Argo Blockchain Q1 2023 Earnings Call Transcript

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June 6, 2023

There are 4 speakers on the call.

Operator

Good afternoon, and welcome to the Argo Blockchain Plc Q1 2023 Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the Q and A tab situated on the right hand corner of your screen. Simply type in your questions and press The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it is appropriate to do so.

Operator

I'd now like to hand you over to Tom Devine, Vice President of Investor Relations. Good afternoon, sir.

Speaker 1

Thanks, Alessandro. Before we begin, I'd like to remind everyone that today's presentation and remarks may contain forward looking statements. For our full risk factors, please see our Form 20 F filed with the Securities and Exchange Commission for the year 2022. I'd also like to point out that in our Q1 earnings and going forward, we'll be reporting our financial results in U. S.

Speaker 1

Dollars. With us today for our discussion of Q1 202023 results are Seif L. Bakley, Argo's Interim Chief Executive Officer And Jim McCallum, Argo's Chief Financial Officer. And now, I'll turn it over to Saif.

Speaker 2

Thanks, Tom. Hi, everyone. Good morning, afternoon. Safe here with my colleague, Jim. Thanks for tuning in today for our Q1 'twenty two results.

Speaker 2

Just a few weeks ago that we provided you with our 2022 year end results and a preview of our Q1, 2023. Going forward, we will provide timely Quarterly updates along with these earnings calls. Before moving to Q1, I just wanted to remind everyone of our top priorities for the next couple of quarters. These priorities include financial discipline and deleveraging, which is top of mind operational excellence, which is optimizing and growing our Hash rate And lastly, growth and strategic partnerships for the sustainable future of this company. We'll touch on these key pillars throughout the presentation as we discuss our results and our current projects.

Speaker 2

With that, let's look at how Q1 shaped up. As I mentioned on the previous slide, financial discipline remains a priority and one of our key pillars. As part of this, we're laser focused on cash flow generation and preserving cash. At the end of March, we had around $14,000,000 of cash on the balance sheet. In the Q1, we mined 4 91 bitcoin and generated revenue of $11,400,000 which is an increase of 15% over our revenue from Q4 'twenty two.

Speaker 2

Our mining margin percentage came in at 49%, which is a significant increase quarter over quarter, up from 35% in the Q4 of 'twenty 2. And that translated into an average cost per Bitcoin mine of $11,811 Aside from the price of Bitcoin and global hash rate, the other Key variable that drives mining margin is our cost of power and hosting. For the Q1, our average all in power price and hosting rate came in at Lower than $0.05 per kilowatt hour across all our operations, and that was lower than the previous guidance we had given on our year end call of $0.05 to $0.05 per kilowatt As we'll discuss in more details in later slides, we are extremely focused on reducing non mining operating expenses Compared to the quarterly average in the second half of twenty twenty two, we were able to lower these operating expenses by 70%. And lastly, for the quarter, we generated an adjusted EBITDA of $1,600,000 I also wanted to briefly mention the spike in hash price that we experienced in May. This was due to higher transaction fees spawned by increased interest in ordinals.

Speaker 2

That was obviously beneficial for us, and you'll see the impact when we release our May operational update later this week. Now, I'll let Jim provide some additional comments on the financial results for the quarter. Jim?

Speaker 3

Thank you, Saif, and hello, everyone. As Tom mentioned, we are reporting our financial results in U. S. Dollars. The majority of our revenues, mining expenses and debt are denominated in U.

Speaker 3

S. Dollars, so it is appropriate for Argo to report in USD. We generated $11,400,000 of revenue for the quarter with $5,600,000 of mining profit For a mining margin percentage of 49%. Our core business operations are profitable and we generated adjusted EBITDA of $1,600,000 In comparison to Q4 of 2022, we achieved higher revenues and lower expenses. We were able to reduce our non mining operational expenses by 70%.

Speaker 3

At the end of the quarter, we had $14,000,000 of cash on hand, which when combined with our operating cash flow leaves us in a good position. Moving to the next slide. Since closing the Galaxy transaction, we've been laser focused on reducing our non mining operating expenses and we have reduced these expenses by 70%. Our core non mining operating expenses for Q1 were $4,000,000 and we have had further reductions since then. We're currently operating at just over $1,000,000 per month in non mining operating expenses.

Speaker 3

Turning to cash, as I mentioned, we ended Q1 with $14,000,000 of cash on the balance sheet, a reduction of $6,000,000 from December 31. From an operating perspective, we generated $1,600,000 of cash flow. Our core mining business is profitable And this operating cash flow was offset by 3 main outflows during the quarter. Firstly, we had restructuring costs of 800,000 Associated with reductions in headcount. 2nd, we had a reduction in working capital of $3,700,000 primarily related to the payment of invoices associated with the Galaxy transaction.

Speaker 3

And third, we had debt service and capital expenditures $3,400,000 Excluding the restructuring and the working capital payments, our cash would have been approximately $4,000,000 higher March 31, 2023. Moving to the next slide, the Galaxy transaction allowed us to significantly reduce our debt. However, we still have $79,000,000 at March 31, 2023, consistent with December 31 levels. Our goal is to reduce debt and we expect to do so using cash from operations and through the sale of non core assets. Non core assets include real estate, Digital assets, certain parts inventory and other investments.

Speaker 3

We look forward to reporting our progress on debt reduction in future news releases. With that, I'll pass it back to Saif.

Speaker 2

Optimizing our Hash rate, we're excited to deploy our new Epic Blockchain, Block Miners, over the next few Weeks months, which as discussed, will add around 300 petahash of additional hash rate capacity. We've been operating an initial deployment of block miners at Maribel for a few months now, and we've been very happy with their performance. So we're excited to deploy these the rest of the machines in the coming weeks months. Regarding our Quebec expansion project, we recently signed and finalized the agreement with the City of Baixaimeau, which gives us access to an additional 8 megawatts Power via our Big Momo facility still sourced from hydroelectricity. We expect to be able to take advantage of this increased capacity in mid to late 2024.

Speaker 2

And finally, as mentioned on our 2022 earnings call, our primary focus in the near term is really about building and maintaining a solid foundation for the company. But having said that, we continue to explore some interesting growth opportunities to maintain our market share as the Hash rate network continues to grow. We've been talking to different energy companies about opportunities to utilize wasted or stranded energy. This helps them because it allows them to monetize otherwise wasted energy and we in turn benefit from access to low cost and secure power. And so When we're thinking about growth opportunities, we're really thinking about innovative strategic partnerships with some key players within the power and energy spaces.

Speaker 2

That's it for now. Jim and I are open to taking your questions. Tom and Mark, off to you.

Operator

Safe, Jim. Thank you Just while the company take a few minutes to review the questions submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published Q and A can be accessed via your investor dashboard. As you can see, we received a number of questions throughout today's presentation. And Tom, if I may at this point hand over to you to read out the questions where it's appropriate to do so. I'll pick up from you at the end.

Speaker 1

Great. Thank you. Our first question comes from Kevin Dede at H. C. Wainwright.

Speaker 1

Has Argo had the opportunity to run any of the Epic Block Miner air cooled prototypes just yet? How much flexibility is there over or underclock as

Speaker 2

So, yes, we've had a small deployment on the block miners at our Maribel For several weeks now, we're really happy with them. They're really efficient. I think as of lately, they're going at 30 jewels For Terahash, so we're really happy with their performance and what they've been doing and the expectation so far has been great. They're purring, they're working very well And we're happy with their performance and we continue to work with obviously Epic and Intel as our partners. So far so good.

Speaker 2

Thanks for the question, Kevin.

Speaker 1

Naftahi at ROTH MKM. What was your cost to mine a Bitcoin in Q1? And what's driving the increase in mining margin from Q4 to Q1, how you think Q2 will turn out?

Speaker 2

Hey, Darren, thanks for the question. So the margin the mining margin for the quarter was 49% and that was up from 35% in our Q4 'twenty two and that translated To Bitcoin mine of about $11,800 Mining margins really driven by 3 factors, Bitcoin price, network Cash rate and power cost, I think in Q1, the average Bitcoin price was somewhere around $22,800 and that was 26% higher than the average in Q4. That was closer to about 18,000. The network Hash rate obviously continued to grow and the average hash rate in Q1 was about 16% or 17% higher than Q4. And then power in Texas, I mean, that got cheaper.

Speaker 2

We saw in 2022 gas prices got really high, power prices got really high, Whereas in 2023, they fell more than 50%. So, obviously, if you combine all those three factors, net net, It's been better. We've had better margins because of that. And I think in Q2, big Prices have been even higher and gas prices have been a little bit lower. So I think our expectations for Q2 are positive.

Speaker 1

Thanks, Dave. Our next submitted question comes from Jake M. Can you talk a little bit more about the impact to the business from ordinals?

Speaker 2

Sure. So transaction fees for miners Typically represent and thanks for the question, by the way, Jake. Yes, so transaction fees for miners typically yield about Or about 2% or 3% of our revenues. In May, that really shot up to about 13%. And some days was even much higher than that, but for certain blocks, obviously.

Speaker 2

So it really means that we ended up mining more block than we otherwise would have. And basically, we're going to be releasing our May operational update later And you guys will be able to see the impact that it has had. But obviously, the ordinals Worked out well for the industry and for us.

Speaker 1

Thanks. Our next submitted question comes from Arash V And this is for Jim. How do you plan on improving your cash flow?

Speaker 3

Thanks for that. We generated 1,600,000 in cash during the quarter and we'll continue to generate cash through Q2. Ways we can Improve our cash flow, are continuing to focus on our operating expenses and through the sale of non core assets. And as we pay down our debt, naturally our debt service costs will decrease and that will That's also another important lever in improving our cash flows.

Speaker 1

Great. Thanks. Our next question comes from Chase White at Compass Point for SAFE. Are you able to disclose the Breakdown of the hosting agreement with Galaxy?

Speaker 2

Absolutely. Hey, Chase, thanks for the question. So I mean, the cost breakdown is Pretty simple. We get access to power on a pass through basis. And then there's a fixed dollar amount per megawatt hour as a hosting fee based on Our electricity usage and so for Q1, the all in price for both power and hosting fee came in sub $0.05

Speaker 1

Thanks, Dave. Our next question, this is for Jim, Submitted from Tom S. How are you planning on getting rid of your debt?

Speaker 3

Yes, thanks for that. Yes, so beginning in May this year, we begin our principal repayments on the Galaxy loans. So we'll be paying that down every month. We're also, as I mentioned, exploring the sale of certain non core assets and using those proceeds to also pay down our debt.

Speaker 1

Thanks, Jim. Our next question is for Steff. How much additional CapEx is required for the EPIC rigs?

Speaker 2

Yes. So thanks for the question. We don't really have much CapEx left to spend for the EPIC rigs. There's maybe a small amount of taxes that we have to pay, But we really don't have anything left to pay. So that's really all baked in.

Speaker 2

And so happy, excited to get these machines in the coming months. And As mentioned before, we've had a small deployment of those machines operating and really happy with their performance. So thanks for the question, Daniel.

Speaker 1

Our next question comes from Kevin Dede again at H. C. Wainwright. What specifically changed To reduce OpEx by 70%, so was this headcount, how much of this change was realized by shifting operations of Helios to Galaxy? And this is for Jim.

Speaker 3

Yes. Thanks, Kevin. A large portion of the reduction was headcount, Which reduced from over 90 to approximately 40 as of March 31, 2023. While most of this shift was related to Helios and the Galaxy transaction, we did also reduce corporate staff. We also had some significant OpEx savings in insurance, for example, now that we don't operate the Huguenotus facility.

Speaker 3

We've also implemented a robust internal process where we are scrutinizing our vendors in order to realize additional So we're really looking at it all encompassing in order to reduce our costs.

Speaker 1

Our next question submitted comes from DS, it's for SAFE. How is the relationship with Galaxy these days?

Speaker 2

Hey, thanks for the question. So I mean, Galaxy has been a great our relationship with Galaxy has been great. It Continues to be a very, very positive one. They have a great team. They're really smart.

Speaker 2

We're working very well together. We've been working very hard together on optimizing our machines and our performance in Texas or at Helios. And I think the skill set has been very complementary. So really happy to have them working with us and it's been a Very positive relationship, so.

Speaker 1

Thanks, Dave. Our next question comes and this will likely be our last question. This comes from Bill at Stifel. With the happening less than 12 months away and continued growth in the network hash rate, how quickly will the company look to grow its Hash rate with any equipment purchases going forward, can we see an additional 300 do we see more than the additional 300 petahash come online this year?

Speaker 2

Yes. So thanks for the question, Bill. So as you know, we've been operating at 2.5 Hash and we're looking at adding that additional 300 petahash. I would say we're keeping all our options open. We're really focused On deleveraging and cash flow and in terms of growth, we're also very mindful of the network difficulty essentially going up.

Speaker 2

And so we're thinking about potential strategic partnerships. We're thinking about how to grow while Utilizing as little CapEx as possible. And I think all options are on the table. We're obviously very mindful of the having and the economics. And we're operating as if economics either stay the same or I think being prepared for the worst is the most important thing to do.

Speaker 2

Expect the best, but be prepared The worst that we are. And so right now, it's about fixing the house, fixing the foundation, making sure that we're We have a strong and healthy balance sheet that can sustain different economics, the having, I. E. And so but while keeping our options open and Looking to potential strategic partnerships, low CapEx opportunities that will help bring our Hash rate up.

Operator

Saif, Jim, Tom, thank you very much for that and for answering those questions from investors. Of course, the company will review your questions submitted today and will publish those But perhaps just before redirecting investors to provide you with their feedback, which shows particularly important to the company, Dave, can I just ask you for a few closing comments?

Speaker 2

Yes, of course. I really just wanted to thank everyone for their continued engagement with Argo. We're really encouraged by some of the improvements we're seeing in our operational and financial results. Our core business is cash flow positive and the Team continues to focus really on maximizing cash flow and reducing debt. So we'll keep updating you through our progress and providing you with our Quarterly financial releases with our earnings call.

Speaker 2

So again, thanks everybody. Really appreciate everybody's engagement and we'll talk to everybody soon.

Operator

Perfect. And thank you very much for updating investors today. Could I please ask investors not to close the session as you now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, and I'm sure it will be greatly valued by the company. On behalf of the management of Envago Blockchain Plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.

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