Q2 2022 Marathon Digital Holdings Inc Earnings Call
[music].
Good day, ladies and gentlemen.
Come to the marathon digitally holdings second quarter, 2022 earnings webcast and conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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I would now like to turn the conference over to your host Charlie Schumacher, Vice President of corporate Communications.
Sir Please go ahead.
Thank you Vikram Hello, everyone and welcome to Marathon Digital Holdings second quarter 2022 earnings call. Joining me on today's call are our chairman and CEO Fred deal and our CFO Hugh Gallagher 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 that 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.
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 marathon Digital Holdings, Inc. Are as such a forward looking statement. Please refer to our earnings release for a full reputation of our forward looking statements.
Investors are cautioned that all forward looking statements involve risks and uncertainties, which may cause actual results to differ from those anticipated by marathon at this time. In addition, other risks are more fully described in marathons public filings with U S Securities and Exchange Commission, which can be reviewed at www Dot SEC Dot Gov. Finally, please.
Note that on today's call, we will refer to certain non-GAAP financial measures in which marathon excludes certain expenses from its GAAP financial results. Please refer to our company's periodic reports on Form 10-K, and 10-Q for a full reconciliation of its non-GAAP performance measures to the most comparable GAAP financial measures.
We will begin today's call with prepared remarks from Fred and Hugh after their comments, we will be going through some of our more popular questions from our investors before transferring to live Q&A with our covering analysts and with that covered I am going to turn it over to Fred to kick things off Brett. Thank you Charlie and thank you all for joining us today for our earnings call the second quarter of 2000.
22 proved to be a challenging time for our industry the broader market and for marathon, but as we will discuss today. We believe our recent progress proves that marathon is well positioned relative to its peers to grow as the leader in securing and supporting the bitcoin ecosystem.
During the quarter bitcoins price declined approximately 56% at the same time energy prices increased in part due to Russia invasion of Ukraine.
The combination of both factors has compressed margins and reduced profits for many in our industry.
Miners, who were running old equipment or overpaying for electricity have been forced to stop mining as a result global hash rate has grown far slower than many analysts were projecting at the start of this year and we've even seen the difficulty rates adjust downward multiple times since the end of May.
At marathon, we tend to be fairly well insulated from the macro environment relative to our peers. Since we run a lean operation we are asset light and we do not have large capital expenditures for datacenters or power assets. However, as our financial results demonstrate we are far from immune to the impact as we are directly tied to a new but maturing.
Assets in the second quarter. In addition to the challenging macro environment. We also had to work through several obstacles unique to marathon the depressed production and negatively impacted our results this past quarter.
As we've discussed in our monthly production report, our bitcoin production with substantially reduced during the second quarter due to downtime and maintenance issues at the power generating station in heart in Montana, coupled with an elongated regulatory process that delayed the energy station of our installed miners in Texas.
For most of the quarter the power generating facility in Montana struggled to produce an adequate amount of electricity to supply our miners with power and in June it seemed that Murphy's law came into effect when a severe storm pass through the region damaging the power plants and taken offline all 30000 of our miners in the area, which represented approximately 75%.
Our active fleet at the time.
The downtime from an inconsistent supply of electricity and the storm caused our miners to produce approximately 45% less bitcoin during the quarter than that theoretically could have if they had been running at 90% uptime, which is more in line with our long term target.
Outside of Montana, the <unk> of our miners in Texas was repeatedly and frustratingly postponed by the power provider until the tax exempt status of the wind farm, where 68000 of our miners are being installed could be confirmed while confirmation was pending we applied pressure, where we could to expedite the process and we continued to have miners instead.
<unk> and preparation of receiving the green light to energize by the end of Q2, we had approximately 30000 miners or three nine X ashes installed across these new facilities.
And as of August 1st that number increased to approximately 49000 miners are $4 seven at crashes <unk>.
These delays are finally behind US just last week miners at the wind farm in West, Texas started to be energized. However, before discussing the immense progress. We've made subsequent to the quarter's end to energize our installed miners procure hosting for the remainder of our fleet and bolster our financial position I'm going to turn the call over to Hugh to discuss our <unk>.
Second quarter financial results in detail Q.
Thanks, Brad.
My focus today will be to comment on our operating results for the second quarter and to provide some color on more significant recent financing activities, including our withdrawal from the investment fund in June and the new credit facilities, we put in place at the end of July .
First operating results.
We recorded a net loss of $191 6 million during the quarter compared with a net loss of $108 9 million in the prior year period.
This is an $82 7 million increase in loss and I'm going to walk through the components of the increase.
And our loss starting with revenues and margin.
As mentioned as Fred mentioned and as we mentioned in our release, we faced some real operational challenges this quarter and we generated revenues of $24 9 million for the three months ended June 32022, compared with $29 3 million during the three months ended June 32021.
This $4 4 million decrease in revenue was driven by lower revenue per bitcoin mind up $6 8 million and this resulted from the lower market prices for bitcoin and the current year period, when compared to the prior year period.
Partially offset by an 8% increase in bitcoin production activity during the quarter, which had the effective increasing revenues by about $2 4 million.
Cost of revenues energy hosting and other during the three months ended June 32022 amounted to $16 7 million compared with $4 1 million in the prior year period.
This $12 6 million increase was driven by accelerated cost recognition associated with our early exit from heart of about $10 3 million and to a lesser extent higher.
Higher cost per bit coin mines.
Total margin, which we define as revenues less cost of revenue for energy hosting and other totaled $8 2 million compared to $25 2 million in the prior year period. This was a $17 million decrease driven primarily by the accelerated cost that harden that I mentioned earlier and the lower revenue perfect coin.
All right.
We also recorded 21 of $21 8 million increase in depreciation expense during the current quarter. This included into caption called cost of revenues depreciation and amortization.
About $18 million of the $21 8 million was related to the acceleration of depreciation into the second quarter as a result of our decision to exit harden the rim.
Remaining increase in DNA was just the impact of having a larger fleet year over year.
So that sort of covers depreciation in our margin, but the largest single driver.
The steeper loss in the quarter was the significant decline in the carrying value of our digital currencies.
Driven by the lower bitcoin prices.
During the quarter.
We recorded a combined impairment expense slash fair value decline of $207 3 million during the current period quarter compared with $125 8 million in the prior year period. So that's 81 $5 million of an unfavorable earnings variance quarter over quarter.
We also saw increased costs related to income tax expense of about $10 million operating expenses of around $6 million and interest expense associated with our.
Our.
Convertible notes of about $3 7 million.
Partially offsetting these unfavorable variances was a gain on the sale of equipment of $58 2 million.
In December of 2021, we entered into a contract in which we agreed to sell certain equipment in conjunction with the development of commercial activities at the King Mountain facility.
During the three months ended June we sold we sent two shipments of equipment for cash proceeds of approximately $87 million and realize the gain a total gain of $58 million.
And finally adjusted EBITDA as we defined it was a loss of $147 2 million compared with a loss of $105 2 million in last year's quarter. This $42 $1 million decline in adjusted EBITDA, primarily resulted from the decline in carrying value of our digital assets, which I spoke about earlier both impairment.
And changes in fair market value.
And lower total margin.
Partially offset by the gain on the sale of equipment.
Now I will turn briefly to a few of the more recent updates on the third quarter.
These are things that are that we see coming up in the next quarter in July .
We sold the final shipment of equipment related to King Mountain.
But we received proceeds of $44 million and expect to record another gain of $29 million on the sale.
We can also now say that we finished the accelerated cost recognition associated with the hard exit.
During the month of July we recorded $7 million of accelerated cost in cost of revenues energy hosting and other and an additional $13 million and depreciation costs.
We are now in the process of moving <unk> selling the hard miners.
And we will report on the outcome of these efforts.
In our monthly production reports as appropriate once we have more definitive plans for these assets.
Turning briefly to our Bitcoin holdings at June 30, we held around 10055 mid point of which 2820 were being utilized as collateral.
The fair market value of the remaining 7235 unrestricted bitcoin was approximately $143 1 million. We also had unrestricted cash on hand of about $86 5 million.
I saw a bitcoin holdings, we expect to continue to add to our holdings over time through mining activities.
And as our mining activities increase we may sell a portion of the bitcoin produced in future periods to fund monthly operations for Treasury management purposes or for general corporate purposes.
As previously reported on June 13th we withdrew 4769 bitcoin from our investment fund and transferred into direct pumping ownership as a result, we no longer will receive mark to market accounting for the bitcoin, formerly held in the investment funds and.
The 4769 midpoint are now classified on our balance sheet as digital currencies.
Also during the quarter, we terminated a loan a bitcoin of around 600 bitcoin.
These were treasury management actions.
That we wanted to consolidate our bitcoin holdings in support of the anticipated Silver gate financing, which we placed on July 28.
Speaking of that financing.
We entered into an additional $100 million term loan and we refinanced our $100 million revolving credit facility.
Term loan includes a $50 million draw at closing, which we've executed.
He has an interest rate of 7% a quarter percent and.
And Theres, a $50 million delayed draw that we have up to 270 days to choose to draw that facility.
Both the term loan and the revolving credit facility are secured by bitcoin in both mature in August of 2024.
Turning to the cash flow statements.
Our total cash position, including cash cash equivalents and restricted cash was right around $90 million a year to date decrease of about $179 million. The primary drivers of this were expenditures of $394 million in advances to vendors related to bitcoin server orders and to a lesser.
Extent.
$14 million related to capital expenditures and $14 million related to equity investments.
These uses of cash were partially offset by proceeds from asset sales of $79 million proceeds from the issuance of common stock of $161 million.
Proceeds from borrowings under our revolving credit facility of $35 million.
At $35 million that was outstanding at the end of June has since been repaid.
Looking forward for the remainder of the fiscal year, we see cash needs for investment, including shipping costs related to previously ordered miners that will be shifts to be substantially lower than what we have incurred to date.
We're estimating this to be in the range of $150 to $175 million.
That completes my comments I'll now turn it back to Fred.
Thank you the second quarter tested our resilience and our resourcefulness as a result events as recent events have demonstrated we not only weather the difficult times, but we capitalized on opportunities to improve our operational and financial position subsequent to the quarter's end.
At the end of July we received the much anticipated news that the exemption.
The power company had been waiting on had been confirmed in that miners will start to be energized at the wind farm in Texas, just last week. The energy provider started feeding power of the data center and energizing our miners of the 68000 miners that will eventually come online at this facility approximately 40000 are already installed and are now being energized.
As of this morning, we had brought approximately 9700 miners online, which added <unk> <unk> to a hash rate energizing. This much capacity is a complex process that will occur in stages. According to the latest schedules the facility should be constructed and energized by the end of the third quarter of this year at that time, we should have approximate.
<unk> 68000 miners online at this facility working to secure bitcoin ledger process transactions and produce new bitcoin for marathon and our investors.
In addition to energizing miners in Texas, We also recently eliminated the uncertainty surrounding our future hosting capacity by securing new hosting arrangements to achieve our prior cash rate target.
When vetting potential new hosting arrangements. In addition to the quality of the operator, we prioritize speed of deployment cost of electricity and hosting geographic diversity and the source of power with this in mind, we signed a major new agreement with applied blockchain, securing approximately 200 megawatts worth of hosting capacity 90 Mega.
What's a which is in Texas, while the other 100 megawatts or at a wind farm in North Dakota as a part of this arrangement we have the ability to add an additional 70 megawatts capacity, bringing the total amount of hosting across all apply blockchain facilities to 270 megawatts, if we choose to exercise the option.
Additionally, we opted to expand our agreement with compute north to include an additional 42 megawatts of hosting capacity at their facility in Grand Prairie, Texas, and we're also expanding with several smaller providers in the U S.
In total we secured enough hosting capacity to support our prior target of 23, three X fashion based on construction schedules. It's our understanding from speaking with our hosting providers that we will have enough miners installed to reach that target by the middle of 2023.
In addition to substantial operating progress we made to energize previously installed miners and procure hosting arrangements for others. We have taken measures to enhance marathons financial position going into the second half of 2022.
As listed in our contract which were published in December of last year. The EF 19, Xps, we purchase from <unk> benefit from price protection.
For the July and August shipments, we received a price adjustment on our first shipments of EF 19, Xps that were relatively in line with current market conditions.
Our current belief that we will receive similar adjustments if market conditions persist through the end of the year. These price adjustments materially reduced our potential capital expenditures for 2022.
As Hugh mentioned, rather than relocate all the miners that we installed in heart in Montana, we have opted to sell a portion of them. This decision begs. The question how are we still on track to achieve our target of $23 three extra ashes.
At Marathon, we're always looking to reduce our costs and boost performance, especially in current market conditions, when bitcoin prices declined and energy rates have increased compressing margins for bitcoin miners.
As part of this strategy and in anticipation of the potentially industry wide margin compression, we opted to purchase an additional 30000 S 19 xps from <unk> in April of this year. We're currently in the process of using these new miners to upgrade our fleet by replacing some of our EF 19 Jays and S 19 pros with.
We are still on target to achieve our prior goal of 23, three X ashes, but with the upgrades approximately 66% of the 23, three <unk> will be coming from XP <unk>.
The EF 19, XP is 30% more energy efficient than the prior generation and by converting to these machines. We are decreasing our electricity costs on a per <unk> basis. As a result, once fully installed we believe marathons fleet will not only be one of the largest but among the most energy efficient mining fleets on a per <unk> basis.
One other update worth mentioning relates to our hosting arrangement with compute north.
Our original agreements with them included a fixed price for energy and hosting as well as a small profit share on a portion of our overall fleet given the current market dynamics, we opted to renegotiate these contracts to maximize the potential profitability.
We have eliminated the joint venture profit share under our new agreements, we will continue to pay a fixed rate for hosting and we will have an extremely attractive fixed price on the wind energy facility in West Texas the.
The remaining grid energy, we use has pass through pricing, which gives us the opportunity to benefit from hedging and participating in curtailment program. Because we now have the benefit of being able to control when our miners will be curtailed. We can now benefit from selling energy back to the grid when it makes economic sense to do so at some of our peers in the industry have recently demonstrated there.
At times when it can be more profitable to sell electricity back to the grid than it is to mine bitcoin under our new arrangements. We now have the ability to participate in this potential upside.
In summary, the second quarter was challenging for the industry and for marathon in particular bitcoin mining is a nascent industry and as I mentioned in our last call. There is no playbook. However, given our progress were confident that we remain on track to grow our position as the leader in this space.
Miners are coming online in Texas, we are hosting arrangement secured to achieve our target of $23 three extra hashes by mid next year. Our mining fleet is state of the art consisting predominantly of the most efficient bitcoin miners available in the market. We have a war chest of bitcoin and our liquidity position and balance sheet continue to improve overall, we've entered the second half.
For the year with added confidence that we remain on track to grow our position as a leader in supporting and securing the bitcoin ecosystem with that I'll turn it back to Charlie So we can begin taking questions Charlie.
Thanks, Ed.
At this time, we're going to commence the Q&A session of today's call. We will start by answering some of the questions submitted by investors on our new Q&A platform. In total we received about 100 questions, which looks fantastic.
While my time to tackle all of them today, but we do want to cover some of the most uploaded questions and also let you all know how much. We appreciate the interest in marathon and the opportunity to have more of a dialogue with our investor base.
So to start the first question comes from Bill <unk>, who asks can you. Please give us an update on the rigs and when they will be plugged into full capacity, we got approval from FERC and they are curious about the <unk> timeline. So I think we've actually covered this a little bit in the prepared remarks and in today's earnings release, but just curious strat or do you have any color that either.
Do you want to provide on the process of receiving approval and starting to energize.
But once the FERC approval was received.
The power provider could proceed with beginning to energize the site, which took certain number of days.
Can't turn on 280 megawatts at one time, they turn it on and essentially kind of a 20 megawatt chunks.
And so while we have $49 and miners installed at the site goes will be energized 20 megawatts at a time and we expect to be fully energized with the 68000 miners installed on site by the end of September .
Our next question comes from <unk>, who asks what are marathons plans for any severe downturn that may occur within the crypto market in the coming years. So I guess any comments around kind of resiliency of the model or how we're prepared to kind of survive crypto winter.
I can touch on part of this and maybe you will have a comment on the other side of this but essentially.
Because of the way we're structuring these power agreements, we do have the ability to curtail our mining operations of mining becomes unprofitable. This is different than other miners, who may have ppas, where they are obliged to take the energy and so we believe that we have strengthened this strategy and it will help us going forward as it relates to the other side of this and how.
Bitcoin pricing may affect us few I'll, let you comment on that.
Again, I think I think Fred to hold the whole point with this is optionality right. So you want to.
Do you want to build flexibility and optionality into your processes as we said.
The financing we completed.
It goes a long way in helping us.
To achieve that goal.
And the other thing I think we need to look at is as we mentioned as we produce more bitcoin.
Using.
Considering using a portion of that production every month to cover your cost, where regardless of where bitcoin going up or down you're matching.
Cost of bitcoin with your cost of production and within the same month.
That's something we're certainly looking at.
But I would say.
To what you mentioned, which is probably the first order issue. The second one is building in financial flexibility. So you can continue to absorb.
Fluctuations that will come in the market.
Thanks, Steve.
Probably a good segue actually into our next question, which comes from <unk>, who asks how does marathon compare or stand out from other miners in the market. So any other additional comments. Besides what you just touched on related to marathons, differentiators or kind of what makes us unique.
As we've stated many times in our public disclosures.
Earnings calls and presentations our strategy is different than many of our.
Colleagues in the industry, where we operate with an asset light model working with third parties, who do hosting and provide energy for us as opposed to being vertically integrated we think that has certainly given us a lot of flexibility, especially with the delays that we incurred.
Energizing miners.
We've been having to make huge capex expenditures and investments in infrastructure I think it would have been a very different financial situation for the company, but our strategy provides us with a great amount of flexibility and I think as you can see.
We've weathered the storm.
Quite well.
Okay.
The second is little more esoteric <unk>, maybe I'll toss it over to you <unk> I was wondering about.
<unk> moved to proof of stake do you think there may be any sort of impact on marathon or our earnings as a result of that shift.
Yes.
Not going to directly comment on whether it will impact our earnings I think just generally in the marketplace.
Theory.
The ether platform is.
So that platform for developing this.
Decentralized applications in smart contracts, where bitcoin.
Is really all around bitcoin is crypto currency and as a.
Network that really is ideally designed for tracking the ownership of assets and I think the two of them will continue to operate very independently of each other.
I think there is still going to be different versions of ethereum VW Cerium classic the current version of <unk>.
People in the news commenting about doing yet another four curious area I think bitcoin won't be really impacted by that much.
Yes, Brett.
Next question comes from Mark <unk>, who.
Is there a future potential of the dividend paid in decline.
This is something that I think.
As a management team we've discussed it's not in the current plan it may be an option in the future or not we don't know but.
I think time will tell.
Okay.
Next question, maybe here that this might be a good one for you <unk> is marathon considering adding additional shares.
Potentially increasing dilution. So can you maybe can you touch on sort of the capital allocation strategy a bit.
<unk> that we have available.
Sure. So we have we haven't an ATM.
At the market facility, that's active that we're using and I had mentioned earlier.
That was a source of about $161 million in the first six months of this year.
So we will continue.
Option that's available to us.
And given the growth mode that we're in that we will probably continue to lean on although less less needs coming up in the next six months and in the first six months.
We also try to make sure that we always keep in mind that whatever we're doing in the short term fit long term.
Debt equity split that equity capital structure.
And that's why we felt comfortable adding a little bit of debt capacity.
This quarter.
Cost of how much we've been able to raise on the equity side, you can lever that with a little bit of that don't want to go overboard on that.
And.
<unk> always financed keeping your long term view.
Of where the company needs to be and keeping optionality and flexibility available to yourself.
So the.
The short answer to your question is yes, we will continue to tap the equity markets as needed for growth.
I think the good message that we put out there is we are clearly want to get to the point, where we're not tapping the capital markets to pay for monthly operating expenses, which is where we've been to this point.
Great. Thank you.
We'll do one more question before we kind of switch switch gears here a little bit so last question.
David J asked is marathon digital planning on branching out at any point in mining other crypto currencies. Besides decline Fred maybe you want to touch on that one a little.
Point.
Bitcoin is our primary focus.
And only focus we may do experimentation.
To learn and understand how some different crypto currencies operate but bitcoin is our focus.
Great.
In the interest of time I think we'll wrap up this session of the Q&A again, we really appreciate the questions and the interest and wish we had more time to answer all of them, but for now I'm going to turn the call back over to our operator to open the line to questions from our covering analysts.
Vikram the mic is yours.
Thank you very much.
We're now going to open the call to questions from marathon covering analyst.
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We have a first question for the line of Jon Petersen with Jefferies. Please go ahead.
Okay. Thank you and congrats on all the progress over the last few.
A few weeks.
Maybe my first question.
If we think about the second half deployment and some of the delays that you had in the first half of the year.
Hey, guys talk to your confidence level that we're not going to run into amortization delays or anything like that with the with the next level of deployment.
Sure so.
The initial site, we are deploying in the second half of the year.
With applied block.
Blockchain already has.
Capacity running at it so that site is.
The expansion that we're doing there is really more of a construction issue than anything else that we don't foresee any amortization issues. There. The second site based on their historical operating experience, we feel fairly confident that that will happen on time.
<unk>.
The good thing is today.
The amortization of Kings Mountain.
<unk>.
The additional capacity that we've tied up with other hosting providers all of the inventory of miners that we have will be fully absorbed here very shortly and if you look at the second half of this year. It's predominantly the xps that are yet to be delivered that.
That will be deployed there. So if anything we believe it's really more deliveries will be the gating item, then construction or energy station.
Okay got it.
And then on the deliveries you mentioned the July and August deliveries were discounted from the original purchase price not sure. If you can if you're able to quantify that for US I think if I remember you guys stay at $79 a barrel harsh I think the.
Market rate I would imagine is less than.
It's down by more than a third from that in your final payment as a third so I'm just curious.
The market.
Our highest rate is less than 33% lower than where you paid are there ways to renegotiate that contract maybe increase the amount of miners that you are buying or how should we think about that.
I think you should think about it as we will be deploying $23 three extra hash and.
We're benefiting from.
Essentially a decrease in the amount of Capex, we're going to have to pay to get those miners deployed I think your estimates on kind of market pricing are most probably definitely in the ballpark you can obviously.
See those numbers.
In the secondary market starting to see the XP prices come down in the secondary market already pretty aggressively so.
I think that's about all we're going to comment on that for obvious reasons.
Okay alright, thank you.
Yes.
Thank you we have next question from the line of Chris <unk> with D. A Davidson. Please go ahead.
Hey, Thanks, good afternoon, and congratulations on the progress.
So this is for Fred or for Hugh but I'd love to hear on the.
It's really impressive you were able to go through this quarter without selling material enough to be quite a lot like a lot of your peers did.
Can you just maybe.
A little more detail on the sources of cash in the quarter looking specifically at.
The <unk>.
Compute north loan and how much of that has been repaid back as well as.
Any.
Some of you had less payments on some of these orders than you expected can you quantify that at all.
Q.
Sure. So so Chris there has been no activity on the compute north loan.
So that's still that's still outstanding so that was not a source.
The two largest single sources of funds.
Or.
The 87 the <unk>.
Proceeds from the sale of the miners that was $87 million, we pulled on the revolver.
And we also we despite that.
It was not a.
Not a tremendous quarter for Matt from a standpoint of stock price.
Did.
Keep tapping.
Tapping our ATM periodically during during the period as well.
So they weren't they were our three main sources of funds and of course.
The.
The biggest use of funds was clearly.
Continued payments for minors.
Important point is that a lot of the <unk>.
The impact on on minor pricing adjustments.
Comps came came in July and a very end of June and into July so that did that did not have.
A significant impact on the current quarter. It is more of an impact as youre looking forward for the remainder of the year and as we said if you just look at you look at where we are in.
In the first six months.
I think I think our number is around $390 million of advances for miners.
And over the next six months, our forecast is around $1 50 to $1 75.
Yeah.
Great. Thank you so much thank you Mike.
My follow up question.
Do you have a lot more but I'll get back in queue.
The <unk>.
The new facility.
Hosting arrangement with <unk> and I think <unk> got another a couple of other hosting deals that you've signed to conclude the $23. Three can you talk at all about the the pricing I was always so impressed by the compute north transaction back in December at $4.02 per kilowatt hour was really attractive pricing.
In today's environment.
Just any indication.
How much higher just given what's happened in energy prices your new contract sorry. Thanks.
While we haven't sort of announced the exact price that is a fixed price contract.
And I think if you look at the fact that we will be deploying X piece, there and with that energy efficiency will still be relatively in the same ballpark.
Prior fixed price agreements that we have a computer.
So the XP efficiency offset the increasing power of some of your cost requires relatively stable, yes, that's a great way to look at it.
Thanks, Craig Congrats thanks.
Thank you we have next question from the line of Chase White with Compass point. Please go ahead.
Thanks, Good evening guys. So.
Just curious what portion of the power.
Purchase agreements have the ability at this point to participate and curtailment programs I mean, you mentioned that.
Certain portion.
Youre able to actually do that in cell tower back.
The markets I'm just curious.
What amount of power is kind of subject to that.
So in relation to the Kings Mountain side, which is a wind farm the wind energy that we have has a fixed price.
Very attractive fixed price.
And so for example, if you look at the forward market and Eric.
This week at <unk>, $400, a megawatt or something like that.
We are significantly below that and so that gives us a very big opportunity to sell the wind energy back the grid energy.
We only take it when we need it and want to mind with it. So that's not energy that we sell back but the wind energy, we have 100% benefit from it.
We sell it to the grid.
Got you that's helpful.
And then I mean.
Is it safe to say just as a follow up to the prior question.
The kind of the blended average electricity costs go up but the efficiency comes down but everything should stay effectively the same I mean are you kind of implying I guess here that that the that the power prices fixed at something like 30% higher given the efficiency of the <unk>.
Yes, I think a good way to look at it is operating with Xps, our cost stay in line with where they've been estimated before.
Got you thanks, guys.
Thank you we have next question from the line of Lucas pipes with B Riley Securities. Please go ahead.
Thank you so much operator and good afternoon, everyone.
I wanted to follow up on this on this last question in May of last year, I think you disclosed the cost per megawatt hour four five cents roughly.
Per kilowatt hour.
How should we think about that cost component not to compete north.
Side of the agreement today.
So.
That's the rate that was changed.
Right so.
In the original agreement, we had no benefit of curtailment. It was a fixed price PPA. We were we had to take the energy, whether we like it or not unless Erik hub was curtailing the site.
And we didn't get the benefit of selling the energy back what we've done now instead is we've negotiated.
A very good price.
Considerably lower than the prior price for the wind energy piece with.
With full rights to sell that back to the grid.
And optimize the profit picture from that on the grid side of the energy we have a full pass through on the energy. So we have the ability to hedge do whatever we want with that energy and so we will optimize there as well. So we've just decided that if you look at the current energy market the short term picture.
<unk>, meaning 2022 2023.
He is going to be a very volatile from grid energy price because of energy prices and we didn't want to be locked in to a five year term at a fixed price based on the current market conditions. We wanted to instead to have the optionality to be able to hedge ourselves by futures and.
Turn on and off of energy as needed and desired to optimize for profitability.
So thats why we <unk>.
Focus on restructuring of the agreement it gives us a lot more optionality.
That's helpful. So on 280 megawatts or so you can.
You are locked in at a fixed rate that rate is presumably somewhat higher than it was before.
On the remainder of the grid.
If youre currently floating the wind energy is considerably lower than the rate we had before butler.
Got it.
Okay.
By a significant factor and then obviously that generates a very interesting opportunity for.
So an example.
If you use the old price of $4, five kilowatt hour or $45 a megawatt.
If current aircraft pricing is $400 a megawatt than we could sell energy, we're paying $45 a megawatt for $400 a megawatt and that profit we receive.
The benefit of that so.
That's really why we structured the room et cetera.
That's very very helpful. Yes that profit can offset any.
Spot market issues with grid pricing as well as help fund futures and other things like that for hedging.
I appreciate the color. Thank you and best of luck.
Okay.
Thank you we have next question from the line of Steven <unk> with Cowen. Please go ahead.
Yeah. Thanks for the question.
Greg can you just discuss the construction timelines on the 270 megawatts of applied infrastructure under new hosting arrangements, where do they stand today.
What's what's construction, what's constructed in North Dakota, and Texas, and what still needs to be done. Thank you and I have a follow up.
So the Texas site to an existing site or this is just expansion of that site.
And.
I'm not going to give you specific how many miners per month.
We will be turned on there.
But it's essentially really the gating item is our deliveries from <unk> versus the construction. So if you think about our deliveries were basically receiving about 15000 miners per month.
Or take a few thousand.
Each month.
We will start seeing receipt of here later this month and so that's really the gating item as we go through the deployment.
Of the apply blockchain sites.
The North Dakota site.
That starts Youll start seeing the first miners going in there right around the December timeframe.
Probably and then that will continue deploying through.
May of next year.
Okay. Thank you and.
And I think the press release highlighted 2800, bitcoin utilize as collateral for borrowings roughly.
Is there any risk of trigger for sales or liquidation here and the contract with silver gate.
Prices of bitcoin would that be potentially.
Well the amount we have outstanding that has since been repaid so so.
The issue.
That you're talking about is.
If you look at where we are today.
We probably have.
Third 3000, some odd bitcoin.
Outstanding as collateral.
And that is of our 10000. So we're not we're not overly concerned about about that I think once you get down to bitcoin prices of.
Around $12000 things get pretty Ross.
But right now for.
Watching it closely and we feel like we've kind of pick the right time to do the debt financing.
And remember.
The issue you also have is.
Once once you can also choose if you wish to.
<unk>, if you have to pay off the loan and since you are over collateralized all the time.
Can also do that so.
I'm not I'm, not particularly worried about that but it is something we have to keep an eye on and we do keep an eye on.
To make sure that we're not getting out over our skis.
The most important thing for me is production ramping right because.
Our view is there is some sort of a level of bitcoin holdings that we want to utilize for borrowing.
As our Bitcoin holdings increase and as our production ramps up that becomes less and less of a concern because the amount that could be drawn on your borrowings becomes less and less of a percentage of your overall bitcoin holdings.
And that's why it's so important that we got that delayed draw down feature in the term loan it gives us an opportunity to grow into that debt as well.
Okay. That's helpful. Thank you I appreciate it.
Sure.
Thank you we have next question from the line of Greg Lewis with <unk>. Please go ahead.
Hey, Thank you and good afternoon. Good morning, good morning, everybody.
I guess I wanted to follow up on the.
The.
The shutting down of harden.
You announced that you are either going to be moving rigs or are selling those rigs off.
Could you talk a little bit about the drivers of those decisions what types of rigs are there and as we think about that what the market is for potentially selling and if we were to move rigs how much it would cost to reposition those rigs and as you look at your existing footprint, where those rigs could even go.
Sure so.
Let me start by saying.
The $23 three extra ashes.
That number does not include any miners from heartland being installed anywhere else.
So yes.
We have no need to use those miners they happen to be older S 19.
<unk> been in use for 18 to 24 months.
We believe that.
What we need to do as much as possible is deployed the latest state of the art machines, meaning ex piece because of the energy efficiency, we think that that's going to benefit us in the long run, especially in the next 18 months of the market where energy prices are going to be very high most probably generally around the marketplace.
So the miners that are at harden.
If you go back into our filings you could calculate that our cost to acquire those miners were somewhere in the low twenties Portera ash.
<unk>.
Essentially if you look at the current market for used machines.
That ballpark, so essentially those machines could be sold.
And their current condition.
<unk>.
Small loss or near breakeven kind of number the cost to move them.
If we were to relocate them somewhere.
It would be.
Around $1 million million and $5.
If we were to do that but.
I think we're very focused on deploying the latest machines that we are getting in and really just exiting kind of any kind of a clean break out of hard so.
So we can move on.
Okay Super helpful. And then I did want to talk a little bit about.
The wind facility I mean, clearly theres going to be opportunities as you mentioned, Fred about selling power into the grid.
I guess, what I would say realizing that we have to look at each of these locations a little differently.
Is there any way that we should think about utilization of the axa hash at that facility just given those opportunities I E.
The summer when it's.
Demand for power pricing tends to be most attractive to sell.
Versus say most of the other.
Other parts of the year when its.
I guess <unk>.
<unk> is more stable and any kind of color you think as we build out our models how should we should be thinking about the utilization of that ex ash I don't know if you want to on a quarterly or even annual basis any have you guys any kind of color there.
It's a great question.
<unk>.
<unk> been working with.
Our provider there and the operator of the wind farm.
It is a very complex calculus to figure out.
The actual capacity because it's very dependent on seasonality and when the wind blows not just with the energy markets are doing and so it varies the amount of hours of the day that the wind generates very during the course of the year a lot of seasonality. So the wind farm operator has some very sophisticated model.
On this they've obviously.
<unk>.
<unk> been operating the site for nearly 20 years at this point so they have a lot of experience and we're relying on their models to really look at this but the generally.
Generally the calculus is if it's more profitable to mine them selling the energy will mind, if it's more profitable to sell the energy than we will sell the energy and so from a cash flow perspective, if you want to.
The company, whether it's bitcoin or whether its fiat currency.
We're optimizing to maximize that profitability.
And this is going to be a process, where it's going to take us most probably a few quarters to understand the real seasonality and the real impact of this but.
The goal is to really to just optimize for profitability.
Okay, and then just I did want to follow up on because I guess, sometimes power prices are negative.
Thats typically probably because winds blowing in the middle of the night.
But I guess, maybe the question is in the event that power pricing is super attractive across the grid.
Or.
Is there an ability for you to draw power to power those rigs when the wind is not available I E are.
Are you plug can we draw from the grid or no absolutely I mean, the wind doesn't blow 27 right. So.
We'll is to optimize the 95% uptime.
Okay or sell energy back to the grid so.
By no means are we only using wind energy, we learned our lessons that heartened that we want redundant energy and again.
Part of the difference in our model to some of our competitors, who sit and only have grid energy is by having the wind energy. There's a lot of wind energy that's stranded at the wind farm that can't go into the grid because aircraft not buying it and so we get the benefit of that has to be extremely low pricing on that energy, but we also have the benefit of being able to draw off the grid.
When that's cheaper the good thing is that.
<unk>.
We have.
The same incentives as the power operator does to operate this site for maximum profitability and so we're very aligned in how we're looking at the energy strategy and I think one of the unique things here.
As we've talked about gosh at this point for over a year's by partnering directly with the power company and really.
Operating a mining business kind of where your incentives are fully aligned with your energy provider. It creates a very unique situation that people operating directly on the grid don't have the ability to do and so I think again our model here is going to be proven to be so.
And what better than some of our colleagues in the industry.
Okay, great to hear Fred Hey, Thank you all for the time and have a great rest of the day.
Thank you we have next question from the line of Kevin <unk> with H C. Wainwright. Please go ahead.
Thanks, Fred Thanks for fitting me in appreciate it no no questions on Meera pool or your optimization is there any way you can talk about that.
Our ongoing strategy and leaving that back into your operation and what sort of efficiency gains we can see.
And a follow up for you.
Ill, just say stay tuned on that and you'll hear things.
In the not too distant future on that.
Fair enough then given multiple sites in Texas spread how far have.
Are you done with your immersion experimentation.
And when.
Could we expect to see marathons implementation.
Yeah, Great question. So we have evaluated a number of different vendors of emerging technologies.
We have kind of honed in on two that we like very much.
I think as.
You might be well aware a lot of the merchant vendors don't have the scale to deploy at our scale quite yet.
So for these current deployments. These are all air based both teen mountain.
And.
The apply blockchain site the apply blockchain sites in the Dakotas have the benefit of a very different climatology, where for a portion of the year, we may even be able to operate the expertise at that site and overclock them even in error.
So that's a benefit there I think as you look at future deployment.
But we haven't announced yet whether thats going to be in later 2023, or 2024, I think youll see immersion make up a portion of those but again.
Emergent is still a relatively new technology.
A lot of the Gen. One technologies that have been deployed either require copious amounts of water again, we are very ESG focus.
We have our goal of being carbon neutral at the end of this year, we'd love to deploy behind renewable energy sources, and we don't really want to be in a position, where we're having to stop water out of the lake to cool our miners and so as we look at emerging technologies. We're looking at solutions that are more closed loop in nature.
And those are systems that are kind of still in their early stages, but we believe longer term, we will provide much better operational stability.
And allow us to leverage different types of deployment not just utility scale deployment, but also micro grid deployment.
Thanks for diving in on that Fred pardon the pun.
Appreciate you entertaining my questions. Thanks, Kevin.
Thank you we have next question from the line of Gustavo <unk> with twist. Please go ahead.
Hi, Brad Thank you for taking my questions.
This one's a bit of a follow up.
Clarification, so for that incremental 254 megawatts.
Been able to book.
As the connection to the grid been approved by the respective operators I'm, particularly asking for the 210 megawatts out of North Dakota with applied.
So the grid operator.
They have been approved.
I am not 100% sure as to whether the full load study has been completed but I do know it's approved.
Gotcha, that's helpful and just looking at the space with all the dislocation that's been going on can you talk a little bit about the opportunity for consolidation beautiful signs of picking up appear or even some of the orders that appears might not be able to pay for.
Sure.
Things, let me too thanks.
Yeah, Great question I think the challenge is.
<unk>.
So acquiring another mining company the problem is.
What is the cost of the infrastructure capex required condition of the current miners they have hash rate so.
As we've looked at it.
We have yet to find an opportunity where we can acquire a miner and have an ongoing operating costs and capex.
Model that beads, just going out and buying state of the art xps and deploying them kind of behind the meter at wind farms solar sites and partnering with energy companies, we think that.
Sort of a de Novo model still beat the acquisition model.
Part of the challenges if you are a minor who has been operating for two years. They are rigs are old EF 19. So you have no idea how they've been treated.
The hosting agreements may only half a year two years, maybe three years left on them and then you're back to square one. So we think there is opportunity.
Opportunity for a lot of hair on some of those deals potentially that doesn't mean that there won't be some fire sales here as some minor struggle.
With their energy pricing and big corn production.
Clearly global hash rate is going to continue to grow just.
Based on our deployments and what are some of our peers are deploying so.
We still think that de Novo model is a better model.
We will see there may be a fire sale that just.
Too good to say no to but our preference to grow through synovus.
Sure.
Thank you I appreciate all the color.
Okay.
Thank you ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back over to Charles <unk> for closing remarks over to you Sir.
Thank you all for your time today the questions that were not answered during today's call. Please feel free to contact our investor relations team at IR at Marathon D. H Dot com. Thank you and enjoy the rest of the day.
Yes.
Thank you very much ladies and gentlemen. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your question.
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Okay.
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