“Omission is the most powerful form of lie.” George Orwell
Our initial report Northern Data — A Shady Bitcoin Mining Host has received great reception within the investor community. It opened up candid dialogue about the true nature of Northern Data’s business model — bitcoin mining — and forced the company to start answering uncomfortable questions. We want to thank everyone who has helped and contributed to our continuing quest to uncover the true nature of this shady bitcoin mining operator that has been “bending the truth” and omitting important information.
Two years ago, we also did investigative reporting on Bitmain’s practices in our Crypto Muddy Waters and More Red Flags for Bitmain IPO articles. Since then, we have remained in close touch with numerous industry insiders and experts, and have an in-depth understanding and unique perspective of cryptocurrencies and bitcoin mining. We are using our expertise and deep industry connections to continue to perform due diligence on various companies. From our constant monitoring of the bitcoin and cryptocurrency industry, we are using our analysis to expose Northern Data’s activities.
The purpose of this follow-on report is to comment on some of the replies that Northern Data has made in its remark post which we believe were both vague and non-specific. Furthermore, we want to pose even more direct questions and have both current and prospective company customers as well as investors have these questions in back of their minds when critically examining Northern Data’s business model.
First, the company is assuring shareholders that “business is fully on track to achieve all targets set for 2020”. We have done research on where this “confidence level” comes from and what we have found is, to say the least, amusing. If you look at their famed investor presentation, the company states that Customers 1 and 2 going online April 2020 for a combined 350 MW. The referral here is to the two Japanese corporates SBI (which is also the company’s largest shareholder) and GMO.
If we assume these two corporates have had misfortune to pay for the full capex, pay substantial US tariffs on importing Chinese servers to Texas (more on this later) and then sign up for the 5+ year contract at inflated all in price of US$0.06/kWh, then the math behind the numbers would be 350MW * 9 months * 725 hours/month * US$0.06/kWh = US$137 MLN or Euro 120 MLN in Revenues for 2020. Assuming a 38% EBITDA margin that’s US$52 MLN or Euro 45 MLN. Provided that other “Non-Bitcoin Mining Hosting” Revenues are miniscule, Northern Data’s 2020 Projections are predominately inflated contracts with the two unfortunate (there is no other word to describe them) clients from Japan. That’s really it! There is also an announced contract for 100 MW with an undisclosed US-based customer and announced 180 MW contract with Block.one, but, we assume them being commissioned later on in 2020, if at all.
On a very important point here, we urge investors to demand Northern Data to provide a document proving that the already launched 350 MW Texas Data Center comprised of the imported Chinese bitcoin mining servers is compliant with 27.6% USA import tariffs. Our analysts estimate that this import tariff would have amounted to approximately US$50 MLN payable to the US Customs and Border Protection Agency. We estimate the above tariffs by assuming 350MW of Bitmain S17s for approximately 9 Exahashes, and at a US$20/TeraHash price, the Total Purchase Price of the miners would be US$180 MLN. Applying the 27.6% USA import tariff rate, the tariff amount would be US$49.7 MLN. It is the duty of both the customer who is importing the equipment as well as the hosting company to ensure these government tariffs are properly paid. If these tariffs have not been paid, then Northern Data’s entire Texas Data Center is in violation of US laws, which is a criminal offense and would seriously jeopardise the operations.
Below we also enclose an excerpt from the Chinese bitcoin mining company Bitmain about this US tariff regulation.
Second, the company stated: “We are a provider of HPC solutions to our clients, offering applications in many verticals and bitcoin mining was one of the first applications of HPC in general. Hence, saying we are a provider of HPC services and at the same time having clients who perform bitcoin mining with the computer power we provide is not contradictory at all.”
We have spoken to numerous industry insiders and classifying bitcoin mining as high performance computing is “bending the truth”. It is alarming that the company still does not understand this crucial point that mining bitcoin is so much more volatile and unpredictable compared to securing customers in the AI/IOT/Video Rendering/Life Sciences/Autonomous Driving space. We can’t over-emphasize “wrapping” bitcoin volatility around the AI/IOT/Video Rendering/Life Sciences/Autonomous Driving story is deceitful, and we sincerely hope regulators take notice of this in order to protect the investors.
Lastly on this topic to avoid any further confusion and deceit, we urge the company to commence segments reporting and to start clearly separating by segments Revenues, Profits and MWs (MegaWatts ) secured. Also needed is separating how much business comes from the related parties, as according to our analysis it is substantial! This way, it will be clear for investors how much of business model is Bitcoin Mining Hosting vs the Other business. In the latest Financial Times opinion piece, the company leadership indicated it had nothing to hide and stated: “ We are as transparent as it gets”. We very much welcome this statement and urge company to back this up with action! Polls conducted also indicate community is confused and asks for more clarity and transparency.
Meanwhile, we urge investors to ask a couple of direct questions ASAP:
1) What % of your 2020 Revenue and EBITDA guidance comes from bitcoin mining hosting (BMH)? What % of that is from 2 customers: SBI and GMO?
2) What % of your 2020 Revenue and EBITDA guidance comes from non-bitcoin mining hosting: AI/IOT/Video Rendering/Life Sciences/Autonomous Driving?
3) How many MWs have you already deployed for bitcoin mining and how many for non-bitcoin mining: AI/IOT/Video Rendering/Life Sciences/Autonomous Driving?
4) Provide detailed breakdown of US$0.06/kWh (all in) energy cost. How much of it is energy, how much is “premium services” and how much is “other” component?
Third, the company stated: “We have disclosed on numerous occasions (via our website, various news outlets, our annual report, etc.) that our largest customers do themselves focus on bitcoin mining indeed.”
Although you do mention bitcoin mining clients here and there, we believe you are greatly de-emphasizing bitcoin mining and greatly inflating the “HPC” story! How can the company state they are building World’s Largest HPC Data Center, when in fact it is a Bitcoin Mining Data Center with Bitcoin Mining Clients? How can the company state they are an “Expert in proving HPC Solutions” when in reality it is a Provider of Bitcoin Mining Services? Below we enclose the Company Description from the website where there is not even a single mention of predominant business — bitcoin mining. This is intentionally camouflaged under “blockchain applications.” If this is not omitting the truth, we don’t know what is!
One of our contacts attended investor presentation by the CEO Aroosh Thillainathan where there was zero mention of the word “bitcoin” or “bitcoin mining” in the entire presentation, but there was plenty of techno-blabber around “High Performance Computing”. There was also no mention of him working in the bitcoin industry at all and being the Founder of HashtrendAG “selling miners for the lambo sound”.
Don’t you think that’s very odd for the CEO who is so proud of company’s roots being in bitcoin that he avoids mentioning bitcoin in his current presentations to investors? Also it’s very strange that in the initiation research report by Hauck & Aufhauser, the analysts mentioned word “High Performance Computing” 20 times and did not mention word “bitcoin” or “bitcoin mining” at all.
We want to use the opportunity and call on the investment banks covering Northern Data, Hauck & Aufhauser and Baader to revise their research to fully cover the company business model of bitcoin mining and the risks of the bitcoin industry. If they want more research on the topic, they can view SEC EDGAR filings of Chinese bitcoin mining companies Canaan and Ebang that have comprehensive sections covering the bitcoin and bitcoin mining risks.
Fourth, the company stated: “Even though some of our customers are exposed to the volatility of the bitcoin price, we are not, because we get paid in $ct/kWh and have a minimum consumption rate negotiated with our customers.”
We simply don’t buy the above argument! The company saying that “we are not exposed to the volatility of bitcoin mining” is short-sighted and a grave misrepresentation of bitcoin industry reality. The bitcoin mining industry is littered with cases of abandoned enterprises and shut down data centers. And when operating at uncompetitive US$0.06/kWh cost curve, one is very susceptible to even minor industry shocks.
Below is the executive summary page of the July 15, 2020 extensive 50-page report on bitcoin mining sponsored by the Fidelity Center for Applied Technology, which also shows how uncompetitive US$0.06/kWh is when the industry median energy cost is estimated to be US$0.03/kWh.
And here are some brief back-of-the-envelope calculations to illustrate our point on the annual profitability of a 100 MW bitcoin mining operation using Bitmain S17, industry leading, bitcoin mining machines.
To summarize, even with the industry leading S17 machines, at US$ 0.06/kWh energy, the customers are in the red if the bitcoin price drops just below US$8000 or if network difficulty increases just above 12%. The margin of error here is very thin and we stand by our words that for a client to be paying all the capex, US import duties on Chinese equipment and locking themselves in for 5+ year contracts is simply insane!
Fifth, the company stated: “we do currently see the greatest demand for HPC solutions indeed coming from bitcoin mining operations, and we are very happy that we can meet the needs of these very demanding sector.”
We greatly doubt that at this inflated US$0.06/kWh the company will continue attracting even more dumb bitcoin mining customers. If anything, our shedding more light on the business model and making this public, smart customers will start thinking hard about placing capacity with Northern Data when there are lots of other opportunities at US$0.03–0.04/kWh (all-in cost and with premium services). We also envision this dialogue will prompt Northern Data’s existing customers to take our findings alongside with Fidelity’s sponsored 50 page report on bitcoin mining and negotiate their contract pricing down!
Sixth, the company stated: “It is alleged that we charge our clients USD 0.052–0.065 / kWh and that this is far too high and unsustainable. This number is simply wrong and as a consequence the conclusions reached are nonsensical.”
We thought this would not come to us teaching the CFO some basic math, but here it goes. As per company projection and guidance of charging EUR 400–500 MLN per Gigawatt, to do basic math, one takes EUR 500 MLN / 1 GW / 8544 hours/year = EUR 0.058/kWh or US$0.067/kWh. The company claims they provide “premium services” for set up and maintenance but this is all inflated, and if we were a Northern Data customer, we would certainly check what competitors charge.
We also enclose an excerpt from the Hauck & Aufhauser research report which also pins down the energy charge at EUR 0.055/kWh, which comes to US$0.0625/kWh! Surely when writing an initiation report, the company would have provided all the information needed.
In regards to cost structure Northern Data actually does not hide what their cost of energy is (dubbed as material cost) it comes to roughly US$0.03/kWh and we believe that is what the company is obtaining in Texas. What customers should not be comfortable with is the whopping 40% gross margin! This is extremely high and puts under risk the business model of the customers. If we were a Northern Data customer, we would definitely be renegotiating this down to US$0.035/kWh or US$0.04/kWh all-in! That price is the known market rate and grateful there is Fidelity-sponsored research to back this up as well!
Seventh, , the company stated: “We operate up to “Tier 3 level” HPC data centers, and are certified by ISAE3202.” This statements certainly requires more clarification if the company really claims to be transparent. Saying “up to Tier 3 level” is intentionally vague and can be deceptive. It would be more accurate to clearly state how much of the company’s data center capacity is Tier 1, Tier 2 and Tier 3 and certifications for each. In addition, the company did not answer any of our previous technical questions related to their data center.
Conclusion:
As our investigation has uncovered, Northern Data’s business model has been largely comprised of securing bitcoin mining customers and locking them in at inflated and uncompetitive prices. In parallel, the company has been hiding its true business model, avoiding at all cost any association with bitcoin. We believe this well-orchestrated campaign of “bending the truth” was done for obvious reason — companies associated with bitcoin and bitcoin risk are trading at extremely low valuations and are shunned by investors. Having Northern Data in any way associated with bitcoin would not in any way allow the company to be at the stratospheric valuations it has! We stand by our findings and advise investors and customers to continue asking hard questions in order to uncover the true business model of this shady bitcoin mining operator. As the saying goes: “You can run with a lie, but you can’t hide from the truth.”