TeraWulf Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 13, 2024

There are 9 speakers on the call.

Operator

Greetings and welcome to the Terawolf 20 24 First Quarter Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.

Operator

Jason Assad, Director of Corporate Communications. Thank you, Mr. Assad. You may begin.

Speaker 1

Thank you, operator. Good afternoon, and welcome to Teriwell's Q1 earnings call. With me today are Chairman and Chief Executive Officer, Paul Prager Chief Operating Officer, Nazar Khan and our Chief Financial Officer, Patrick Flurry. Before we get started, I'd like to remind everyone that our prepared remarks may contain forward looking statements, which are subject to risks and uncertainties, and we may make additional forward looking statements during the question and answer session. These forward looking statements are subject to risks and uncertainties, and actual results may differ materially.

Speaker 1

When used in this call, the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project and similar expressions as they relate to Terawolf are such forward looking statements. Investors are cautioned that forward looking statements involve risks and uncertainties, which may cause actual results to differ materially from those anticipated by Terra Wolf at this time. In addition, other risks are more fully described in Terra Wolf's public filings with the U. S. Securities and Exchange Commission, which may be viewed at sec.gov and in the Investors section of our corporate website at terawolf.com.

Speaker 1

Finally, please note that on today's call, we'll refer to certain non GAAP financial measures. Please refer to our company's periodic reports on Form 10 ks and 10 Q and on our website for a full reconciliation of these non GAAP performance measures to the most comparable GAAP financial measures. I'd like to also inform investors of our new investor deck, which may be found also at terawolf.com. We'll begin today's call with prepared remarks from Paul, Nazar and Patrick, then we'll proceed to Q and A. My pleasure to now turn the call over to TeraWol's CEO, Paul Prager.

Speaker 1

Paul?

Speaker 2

Thank you, Jason, and good afternoon, everyone. We appreciate your attendance today as we dive into our Q1 2024 financial results. Just a couple of months ago, our last earnings call, we highlighted Teri Wolf's significant growth and accomplishments throughout the fiscal year 2023. We experienced robust organic growth at existing sites, achieved substantial debt repayment and bolstered liquidity. These achievements underscore the strength of our foundation and set the stage for the growth we are excited to talk to you about today.

Speaker 2

For those unfamiliar with Terra Wolf, we specialize in energy infrastructure, drawing from over 3 decades of experience. Our primary focus presently centers on Bitcoin Mining where we employ sustainable practice utilizing 0 carbon energy resources while also contributing to grid stability. Operating from our 2 principal data centers Lake Mariner in Upstate New York and Nautilus Crypto Mine in Pennsylvania, a joint venture with Talend. We take great pride in sourcing 95% of our power from clean energy Our expansive mining facilities currently have a combined self mining hash rate of 8 exahash per second, powered by approximately 64,000 deployed miners with a fleet efficiency of 24.6 joules per terahash, we utilized 210 megawatts of infrastructure capacity. Notably, our miners consistently operate at an impressive 98% of installed nameplate capacity.

Speaker 2

We're actively expanding our mining operations at Lake Mariner with Building 4 scheduled to be complete at the end of June and Building 5 commencing construction. These expansions are projected to raise our total operational capacity to over 10 exahash per second by mid year with a fleet efficiency of 22.7 joules per terra hash and subsequently to more than 13 exahash per second with a fleet efficiency of 20.9 joules per terra hash. We have one of the most efficient minor fleets in the industry. As Patrick will elaborate, we finalized a new miner purchase and option agreement with Bitmain for S-21s and S-21 PROs, solidifying our growth trajectory. This contract not only ensures the prompt delivery of machines to occupy Building 4, but also secures favorable pricing for up to 6x ash of potential future deliveries.

Speaker 2

Looking forward, our plan is to achieve a 300 megawatt infrastructure capacity by year end 2024 with the goal to further expand to 600 megawatts of deployed infrastructure in 2025. As an energy infrastructure business, we are committed to ongoing development and identifying optimal applications for our megawatts, whether it's Bitcoin mining or high computing endeavors. The significance of owning infrastructure and scalability cannot be overstated. Our optionality extends well beyond that of our peers, thanks to our energy backgrounds and existing digital infrastructure. In fact, I believe no miner is better positioned than Terawolf when it comes to owning scalable, low cost and 0 carbon energy infrastructure assets.

Speaker 2

Over the last 9 months, Wolf Compute, our internal innovation hub has been focused on researching, developing and deploying our extensive and scalable digital infrastructure. Following a successful pilot phase involving a compact NVIDIA GPU system, we allocated a 2 megawatt power block at our Lake Mariner facility, which could support over 1,000 H100 GPUs as part of a broader high performance computing initiative aimed at diversifying our revenue streams. Tera Wolf's large scale energy infrastructure coupled with access to 0 carbon low cost power is invaluable for meeting the growing demand from Bitcoin mining and AI applications. Our sites fulfill demanding specifications of hyperscalers offering direct access to extensive contiguous land suitable for constructing data centers as well as access to abundant water for cooling and adherence to a sustainable ESG framework. In a few moments, Nazzar will provide more detail how we are strategically and carefully approaching the AI HPC opportunity.

Speaker 2

The immense value of our available, scalable and sustainable energy infrastructure is undeniable as demonstrated in recent research reports from both Morgan Stanley and Goldman Sachs. We believe the market isn't properly attributing the inherent and significant value of our owned infrastructure in our current market valuation. Turning to our financial position. We remain steadfast in leveraging our resilient low cost infrastructure to maximize profits, repay debt and return value to shareholders. Our performance in the first quarter highlights Terra Wolf's consistent achievement of industry leading profitability.

Speaker 2

We delivered a GAAP gross margin of 66%, which increased to 71% inclusive of Dauntless and non GAAP adjusted EBITDA of 32,000,000 dollars which translates to an EBITDA per exahash of approximately $4,100 among the highest of our public peers. Additionally, our quarterly SG and A of $8,000,000 and stock based comp of $7,000,000 are far below all of our peers. Why are these statistics important for management and shareholders to consider? Because they highlight Terol's competitive advantages versus all other public Bitcoin miners. 1, low cost, 0 carbon power.

Speaker 2

2, profitability. We generate more EBITDA per exahash than our larger public peers and therefore require less capital and future growth to achieve the same level of profitability as our peers. And 3, efficiency. Our team is lean, mean and we manage Terawolf to achieve maximum profitability for our shareholders. We are not a lifestyle company for management.

Speaker 2

We estimate our cost to mine a bitcoin at approximately $40,000 per bitcoin post having, utilizing a network cash rate of 600xash, positioning us as one of the lowest cost producers in the industry. Looking forward, we remain squarely focused on capital efficiency, ensuring that every dollar we spend on CapEx creates shareholder value. This approach underscores our commitment to maximizing returns and driving long term sustainability in our business. Before I conclude my remarks today, I want to underscore the significance of capital efficiency within our strategic framework. At Wolfe, we firmly believe that our success hinges not merely on the speed of our expansion, but on the discerning allocation of capital to generate sustained returns for our shareholders.

Speaker 2

So what precisely do I mean by capital efficiency? I'm referring to the prudent utilization of funds whether derived from free cash flow, debt or equity to operate and expand with a keen focus on the relationship between capital deployed and the resulting returns. This distinction is crucial. It enables investors to differentiate between the companies that are growing profitably versus simply growing. At Terra Wolf, we firmly believe that not all exahash is created equal.

Speaker 2

And guess what, the same is true for dilution. As we have demonstrated quarter after quarter, our approach is one of prudence, ensuring minimal dilution to maintain alignment with our stakeholders. Remember, this management team, including yours truly, is among the largest shareholders, which underscores our entire alignment with you, the investor. So beyond the exhaustive analysis and modeling, what truly defines our strategy is capital efficiency. You should rest assured that when we decide to utilize the ATM, it is with the absolute undeniable conviction that every dollar invested will yield a substantial return.

Speaker 2

It is clear that some of our competitors aren't focused on profitability when announcing expansion plans and that is what differentiates Terawolf. Capital efficiency serves as the cornerstone of our decision making process, guiding us to make investments that not only fuel growth, but also ensure that every dollar spent generates substantial long term value. This disciplined approach empowers us to maintain a lean and adoptable business model, while seizing opportunities that align with our core objective of delivering sustainable growth and returning value to our shareholders. It is also why TeraWulf delivers more profitability with less dilution than any of our peers. Now I'll hand the call over to my partner, friend, Ghazir Khan to elaborate on Wolf Compute's initiatives before our CFO, Patrick Fleury provides a detailed review of our financial results for the Q1.

Speaker 3

Thank you, Paul, and good afternoon, everyone. Before delving into the latest developments at Wolf and Cute, I'd like to provide some context regarding the surging demand for energy infrastructure. As Paul mentioned, our expertise lies in the power generation sector. Over the past 2 decades, we've been involved in the development, construction, financing, ownership and operation of power generation facilities, both domestically in the United States and in various overseas jurisdictions. Essential to our operations has been our keen understanding of power flows, a skill that's particularly pertinent in today's landscape.

Speaker 3

With the advent of high demand modes such as HPC and AI, ensuring timely access to sufficient power has become a critical concern. However, access to power and energy infrastructure remains a significant constraint. These high density compute loads have 2 primary objectives: 1st, to secure access to power at scale and second, to do so within the next 12 to 24 months. Once these primary objectives are met, considerations then shift to securing low cost and 0 carbon power solutions. Fortunately, the Terrell portfolio boasts substantial capacity to fulfill each of these objectives.

Speaker 3

As high density compute loads gravitate towards areas with ample power resources, we're actively engaging with various counterparties to allocate our energy infrastructure accordingly. We are in the early stages of this transition and are thoughtfully analyzing the alternatives. Over the past 9 months, Wolf Compute has been dedicated to developing the blueprint for our low cost, 0 carbon and scalable digital infrastructure. Traditional data centers are facing challenges in meeting the escalating rack density requirements of current and next generation GPUs. To address this, our engineering team has collaborated closely with industry leaders such as NVIDIA to design air cooled and liquid cooled facilities tailored to meet these demands.

Speaker 3

The culmination of these efforts is the construction of our 2 megawatt facility at the Lake Mariners site slated for completion by early August. We're currently in discussions with several counterparties regarding the utilization of this capacity. Our core expertise at Terroof lies in energy infrastructure and our primary objective remains to expand our facilities to meet the increasing energy demands of the rapidly growing high density compute market. Following our initial 2 megawatt project, we're now in the final stages of designing a 10 megawatt facility engineered to be easily scalable. As you'll see in our most recent investor presentation, we've summarized various strategies for extracting value from our infrastructure as it relates to AI HPC applications.

Speaker 3

Each strategy entails distinct capital, operational and margin considerations. Given our dedication to energy infrastructure and our belief in being at the forefront of the growing demand for it, our current focus is on the colocation, white space and rack ready model. This approach strikes a balance between long term ownership of energy infrastructure and the potential for increased revenue per megawatt over time in the most capital efficient manner. We expect the supply of scaled low cost 0 carbon energy infrastructure to become more constrained over the next year. Hyperscalers are aggressively acquiring and optioning energy infrastructure that they plan to grow into over the next few years.

Speaker 3

We believe the path to creating highest shareholder value is by designing and building next generation data center infrastructure that we offer into the market. Looking forward, we envision an opportunity to expand our high density compute business to 100 megawatts within the next few years. This expansion will leverage our existing assets and may involve acquiring additional sites to bolster our capacity further. Now, I'll hand the call over to our CFO, Patrick Plurry, to provide a detailed review of our financial results for the Q1.

Speaker 4

Thank you, Nazzar. As Paul stated, our Q1 was strong across all financial metrics, driven by favorable business fundamentals and outstanding execution. In the Q1 of 2024, we self mined 767 Bitcoin at Lake Mariner and our net share of mined Bitcoin at Nautilus was 284 for a total of 10 51 Bitcoin or about 11.5 Bitcoin per debt, a 10% increase over the 959 Bitcoin mined in 4Q 2023. We received an additional 6 Bitcoin in 1Q 2024 and 13 Bitcoin in 4Q 2023 from profit sharing associated with a hosting agreement at Lake quarter over quarter, reaching $42,400,000 in 1Q 2024 from $23,300,000 in 4Q2023. Our value per bitcoin self mined this quarter, a non GAAP metric that includes bitcoin mined at Nautilus, averaged 53,750 per Bitcoin for a total of $56,800,000 as detailed and defined in our monthly operating reports and press releases.

Speaker 4

As a reminder, there is a key difference between our GAAP financials and the monthly operating reports and 2024 guidance. Due to our 25% ownership in Nautilus, the revenue, cost of revenue, operating expenses, depreciation and amortization at Nautilus are not consolidated into our GAAP financial statements. Instead, the financial impact of the Nautilus joint venture is reflected in the equity and net income or loss of investee net of tax line item on the GAAP income statement. Our GAAP cost of revenue, exclusive of depreciation, for 1Q 2024 was $14,400,000 a 61% increase over $8,900,000 in 4Q 2023. The quarter over quarter increase was principally due to a 37% increase in average operating exahash in addition to higher realized power costs at Lake Mariner in 1Q 2024.

Speaker 4

Looking now at our gross profit, also exclusive of depreciation, we saw an increase of 95% quarter over quarter from $14,400,000 in 4Q2023 to $28,000,000 in 1Q2024. Our total power cost per bitcoin mined, a non GAAP metric that includes bitcoin mined at Nautilus, was $15,501 in 1Q 2024 compared to 10,308 in 4Q 2023. As a reminder, in our GAAP financials, unlike our monthly operating reports, the company records proceeds received and to be received for demand response programs as a reduction in cost of revenue. These expected proceeds totaled $1,200,000 in 1Q 2024 and $1,000,000 in 4Q2023. As disclosed in our 2024 guidance, we expect to achieve an average power cost including demand response revenues and the impact of Nautilus' 0.02 dollars power of $0.035 per kilowatt hour in 2024.

Speaker 4

For 1Q 2024, we achieved an average power cost of $0.041 per kilowatt hour. Operating expenses were stable quarter over quarter at $1,700,000 in 1Q 2024 and 4Q 2023. As disclosed in our 2024 guidance, we expect $13,500,000 of operating expenses in 2024, which includes operating expenses at Nautilus. Of the $13,500,000 total approximately 50% is expected to be incurred at Lake Mariner and 50% at Nautilus. SG and A expenses increased quarter over quarter from $8,800,000 in 4Q 'twenty three to $14,900,000 in 1Q 'twenty four.

Speaker 4

However, the increase is almost entirely due to 6 $200,000 of stock based compensation expense incurred in 1Q 2024. Adjusting for stock based comp, SG and A decreased 6% year over year from $8,500,000 in 1Q 2023 to $7,900,000 in 1Q 'twenty four. SG and A spend is more heavily weighted to the Q1 of the year versus following quarters. And as disclosed in our 2024 guidance, we continue to anticipate approximately $27,500,000 of SG and A in 2024. Depreciation increased quarter over quarter from $8,300,000 in 4Q 'twenty three to $15,100,000 in 1Q 'twenty four, which was the result of an increase in mining capacity and infrastructure placed into service, as well as $3,800,000 of accelerated depreciation related to certain miners of which the company shortened their estimated useful life based on expected replacement by April 30, 2024.

Speaker 4

Gain on fair value of digital currency net of $1,300,000 in Q1 2024 is a new line item for us given our early adoption of the new FASB accounting rule, which marks the company's Bitcoin holdings to the fair market value as of the filing date with changes in fair value recorded in net income. It is critically important to note this 1,300,000 is substantially all realized gain, meaning it is realized cash in our bank account and not theoretical mark to market gains on paper, which many of our peers at Hodul have reported. I am amused watching our public peers report adjusted EBITDA inclusive of theoretical mark to market gains on BTC Hodul balances as adjusted EBITDA is supposed to help an investor determine normalized cash flow generation for a business. It will be telling to see if our peers stick to this methodology if and when BCC price drops quarter over quarter as it's done thus far in 2Q 2024. I won't be holding my breath for the self declared industry leaders to do the right thing.

Speaker 4

GAAP interest expense in Q1 2024 and 4Q2023 was $11,000,000 $9,300,000 respectively, which includes cash interest expense and amortization of debt issuance costs and debt discounts related to the term loan financing. However, cash interest paid during 1Q 2024 was $3,700,000 down over 8% from $4,100,000 in 4Q 2023. This decrease is the result of repayment of $33,400,000 of debt in 1Q 2024. This trend will continue in 2Q 2024 as we repaid a further $30,100,000 of debt in early April. In total, the company has reduced its debt balance by over $70,000,000 since the start of 4Q 2023, with $51,500,000 of free cash flow from operations and only $18,600,000 of equity proceeds.

Speaker 4

In connection with the voluntary prepayment of $18,600,000 of debt in 1Q 2024, the company incurred prepayment fees of $300,000 recognized unamortized discount of $1,700,000 associated with the principal repaid and recorded a loss on extinguishment of debt for a total of $2,000,000 In 1Q 2024, we reported $5,300,000 in equity and net income of Investee, net of tax as compared to $3,300,000 in 4Q 2023. These amounts represent Peril's proportional share of net income of the Nautilus joint venture. Our GAAP net loss for the Q1 was $9,900,000 compared to a net loss of $10,800,000 in 4Q 'twenty three. Our non GAAP adjusted EBITDA for 1Q 2024 was $32,000,000 a 95% improvement over $16,400,000 in 4Q 2023. Turning our attention to the balance sheet.

Speaker 4

Of March 31, we held $45,800,000 in cash with total assets amounting to 395,000,000 dollars and total liabilities of $123,000,000 As we move through 20 24, we anticipate a consistent and rapid reduction in our long term debt with an estimated $15,000,000 to $20,000,000 repayment the 1st week of July. Our net working capital excluding the current version of long term debt held steady quarter over quarter at positive 31,000,000 dollars As disclosed in our updated investor deck and 2024 guidance slide, we achieved a marginal cost of production, including every single cost in the company of approximately $29,000 in 1Q 2024 and expect to achieve approximately $40,000 in 2Q and the second half of twenty twenty four. 1Q twenty twenty four realized cost per BTC was higher than our expected $25,000 due to seasonally higher realized power costs of $0.041 per kilowatt hour versus our projected $0.035 per kilowatt hour annual average and seasonally higher 1Q 2024 SG and A expense due to annual filings, audits and related legal fees. Lastly, in March 2024, the company entered into a minor purchase and auction agreement with Bitmain to lock in pricing of approximately $16 per terra hash on an additional 7 exahash of F21 and F21 Pro Miners.

Speaker 4

The company has paid $17,500,000 for 5,000 F21 Miners, which we expect on-site at Lake Mariner by the end of May and funded a further $9,600,000 deposit for an additional 30,000 minuteers. At Wolf, our financial objectives remain clear and simple: maximize profits, repay debt and return value to shareholders, while providing investors access through transparency and accountability. With that, I'll pass it back to Paul and look forward to answering your questions.

Speaker 2

Thank you once again for joining us today. In summary, Terrell stands at the forefront of the industry with its best in class assets, lowest unit economics and unparalleled ability to scale our owned infrastructure. We remain deeply committed to delivering consistent growth and profitability while aligning closely with the interests of our investors. As we look ahead, we believe our infrastructure strategic importance is currently undervalued by the market. The foundation we've laid and the trajectory we're on underscore our potential for continued success.

Speaker 2

We appreciate your continued support and confidence in Tera Wolf. Together, we are poised to capitalize on the exciting opportunities ahead, uphold our position as a leader in capital efficiency and deliver sustained value to

Speaker 4

our shareholders.

Operator

Thank you. We will now be conducting a question and answer The first question comes from the line of Josh Seigler with Cantor Fitzgerald. Please go ahead.

Speaker 5

Yes. Hi, guys. Good afternoon. Thanks for taking my question today. Just wanted to start by saying I really appreciate the breakdown of your unit cost here.

Speaker 5

It's very helpful for us investors.

Operator

For my first question, I

Speaker 5

was wondering, now that we have passed to having you've demonstrated this profitability now, do you expect more financing channels to really open up, maybe perhaps debt markets once you've proven that profitability post having? Thanks.

Speaker 4

Yes. Hey, Josh, this is Patrick. Can you hear me okay?

Speaker 3

Yes. Okay.

Speaker 4

I'll take that as a yes. Yes, look, it's a great question. I think we've talked about this before. I'd like to see the debt markets kind of from a corporate level, so not the old minor finance model because that obviously didn't work very well. But from a corporate level debt perspective, as the business gets more mature and candidly post having there's a separation of companies that are profitable and those that are not that really set up more as lifestyle companies, as Paul mentioned, for management teams.

Speaker 4

Yes, I think I'd like to see the debt markets reopen and you'll see in a slide that we put in our slide deck, I think it's Page 12, but we just are providing a bridge of capital needs for the year and we have assumed that we just take all of our free cash flow and pay down our debt. I do think there's a possibility. I've already received a bunch of inbound. I mean, certainly given our business and the collateral that we put in the ground has grown over time, and the debt has been reduced. Yes, I think there'll be opportunities to kind of term that debt out.

Speaker 4

So it really will become a question of whether we want to keep it or not. But I think for us as we pivot a bit more into the high power compute and AI space, That space, the public companies trade at 20 to 25 times EBITDA and they all have 6 times leverage because you've got long term contracts and it's a much more stable revenue business. So I could see us as we kind of get into that really have 2 kind of silos, 1, the Bitcoin mining business, 2, the compute business and those are very different financing beasts. So yes, I'll just leave it at that.

Speaker 5

Yes, understood. That makes sense. Following up on that, I did want to ask a little bit more about the HPC side of things for my second question. Most notably, last we talked about high performance compute was a couple of months ago. And in your deck, you've outlined the 3 potential business models that you could pursue and you have the pilot program and works here.

Speaker 5

I was just wondering now that time has passed, if you're becoming more comfortable with one specific model over another in terms of what the future of HPC may look like for both?

Speaker 4

Yes. Go ahead, Nas.

Speaker 3

Hey, Josh, it's Nasir here. Yes, I think as we've noted, our core expertise is really around energy And so we are getting more comfortable and we've been working to design the next generation data center, given where GPU wrapped entities going, a lot of legacy data centers may not be able to most efficiently meet the power needs. And so we think from a delivering a infrastructure that can be used for not just H100s, but even kind of Blackwells and beyond. We're designing digital infrastructure that can meet those needs. So we're getting very comfortable that we can design, put up and operate that physical infrastructure.

Speaker 3

So kind of in that, if you look at Page think it's Page 14 in our deck, that middle column really kind of what we think is a sweet spot between owning the infrastructure, bringing in customers who may pay for the GPUs and having kind of a long term ownership around that. Now that being said, this is kind of the full spectrum of the alternatives that are out there. And as we get further along into it, post our 2 megawatt pilot, we're finalizing the design for the 10 megawatt facility. If we see an opportunity, Patrick just mentioned on financing or other things, to be able to facilitate kind of being participating in more of the chain, we'll do so. But currently, we're really focused kind of on that middle column and that's where we think our expertise lies.

Speaker 3

Patrick, can you add to that?

Speaker 2

Yes. This is Paul. Hey, Josh. The only thing I'd want to add is a little bit unique to Wolf, is our sites. Not everyone has the energy infrastructure for that kind of scale in terms of power.

Speaker 2

Not everybody has the water permits at that kind of volume of water, and all the access to the contiguous land that one of these massive data centers want. That makes it exciting. But again, they're all out shopping for this stuff, which just means that the energy infrastructure value is going to continue to head north. I think Nazir said the other day in one of our calls, we're not looking for a trade, we're looking to build a business. So in that regard, I think our inclination is to focus on that middle column because I think it's just it's about returning maximum value to the shareholder, as opposed to sort of having us work for Meta Amazon or one of those guys.

Speaker 2

And so that's how we're currently thinking about it. But these are early days, Josh, and I don't think one needs to sort of make a commitment at this point as much as one needs to really study this market and understand it. That said, it's also very important to us that we remain mining Bitcoin. We're really good at it. I think we're best in class at it.

Speaker 2

And we believe in Bitcoin. So I think what Patrick said earlier, which is we see ourselves possibly having at least a couple of buckets out there, one HPC and one mining Bitcoin. I think you'll continue to see that as a driver of our business philosophy.

Speaker 5

Yes, understood in that regard. Congrats on the great results here guys and looking forward to the future. Thanks.

Operator

Thank you. Next question comes from the line of Lucas Pipes with BYD Securities. Please go ahead.

Speaker 6

Thank you very much, operator. Good afternoon, everybody. Patrick, I guess I'll have to look up that industry classification system. But in more serious matters, we are hearing a lot about the tightness in the power markets with the AI growth. And Paul, you know power markets extremely well.

Speaker 6

So I wonder I wanted to hear your opinion on that. Is that true? Do you see that tightness in the power markets? And then if it is true, who gets that economic rent? Is it the utility?

Speaker 6

Is it anyone with the PPA? And to what extent does geography matter in all of this? Appreciate your thoughts on this. Thank you.

Speaker 3

Naz, do you want to

Speaker 2

start with respect to HPC and I'll follow?

Speaker 3

Sure. Hey, Lucas, it's Nazzo here. So as we look at the landscape, there's a mismatch, the size of the demand and the timeframe for which supply is available. So with infrastructure, if you have enough time and enough money, things can be solved. And right now, we're at a point in time where the near term demand helps strips the available supply.

Speaker 3

And that's particularly the case if you want scaled access to power at a low cost and it comes from a 0 carbon source. There's not that many places where you can find all of those variables available to you. And so as we think about it, kind of the owner of that infrastructure or the owner of that right to procure or use that power should be able to capture the rent. And so what we see happening right now is if you look at kind of at one end of the spectrum, hyperscalers are flushed with cash and they're out there optioning up as many of these sites as they can. And whether they ultimately use the capacity or not, that's not their concern for today.

Speaker 3

They'll worry about that tomorrow. But in the near term, they're just optioning it all up. And so again, from our perspective, we've got 300 megawatts of incremental available capacity yet to be developed. And so we think fundamentally we're sitting at the constraint point, where again there's not enough supply to meet the demand. And so we should be positioned to capture a fair amount of that rent.

Speaker 3

And how we do so, and I think that those business models are still evolving. And so the other thing that we're seeing is the traditional model for how data centers operated. They went into a territory, they called up Dominion, said we need 40 megawatts, Dominion said we'll serve you. That may occur. We think that will occur, will still occur, but we are also seeing the demand sources going directly to procuring that supply themselves and whether it's Microsoft's announcement of Brookfield saying build out 10.5 gigs of capacity for us or what Amazon did at the talent site.

Speaker 3

And so again, those places where you have access to that power and you can deliver that, and we do think that those will be best positioned to capture the value that's coming from that demand.

Speaker 2

The only thing that I would add to it is, I look at there being some competition then to a Bitcoin miner, because he's got to compete with a whole different level of fellow in these hyperscalers for sites with power and not all sites are created equal. Likewise, I think Patrick mentioned earlier today, he said, if you've got a good business model, but bad power, well, you're hosed because at the end of the day, you have bad power contracts, it's bad power contract. You'll never right size your costs. And so we have good power. We have good location, but green power, but good power and that it's really inexpensive.

Speaker 2

So I think you have to look at some of the shops in Bitcoin mining that really have great power agreements and are transparent by the way about them. And that's where you ought to be making your bet.

Speaker 6

That's very helpful. Really appreciate the color and yes, that provides a lot of context. Quick second question, just in terms of that 9 point $6,000,000 towards an additional 30,000 minuteers. How should we think about kind of that by itself from a timing perspective and then kind of longer term or rather beyond that, where's your head as it relates to growth? I appreciate your thoughts.

Speaker 6

Thank you.

Speaker 4

Yes, sure. So Lucas, I think that whole contract, right, is for 7 exahash total. 5,000 of that we pointed out in the call has been paid for and will be delivered at the end of this month. And then really I think as you we haven't committed beyond what you see on Page 12 of our deck and perhaps Nazar can speak to this, but I'll just mention it because part of it is we think that model is changing. I mean, even over the past few weeks, we've gotten some calls from folks that are discussing concepts like giving the miners to us for free with a profit share.

Speaker 4

And so, I think we're hesitant to kind of commit to anything beyond what we've kind of laid out. We'll have 13x Ash of infrastructure ready to rock and roll this year. We'll be at 10x Ash by July 1. So that's I realize Lucas that's not as specific as they typically like to be, but there's a lot of movement in that market. So that's kind of how we think about it.

Speaker 4

I don't know, Nazzar or Paul, if you want to add anything there.

Speaker 3

Yes. Just to add to that Lucas, the contract is for 25,000 remaining machines at $16 per carahash and that $9,600,000 represents a 10% deposit on those machines. And so as Patrick said that we've in that contract, we've effectively taken down 10,000 of those machines cover building 4, which will come online here, as Patrick said, by July 1. And then the remaining liners are on option available to us. And for us, it's really about capital efficiency.

Speaker 3

So as we are thinking about continuing to grow the business and allocating the infrastructure most effectively, that capital kind of question comes in. And so as Patrick said, we're looking at a number of different ways to skin that cat and it ranges from purchasing more miners at $16 Terra Hash, some sort of profit share and even kind of something in between, which would just be effectively being able to replace hash cords and machines. So you're significantly limiting your capital costs by using kind of the existing box that exists for the miner and swapping out hash boards with the next generation hash boards. So there's a whole spectrum of things that we're actively looking at in terms of how we will populate those next buildings that are coming up.

Speaker 6

Thank you. And is the deposit transferable? So if you chose to go forward with another option, how should we think about the deposit?

Speaker 4

No, I mean the deposits for those machines, Lucas. So we'll either but as you know that deposit kind of works down every time we take a delivery of machines ratably, Yes. Yes. So the deposit is down to secure the price and the future delivery and then we'll kind of work that down over time as we take machines.

Speaker 6

Got it. All right. Well, I appreciate the color and continue best of luck.

Speaker 4

Thanks, Lucas.

Operator

Thank you. Next question comes from the line of Joe Flynn with Compass Point Research and Trading. Please go ahead.

Speaker 7

Hi, guys. I had a question related to the Nautilus option to expand 50 megawatts. Do the terms of that option change at all with the Amazon acquisition or does it require like a sign off? And then ultimately, how should we think about timing of getting that capacity online if there's no change? Thanks.

Speaker 3

Sure. The Amazon is a new landlord to the agreement we have, it's the agreement we have, so there's no change in the terms and conditions of the agreements. We are currently working to finalize the designs for that facility. We're targeting a 2025 online date for that. Currently, we're focused on completing Building 4 and we've got a pretty quick turn on delivering Building 5 at Lake Mariner.

Speaker 3

And so we've slated the Nautilus expansion for 20 25. And so we are working with the landlord there to finalize the design for the building that we put at that site.

Speaker 7

Great. And Patrick, you kind of touched on this already, but I guess in this low cost hash price environment, how should we prioritize like between paying down debt and CapEx, the opportunities to push some CapEx out if needed for the flexibility? Thanks.

Speaker 4

Yes, sure. I mean, I think what we try to be again, our philosophy as everyone knows on this call is being highly transparent, which many of our peers purposely do not. And so we are going the other route. So on Page 12, we've literally laid out everything that we the management team has committed to for this year. And so you can see on that slide, we've got around $45,000,000 $50,000,000 left to raise over the next 6, 7 months.

Speaker 4

So that just to put into context and the reason why we put Slide 11 in our deck is that absolutely pales in comparison to even if again, even if we just did equity for that $45,000,000 to $50,000,000 that we're talking about and we used all of our free cash flow generated during this year to pay off the debt. It's just Page 11 puts it in context for you. I mean some of our peers issued over $500,000,000 on the ATM in the 1st 4 months of the year, okay? And not only that, but they generated virtually no profit. I mean 2 of our largest peers generated close to $10,000,000 $50,000,000 being close to 50% and 150 percent larger than our company.

Speaker 4

And we generated $32,000,000 of EBITDA. And so I think we are happy to own and commit to what is on Page 12 here, because we are massively and accretively growing the business using equity as an eyedropper. These other companies on this Page 11 used equity with a fire hose. And so not only that, but and by the way, my hat's off, you'll see on the top of this page, CleanSpark is highly profitable. So using your ATM to fund highly profitable growth, I will applaud that all day.

Speaker 4

But when you're using your ATM to fund a hodal strategy where only management benefits by paying themselves more if the price of Bitcoin goes up. That's why we put the quote on the top of the page, read it. Revenue is vanity, profit is sanity, but cash is king. A bunch of our peers are focused and they'll go out and talk to you guys how much exahash they're putting in the ground and how big their revenue is. Well, guess what?

Speaker 4

It doesn't matter. Every single business that I've ever invested in or most investors on this phone, right, even Uber, at some point, Uber has to be profitable for people to stay invested. And so I think you have to see some of these companies show you guys a profit. And I think now that we're into the having, some of the peers are telling you their hash costs, which we also put out in crystal clear numbers on Page 13, both actual realized in Q1 and what we expect in 2Q and the second half, it's all right there for you guys to see. A bunch of our peers are asked and trying to give you all the tools you need to see that we are a and trying to give you all the tools you need to see that we are a profitable company that prudently accesses the capital markets when we need to, to grow.

Speaker 7

Understood. Thanks for the color.

Operator

Thank you. Next question comes from the line of Mike Grondahl with Northland Securities. Please go ahead.

Speaker 8

Hey, thanks guys. Kind of referring to Slide 14, Wolf Compute or the HPC opportunity. Now you're kind of focused on that center column. Paul, are you thinking of this as a business tens of millions or 100 of millions? And then maybe as a follow-up, what do you think this business will look like in 3 to 5 years?

Speaker 2

So, Naz, why don't you start and then I'll come in and give my thoughts on where we're headed.

Speaker 3

Sure. Mike, we think we can grow this business to 100 of megawatts. And so our 2 megawatt pilot and the 10 megawatt building that we're designing is more geared towards an engineering exercise to ensure that the product that we have available meets all of the specifications and demands of people that will use our infrastructure not just today, but again future proofing a bit for at least the next couple of iterations of GPUs that may come out. So we believe again the availability of power at scale at low cost and 0 carbon is tight. And so we firmly believe that over time, this is a business that we could build into 100 megawatts plus, right?

Speaker 3

With the 300 megawatts that we have today, we think we could build that up. We are also looking at a number of other sites as well, which could further add to the capacity to build that business out. So again, we think it's we're trying to build a business here, that's really focused in on that. As we kind of fast forward 2, 3, 4 years from today, again, this page also lays out somewhat of the how we see the marketplace playing out. You have your hyperscalers again who have the capital and the ability to throw down a lot of cash and try to control their own destiny.

Speaker 3

And so you see them doing that in a number of different places. Again, I gave the example earlier of Microsoft Brookfield, the 10.5 gigawatts of power that will feed directly into Microsoft's needs. And so there's only a few names in the world that can afford to do that and they're going to do that. At the other end of the spectrum, you have kind of the newer AI companies developing 1 or 2 or 3 of them will likely grow from where they are today to be becoming something fairly significant. And you have enterprise customers in between.

Speaker 3

And so we really believe that for other than kind of the hyperscalers, the availability of what we can offer is going to be tight limited and we're going to be a natural and complementary customer or partner for them. So that's where we're positioning ourselves and we do think that over time this can become a real business.

Speaker 2

Yes. And thanks, Nash. What I'd like to add is a couple of things. One is, BB King has a great song. He used to say it, don't make you move too soon.

Speaker 2

These are very early days in the high speed compute business. And I think it would be prudent for us to really look at all the ways that we could take advantage of our megawatts of our energy infrastructure, because that's really our advantage, right? The sites, the water permit, but it's the access to low cost carbon free energy that is what is so enabling on a long term basis to building a business at Wolfe. So I think that is why we're located that's why we're focused on that center column right now, because that's where we think it's likely is to see the best value for Wolfe shareholders. That said, we're constantly I mean, this is all we talk about every minute of the day, trying to figure out how do we get the most to our shareholders out of our energy infrastructure.

Speaker 2

I think on a long term basis, you would see Wolf having 2 divisions, if you will, high speed compute and Bitcoin mining. We like Bitcoin mining. We're very constructive on the price of Bitcoin. We are the most efficient at it. And we don't think it would be prudent to just sort of switch gears and become a high speed compute company.

Speaker 2

Particularly at this point in time, there's so much to learn. We think the right thing to do is to sort of continue our analysis, focus on the center column, do what we're doing in terms of the 2 and then the 10 megawatts and then continue to be dedicated to Bitcoin mining at the lowest possible cost. And so that's where I think we're headed. I think that will also avail us additional opportunities in terms of our cap structure because I think that again the high speed computing space much more it's much kinder on an institutional level to a business and when you think about lending and the kind of terms that are available to you. So I think that's where we'll end up.

Speaker 8

Got it. And then one follow-up. I'm trying to connect Slide 12. One of the uses of the $47,000,000 of capital is Wolf Compute and it says $5,000,000 How does that blend into Slide 14 in the financing line for the middle column, it says equity initially. Can you just kind of speak to the financing and what equity initially means in that center column and how far $5,000,000 goes?

Speaker 4

Yes. Nez, do you want to take that first part and then I'll take the second on the 5?

Speaker 3

Sure. The 2 megawatt pilot that we're building is largely most of that $5,000,000 budget. So that's the full design, engineering, construction costs associated with that 2 megawatt pilot. That 2 megawatts of capacity will be available in early August and or in discussions with a number of different counterparties around utilizing that capacity. So that's where the bulk of that goes.

Speaker 3

And that budget also includes the engineering and design work for the 10 megawatt building as well. And again, that 10 megawatt building is designed to be scalable. And so whether we build 10 megawatts or 20 megawatts or 30 megawatts, it's really just scaling up that design. And so that's what's included in that budget there for the compute business.

Speaker 4

Yes. And then Mike to answer your question, so I think it's helpful to distinguish between perhaps the build to suit, which is the right column and then the co location, which is the middle column. So in the build to suit model, which I think we've talked a little bit about before, that's a single company, big public company, Magnificent Seven type stock. And what we've learned as we have gotten down that rabbit hole is that's, to borrow Paul's phrase, although BB King wasn't he was far from a one hit wonder, but that's a bit of a one hit wonder, meaning we think we can create a lot of value doing that. But then it's a one time event, creates a lot of value and then we're working for that entity basically for the next 15 years.

Speaker 4

Whereas if we pursue the co location, and by the way, sorry, just backing up, Mike, that's obviously very financeable because that corporate, right, is an A plus credit. And so generally speaking, you can get 80% to 90% financing at 2.50 to 3 100 basis points behind the corporate credit. And so that's different if you go to co location, the middle column, it's essentially the same business. But instead of the sort of Magnificent Seven type stock taking all the profits, because as we know those companies are all very profitable, Wolf gets to effectively bring in 3rd parties to help us manage that because that's our business is in cloud compute, but we can leverage 3rd parties that aggregate enterprise customers, and then finance off that. And so initially that is equity, but as that business matures, it is also financeable up to kind of 80 ish percent, but it's kind of baby steps because you've got to aggregate the customers and then there's sort of safety in numbers once you have a bunch of customers in there as opposed to just financing off of the back of the corporate credit rating of 1 customer.

Speaker 4

Does that make sense?

Speaker 2

Yes, that's helpful.

Operator

Thank you. Next question comes from the line of Bill Papnastacio with Stifel. Please go ahead.

Speaker 5

Good evening, gentlemen. I appreciate the transparency in the slide deck and those funny analogies on dilution. For my first question, I'm just curious to hear whether there's been an uptick in the number of subscale Bitcoin mining peers knocking on door following the halving event, just given the dynamics on mining economics. Do any of these peers have compelling assets or operations that would be of appetite to Terra Wolf today? Or will the focus remain on HPCA ad business?

Speaker 5

Yes, Paul. I'm happy to add. Yes, Paul. Yes, Paul. Yes, sure.

Speaker 5

Yes, sure.

Speaker 4

Yes, Paul. Yes, sure. Yes, Paul. Yes, sure.

Operator

Yes, Paul.

Speaker 2

Yes, sure. Listen, I think we have to focus on execution of our business plan and that's what we're focused on. We have even when Nazar mentioned earlier, like pushing Nautilus expansion out to 2025, it's because we have such a low cost to build at Lake Mariner that it just makes sense for us to focus on the careful and considerate execution of our business plan with our existing sites. That said, everybody in the space is talking to everybody in the space. And as you know, we have a management team that's been together for a very, very long time that are really focused on energy infrastructure.

Speaker 2

And as Patrick went off about a little while ago, really focused on EBITDA per exahash at the smallest dilution to the shareholders. So culturally finding somebody that would be a right fit for us, it's probably not easy. And we're very focused as well on the carbon free element to our energy. So I think that sure, everybody is chatting. Are there many likely dates?

Speaker 2

I don't think so. I think we need to focus on just execution, paying down our debt and we're on our way. I think the institutions when they come to the market are coming to us. They're appreciating the level of transparency and the actual performance that Tera Wolf is delivering under Nasrin, Patrick. And I think that we just need to continue to get that message out to the real world.

Speaker 2

I mean, if you again take a look at that Slide 11, we're talking about EBITDA per exahash and then you take a look at the massive dilution on the right side of the page versus the hardly any on the left side of the page. And then when you put in that 3rd column where you look at stock based comp, I mean, it really is very troubling and you'll see that there just are a lot of companies out there that just they shouldn't be out there and it doesn't make sense for us to sort of join with them because we're all about making money through the appreciation of the shares of our stock. We're aligned with our investors. So that's sort of how I look at it. Cultural is a big issue with us because again focused on energy infrastructure and been around a long time.

Speaker 5

I appreciate that color. Shifting gears, just hoping to get some more color on the debt repayment plans. Previously, there were talks about potentially refinancing once the indebtedness dipped below $100,000,000 Should we assume that that's completely off the table and full repayments going to happen before 2024? Any color you can provide there?

Speaker 4

Yes, Bill, it's Patrick. So like I said, you'll see in our updated slide deck on Page 12, we've laid out the capital bridge for 2024. Our free cash flow this year will take care of all of our debt. And then we've got some commitments out there for Building 5. Also laying the foundation, you'll see in that page, we've got a bar chart that says LMD Site Electrical.

Speaker 4

That's some electrical work that we're doing on the site that will allow us to expand into 300 megawatts very quickly. So some significant line expansion, transformers, upgrades that we're doing. So I think, yes, I mean, look, if the financing markets get more affordable or if we want to sort of combine that debt maybe with a debt financing at the compute business. Yes, I mean there's a lot of options on the table that would then decrease the capital need there. But I think for now, our view is, let's just the biggest asset of our company is the cash flow generating ability because our power costs are so low and our profitability is so high.

Speaker 4

So let's take advantage of that, get rid of the debt and then then start look to the future. Awesome.

Speaker 5

Thanks for answering the questions and congrats on the strong operating cash flow.

Speaker 4

Thanks, Bill.

Operator

Thank you. Next question comes from the line of Marcelo Rasi, a private investor. Please go ahead.

Speaker 4

Hey, everyone. Thanks for taking the question. I understood Nautilus runs on $0.02 per kilowatt power. But earlier in the call, somebody mentioned there was seasonality power cost adjustments. You elaborate on that?

Speaker 4

What percentage of the power is subject to seasonality? Yes, sure, Marcel. It's good question. It's Patrick Flurry. So we have 210 Megawatts in operation right now, 50 Megawatts at Nautilus, that is fixed power at $0.02 And then the 160 that we have at Lake Mariner, which is soon to be $195,000,000 when Building 4 comes online July 1.

Speaker 4

That power floats and we realized generally Zone A power prices in the New York ISO at that plant. And so you can see if you look on Page 20 of our updated deck, there that power generally at Lake Mariner has been around 0 point 0 $4 Last year for the entire year 2023, we realized a blended $0.032 at both sites and that was roughly $0.02 at Nautilus and I think $0.03 6 or $0.03 8 at Lake Mariner. And so, yes, there are typically in the Q1, our power is a little higher in the shoulder months, which tends to be the Q2 and the Q4, those tend to be really low price periods at Lake Mariner because there's no real demand there. The demand is really a function of heating and cooling days. So it's mostly in the winter, where it gets real cold for a couple of weeks and then the summer where it's real humid for a couple of weeks.

Speaker 4

But that's the beauty about being 30 miles east of Niagara Falls. So yes, so we haven't changed our guidance for the year. It's still that we expect to realize $0.035 And like I said, we feel good because we realized $0.032

Speaker 2

last year.

Speaker 3

Thank you.

Operator

Thank you. Next question comes from the line of Bob Evans with PENNINGTON Capital. Please go ahead. Mr. Evans, please go ahead with the question.

Speaker 3

Hi, thanks for taking my question. Just to follow-up, a prior question, just to get a sense of scale that you're thinking for the HPC AI opportunity. I know you're looking at the middle part of the slide, but again, is this 100 of millions of revenue opportunity? Or give us some sense of scale, at least what we should think this should ramp to? I know you're trying to put various clients into this project, but just give us a sense of revenue potential.

Speaker 4

Yes. Look, I think, Bob, as we kind of put on the page, right, I mean, if we took 300 our 300 open megawatts at Lake Mariner, right? It would be you can multiply 300 times 1.31.5, right? So it's $300,000,000 to 450,000,000 dollars So I think Nazzar answered earlier like we expect it to be in the 100 of 1,000,000. I think at this point we're not committed to dedicating, as Paul mentioned, all of that capacity to HPCAI because we're very good at Bitcoin mining as well.

Speaker 4

But we're also infrastructure people and there's a big business that sits outside of the public company as well. So think I would just say stay tuned. There's lots to come this year on that.

Speaker 3

Okay. And then is the right way to look at it on the cost per megawatt and revenue per megawatt? I mean, if we just take the midpoints of both of those ranges and divide it out, does that mean it's I guess my understanding is that this business might be kind of a payback period of a couple of years, but if I do that math, it might look like it's longer than that. I'm just trying to understand the right way to think of cash generated and paying for itself.

Speaker 4

Yes. So that's a really good question, Bob. So we are and look, I just I want to caveat this because we put down a lot of numbers here on the page, on Page 14. And you'll see that it says in the title of the page is potential illustrative business models. And I just want to point out Bob that we've been we're a hardworking smart management team, but we've been studying this business for 9 months, right?

Speaker 4

We've been in the private power business for 30. So when you're in your lane for 30 years and you get into a new lane, there's a lot of work to do before you get run over you don't want to get run over. So this is our initial learning. But I think generally speaking, the cloud business, right, so the far left column, much more revenue sorry, much more capital intensive business, but quicker paybacks, right, because people are desperate for GPU as a service type business. We're more focused again, I think our sweet spot as Nazar pointed out, we're infrastructure people and we also don't necessarily we aren't comfortable taking the GPU technology risk yet that the far left column would require.

Speaker 4

So the colocation business, yes, your point, it doesn't have the sort of 18 months to 36 month payback. It's more of a kind of, I would say, 3 to 8 year payback period. But that's still pretty good. And that business, like we said, we think these multiples down here in the bottom of the page are very conservative. But our view is that should be a 10 to 20 stable multiple business over time.

Speaker 4

So we think we can create a lot more value with less capital, focusing on that middle column versus either the left or the right.

Speaker 3

Okay. So if I was going to simplify it, we'd say, you believe you can build a multi $100,000,000 business with, call it, 70% plus EBITDA margins that should have

Speaker 5

a higher EBITDA value multiple

Speaker 3

than a lot of other options out there?

Speaker 4

Yes, correct. And the only thing I would add is less capital intensity as well.

Operator

Okay. Yes.

Speaker 2

I would want to just say one other thing. As Nazzar mentioned in his presentation, we've got these 2 megawatt at Wolf Compute and we're putting up a 10 megawatt facility. So we're not set, Bob, on what we're going to do here. We're set on taking the experience of Wolf Compute 2 and putting up this 10 megawatt building and continuing to refine our analysis to come with the right program for Terawolf, utilizing both the existing infrastructure that we have and the access to large massive other infrastructure that we would have sort of outside of the public vehicle. So that's the point.

Speaker 2

The 2 megawatts and the 10 megawatts are us dipping our toe in the water in the prudent way to ensure we come with the right answer on behalf of our shareholders.

Speaker 3

I get that. I agree with you and that obviously things work out to anywhere on this slide. It's a higher multiple more predictable business model. So I agree. Thank you.

Speaker 3

Thanks for clarifying. Thanks, Bob.

Operator

Thank you. Ladies and gentlemen, we have reached the end of question and answer session. I would now like to turn the floor over to Jason Assad for closing comments.

Speaker 1

Thank you, operator. That concludes today's conference call. Thank you for joining us. And please note this has been one of our highest attended calls, so thank you for the continued and growing support. I'd also like to again remind you about our new investor deck, which may be found on our website at terawolf.com.

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Earnings Conference Call
TeraWulf Q1 2024
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