Cipher Mining Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 5, 2024

There are 9 speakers on the call.

Operator

Good morning and thank you for standing by. Welcome to the Cipher Mining Inc. 4th Quarter and Full Year 2023 Business Update Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Josh Payne, Head of Investor Relations. Josh, please go ahead.

Speaker 1

Good morning, and thank you for joining us on this conference call to discuss Cipher Mining's 4th quarter and full year end 2023 business update. Joining me on the call today are Tyler Page, Chief Executive Officer and Ed Farrell, Chief Financial Officer. Please note that you may also review our press release and presentation, which can be found on the Investor Relations section of the company's website. Please note that this call will also be simultaneously webcast on the Investor Relations section of the company's website. This conference call is the property of Cipher Mining and any taping or other reproduction is expressly prohibited without prior consent.

Speaker 1

Before we start, I'd like to remind you that the following discussion as well as our press release and presentation contain forward looking statements, including, but not limited to, Cipher's financial outlook, business plans and objectives and other future events and developments, including statements about the market potential of our business operations, potential competition and our goals and strategies. The forward looking statements and risks in this conference call, including responses to your questions, are based on current expectations as of today, and Cipher assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. Additionally, the following discussion may contain non GAAP financial measures. We may use non GAAP measures to describe the way in which we manage and operate our business. We reconcile non GAAP measures to the most directly comparable GAAP measures and you are encouraged to examine those reconciliations, which are found at the end of our earnings release issued earlier this morning.

Speaker 1

I will now turn the call over to Tyler Page. Tyler?

Speaker 2

Thanks, Josh. Hi, this is Tyler Page, CEO of Cipher Mining. Thank you very much for joining our Q4 2023 business update call. Let me begin the call with a few summary financial statistics from our outstanding Q4 of 2023. Ed will give a full breakdown of our numbers during his portion of the call, but I wanted to highlight our performance during the Q4 of 2023 upfront because it was the Q1 we have had since going public that featured completed operations at our original 4 data centers for the full quarter.

Speaker 2

In this sense, it provides the most accurate view of the progress we have made toward our vision of Cipher's full capabilities as a low cost producer of Bitcoin. Our progress has been immense. By mining 1327 Bitcoin in the quarter, a production increase of 252 percent year over year, we produced revenues of $43,000,000 and GAAP net earnings of $11,000,000 We early adopted the new accounting standard in 2023 and these numbers include mark to market gains on our Bitcoin inventory. But I think it is important to highlight that even under the previous accounting treatment for Bitcoin, Cipher also would have produced positive GAAP net earnings for the quarter. This is not something most of our competitors can say.

Speaker 2

Our adjusted earnings were even stronger. We produced adjusted earnings of $28,000,000 for the quarter, which represents massive progress and an improvement of over $50,000,000 year over year. We are very proud of these milestones as they demonstrate our relative strength and outperformance versus competitors. And with the upcoming halving on the horizon, we believe that the relative advantages of being a low cost producer of Bitcoin will only increase going forward. As of the end of February, Cipher held 1433 Bitcoin in inventory and $69,000,000 of cash, while our total self mining hash rate has grown to 7.4 exahash per second.

Speaker 2

For those that follow the Bitcoin mining space, you already know that the having is nearly upon us. We have spoken repeatedly about how Cypher is built to thrive throughout market cycles. While the cut in new Bitcoin supply from the having is painful for the industry, it can reward thoughtful miners while exposing those miners who have not been disciplined in their strategic decision making. Cipher has been very disciplined while planning for the having for years. We are built to succeed with approximately 96% of our portfolio energized through fixed price power at an industry low cost of electricity of roughly 0.2 $7 per kilowatt hour.

Speaker 2

As a reminder, electricity represents the large majority of our operating costs and our low price is a key driver of our best in class unit economics. Furthermore, as we complete our expansions at Behr and Chief and complete the full Black Pearl site, our overall rig fleet efficiency will improve from 29.9 joules per terahash currently to 22 joules per terahash. Turning to our growth plans. We expect to complete 30 megawatt expansions at each of our Baron Chief joint venture data centers in the Q2 of this year. And for those expansions to add 1.25 exahash per second of self mining capacity to our production.

Speaker 2

We also expect to add an incremental 0.62 exahash per second of self mining capacity via hardware and software optimization of our existing fleet that we expect to be fully online by the end of the third quarter. Lastly, we are most excited about the enormous potential of Black Pearl, our 300 Megawatt site in West Texas. We recently commenced construction activity and aim to energize the site in the Q2 of 2025. Slide 5 is a high level overview of a Bitcoin mining business that we like to include each quarter to remind everyone how our business model works. We operate the box in the middle of the drawing that says mining equipment, which represents our data centers and mining rigs.

Speaker 2

As I discussed earlier, the majority of our operating expenses is electricity, which our data centers convert into computing output. Unlike traditional data centers, which operate a similar model and sell their computing output to enterprise clients for dollars, Cipher sells its computing output called Hashrate to the Bitcoin network for bitcoins. To make this model operate profitably, a Bitcoin mining company needs to control both its electricity costs and the capital it spends to build new data centers, including mining equipment. Controlling these costs enables a miner to be a lower cost producer and our focus at Cipher has always been on controlling these specific costs to produce the best possible unit economics. That illustration hopefully gives you a good sense of a straightforward Bitcoin mining business.

Speaker 2

Cipher however does have an additional element to our business that is incredibly valuable. We have the ability to sell power back to the grid at our Odessa facility. Our power purchase agreement gives us a combination of downside risk protection as well as upside optionality to our revenue streams that doesn't exist for most Bitcoin miners. Let's now turn to Page 6 and look at some recent Bitcoin market events. Since our last business update, we've seen many positive headlines impacting Bitcoin miners.

Speaker 2

The SEC's approval of the Bitcoin ETFs in January has dominated the headlines and the price of Bitcoin has positively reacted to the better than expected early inflows into the products. We believe this is a massively positive development for the space as it will pull additional investment dollars into the ecosystem. In addition to the new U. S. ETFs, in the past few months, we have also seen elevated periods of transaction fees paid to miners, as well as a new accounting standard that provides investors transparency into the mark to market value of Bitcoin held on balance sheet.

Speaker 2

While both of these good developments have provided additional tailwinds to the sector, we have also seen a counterbalancing steady climb to an all time high in overall Bitcoin network hash rate, which suppresses minor economics. Perhaps most noteworthy for Cipher shareholders and prospective investors, on February 26, our majority shareholder Biffure announced plans to distribute the majority of its Cipher shares and break up its concentrated position on our cap table. We believe greatly reducing our largest investors' ownership concentration increases our free float and creates a positive liquidity environment for our shares overall as we move forward. As we head toward the having next month, Cipher is focused on executing the expansion and build out of data centers, optimizing the production from our current fleet and selectively looking for new growth opportunities. We have reviewed many acquisition opportunities over the past several months and expect the opportunities to improve as we go through the having.

Speaker 2

We will evaluate these opportunities with the same disciplined approach as always and hopefully find expansion options at cyclically low prices. On Slide 7, we give a portfolio overview of our existing data centers and a timeline for expected expansion in our self mining hash rate. In 2023, we paid an average all in electricity cost of $8,626 per Bitcoin produced at our data centers. We are very proud of this number and it drives our best in class unit economics. Please note that when some of our competitors talk about these costs, they only include electricity and not transmission and other charges.

Speaker 2

In contrast, when we talk about all in electricity costs, we mean the total cost to deliver electricity to our mining rigs. So our numbers include all transmission and other charges and our low numbers dramatically demonstrate our competitive advantage. On the left side of the slide, you have a snapshot of our 4 current data centers, along with our in electricity cost per Bitcoin at the respective sites for the year 2023. The chart on the right of the slide gives you a graphic illustration of the current Cipher Hash rate as well as the additional growth opportunities in the coming year and a half. At this point, we will turn to production by site.

Speaker 2

On Slide 8, you can see a picture of our fully operational Odessa facility. Odessa is the most significant part of our portfolio as it represents approximately 90% of our Bitcoin production. Odessa is a wholly owned facility with a 5 year fixed price power purchase agreement and some of the lowest cost power in the industry. In the Q3 of 2022, we began reporting a 3rd party independent valuation to give investors a sense of how much value is represented in the power contract alone. As always, Ed will talk more about it in his remarks.

Speaker 2

We currently generate approximately 6.4 exahash per second at the site, utilizing approximately 207 megawatts. We have mined roughly 6.35 Bitcoin at the site through February 29 and had a recent maximum daily mining capacity of approximately 10.8 Bitcoin per day. On Slide 9, we show a picture and highlights from our Alborz data center, which we believe is a truly unique site. Alborz is 100% powered by wind and is a joint venture that we share with our energy provider. It currently has a total operating capacity of 40 megawatts when the wind blows.

Speaker 2

That 40 megawatts powers roughly 1 point 3 exahash per second of rigs. Alborz can mine a maximum of roughly 2.2 Bitcoin per day and year to date the site has mined approximately 88 Bitcoin through February 29. Roughly half of that total capacity and site production belong to Cipher. We are working to supplement the wind production at Alborz with a grid connection, which would allow us to increase our uptime and generate more Bitcoin with the existing equipment at the site and we remain confident that we will have that arrangement in place later this year. Slide 10 shows operational highlights from our Behr and Chief data centers.

Speaker 2

Combined, the sites operate 20 megawatts, which can generate approximately 0.7 exahash per second and can generate roughly 1.1 Bitcoin per day in current market conditions. Baer and Chief are also structured as joint ventures and feature shared economics similar to Albor's. Unlike our other sites, which have behind the meter power arrangements, Bear and Chief are set up in front of the meter at a location in Texas that typically features attractive market prices. Finally, I will close with a few pictures of the expansion work underway at Cipher. We are very busy every day working to expand our mining capacity in the coming months, and we look forward to providing future updates on our progress.

Speaker 2

Now, I'll turn it over to our Chief Financial Officer, Ed Farrell.

Speaker 3

Thank you, Tyler, and hello to everyone on the call. As a reminder for those following our webcast presentation, I'll be referring to our results for the 3 months 12 months ending December 31, 2023. I will discuss some of the key financial metrics for Q4. I'll provide some additional 4th quarter color as well as walk through our full year results. This quarter marked our Q1 of operations since inception with all four of our data centers being fully deployed and it's a testament to the dedication of our entire team and the strength of our company that we were able to deliver positive GAAP earnings for the quarter even before adopting the new accounting standard related to the fair value of Bitcoin.

Speaker 3

As observed across the industry, top line growth doesn't always translate into bottom line earnings. However, at Cipher, this quarter showcased strong top line growth that also positively impacts our bottom line. In the quarter, we mined 1195 Bitcoin, which resulted in revenues of $43,400,000 an achievement we all take great pride in. Yet upon closer examination, these numbers become even more impressive. While our revenues were up 43% sequentially, the cost of power to generate those revenues was only up 2%, underscoring the value we get from our fixed price PPA at Odessa.

Speaker 3

We will talk about it later, but the value of that PPA also increased by over $13,000,000 in the quarter, again a testament to the capabilities of our power and origination team. Despite substantial top line growth in Q4 at $22,500,000 G and A expenses were down 6% from the prior period. This emphasizes the significant potential for will leverage within our business model. Looking ahead, we are excited about our prospects as we scale up operations significantly encountering industry headwinds such as the upcoming halving and rising network cash rates, which are challenges that all of our competitors face. However, we firmly believe that Seifer is well positioned to navigate obstacles and emerge as a leader through this next cycle.

Speaker 3

In our Q3 business update, we talked about the challenging operating environment. Transitioning to the Q4, we experienced much more favorable conditions marked by a rally in Bitcoin price and a significant increase in our production as we fully energize Odessa. As a result, our Q4 was characterized by strong top line free cash flow. These conditions combined with our ability to draw on our ATM led to a substantial improvement in our liquidity position. I would also like to take a moment to talk about the new accounting standard, which requires entities that hold crypto assets to measure them at fair value.

Speaker 3

We believe this is an important step forward for the industry and positive development for institutions looking to invest in the space. In December, FASB released new rules mandating companies to adopt the new standard for the fiscal year after December 15, 2024. Additionally, FASB provided companies the option to early adopt a choice we made for the 2023 fiscal year. We underwent a rigorous process to transition this to this new standard and assess our realized and unrealized gains and losses as well as the impact of previously reported Bitcoin impairments. The fair value adjustment for the Q4 compared to the prior accounting guidance resulted in net earnings impact of $3,000,000 Now let's turn our attention to the full year consolidated balance sheet and statement of operations.

Speaker 3

As of December 31, our total current assets stood at $155,000,000 up from $48,000,000 at year end 2022. Our accounts receivable were $622,000 versus $98,000 the previous year and our prepaid expenses were $3,700,000 versus $7,300,000 in the prior year. I should note that those prepaid expenses are primarily due to corporate insurance, which is worth highlighting because we were able to reduce our D and O premium significantly this year. We recorded a Bitcoin balance of $33,000,000 representing the 780 Bitcoin we had in treasury on December 31. That number is up from the 399 bitcoin we had at year end 2022, which was net valued at $6,300,000 net of impairment.

Speaker 3

As always, I'd like to dedicate a few minutes to the value of our Odessa PPA derivative asset. We have previously highlighted the significant competitive advantage provided by our power contract at Odessa. As a reminder, we began publishing a 3rd party mark for this agreement in the Q3 of 2022. That mark is represented as a derivative asset on our balance sheet that gets revalued each reporting period. Essentially, it reflects the in the money value of the contract relative to the current forward prices at our Odessa facility.

Speaker 3

As of December 31, this asset was valued at $93,600,000 which represents an increase of $26,900,000 year over year. This change is recorded as a gain on our income statement. It is important to note that this asset is in 2 components on the balance sheet, $31,900,000 as a current asset and $61,700,000 as a non current asset. The change in fair value of this contract will affect our GAAP earnings, but we excluded from our non GAAP reporting. Our other significant assets include property and equipment of $243,800,000 primarily attributed to our Odessa facility.

Speaker 3

This figure includes miners and related equipment of $163,500,000 as well as leasehold improvements valued at $139,000,000 dollars These items are offset by $59,100,000 of accumulated depreciation. In addition, we hold intangible assets of $8,100,000 which includes $7,000,000 designated for the payment of Black Pearl site and its related ERCOT approval. The remaining $1,100,000 relates to capitalized software. At year end, our equity investee interest in Alborz BairdChief stands at $35,300,000 Our operating lease of $7,100,000 is primarily related to real estate leases. Additionally, deposits of $23,900,000 includes the previously reported Luminance Security deposit of $12,500,000 and a $6,300,000 deposit to Encore related to Botpro Data Center.

Speaker 3

I would like to report that our current liquidity position on February 29 is $158,000,000 comprised of $69,000,000 in cash $89,000,000 worth of Bitcoin assuming a 62,000 dollars price per Bitcoin. Now let's look at our GAAP operating results. Before delving into our full year numbers, I'd like to provide more detail on the 4th quarter results. Considering this marks our first full quarter of operations with all 4 of our data centers at full capacity. In the 4th quarter, we mined 1195 bitcoin resulting in $43,400,000 in mining revenues versus the prior quarter when we mined 1078 bitcoin producing $30,300,000 in revenue.

Speaker 3

We are particularly proud that despite significantly higher operating revenue, our operating expenses including G and A and depreciation and amortization remained relatively flat quarter over quarter. As I mentioned earlier, G and A totaled $22,500,000 a decrease of 6% from the previous quarter. Depreciation and amortization came in at $16,800,000 a slight increase from the $16,200,000 in the previous quarter. The cost of revenue was $13,300,000 which includes our power and direct expenses relating to Odessa, a 2% increase over last quarter. Now let me turn to our full year results, which we can see on Slide 15.

Speaker 3

For the full year 2023, we mined 4,350 Bitcoin, resulting in $126,800,000 of revenues generated entirely from our Odessa facility. The cost of revenue for the year was $50,300,000 versus $748,000 in the prior year. G and A expenses came in at $85,200,000 in 2023 versus $70,800,000 in 20 22. The increase of $14,400,000 was primarily driven by compensation and benefits as we invested in building out our team, increasing our headcount from 22 employees to 36 employees. Depreciation and amortization for the year $59,100,000 versus $4,400,000 in the prior year.

Speaker 3

This increase was primarily due to miners and equipment and leasehold improvements at Odessa being in service for full year compared to only 2 months in the previous year. As we mentioned earlier, we recorded a positive change in the fair value of our derivative asset of $26,800,000 year over year. Power sales amounted to $9,900,000 in 2023 versus $500,000 in the previous year, reflecting the ramp up at Odessa over the course of 2023. For our JV sites, the line item titled Equity and Losses of Equity Investees was $2,500,000 in 2023 compared to $37,000,000 in 2022. It is worth noting that the losses in 2022 were primarily from the fair value contribution of miners to our JVs at the time when miner prices were much higher.

Speaker 3

Let's now turn to our slide on our non GAAP measures used to reconcile our adjusted earnings exclude the impact of depreciation of fixed assets, the change in the fair value of our derivative assets, deferred income tax expense, the change in fair value of warrant liability, stock compensation expense and other non recurring gains and losses. These supplemental financial measures are not measurements of financial performance in accordance with U. S. GAAP and as such they may not be comparable similarly titled measures of other companies. We believe that these non GAAP measures may be useful to investors in comparing our performance across reporting periods on a consistent basis.

Speaker 3

Management uses these non GAAP financial measures internally to help understand, manage and evaluate our business performance and to help make operating decisions. When we adjust our 4th quarter GAAP results to the GAAP net income of $10,600,000 we add $17,200,000 for those items I just listed. That brings us to adjusted net income of $27,800,000 for the quarter compared to $2,300,000 in the previous quarter. For the full year, our adjusted GAAP results yield an adjusted earnings gain of $46,200,000 versus an adjusted earnings loss of $64,900,000 in the previous year. I will conclude my remarks by saying we are extremely pleased with our financial performance in Q4 and throughout the entirety of 2023.

Speaker 3

Our philosophy continues to be that to be a leader in the mining space, we need to focus relentlessly on having best in class unit economics. We firmly believe 2023 validated our ability to deliver on our stated objective by successfully bringing online our initial 4 data centers. We are excited about the next stage of growth that Tyler outlined. And with our current financial position, free cash flow generation, lack of debt and best in class unit economics, we believe we should be well positioned to be a leader through the next cycle. We look forward to updating you in greater detail on our expansion plans when we report for the Q1.

Speaker 3

I will pause now and Tyler and I are happy to answer your questions.

Operator

Thank you. And our first question coming from the line of John Soder with Needham and Company. Your line is open.

Speaker 4

Great. Thanks for taking my question. Congrats on the quarter guys. It looks pretty solid despite the without even the accounting rule changes. I guess two questions, maybe one for each of you.

Speaker 4

Ed, when you talked about operational leverage boost, so we noticed that as well as the G and A coming in a little bit lower than what we actually estimated for Q4. If you can grow exash to 9 plus in G and A flat in 2024, it seems like another big boost there. Is that how we should be expecting G and A to basically be flat over 24?

Speaker 3

Yes. Good morning, John. Thanks for listening and thanks for the question. I would look at G and A over the next two quarters as being relatively flat. We don't look as we mentioned, we built out the team.

Speaker 3

I think we'll get a lot of leverage from building out the team. As we bring on more exahash and we expand our data centers, we should expect some additional depreciation and amortization. But when you neutralize that for the non GAAP numbers, I would expect that not to be too much greater than we've been reporting in the Q4 of 2023. Is that helpful?

Speaker 4

Yes, that is. Thanks, Ed. And then Tyler, on the Bitfury side of things, and apologies if I missed it, but can you just remind us, so how many shares Bitfury still has right now, the timeline for that distribution? And then I believe there's no more lockups, Is that correct?

Speaker 2

Yes. Hey, John. So let me actually add one more piece of color to Ed's answer about SG and A because I think it's important for context and then I'll answer the Bitfury question as well. I mean, I know you asked sort of for specific near term, but I think it's important to think about SG and A, especially as we come into the having. The way we look at SG and A, I do think is pretty differentiated from most other Bitcoin miners.

Speaker 2

And I think about that that needs to be kept in mind as all the research analysts and investors in the space look at what happens to these companies post having. And so we often talk about the relentless search for cheap power because that drives the unit economics. And look in a post having world as the world evolves and these sites get bigger, there's really kind of 2 ways to seek out that cheap power. Some folks not Cipher have gone to jurisdictions where there may be regulatory risk or other challenges that we find hard to underwrite and you get cheap power so long as they don't raise the miner tax or the government comes after mining or something like that and maybe there are people that can underwrite that risk better than us. The other way in the way that we've really focused since day 1 on doing this is to go to a place like Texas where you can monetize the curtailability of these data centers.

Speaker 2

And as we've talked about often, our data centers can power up and they shut down within a minute. They can do it very quickly. They can respond to price signals. And we talk a lot about the opportunities to sort of be involved in providing power back to the grid, making extra cash to do it, and that being a real hidden ability of what we can do. And the thing is, if you take what I'll call a more basic operating model for a miner where you just find a power cost and try to run your rigs 100% of the time.

Speaker 2

That model is going to be more and more challenged. And if you did that in Texas, the average price in Texas is something like $0.06 kilowatt hour. And so to sort of manufacture your own lower electricity price, you have to be able to curtail your data centers, potentially participate in demand response programs, etcetera. The only way to do that is to build a stack of talented people across ops, technology, trading. It's not easy and we're one of the only companies that really does that at scale and that will be an even bigger part of our story as we build Black Pearl.

Speaker 2

So that's all by way of saying that when our SG and A is building a different company with a different skill set of people and it scales very well. So whereas I think now we're going to we're at half of less than half of the output will be from a megawatts perspective and like a third or less than a third of what will be from a Hash rate perspective after we bring Black Pearl online that SG and A scales very, very well. It is not a linear scaling. And so Ed, your specific question was about the next quarter or 2. I think it's important to keep in mind that this will become one of our greatest relative strengths in the long term because we will bring on very large data centers with very little linear growth in SG and A.

Speaker 2

So we're sort of just getting started in some ways on the chassis that we're building to continue to source and produce our own chief power and control our own destiny. So I think that's important context for SG and A just on a longer term not exactly your question. And then to get to your specific question and thank you for indulging me on that. Yes, so Bitfury is in the process of distributing those shares. They put out a press release and they talked about this that they plan to end up with 50,000,000 shares at Bitfury.

Speaker 2

And so that will be below 20% of our overall shares. We have raised some money via the ATM, so we'll even be a little bit less than that on a percentage basis. That's in process right now. I don't know exactly where they are in that process because that's sort of outside of my conversations with them. But I know it's sort of very short term.

Speaker 2

They are in the process. I expect it to be days for them to complete those distributions. And so we will go from where we were not that long ago when they were north of 80% of our cap table to decently below 20 percent. And there are no more lock ups on that. So those will be freely tradable shares as they're distributed.

Speaker 2

I think it's good to give some context on this as well. I've heard a lot from investors over the last year or so, hey, Tyler, we love the Cipher business model. We love how you create your own cheap cost of power. This is very sustainable. You have a clean balance sheet.

Speaker 2

We like everything about it. But we're an institutional investor and we don't buy the stock of companies with an 82% shareholder. And so this has been a central challenge for us to solve that we focus every day on building a great business, but of course we want to also have Cipher stock be a great investment. I think the very wonderful thing about this outcome is that if you think about what I would like to see on our cap table over time, in a perfect world, we'd have a bunch of long term investors that understand Bitcoin mining. And so we sort of short circuit the timeline here.

Speaker 2

These are shares that are being distributed to Bitfury already owned. So it's not adding new shares. These are existing shares going to investors that have been invested in Bitfury and Bitcoin Mining typically for a long time, sometimes longer than a decade. So I think from our perspective at Cipher, we're really excited about this. I think just based on my conversations with investors, I have heard we traded a discount to where our business model should be trading if we didn't have such a concentrated cap table.

Speaker 2

And I believe that that discount will be removed and that frankly I think we should trade at a premium based on just the results we've put out. So no lock ups, that distribution is in process and I expect it to be completed within days.

Operator

Thank you. One moment for next question. And our next question coming from the line of Richard Yates with JPMorgan. Your line is open.

Speaker 5

Hey, good morning guys. A few housekeeping questions, I'll get to those in a second. But I wanted to you guys announced a big purchase with Bitmain, I believe it was in December. It included an option for 2024. I look at your Odessa site and it has very impressive power cost, but still has a pretty high dual Potera Hash.

Speaker 5

My question is, does it make sense to swap out machines at Odessa for maybe the T21s? And kind of how do you think about that? Like what's the calculus for doing that? And I have a few follow ups. Thank you.

Speaker 2

Sure. So great question, Reggie. The current plan is not to put the T21s from that large order you mentioned, which includes if you fully exercise the option, up to 15.8 exahash of T21s and that's at $14 a terahash, which is just an awesome price. If you look at the profitability where we are, call it an S-nineteen JPRO efficiency right now, it's hard to keep up with this, but I think it's about 100 and $65 or so per megawatt hour right now. So getting more and more profitable and as everyone knows that generally drives the cost of rigs.

Speaker 2

So having locked in $14 is just an awesome price on that purchase. Our current plan is not to use those at Odessa. We recall that we do have an order of 1.2 exahash of S21s that we are using at Odessa both to swap out for machines getting repaired and generally upgrade from the least efficient machines we have. That replacement exercise gets us to a big part of the growth in Hash rate that we projected for this year. So we've got a projection of 8.7 eggs of Hash in the 2nd quarter and then 9.3 eggs of Hash in the 3rd quarter.

Speaker 2

That's largely the Barents Chief expansions, but then also that's this swapping out and optimizing of the lowest sort of efficiency rigs at that site. I mean the one other thing I'd say is even in our current efficiency, I think industry average is more like 34 joules a terahash. So we're already decently more efficient than the industry average. And as we mentioned, by the time we get all these things plugged in, we'll be at 22 joules per terahash. But that's the current plan.

Speaker 2

I also we mentioned, I mentioned in my prepared remarks that we are also working on various hardware and software optimizations. Obviously, over time, we learn a lot about operating these rigs and sort of environmental specifics and there are various software and hardware tricks of the trade that we also use to squeeze extra efficiencies out of those. So even our least efficient machines becoming more efficient just through minor upgrades that don't include like a full swapping out.

Speaker 5

Got it. And just to kind of clarify there. So for that Bitmain announcement in December, there was a piece of it that was for 2025. There was an option for 2024. I guess based on what you've kind of announced and disclosed so far today in the last few weeks, are you does that assume that any of that option is used for 2024?

Speaker 5

And if not, how are you thinking about that option? And can you extend it beyond 24? And then my last question, I feel a lot of you right there.

Speaker 2

Go ahead. What's the last Give me the last one first.

Speaker 5

Yes. And the last one too is what's your what is your appetite for tuck in acquisitions? Does my first question make sense? So like I'm trying to figure out

Speaker 2

like 100%.

Speaker 5

That option, yes, like has it been is it accounted for or is it spoken for? And if not, like what is the plan for that? Yes.

Speaker 2

So sizing of that option is tied out with Black Pearl. So we could build the full 300 megawatts of Black Pearl buying rig T21s for $14 a terahash. And so at Black Pearl, which will be energized in the first half of twenty twenty five, we have the ability to basically build that full site. If you look at Slide 7 of our deck, the walkout to 25.1 exahashes assumes that we plug in all those T21s at that site. Keep in mind that the option is exercisable in calendar year 2024, but when we exercise it, it takes a few months to deliver.

Speaker 2

So here's how we're thinking about it. At a baseline, when we do CapEx planning for Black Pearl, we've locked in the most important variable cost in CapEx that that cost per terahash can go up 600%. We've locked it with that option. And if we find nothing else to do with rigs beyond the expansions we've already laid out, we can exercise that full option and build the full Black Pearl. The sort of great thing about this timeline that we've got is also to your answer your second question about tuck in acquisitions.

Speaker 2

We are spending a lot of time looking at opportunities. There is a lot for sale. There are companies for sale. There are ones that are well known. There's private ones that are less well known.

Speaker 2

There's domestic ones, there's international ones, there are sites, there are folks that want to get out of the hosting business, there's folks that want to sell infrastructure. So we are looking at a lot. I think a hallmark of our history has been an extremely disciplined focus on return on investment. And so we're just not going to overpay for stuff because that's ultimately what produces things like positive GAAP earnings is the discipline not to overpay for things. So my hope is that we will find amazing opportunities at very low prices that are available right away.

Speaker 2

We could exercise that bit main option right away to fill it, fill whatever we buy with new rigs. And then we can source other rigs for sort of the back half of Black Pearl. But at a minimum, we can use the full option to build all of Black Pearl and then it truly has optionality if we find a better way to use them faster. Does that make sense?

Speaker 6

That does, that does, that does.

Speaker 5

It does make sense. One last point of clarification on that. So I assume that that means the option piece of it can be exercised at any point in 2024 and not necessarily at the end of 2024?

Speaker 2

Correct. That's right.

Speaker 5

Got it. Perfect. Thank you so much.

Speaker 3

Of course.

Operator

Thank you. And our next question coming from the line of Joseph Vafi with Canaccord. Your line is open.

Speaker 6

Hey guys, good morning. Great to see the Q4 results and the adoption

Speaker 2

of the

Speaker 6

accounting standards. Just I was just thinking here, we've had this really nice run up here in Bitcoin that's been pretty rapid and precipitous. Just wondering how the higher Bitcoin price is perhaps having effect on your operating strategy, the build out strategy and the HODL strategy. Could you move Black Pearl forward faster now with a higher average price per bitcoin selling them or does it make sense to huddle or you huddle less because the price is high. It's kind of a high class problem, but just trying to see how it's affecting the business and maybe tweaking the strategy.

Speaker 2

Thanks, Joe. So, good question. First of all, Black Pearl has an energization schedule, which is set for the Q2 of next year. So unfortunately, we cannot move that up. In addition to there just being a lot of logistics, we're clearing large 50 acre fields now.

Speaker 2

We have to install and build everything. But really the timeline there, even if we wanted to, the challenge is there's an energization timeline that we don't have optionality on. Now what we do have optionality on is how much we built. We sort of publicly committed to building the first half of it. We have an option to build the second half of it.

Speaker 2

And the way I think of the increasing economics of the business, frankly, which is tied to the higher Bitcoin price, it makes it more likely that we could green light the full 300 megawatts as opposed to just the first half of it, which we've committed to. That we do have optionality on. So I think of it in those terms. And then speaking more broadly about treasury management, let me remind everyone that in general, it's our goal to build a Bitcoin treasury over time. We need to do that thoughtfully about different ways we can tap capital.

Speaker 2

It's been very favorable to build that treasury recently. But in addition to selling some Bitcoin with regularity to pay our fee bills and holding an increasing number of Bitcoin. We also hedge. We did see a noticeable pickup in hedging over the last few months and that's because we've had these big sort of known binary events, right? Things like the ETF approval date when everyone was coming into that week.

Speaker 2

For example, we put several costless collars around Bitcoin we held in inventory, where we protected the downside in case we got a piece of bad news on that inventory. And also we didn't pay anything for it other than giving up upside that was well above the VIN market price. So sort of we're either selling at a better price than was in the market to buy downside insurance. We continue to do that as well as look at other ways to think about hedging. We're following the Hash rate Derivatives market very closely to look at ideas.

Speaker 2

We've got other known events coming up like the halving, but also things like there's timelines on the ETF approval, which may have an impact on the space. It wouldn't surprise me if we continue to do things like costless collars. Of course, that also comes down to an analysis of the relative economics. We want to do that when the option map is very favorable and we can keep a lot of upside to protect downside. So it's not just we put this much in that this bucket and this much in that bucket, it's dynamic.

Speaker 2

But listen, the rising Bitcoin price is certainly very helpful for our optionality, not only on sort of building the full Black Pearl, but look when we look at acquisition opportunities. It certainly is nice to have that going up.

Speaker 6

Sure. That's great color. Thanks, Tyler. And then just wondering transaction fees have been kind of in the news and I know you mentioned it. How material was that in the quarter on relative to overall revenue?

Speaker 6

And just trying to think about post having transaction fees, if you got any thoughts on that? Thanks a lot.

Speaker 2

Sure. So I think it's a really important thing to keep in mind if you evaluate investing in a Bitcoin miner. And again, we sort of had this extraordinary moment in the history of the space where you have the having upon us, which we think is going to expose the less disciplined models in the space. You're going to have to have a better nuanced understanding of power going forward in a clean balance sheet. But also with ETFs available, I think a lot of the investors in this space historically have been short timeframe investors looking to trade Bitcoin moves and these were the companies that had balances of Bitcoin.

Speaker 2

And obviously there was GBTC out there historically, but now flash forward, you've got ETFs as an option and the same investors certainly seem to like MicroStrategy quite a bit. And I think that draws a lot of the eyeballs that we're trading these Bitcoin mining companies really for their Bitcoin balance. So I think you need to break out the balance from the mining business because there's sort of options to investors have other options. And that's why it's so important that in this last quarter, we were profitable without marking the Bitcoin held in treasury to market, that from a GAAP basis. It was it's very important.

Speaker 2

I mean, that means not only are we a treasury balance, we're an operating business that is solid. And now to get to your question about transaction fees, what's so important and attractive about that non treasury piece of the business, the operating mining business is that in the Q4, we did see these spikes in transaction fees. They're not always sustained. Sometimes there's a hot BRC20 token, typically from Asian investors. I think sometimes we're trying to figure out like what's driving the fees today.

Speaker 2

And we saw periods, we had days where we more than doubled our Coinbase Rewards from the transaction fees. So it is a massive potential upside. We continue to see developments in the use of block space as being valuable. And so I think the thing that's important to remember, like why would you buy a Bitcoin mining company if there's an ETF out there, not only are you buying this sort of operationally leveraged operating business, but you're long a call option on transaction fees. And so if we see those fees spike or they're more sustainable, that's extra basically that you get from this business and that has the potential to spike rapidly.

Speaker 2

We'll see what happens with the spike in demand is generally we continue to see more investors come to the space and demand spike. Traditionally, that makes transaction fees go up. Also, we've got these other uses for block space that we saw really last quarter. And on the magnitude, I don't know off the top of my head the magnitude for the whole quarter, what it was in the aggregate, but we definitely had sustained days where it was 50% to 100% of the rewards we were getting from the Coinbase reward.

Speaker 6

Got it. Thanks. That's good color. Much appreciated, Tyler.

Speaker 2

Yes.

Operator

Thank you. And our next question coming from the line of Greg Lewis with BTIG. Your line is open.

Speaker 7

Yes. Hi. Thank you and good morning and thanks for taking my question.

Speaker 3

Tyler, I was hoping for

Speaker 7

a little bit of an update on Alborz and where the status is of getting grid connected to there and any kind of timelines and thoughts around what else needs to happen in terms of spending to make that happen?

Speaker 2

Sure. Thanks for the question. So I we still think that it is in the near term. I think we could see it as soon as the next quarter. The only reason I haven't given a specific date is that it's basically negotiating contracts.

Speaker 2

Those contracts are all in motion. Some of the contracts, the types of entities involved to do things like set up a grid connection don't necessarily move as quick as other contractual negotiations. And so that's the only reason we haven't been as specific because I just I can't it's hard to underwrite that exact timeline. That said, it's in process. So, my optimistic goal would be in the Q2, and I think that's achievable.

Speaker 2

And then I'll remind everyone that we also have technically a 50 megawatt PPA there. So we would have potential for another 10 megawatts of expansion at Albours should we choose to do that. The grid connection you would think would add roughly 20% or so of uptime to the machines that are already there. So it would be meaningful. It's not going to move the entire ship, but it's an excellent way to squeeze more out of what we already have.

Speaker 7

Okay, great. And then just as we think about that, then obviously the electricity costs there probably best in class. Maybe that with the grid connection, maybe it sort of trends up somewhere in more in line realizing that electricity pricing. You mentioned the PPA, but maybe it looks a little bit more like Odessa's and maybe thinking more in in I guess what I'm wondering is that the utilization improvement probably far outstrips the I guess, higher marginal cost of the electricity. Is that kind of

Speaker 2

how we should That's right. I mean, I think of it this way, right? So power tends to first of all, our cheapest power in the portfolio as we show in the deck is at Alborz. And so it's great when the wind is blowing that is the strongest economics we have. Obviously, when the wind blows, that's great.

Speaker 2

When it doesn't blow, we're not currently drawing power. In Texas, obviously, when the wind blows, typically the grid market price is also lower. So I do think it will be higher than we pay when we're drawing from the grid. But what we will do as we do it all the front of the meter sites, we will manage that sort of curtailment, right? So we will avoid the most expensive free market hours, we'll increase the utilization and I think of it as 3 quarters of the time it will be that cheap price at Albor's and one quarter of the time it will be closer to Baren Chief.

Speaker 2

Super helpful. Thank you

Speaker 7

for the time.

Speaker 2

Yes.

Operator

Thank you. And our next question coming from the line of Josh Sigler with Cantor Fitzgerald. Your line is open.

Speaker 3

Yes. Hi. Thanks for taking my question, guys. First of all, I know it's still early stages, but I'd love to understand kind of how you're thinking about the pace of CapEx spending and the rollout of that spending as we head into the Black Pearl Energization? Thank you.

Speaker 2

Sure. So it's early days and we're still at the point where we're testing different design decisions at Black Pearl. So we're looking at air cooling, we're looking at hydro. I would say maybe we haven't completely ruled out immersion, but we're not favoring it. It's more likely to be hydro or air cooled.

Speaker 2

As we look at cost projections at that site, it's running in line roughly with Odessa. So Odessa, we came in just above $500,000 per megawatt for the non rig infrastructure. We're tracking towards the same thing at Black Pearl. I'll say one difference though at Black Pearl, technically we're building and owning the substation there for a 300 megawatt site. So if you include that as well, that would take the average cost again, it's early, we like to build in contingencies, etcetera.

Speaker 2

But we're forecasting $650,000 to $700,000 per megawatt for the non rig infrastructure. And then of course, should we choose to put all the T-twenty ones there, we've got that prices fixed and partially paid already. So we've paid I think in the course of that process, that CapEx, we've paid 20 something million so far, below 20,000,000. And then between the if you mark our to market our bitcoin today, we've got about $165,000,000 or so, or I should say at the end of February, if you look at the numbers that we reported between cash and Bitcoin. Thus far, March has been a strong month, obviously, with Bitcoin value.

Speaker 2

So between the cash on hand and what we expect to be ongoing operating cash flows, we're very comfortable certainly with the first half of Black Pearl. And as we continue to watch the market dynamic, I'm hoping that we'll push forward to try to do the full $300,000,000 from day 1.

Speaker 3

Yes, understood. Thanks, Tyler. That's helpful color. And look, in your presentation, you broke down your energy costs by size on an all in basis. And I think it's very helpful, really points to the operating leverage inherent in this business.

Speaker 3

I'm curious, as Black Pearl comes online, how are you thinking about its impact on your all in energy costs per Bitcoin mine going forward?

Speaker 2

So let me give some color on how we're thinking about it. It's hard to project exactly. So Black Pearl is a front of the meter site, but it is so what we will do is manage curtailment and we plan to participate in demand response programs in Texas, so things like ancillary services. So to give some color, I mentioned if you were what I'll call a basic model Bitcoin miner that just flips on machines and runs them 100% of the time, The cost in a spot like that in Texas would be something like $0.06 per kilowatt hour, which is not that attractive to us much, much higher than the rest of our portfolio. If you then sort of manually operate and trade and curtail to basically mirror what we've traded in curtailment at Odessa, but there we've got it baked into the contract as a fixed price.

Speaker 2

So in other words, think about we shut off the 5% most expensive times for floating prices in the market, which is basically what we have to do at Odessa. That would take that $0.06 price somewhere down to like the mid $0.03, dollars 0.035 something like that. If you then sort of make all the trading decisions around power optimization, so things like participating in the ancillary services market, looking at real time versus day ahead markets, thinking about other things like congestion trading and other things we can optimize. If you did it perfectly, which we will not, but we will aim for, we think you could get the price actually on a net basis below $0.02 per kilowatt hour. So in reality, the way we will operate the fully scaled up site, I would currently forecast to be somewhere between, let's call it $0.02 $0.035 on a net basis.

Speaker 2

And so depending on how that ends up, that's right on top of our portfolio basically.

Speaker 3

Yes, understood. Thank you.

Operator

Thank you. One moment for our next question. And our next question coming from the line of Bill Papinaucoup with Stifel. Your line is open.

Speaker 3

Yes. Good morning, guys, and congrats on the pin and thank you for taking my questions. I just have one here. Tyler, I was just hoping you could share your thoughts on how you see the industry evolving over time with respect to consolidation. If we look at the universe of public Bitcoin miners, it's evident that operators who have focused purely on Bitcoin mining have achieved arguably superior financial performance and scale.

Speaker 3

And a number of these players are building massive data centers. And so what's your take on the appetite to acquire subscale peers? Has that diminished at all?

Speaker 2

Thanks for the question. I'd say we look at everything. We're always looking for an opportunity. I think often sites are for sale or sellers are distressed for a reason. Sometimes I'd say most typically we screen things out because we're just not interested in power prices that we don't think are sustainable through a bull and bear cycle.

Speaker 2

The competitors the competitive landscape is getting larger and larger scale. It does make sense that the large scale players going to do better on a going forward basis. I think being a registered company in the U. S. Gives people great access to capital markets to fund expansion and also gives you scale to negotiate lower CapEx, etcetera.

Speaker 2

I think there are folks out there that are basically to your point, maybe Bitcoin mining is not working that well and the shiny new toy is something like AI. We've looked at all kinds of AI proposals and eyeballed it. That is not currently on our roadmap. We are much more interested in opportunities to sort of integrate upward into the power industry. And so we'll continue to look at that.

Speaker 2

But I think going forward to your question, it's dynamic. I mean, Bitcoin prices are going up so fast right now. Who knows what the price is going to be at the halving? Maybe Bitcoin price bales some of the less efficient guys out. But if you assume we go forward with very large network cash rate growth and non completely parabolic Bitcoin price increases, I think you're going to see a dispersion among the miners.

Speaker 2

I think people are going to stop looking at these companies as the same thing and seeing them trading all in line. And as I mentioned earlier, in our case, we think the ability to have a team, a company, operations technology that can effectively produce its own cheap power from the free market in the way we interact with the grid, particularly in places like Texas, that's just going to make us more sustainable. So from an M and A perspective, the challenge is, I don't we don't love the hosting business really in either direction around having with new chipsets coming out. I think that business is going to be challenged. And so we're less interested in general in sites that are for sale that have hosted clients with contracts or maybe have obligations on the power side that they can't necessarily pass through to clients.

Speaker 2

There are challenges like that that sometimes make things for sale. Overall, I think the differentiator for us is, are there companies that look at Cipher and say, wow, those are the best in class unit economics and they have large scale and expansion and a clean balance sheet. So we'd love to effectively aggregate with them to become a very large player. I think that could be something that becomes interesting to us. There is an interesting valuation gap in our opinion between us and some of the biggest miners where we think we're running a better company, frankly.

Speaker 2

And so if there are opportunities that we think are very good price and very accretive to shareholders, we're certainly looking.

Speaker 3

Great. That's amazing color. I think your strategy makes sense just given your superior unit economics. The lowest cost producer for commodity always wins. That's all the questions I have.

Speaker 3

Thank you.

Operator

Thank you. And next question coming from the line of Joe Flynn with Compass Point Research. Your line is open.

Speaker 8

Hi, guys. Most of my questions were asked, but I thought I'd maybe just ask about one thing that was brought up earlier was at some point the fixed year PPA like it's a I think it's a 5 year deal. But can you walk us through maybe the process of renegotiating that? I mean, you guys have clearly demonstrated that best in class economics and you ultimately see like risks there? And just regarding that, like are those kind of deals still out there for, let's call it, newer miners that haven't demonstrated a track record yet?

Speaker 8

Thanks.

Speaker 2

So thanks for the question. I think from our perspective, part of the reason that contract was set up as fixed price is the market was a little bit cheap on a forward basis and we could lock those prices over 5 years and so we chose to do that. As you mentioned, we've got 3.5ish years left on that contract. We're in constant negotiations and it's sort of a it's a symbiotic relationship with our power provider there because they're giving us curtailment notices. We're managing curtailment.

Speaker 2

We provide a lot of data. We work we're in constant contact with them. So listen, even with that amazingly cheap price, over the life of that contract, we're going to pay something like $250,000,000 to our power provider. So I think there's every commercial incentive for us to keep working. We are co located with their data center and we're in constant negotiations about things that happened beyond that 5 years, but also expansion opportunities, other opportunities potentially at sites with them and other places, etcetera.

Speaker 2

So I'm optimistic that over time we'll extend or alternatively if there are amazing sites down the street, we certainly have that capability now with 4 larger data centers in Texas and hopefully more in the pipeline as they come available. We'll find whatever the best outcome is for shareholders, but we've got a few years. I think you asked if those opportunities are available to new miners. I would say they weren't even available to old miners because like that counterparty for example gave anecdotes about how lots of miners had knocked on their door for an opportunity. And from a counterparty perspective, we showed very professionally, we could post double digit $1,000,000 of collateral to support the contract, etcetera.

Speaker 2

So I think it's hard to go through the counterparty analysis, even if you have built space. Right now, as far as doing new deals like that, I mentioned the economics that we can effectively replicate from how we curtail at Odessa to take a front of the meter floating price site and more or less through the tech ops and trading stack we've built, manufacture our own results from the floating price. I think that means that right now floating price is more attractive than what we've seen for market hedges, which is why right now we haven't been doing as many fixed price deals. That will change over the course of years cycles happen. So right now I think the best way to do it is to try to manage curtailment manually and participate in those demand response programs, whether you're us or anyone else.

Speaker 2

I think the difference is we've invested years and a lot of money in a team, a tech stack, in an operations set of procedures and people that can manually operate and take advantage of produce those economics? I think that's very hard to do at smaller scale or with a different team.

Operator

Thank you. Now last question in queue coming from the line of Mike Kalanissi with H. C. Wainwright. Your line is open.

Speaker 4

Hi, good morning guys. Great quarter and thank you for taking my question this morning. I'm curious to what price range you'd consider on a cost per megawatt basis to acquire infrastructure as you evaluate some of these M and A opportunities out there?

Speaker 2

Thanks. Thanks, Mike. I'd say it's dynamic like everything else, right? I mean, the Bitcoin price is going up, enthusiasm is going up. I don't think anyone's ever going to get the price we got for Black Pearl.

Speaker 2

We paid $7,000,000 for a 300 Megawatt ERCOT approved site. So now it's not built, but having the sort of approval and capacity to go to 300 Megawatts is an amazing price and far, far less than I've seen anyone achieve. I think it's dynamic. It's really side by side. It depends on what you're buying, what the power contract is, what are the opportunities to do things like manage your curtailment and be paid for that, so that you can sort of again manufacture your own cheaper prices?

Speaker 2

And then if there's hardware there, what's state of the hardware? Again, we're doing diligence on some sites. Some sites, the hardware is pristine. At other places, it's not. And so coming up with a secondary market value for things like if there are rigs there, substations, transformers, etcetera, is it a building containerized, etcetera.

Speaker 2

So I'd say every situation is a little bit different. But where we always start is, we typically look for a minimum of scale. We screen out things most often below 50 megawatts unless there's a compelling reason to look at them. Next thing we look at is the power, how sustainable is the power, what are the risks that the power could change, are there what's the regime like, etcetera. And then beyond that, it's kind of a market price evaluation of what equipment might be there.

Speaker 2

So it's hard to give a stock answer to that other than basically anything we do with capital at the company starts with a return on investment calculation. And that's whether we're buying rigs, buying power or buying a site. And so all I can say is we will remain very disciplined and try to make investments that we think are going to have a fantastic return for shareholders.

Operator

Thank you. And that's all the time we have for our Q and A session. I will now turn the call back over to Mr. Tyler Page for any closing remarks.

Speaker 2

Look, thank you very much to everyone that participated on the call. We are really excited. We have been thinking about the having for years when we built this business and even this earnings call getting excited to talk about where we would be positioned going into this really transformational period in the space. So thank you for your time and we're very excited to give you further updates in the coming months.

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Earnings Conference Call
Cipher Mining Q4 2023
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