Hut 8 Mining Corp. (TSX: HUT) is a Canada-based bitcoin mining company and has the highest installed capacity rates within the industry and has a record of holding more self mined bitcoins than any other crypto miner or publicly traded across the globe.

Key highlights

• Launch of At-The-Market Equity Program: On February 11, 2022, the company initiated its At-The-Market Equity program, which enables it to sell from time to time its common share through an agent, H.C. Wainwright & Co., LLC. across the NASDAQ stock market in the US. The total sales are estimated at around USD 65 million, and the proceeds will be deployed towards working capital and funding its business operations currently in progress, repayment of the debt, and acquisitions.

• Update on the Bitcoin production & reserves:On February 3, 2022, the company stated that it achieved 9.93 Bitcoin per day production rate which came out at 308 Bitcoin produced in the month of January 2022. The operations were optimized to an extent where its production cost was reduced to less than the average of CAD 2,600 per Bitcoin. The company held 5,826 Bitcoin in reserves on January 31, 2022.  This performance was further contributed by an increase of 17% in its installed operating capacity from December 31, 2021, which currently evolves at 2.36 exa hash per second (EH/s).    

• Acquisition of TeraGo’s Data Center: On January 31, 2022, the company announced it successfully closed the definitive agreement to acquire the cloud and colocation data center business from TeraGo Inc. for CAD 30 million. This acquisition will enable the company to expand its operations from Five data centers across Canada, to offer sustainable and comprehensive technical services including the much-demanded scalable cloud services to its customers.

• Industry beating margins: The company outperformed on the profitability front by reporting an EBITDA margin of 46.6% for Q3FY21 as compared to the industry median of 7.6%. Further, it lowered its costs of operations which is respectably intimated on its Operating margins of 36.3% for Q3FY21 vs the industry median of Negative 0.8%.

Source: REFINITIV, Analysis by Kalkine Group

 Risks associated with investment

The company majorly deals in the Bitcoin and mining of digital assets, which is backed by the world of cryptocurrencies, one of the most volatile assets and extremely vulnerable to the laws and regulations. Another serious issue encroaching towards the world of Bitcoin is cyber security threat where the scam/theft can cause the companies to suffer losses. 

Financial overview of Q3FY 2021 (Expressed in CAD)

Source: Company Filing 

• Increase in Revenues: The company posted significant growth in revenues to CAD 50.34 million in Q3FY21 as compared to CAD 5.75 million in pcp. The push was majorly from mining operations of CAD 47.9 million for 905 Bitcoin in Q3FY21 vs 372 Bitcoin mined at the total cost of CAD 5.3 million in pcp.

• Operating Income: The explosive revenues were on account of an increase in mining for Bitcoin which increased the cost of revenues to CAD 21.23 million still bringing the positive operating income of CAD 18.27 in Q3FY21 where the company suffered operating losses of CAD 0.84 million in pcp.

• Net Income:  For Q3FY21 the company reported Net Income of CAD 23.37 million, which is a turnaround from the negative Net Income of CAD 0.90 million in pcp. The drastic shift from negative to positive was on the grounds of improvement in the revenue generation, and efficient self-mining operations,  
  

Valuation Methodology (Illustrative): EV to Sales Based

Analysis by Kalkine Group

Stock recommendation 

The company gave 4.77% positive returns in the last one month and 63.055 returns in the past nine months. Further, on the pretext of strong revenue numbers, positive net income with the declining cost of operations and increasing capacity utilizations makes the stock be a part of the portfolio to proxy play the Bitcoin and crypto asset class for better diversification. On the valuation front, the stock still shows the headroom left to catch with its peers, leaving the scope for the investors to match the industry valuations.

On the technical front, the stock rallied from the lows of CAD 6.88 in April 2020 to the lifetime highs of CAD 28.11 on May 21 and sold off from there gradually. Currently, the prices are in the support zone of CAD 19 to CAD 18 levels, before the stock moves on either side.  Interestingly the 200 DMA is crossing over the 50 DMA at current levels, and the more the stock sustains above the crossover, the fresh buying can be witnessed in the coming period from hereon.

Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the current market price of CAD 7.85 at 9:51 AM Toronto time on February 18, 2022. We have considered Voyager Digital Ltd., HIVE Blockchain Technologies Ltd., Bitfarms Ltd. as the peer group for the comparison.

One-Year Technical Price Chart (as on February 18, 2022). Source: REFINITIV, Analysis by Kalkine Group 

   Technical Analysis Summary:

Disclaimer

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