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This Pennsylvania Bitcoin miner just filed for a massive IPO

October 15, 2021, 12:00 AM UTC

Even when Bitcoin was selling at $47,000 in mid-September, “mining” the world’s leading cryptocurrency ranked as probably the most world’s most lucrative legal enterprise. The Bitcoin picture provided a business school-worthy case study in how the combination of soaring prices and barriers to entry were leading to astounding profitability for the entrenched players. By September, Bitcoin was selling for over four times the $11,000 it fetched a year earlier, when the industry was already making good money. But a crackdown in China and a severe shortage of the semiconductors used in mining computers rendered the industry a lot less competitive, handing a bigger share of the market, and far fatter profits, to the established producers that already had plenty of machines, and just kept minting coins.

In the past month, Bitcoin’s gone on a tear, jumping 21% to $57,000 at mid-afternoon on October 15. The field that already dwarfed the profitability such high-margin stalwarts as luxury goods, software, snacks and running a dominant search engine is now even more richly rewarding. And no recent evidence is more revealing than the prospectus for an IPO just issued by a newcomer that plans, of all things, to generate Bitcoin burning waste coal in the wilds of Pennsylvania.

On October 14, Stronghold Digital Mining officially launched its offering at a proposed price of $16 to $18 a share. The IPO would give Stronghold a market cap of around $1 billion, and raise roughly $100 million in fresh capital to grow the business. Stronghold moved incredibly fast in securing the facilities and financing to start mining big time, while the displaced Chinese producers are still mostly looking for new homes. Over time, the projected bonanza that lured Stronghold will wane as the uprooted resettle in Texas, Kazakhstan or Canada, and hungry startups build new, towering racks of ASIC miners. But for now, the results Stronghold foresees, and in the current boom look credible, stand as a thing of wonder.

The unorthodox business of mining with waste coal

Stronghold’s two founders are an unusual team. CEO Greg Beard is a Wall Street star, the former global head of natural resources at Apollo Global. His partner and co-chairman is Bill Spence, a folksy veteran of Pennsylvania coal country who spent much of his career scooping up refuse coal from virtual mountains of the stuff to power refuse coal plants––and now, to make Bitcoin. The waste coal industry rose in the 1980s as a vehicle for collecting and burning the black expanses scarring the Keystone State. Those piles consist of coal riddled with rock that plants dumped all over the Keystone State’s countryside from the late 19th century to the 1970s. The business of refuse coal thrived, supported by subsidies from the state, and a requirement that utilities pay above-market rates to purchase their electricity. “Primary fuel providers” like Spence cleaned up about half the black hills polluting rivers and ground water. But the fracking boom that brought super-cheap natural gas, and energy deregulation that freed utilities from paying super-high rates to the waste coal producers, effectively killed the industry.

By last year, around half of the waste coal plants in Pennsylvania had shut down, and the remaining ones were running at a fraction of their old capacity. But Beard and Spence saw a big opportunity. The facilities represented a lot of capital in the ground that was mostly idle, and the state was still providing substantial aid, both for collecting the waste coal, and generating electricity, though the aid still failed to make their electricity competitive in most periods. In the spring of this year, Beard and Spence launched Stronghold by purchasing a mostly-shuttered plant called Scrubgrass, on a 650 acre site about an hour’s drive from Youngstown, Ohio, and later clinched contracts on two more facilities.

Stronghold’s remarkable projections

Today, just about any Bitcoin mine that’s up and running is extremely profitable. That’s because the coins are selling at multiple the cost of winning them. The dominant number on the expense line is electricity. Hence, miners are looking for places with cheap power, and those sources are plentiful, ranging from coal in Kazakhstan and Iran, natural gas in Alberta, Canada, and hydro in Quebec. Stronghold is forecasting that its electricity costs will be far below the industry average, making its margins tower above the norm.

Let’s examine the numbers in its new S-1/A filing, dated October 13. The share of all newly-issued Bitcoin a producer gets is directly proportional to the slice of the industry’s total “hashrate” that it controls. The hashes are the random codes that unlock the awards. The more you generate, the more Bitcoin you get. According to the filing, Stronghold expects that by December of 2022, when all of its machines will be up and running, it will be generating 8000 pethash per second (ph/s). (A petahash is one quadrillion hashes). The approximate size of the entire industry before the China explosion was 150,000 petahash, and it’s likely to regain that level. Hence, Stronghold would control an astounding 5% of the global market.

At the current price of $57,000, the run-rate for Bitcoin revenues is $18.7 billion. At a 5% share, Stronghold would be posting revenues of around $950 million a year. Stronghold would be mining 17,400 coins annually. Its “output” of 47 per day would harvest $2.7 million every 24 hours.

How about costs? In the S-1/A, Stronghold discloses that its “net cost of power,” which includes purchasing the waste coal fuel, and all expenses of operating the plants and covering their administrative expenses, amounts approximately $3000 per coin mined. That’s less than $60 million a year. Including all capital costs as detailed in the filings, and Fortune estimates for corporate overhead expenses, Stronghold should be generating pre-tax profits in the mid-$700 million range by the close of 2022. Of course, those projections rest on important assumptions: that Stronghold’s cost play out as anticipated, that Bitcoin’s price remains around $57,000, and that the network’s size stabilizes at 150 ph/sec.

But if Stronghold’s vision for mating refuse coal with Bitcoin works as planned, it will be generating 70%-plus margins on nearly $1 billion in revenues by the next year’s holiday season. And that’s a conservative estimate, given the numbers in the S-1/A. To paraphrase an old oil man talking about black gold, “There’s no business like Bitcoin business.” Times nearly this flush won’t last, but the Stronghold guys resemble the old wildcatters. And they may have landed a gusher.

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