How Iris Energy can mine more bitcoin than its US competitors

Branding itself as a “buyer of last resort”, Iris can turn its mining operations on and off at the flick of a switch and use up energy that’s generated throughout the quiet nights when power would otherwise go to ground.

In the month of September, Iris Energy mined 325 bitcoin, which equates to around $US6.2 million, an 8 per cent improvement from August. And every bitcoin mined – and sold every day, irrespective of price – costs it about $US8691 in electricity.

Daniel Roberts, co-founder and CEO of bitcoin miner Iris Energy, says bitcoin’s security is more powerful than that of ethereum. Janie Barrett

But for all this neat economics, investors have been wary of jumping on board: Iris Energy stock has copped a bludgeoning during its first 12 months of public life.

Listing in November 2021 with a price of $US28 and a market value of $US231 million, Iris stock has crumbled 86 per cent to $US3.40.

Co-founders Daniel Roberts and brother Will have watched the value of their 25 per cent holding slip sharply.

Like any gold or lithium miner, bitcoin miners like Iris Energy tend to track the price of their underlying commodity.

From euphoric highs last November when bitcoin was fetching $US60,000 a coin, the price has fallen 70 per cent to about $US20,000.

But, as we’ve discovered over and over again, markets are not perfect price discovery machines. Or at least, when they’re pumped with cheap money, it can take a long while to find the consistent value of something.

That’s what Macquarie analysts, who have started covering the stock, are hoping.

In a recent note to clients, Macquarie said the Iris shares were at the mercy of bitcoin prices and were not fully capturing the asset value. Indeed, the analysts said if bitcoin gained some upwards momentum, they expected Iris to enjoy a new surge of interest.

But bitcoin mining is a new concept for most hardened investors, many of whom aren’t sure that the cryptocurrency will have any value at all come the next 10 years.

But the business of Iris Energy is a lot less speculative than any connection with cryptocurrencies might suggest.

Iris has deliberately targeted sites in British Columbia and Texas, where there is heavy penetration of hydro and excess renewables. And despite its headline bitcoin mining activities, at its core the company essentially runs highly efficient data centres.

That means that any business that needs real-time cloud computing, shared drives, low latency and high reliability computing power could come knocking at Iris Energy’s door.

Iris signed a memorandum of understanding 2½ years ago with Dell Computing, with the aim of bringing customers and hardware on to the site at Canal Flats. But dedicating raw computing power to mining bitcoin – even at these low prices – is still too profitable for the company to pass up.

Exahash, petahash, and terahash are all metrics of computing capacity, measuring the number of calculations per second.

Every 10 minutes, the bitcoin network generates a random number and all the computers around the world use trial and error to guess the number. The first computer to guess that number receives a few hundred thousand dollars worth of bitcoin.

Then the process starts again. The more computers you have, the more bitcoin you can receive. So the more exahash, petahash or terahash you have as a proportion of the global hash rate – or global computing power – the greater the share you can mine.

As it stands, US listed miners – such as Riot Blockchain and Core Scientific – have a combined hashrate of about 43 exahash per second, and account for about 20 per cent of the global hashrate.

More efficient

Iris Energy itself accounts for less than 1 per cent of the global network hashrate. But JP Morgan analysts point out the Australian operator generates more bitcoin per exahash of processing capacity than all other US listed miners.

The investment bank estimates that Iris’ operations were about 61 per cent and 24 per cent more efficient than Riot and Core Scientific’s facilities respectively over the last three months. These two competitors are among the largest bitcoin miners in the US.

JP Morgan says Iris generates more bitcoin per exahash per second of computing power than all other publicly traded operators, highlighting the Australian company’s efficient in-house operations – which the market seems to have missed.

Looking at the market more broadly, bitcoin miners are not all created equally. They vary by scale, operating efficiency, access to capital and growth plans which inform profitability and valuations.

Considering the anticipated mining hashrate of the biggest bitcoin miners in North America, JP Morgan says they trade on average 108 to 152 times their current hashrate, on an equity and enterprise value basis.

The bank notes that Iris Energy is one of the cheapest mining operators, trading on a 65 times current enterprise value to hashrate basis.

While Iris Energy’s stock price has dwindled alongside the bitcoin price, the company has been racing to build as many facilities as it can to mine bitcoin. As it stands, the company has 3.7 EX/s (exahash per second) in operating capacity.

Last month, Iris brought online its third operating bitcoin mine at Prince George in British Columbia. This follows the launch of one at Canal Flats, and another up the road at Mackenzie in British Columbia. A third mine at Mackenzie is under construction, along with one at Childress in Texas.

It’s this efficiency at bringing new data centres online that gives investors hope that Iris Energy can turn around its fortunes over the next 12 months, and execute on its plans to become the largest miner in the United States.

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