses of CAD 0.79 million.
• The group’s operating expenses also reduced by 25% on a YoY basis to CAD 17.02 million against CAD 22.55 million reported in the same quarter of FY19. This was primarily driven by substantial decrease in the Equity based compensation and General and administrative expenses.
• The company reported net comprehensive income of CAD 44.635 million in the quarter under consideration against a net comprehensive loss of CAD 68.238 million in Q3FY19, driven by net unrealized gain of CAD 16.156 million on digital assets and Net unrealized gain of CAD 17.09 million on investments.

Source: Company Filing

Risk Associated with Investment

The company’s business model is significantly exposed to the volatility in the cryptocurrency prices, equity market and other speculative asset classes. A downturn in the global financial market could have a significant impact on the group’s performance.

Valuation Methodology (Illustrative): EV to Sales

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock Recommendation: There are humungous uncertainties hovering over the global economy on the potential impact of COVID-19 pandemic on the world economy in the next few quarters. A mix of opinions are floating over the world, as some are claiming that we are back to the normal and some are quite bearish on the global economic health in the next few quarters. This can bring a lot of large swing the financial markets and speculative asset classes, which could have a similar impact on the GLXY shares as well. However, given the momentum indicator levels on the daily and weekly price chart, recent insider selling and valuation, we believe a price consolidation due in the next few trading sessions. Therefore, based on the above factors, we recommend investors to 'Avoid' at the closing price of CAD 12.30 on January 06, 2020. We have considered PennantPark Floating Rate Capital Ltd, WhiteHorse Finance Inc, First Eagle Alternative Capital BDC Inc, etc. as the peer group for comparison purpose.

1-Year Price Chart (as on January 06, 2020). Source: Refinitiv (Thomson Reuters).

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.