The Practical Islamic Finance Podcast

Iris Energy Update

August 29, 2024 Rakaan Kayali

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Iris Energy Update

In this episode we will cover:

  • Iris Energy Update & Stock Concerns
  • Earnings Report Review
  • Electricity Costs & Profitability
  • Investor Presentation Highlights
  • AI Cloud Services Revenue Increase
  • Megawatt Pricing & Investor Equity
  • Childress Location Development
  • Electricity Costs & Bitcoin Mining
  • AI Cloud Services & Market Position
  • Financial Overview & Growth
  • Stock Market Environment & Impact
  • Electricity Costs & Future Catalysts
  • Q&A Session

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salam@practicalislamicfinance.com

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Our podcast is about helping people ethically build wealth. We cover a broad range of topics including stock and crypto investing, product reviews, and general financial well-being.

DISCLAIMER
Anything you hear in this video is an opinion. It is not personalized financial advice. Make sure you do your due diligence before making any investment decisions.

As-salamu alaykum everyone, I hope you are doing well. I wanted to give you guys the Iris Energy update without delay because I know that some may be nervous about the price action of Iris as of late. We're basically at half of our recently achieved all-time highs. I want to make sure that I give you my thoughts on the latest information out of this company and the company did report earnings today. And the concise version of my review is that the earnings were quite good and very promising. There were, there was really a couple of things that I wanted to make sure of that I was unsure of going into the earnings. So the first was the cost of electricity and getting that down because in their last update, cost of electricity was terribly high and they were basically not mining Bitcoin profitably. And that's really the crux of their business, which was something that got investors very nervous. Nice to see you. So I wanted to make sure that electricity costs went down and they were able to make that business viable again. And then also I wanted to make sure that they weren't diluting shareholders again, which was a big thing. And I think the still taking questions in the earnings call, but it's drawing to a close at this point. I think the meat and potatoes were delivered. I'm going to give you my thoughts. Let's go over their investor presentation very quickly. I'll give you my take on the highlights here. Let's see if I can. All right. Coin mining, 15 exahash installed. They're on track to reach 20 exahash by the end of this month, by the end of September and 30 exahash in 2024. They also increased their forecast for 2025 from 40 exahash to 50 exahash. So they're not targeting 50 exahash in 2025. Still at the 816 NVIDIA H100 GPUs. That hasn't increased, although their revenue has increased from their AI cloud services business. 300 megawatts operating, 510 megawatts will be operating by the end of 2024. And there's still close to two and a half gigawatts capacity that it has. And the CEO then mentioned that they were looking to increase that number substantially. And I agree with the general thesis that the CEO has regarding the digital world, basically accelerating, expanding the demands for it, expanding much faster than the physical world can expand in order to accommodate the growing demand. And that's creating a bottleneck that's benefiting infrastructure providers such as Iris Energy. So this makes sense. And then I'm going to show you basically the money slide for investors from the investor presentation, which is actually, I think the most important slide in the recent update. So that's exciting. I'll show you what I'm talking about in a second here. So as I mentioned, close to two and a half gigawatts secured power capacity, one gigawatt plus in the development pipeline, and that's set to expand even more. All right. They were able to increase efficiency basically from 30 joules per terahash to 15 joules per terahash. So how much power does it take to generate one terahash? They went from 30 joules to 15 joules. That's fantastic. They're basically twice as efficient. So that's very good as it relates to profitability for this company. They purchased, so this new 15 joules per terahash was made possible by the purchase of the S21 XP miners, and they still have remaining minor options that get them to that 50 exahash target that we talked about in 2025. All right. So they have a pretty good track record of expanding their mining capacity. Now, this is something that's interesting. So building and fit outs designed internally to optimize speed, flexibility, and cost at around 650,000 per megawatt. Now, if you'll remember the acquisition that happened or the talks of the acquisitions for Stronghold Digital, that was pricing the megawatt at around 1 million, being able to make the necessary investments to benefit from power at a 650,000 per megawatt, and the market is pricing it at a million dollars per megawatt. There's profit there, right? You can see the profit potential here and their return for investors, the increase in investor equity. The difference between the cost and what the market is valuing is really where the investor's equity lies. So that was encouraging. Here we see images. I shared an image like this on our Discord previously, but you can see in the Childress location how they're expanding their capacity. They have land set aside for an additional 400 megawatts, so that's expected to be in 2025. And you can see the rapid development from August 2023 to March 2024, and then August 2024. Now, this was extremely important for me. I wanted to make sure that they got the cost, the electricity cost per Bitcoin mined down to a profitable level. And they did mention that they went from hedging arrangement for electricity costs that was costing them a lot, so it ended up costing them 4.3 cents per kilowatt hour. And now if they didn't have that hedging arrangement and they just bought spot the electricity that they needed, it would have cost them 3.5 cents per kilowatt hour. So now they've moved towards a spot system. And month to date for August, the electricity cost one of the hottest months in the year, and therefore the amount of energy needed to cool the systems is highest. The electricity cost was 3.1 cent per kilowatt hours, giving the electricity cost per mining Bitcoin, making that at around $23,000. That's very good. Bitcoin right now it's at $60,000. We had a dip in the last 24 hours that was caused by liquidations, but it's been steady at $60,000. I expect it to be more than $100,000 by the end of the year. If your electricity cost per mining one Bitcoin is $23,000, you're in good shape. Now there's other costs to mining the Bitcoin, obviously a depreciation and administration and so on. However, the main two costs are depreciation and electricity. And if you've got electricity under control, that's the toughest part. All right. So let's talk about AI cloud services. This is the business that I think pivoting to makes a lot of sense when the, and preparing yourself for the pivot makes a lot of sense in order to weather the post bull run for Bitcoin. So you can see that the monthly revenue has been increasing. Now these are annualized figures. It's a very tiny business still. It's still a proof of concept. Their client poolside will be, they extended their contract till the end of August, but then they're moving on basically. They express this in a really window dressed way. But the fact of the matter is poolside is moving on from iron and consolidating its operations with other providers. But they do see a strong customer demand and pipeline. And the number of customers that they're servicing has been increasing. So May, they had two, July six. So it is increasing. That's good. So we did touch upon this 510 megawatts in data centers in 2024, 2.3 gigawatts grid connected power secured and one gigawatt in the development pipeline. So that's really great. Access to this power is going to become increasingly in demand, I believe. And this is the slide that I thought was perhaps most exciting, especially as an investor. So they're in talks with Morgan Stanley to process and evaluate AI data center opportunities for 1.4 gigawatts, for 1.1 gigawatt site underway. So NDAs have been signed, information being provided to interesting parties. So maybe there's a partnership that emerges from this, wherein a partner provides capital for developing a site. And there's a long-term partnership agreement there with projected cash flows that really increase the market's valuation for the stock. So this could be a potential catalyst in the next quarter or two, aside from what we expect to be the main catalyst, which is Bitcoin's price appreciation. So that was, I think, very exciting. Canadian and children's sites suitable for a range of structures being discussed with prospective partners, including AI cloud services and co-location. And what's also exciting about this is that the margins for these businesses are really good. So if we can get some cash flows from them, the margins on those cash flows are really fantastic. And that's really going to boost the price of the stock. All right, let's talk finances. So if we look at the adjusted EBITDA, we're looking at a year that ended at around 55 million EBITDA. So earnings before interest taxes, depreciation and amortization. Compare that with last year, that number was 1.4 million. So from 1.4 million to 54 million, that's a good growth. And then adjusted EBITDA margin is 30%. However, I'm not really sure EBITDA makes much sense to look at when you're talking about the Bitcoin miner, where the number one cost is depreciation or number one or number two, the other being electricity. So if you look at the actual bottom line, loss after income tax expense for the period was 29 million, which is still a big improvement compared to 171 million last year. So they're on their way towards profitability. I think people can see the path now towards profitability. They're knocking on its door. If you look at cash, we can see that there has been an increase in cash to the tune of 336 million for the company, whereas last year they actually burned through 37 million in cash. And the cash and cash equivalents at the end of the year was 404 million for the company. So that's what they have in cash right now, compared to only a balance of 68 million at the end of last year. So this is all good. So they have the, and nothing really noteworthy here. Look at total assets. It's 1.15 billion in terms of total assets. Now, when you compare that to the market cap of the company, it's actually quite encouraging considering that the entire market cap of the company is 1.39 billion. Almost without any cash flows, the assets themselves cover the market cap of the company. And they have no debt, total assets of 1.1 billion, cash and cash equivalents of 404 million, a strong balance sheet, total equity increased about a billion with gross proceeds of 822 million. From 121 million shares sold at the market. So all of this is good. I think all of this is encouraging. I think we got the report that we needed for the next three months for this stock. Really we're going, we went through a really tough period and it looks like the company is on the right track. This, I think the stock would in a different market environment, it's up 7% after hours, the stock is. And I think in a different market environment, it would be up more than that. NVIDIA reported earnings, which I thought were quite good. And it's actually, last I checked it was down. So let's see what it's doing right now. NVIDIA is down 8%, even though it beat on top and bottom line. So market is not in the mood right now to go on a bull run, but I think it will be. We're just seasonally in that part of the year where the market kind of gets down on itself. But this was an encouraging earnings report and it's what we needed. I wanted to make sure that electricity costs were down. I wanted to make sure that we weren't going to be diluted. There was no plan for dilution. I see a number of catalysts on the horizon. The company looks like it's in solid, healthy financial shape. It's looking at the right things with its partnership with Morgan Stanley and looking at building out some of its sites to cater to data centers and AI. And I think we're on schedule with regards to Bitcoin going on a run, inshallah. Liquidity levels globally are certainly pointing towards that inevitability, I think. We're sitting, I think, in a good spot here with this particular position. I will share buy and sell prices once I get a better handle on projected revenue, buy below and sell above for Iris Energy. And I'll share that with PIF members or share a summary of what I went through with PIF members. And you can obviously follow our buy below and sell above prices on our watch list. All right. Very quickly, I'm going to go over questions. Walaikum salam to everyone who came and said salam. I really appreciate it. Rashad says, my biggest fear is if it will be acquired by another company. That doesn't necessarily need to be a fear because typically that corresponds with a big appreciation in the target company. You saw that with a stronghold. If it does get acquired, I will sell. If we do get like a 30, 40, 50% pop, I'll sell. You seem discouraged, or maybe I haven't listened to your videos. One XP in a while. Yeah, that's just the cadence that I talk at. I am definitely not discouraged. Alhamdulillah. Salim says, one of the Bitcoin mining channels I follow predicts iron at $80. Okay. Those people need to be given da'wah that hashish is haram. Shawak says, is there any data if they use solar as a source of energy? They currently do not. But again, when I looked at the relaying the price of electricity, it seems like they have that at good levels. And they also mentioned the new GPUs and the liquid cooling potential for those new GPUs may also decrease the amount of energy needed for operations. Rashad says, didn't understand your ex post about Binance. Oh yeah. So Binance ended up seizing the assets of some Palestinians that Israel told them were bad people. And a lot of people started pulling their money out of Binance. Now I've said this for years now. I don't deal with Binance. I don't trust them. And yet again, I am proven right. All right, Azhar. I'm not sure what that is. That's probably a different language. But leave a like if you enjoyed this live. And until next time, make sure to take care of yourself. As-salamu alaykum and peace be upon you all.