AnalysisNews

The First Big Bitcoin Landlord of Western Canada Goes Public

The real money in real estate isn’t flipping houses but being a landlord.

DMG Blockchain Solutions (TSXV: DMGI) has begun trading on the Toronto Venture Exchange.

DMG has several business models but their first attention-grabber for the public markets is being a huge mining-as-a-service bitcoin provider.

Their mining facilities across Canada have a current capacity of 40 megawatts and they plan to expand upto 80 megawatts by end of summer.

In speaking with Dan Reitzlak, CEO of DMG, he is predicting that DMG will have 10,000 Bitcoin mining rigs operational and “energized” by May of 2018.

It’s common knowledge that Bitmain is cutting back orders of the Antminer S9 due to heavy demand. But plenty of S9 mining rigs could flood the market very soon, Reitzlak says.

“We had lots of call from China for companies looking for industrial-scale hosting services in Canada.”

“This is really important. Sheldon [Bennett, CTO of DMG] is the most experienced mining operator in the country. He set up Bitfury’s 58-megawatt facility, the largest in the country that I’m aware of. You can’t just use ordinary electricians for this, you’ve got to have done this before.”

Those ten thousand rigs will consume about 14 megawatts, so there is lots of room to grow.

“if I had 200-300 million dollars, I could build out to a gigawatt of mining and go to China and say come to Canada,” says Reitzlak.

DMG Blockchain is ramping up quickly. By the 23rd of February, they will already have close to 3,000 mining rigs plugged in and turned on. Another 1000 rigs are due to be delivered in three weeks.

And how will DMG pay for all of this? By becoming a landlord.

Introducing the Mining-As-A-Service (MaaS) Model

DMG has immediate plans for 80-megawatt capacity but already is planning to add another 40 megawatts on top of that.

To finance such an enormous build-out, DMG (and any other public Bitcoin mining company) can choose one of three ways to raise money:

  1. Mine the Bitcoin and sell on the open market (which is hard to do when you haven’t build the mining facility yet.)
  2. Raise the money through investor financings.
  3. Sell mining (hosting) contracts.

Option number three is what DMG is focused on, with their Mining-As-A-Service (Maas) business model. DMG is in the business of selling mining contracts to various corporate and private customers who want to ensure and safe and steady supply of Bitcoin.

Of the nearly 3,000 miners currently operating, 2,600 have been leased to DMG customers including:

  1. 1100 to Bitmasters, a Japanese network marketing group that has been buying (and hoarding) Bitcoin for five years. They have ~20,000 members.
  2. 1000 to Mogo, a Canadian financial services firm with 500,000 members
  3. 600 to a private company which was their first mining contract signed back in August 2017,

Furthermore, the 1000 rigs due to be delivered in 3 weeks will be leased out to another Japanese company (identity to be announced later).

Now the MaaS business model has drawbacks. Back in December, when the price of Bitcoin was briefly $19.000, it was obvious that DMG left a lot of money on the table.

For example, the contact signed with the private company in August only paid them $100,000 a month (and is in the process of being reworked).

But then again, you had the wicked price correction in January.

In the future, there will be considerable debate between the merits of selling Bitcoin mining contracts or selling on the open market, but it’s obvious that the former is much less risky and allows for better operational planning.

When I asked Reitzlak if they plan to continue leasing out close to 100% of their rigs, he said they were leaning towards a 50/50 blend of leasing and keeping the Bitcoin. But a lot depends on the future price of Bitcoin and demand from such customers as Bitmasters and Mogo.

The Listing is New, But the Company is Not

DMG Blockchain was founded in September 2016. They built their first mining facility in the fourth quarter of 2016. They built their second mining facility in the third quarter of 2017.

In the last three months, DMG has raised CAD $35 million to finance further expansion including bumping up their management team to 15. Here are the key players:

Daniel Reitzik is the co-founder and CEO of DMG Blockchain Solutions. Previously, Reitzik founded WindowActive Systems Inc., a touchscreen technology company. Reitzik was also the CEO of the publicly-listed Digital Youth Network Corp.,

Sheldon Bennett is the Chief Technical Officer. He has over 20 years of management experience. Before DMG. Bennett led BitFury’s Canadian mining operations, where he was responsible for engineering and the setup of industrial bitcoin mining operations. Previous to this he held senior positions at companies like Cisco Systems, Ernst & Young and Fonterra.

Steve Eliscu is the Executive Vice President of Corporate Development. He was most recently head of finance at Bitfury. He ran his own consulting business and was part of a corporate development team that executed a half-billion-dollar acquisition. He has nine years experience at UBS as a research equity analyst.

There are some other very good, very seasoned executives working for DMG but for the sake of brevity I have not included their bios here.

If you have never heard of Bitfury, their company website is here. They are one of the oldest, largest and most successful blockchain companies in the world. DMG has managed to poach many executives from Bitfury so they are climbing the learning curve as fast as any other management team out there.

Share Structure

The Company has 93 million shares outstanding, and 105 million fully diluted.  DMG raised their money at 35 cents and 80 cents.

If DMG can scale up their mining operations to 80 megawatts without further investor financings, that would be…amazing.

They did to raise $35 million in financings privately which is good. Most companies must wait until they are public before getting a big raise.

(Please note, I invested in a DMG investor financing).

Conclusion

There are two other cryptocurrency mining companies that are listed on the Toronto Venture Exchange,Hive Blockchain (HiVE-TSXx) and Hashchain (TSXv-KASH).

HIVE’s market cap is $494 million and Hashchain is $66 million. If you put DMG right between the two, you get a valuation of $313 million or about CAD $3.00 a share. Today it opened at $1.40.

In the long run, I will be very curious to see if the market looks at the service contracts with Mogo and Bitmaster and real dollars from these contracts and rewards DMG accordingly.

Most, if not all other public cryptocurrency companies are being penalized for having too much crypto on the books and not enough dollars. That’s shouldn’t be the case with DMG.

But we’ll see.

Ross

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