Hut 8 Mining Corp.'s (HUT:NASDAQ;HUT:TSX) pending all-stock merger deal with U.S. Bitcoin Corp. (USBTC) is "a material upside catalyst," reported Canaccord Genuity analyst Joseph Vafi in a March 10 research note. Both companies are digital asset miners.
"The addition of USBTC will be a game changer," Vafi wrote.
Attractive Return on Investment
Hut 8 offers investors significant potential return given the difference between its current share price of US$1.80 per share and Canaccord's target price on it of US$5 per share, recently lowered from US$6, Vafi noted. Additionally, the target price does not account for the expected benefits of the USBTC transaction.
The benefits "should drive a doubling of hash rate while also materially improving margins," wrote Vafi. "We also believe that over time bitcoin's spot price will rebound," adding yet more upside to Hut 8.
Canaccord rates Hut 8 Buy.
Benefits From the Merger
Vafi presented the gains Hut 8 will see both from the deal with USBTC and from its re-domiciling in the U.S. They include:
- A large hosting business in bitcoin mining
- A large footprint in bitcoin data center managed services
- A doubling of its self-mining exahash capacity
- A notable increase in its mix of cheap green power in the U.S.
- Greater flexibility in terms of infrastructure to expand capacity
- Access to broader capital markets distribution
- Knowledgeable, experienced people in USBTC's management team
"We see a lot to like here in comparison to Hut 8 standalone," wrote Vafi.
Ongoing Operations, Issues
Hut 8 continues to successfully mine and grow its amount of held, or HODL (Hold On for Dear Life), bitcoin, Vafi reported.
Also, it is still dealing with two persisting problems. One is its legal dispute with Validus, which provided power at Hut 8's North Bay, Ontario site.
"We continue to believe that Hut 8 has a sound case in its disagreement with Validus," wrote Vafi.
The other issue pertains to the electrical infrastructure at Hut 8's Drumheller, Alberta site.
Q4/22 Revenue Down
The Validus and Drumheller issues, along with lower spot prices, a higher network hashrate and Hut 8 hanging on to its earned bitcoins all contributed to the company generating less revenue in Q4/22 than in Q4/21, Vafi explained. Specifically, Q4/22 revenue was CA$21.8 million (CA$21.8M), reflecting a 62% year-over-year decrease.
During Q4/22, the company mined 698 bitcoins, taking the total it is holding to 9,086.
One bright spot in its financial report is the steady cash flow Hut 8 is generating from its January 2022 acquisition of TeraGo's data center. Last year the business, not related to bitcoin mining, yielded US$16.9M, 11% of Hut 8's total revenue for 2022.
"We are encouraged by the revenue from its high-performance computing business, which continues to grow," Vafi commented.
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Disclosures For Canaccord Genuity Corp., Hut 8 Mining, March 10, 2023
Analyst Certification: Each authoring analyst of Canaccord Genuity whose name appears on the front page of this research hereby certifies that (i) the recommendations and opinions expressed in this research accurately reflect the authoring analyst’s personal, independent and objective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoring analyst’s coverage universe and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the authoring analyst in the research, and (iii) to the best of the authoring analyst’s knowledge, she/he is not in receipt of material non-public information about the issuer.
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