Summary Iris Energy has survived the crypto winter and is guiding for 5.5 EH/s in Q2. The company projects itself to be a top 5 public miner by production capacity. If I can achieve production projections, I think it would be wise to adjust treasury strategy before the halving. Iris Energy ( IREN ) is a Bitcoin ( BTC-USD ) mining stock that I've covered previously on three different occasions: A Way To Play Bitcoin's Eventual Turnaround Execution and Production Look Strong Things Have Changed For a more in-depth look at my thoughts on Iris, I'd encourage reading each of those previous articles. Brief Summary Iris attempted an aggressive scaling of BTC production capacity last year and quickly grew from 0.9 EH/s in April to 3.9 EH/s by the end of October. The problem the company ran into was the scaling attempt essentially came at the worst possible time as BTC's price fell dramatically following the collapses of Terra Luna ( LUNC-USD ), Celsius ( CEL-USD ), and FTX ( FTT-USD ). What arguably made matters worse for many in the Bitcoin mining space was an increase in electricity costs that crushed mining profitability and pushed many over-levered miners into insolvency. While I think many would agree Iris did a better job managing its balance sheet than certain mining peers, the loss of machines that were collateralized through special purpose vehicles sort of put Iris back to square one and without any BTC in treasury due to the company's production liquidation strategy. With roughly a year remaining until the next Bitcoin halving, mining companies are running out of time to acquire as much BTC as possible before the block reward is chopped from 6 BTC down to 3. Iris Updates In February, Iris reported $13.8 million in earnings for the 2nd quarter of its 2023 fiscal year. This was a 15% quarter over quarter revenue decrease which the company attributed to declining Bitcoin prices and the decreased number of Bitcoin mined in the period. This was coupled with increases in electricity, site, and corporate costs that resulted in $17.7 million in negative operating income for the quarter: Operating Income (Seeking Alpha) Earlier this month Iris disclosed 156 BTC mined and 1.7 EH/s of operating capacity as of the February production update. Shortly after that February production update, Iris announced that the company has started installing additional machine deliveries that will ultimately take the company's operating exahash from 1.7 EH/s to 5.5 EH/s. The majority of which will be coming online shortly : 160MW of data center infrastructure (supporting ~4.9 EH/s) is available immediately, with commissioning of the first 20MW at Childress (supporting the remaining ~0.6 EH/s) expected in the coming months. If Iris is able to execute on bringing these machines online, it will make the company a top 5 public miner by monthly production capacity : Production Guidance (Iris Energy) Note, this slide does not include Core Scientific ( OTCPK:CORZQ ) which still had the largest mining capacity as of February but is currently going through bankruptcy . Revenue Modeling Aside from energy costs, Bitcoin prices, and potential regulatory risk that comes from mining in jurisdictions that are unfriendly to crypto, the major headwind that is shared by all of these public miners is the block reward halving that is roughly a year away. If Iris can execute on scaling goals and achieve 5.5 EH/s in Q2, the company projects annualized revenue generation of $94 million at a $25k BTC price: Revenue Projection (Iris Energy) So far in 2023, Iris has generated 328 Bitcoin at an average EH/s of 1.6. At the company's current BTC per EH/s levels, 5.5 EH/s per second could generate a little under 568 BTC per month assuming global hash rate remains at levels similar to where they have been over the last two months. Global Bitcoin Hash Rate (CoinMetrics) This is not a sure thing however as I expect global hash rate will likely continue the broad trend higher. To estimate Iris' revenue at full 5.5 EH/s capacity requires an additional input; how much BTC Iris can mine per exahash. Over the course of the last 12 months, the company's BTC per EH/s has varied considerably but has generally been somewhere between 115 and 130. Given the current global hash rate trend and the increasing Bitcoin price possibly bringing more miners back online, I'd take a more cautious view when assessing BTC per EH/s expectations: Monthly Revenue from 5.5 EH/s BTC production Bitcoin Price BTC per EH/s $20,000 $25,000 $30,000 $35,000 $40,000 85 $9,350,000 $11,687,500 $14,025,000 $16,362,500 $18,700,000 90 $9,900,000 $12,375,000 $14,850,000 $17,325,000 $19,800,000 95 $10,450,000 $13,062,500 $15,675,000 $18,287,500 $20,900,000 100 $11,000,000 $13,750,000 $16,500,000 $19,250,000 $22,000,000 105 $11,550,000 $14,437,500 $17,325,000 $20,212,500 $23,100,000 110 $12,100,000 $15,125,000 $18,150,000 $21,175,000 $24,200,000 Source: author projections If we assign a base case of 90 EH/s at a $30k BTC price, Iris is looking at roughly $14.9 million in monthly revenue, or $44.6 million per quarter if the company continues to sell production. Measured in Bitcoin, this base case guess could generate 1,485 BTC per quarter if the company decides to pivot to a HODL strategy at any point before the halving. Main Takeaway Though Iris has been very clear about liquidating production to fund operations, at some point the company may want to re-examine that approach before the Bitcoin halving next year. When the block reward is cut, revenue from mining will drop off dramatically unless the price of BTC moves up considerably. If that happens, it would behoove companies like Iris Energy to have some BTC in treasury that it can sell post-halving. At current EH/s levels, it's unlikely that Iris will be able scale a HODL stack that compares to companies like Riot Platforms ( RIOT ) or HIVE Blockchain ( HIVE ) should it choose to pivot its balance sheet management in anticipation of the halving. But even in the event that it doesn't pivot the treasury management strategy, Iris stock should benefit greatly from production expansion in the coming months if it can hit its timelines.
