Can Argo Blockchain keep investor momentum going after upgrading its Q2 guidance?
This week saw crypto-mining services company Argo Blockchain (LSE:ARB) continue a string of strong updates with the news that it was upgrading its second-quarter guidance by 57pc. The move, which was prompted by strong market conditions and better-than-expected hardware prices, prompted a 21pc rise in Argo’s share price to 6.8p. In comparison, it sat at just 3.3p at the beginning of May. Here, we take a look at the firm’s operations to date and ask whether its prospects outweigh the risk of another widespread crash in the cryptocurrency market.
What is it?
Argo Blockchain was established in December 2017 to develop a platform that could offer cryptocurrency mining as a service (MaaS) to anyone in the world at scale. In very simple terms, this type of ‘mining’ is a process in which transactions for various forms of cryptocurrency are verified and added to the blockchain digital leger. Every time a cryptocurrency transaction is made, a miner is responsible for ensuring the authenticity of information and updating the blockchain with its details.
The process itself sees numerous miners compete to solve complicated mathematical problems associated with a block containing the transaction data. The first miner to crack the code authorises the transaction and is paid in cryptocurrency themselves. Given the highly technical nature of this process, miners must use specialised hardware that uses huge amounts of energy to remain competitive.
Argo’s platform went live in June last year, initially covering just four cryptocurrencies – Bitcoin Gold, Ethereum, Ethereum Classic, and Zcash. Its technology allows users to configure and manage the cryptocurrency they wish to mine, which mining pool they wish to contribute to, and how they would like to store the generated coins.
Two months after launching its platform, Argo went on to list on the main market of London Stock Exchange, raising £25m before expenses to raise its profile and fund its expansion and long-term growth. The firm got to work on this growth immediately, expanding its mining capacity to 9.5MW with two new data centres and a new server platform and adding cryptocurrencies Komodo, Horizon, and Bitcoin to its platform. By the beginning of December, it had sold 10,325 mining packages, up from 4,200 at the beginning of October – a rise of 146pc that put it considerably ahead of its sales targets.
Despite strong progress, Argo suffered greatly throughout its first six months of trading, with shares falling from highs of 13.1p in August 2018 to an all-time low of 2.8p in February 2019. This decline stemmed from rapidly deteriorating conditions in the cryptocurrency market, where prices slumped by as much as 80pc throughout 2018. Indeed, from 1 January 2018 to 1 January, the price of Bitcoin fell from $13,791 to $3,768.
In response to this severe price pressure and volatility, Argo announced in February that it would cut its costs by 35pc, stop accepting new mining subscriptions, and terminate all existing MaaS contracts by 1 April. Instead, it said it would temporarily focus on mining directly for its own accounts.
The business said the restructuring measures and refocus – which followed six months of better-than-expected growth – would reduce its overall cash burn and deliver EBITDA break-even ahead of expectations in H2 2019. Elsewhere, it added that its temporary movement away from SaaS would enable it to step-up its long-term investment in mining capacity as its marginal peers leave the industry and hardware prices crash by up to 70pc.
Argo’s pro-active approach to its unfortunate macro situation was received well by investors, with its shares jumping by 20pc on the day the update was released. As the firm put it in its full-year results several weeks after the strategic change: ‘The board strongly believes that Argo’s refreshed strategy, strong balance sheet, business agility and technology experience provides a strong foundation to ride out the current challenging market conditions and deliver long term shareholder value.’
After remaining below 4p for some time, Argo’s shares have enjoyed a huge amount of positive momentum since the beginning of May. This has been driven primarily by two factors.
Firstly, after taking advantage of depressed industry prices to increase its hardware capacity, the company announced a strategic partnership with HIVE, one of the world’s leading crypto-miners, on 13 May. The deal will see the two work together to create the world’s largest purpose-built B2B mining service provider. The firms plan to bring together their existing mining capacity to meet increased demand from the institutional space, an area that they claim to have been showing increasing interest in the crypto asset space.
‘This new strategic partnership presents a significant opportunity to service larger strategic institutional clients who need mining-as-a-service (MaaS) infrastructure to mine virgin coins from safe jurisdictions like North America and Europe and in addition from publicly listed entities such as Hive and Argo,’ added Argo in its update.
Under the terms of the proposed strategic co-operation, the two business also agreed conditionally to a share swap arrangement. This sees Argo receive c.16.3m Hive’s shares, and Hive receive c.44m of Argo’s shares, equal to 15pc of its total issued share capital. Crucially, this deal valued Argo’s shares at 11.6p each – a 231pc premium to its closing price in the previous day’s trading. Unsurprisingly, the news prompted a 75pc lift in Argo’s share price.
Argo’s second major positive development has its roots in a requisition notice issued at the beginning of April. This saw major shareholder First Investments request a general meeting at which it would propose the removal of the organisation’s then-executive chairman Jonathan Bixby, and its director Mike Edwards.
After some to-ing and fro-ing, the two firms announced a complete reversal of sentiment of 15 May, with Bixby stepping down from Argo’s board and Edwards assuming chairmanship of the business. Separately, and most importantly, Argo announced that First Investments had signed a commercial letter of intent to become Argo’s first and potential largest enterprise-level MaaS client for up to $1m. As well as validating Argo partnership with Hive, the news led Argo’s shares soar to 7.5p.
This brings us to this week, which has seen Argo upgrade its guidance for the second quarter of 2019. The company said it expects to generate c.£685,000 of crypto assets in May based on a Bitcoin price of $8,575 – an increase of c.37pc on its previous guidance in April. The business also said it now anticipates generating c.£2.85m of crypto assets on its balance sheet by the end of the second quarter, approximately £1m or 57pc higher than previous estimates.
Argo put these increases down to a combination of increasing cryptocurrency prices – which have risen c.49pc since its last update – and higher anticipated production levels from its new and existing equipment.
It is certainly encouraging to witness the beginnings of a turnaround in Argo’s fortunes, and its upgraded forecasts on the back of its Hive and First Investment deals represent a great kick-start to its new strategy. What’s more, the firm’s £15m cash balance as at 14 February bodes well – although this will have been eroded somewhat by hardware expenditure since.
A problem for many moving forward lies in the ongoing prospects of the cryptocurrency market. Argo would have you believe everything is moving in the right direction. Indeed, upon announcing the deal, the firm pointed out that bitcoin prices had almost doubled from $3,566 to $6,900 between February and May. Likewise, it added that the industry has hit a tipping point as its regulatory environment becomes clearer and large financial institutions like JP Morgan, Fidelity and even Facebook show growing interest in the space.
While that may be true, the more risk-averse among us will struggle to forget how quickly the cryptocurrency space was wiped out in the previous downturn.
Prices remain far below the peaks achieved prior to this downturn, and if another collapse occurs then these large institutions are unlikely to hang around. Meanwhile, the clarity of the crypto sector’s regulatory environment will be largely irrelevant.
Argo looks like a sound business with a shrewd management team that has so far managed well the tumultuous macro conditions in its sector. What’s more, its progress over the last couple of months shows that it has the potential to really beginning throwing off some serious cash under the right conditions. With this in mind, exposure to the business may be best suited to those well versed in cryptocurrencies that are confident in the sector’s ability to use technological developments to avoid another widespread crash.
Argo Blockchain’s Bixby details partnership with leading crypto-miner HIVE
The author was remunerated but does not hold shares