Q2 2022 Stronghold Digital Mining Inc Earnings Call
Okay.
Good afternoon, welcome to stronghold digital mining conference call for the second quarter ended June 30 of 2022. My name is Martin and I will be your operator.
Before this call stronghold issued its results for the second quarter 2022 in our press release, which is available in the investors section of the company's website.
Www dot stronghold digital mining.
You can find the link to the investors section at the top of the homepage joined.
Joining us on today's call, our strongholds co chairman and CEO , Greg Beard, and CFO , Matt Smith.
Following their remarks, we will open the call for questions before we begin Jeff ramp from Gateway will make a brief introductory statement Mr. Graham. Please proceed.
Thank you Bobby.
Good afternoon, everyone and welcome today's slide presentation, along with our earnings release and financial disclosures were posted to our website earlier today and can be accessed on our website at stronghold digital mining dotcom. Some statements. We're making today may be considered forward looking statements under securities laws and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors many of.
Of which are beyond our control, which could cause actual results and events to differ materially from those described in the forward looking statements for more detailed risks uncertainties and assumptions relating to our forward looking statements. Please see the disclosures in our earnings release and public filings made with the Securities and Exchange Commission, we disclaim any obligation or undertaking to update forward looking statements to reflect circumstances.
Chances are events that occur after the date. The forward looking statements are made except as required by law. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables to applicable GAAP measures in our earnings release carefully as you consider these metrics we expect to file today, our quarterly report on Form 10-Q, with the Securities and Exchange Commission, which that.
For detailed disclosures and descriptions of our business as well as uncertainties, another variable circumstances, including but not limited to risks and uncertainties identified under the caption risk factors in our quarterly reports on Form 10-Q filed on May 16th 2022, and August 16th 2022, and annual report on Form 10-K filed on March.
<unk> 29 to 2022.
You may get strong hold securities and Exchange Commission filings for free by visiting the SEC's website at SEC Gov or strongholds Investor Relations website at IR Dot stronghold digital mining dotcom.
I would like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of strongholds website now I would like to turn the call over to strongholds co chairman and CEO , Greg Beard. Sir. Please proceed you.
You bet. Thank you Jeff.
Afternoon, everyone. So I think once again apologies we are a live call today does not have any recording I think I've got I'm joined on the table by you know my team has been working hard for weeks and really months on what is a series of transformative transactions for the company and you'll hear about how.
Where we are much better on the other side of it so excited to walk you through this call today and apologies that it took us a little longer to get all this news out but we've got a yes. It was quite an achievement with the you know about a half a dozen counterparties that were all exit co contingent upon each other to get it signed.
But it just took longer than what we had hoped.
We're happy to be a b through and done today. So thanks, everyone for joining us.
For today's call, we're going to reference and associated slide presentation that is available through the webcast and on the IR portion of our corporate website.
So I'm going to start on slide three of that presentation.
To discuss our vertical integration, which is a foundational piece of our strategy and a source of significant value for struggled. This slide provides visibility for how we think about our business and our ability to toggle between bitcoin mining and selling power to the grid, which is an intrinsic advantage of power asset.
Ownership.
We can pull from the grid when grid prices are lower than our available cost of power and we can sell power to the grid on grid prices are more attractive than bitcoin mining economics. Most recently the ladder has materialized as we have seen very strong power prices over the past few months.
With our power pricing, averaging over $100 per megawatt over last month, and even higher during non peak hours.
This near record pricing is expected to continue for at least the next six months with Ford prices over $100 a megawatt on average and we're going to explain how that relates to bitcoin mining economics as well. So if you see the tables on the top right. They are intended to provide insight.
How to think about good corn prices and dollar per megawatt terms and vice versa for a few recent vintage miners.
For bitcoin prices between 20020, 5000, we would expect a macro V. T. M 30 S to generate revenue between $92 and $115 per megawatt hour for a more efficient bit made and S. 19, J J pro we'd expect this range to increase to 114.
<unk> to $143 per megawatt hour on the bottom chart, we are showing the inverse had grid pricing translates into bitcoin prices.
$125, a megawatt which is in line with the average on peak price over the next six months, you'll see that the implied bitcoin price ranges from 22 to $27000 across the minor type shown.
So we expect to sell power to grid over mining bitcoin with frequency during the next several months. Additionally, we have developed a proprietary software that allows us to take advantage of inter day power price movements by turning our datacenter off within minutes, allowing us to divert that power to be.
Old.
As a reminder, when we went public last year bitcoin prices were substantially higher and grid prices substantially lower than where they currently are so the economics of the power business represented a more theoretical downside protection.
We didn't expect the power business to be a meaningful driver of value for at least a couple of years, but it's critical now.
At current pricing levels of bitcoin and the power markets. Our power business offers returns that are attractive and oftentimes superior to a bitcoin mining business. Consequently, there's a higher probability that a meaningful portion of our power generation will be allocated to selling power to the grid irrespective of our hash rate capacity.
Pasty, which brings me to our next slide to discuss the recent agreements we have made in the context of current market dynamics.
Yes.
So now turning to page four.
When we initially capitalize the business we structured it to operate in a 30000 dollar.
Downside bitcoin pricing case, we took out equipment level loans non recourse the stronghold knowing bitcoin could drop even further this structure has provided us with significant flexibility.
And this prolonged.
Downturn.
Over the past few weeks, we've worked with our lenders to restructure our debt outstanding was neither egg in Whitehorse with these ends in mind. We believe this restructuring is transformational for stronghold in terms of capitalization liquidity leverage and ultimately equity value.
We have entered into an agreement to eliminate all debt outstanding with 98, nearly $70 million in exchange for approximately two five X and hash of miners that we believe has a replacement value closer to $50 million. So we view this effectively as an asset sale at a meaningful premium to current market value.
We were able to achieve this outcome due to the structural security of the agreements, we negotiated which were with Llc's and were non recourse to <unk> Inc.
Additionally, we executed a commitment letter with Whitehall, which will convert our equipment financing into a first lien note.
More than double tenor to 36 months and provided $20 million line of credit accordion that is undrawn today White Hot will receive 2 million warrants as a part of the financing.
Lastly, we have extinguished approximately $11 million of principal from the convertible notes by reducing the strike price on the warrants. We will also <unk>. The remaining principal over the next few quarters with a total reduction of cash interest and principal payments by $25 million.
So to summarize this is an immediate $79 million reduction in debt and a $113 million reduction in <unk>.
Cash principal and interest payments through 2023 and exchange, we will be transferring away approximately 26000 miners and issuing 2 million warrants.
This move is uniquely advantageous to strongholds as a vertically integrated bitcoin minor since we generate our own power, we can almost instantly toggle from bitcoin mining to southern power to the grid, allowing us to continue earning revenue and largely offset the divested mining capacity for at least six months.
So turning to slide five to further illustrate the continued revenue generation capabilities of our business.
Which has given our uniquely vertically integrated model that has the ability to toggle between bitcoin mining and Sunpower accordingly.
We estimate a minimal impact on our revenue as a result of a reduction in liner fleet, while our mining fleet has been reduced our power sales can step up to fill in that revenue gap. Since there is now more power generation available to sell into the grid and as we have previously discussed future power prices through winter.
2023 are currently quite high so the power generation that is being reallocated. The grid can continue to earn attractive returns for us.
So in this example on the slide we are only trading off $9 million of revenue. During this period in exchange for a significant debt and interest reduction previously discussed in a period when cash flow is extremely important.
Now compare that to a traditional <unk> only business model that does not have the ability to toggle sales to the grid you can see that stronghold can generate 95% of the revenue with 15000 Myers.
Then a bitcoin only business model could generate over 40000 miners over time of course, we expect to Opportunistically replaced.
The 26000 empty slots.
I will now hand, the call over to our CFO , Matt Smith to discuss in more detail the financial impact of the restructuring and our financial position.
Thank you, Greg and good evening, everyone Slide six provides additional detail about the impact of these agreements to our liquidity and financial profile.
Our restructuring is highly attractive from a financial perspective, the left hand chart shows our debt over time before and after restructuring.
Our principal outstanding will be reduced to 144% to $65 million.
And it remains at a very manageable level through 'twenty, two through 2023 and into the having in 2024 importantly.
The right hand graph illustrates the quarterly and cumulative impact on our debt service cash flow, our cash outflows and estimated forecasted cash flow impact.
Quarterly debt servicing cash outflows were set to peak at around 30 million, but it has now decreased to about $5 million.
As we have eliminated converted or restructure the vast majority of our outstanding debt.
Through year end 2022.
June of that servicing cash outflows are reduced by $82 million.
From a 100 million to $18 million and through the end of 2073 cumulative debt servicing cash outflows are reduced by $113 million from 140 million to $26 million.
This decrease in debt service, along with continued revenue generation from our power business in mining fleet will allow us to generate more cash flow than we otherwise would have without these agreements.
We estimate these transactions collectively improve our cash flow by about $40 million through year end 2023 relative to our base case internal projections before these transactions and this assumes no benefit to value we can create.
From prudently.
And potentially filling 25000 open mining slots that we have fully developed.
And are energized given.
Given robust power markets, we're not in a rush to fill the slots and you can expect us to be patient and opportunistic when looking to add to our mining fleet over the coming quarters.
As we expect to build.
To being a low cost bitcoin miner with scale in a world where capital availability is similar between tight and nonexistent for bitcoin miners, we believe having a self sufficient business is critical accordingly, we expect this self sufficiency to provide us with opportunities to create meaningful shareholder value through accretive transactions that <unk>.
ROE our mining fleet in an intelligent way.
Slide seven provides a high level overview of our second quarter 2022 results.
As we previously announced we mined 637 gross bitcoin during the quarter, representing a sequential increase of 45% in the first half of the year, we mined 1075 bitcoin.
Revenue for the second quarter was $29 2 million, a 2% sequential increase despite the material decrease in bitcoin pricing in the second quarter.
With the increase being driven by our increased bitcoin production and relative stability in our power business.
Adjusted EBITDA during the quarter was negative $1 million compared to $4 million in the first quarter of 2022.
I would note that during the quarter, we recorded a $5 2 million noncash impairment associated with our digital currency holdings, and a $5 7 million noncash impairment associated with our bitcoin mining assets.
Both of these impairments were due to the significant decrease in bitcoin pricing during the second quarter and again are noncash in nature.
During the quarter, we continued our positive environmental impact removing approximately 241000 tons of coal refuse from piles and returning approximately 168000 tonnes a beneficial use ash to remediate these toxic co piles.
Lastly to properly calibrate your models I want to remind everyone that there will be planned downtime that will occur in the third quarter at both of our plants.
During September we plan to conduct our annual plant maintenance at both <unk> and Panda Creek, resulting in approximately two weeks of downtime at each plant.
This will reduce our power generation in the third quarter relative to a quarter without the maintenance and we will record incremental operating expenses of around $5 million, which is unchanged from prior expectations related to turnaround. These.
These turnaround events are normal course operations for base load power plants, and they ensure long term reliability and the performance of the assets.
Into very tight power markets as we look forward in the winter and into 2023.
We strategically schedule the outage during the second half of September , which should have lower power prices compared to peak summer or winter.
Which allows us to still import power to mind bitcoin as long as bitcoin margins remain higher than import costs.
I will now turn the call back over to Greg for closing remarks, great. Thanks, Matt So I'll.
I'll now turn to slide eight.
<unk>.
And just to give you a view of our strengthened patterning floor for the company.
First we're going to focus on power in the near term.
This is our lifeblood of our business and we expect to largely focus on selling power to grid with over 100 megawatts of excess power capacity availability.
To sell after allocating power to a minus fleet.
Which will generate approximately one point for axa hash and consume about 50 to 55 megawatts of power.
As I alluded to earlier, we did not expect power economics to compete with bitcoin economics until potentially the having in 2024, while we always plan to invest in our plans over time to bring them back to base load. We did not think it would be as important so quickly.
We have experienced through liability issues and plant operations, we're making significant progress and are confident in go forward operations, we will be taking that one to two week outages at both plants at <unk> in September that work at Panther Creek is expected to be less significant in nature and scrub grass improvements remain a primary objective for us.
To that end, we are continuing to progress the scrub grass upgrades.
We've spent about $3 million in 2022 and expect to spend about another $2 million to complete the remaining work.
In late September early October at which point, we anticipate scrubbed brass will run.
Baseload with more consistency.
On the bitcoin mining side of the business and plan to be patient, but opportunistic buyers and an extremely oversupplied market.
We estimate there are over a half a million minus on plug in North America and buyers are few and far between.
Between given the distress in this space as we have shown since our IPO. This is an extremely creative and motivated team. So in addition to open market open market purchases, we are evaluating JV and M&A opportunities that leverage our core capabilities, including power and infrastructure ownership and operator ship.
We are long infrastructure and short miners and the industry is generally the exact in the exact opposite position.
As we have long said owning your own power and infrastructure asset provides key advantages and we plan to leverage to the benefit of our shareholders.
Lastly, we plan to aggressively review, our cost structure to identify redundancies and areas for efficiency improvements to lower our cash cost and an improved profitability. We estimate there are between $5 million to $10 million of annual savings potential and our current cost structure and we will begin cutting over the coming quarters as you.
You all know we came out of our IPO in hyper growth mode, which put significant pressure on the company the scale and capabilities in operations as we've matured. This has given us time to reassess our business needs and have accordingly identified opportunities.
To eliminate these redundancies in our cost structure. Looking ahead, we expect strong holds to be an optimized operator power assets.
<unk> power to both the grid and to our bitcoin mining operations with the ability to toggle between business units.
And optimize profitability and also provides stability to the grid.
We expect to continue to delever and enhance our capitalization.
We will also have a strong capital efficiency through the prudent acquisition of mining assets and related equipment to generate attractive full cycle returns on our capital Lastly, we will be an efficient operator running our power plants with high uptime, and low cost and maintaining a bitcoin mining fleet with strong utilization.
Thank you everyone for taking the time to dial in we're now ready to take your questions.
Operator.
The floor is now open for your questions to ask a question at this time. Please press star one on your telephone keypad, if at any point you would like to withdraw from the queue.
Please press star one again, we will take a moment to render our roster.
Now our first question will come from.
Chase White from Compass point research and trading. Please proceed.
Yes.
Thanks, Good evening guys.
So.
First question I have a few questions, but just to make sure there's no impact to the miners and the northern JV.
J D to the reduction in minor script.
No, yes, we gave them back to <unk>.
So yes, we have we need to.
We have a bunch of miners that we are going to effect that we already have to divest and that we're going to put into that JV to replace them.
Exactly.
And fairly near term, we'll have those 14000 miners replacing.
Yes.
Sure.
Gotcha and then.
How should we think about the ramp up to full capacity at scrub grass going forward. Once you guys start.
Thanks marketplace <unk>, yeah, so part of our dream scenario would have been to get on this call and say, hey, we extinguish that I beg debt.
Refinanced the white hot debt.
Advertise the convertible note.
Had we been able to we would have also said we've already replaced all these miners while we couldnt. It was not we weren't our documents didn't allow us to do that.
That would have been viewed as our.
Circumvention of our debt docs.
So we couldnt do it so I think that was the that would've been like the Cherry on top so I think you need to recognize over time.
All of these miners in the market, we have a very strong sense for where and what kind of costs and the timeframe to timeframe to prudently replace these modest but I don't think you could call out any mining broker in the world and you will see you will find that there is a glut of monitors out there and.
We already get a lot of phone calls by buying equipment.
And I don't have any no.
No anxiety about.
Refilling, the northern data JV quickly without issue with them.
And prudently.
Filling up the 26000 slots that are nearly empty, but I'll say it because power prices are still high.
I'd say, we've got in our more than six months to do it because we're not really losing any revenue along the way.
So as much right.
Sure David I was more talking about the.
Sorry, I wasn't talking about the actual power capacity like to get to nameplate at scrub grass.
So what I would say give us we're going to be out late September early October I think as we talked about there's a lot of equipment that we order about a year ago is finally here.
And.
We're going to solve it at the at the end of September .
Give us.
45 days to.
Get all of that fresh equipment going it will have about $5 billion of new capital in the plan this year.
We've got it in a way overstaffed right now just to make sure that we get it.
On solid footing. So it give us gives us 45 days after the reboot too to show you.
How reliable it can be but it's Scott.
<unk> 20, plus years of operating data audit that shows that it is an extremely reliable plant win win all the equipment is up to date.
And that's what we expected base I would say give us.
I was looking November at sort of the problem at the beginning of a fair test for where Scott Raskin end up but it's a it's the nameplate capacity of 85 megawatts on that plan.
Got you that's helpful and if I may one mark the reduction of the exposures of capacity markets.
Does that impact.
How could that impact the future electricity sales revenues.
The pricing that you receive your set of reduce it and then on top of that is your designation as a rugby generate are impacted by this at all.
Yes, so we were getting a capacity payment and you guys help me I think it was about 7% on capacity payments, which we involve plants.
On an annualized basis and that was what we expected and that number might have been going down.
Down next year, so we opted to come out of that market to a no longer get that capacity payment. The reason we opted out is that there is a regulatory.
Ruble.
Called cost capping and we are finding that.
That we were effectively not able to sell power at the spot price.
Cause the grid, operator was limiting was declaring grid.
Grid congestion or other let's say electoral physical issues with the system that then gave them a reason to say you can only sell powerful year cost plus 10%.
As opposed to selling powerful market pricing and that was effectively lapping the the cream off of the that the peaks of the market.
Pricing.
We're very very thankful that we opted out so we gave up the the capacity payments in exchange for the ability to to take.
<unk> of the peaks in power pricing and given some of the prices that we've seen this summer.
Kind of repay.
And I expect that to repay to be repaid many fold.
Yes.
Just to nail that home.
We were many days, we were stuck selling in the day ahead market.
Versus the real time market and if you.
Our our close observer of those markets I think you will find in recent days.
For instance, at Panther Creek, a week ago prices reached $2000 a megawatt, whereas the day ahead market was stuck in the low hundreds.
So I think you'll find <unk>.
Significant dynamic response and revenue opportunities in the real time markets that just werent available to US previously so when we think about the revenue opportunity and the convexity, that's where that's where you want to be.
Okay.
Got it very helpful. Thanks, guys.
Sure.
Our next question comes from Lucas pipes.
B Riley Securities. Please proceed.
Hey, good afternoon, Thanks for taking my question.
The first one is in terms of the one four extra cash that are remaining.
Utilization rate that we should be thinking about for for that for the second half of the year and on the power side more more broadly.
What's a good range for the cost cash cost per megawatt hour. Thank you very much.
So I think what we're modeling for utilization to the acute medically ill patients.
I think we like to say why aren't you model out 90%.
For the minor.
Minor fleet.
I'm sure that.
But we can beat that given that we have.
A lot of tax it once they recover from moving at 26000 meters will have a smaller fleet to match.
Until we grow again.
And then what was your question I guess on the power side.
Cash cost per megawatt hour.
Thank goodness I.
I think I assume for the third quarter, a relatively high cash cost innovation be declining.
We're pretty meaningfully hopefully in the fourth quarter post.
Post downtime.
What numbers that we have for four.
For the fourth quarter.
So if you look at the if you look at the variable cost of power.
We want to be careful we purposely avoided giving explicit guidance here because of the.
The volatility of the markets for ammonia and <unk>.
Limestone locally and then obviously.
Diesel is an input in with surcharges related to transportation transporting vehicle refuse that we use as primary fuel in our plants.
We have I think.
You can find we've met we've seen kind of.
We'll call between 50 and $80 per megawatt of cost it's been quite volatile.
As we sort of work through the recent months from a maintenance perspective.
It depends on how you treat certain of those costs are going to O&M.
And that would be that would be before rec sales and.
So.
We as we think about the fourth quarter and beyond this period, where we were coming out of a period of relatively low utilization.
The fixed cost amortization picks up considerably.
We've seen we've seen upward pressure in virtually every one of our variable costs abate and so we're pretty optimistic about how that fixed cost absorption plus the variable cost.
Kind of mitigation and topping and you can look at most of those costs I just mentioned they've all come off.
We're pretty optimistic about.
Meaningfully getting our cost to power down between 'twenty three.
That would be sub 50 or.
Maybe even lower than that.
I would say.
Yes.
Possible, but I think we should probably look more at the at our margins.
Our prices are through the roof again next year.
<unk>.
Some of our variable cost to also be higher.
I think I think we should probably start to introduce the idea of a power margin being more important than our cash cost.
They are there so correlates.
Sure.
Yes people people in the crypto universe focus on the cash cost the cost of electricity.
And they compare it to bitcoin price, but when you are selling power at a bitcoin equivalent price of 100000 to 250000.
During peak days in the summertime.
You don't focus as much on this when you focus on margins. So I think we're pretty optimistic as we look at the winter forward power curves.
And our opportunities.
Two.
To deliver reliability to the grid and just happens to be the case that when the grid is vulnerable and calling for calling for your electricity. It's also the most profitable deliberate I think we will we will look forward to demonstrating those lower costs coming out of these planned downtime events and but I think margins are going to be quite.
Quite strong.
Okay.
As a result of the revenue opportunity as well.
Costs coming down.
That's very helpful. Thank you.
My second question is.
Good high level.
With regards to the transactions you announced so.
Okay.
Got it all the detailed slide I think at about 24000 PTC Europe .
Better off at the end of 2023 from a cash flow perspective, having done.
These transactions today.
How high.
Good quite price has to be in no specific number just ballpark for you.
<unk> have been better off not having done these transactions.
You see what I'm getting at like how great of a BTC environment, we have to be.
Living in.
Goodbye.
Yes.
Yes.
Yes.
The the risks that we have right now.
Quint Rich tomorrow and opens up at a 100000 hours of client.
Obviously, we probably would rather have all these machine for that because now we will now need to a revival.
And it may be more sensitive to do that if price reps I think our view is we have a.
No.
Quarters and quarters of mining supply led to work through.
So we think we have an advantage there.
Sure.
And I don't really view AA.
From our perspective, we just.
Capitalized on an opportunity to replace our fleet.
Big discount to JV debt outstanding and that that is going to be true of any good corn price.
And so I think we have that.
Elimination of crews trained the equity.
And so I think really it's a yes.
By our math.
This is this is a value capture transaction in addition to a liquidity and optionality enhancing one.
Regardless of the formats.
And then I would focus you on 2024, when we go into April 2024, and are having and the big end markets. Obviously history would suggest that there is a.
Positive bitcoin price response to offset the step function lower in capital efficiency for miners, but when you wake up in April 2024, and every one of your bitcoin miners produces half as much bitcoin.
Our power revenue and EBITDA generation opportunities don't have and so I think when we think about this it's beyond this.
We'll call it sort of myopic view of bitcoin price versus cost of electricity.
How do you optimize for selling power.
Or importing power.
When power prices are depressed.
And how do you think about dynamically switching over to Monty for bitcoin at night or during the day or during seasonal shorter months.
And then ultimately over multiple years, how does that look and I think we like our chances of being seriously on offense.
And being able to sit back and look for opportunities distressed equipment, which.
Which we're seeing.
Meaningful signs of.
And certainly moving our costs down there are lots of low hanging fruit.
All those things suggest that.
Bitcoin needs to be 40000, plus 45000, plus from where we were aware that amortization was fixating and now thats largely.
Relieved and clearance.
Clear skies ahead, so we're really optimistic.
Yes.
I appreciate the color.
Good luck.
Thanks.
Our next question comes from Chris <unk> from <unk>.
Davidson. Please proceed.
Alright, Thanks, good afternoon, and congratulations I know, there's a lot of work.
Yes.
Imagine actually.
So on the just.
The current state of mining operation I see you have 25000 open slots.
We've obviously seen quite a bit of.
Of pressure on rig prices and there is some fire sales out there some folks have jumped on.
What's the hesitation here.
Do you think commodity prices are going lower or do you not only have the capacity on the power side to plug in at this point.
Yes.
We're expecting something on the mining side sooner or we got to wait to see a breakpoint price can go higher.
Yes, I think.
This maybe.
Maybe isolate and I think we're really structurally positive on blockchain technology and on bitcoin over over the four or five year horizon, but I think we want to have ultimate flexibility as we move through 'twenty three 'twenty four is having.
And to take advantage of the.
The volatility and so when we think about.
What we just did to restructure the business and put ourselves in better footing.
Last thing, we're going to do is rush into a market timing call on equipment.
Our research shows that there are potentially half a million dollars landed brand new bitcoin mining rigs.
And in that they can't find plugs or that are waiting for plugs to be built out.
That is it material contrast to the.
Actual plugs themselves or the value of fully built out energized plugs and data centers has exploded as a result of scarcity with too many miners and too few power plants with clarks given the lack of investment in power plants over the last multiple decades. So when we think about <unk>.
Spending our dear investor capital to buy miners today.
We're going to prudently think about opportunities, we're going to stand back and look for pain points and we're going to frankly.
Reflect on the lessons from the last nine months since almost a year since the IPO and we're going to be seriously on offense.
Thinking about how to create value.
I appreciate the opportunity passes is all or nothing has the power markets are so strong that if we don't buy.
Places.
Six out of slots in the next six months and I can see a big difference in revenue.
Negligible.
Yes.
To serve lever up to not make any more money.
And.
Not my expertise, but where would the Brooklyn equivalent price.
Before the power markets went crazy.
With all the disruptions in 2022, Woodford power or the <unk>.
<unk> last year.
So I think last year, we had to kind of the opposite we had we had fantastic bitcoin mining margins, where we're making equivalents like $250 per megawatt and.
In power prices were in the high <unk> low <unk>.
And so in those cases, we.
We could have decided to shut the power plant down and just buy power from the grid and.
And use that power to mine to run their data centers.
And now we're in exactly the opposite position, where we are selling power and.
Centre divesting of a large portion of the.
The minor fleet.
Because power prices now averaging.
120 Bucks during the day.
I think what we're expecting is.
There's probably a period of time, where we're running the datacenter during the day.
I'm sorry.
We're.
Putting the datacenter in sleep mode during the day and selling power and at night when power prices are significantly cheaper.
Brian in the data center side.
We have software its title the data center off and on.
We do have to satisfy.
Sure.
The grid for Ikea for a reggae.
Tests that we passed we also do it for ourselves just to take advantage of power pricing spikes.
Which way.
The past few weeks.
Kind of amazing.
Pricing levels for power that makes you.
Once you shut the data center off quickly.
Yes.
Not to belabor it but just.
Wanted to drive one thing.
I think there is lots of it in the discussion which is.
In PJM are power market.
Or are you look at markets like ERCOT, where natural gas is the marginal fuel when you think about the average heat rate.
Modern CGT natural gas plant, it's about a 10 well call it about a 10% rate and so when you think about.
Power prices and you look back at 2021 or prior years, where we're coming out of a sort of generational lows and use energy prices.
That led to a generation of Underinvestment and fossil production and and that is coming home to roost as we speak and so I think.
We're sort of dubious of of calling for a top in power prices I think we really like our exposure our net long exposure and.
Think about the convexity, we can capture in the power markets by providing them with reliability is something thats very very positive and so we're going to do everything we can to exploit that in these.
These material transactions are a key part of that.
Yes, it makes total sense.
I want to follow up I think it was lucas's question on power price or is there a path to power what youre generating now.
I think that was like the best part.
Our view of the whole stronghold story because.
Because you've given what's going on the world today, where you've got.
High natural gas prices don't really line directly on natural gas it sounds like a lot of your inputs have risen in price, but can you just walk us through potentially like where you sit today roughly versus the IPO or guidance.
Two.
<unk> is that even a possibility today are alright.
And what are the what is it what has changed in the last year.
Not a possibility.
So if you look at the cost of generating power.
Almost anywhere in the world.
The input costs are up three four or five X.
If you look at our power costs.
They've risen too far far less and so if you look at when Greg mentioned earlier that our plants were being called on through to the end of May and quote unquote cost caps by PJM as as a capacity resource.
Because by definition PJM views us as a low cost provider of energy.
And we get called on to be to provide we got called on to provide that service to the grid. We're now out from under that and selling in the real time market starting in June .
We talked about the uplift there.
But when you think about the.
The cost recovery.
It's just not it cannot be isolated from the overall revenue opportunity in the prices of power margins have exploded relative to the cost of power and.
And so I think we.
Our.
Our costs have risen.
You think about.
You can sort of go through the trailing three quarters of.
Of O&M cost of fuel our cost have risen above $50 a megawatt.
The $60 $70 megawatt range, that's not a secret if you can back into that math, but that's due to significant O&M investment in the plants.
Because we're not elongated the life of our plants with our investments they have to be expensed and theyre not capitalized we are in a typical business that would be capitalized and so our O&M has been pretty heavy handed but as we move out of these downtime out of these planned downtime periods.
We should see significant fixed cost absorption.
And then as I mentioned before we've seen a number of our input costs from a variable cost cash cost perspective.
I've started to come off meaningfully as we track into the shoulder months and so I think we're hopeful we're quite optimistic about.
No.
40% to $50 cost of power being a more sustainable level as we go into 'twenty three than some of the onerous parts of the cost structure as we.
Some of the input costs exploded and we were just not not yet set up to be.
To be the Baseload provider that we wanted to be.
Thanks, I appreciate that Matt last quick one for me.
I saw an update on the nerve it sounds like <unk> made some progress there can you give some details.
Yeah.
Sure I think we've got I think I think what we have disclosed we received about half of the contract value.
Good news is incentive received in Minerva, we are receiving replacement hash rate and a form of bid named F&I TMJ pros.
And so we have been.
Yes.
We've been putting pressure on the nerve that to continue to.
Shifting replacement hatch rate.
And I'll say it again do not modeling a bunch of upside from Minerva, but we will gladly reported.
As Seth triples in.
Okay, great. Thanks, Greg It's Matt here.
Thank you.
Our next question comes from Jacob <unk> from Tpa. Please proceed.
Hey, good afternoon guys.
Alright.
Just kind of a follow up on the on the cost question I appreciate that the inputs are elevated to some extent, but looking ahead can you guys talk about the ability or willingness to maybe.
Lock in the variable cost.
Sure.
Looking forward to an elevated power market over the next 612 months.
So there arent really liquid forward prices for ammonia limestone.
And we don't want to buy trucks and increased our fixed cost investment and so we're happy to be price takers, because we're way more than making up for it with power prices. When it comes to surcharges to truck coal revenues of waste coal out of the hills or expensive dania into our plants.
But as we think about as we really think about that cost structure.
I think I think.
What I'm sensing is there as were just theres, a little bit of loss perspective.
Given the focus on it.
Costs have gone up too.
Two maybe two five times.
Over last year, no ammonia is up five X.
Diesel was up.
100% and when you think about coal refuse is effectively flat price, but some of those other variable expenses that will drive the variable costs higher variable cost is probably.
Plus or minus $45 a megawatt.
And so when I talk about the fixed cost absorption dramatically improving out of our two plant turnarounds in September .
It's a very serious and fairly straightforward mathematical equation, where the fixed cost absorption ticks up his day.
Utilization of the plants drives into the wintertime.
And we've seen almost every variable cost categories start to come off.
And a couple of cases has come off decently.
So we're again, we're pretty optimistic about.
40 to $50.
Cost of power as we look into our future in the not too distant.
Period, and so it's hard to lock that in because there arent liquid forwards for the cost inputs.
We are.
I would say were exuberant about the margin opportunity.
Okay I appreciate that and then.
Maybe the second question just curious you guys talked about half a million.
The miners available on the market brand new landed miners.
Curious can you give me a sense of.
How that market's transacting and really what I'm. After is if we think about you guys replacing that fleet.
Over a given period of time should we expect a material uplift and minor efficiency.
Yes, so we.
<unk>.
It's a pretty small set of people who transact in miners in large size and so we try to make sure. We're dialed into that geography, I think we would characterize.
In recent months that the market is more or less frozen with expanding bid asks on equipment, where bitcoin bowls don't want to part ways with high efficiency efficient machines.
And there is a lot of machines that were purchased after all the ASIC chip ramp up that happened in the machines that were ordered.
Those machines are not getting plugged in because <unk> and I think we've seen kind of a market that's frozen waiting to see what direction Bitcoin will move over the next 456 months.
And I think the routes we are a price taker when it comes to making and selling bitcoin and making and selling power and.
We were just not in a sustainable place with our cap structure, but now we sure as heck are where we can take our time buying efficient machines high grading the fleet every day.
Improving utilization both at the plants and the data centers and so between the low hanging fruit and kind of being very careful about how we bring miners back into our data centers I think we're looking to improve our game in every way.
And that minor oversupply is not something we see ending anytime soon.
Alright, great. Thanks, guys I appreciate the time.
Okay.
Our next question comes from Mike Grondahl from Northland Securities. Please proceed.
Hey, guys just continuing on the 25000 open slots.
Is it fair to say that the two most important variables kind of in your thought process on on replacing those is kind of the forward curve and two just the price of miners out there.
Yes, I think thats right, obviously, if the right now the forward curve is still high for power that it says we are not in a rush so it doesn't make sense to <unk>.
<unk> be in a rush to buy miners.
To fill those slots.
And then maybe run them maybe not.
These are expensive so I think for us if you're if you're if you don't own your own power plant can and can't take advantage of the curve you would never have given up the matters in the first place but for US we gave them up because it didn't mean, a theyre going to make a.
A lot less revenue.
And obviously it impacted very in a very positive way, our liquidity and financial position.
So it was really as easy as an easy decision for us.
I think I just want to make sure that that the mark.
I can understand that we are not going to not going to see us re lever up too.
Make ourselves a potential to put ourselves in a potentially a a tough position again bitcoin prices don't stay high.
But we do have empty slots will they be empty in a year it is highly unlikely.
We will find ways.
To Opportunistically buy.
Miners that we're just not going to do it in a hurry so I really can't at this point.
We're this is fresh for maybe.
Sure.
And I don't five or I think we actually have all of these as these deals done.
Ask again in a couple of weeks and we'll probably have a.
<unk>.
A better answer for timing for how to expect the slots to be filled but right now I can say.
They're going to get filled because it's not it does makes sense to do you have the option to mine bitcoin, but.
I think the good news is it.
It's not going to make us much more money at this point.
We did it so they have <unk>.
The bar to do that is extremely high.
Sure got it okay. Thanks, guys.
Sure.
Our next question comes from Steven <unk> from Cowen. Please proceed.
Alright. Thanks for the question I just wanted to touch on the constituents of the current minor rig fleet. So the one four exit how should make it sounded like 15% to 16000 rigs. What's the makeup of that and I know you made some comments around Minerva I believe in the press release. It said you took delivery of.
8500 Minerva rigs.
Those rigs are the Minerva rigs.
Why were you able to get bit main rigs from Minerva. Thank you.
Yes.
To drive something in them.
Press release explicitly states that we have received value from Minerva in the form of cash.
Leading industry, leading brand new in this case, we mentioned this 19 J pros on the call here.
We took possession of about 3400 Minerva.
But since then most of the value we have received from Minerva are.
A result of their doing swaps in us receiving brand new machines that are hashing it.
<unk> per second and so.
Make no mistake.
Minerva number are capped.
The 3400 that we've sort of previously disclosed and the rest are in.
Really good machines.
Brand brand new bit, Maine, new machines.
Sorry, if that's related to the Minerva question.
Okay. That's helpful and then I guess.
Maybe I want to tackle this question of getting to scale in another way.
Mining bitcoin.
Value of a house right today is arguably more and deployed then the value of hatch rate deployed a year from now and so how do you think of that strategically as youre going to market prior to the next having.
And balancing that with sort of this new focus now on just selling power back to the grid.
Theres just really one answer it's patients we.
We don't have to do anything.
We have incredible convexity in the power markets that we just opened ourselves up to.
And.
You eloquently said it in 2024.
The revenue generation from a single Meyer is cut in half and so we're going to be really thoughtful about how we approach that and keep flexibility and try to be on offense every day.
Alright, thank you.
At this time. This concludes our question and answer session I would now like to turn the call back over to Mr. Byrd for his closing remarks.
Alright, Hey, guys. Thanks for the questions. Thanks.
At our Investor base for joining those debt thanks to the patients.
And let us get all this news out and we look forward to the coming months and quarters as we take advantage of our new found position of strength.
Talk soon.
Right.
Thank you for joining us today for strongholds, earning call you may now disconnect.
Okay.
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