Iris Energy: Leveraged Bet On Renewable Bitcoin Mining (NASDAQ:IREN)

Iris Energy Limited (NASDAQ:IREN) specializes in sustainable energy for Bitcoin mining. With facilities in British Columbia, Canada, and Childress County, Texas, IREN is expanding its capacity, particularly in Childress, Texas, to take advantage of low-cost renewable energy. Its commitment to environmental sustainability is worth highlighting. The profitability projections are optimistic due to the increase in Bitcoin price. On the other hand, IREN is moving to AI cloud services to increase its portfolio in the technological innovation field. However, its main focus remains Bitcoin mining. In my valuation analysis, IREN is effectively a leveraged bet on Bitcoin’s price, being viable at a post-halving price of $50,000 or higher. This optionality and scale make IREN a compelling speculative investment in Bitcoin mining.

A Mining Venture: Business Overview

Iris Energy Limited specializes in Bitcoin data mining centers. IREN was founded in 2018 and IPOed in November 2021. It is headquartered in Sydney, Australia. The company operates under the principle of prioritizing using renewable energy sources. IREN owns and operates next-generation data centers powered by 100% renewable energy, generating revenues from its hashing power that awards IREN Bitcoin, which in turn sells and receives its revenues.

Currently, IREN has four facilities: three in British Columbia, Canada: Canal Flats with 30 megawatts, Mackenzie with 80 megawatts, and Prince George with 50 megawatts; and one in Childress County, Texas, USA, with 20 megawatts for initial capacity. This last site is in the West Texas Load Zone with access to low-cost renewable energy, which is beneficial as a mining operation. Also, IREN is expanding with an additional 80 megawatts of energy, and the region has 37 gigawatts of renewable energy (wind and solar farms) with only around 18.5 gigawatts of transmission line capacity. The periods of oversupply lead to reduced energy costs, making it an ideal region for IREN’s business model, as power costs are likely to remain within a reasonable range.

IREN’s facilities are optimized for Bitcoin mining. The company plans to nearly double its Bitcoin mining capacity by Q2 2024, increasing from 5.6 EH/s (exa hashes per second) to about 10 EH/s. To increase profitability, IREN wants to reduce its electricity cost by moving more of its operations to Childress, Texas. The company is building a new 1,400 megawatt data center in Childress, Texas, expected to be in service in late 2026. On November 30, to improve efficiency, IREN acquired 1.4 EH/s of Bitmain S21 miners, a mining rig model, to increase its mining capacity. IREN operates data centers using 180 megawatts, with 80 megawatts under construction and 500 megawatts of additional power available.

The company plans to expand to Cloud services with ongoing customer and financing negotiations, including generative AI firms, aggregators, and start-ups. In August 2023, IREN acquired 248 NVIDIA H100 GPUs to exploit growth opportunities, such as the increasing demand for power-dense computing with generative AI. In September, IREN reported the prospectus to sell ordinary shares, debt securities, warrants, subscription rights, purchase contracts, and units to raise $500 million. Further, IRES partnered with the AI software provider WEKA to obtain storage and data management for generative AI in October. Following its vision, IREN aims to help build a sustainable future with green energy data centers, offering local employment and supporting local communities.

Projections in Bitcoin Mining for IREN

As you might expect, IREN’s financials are related to the Bitcoin price. The financial projection computing profitability of the mining operation under different circumstances can be estimated with a Capex of approximately $31 million. The annual profits for the mining operation under different Bitcoin price scenarios from $25,000, $35,000, $50,000, and $100,000, with a hash rate of 1.1 EH/s, the hypothetical profits under these circumstances are estimated to be $16, $24, $36, and $75 million for the respective Bitcoin prices, before the halving. After the halving that occurs every four years, the hypothetical profits decrease when the reward for mining Bitcoin is cut in half. However, we could assume a 20% reduction in the global hash rate, leading to less mining competition. The estimated annual profits post-halving are $9, $14, $21, and $46 million for the respective Bitcoin prices.

On December 6, IREN announced that it mined 369 Bitcoins in November. In October, IREN mined 376 Bitcoins. However, the mining revenue for the month was $13.7 million compared to $11.2 million in October due…