Would You Invest in A Company Trading Close to Cash?

By | August 27, 2018
If you don’t believe that the market has soured on bitcoin public miners, have a look at FortressBlockchain (FORT-TSXV).
Trading close to cash value with revenue and positive cash flow.

Any investor has to look at a company trading close to cash, if only to figure out what’s wrong with it.Total revenue for the quarter was $1.35 million CAD. EBITA (Earnings before interest, tax, depreciation and amortization) was $234,000.Net Loss during the quarter was $268,741. The largest expenses were non-cash costs for depreciation $384,215 and share based compensation $355,712.

As of June 30th, the company had $9.1 million in cash and $1 million in digital currency.
Fortress Blockchain traded last Friday at 15.5 cents CAD. With 71 million shares out, that’s a market cap of $11 million and an enterprise value of $1 million.

Excluding one-off cost of share-base compensation and depreciation, cash flow is about $500K per quarter.

How Quickly Love Turns to Hate (Or Indifference)

There are three big reasons why all the public bitcoin miners (including Fortress Blockchain) are in the doghouse.

An obvious factor is the price of bitcoin has plummeted, from nearly $20K USD in late December down to below $7k.

Increased competition is another. The bitcoin network hashrate (roughly the number of miners competing for new bitcoin) has gone from 16.5 million Terahash to a high of 54 million Terahash in mid-August.

That means you need more 300% more hashing power to mine the same amount of bitcoin today as you did at the start of 2018.

The third reason was the high cost of mining rigs (specifically Bitmain rigs) in the last quarter of 2017 and first quarter of 2018.

Many bitcoin mining companies bought their rigs for retail price of $2000 USD and then waited up to three months to receive the rigs from Bitmain (and of course, by March 2018 bitcoin prices were way down).

The triple whammy has hammered the share price of every cryptocurrency mining stock this year. I don’t know of one stock that has manage to drop less than 50%. Most are 75% or more off their all-time highs.

The Big Question: Is the Bottom In?

To answer the big question, we need to look at those three factors.

Where is the price of bitcoin going? And the answer is I don’t know. I do know that the share price of these mining stocks are highly correlated to the price of bitcoin. If bitcoin pops up to $9K or $10K then I think these stocks go up a lot.

But what if the price of bitcoin goes down? In case of Fortress Blockchain, it will trade cash in the bank.

Remember, Fortress has the lowest break-even cost for mining bitcoin in all of North America (4.1 cents a kilowatt, all costs included, for it’s 2 megawatt facility).

If Fortress starts bleeding cash, then EVERYBODY is bleeding cash. And if everybody is bleeding cash, then that means some miners will be going bankrupt and switching off their mining rigs. That means it will become more profitable to mine bitcoin.

The moral of this story is: If you are being chased by a grizzly bear, you don’t have to run faster than the bear, just run faster than the guy next to you.

Fortress is one of the fastest runners out there.

This train of thought begs another question: if all the bitcoin miners go bankrupt in the next six months (and believe me, most of the miners on the Toronto Stock Venture Exchange are priced that way), who is going to buy all the next-generation mining rigs?

Last year Bitmain had essentially a monopoly on mining rigs, with market share of more than 75%.
But this year multiple new Chinese and Japanese competitors have entered the market, not to mention Samsung from South Korea.

Everybody is touting the promise of the new next-generation chips which will be 50% more efficient at mining than Bitmain’s flagship Antminer S9.

It doesn’t take a genius to see that there is now price competition in the bitcoin mining rig marketplace. The new rigs are priced at $2000 USD (same as the S9 last year) but Bitmain has already responded by slashing prices of the S9 to $600 USD.

The mining rigs manufacturers HAVE to price their new rigs so that the miners have at least a chance to make money. Trust me, suckers willing to overpay for mining rigs and wait three months for delivery are in short supply nowadays.

Fortress Blockchain looks to be another one of those asymmetrical trades that are now commonplace in the cryptocurrency universe.

Can Fortress Blockchain go down by 50%? Sure. but then it’s trading way below cash.

Can it go bankrupt? How is going to do that with $9 million in cash (not including their digital cash)?

Can it go up more than 50%? It has a market cap of $11 million. These types of stocks can go up 50% in one day.

Can it go up more than 100%? If the price of bitcoin goes to $10,000 before the end of 2018, anything can happen.


Disclosure: I own shares of Fortress Blockchain.