Building More Attractive Than Buying Right Now

Though consolidation of crypto miners is likely imminent, Marathon Digital’s chief executive said, mergers and acquisitions are likely to play out between the segment’s smaller players. 

“The equity markets aren’t getting any looser, the debt markets aren’t getting any cheaper, and you see some of the deals miners are doing for financing are pretty expensive,” Marathon CEO Fred Thiel told Blockworks. 

But for the largest bitcoin mining companies with ample cash reserves and up-to-date new machinery, Thiel added, it’s more prudent, in many cases, to build than it is to buy. 

Many mining companies raised money during the bull run late last year to ink power agreements and order containers. Expecting to raise more money for machines, miners saw capital markets start to close, leaving them with unused hosting capacity. 

Other companies built out third-party hosting capacity, expecting higher growth that ultimately fell far short of their projections. 

“We’re getting a lot of phone calls,” Thiel said. “Companies who before were just considering self-mining are now having to actively look at offering up hosting capacity to a third-party. We’re starting to see more and more attractive deals.”

Thiel and other industry executives have pointed to the price of new machines — which has plummeted in recent months — as rationale to continue building m, not buying. Hut 8 Mining CEO Jaime Leverton said during a panel at Blockworks’ Digital Asset Summit in New York last month that asset-based M&A deals with other firms can be “tricky” as a result.

“If you paid $70 or $80 per terahash for your equipment — and you’ve got some leverage on that — I’m not going to take your debt for overpriced machines, when I can just buy machines straight-up for $20 or $25 per terahash,” Leverton said. 

Frank Holmes, executive chair of HIVE Blockchain Technologies, told Blockworks last month that his firm is set to evaluate buys of equipment, and potentially mining firms, over the next six months. 

Energy prices — a top concern for all miners — are hitting certain companies in the space particularly hard, Thiel said.

“As we get through this winter, the consolidation and the kind of cleansing that will happen, it will be very clear which businesses are professionally run and well financed and which ones aren’t,” he said.

Hash rate growth, international expansion

Marathon posted a net loss of $192 million during the second quarter and is set to report its third quarter earnings next month.

The company said on Oct. 6 that its fleet of 57,000 represents a capacity of roughly 5.7 exahashes per second (EH/s). An additional 19,000 miners — amounting to 2 EH/s, are expected to come online in the next 30 days.

Thiel told Blockworks the company seeks to hit roughly 13 EH/s by the end of 2022 and 23 EH/s by mid-2023. 

“Hosting has all been contracted; the machines have all been ordered, and pretty much all paid for and are scheduled inbound,” the Marathon CEO said. “Stuff can happen…but at this point there are no gating items that we’re aware of.”

Thiel said last month’s bankruptcy filings by Compute North, one of Marathon’s hosting providers, is not expected to impact Marathon’s growth targets. The entities associated with the King Mountain and Wolf Hollow mining sites in Texas are not directly subject to the bankruptcy process, he added.

“The court already gave [Compute North] permission to continue operating as it prepares to auction assets in the coming weeks and months to pay down its debt,” Compass Point Research & Trading analysts Chase White and Joe Flynn wrote in an Oct. 4 research note. “Even after this, we expect [Marathon] to continue to be allowed to operate at the data centers given the value of the operations is almost solely driven by miners actually mining.”

Marathon invested $10 million in Compute North via convertible preferred stock. It also loaned the company $21.3 million and has paid the hosting provider roughly $50 million in operating deposits.

“We don’t see any issues with the deposits at this point,” Thiel said. “The loan that we have to them we’ll see how the bankruptcy all shakes out and what we end up with.”

As Marathon continues adding miners to its US sites, Thiel said the company is also looking to build relationships, as well as new mining sites, internationally — naming Latin America and the Middle East as potential targets. 

“There’s a lot of stranded energy in parts of the world where energy is very inexpensive and where regime risk is fairly low, and so we’re definitely exploring that,” he said. “We think Texas is reaching a point where there’s a lot of mining in Texas and people need to start looking at other places.”

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