Bitcoin mania has come to the Tel Aviv Stock Exchange on a scale that makes the rise of the world’s best-known cryptocurrency look like small change. While bitcoin itself has more than tripled in value over the last two months, shares of the tiny company Natural Resources have soared 51-fold in that time.
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Natural Resources is basking in the bitcoin limelight thanks to a decision announced in October to switch its business from mining for gold and iron, as its name implies, to mining for cryptocurrencies. Last week the company said it was acquiring 75% of Backbone Hosting Solutions, a Canadian cryptocurrency miner, in an all-share deal.
But even with all the news about Natural Resources out in public, its stock price kept climbing Sunday. At one point it was up 100%, briefly giving the company that was nothing but a shell company seven weeks ago a market value topping 1 billion shekels ($284 million), more than El Al Israel Airlines.
Natural Resources retreated from its high for the day, but it was still up nearly 48% for Sunday at 56.07 shekels, with a market value over 825 million shekels.
On Sunday, Natural Resources updated the financial information on Backbone, also known as Bitfarms. With its four server farms, the company “mined” 390 bitcoins over the month through December 5. (In the cryptocurrency industry, so-called miners use software to solve math problems and receive a proportionate number of bitcoins in return.) The company also mined 319 of another digital currency called Bitcoin Cash, 1,434 of Lightcoin, 147 Ethereum and 54 Dash.
All told, Natural Resources said, this added up to about $4 million worth of cryptocurrencies for a month’s work — and that was when they were trading at much lower prices than they are now.
Already the biggest bitcoin miner in North America, Backbone is adding two more server farms to the four now, which will double its capacity of 25 megawatts and 250 petahash, the speed at which a computer completes an operation in the bitcoin code.
All told, Backbone had costs of $2.4 million during the month, of which $1.8 million was for capital expenditure. Bitcoin mining uses a lot of electricity because of the great computer power required and air conditioning to keep the servers cool. But power prices in Canada are low and so are the temperatures, so electricity is a bargain: It was just $521,000 for the month, Natural Resources said.
The question investors must ask themselves now is where will Natural Resources' stock go. A big part of the answer lies in the way the acquisition deal is structured. In the all-share deal, Backbone’s shareholders will receive a 75% stake in Natural Resources through a private placement of 50 million new shares.
Right now Natural Resources’ share count is just 14.7 million, and that figure will grow to 17 million shortly after insider shareholders, including the company’s CEO, Roy Sebag, are issued more shares as is planned.
Judgment Day will come after the private placement is completed. At that point, under new rules issued by the TASE three weeks ago, a company that allocates 75% or more of its stock to a new shareholder is regarded as a new company for trading purposes.
That means that in the first day of trading under the new shareholder structure, the stock opens at par value. One of three things could occur.
The first is that investors will regard all the value of Natural Resources’ acquisition of Backbone already built into the price. Natural Resources’ valuation will no longer be spread out over 17 million shares but over 67 million, so at Sunday’s market value, the stock will trade at just 12.30 shekels.
On the other hand, investors could decide that their shares didn’t yet fully reflect the value of the newly merged company, which could lift Natural Resources’ market cap to nearly 3.8 billion shekels, based on the 67 million shares.
Under the third outcome, the first day of trading will see no trading at all because of the huge gap between bid and offer prices. Natural Resources’ shares will close at par, or a market valuation of a mere 67 million shekels.