KanawatTH
Even though Core Scientific (NASDAQ:CORZ) decided to sell off a lot of its Bitcoin holdings over the last several months, it is still positioned well for when the price of Bitcoin returns to its upward growth trajectory.
Much of that is attributed to its reluctance to take on more debt, cost-cutting measures, access to capital, and its highly successful production performance which is projected to reach approximately 2,000 Bitcoins per day by the end of 2022, according to management.
With the share price of CORZ collapsing throughout 2022, the risk/reward dynamic is very favorable for investors taking a position at this time or averaging down to lower their cost basis.
In this article, we’ll look at the various factors that make CORZ a good speculative play for investors over the long haul.
Recent production performance
In its latest release, CORZ reported it mined 1,213 Bitcoin in September, a 9 percent decline from the prior month.
CEO Mike Levitt said the drop in the number of Bitcoin mined was related to some defects in electrical equipment from manufacturers, along with severe weather in some of its mining jurisdictions, which caused it to temporarily shutter some of its mining operations.
Even under those difficult circumstances, the company was able to boost its EH/s from 12.69 EH/s in August to approximately 13 EH/s in September. That was the result of the company expanding the number of self-mining servers from 127,716 to close to 130,000 during that period.
As for sales, CORZ sold 1,576 BTC in September at an average price of $20,460 per Bitcoin, for a revenue total of $32.2 million. In contrast, the company sold 1,125 BTC in August for an average of $23,014 per Bitcoin for a total of $25.9 million in revenue. As a result of the sales, CORZ held 1,051 BTC and $29.5 million in cash at the end of September, in comparison to the 1,406 BTC and $47.2 million cash it held at the end of August.
When CORZ first sold off its BTC in earnest, it concerned me because I liked the strength it added to its balance sheet, and the future potential of the value of the Bitcoins it held before it implemented its strategy.
But with the company able to produce so much BTC on a monthly basis, it won’t take the company long to build up its BTC reserves once the price of Bitcoin starts to move up again.
And as its production levels continue to significantly rise over the next 3 months or so, it’ll be able to both grow its holdings while selling off if the price of Bitcoin justifies those actions.
At the end of September CORZ was operating about 232,000 ASIC servers for self-mining and colocation, which generated 22.5 EH/s. By the end of 2022 CORZ has plans to add 38,000 more self-mining ASIC servers.
Concerning its colocation services, the company added around 8,400 new servers to further serve its 102,000 customer-owned ASIC servers. Colocation accounts for approximately 9.5 EH/s, or 42 percent of total EH/s, something not all investors are aware of; that’s what brings the total to 22.5 EH/s.
Balance sheet and access to capital
At the end of Q2 CORZ had total debt of about $960 million, not including accounting reserve adjustments which were a little under $200 million. Of the overall debt, a little over $500 million was privately placed convertible notes, which mature in April 2025. They won’t have much cash impact on the company because they bear interest in cash at a 4 percent rate. They include a non-cash pay of 6 percent with no principal payments due until they mature. Management stated it was “very comfortable” with the maturity date. Assuming the price of Bitcoin rebounds and share price climbs, the company should be able to convert the debt to equity.
CORZ also has a debt obligation with B. Riley for $57 million that will pay out over the next eleven months. It has already paid off $18 million of the original loan of $75 million. Management stated it’s also comfortable with its ability to pay what it owes B. Riley.
Concerning the financing of its equipment, CORZ plans to have 170,000 self-mining servers operational by the end of 2022, with a little over half (86,000) “currently encumbered by debt or leases,” representing about $330 million as of the end of Q2. Management, once again, said it doesn’t see a problem with continuing to service equipment debt either.
In regard to financing, the company has a $100 million equity line of credit it can tap into whenever it wants over the next couple of years. Presumably, unless it’s absolutely needed in the near term, management said “we don’t believe it is sensible to increase our debt.”
In an effort to lower expenses the company cut 10 percent of its staff and is getting out of non-core businesses.
Something that investors should consider in regard to the company’s balance sheet and servicing its overall debt is the projected increase in the number of Bitcoins produced on a monthly basis.
If it in fact comes close to the 2,000 monthly Bitcoins mined, that’s a big increase from where production stands today. On average, it would be approximately 700 to 800 more Bitcoin mined a month by the end of 2022. Even at a modest average price of $19,000, that would generate $38 million in revenue a month. It’s easy to see the impact this would have on the performance of the company if the price of Bitcoin resumes its upward trajectory. That in turn would significantly improve the balance sheet of CORZ because of its ability to pay down debt and use revenue from Bitcoin sales to finance its needs. I also believe the company will eventually start to build up its Bitcoin reserves again, further solidifying the balance sheet. That won’t happen in the near term, but when inflation starts to shrink on a sustainable basis, the price of Bitcoin would provide a lot more options for the company than it currently has.
What to look for with the Federal Reserve
My thesis is that once inflation starts to show signs of slowing down, the price of Bitcoin will initially surge, by which I mean the first time CPI has any meaningful drop. I don’t believe the first month it drops the boost in the price of Bitcoin will hold at high levels, rather, it’s likely to soar and then pull back to higher lows, with investors looking to increase their positions if inflation drops for two months in a row.
At that time I think the Federal Reserve will have pressure on it to stop rate increases, depending on the level of the drop in inflation. If it’s modest, it’s likely it’ll reduce the size of the hikes, but probably increase it by 25 basis points. Under that scenario, the price of Bitcoin should find support but be limited to the upside until the market is convinced inflation is under control.
When I say under control, I don’t mean it’ll be close to the Fed’s stated goal of getting it down to two percent. I mean it’ll drop enough to convince investors that the worst is over, and over time it’ll continue to fall, even if it’s two steps forward and one step back.
My belief is by the end of the year we’ll have much more clarity on this, and the market will respond accordingly. Barring a Black Swan event, the most likely scenario is by the end of 2022 inflation will start to reverse direction while momentum slows, preparing the way for more positive sentiment to start the year.
I know that some in the financial world are starting to use the recession word, but based upon the metric used over the last seventy years (two straight quarters of a decline in GDP), we’re already in a recession. I think the reason the definition is being played with is because of the mid-term elections coming up in the U.S.
The reason that’s important is because if we’re truly already in a recession, it could trigger investors to sell off decent assets based upon financial media outlets suddenly declaring a recession, as if it’s just begun.
As it relates to CORZ, it’ll participate in any negative catalyst that triggers another sell-off in riskier assets if a recession is announced at some time in the near future as being official.
However that works out, I think over the next several months we’re more likely to see inflation starting to go down in response to interest rate increases by the Fed, and that should result in a big upward move in the price of Bitcoin if it happens more than one month in a row.
Conclusion
With its increasing monthly Bitcoin production, along with equity line of credit, I believe CORZ has the ability to finance its operations at least through the end of 2023.
Since it has invested heavily in mining equipment to rapidly increase the number of Bitcoins it produces on a daily and monthly basis, it could surprise to the upside if the price of Bitcoin sustainably increases through 2023.
On the other hand, if for some reason inflation remains more stubborn than I think it’ll be, it would result in the company needing to find more ways to finance operations until that turns around. I don’t think that’s likely, but it’s a possibility.
The bottom line is by the end of the year CORZ is going to increase the number of Bitcoins mined by quite a bit, and that will generate a lot more revenue. How that’ll impact the bottom line and help it throughout 2023 will be determined by how the price of Bitcoin moves in response to inflation. The ability of CORZ to produce the quantity of Bitcoin it does separates it from most of its competitors. That’s one of the reasons I’m not concerned by its hefty debt load, because it has resulted in rapidly increasing its production numbers.
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