Why This Time Could Be Different for Canaan Stock

You don’t have to know much about cryptocurrencies to understand that the market is volatile. By logical deduction, companies that are tied to this never-a-dull-moment sector are inherently risky. And that extends even more so for crypto mining equipment providers like Canaan (NASDAQ:CAN). On a year-to-date basis, Canaan stock is down over 38%, despite the underlying bitcoin (CCC:BTC-USD) price up roughly 135% over the same period.

a clock in the middle of a watch: Cryptocurrencies: Pile of altcoins represented as physical coins

© Provided by InvestorPlace
Cryptocurrencies: Pile of altcoins represented as physical coins

Unfortunately, the concept of buying publicly traded companies levered to virtual currencies or crypto mining is a pick-your-poison affair. With the blockchain reward tokens, the direct sector has a “wild west” element to it that may not suit all investors.

On the flipside, with public corporations, you’re buying equity into a real business. Of course, that business is tied to the fantastical crypto sector, where disaster is sometimes only minutes away.

Further, Canaan’s third-quarter earnings report detailed just how risky its equity units really are. Financially, the numbers were terrible. Q3 net loss came in at $12.7 million or 54 cents per share, more than quadruple the size of Q2’s $2.38 million loss (10 cents per share). Not surprisingly, Canaan stock heaped more red ink on an already scarlet technical picture.

Of course, the financials overlook the potential upside to the underlying business. According to Canaan CFO Quanfu Hong, “demand for mining machines in the market continued to rebound in Q3 2020. We have received a large number of pre-sale orders scheduled for delivery starting in the fourth quarter.”

Load Error

So, should speculators jump aboard Canaan stock on anticipation of increased demand for crypto mining? Initially, the idea makes sense: though volatile, bitcoin is within touching distance of its all-time high.

However, blockchain mining is an energy-intensive process that involves computers competing with one another to solve complex problems.

Further, the winner-takes-all dynamic of most crypto mining protocols forces would-be miners to be economically rational players.

In other words, is the juice worth the squeeze? With improving solar energy technologies, the answer could be yes.

Canaan Stock Could Receive an Ironic Lifeline

As DigitalJournal.com points out, some critics have complained about bitcoin’s carbon footprint. Essentially, “mining is a huge waste of energy that is damaging to the environment.”

Certainly, if the virtual currency complex collapses, that would be a lot of energy expended for no good reason. As well, that’s one of the lingering fears associated with buying Canaan stock.

On the surface, bitcoin is a concept that should drive liberals and progressives nuts. To their perspective, virtual currencies and crypto mining represent nothing more than human avarice with a severe environmental cost.

Gallery: 9 Gold Stocks to Buy as Uncertainty Clouds the Election (InvestorPlace)

In a world turned upside down by the novel coronavirus, there’s a premium for stability. In part, this explains why the gold price is near the $2,000 level at time of writing. For those that prefer the convenience of tradable securities while offering exposure to precious metals, gold stocks may be an appropriate vehicle right now. Certainly, this sector benefits from the two traditional catalysts that bolster this safe-haven asset: fear and inflation. For one thing, we have the existential threat of the still-raging Covid-19 pandemic. According to data from the Centers for Disease Control and Prevention, on Nov. 5, new daily infections soared to nearly 118,000. For context, the summer surge in cases peaked at just under 75,000. Undoubtedly, the inability to get this outbreak under control was one of the reasons why the American electorate decided on a transition in power through President-elect Joe Biden. Second, the health crisis of the novel coronavirus has obviously spilled over into the economic realm. To be fair, the Trump administration has done an admirable job in helping to drive down national unemployment rates from their startling peak. However, the governmental response overall was found lacking. When Biden takes over, though, he must be careful to support a low-interest rate environment. Otherwise, he could risk collapsing the robust housing market, cratering economic sentiment. Of course, a low-interest rate environment is net positive for gold stocks. True, a Biden administration could theoretically become monetary policy hawk. But I just don’t see that happening because a fragile economic recovery needs support, not austerity. Societally as well, the country is fractured. Angered by the odd election night swings, many Trump supporters are crying foul, questioning the validity of the ballot-counting process. They’re not in any mood to concede, which raises the specter of social unrest. Therefore, I very much like these gold stocks to buy. Franco-Nevada (NYSE:FNV) Wheaton Precious Metals (NYSE:WPM) Sandstorm Gold (NYSE:SAND) Barrick Gold (NYSE:GOLD) Newmont Corporation (NYSE:NEM) Polyus (OTCMKTS:OPYGY) New Pacific Metals (OTCMKTS:NUPMF) White Gold (OTCMKTS:WHGOF) Northstar Gold (OTCMKTS:NSGCF) Finally, we should bear in mind that 2020 has been an unprecedented year on so many levels. Although it’s just my personal anecdote, a lingering notion exists that, like a classic slasher film, the start of this new decade isn’t quite done with us yet. In preparation, you’ll want to keep close tabs on these gold stocks to buy.

Gold Stocks to Buy: Franco-Nevada (FNV)

The leading gold-focused royalty and streaming company in the markets, Franco-Nevada has a distinct advantage over other gold stocks to buy. Through its royalty/streaming business model, Franco-Nevada provides balanced exposure to the gold exploration sector while mitigating much of the risk associated with it. As a result, if you’re squeamish about precious metal miners, FNV stock may give you the relative stability you’re seeking. Further, Franco-Nevada is delivering on the financial performance front. According to the company, its third-quarter earnings report saw record revenue, EBITDA, and net earnings as all mining assets returned to normal operations. Better yet, the company added 25 new royalties to its portfolio, bringing the total count of mining-related assets to 316. Finally, FNV stock has been on a tear since late October. Apparently, Wall Street was anticipating a Joe Biden victory and it might just get that. However, the uncertainty over what President Trump will do if he loses on “paper” bolsters the case for arguably most gold stocks.

Wheaton Precious Metals (WPM)

As a streaming specialist, Wheaton Precious Metals distinguishes itself from companies which feature a mix of streaming and royalty businesses. The most conspicuous difference is the ownership of the underlying physical assets. Royalties involve a share of revenue rights, while streaming involves an actual delivery of precious metals. What makes both similar is their end goal – these gold stocks provide superior cost predictability in an otherwise volatile market. Now, one of the knocks against investments like WPM stock is that they often end up mitigating upside during robust bull markets. Given so much uncertainty and tensions across the geopolitical spectrum, that wouldn’t be helpful for Wheaton Precious Metals. Nevertheless, shares have performed very well this year, gaining over 69% since the beginning of January. Further, the narrative for gold stocks is likely going to be a long one. For instance, the underlying spot market didn’t consistently move higher. By going with streaming investments like WPM stock, investors new to the arena can enjoy a relatively smoother ride.

Sandstorm Gold (SAND)

As one of the comparatively smaller names among royalty-based gold stocks, Sandstorm Gold may not be the first idea to pop up, especially during a period when conditions are not favorable for precious metals. However, in a tumultuous time like this, SAND stock has tremendous appeal. Still, with the company having a lower market capitalization than its bigger rivals, Sandstorm is riskier. Further, the added risk hasn’t quite panned out in SAND’s favor. For instance, SAND stock is up slightly over 10% on a year-to-date basis. That’s solid but not nearly as much profitability as the previous two gold stocks enjoyed. Yet this circumstance might also translate into opportunity in the making. Here’s my logic. With so much attention paid to newbie traders who have irrationally bid up some garbage names, they may eventually turn their attention toward the precious metals sector, specifically streaming/royalty firms for their balanced exposure. Combined with the lower price point for SAND shares, it’s very possible we could see a big boost heading into 2021.

Barrick Gold (GOLD)

One of the world’s biggest gold stocks, Barrick Gold, should be on everyone’s radar with so much tension packed into our election. But a company-specific reason to consider GOLD stock is that the Canadian mining firm brought home some compelling numbers for its Q3 earnings report. First, Barrick posted an adjusted profit of $726 million (41 cents a share), which represented an increase of 78% year-over-year. It also shattered the consensus estimate calling for 33 cents. Further, the bull market in gold led to free cash flow of $1.3 billion, a corporate record. You can thank rising gold prices for that metric. Overall, GOLD stock has put a lot of smiles on stakeholders’ faces, with shares up over 45% YTD. While speculators often don’t go for large-cap miners because of their limited upside, Barrick has gone against the grain. Frankly, you can expect this company to continue surprising Wall Street because the narrative for precious metals is only improving.

Newmont Corporation (NEM)

Similar to other gold stocks, Newmont Corporation delivered convincing numbers for its most recent earnings report. According to management, Newmont rang up Q3 adjusted EBITDA of $1.7 billion, which is a record. In addition, it enjoyed free cash flow of $1.3 billion and generated $1.6 billion of cash from continuing operations. Management emphatically stated that “This was the best quarterly financial performance in Newmont’s history.” Optically, it didn’t hurt that the second quarter was a rough one for the mining industry. Thus, the bounce-back is an encouraging signal for the sector. Clearly, investors felt the same way, bidding up NEM stock immediately following the earnings results. Although one of the safer plays among gold stocks, I believe Newmont is worthy of inclusion for any investor’s portfolio at this time. No matter what your political views are, we need to come together after such a divisive election cycle. But if we don’t get that unity – and we probably won’t – NEM stock stands to move much higher.

Polyus (OPYGY)

From my perspective, gold stocks should not only be insulated from political rumblings, they should benefit from the rising tensions. But what about mining firms based in Russia? Ideologically, the Trump administration is more favorable to the Russians and less so for the Chinese. With Biden, it’s generally the opposite. However, if you want to hedge your bets in case Trump pulls out a miracle, you may want to look at Polyus and OPYGY stock. Yes, this is a weird ticker name, even for over-the-counter stocks. Nevertheless, according to FT.com, Polyus is Russia’s largest gold miner by production. And if the company’s claim is accurate regarding its undeveloped Siberian deposit Sukhoi Log being the largest in the world, that would make Polyus the world’s second-largest gold miner by proven reserves. Frankly, with how ugly the 2020 electoral race has been, I can imagine ardent Trump supporters buying OPYGY stock as a middle finger to America’s elitist establishment. So, don’t be surprised to see some crazy sentiment for this Russian giant.

New Pacific Metals (NUPMF)

For the next three gold stocks, I’m going to focus on speculative companies. And please be aware that I’m not being coy with my language. These exploration companies are high-risk, high-reward ventures: you can make a killing, or you can get killed. Please gamble responsibly. First up is New Pacific Metals, which technically doesn’t belong in the gold stocks category. Instead, NUPMF stock is levered primarily to the silver market. Granted, the two metals are different. However, it’s fair to point out that gold and silver are often paired together. Fundamentally, what makes New Pacific Metals stand out is its Silver Sand project in Bolivia. Backed by Silvercorp Metals (NYSEAMERICAN:SVM) and Pan American Silver (NASDAQ:PAAS), NUPMF stock theoretically offers some downside protection relative to other highly risky silver and gold stocks. Further, Bolivia was the seventh-largest silver producing country in 2015, making the underlying market a viable one.

White Gold (WHGOF)

There aren’t many things better than gold unless of course it’s White Gold. Seriously, though, if you don’t mind the potential for severe volatility, you want to check out WHGOF stock. Earlier this summer, shares peaked at 95 cents. Currently, White Gold’s equity unit can be had for 70 cents each despite the underlying metal increasing in price due to fears of increasing social unrest. Moreover, the gold exploration specialist operates in the prolific White Gold District of Yukon, Canada. Featuring a claim of over 420,000 hectares, this represents over 40% of the district. According to White Gold’s website, indicated resources, which is an estimate of quantity, grade and mineral content with a reasonable level of confidence, amount to just under 1.14 million gold ounces. Of course, WHGOF stock is one of the small-capitalization gold stocks in the over-the-counter markets, which inherently makes it a colorful gamble, to say the least. But if you don’t mind living on the wild side, this could be for you.

Northstar Gold (NSGCF)

One of the reasons why true baseball fans admire future Hall of Famer lock in Ichiro Suzuki is because he was a strategist at the plate. While some fans take their love of the game to statistical absurdities, Ichiro was both a great athlete and a mathematician. Rarely if ever did he swing for the fences for the heck of it. But if you want to be the anti-Ichiro with your investment holdings, you may want to check out Northstar Gold. A micro-cap gold exploration company, NSGCF stock is pure speculation. Sure, the organization’s marketing pitch appears compelling, with the primary focus being the prolific Abitibi Greenstone Belt in Canada. Plus, Northstar has a management team that’s experienced in the global exploration market. But at the end of the day, you’re banking on whether the company can deliver the goods or not. Frankly, you just don’t know what you’ll find, which is why gold stocks levered purely to exploration are a dime a dozen. However, Northstar is intriguing because of its Miller Gold project, which could yield significant gold content thanks to the property’s similarity with other viable gold projects in the region. Still, don’t get too carried away. On the date of publication, Josh Enomoto is long gold and silver. A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

More From InvestorPlace

10/10 SLIDES

Yet it’s also the advent of one of the left’s flagship projects – clean renewable energy – that’s providing an ironic lifeline to investments like Canaan stock.

Although specific details are difficult to come by because of myriad variables, we can safely say that crypto mining is expensive, many times prohibitively so. According to information from Digiconomist.net, the bitcoin mining’s cost percentage, or the ratio of electricity costs to total miner income is approximately 53.8%.

While that might sound enticing, bear in mind that over the long run, miners will incur on average several months of zero income. Just do some quick math based on the above cost percentage and you get a startling idea of how much overhead is involved in a mining operation.

Moreover, energy consumption costs are sure to rise assuming that bitcoin swings higher to new plateaus. From February 2017 to December 2017, when BTC jumped from sub-four digits to its previous all-time record, the bitcoin energy consumption index increased by 264%. Further, the index more than doubled from there into late 2018, even though BTC was only trading hands at around $6,400 by that time.

Click to Enlarge

Source: Chart by Josh Enomoto

After a severe drop in the consumption index in November to December of 2018, it again increased as BTC clawed its way back toward five-digit prices.

In the year so far, the index increased over 6% to its present nominal rating of nearly 78 terawatt-hours.

Because bitcoin price enthusiasm quickly raises mining-related energy consumption, it’s very conceivable that the consumption index will rise conspicuously.

In prior years, that may have discouraged mining operations, sinking the crypto market and associated investments like Canaan stock.

However, the cost savings of solar energy could end up supporting higher BTC prices.

Solar Potentially Makes Crypto Mining Great Again

Due to the high energy density of fossil fuels, we may not see solar energy infrastructure replace traditional power sources. However, solar still figures into the picture because it provides energy addendum for “free” – you know what I’m talking about.

Moreover, with the capacity of retail solar panels relative to the power needs of an average home, it’s conceivable that your average non-crypto mining consumer can save about 10% to 20% off their utility bills.

And the beauty of solar systems is that the cost savings are more pronounced the more energy you consume.

Now, the math behind crypto mining operations is complicated because of the aforementioned variables. For instance, just living in a different state could save you tons of money.

For simplicity’s sake, just imagine what 10% to 20% can do on an individual scale, where you’re spending several thousands of dollars per month, and tens of thousands annually.

Yes, bitcoin mining will still be prohibitively expensive for most people, even with saving money to the upper range of the spectrum.

If cryptocurrencies become more integrated into the mainstream, we could see less energy-intensive protocols like proof of stake take off. If so, companies like Canaan can pivot to equipment that serves these projects, bolstering the longer-term thesis for Canaan stock.

Nevertheless, this isn’t a wholesale endorsement of crypto mining. Frankly, it’s a whole different animal from the underlying virtual currency market.

But many people will take the plunge, possibly inspired by solar energy’s cost savings. And this could be the underappreciated catalyst for taking this digital sector higher.

On the date of publication, Josh Enomoto held a long position in BTC.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

Tags: Canaan, Stock, Time