Q4 2022 Hut 8 Mining Corp Earnings Call
Welcome to hut, eight fourth quarter and full year 2022 financial results analyst and Investor call. In addition to the press release issued earlier today, you can find hut eight financial statements and MD&A on the Companys website at Www dot.
H dot idle.
Under the company's SEDAR profile at Www Dot SEDAR dot com and under the company's Edgar profile at Www Dot <unk> Dot Gov.
Noted otherwise all amounts referred to during this call are denominated in Canadian dollars any comments made during this call may include forward looking statements within the meaning of applicable securities legislation regarding the future performance of hut eight mining Corp, and its subsidiaries.
The statements made reflect current expectations and as such are subject to a variety of risks and uncertainties that could cause actual results to differ materially from current expectations.
These risks and uncertainties include but are not limited to the factors discussed in its annual MD&A and annual information form for the year ended December 31, 2022, except as required by applicable law hut eight undertakes no obligation to publicly update or review any forward looking statements.
During the call management May also make reference to certain non I F. R. S measures that are not separately define under I FRS, such as adjusted EBITDA and mine profit management believes that non I F. R. S financial information taken in conjunction with Ifr S financial measures provide.
Useful information for both management and investors.
Reconciliations between I F. R F and non I FRS results are presented in the tables accompanying our press release, which can be viewed on our website.
I'd now like to turn the call over to Howard H CEO , Jamie Burton. Please go ahead.
Thank you Joelle good morning, everyone and thank you for joining us to discuss <unk> results for the 2022 fiscal year I will start by restating. The obvious 2022 was a challenging year for our entire industry for us. This meant that pivoting and changing was essential this is where our balance sheet first approach which is.
Been in place since the early days of the previous Bull market enabled us to continue pursuing opportunistic moments throughout the year closing our acquisition of five high performance computing data centers and integrating them into our business operations.
Managing through the east merge last fall expanding our leadership team and growing our team members to over 100 across British Columbia, Alberta, and Ontario, continuing to advance our ESG goals by finding innovative ways to recycle our miners and computing infrastructure.
Self mining decline throughout 2022 at modest costs, despite fluctuating power prices, resulting in a 28, 1% year over year increase in bitcoin mind, and a 25% year over year increase in hash rate. Thanks to steadily plugging in new miners throughout the year, we continue to believe in our expansion into the high performance.
Computing business as we renovated our flagship data center in Kalana and refresh our data centers in the greater Toronto area, and Vancouver, we welcomed new customers, including enthusiast gaming then layer and Luxor, we're replacing our networks with new Cisco carrier grade routing and switching hardware, we're re architected our network carrier.
Up next to provide increased resiliency diversity and capacity.
We re certified the organization under our stock to compliance program, ensuring security best practices across 158 unique operational controls as.
As we look ahead, we are confident that 2023 will be a year of extraordinary growth.
As announced last month, we look forward to the future were headache mining Corp, and USA Corp will combine in an all stock merger of equals to grow into a highly diversified U S. Domiciled publicly traded organization. The combination will see us with established stope mining operations at five mines, two in Canada and three in the U S running a total of $5 six.
With 244 megawatts of total energy available.
It will give us six X the hash of installed hosting capacity powered by 220 megawatts of hosting infrastructure at our site in Texas with clients that include some of the largest miners in the industry. It will take us into the very nascent space of managed infrastructure operations at two U S sites, where U S. PTC has pioneered a new business model.
To capture untapped value from the mining ecosystem, which is incredibly exciting with managed infrastructure operations. The team goes into a minor as existing site.
Site or site and runs the day to day operations manages the property performs maintenance and importantly.
Optimizing performance using USB PD purpose, driven software, which provides real time monitoring capabilities to optimize the energy consumption of thousands of machines across the site. It also enabled profitable participation in demand response programs and can help to balance the grid, improving grid stability, while reducing energy costs and speaking of energy the U S. A.
One team brings outstanding energy sourcing management and hedging capability to new hot significantly enhancing our ability to better plan around stable and predictable energy usage and mitigate fluctuated fluctuating prices across markets.
We look forward to the expected completion of the business combination in Q2 and beginning to work together as a team I'm very proud of our team's commitment to operational excellence across the business and the trajectory of how we look forward to continued success in 2023 as a further diversified digital asset mining hosting managed infrastructure operations and high.
Performance computing organization before I turn it over to Shannon <unk>, our CFO , who will review our key financial results I would like to thank our board for their support and guidance our executive team for their incredible leadership and our team across the country for their execution across all of our business lines I would also be ready.
Miss if I didnt take a minute to thank our investors for their continued commitment to Heidi <unk>.
2022 was incredibly dynamic time for bitcoin and the broader industry and your support of our organization is very much appreciated Jennifer over to you.
Thanks, Jamie and good morning, everyone, let's begin with our full year results for 2022.
We achieved revenue of $157 million for the year of $23 $1 million decrease relative to the prior year of $173 8 million. This.
This year over year decrease was driven by the reduction in price of bitcoin, which more than offset the expansion of our bitcoin mining fleet and incremental contributions from the high performance computing business. We acquired in Q1 of 2022 revenue from digital asset mining activities was $133 million.
We bind 3560 <unk> bitcoin this compares to $165 4 million.
Dollars of digital asset mining revenue in 2021, when we mined 2000 and 786 Bitcoin, we increased our mining production by 28% compared to 2021, and our average cost to mine each each bitcoin reduced by 7% relative to the prior year.
Reflecting more efficient miners deployed partially offset by higher energy prices in the year.
Our high performance computing business contributed an additional $16 $9 million of revenue in 2022, the majority of which is monthly recurring revenue.
Okay.
Cost of revenue for the year was $175 $6 million compared to $85 million in the prior year and consist of depreciation and site operating cost.
The increased depreciation expense from $23 3 million in 2021 to $93 9 million was driven by the increased number and overall cost of binders deployed during the year and $5 $1 million of additional depreciation from the newly acquired <unk> business.
Site operating costs increased by $20 1 million to $81 8 million from 2021.
Within the digital asset mining operation site operating costs increased by $11 $7 million consistent with our expansion of mining fleet and increased power costs.
We incurred $8 $4 million in operating costs related to the high performance computing operation all of which are incremental year over year.
In terms of margin, our digital asset mining operations generated profit of $64 million versus $108 1 billion in the prior year.
Reflecting the combination of lower bitcoin prices and increased electricity costs.
General and administration costs for the year were $49 $8 million compared to $40 3 million in the prior year. The increase was primarily due to the combination to a combination of higher personnel costs insurance premiums.
And other costs largely in support of the high performance computing line of business.
We recorded a net loss of $242 $8 million for the year compared to a net loss of $72 $7 million in the prior year.
In the fourth quarter of 2022, the company conducted impairment testing of its three digital asset mining cash generating units also known as C. G use medicine hat Drumheller in North Bay.
Due to depressed digital mining economics, specifically the decline in price of bitcoin throughout periods. During the year ended December 31, 2022, the company recorded an impairment charge on its digital asset mining Cpus the.
The difference between the pre impairment carrying value and the recoverable amount of the company's digital asset mining CG use is $98 $6 million.
In addition duties theory emerged during the year ended December 31, 2022, where do you see room network changes consensus mechanism from proof of work to proof of stake the company recorded an impairment charge on its GPU mining group assets as a result of being unable to find an alternative digi.
The asset to mine with profitable mining economics.
The difference between the pre impairment carrying value and the recoverable amount of the company's C. G. You mining group of assets is $15 $2 million the combined.
Impairment booked in for Q2 thousand 22 was $113 9 million as a reminder, this is a noncash entry.
Also impacting the net loss, we recorded a 138 point $134 8 million noncash loss on the revaluation of our digital assets as a result.
The decrease in the price of bitcoin.
We incurred a noncash gain of $98 8 million on revaluation of our warrant liability compared to a $114 $2 million noncash loss in 2021.
The remainder of the net loss was primarily driven by the lower revenue from digital asset mining operations and higher cost of revenue in 2022.
Reflecting the operating results discussed previously hut achieved.
Achieved adjusted EBITDA of $32 million for 2022, compared with $96.6 million in the prior year.
Our balance sheet remains healthy with minimal debt and a cash balance of $30 5 million as at December 31, 2022.
On August 17th.
<unk> 22, we entered into an equity distribution agreement pursuant to which we established an aftermarket equity program with maximum proceeds of up to $200 million U S. Approximately $270 9 million Canadian.
As of December 31st 2022, we raised $32.8 million U S. Net proceeds approximately $44 1 million Canadian.
Under this program.
We have now seized issuance under the ATM program given the currently proposed business combination with U S. PTC.
Our Bitcoin holdings are marked at fair value and totaled $203.7 million as at December 31, 2022 based on 9086 Bitcoin held in reserve.
Yes.
I will now turn to our Q4 results and provide some additional commentary.
Our fourth quarter results for 2022 were impacted by the reduction of bitcoin prices and our ongoing dispute with validus related to our North Sea mining facility, where we stopped mining in mid November .
We achieved quarterly revenue of $21.8 million compared to $57 9 million in the prior year's quarter revs.
Revenue was impacted by a substantial drop in bitcoin prices. The average bitcoin price in the quarter was approximately $24600 compared to approximately $70400 in the same quarter a year prior.
We mined 698 bitcoin this quarter compared to 789 did coin in Q4 2021, the reduction in mind Bitcoin you do electrical issues at the drumheller location and a higher than normal levels of curtailing due to a sharp increase in power rates.
We also generated $4.5 million in revenue.
From the high performance computing business.
In the quarter, while we generated $2.4 million in revenue from hosting during the same period in 2021.
Cost of revenue was $45 2 million.
In Q4, 2022 versus $27 3 million in Q4, 2021 with the increase driven by increased depreciation expense as a result of our expanding our mining fleet.
The cost of money each each bitcoin for Q4, 2022 was approximately $20100 compared with approximately 22800 in the same period a year ago.
General and administrative expenses were $40 8 million for the fourth quarter versus $14 1 million in the prior year period.
We had a reduction in sales tax due to lower purchases in Q4 compared to Q4 2021. This was offset by the inclusion of SG&A related to the H P C business.
We reported a loss for the fourth quarter of $186 $7 million compared to a loss of $99 1 million in the prior year's quarter.
As previously discussed we took an impairment charge of $113 $9 million this quarter in.
In addition, we recorded a $37 2 million dollar noncash loss on the revaluation of our digital assets as a result.
Of a decrease in the price of bitcoin.
In Q4, 2021 we booked a $114 $2 million noncash loss on the revaluation of warrant liability compared to a gain of $4 $3 million in the current quarter.
Adjusted EBITDA was a loss of $3.9 million versus a positive EBITDA of $35 $3 million in the prior year's quarter.
For the three months ended December 31, 2022, adjusted EBITDA was negatively impacted by three factors firstly, the shutdowns north vein mining site impacted our bitcoin mined in the quarter.
Lee we saw a sharp increase in power rates and our drumheller site in the quarter, which resulted in lower profitability higher than normal levels of curtailing and fewer bitcoin mind.
Lastly, a further reduction of bitcoin prices had a negative impact on our revenue and adjusted EBITDA.
Our balance sheet remains healthy we closed the year with $35 million in cash our debt continues to be relatively low our bid whole bitcoin holdings are marked at fair value and total tools $3.6 million as of December 31, 2022, with 9086 of bitcoin and custody.
Thank you for joining us with that I will turn the call back to our operator for analyst Q&A.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone.
You'll hear three tome prompt acknowledging you're requesting your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press the star followed by the Q. If you are using a speaker phone. Please lift the handset before pressing any keys one moment. Please for your first question.
Your first question comes from Mike colonies with H C. Wainwright. Please go ahead.
Hi, Good morning. Thank you for taking my questions first one for me. So that you relocated 7000 miners from North Bay to Medicine hat, how long do you guys think it will take to redeploy those miners there.
And do you have the sufficient infrastructure and power availability to support the additional capacity.
Yeah, So I'll take that one and we've moved miner is really into temporary storage for now while we we assess.
Yeah.
Various options of where we can redeploy them. We don't currently have that much available capacity in medicine hat today.
Got it got it and I appreciate the clarity there and then the next one for me if we look at post merger environment here, you'll be operating several different business lines, how should we think about strategic priorities for the balance of 2023 after the transaction closes and how you intend to allocate capital.
Yeah, we're entirely focused on getting this transaction closed as you can you can imagine in working with the combined team to plan out the integration and so too soon for from USA, where we're going to be prioritizing capital allocation.
Got it thank you for taking my questions.
Anytime you next year.
Your next question comes from Joseph <unk> with Canaccord. Please go ahead.
Good morning, Joe.
Oh, sorry, I was on mute Hey, good morning, Jeremy and good morning team.
Thanks for taking my questions.
Yeah.
I know you probably can't talk too much about validus, but is there at least a time frame that perhaps we should be looking at where we may get a resolution on that and I'll have a quick follow up.
So yeah, we are to be transparent we've had some setbacks at our North Bay site, which affected our results in the latter part of the year and issue that that we continue to be addressing in November 2022, we delivered a notice of event of default to Validus and as we announced in January 2023, we filed a statement of claim.
Validus in February of 2023, we received the statement of defense and cannot claim from Validus.
Denies the majority of the allegations in the statement of claim and brings counter claims. We believe the counter claim is meritless and intend to vigorously defend all of the claims in the counter claim while pursuing the claim set out in our statement of claim having said that these matters are in the early stages of litigation and we can't make any assessment regarding.
And the likely outcomes with a high degree of uncertainty. Unfortunately, the current litigation means that the North Bay site is not currently operational and miners and electrical equipment has been removed from the site.
I just mentioned to the to the prior question, we're assessing opportunities to energize. The approximately 7000 miners from North Bay, which represents approximately 680 potash of capacity, but given this is a legal matter we cannot comment further at this time, although I appreciate the question Joe.
Sure absolutely.
That was a very clear answer.
I'm glad that you had it.
Ready to be.
So to say so so that does.
That's fair enough just if you kind of look out at the landscape now I mean, it does feel like mining today is is in better shape than it was a few months ago with spot prices being higher.
Sure.
Mining equipment.
Pricing still haven't not hasn't responded that much at this point, how do you feel about.
The supply side of the business you know looking into 'twenty two 'twenty three I know you've got a lot of moving parts you've got to finalize the merger here, but it does seem like mining rigs are attractively priced right now I'm not sure how long they will be.
Any thoughts on exporting this this pricing environment right now thanks a lot.
No problem, Yeah, we still see a lot of available supply in the market from from a mining a minor capacity perspective, the long pole in the tenant as I think we've discussed before is is on the the access to power side, but also the power distribution infrastructure and so I think we're just.
Can it continue to assess the market and again really really focus on getting our our merger closed.
Incredibly excited about that.
The increased diversification of new Hot went in the combined entity and the Optionality that it'll give us.
Strategically pivot as as this supply environment.
Continues to.
Jeff.
Great. Thanks, a lot Jamie.
Of course anytime Joe.
Your next question comes from Chris <unk> with D. A Davidson. Please go ahead.
Alright, Thanks, and good morning physically taking my questions.
I wasn't able to tease out the exact number but it looks like the.
Gross margins are.
Profit margins in the bitcoin mining side of the business were came in a lot better than I was expecting.
I saw there was a book as a full year number around 20000 Canadian cost per mind can you talk about the fourth quarter and if you can provide some insight into our average power costs are.
Are they are they increasing or decreasing in the outlook for 'twenty three things.
I'm happy to turn it over to shut off to answer your question.
Thank you Jamie. Thank you for the question so the cost of mining in the fourth quarter of this fiscal year was $20100 that compares to 22800 in the prior year.
In the fourth quarter. This year, we did see an increase in the.
<unk> power costs that we were seeing particularly in our drumheller location.
Sharpens Stark increases in the power rates there so that impacted our numbers all the offset to that is we did have a lot a month and a half of mining in North Bay as you know we've got favorable power rates at the time with Validus at that time, we were mining still so those two factors.
Kind of led to the 20100 average cost of mining in the quarter.
Okay, and so is it going forward.
You won't have north Bay, but.
How much did the precipitous drop in natural gas prices help out the outlook for 'twenty three.
You know I really can't give too much guidance, specifically about what the impact will be in 2023.
Certainly we have seen some drop in our power rates in Alberta since the end of the year.
So we'll hope to see that trend continue as we move forward.
Okay.
Jim and Jeff.
Sort of ask a.
An industry question that you may or may not be able to comment on that I'm, just thinking about silver gate and what's happening to the traditional banking system, the United States, where we're.
A lot of.
No.
Relative related related companies have been using silver gate.
As their banking partner.
Today, it's down there and what do you think it means for the industry.
Yes, I'm happy to take that one.
Yes.
Obviously, we know silver gate and and the team, although we've never had had a direct.
Working relationship with them. So we don't there is there.
There is no direct impact too hot in that regard from a broader ecosystem perspective certainly.
It's not something that any of us wanted to see.
It's gonna have ripple effects.
I think we've already seen overnight.
But from a hot perspective, there is no direct implication.
Okay squeeze in one more if you don't mind.
H B C revenue.
Came in almost exactly where I had it so solid progress there but.
With all the hype around AI and the fourth quarter and for other companies indicate that HBC demand is still rising rapidly can you give us any color on what you expect.
Of how that business to look into this year.
I can't I can't give you any any forward looking guidance, but what I. What I can say is we are very pleased that we did that acquisition. It's been just over a year. Since we are since we diversified into the into that area and then ultimately we're able to not just integrate the business.
And spent a significant amount of time at focusing on upgrading that business. So I think we are.
We've timed the market incredibly well and we continue to be to be bullish on the space and really thrilled that that that were a bit ahead of the curve on that diversification strategy.
Awesome. Thanks, so much.
No problem. Thank you.
Your next question comes from George Sutton with Craig Hallum. Please go ahead.
Good morning, George.
Good morning, Jamie so.
Also on <unk>, just asking the question a different way can you talk about the key use cases that you currently have relative to the HBC.
Segment Okay.
So as I as I think you know when we purchased that business, we purchased it with an existing fleet of enterprise customers, though and we've got just under 400 enterprise customers across the five data centers and they're consuming.
Our mix of products from US, which includes co location cloud and managed services.
The.
So and those customers are from very diverse industries I think really all major industries are represented in our current customer base.
And when we when we kind of look forward and think about the demand profile that that where we're seeing.
Really increase from it we're definitely seeing more inbound demand from at from artificial intelligence gaming continues to be strong.
Machine learning is is another area that that got traction, but I would say.
The leading use case right now from a demand perspective that we're seeing and in inbound capacity is coming from from AI project.
So Shannon if I wonder if you could address the draw.
Drumheller question this way.
Your overall cost.
20100, I'll use $15000 as an equivalent U S dollar amount.
For Bitcoin NAV.
Natural gas prices are down 50% year to date, so my assumption would be.
But that you should be seeing those fall and I'm getting to the curtailment question in terms of trying to understand when you extensively would curtail as it simply at the production cost number or are there.
Additional considerations relative to that.
Yeah. So I would just first of all I would just kind of highlight though drumheller specifically we are investigating some electrical issues that are drumheller site, which have reduced our overall production there, but we're in the early stages of exploring supplementary options to mitigate the challenges and hope we have more definitive plan ready due course, so it's a.
Bit more complicated than drumheller and that you're right that we're seeing energy prices drop, but we are seeing an impact on production right now do these electrical issues for a bit more it's going to play into the first quarter is as we look into these issues that we're having that site specifically.
A bit more complicated than just energy price reduction.
I assume that was the case and then finally is there any update you can give us on the closing process in terms of things that you are waiting in terms of.
Stipulations or anything that we need to be aware of in any sense of the timing of the close.
And great question, so I'll take that.
The closing of the proposed merger of equals with USB D. C continues to be a top priority as we've discussed and we're happy to share that we have received a no action letter from the competition Bureau of Canada in respect of the proposed merger merger. The letter confirms that the competition Bureau does not at this time intend to challenge the proposed transaction under.
The merger provisions in the competition Act. This is a very positive development as we continue to work to obtain all necessary regulatory shareholder exchange and other approvals required to close the transaction.
But that's that's as much of an update as I as Ive got for you today.
That was impressive off the top of your head.
You know me I've always prepared.
Your next question comes from Bill Popper.
Cause you from Stifel. Please go ahead.
Hi, Good morning, Jerry mentioned.
Yes. Thank you for taking my questions I just wanted to first touch on the high performance computing business.
We continue to see upward movements in margin performance for the business unit.
The mouse that over 50%.
Just wanted to hopefully get some more color on how we should be thinking about margins in the long term and how the team is strategizing on what I believe is still excess capacity at some of the terrible sites.
Yeah, I'm struggling how to answer that question.
We.
We've got a we've done a lot of work as I've talked about.
Updating our facilities and I went into some of the specifics already.
On this on the call. This morning, we've got an incredible sales team in place that that actively.
Driving expansion of the of the of the pipeline and but I.
I don't know how to get into more specific details with you we do have.
Some expansion capabilities remaining in.
In a few of the sites not not all five of our expandable.
But we'll continue to look.
Look to expand as <unk>.
As required when when the capacity adds that we have built out already is filled up.
So it's really a data center by data center question as opposed to.
Weak demand question.
Right great. Thank you.
Create the color and I understand that the data centers will be specifically focused to particular regions. So that makes sense yeah.
Exactly yeah, so shifting gears to the mining space.
The company was able to see.
Fairly strong gross my margins, just given where breakeven electricity costs were and.
Assumed.
Power costs may be for new sites and it appears that.
Things are trending in the positive direction in 2023, just based on that same analysis.
Given the relationships that you guys have and just your your take on this space with manufacturers.
How do you see further consolidation in the space as we approach the having.
<unk>.
Are you planning do you see an improvement in overall mining economics.
What's your take on on 2023.
Yeah, I mean, I wish I had a crystal ball I think.
We've we've all been surprised by the continued growth of the hatch rates and difficulty level. Despite relatively sideways trading of the bitcoin price in general obviously, a nice development that we've seen.
Natural gas prices come down and as John had mentioned hopeful hopeful that that that will continue but it's really really difficult for us to make a prediction on and ultimately warehouse right and difficulty youre going to go.
As well as the equate price so.
What we've what we've always tried to do as a business and our leadership team is is make sure that that we have optionality built into the system, which for us only increases when we when we get the merger closed CPP and we we.
We believe in the diversified business model that that we've kicked off with and ultimately again expands with this merger.
We really cannot predict.
Where we're bitcoin prices going to go or ash right in the short term for sure.
And keeping them keeping in mind, we're right about a year away from having.
<unk>, which has its own unique implication because as I think everyone's aware.
Right I guess it helps to have that huge corn treasury too is as we approach the having and hopefully get the upside there. Thank you for taking my questions.
My pleasure anytime.
There are no further questions at this time. Please proceed.
Okay. Thank you again, everybody for joining today and for you.
And for your continued support we truly appreciate it and we look forward to.
Citing 2023 and have a great day everybody.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
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The conference is no longer.