Q3 2022 Cipher Mining Inc Earnings Call
Good morning, Thank you for standing by and welcome to stay for mining third quarter 2022 business update conference call. Please be advised this conference is being recorded and a replay will be available on <unk> Investor Relations.
Website I would now like to hand, the conference over to <unk> Investor Relations.
Good morning, ladies and gentlemen, thank you for joining us on this conference call to discuss cipher Mining's third quarter 2022 business update.
Joining me on the call today are Tyler page, Chief Executive Officer, and Ed Farrell Chief Financial Officer. Please note that you May also review our press release and presentation, which can be found on the Investor Relations section of the website at investors at Seifer mining dotcom.
Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website.
This conference call is the property of site for mining and any taping or other reproduction is expressly prohibited without prior written consent.
Before we start I'd like to remind you that the following discussion as well as our press release and presentation contain forward looking statements, including but not limited to ciphers financial outlook.
The plans and objectives and other future events and developments, including statements about the market potential of our business operations potential competition and our goals and strategies.
The forward looking statements and risks in this conference call, including responses to your questions are based on current expectations as of today and Seifer assumes no obligation to update or revise them, whether as a result of new developments or otherwise except as required by law. Additionally, the following discussion may contain.
non-GAAP financial measures we.
We may use non-GAAP measures to describe the way in which we manage and operate our business we.
We reconciling non-GAAP measures to the mostly most directly comparable GAAP measure and you are encouraged to examine those reconciliations which are found at the end of our earnings release issued earlier. This morning, I will now turn the call over to Tyler Tyler.
Hi, This is Tyler page CEO of safer minded thank.
Thank you very much for joining our third quarter business update call.
Let me start with some key developments since our last call.
Today, we are announcing quarterly earnings of 24 per share, which validate ciphers resilient position as a low cost producer and bitcoin mining.
We have always said that our low cost fixed price power contracts are some of our strongest assets.
And we can now quantify the value of our Odessa power contract is being valued at roughly $78 $9 million at the end of the third quarter.
Our contractual arrangement at ADESA allows us the flexibility to mine bitcoin or re sell power to the market, which potentially provides benefits when bitcoin mining margins are low.
As power prices have moved higher since we executed the contract it is substantially in the money.
Since our last business update when we announced the completion of our outboard data Center I am happy to report that we have now completed construction and are operating two new data centers, we call bear and chief.
The outboard data center is 100% powered by wind and produced a total of 196 bitcoin during the quarter.
Baron Chief are now up and running and between the two of them can produce roughly to bitcoin per day at their current size.
Our team has also made tremendous progress at our largest data center at ADESA since our last update.
The infrastructure and rig installation is complete for the first phase of miners, which are capable of generating about 2.3 exit cash per second.
We are currently executing the final necessary steps to begin mining and we expect that cash rate will be coming online this month.
We have additional mining rigs capable of producing roughly two six <unk> per second shift or scheduled to ship to Odessa by year end.
In addition to our execution progress and in light of all the turmoil going on in the crypto industry I would like to remind everyone of our strong liquidity position.
As of Wednesday November nine the day after last week's tumultuous news about Fts and finance, we have approximately $25 billion of cash and 161 bitcoin on our balance sheet.
Unlike some of our competitors now struggling to meet their debt obligations. Our only debt obligations are relatively small secured equipment finance loans at our sites that have payments expected to be covered by ongoing operations.
We have no further payments to make to any mining rig manufacturers.
Before diving deeper into our market and business update let me take a moment to remind everyone. How our business model works.
On slide four you will see a simple overview of a bitcoin mining business.
We operate the box in the middle of the drawing them that says mining equipment, which represents our data centers and mining rigs.
We spend the majority of our operating expenses on electricity.
Which our datacenters convert into computing power.
Unlike traditional data centers, which operate a similar model and fill their computing power output to enterprise clients for dollars cipher sells its computing power called hatch rate to the Bitcoin network for bitcoins.
To make this model operate profitably a bitcoin mining company needs to control both its electricity costs and the capital expense to build its data centers, including what it spends to purchase mining equipment.
Controlling these costs enables a minor to be a lower cost producer.
And our focus at safer has always been on controlling these specific costs to produce the best possible unit economics.
On slide five we highlight some of Cypress specific cost advantages specifically, our fleet of mining rigs cost us an average of $31 52 per Tera <unk> per second.
And that fleet has an average efficiency of 31.5 jewels for terahertz.
This is a fleet of rigs that has both a lower acquisition costs and better efficiency than most of our competitors.
We have already paid for and expect to install rigs capable of generating about five eight <unk> per second by early 2023.
We expect to have a total infrastructure capacity capable of handling rigs that could generate up to seven exit hash per second in early 2023.
And given current distressed market conditions for hardware, we continue to look for low priced opportunities to expand our total hash rate.
We have some of the lowest power costs in the industry with an average power price of approximately $2 seven per kilowatt hour a range to be a long term power purchase agreements.
We use a variety of structures to achieve such a low power cost.
Furthermore, we have developed a proprietary real time power pricing model to optimize our decision, making and the profitability at our data centers.
We expect to complete the infrastructure at our fourth data center at Odessa in early 2023.
And when it is done we expect to have a total operating capacity of approximately 267 megawatts.
Now, let's talk about ciphers approach to navigating the recent choppy markets on.
On slide six we show the last several months of bitcoin prices along with several noteworthy news events for the industry.
Generally it has been a very rough few months for the bitcoin mining industry.
Until last week Bitcoin prices had remained relatively flat while power prices and overall network cash rate increased.
These market conditions that produced a great amount of distress among companies focused on bitcoin mining.
We are also seeing the price of mining rates continue to drop and there are public quotes for new machines offered at less than $20 per <unk> per second.
Last week saw incredibly fast moving and volatile crypto prices related to the liquidity crunch at SPX.
Problems in adjacent crypto markets bled into bitcoin prices and that price action has only made mining conditions more difficult.
We remain big believers in a brighter eventual future for bitcoin for those who can survive the choppy markets and we don't mind other crypto currencies.
Given this market backdrop, the current strategic focus at Cypress is defined low risk cyclical opportunities, where we can take advantage of our relative strength and continue building a company that can withstand the storm and ultimately emerge as the industry winter when brighter days return.
From a day to day perspective, we remain laser focused on the completion of our data centers.
Let me close my observations on the recent market turmoil by saying that we don't yet have clarity on the specific causes of the SPX fiasco.
But some are calling it the worst day in the history of crypto.
For some perspective I am not working professionally at my second firm in the industry that I have helped grow from day one.
I have watched the ups and downs of the industry through multiple boom and bust cycles over many years at this point.
Over time my focus has evolved from what started as a more generalized interest in crypto and all of its use cases to one that focuses on the potential of bitcoin.
We built cipher mining to support the infrastructure of bitcoin as it scales. We think our business has tremendous potential to grow from bitcoin network adoption over time.
And the bitcoin as a separate indistinguishable thing from the rest of the crypto universe.
We believe this market turmoil will ultimately cause investors regulators and others in the ecosystem to come to the same realization and see bitcoin is something unique and different.
My hope is that investors ultimately come to the same realization I did a few years ago. The bitcoin is the future.
Now, let's talk about how cipher is helping ensure that future.
Moving to more specific highlights on our data center build out slide seven shows some operational highlights from our <unk> data center.
<unk> is a joint venture that we share with our energy provider that has a total operating capacity when the wind blows of 40 megawatts.
At 40 megawatts Power's roughly 1.3 exit hash per second rigs.
In the third quarter as we ramped up the data center and somewhat less windy than typical conditions the site mind roughly 196 bitcoin.
Note that our all in electricity cost for bitcoin that Albert was approximately $4571.
Slide eight shows operational highlights from our Barron chief data centers.
Barron Chief were completed and made fully operational in October .
Note that one of our new Transformers at Bayer had a problem that's being fixed which means there is currently only mining at eight of its expected 10 megawatts.
Combined the two sites are capable of generating roughly two bitcoin per day and current market conditions.
Turning to our Odessa datacenter slide nine has some beautiful pictures of the significant progress we have made at our largest site.
As I previously mentioned, we currently have installed rigs capable of generating roughly two three <unk> per second at Odessa.
We are in the final stages of preparing the data center and we expect those rigs will be fully operational by the end of the month.
You can also see the anticipated monthly ramp up schedule by megawatts and we expect the full 207 megawatts to be available in February of 2023.
You can also see our current forecast for expanding operational hash rate at the site each quarter.
Note that we currently forecast having in excess of 44 megawatts of power and infrastructure capacity beyond the mining rigs for which we have already paid in a range of shipping.
This additional capacity provides us tremendous flexibility to expand by purchasing mining rigs at bargain prices in the coming months.
We're alternatively to sell power capacity to the market at times when doing so is attractive.
Because of our long term low cost fixed price power contract at Odessa, We have an advantage that few other bitcoin miners have.
We have the flexibility to resell our power capacity at market rates and given the currently forecasted market prices for power. This flexibility provides an excellent hedge against potential future declines in bitcoin mining margins.
I will close my portion of the call by reiterating some key statistics of safe reminding that show our position of relative strength against other bitcoin miners.
For our very efficient fleet of roughly 57000 rigs installed in order, we paid an average price of approximately $31 52 per <unk> per second and our average weighted power prices about $2 seven per kilowatt hour.
In this tough market for bitcoin miners I'd like again to emphasize cypress strong liquidity profile.
As of November 9th we had approximately $25 million of cash and 161 bitcoin on our balance sheet. We do not have the debt service woes that some of our competitors are experiencing and we have no further obligations to make any additional payments to mining rig manufacturers.
As part of our prudent liquidity and balance sheet management in the third quarter. We also put in place a $250 million at the market equity shelf.
We have yet to sell a single share from the shelf and as of now we don't anticipate tapping at current share price levels.
When you combine our liquidity profile with our expanding operations and strong unit economics, we believe Cyprus positioned to emerge from this challenging market as the true leader in the bitcoin mining space.
Now I'd like to turn it over to our Chief Financial Officer.
Ed Farrell.
Thank you Tyler and Hello to everyone on the call.
Tyler's remarks, he highlighted a couple of key financial metrics for the company in the third quarter, which I'll also touch on in my remarks.
As stated we completed our Barron chief facilities and have made significant progress in the buildup of our <unk> site in.
In the third quarter, we spent $43 million on Capex, primarily related to that site, which we expect will contribute to our operations commencing in the current quarter.
This period, we recorded a $78 9 million derivative asset on our balance sheet related to the aluminum power agreement.
This was the primary driver to the 24 net income per share that we reported.
This contract is recorded as a derivative asset two line items on the balance sheet.
$34 million as a current asset and $48 5 billion as a non current asset.
For this quarter and future periods the change in fair value of that contract will flow through our GAAP earnings and we were excluding the impact for non-GAAP reporting.
Other significant assets include cash of $28 1 million.
Bitcoin of $2 3 million.
Deposits on equipment of $200 million.
Property and equipment of 41, 1 million and our equity investment in our JV $31 7 million.
We had working capital of $51 million and we continue to fund investments in our operations with the cash on hand.
As Tyler mentioned earlier as of November like we had cash balance of $25 1 million and held 161 bitcoin.
I'd like to mention that in accordance with the aluminum power agreement to fund the remaining half of the required independent collateral of $6 $3 million.
As Tyler noted as a matter of good corporate housekeeping, we now have $250 million ATM shelf that we have not utilized when market conditions improve it will add to our liquidity profile.
Now, let's look at our GAAP operating results for the quarter ending September 30.
We had net income of $59 2 million.
<unk> and net income of 24 per share.
The primary drivers are as follows.
The change in fair value of our desktop power agreement resulted in a gain of $85 $7 million and this was offset by our equity investment <unk>, which had a loss of $8 3 million. This.
This includes the fair value adjustment adjustment of $7 $2 million relate.
Related to the miners, we contributed to the JV and.
In addition, our share of the operating loss at <unk> was $1 9 million. These two items are offset by accretion of $800000 relating to the basis differences for miners that were previously contributed to the JV.
Onto expenses.
We incurred G&A was $17 8 million.
This includes stock based compensation of $10 5 million and the.
Seven three incurred include business insurance payroll and benefits professional fees technology occupancy and other public company expenses.
We believe non-GAAP financial measures are also helpful to investors and comparing our performance across reporting periods on a consistent basis.
Our non-GAAP P&L and non-GAAP diluted earnings per share exclude the impact of certain noncash recurring items, which includes stock compensation expense.
Change in fair value of our derivative asset.
Depreciation of fixed assets and the change in fair value of warrant liability.
These measures are not a substitute for our GAAP results, but management will use these non-GAAP financial measures internally to help understand manage and evaluate our business performance and helped us make operating decisions.
So for the three months ended September 30, our non-GAAP loss of $14 1 million resulted in a non-GAAP net loss of <unk> <unk> per share.
We've provided a reconciliation of our GAAP versus non-GAAP results.
Finally, as you can see we have made significant progress in becoming an industrial scale Bitcoin mining company and we look forward to reporting our progress in future periods.
I'll stop there and Tyler and I are happy to take your questions.
The floor is now open for your questions to ask a question at this time. Please press star one on your telephone keypad at any point you would like to withdraw from the queue. Please press star. One again, you will be provided the opportunity to ask one question and one further follow up.
Question, we will take a moment to render our roster.
Your first question comes from the line of Mike colonies from H C. Wainwright. Your line is open.
Great. Thank you hi, good morning, guys and thank you for taking my questions. This morning, and congratulations on all the progress Youre, making at each of your sites really exciting to see that.
To start I guess, how should we think about your strategy for purchasing additional mining rigs to fill out the remaining 44 megs.
Infrastructure and Odessa, once said sites fully built out.
Would you guys consider hosting equipment at all at the facility.
Hey, Mike It's Tyler Thanks for the question.
Yeah, I I think I think of it this way given the market conditions, we're trying to maximize for opportunistic flexibility.
So rig prices continue to drop.
They have certainly gotten extremely cheap compared to.
Historical prices.
We actually executed a purchase this past quarter of 5000, New S 19, J pros that we're going to purchase entirely with sort of accumulated coupons in deposits with Maine.
We will continue to Opportunistically look to fill those slots at Odessa I think the thing for US is that if you look at the powering up schedule.
We've already acquired the miners for about the first 163 megawatts or so so it's really that last leg because it'll be towards the end of the first quarter in the new year, where we'll have the slots available. So when I think about flexibility our options. There are go shopping in a distressed market for really cheap machine.
<unk>.
Potentially think about strategically working with someone that may be repossessing machines or looking for hosting opportunities I don't think that's our primary goal, but lots of interesting things are happening in this space and their machines being repoed by lenders that.
Are going to look for a home. So if we find something that we think is the most favorable for shareholders we'd be willing to do that I think also we'll be weighing the opportunity set versus selling power in the market.
So what I would tell you is solving for flexibility, but we're pretty confident we're going to find either.
Historically cheap prices for the rigs that we would just go purchase or potentially interesting business opportunities.
That's great so definitely some optionality, there and as a follow up to the Odessa facility can you just confirm the remaining infrastructure Capex you have to.
To complete the build out there.
Yeah, Let me, let me give a picture so we pay via monthly invoices that will stretch out four or five months into the new year, It's roughly about 20 million Bucks I think of expected remaining infrastructure capex there.
But they come due out month by month as as progress is made.
Got it got it and last one for me.
Appreciate the electricity cost per bid claim on the al bores.
<unk> 5000 per bitcoin, which is really strong how should we think about your all indirect costs to mind, a bitcoin when all of your sites are fully up and hashing as we look out over the next quarter or two.
Yeah, I think that it would likely be the blended electricity price is likely to be slightly higher than that but ballpark al Bors is.
Our our cheapest power in the portfolio generally you know unless we get really cheap front of the meter prices at Behr and chief.
But I think thats ballpark, so probably slightly more expensive electricity prices as we scale up.
Got it. Thank you for taking my questions I appreciate it thanks.
Thanks, Mike.
Again the floor is open for your questions to ask a question time. Please press star one on your telephone keypad.
Okay.
That does conclude today's questions I would now like to turn the call over to Tyler paid CEO for closing remarks.
Thank you. Thank you to all of our investors for participating in the call. We look forward to continuing to update you on our progress as we move forward.
Have a great day.
Yes.
Yes.
Thank you ladies and gentlemen, this does conclude today's call. Thank you for your participation you may now disconnect.
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