Is this short-seller right about the Argo Blockchain share price?

In August, short-seller Boatman Capital launched an attack on the Argo Blockchain (LSE: ARB) share price. The short-seller criticised the company’s decision to pay $17.5m for 160 acres of land in Texas to construct a new Bitcoin mining operation.

Boatman argued that using a formal appraisal process and comparing the property to other blocks of land in the region, a more appropriate valuation would have been $168,000.

This week, Boatman has published another report. Since the initial statement was published, it claims other issues have come to light that raise further questions about Argo’s business strategy and corporate governance. 

Boatman’s accusations

The short-seller raised nine points in its report explaining its view on the company. In my opinion, the most important observation is that the firm has seen four of its five board directors quit this year. And the fact that its CEO is currently also interim chairman, which is a breach of UK corporate governance guidelines. 

Boatman also points out that the company has been leaning heavily on shareholders to fund ongoing business costs. The group has diluted shareholders by 52% this year. It has also relied on funding from junk bonds and a Bitcoin-backed loan (with an interest rate of 11.5%). 

Issuing new shares to fund capital spending projects is not that unusual. Many smaller companies follow this approach if they cannot fund spending from operations. 

But the downside of this approach is that it dilutes shareholders. For every new share issued, existing investors’ claim on the underlying business (and its profits) declines. 

Interestingly, Argo is asking investors for cash when it reported a mining profit of $9.6m in November. It also owned 2,317 Bitcoin, or Bitcoin Equivalent at the end of the month. 

The outlook for the Argo Blockchain share price

I think it is worth taking Boatman’s views on the company into account. It explains why the market is placing such a low valuation on the stock.

Despite reporting a mining margin of 86%, the stock is trading at a forward price-to-earnings (P/E) multiple of just 8.7. Peers in the sector command multiples of 20 or more. 

Whenever I have covered the company in the past, I have always made it clear that I believe the market will continue to view the business with scepticism until Argo can prove its worth. 

With profits growing and its mining expansion underway, I think the corporation is doing just that. 

As such, despite the accusations from Boatman, I would continue to buy the stock for my portfolio as a speculative investment. I think the company is one of the best ways to invest in the cryptocurrency sector, mainly due to its strong balance sheet and probability.

However, I will be keeping an eye on the risks outlined by Boatman. These could cause me to change my opinion of the business if they become problematic.