Q4 2022 Stronghold Digital Mining Inc Earnings Call

March 29, 2023

Speaker 1: I.

Speaker 2: Four.

Speaker 3: Good morning, and welcome to Stronghold Digital's Mining Conference call for the first fourth quarter and full year ended December 31, 2022. My name is Justin and I will be your operator this morning.

Speaker 3: Before this call, Stronghold issued its results for the fourth quarter and full year 2022 in a press release, which is available in the investor section of the company's website at www.strongholddigitalmining.com. You can find the link to the investor section at the top of the homepage.

Speaker 3: Joining us on today's call are Stronghold's co-chairman and CEO , Greg Beard, and CFO , Matt Smith. Following their remarks, we will open the call for questions. Before we begin, Alex Cobton from Gateway Group will make an introductory statement.

Speaker 3: Mr. Coles, please proceed.

Speaker 4: Great, thank you, operator. Good morning, everyone, and welcome. Today's slide presentation, along with our earnings release and financial disclosures, were posted to our website earlier today and can be accessed on our website at www.strongholddigitlamining.com.

Speaker 4: Some statements we're making today may be considered forward-looking statements under securities law and involve a number of risks and uncertainties.

Speaker 4: As a result, we caution you that there are a number of factors, many of which are beyond our control, which could cause actual results and events to differ materially from those described in the forward-looking statements.

Speaker 4: For more detailed risks, please visit www.nchsoftware.com.

Speaker 4: uncertainties and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release, and public filings made with the Securities and Exchange Commission.

Speaker 4: We disclaim any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law.

Speaker 4: We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and the reconciliation tables, the applicable GAAP measures, and our earnings release carefully as you consider these metrics.

Speaker 4: We expect to file our annual report on form 10K by the end of the week with the Securities and Exchange Commission, which sets forth detailed disclosures and descriptions of our business. As well, as uncertainties, other variable circumstances, including by now limited to risk and uncertainties identified. Under the caption of risk factors in our previously filed.

Speaker 4: quarterly reports on Form 10Q filed on May 16, 2022, August 18, 2022, and November 10, 2022, and are to be filed annual report on Form 10K.

Speaker 4: You may access Stronghold's Securities and Exchange Commission filings for free by visiting the SEC website at www.SEC.gov or Stronghold's investor relations website at ir.strongholddigitalmining.com.

Speaker 4: I would like to remind everyone that this call is being recorded and will be made available for replay via the link available in the Invest Releasing section of the Stronghold website.

Speaker 4: Now, I would like to turn the call over to Stronghold's co-chairman and CEO , Greg Beard. Greg.

Speaker 5: Thank you, Alex. Good morning, everyone, and thank you for joining us on our fourth quarter and full year 2022 earnings call. For today's call, we are going to reference an associated slide presentation that is available through the webcast and on the IR portion of our corporate website.

Speaker 5: I want to start by thanking our employees for their ongoing hard work and dedication to our mission during a difficult time in our markets.

Speaker 5: While 2022 was a challenging year for our business and most public Bitcoin mining companies, we believe that we undertook several important steps to survive the downturn in the crypto markets and best positioned strongholds for long-term success.

Speaker 5: We responded proactively to challenges in both the crypto and power markets while prioritizing liquidity to endure.

Speaker 5: Before turning the call over to our CFO Matt Smith for a detailed review of our financial results, I would like to touch on some of these highlights from our business transformation over the last year and why we remain excited about the year ahead.

Speaker 5: Let's start on slide three.

Speaker 5: As a reminder to everyone on the call, Stronghold owns and operates two waste coal reclamation facilities in Pennsylvania, Square grass and Panther Creek.

Speaker 5: Over the course of 2022, we removed over 1 million tons of coal refuse from the environment and mined over 2,000 bitcoins. We are currently at 2.6 exahash of hashrate capacity and have the ability to get to 4 exahash with the already built and ready to use slots at our data centers.

Speaker 5: Moving to slide four.

Speaker 5: Back in August , on our second quarter 2022 earnings call, we outlined a strategy to rapidly de-lever our balance sheet, enhance liquidity, improve efficiency, and opportunistically build our mining fleet to better position strongholds for success and ultimately maximize shareholder value.

Speaker 5: While there is still work to be done, we have made considerable progress on all fronts and believe that we have a robust platform to grow value for shareholders.

Speaker 5: First, the vertically integrated business model is working. We are constantly looking at grid prices and Bitcoin mining economics and choosing whether to self-power our Bitcoin mining operations, sell power to the grid, or import power from the grid to power miners when grid pricing is lower and are available cost of power.

Speaker 5: restructuring virtually every piece of material debt on a balance sheet.

Speaker 5: Since June of 2022, we have reduced our debt by nearly 60% to $60 million, which we believe is a manageable level in the context of our cash flow expectations.

Speaker 5: We also have no mandatory amortization until July 2024, which has enhanced New York's liquidity and flexibility.

Speaker 5: With the restrictions behind us, we are now laser focused on scaling and optimizing our Bitcoin mining operations at each of our data centers.

Speaker 5: We are raising our hashrate guidance back to 4x4 hash.

Speaker 5: and believe that we will be there by the end of the year, if not sooner. Through purchasing miners in a distressed, oversupplied market, and through entering into hosting agreements, such as the previously executed Foundry deal, we think we can grow hashrate in a highly capital-efficient manner.

Speaker 5: Finally, on the cost side, we have also made progress in materially reducing expenses across our business.

During the fourth quarter of 2022, we began to see the benefits of these initiatives in our financials.

as our cash G&A expense is now trending below 20 million on a run rate basis.

Last quarter, we successfully completed planned outages at both our scrubgrass and panther creek plants, which represented the last of the major planned investment cycle. We expect to see more consistent and reliable power generation moving forward at both facilities and have been pleased with the post outage performance so far.

We began to realize the benefits of the investments that were made during the fourth quarter and continue to believe that we will achieve an estimated net cost of power of $45 to $50 per megawatt hour in the first quarter of 2023 based on our results and performance to date.

We've also been able to generate value from selling beneficial-use ash, a byproduct of our cold rough-use-to-energy process, to offset expenses.

In 2022, we realized a benefit of approximately $300,000, of which $200,000 came in the fourth quarter.

from a combination of incremental revenue and avoided disposal costs via sales and the beneficial use ash.

Ash is an end-flood business revenue stream that we expect to grow further and realize the benefit of at least $1 million during 2023.

Moving to slide five, as I mentioned, we believe that the vertically integrated model is working and continues to prove its value.

The optionality of the self pilot to the grid provides a natural hedge for Bitcoin mining economics.

which we saw over the summer and during the fourth quarter. Additionally, our model provides the ability to sell to the grid when power prices spike.

and lower plant output to import from the grid when power prices are below our available cost of generating power.

We have realized benefits doing both in just the last few months. During the fourth quarter, as Bitcoin prices continue to slump, we showcase the benefits of owning our own power plants and how our power market optionality provides us with strategic advantages over our peers.

During the quarter, we experienced two extremes, record high PGM power prices in December and record low Bitcoin hash price in November . And we're able to flexibly shift between selling power to the grid and using our self-generated power to mine Bitcoin.

Between December 23rd and December 25th, Winter Storm Elliott dictated that PGM declare a state of emergency. On the morning of the 23rd, we proactively shut down our Bitcoin mining operations and sent power to an extremely supply-constrained grid for the next several days.

helping to balance the grid, and benefiting consumers.

the grid and benefiting consumers. During this period

we realized grid prices in excess of $1,000 per megawatt hour, more than 10 times what we would have made if we converted that power into Bitcoin.

because we were able to deliver power when other generators could not.

More recently, we have experienced grid pluses below $20 per megawatt hour and even negative at times in March, and there's lowered plant output to realize savings versus available costs to generate power.

The chart on the right of the slide highlights how we can adjust our operations depending on power prices and hash price to optimize revenues with our vertically integrated model.

Let's move to the next slide. As I mentioned earlier, we spent the last seven months taking our debt from nearly $150 million to $60 million through a series of transactions with our lenders and debt holders. First, in August , we completed the extinguishment of approximately $67 million in debt associated with our NYDIG equipment financing.

via the return of approximately 26,000 Bitcoin miners. Also in August , we eliminated about 11 million of convertible notes by re-striking approximately 6 million words.

In October , we converted our White Hawk equipment financing with a 13-month tenor into a first lien note with a 36-month term and upsized its financing by $23 million.

This February , we completed the exchange transaction with our convertible note holders.

to convert about $18 million of debt and accrued interest into convertible preferred stock.

Finally, also in February , we amended our White Hawk note postponing mandatory amortization until July 2024 and significantly loosening the financial covenants for 2023 and 2024 to strengthen the company's ability to withstand industry pressure through the habit.

As a result of these transactions, we have now successfully restructured nearly our entire balance sheet to make Stronghold more resilient and provide a platform to focus on accretive opportunities.

Moving to slide 7, our enhanced liquidity position and improved cost structure gives us the flexibility to manage through this down cycle and the opportunistic but disciplined and growing our minor fleet without additional leverage.

Today, Stromhold's Bitcoin mining fleet totals almost 30,000 miners with hashrate capacity exceeding 2.6 exahash per second.

4,500 of these miners associated with a definitive hosting agreement we signed with Foundry in November with total hash capacity of approximately 420 petahash per second.

Since then, we've expanded our partnership and signed a two-year hosting agreement whereby Islandry will fully participate in our vertically integrated business model.

While hosting is not a core focus, this unique agreement is highly beneficial for stronghold and demonstrates our ability to creatively increase hashrate without significant capital investments.

The hosting agreement allows us to quickly plug miners into our Panther Creek data center with no material capex.

This hosting deal and potentially other similar hosting deals offer us a natural pathway to fill a small portion of our open slots while we continue to thoughtfully pursue purchasing wholly owned miners.

Finally, an update on Minerva. We previously announced they should expect no additional deliveries from Minerva because of the uncertainty at the time.

However, Minerva supplied to the upside and we recently announced that they have now fulfilled approximately 85% of our initial order from 2021, leaving only 230 petahash per second remaining to be delivered.

And after a significant effort by our operations and engineering teams, we believe that miners received from Minerva are now performing largely in line with manufacturer expectations.

With that, I'd like to pass it over to Matt Smith for a financial update.

Thanks, Greg. I'll start with a review of our fourth quarter and full year 2022 results. Keep in mind that our fourth quarter results are impacted by two extremes, record high PJM power prices in December and record low Bitcoin hash price in November .

Revenue for the fourth quarter was $23 million, a 38% increase compared to $17 million in the same quarter a year ago. During the fourth quarter of 2022, our energy segment had approximately $15 million of revenue.

We also mined almost 450 Bitcoin with total mining segment revenue of approximately 8 million

For the full year, revenue was $106 million, an increase of well over 200% compared to $31 million in the prior year.

During the fourth quarter, we began to realize the benefits of the investments and planned maintenance events that were made at our ScrubRass and Panther Greek plants to improve plant efficiency and reliability.

This was especially true and on display during the period of December 23rd through the 25th when many plants in PJM were unable to deliver power to the grid when called upon.

Adjusted EBITDA during the quarter was approximately 5.2 million compared to approximately 0.3 million in the same quarter a year ago and negative 3 million in the third quarter of 2022.

It is important to note that the company's intense focus on cash cost reductions began to materialize in the fourth quarter. During the quarter, we continued to operate in an environmentally beneficial way, removing approximately 295,000 tons of coal refuse from piles and returning approximately 173,000 tons of beneficial ash.

beneficial use ash to remediate these toxic coal piles.

Moving on to slide 9 to discuss a fresh look at guidance for the next 12 months.

you will find that the drivers of our cash flow have shifted from our prior guidance and yet our Guidance is quite similar to what we previously communicated

When we last provided guidance, power prices were more attractive than Bitcoin mining economics. Since then, forward power prices have fallen, but hash price has risen.

and we now expect to exit the year at 4 exit hash instead of 3. This illustrates the strength of our business model.

It is important to note that our hash rate guidance does not include 25 megawatts of owned end-to-end data center infrastructure, including 20 of our proprietary strongboxes, transformers, breakers, and switchgear that are currently in inventory waiting to be deployed. This is almost one exa-hash of upside to our current guidance.

I will now turn the call back over to Greg for closing remarks.

Thank you, Matt. In summary, we believe that we have made significant progress on our strategic plan to enhance liquidity, improve operational efficiency, opportunistically build our mining fleet, and ultimately maximize shareholder value.

Our vertical integration and power market optionality continues to provide us with strategic advantages over many of our peers.

as does our data center infrastructure that is fully built out with additional slots open.

With that, operator, let's open the call up for questions.

And thank you. And one moment, please. As a reminder to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. And one moment for our audience.

First question. And our first question comes from Chase White from Compass Point Research and Trading LLC.

Thanks, good morning guys. Just curious, your fuel costs were like 60% of what they were in the third quarter and the prior quarter. I'm trying to understand what drove that down so much. Was there a one-time credit or something? Then I have a follow-up. I'm trying to understand what drove that down so much.

Sure, it's good morning. So it were a combination of things. Rec prices moved up considerably over the course of the fall into the winter. 2nd, you know, annually receive our waste coal tax credits once a year. And so you, we earned, we earned those over the course of 2021.

We spent a lot of time on fuel mix and optimizing it as we went through the outages.

And as you know, 2022 was rampant with inflation throughout the supply chain, including diesel, ammonia, which drove up most of our input costs that we suffered from over the course of the second quarter. And as we moved out of the second and third quarter, we started to see some of the normalizing of diesel.

ammonia, other costs flow through, and that led to a pretty meaningful

improvement in costs over time over the course of the fall into the early 2023 period. We think that fuel costs will be down considerably in 2023 over 2022, the magnitude of which is yet to be determined, but there will be a next improvement. We think there will be...

Almost in every line item, we've seen costs start to trend in the right direction for us. And so we're optimistic about fuel costs in 23. Rex remained elevated. The tax credits, the plants ran much more in 2022 than in 2021, and so our tax credit in 2023, receipt will be up considerably from 2022.

And so most things are going in our favor in fuel costs in 2023. Got it, very helpful. And then, you know, with things now moving in the right direction, I mean, do you guys expect to start holding Bitcoin again, building that up on the balance sheet, or are you still kind of at the point where you need to be selling virtually all of it in order to ensure...

agreement and so we can either deliver power at our price or we can impact our cost or we can import and it's an optimization of cost of energy.

And right now, obviously, with power prices off, it makes sense to convert as many electrons as we can that we're making or importing and maximizing our data center consumption of electricity and money for Bitcoin. We're converting to Bitcoin. Revenue for Bitcoin is $90-$100 per megawatt right now. Far in excess of that.

largely come to an end. And so we have been radably, you know, over the course of the fall and into the winter, you know, as we're working through these material deleveraging events, trying to get our balance sheet in the right place and cutting costs, you know, it made sense to radably monetize our Bitcoin.

and convert it to USD. And so we avoided significant depreciation in the price of Bitcoin last year with that method. We continue to vigilantly manage leverage and optimize for liquidity. And so I think we're going to continue to take a balanced approach on having enough cash around to...

to fund the business. Right now we're in the market negotiating to fill out data centers as we described in our press release and the best hedge we have for that is to hold some Bitcoin. If minor prices were to go up, which we have not seen yet, but if minor prices were to increase, holding Bitcoin is a nice hedge for that.

And so we have, I would say we've held a little bit more Bitcoin, a little bit longer as we've moved out of the nadir of the fall into this 2023 period. But I still expect that we're going to take a balanced approach and monetize radably just maybe over slightly longer holding periods.

Thank you. Thank you.

And one moment for our next question.

And our next question comes from Chris Benler from DA Davidson. Hi, thanks and congratulations on the success here. It's pretty impressive. I wanted to basically follow up on Chase's question about expenses in terms of the mining operations and power sales.

We have sort of quite lowered than we expected. On the fuel side, it didn't look like there was any one-timers or any significant one-timers in operation and maintenance this quarter. So I'm calculating close to a 50% non-gap gross margin. I just wanted to know, what did that look like in the first quarter? I imagine it won't be quite as high. And maybe if you just talk about some of the puts and takes there. Thanks. Sure. Thank you.

and towards our favor. And so that was a key piece. Every line item, the cost started to turn down.

fuel costs. O&M was a step function improvement in the fourth quarter of the third quarter. Part of that is a function of outages in the third quarter, and part of that is a function of improved fixed cost amortization in the fourth quarter. And so I guess the good thing is those trends continue to be a tailwind into the first quarter in terms of the absolute level of those costs.

Power prices came off obviously. We're a price taker. And so gross margins obviously compressed into the first quarter with power. But a pretty material offset has been the expansion of hash price and Bitcoin price as we've moved into 2023. We're not going to give you know.

first quarter guidance today on the call, but you know, we're glad that the business model has the flexibility to, if it doesn't make sense to sell power, to convert it to Bitcoin and we're glad we have the flexibility to import electricity instead of make it.

which give us a pretty good buffer with our gross margins. And that's going to be pretty constructive, we think especially relative to peers as we go through 2023.

Okay, that's helpful, Color. So a related question, I like the way, as we think about the trade-off between mining and selling power, I think you were giving some converted metrics, like what kind of Bitcoin price we're looking at in terms of where that line is. I don't know if I missed it this quarter, but can you talk about...

Given the extreme volatility, I think we've seen in power prices, like where's the Bitcoin equivalent today and what does it look like on the forward curve?

Go ahead. Go ahead. Go ahead. I think just just I know everyone sort of speaks in Bitcoin that's probably seen this call sort of convert Bitcoin to power. You know, an efficient machine will make more than $100 a megawatt hour equivalent.

And so obviously it takes pretty high power pricing, pricing to power more than $100 a megawatt to want to divert power back to the grid. At the same time, our cost of power as we've disclosed is now well below $50 a megawatt power. Even when we're running the plants.

We can make a healthy margin on those efficient machines. The benefit we see today is that if you look at like PGM pricing like right now as I'm speaking, it's below $20 a megawatt hour. So we think that's a cost advantage that few other miners would have. So as we've talked about in cases like now, we have...

We're focused not on making power but on buying it at that cheap price from the grid and converting it to Bitcoin. So when prices are super high, or I think above $100 a megawatt, expect us to sell to the grid. When prices are low, expect us to buy. And then there's obviously the cases in between.

Ironically, a little bit, one of the impacts that we see over the immediate, medium, and definitely long term is the impact of renewable energy installations into PGM, our grid, is having the effect of increasing pricing.

During some periods and decreasing it in others. So it's like we're creating a grid that is

that is a little bit less stable because we're taking out what you'd call base load fossil fuel plants and replacing them with intermittent

solar and wind assets. So when power is cheap it can even go negative.

So we're in a great position to take advantage of what is quickly becoming the new reality in the power market. And hopefully we'll have others agree with us that this is a really valuable option. That's a fun way to answer a question.

That's great, Connor. Thank you. I guess I'm surprised and pleased to see the progress with minor VA and Minerva and how you've almost gotten all the value out of that contract. You mentioned that they're performing largely in line.

Is there a significant difference between the rest of your fleet and those machines in terms of efficiency and uptime? Or is it actually pretty close? They still lag a little bit. I think if you think about the Minerva deliverance.

the first batch that we got was really the disastrous batch. And that the uptime with those early machines was low. We had problems with the power supply units that they sent.

And I think if you were to grade Minerva on the later deliveries, their performance is more in line with what we would expect from a sort of more seasoned manufacturer. And also, I think credit to our own engineering team. We've sorted out what the In the studio,

ticks are for the machines and can now get them to be a little bit higher. So I think overall, the performance would say is pretty close to what was originally going to be.

expected, I would say, that are in line with those expectations. But I think it took a little more work to get there. Thanks so much and congrats on the progress.

Thanks. And thank you. And one moment our next question.

And thank you. And one moment, our next question.

One moment, please. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by. We will compile a Q&A roster. Thank you.

Okay.

And one moment for our next question.

And our next question comes from Lucas Pike from B Riley. Your line is now open.

Yeah, thank you operator. This is Nick calling in for Lucas. Appreciate all the color so far. I think most of my questions have been answered, but you noted building the fleet through purchases of distressed rigs and was just hoping to get some color on kind of where you see pricing today.

Have you seen prices tick up with the recent BTC recovery or is kind of the oversupply holding holding prices at the lower levels? Yeah, so hey Lucas, our next, sorry, with regards to Lucas, we haven't seen prices return to, you know, they're anywhere near their prior levels, you know, we would just describe them as the market is still oversupplied.

with miners and I would say, you know pricing hasn't fallen further, but I would say it's stabilized at the moment level.

But yeah, I think it's those that have the means to pay for minors, it's still all you need to say for them if you want them.

Great, great. Greg, that's really helpful. And maybe just one follow-up on that. Would you be looking at a similar miner that you have in the fleet today, call it an S19J Pro, or would you be looking for something more like an S19XP where you might realize some more power efficiency? You know what, I think – Not…

The XP's haven't been that interesting to us. They're still expensive on a per-tier hash basis relative to what we think the value is versus the from the other also more efficient machines. I think what we're really focused on is the value of the XP.

And you should be too, is if you understand the leverage in our model, getting to 4X a hash is important to us. We can dramatically increase cash flow by refilling our data centers. And we have all this infrastructure, power plants, all the infrastructure, and we fully built our data centers. And so we're now carrying a

We have a cost that reflects the ability to house four exahash of data centers, data center miners, and we're only at 2.6 exahash today. So it's just the incentives and the accretion by filling data centers are so strong.

They were mostly focused on, hey, just get it filled. And then the secondary question is, can we get it filled with as efficient a minor as possible? And we think we will be able to do that. So I think not quite XPs, but close is would be the answer on what we're looking at right now.

Got it. Well, that's very clear. So thanks again and continue best of luck.

Got it. Well, that's very clear. So thanks again and continue best of luck. Okay, thank you.

And thank you. And one moment for our next question. And our next question comes from Kevin Deedy from HC Wainwright. Your line is now open. Thank you, gentlemen. Greg, and I know you guys have done a great job sort of looking at the

per megawatt.

per megawatt threshold that...

sort of suggests your opportunity to buy power versus mine. And then how would you suggest we look at that going forward given sort of the downturn in the power curve? And then how do you evaluate that time it takes to get to that point?

to wind the plant down and then spin it back up again? Sure, so I would just set the table by saying that we were price takers in the power markets.

and that comes with a fair amount of volatility. And so there are always going to be opportunities like there were last summer, like there were over the course of the winter to capture that pricing convexity, that upside. And that's why you invested the plans so that when you want to capture that and deliver power to the grid and reliability to the grid, you can do that reliably.

And, excuse me, when you think about the forward curve as price takers, the forward curve is between $40 and $45.

our pricing nodes within BJM over the course of the next 12 months. And so that means, you know, embedded in that are going to be peak hours in July and August and December , January , February of the winter, sort of end of 23 into 24, you're going to have times where you're selling as much power to the grid as possible.

April , May, and June , September , October , November , those are the shorter months where seasonally demand collapses relative to the summer and winter and the power markets loosen. So we're at the very beginning of what looks to be an incredibly loose power market in April , May, and June . We're at the very beginning of what looks to be an incredibly loose power market in April , May, and June . So we're at the very beginning of what looks to be an incredibly loose power market in

And so we expect to be able to import purchase power at a very low price. The forward power curve is currently I think high 20s, low 30s as we move into the shorter months.

the last week and a half we've been capturing price that's you know half that You know for a big chunk of each day And so we actually think that we're optimistic about the ability to import power and lower our variable cost lower our Overall cost of power over the next you know three months and then in the shorter

But we still want to be prepared and able to deliver power to the grid when the power is called for via price during those peak seasonal periods. And so for us, we're in the energy arbitrage business. We want to be able to have the lowest possible cost, and we have the ability to have two different revenue sources and optimize. And that will continue to be the case. For more information, visit www.fema.gov

Yeah, I think there's one thing to add. When the plants are running, because power prices justify it, we have the ability to very quickly, literally within a few seconds, divert power to the grid by shutting down the data centers. So, that is – I think it's a more lengthy process to go from dark power plants to turn them on.

But once the plants are on, we can easily and quickly divert that power to the grid within seconds, which we've applied for and received our designations from the grid oscillator demonstrating that we have the ability to do that within seconds, which is a very stabilizing...

or tool for the grid to have access to that power. So I think you don't think about it as just a binary option. It's a multi-way option. It's a multi-way option.

on power. High power pricing gives us a great opportunity. Low power pricing is a great opportunity. And then because we can toggle that data center on and off, we can take advantage of that in between as well.

both high power pricing gives us a great opportunity, low power pricing is a great opportunity, and then because we can toggle that data center on and off, we can take advantage in between as well.

It's happening, like looking backward, the grid on a go forward basis isn't the same grid that we saw years ago. The trillions of dollars of infrastructure bill spending is making it into our national power grid and it's causing for higher power pricing.

on one end at certain time frames and lower power pricing at the other end. So in a way, our plants are perfectly situated for that environment that we're entering, given the modifications in power infrastructure that we have. The solution for the grid would be to install an industrial-scale battery.

Yeah, no, no, no. I was sort of looking at it from an operating perspective as well, right? Understand that.

I don't know, I was sort of looking at it from an operating perspective as well, right? To understand that that's a lot of heavy equipment.

to turn on and off when you're burning coal and creating steam and running the turbine. So I guess what I was wondering is how you factor that in. So Matt's alluded to a power curve that looks really beneficial for buying power. So my takeaway is hey, shut the power plants down.

Right? If you're not going to need them until summer peak months, right? Do you just go cold? Yeah, I think that's what you can expect. We may end up running, you know, it's not, it's almost that simple, but because we have something called demand charges and we have the need to sell more power to the grid than we buy from it across two plants.

there are nuances to that answer, but yeah, a generality is yes. If over the next, you know, period of time we're expecting power prices to be in the 20s, it makes sense to to shut them down and to buy power.

With the caveat being, hey, there might be situations where...

We need to make power to quote net out and deliver more power that we're consuming. And that would that could end up saving us more on a net basis than just buying buying power in that way, which is as a generator, it's unique to us. I think a lot of a lot of Bitcoin miners are under PPAs that don't have this kind of flexibility. And.

You know, we probably aren't as transparent as we are in terms of what the net power costs are, given our costs we can describe as an all-in basis, includes transmission, includes taxes, includes fees that others might not be disclosing.

So I think, you know, if you were to study us over a period of time, I think you would be determined that we have to have among the lowest cost.

if you were to study us over a period of time, I think you would determine that we have to have among the lowest cost of power of any miner.

Given our asset base. Okay, fair enough.

You've alluded to having maybe 14,000 to 15,000 plugs available. I'm wondering how you might characterize Foundry's appetite and whether or not we might expect them to go from...

You know the 4500 miners you said they've deployed with you to using more of those plugs

4500 miners you said they've deployed with you to using more of those plugs or

How, I guess, how should we think about your timeline to purchase given your four X to hash target? Yeah, so I think the guidance that we're giving is toward the end of the year. That will have it, we'll have the data center full, but it was certainly, I don't want to look at McKinney.

any comments on any other minor on whether they're going to host with us, expand on what's or not, that's sort of bad for them. They should answer their own questions as to what they want to do. We, you know, it's publicly known that these slots are available, and we intend to fill them. If we can fill them, you know, there are a variety of ways to do that.

One is just to go buy the miners. A second would be to do a hosting deal like we've done with Foundry. A third could be a blended deal. We could say do a miner for equity exchange.

And, you know, probably a variety that I'm not even mentioning here in between. But I think it's a, to have the slots empty.

conjunction the slots being empty with our low cost of power, expect them to be filled.

By the end of the year, that's what we aspire to do. Fair enough, Matt mentioned an additional 25 megawatts. Is that at, uh. Is that a Panther complete inventory ready to power?

or supply another 25 watts from megawatts for mining? Yes, so I think what we're referencing there is we don't have room for that 25 megawatts at our existing data centers. So we're looking at a variety of...

of options as to where to put those megawatts. So the fully funded part is we have the transformers, the containers, the switch gear, sort of it's a, it would be a small amount of CapEx to be able to install that data center given we have the CapEx heavy part of the.

the cost already in our possession, you know, unencumbered. But we are not ready yet to...

to state where the, that's what that megawatts will come from. Sure enough, I'm going to press you a little bit more on that Greg. Your, your next 12 months.

Forecast looks favorable, right, from an adjusted EBITDA perspective. It seems to me that, given you've worked really hard to de-lever, our

How would you consider adding a third power plant? Which I seem to remember was part of Stronghold's original plan, I think going back to 21.

No, we obviously right now, we have no interest in re-leveling the balance sheet, so do not put that in any model. We're going to stay. I wasn't going to go there. I just wanted to know how you thought about it. Yeah. I think what you would expect is, hey, there are a number of...

Bitcoin mining operations that got halfway done that you know maybe entered into or got close to entering into power purchase agreements you know even in our own neighborhood which is probably why we want to stay. You know so to expect us to and to have that 25 megawatts at a site that we don't own.

where we buy power on maybe a subcontracted basis from either another miner or from a power producer. It's really a, you know, it would be significant for us to go from 4x to 5x. So we're focused on that.

But we're not going to buy another power plant to do it. We think there are opportunities in our neighborhood to plug that infrastructure in and just buy the power.

but we're not going to buy another power plant to do it. We think there are opportunities in our neighborhood to plug that infrastructure in and just buy the power.

It'll probably cost us more than if we were to make it ourselves owning the plant, but that's not a...

probably it'll probably cost us more than if we were to you know make it ourselves owning the plant but that's that's not a that's not going to happen this year.

Okay, thank you. Thanks for entertaining my questions. Appreciate it. No, thank you. Thanks for your interest.

And thank you. And if you would like to ask a question, that is star 11. Again, if you would like to ask a question, that is star 11.

And I am showing no further questions. At this time, this concludes our question and answer session. I would now like to turn the call back over to Mr. Beard for closing remarks.

Great. So hey, thank you investors. Thank you analysts for your interest. And we've had a, you know, 2022 was an extremely painful year for the company. You know, we set ourselves up to survive.

through all of these...

Restructuring the data with our lenders, we're thankful to them as well. In addition, just one of our vendors. So. We are, I'm happy to say that we are through the woods here. And have a lot of upside to our model. There's a lot of accretion that we can have with the Glith activities that we're working on, and we look forward to the posting the market.

Also, hey, thank you to our teams at the power plants, at the data centers, from the finance team. Thank you to my partner, Bill. So we're happy that we will have sunnier skies ahead here, and we are positioned to take advantage of it. So thank you, everyone. You can watch the entire show from anotherrie.org and take pride in the other level of security,

Thank you for joining us today for Stronghold Earnings Call. You may now disconnect.

Qu.

Good morning and welcome to Stronghold Digital's mining conference call for the first fourth quarter and full year and in December 31st 2022. My name is Justin and I will be your operator this morning.

Before this call, Stronghold issued its results for the fourth quarter and full year 2022 in a press release, which is available in the investor section of the company's website at www.strongholddigitalmining.com. You can find the link to the investor section at the top of the homepage.

Joining us on today's call are strongholds co-chairman and CEO Greg Beard and CFO Matt Smith. Following their remarks, we will open the call for questions. Before we begin, Alex Cobstom from Gateway Group will make an introductory statement. Mr. Cobstom, please proceed.

Great, thank you operator. Good morning everyone and welcome. Today's slide presentation, along with our earnings release and financial disclosures were posted to our website earlier today and can be accessed on our website at www.strongholddigitalmining.com. Some statements we're making today are questions or suggestions about the knee John holding up the button. There's a video opportunity below where yourma vegetables are developed and In

may be considered forward-looking statements under securities law and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors, many of which are beyond our control, which could cause actual results and events to differ materially from those described in the forward-looking statements. For more detailed risks, uncertainties, and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release.

and public filings made with the Securities and Exchange Commission. We disclaim any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and the reconciliation tables.

but not limited to risks and uncertainties identified under the caption risk factors in our previously filed quarterly reports on Form 10Q filed on May 16, 2022, August 18, 2022, and November 10, 2022, and are to be filed annual report on Form 10K. You may access strongholds, Securities and Exchange Commission filings for free.

by visiting the SEC website at www.SEC.gov or Stronghold's investor relations website at ir.strongholddigitalmining.com. I would like to remind everyone that this call is being recorded and will be made available for replay via the link available in the investor relations section of Stronghold's website. Now, I would like to turn the call over to Stronghold's.....

co-chairman and CEO Greg Beard. Greg. Thank you, Alex. Good morning, everyone, and thank you for joining us on our fourth quarter and full year 2022 earnings call. For today's call, we are going to reference an associated slide presentation that is available through the webcast and on the IR portion of our corporate website.

I want to start by thanking our employees for their ongoing hard work and dedication to our mission during a difficult time in our markets.

While 2022 was a challenging year for our business and most public Bitcoin mining companies, we believe that we undertook several important steps to survive the downturn in the crypto markets and best positioned strongholds for long-term success. We responded proactively to challenges in both the crypto and power market.

excited about the year ahead.

Let's start on slide three.

As a reminder to everyone on the call, Stronghold owns and operates two waste coal reclamation facilities in Pennsylvania, Scrubgrass and Panther Creek. Over the course of 2022, we removed over 1 million tons of coal refuse from the environment and mined over 2,000 bitcoins.

We are currently at 2.6 exahash of hashrate capacity and have the ability to get to 4 exahash with the already built and ready to use slots at our data centers. Moving to slide 4. Back in August , on our second quarter 2022 earnings call, we outlined a strategy to rapidly de-leather our balance sheet, enhance liquidity, improve efficiency, and opportunistically build our mining fleet to better position strongholds for success.

and ultimately maximize shareholder value. While there is still work to be done, we have made considerable progress on all fronts and believe that we have a robust platform to grow value for shareholders. First, the vertically integrated business model is working. We are constantly looking at good prices and Bitcoin mining economics.

and choosing whether to self-power our Bitcoin mining operations, sell power to the grid, or import power from the grid to power miners when grid pricing is lower and our available cost of power. As I will further elaborate, just in the last few months, we have realized significant benefits from both selling power to the grid and buying power from the grid. Moving on to our balance sheet.

We recently completed a seven month process of restructuring virtually every piece of material debt on our balance sheet. Since June of 2022, we have reduced our debt by nearly 60% to 60 million, which we believe is a manageable level in the context of our cash flow expectations. We also have no mandatory amortization until July 2024, which has enhanced New York's for liquidity and flexibility.

With the restructures behind us, we are now laser focused on scaling and optimizing our Bitcoin mining operations at each of our data centers. We are raising our hashrate guidance back to 4x a hash and believe that we will be there by the end of the year, if not sooner.

through purchasing miners in a distressed, oversupplied market, and through entering into hosting agreements, such as the previously executed Foundry deal, we think we can grow hashrate in a highly capital-efficient manner.

Finally, on the cost side, we have also made progress in materially reducing expenses across our business.

We have done this through a combination of completing several one-time projects and right-sizing our business through insourcing certain functions and improving overall efficiency to adjust to the current market environment. During the fourth quarter of 2022, we began to see the benefits of these initiatives in our financials as our cash G&A expense is now trending below $20 million on a run-rate basis.

Last quarter, we successfully completed planned outages at both our scrubgrass and Panther Creek plants, which represented the last of the major planned investment cycle. We expect to see more consistent and reliable power generation moving forward at both facilities and have been pleased with the post outage performance so far.

We've also been able to generate value from selling beneficial-use ash, a byproduct of our coal rough use to energy process, to offset expenses. In 2022, we realized a benefit of approximately $300,000, of which $200,000 came in the fourth quarter, from a combination of incremental revenue and avoided disposal costs via sales of the beneficial-use ash.

ASH is an end-flare business revenue stream that we expect to grow further and realize the benefit of at least $1 million during 2023. Moving to slide five, as I mentioned, we believe that the vertically integrated model is working and continues to prove its value.

The optionality to sell power to the grid provides a natural hedge for Bitcoin mining economics, which we saw over the summer and during the fourth quarter. Additionally, our model provides the ability to sell to the grid when power prices spike and lower plant output to import from the grid when power prices are below our variable cost of generating power.

We have realized benefits doing both in just the last few months.

During the fourth quarter, as Bitcoin prices continue to slump, we showcase the benefits of owning our own power plants and how our power market optionality provides us with strategic advantages over our peers. During the quarter, we experienced two extremes, record high PGM power prices in December and record low Bitcoin hash price in November .

and we're able to flexibly shift between selling power to the grid and using our self-generated power to mine Bitcoin. Between December 23rd and December 25th, Winterstorm Elliott dictated that PGM declare a state of emergency. On the morning of the 23rd, we proactively shut down our Bitcoin mining operations.

and sent power to an extremely supply-constrained grid for the next several days, helping to balance the grid and benefiting consumers. During this period, we realized grid prices in excess of $1,000 per MWh, more than 10 times what we would have made if we converted that power into Bitcoin, because we were able to deliver power when other generators could not.

More recently, we have experienced grid prices below $20 per megawatt hour and even negative at times in March, and there's lowered plant output to realize savings versus available costs to generate power. The chart on the right of the slide highlights how we can adjust our operations depending on power prices and hash price to optimize revenues with our vertically integrated model.

Also in August , we eliminated about 11 million of convertible notes by re-swiping approximately 6 million words.

In October , we converted our White Hawk equipment financing with a 13-month tenor into a first lien note with a 36-month term and upsized its financing by $23 million. This February , we completed the exchange transaction with our convertible note holders.

to convert about $18 million of debt and accrued interest into convertible preferred stock. Finally, also in February , we amended our White Hawk note postponing mandatory amortization until July 2024 and significantly loosening the financial covenants for 2023 and 2024 to strengthen the company's ability to withstand industry pressure through the habit.

As a result of these transactions, we have now successfully restructured nearly our entire balance sheet to make Stronghold more resilient and provide a platform to focus on accretive opportunities. Moving to slide 7.

Our enhanced liquidity position and improved cost structure gives us the flexibility to manage through this down cycle and the optionistic but disciplined in growing our minor fleet without additional leverage.

Today, Stormhold's Bitcoin mining fleet totals almost 30,000 miners with hashrate capacity exceeding 2.6 exahash per second.

4,500 of these miners associated with a definitive hosting agreement we signed with Foundry in November , with total hash capacity of approximately 420 petahashes per second. Since then, we've expanded our partnership and signed a two-year hosting agreement whereby Foundry will fully participate in our vertically integrated business model. While hosting is not a core focus.

This unique agreement is highly beneficial for stronghold and demonstrates our ability to creatively increase hashrate without significant capital investment. The hosting agreement allows us to quickly plug miners into our Panther Creek data center with no material capex.

This hosting deal, and potentially other similar hosting deals, offer us a natural pathway to fill a small portion of our open slots while we continue to thoughtfully pursue purchasing wholly owned miners. Finally, an update on Minerva. We previously announced that you should expect no additional deliveries from Minerva.

because of the uncertainty at the time. However, Minerva supplied to the upside, and we recently announced that they have now fulfilled approximately 85% of our initial order from 2021, leaving only 230 petahash per second remaining to be delivered. And after significant effort by our operations and engineering teams, we believe that miners received from Minerva are now performing largely in line with manufacturer expectations.

With that, I'd like to pass it over to Matt Smith for a financial update. Thanks, Greg. I'll start with a review of our fourth quarter and full year 2022 results. Keep in mind that our fourth quarter results were impacted by two extremes.

record high PJM power prices in December , and record low Bitcoin hash price in November . Revenue for the fourth quarter was $23 million, a 38% increase compared to $17 million in the same quarter a year ago. During the fourth quarter of 2022, our energy segment had approximately $15 million of revenue.

We also mined almost 450 Bitcoin with total mining segment revenue of approximately 8 million. For the full year, revenue was 106 million, an increase of well over 200% compared to 31 million in the prior year. During the fourth quarter, we began to realize the benefits of the Bitcoin market.

of the investments and planned maintenance events that were made in our Scrubgrass and Panther Creek plants to improve plant efficiency and reliability. This was especially true and on display during the period of December 23rd through the 25th when many plants in PJM were unable to deliver power to the grid when called upon.

Adjusted EBITDA during the quarter was approximately 5.2 million compared to approximately 0.3 million in the same quarter a year ago and negative 3 million in the third quarter of 2022. It is important to note that the company's intense focus on cash cost reductions began to materialize in the fourth quarter. During the quarter, we continued to operate in an environmentally beneficial way Again, our understanding of the consistent costs descendants had earned were diminished. denominator

removing approximately 295,000 tons of coal refuse from piles, and returning approximately 173,000 tons of beneficial-use ash to remediate these toxic coal piles. Moving on to slide 9 to discuss a fresh look at guidance for the next 12 months.

you will find that the drivers of our cash flow have shifted from our prior guidance and yet our guidance is quite similar to what we previously communicated. When we last provided guidance, power prices were more attractive than Bitcoin mining economics.

Since then, forward power prices have fallen, but hash price has risen, and we now expect to exit the year at 4 exit hash instead of 3.

This illustrates the strength of our business model. It is important to note that our hash rate guidance does not include 25 megawatts of owned end-to-end data center infrastructure, including 20 of our proprietary strongboxes, transformers, breakers, and switchgear.

that are currently in inventory waiting to be deployed. This is almost one exa-hash of upside to our current guidance. I will now turn the call back over to Greg for closing remarks.

Our vertical integration and power market optionality continues to provide us with strategic advantages over many of our peers, as does our data center infrastructure that is fully built out with additional slots open. With that, operator, let's open the call up for questions.

And one moment for our first question. And our first question comes from Chase White from Compass Point Research and Trading, LLC. Thanks.

Morning guys, so just curious. I mean your fuel costs were like 60% of what they were in the 3rd quarter and the prior quarter. So, trying to understand what drove that down so much. And was there like a 1 time credit or something? And then I have a follow up. Sure. Hey, Chase. Good morning. So, it were a combination of things.

Rec prices moved up considerably over the course of the fall into the winter. Second, annually we receive our waste coal tax credits once a year. And so we earned those over the course of 2021. You receive them in the fourth quarter of the next year. And so we received the waste coal tax credits during the course of the fourth quarter.

Similarly, in 2023, we will receive the waste coal tax credits again kind of towards the fourth quarter. But then additionally, we spent a lot of time on fuel mix and optimizing it as we went through the adages. And as you know, 2022 was rampant with inflation throughout the supply chain, including diesel, ammonia, which drove up most of our input costs that we suffered from over the course of the second quarter.

And as we moved out of the second and third quarter, we started to see some of the normalizing of diesel, ammonia, other costs flow through. And that led to a pretty meaningful improvement in costs over time over the course of the fall into the early 2023 period.

We think that fuel costs will be down considerably in 2023 over 2022, the magnitude of which is yet to be determined, but there will be a mixed improvement. We think there will be.

And so most things are going in our favor in fuel costs in 2023. Got it. Very helpful. And then, you know, with things now moving in the right direction, I mean, do you guys expect to start holding Bitcoin again, building that up on the balance sheet or?

Are you still kind of at the point where you need to be selling virtually all of it in order to ensure you can pay bills? Well every day is an optimization exercise every hour. You don't really want to turn the plants on and off rapidly, but you know we have the ability here to import

at very low prices. We're not locked into a PPA or any sort of power agreement. And so we can either deliver power at our price or we can import at our cost or we can import. And it's an optimization of cost of energy. And right now, obviously, with power prices off, it makes sense to convert as many electrons as we can that we're making or importing and maximizing our data center.

consumption of electricity and money for Bitcoin. Now we're converting to Bitcoin, revenue for Bitcoin is $90 to $100 per megawatt right now, far in excess of where power prices are, so it makes sense to mine optimally. Got it. Thanks, very helpful. Chase, I apologize, and just to sort of follow back up with your question, our capital cycle in 2021 and 2022 has largely come to an end.

And so we have been radably, over the course of the fall and into the winter, as we're working through these material deleveraging events, trying to get our balance sheet in the right place, and cutting costs, it made sense to radably monetize our Bitcoin and convert it to USD. And we avoided significant depreciation of the price of Bitcoin last year.

We're in the market negotiating to fill our data centers as we described in our press release. And the best hedge we have for that is to hold some Bitcoin. If minor prices were to go up, which we have not seen yet, but if minor prices were to increase, holding Bitcoin is a nice hedge for that. And so I would say we've held a little bit more Bitcoin.

A little bit longer as we've moved out of the idea of the fall into this 2023 period, but I still expect that we're going to take a balanced approach and and monetize radically just maybe over slightly longer holding periods. Yeah, thank you.

And one moment for our next question. And our next question comes from Chris Benler from DA Davidson.

I think and congrats on the success here. Pretty impressive. I wanted to basically follow up on Chase's question about expenses in terms of the mining operations and power sales. We have sort of quite lowered than we expected on the fuel side. It didn't look like there was any one timers or any significant one timers in operation and maintenance of the score.

I'm calculating just close to a 50 percent non-gap gross margin. I just wanted to know what does that look like in the first quarter? I imagine it won't be quite as high and maybe if you just talk about some of the puts and takes there. Thanks. Sure. So, I just want to make sure I understand the question. We were flexibly curtailing in the fourth quarter as power prices dictated it and we definitely saw an expansion of gross margin, particularly in December , as power prices rose and our cost of...

cost of energy was moving towards our favor. So that was a key piece. Every line item, the cost started to turn down.

Fuel costs, O&M, I mean O&M was a step function improvement in the fourth quarter over the third quarter. Part of that is a function of outages in the third quarter and part of that is a function of improved fixed cost amortization into the fourth quarter. So I guess the good thing is those trends continue to be a tailwind into the first quarter in terms of the absolute level of those costs. Power prices came off obviously.

We're a price taker, and so gross margins obviously compressed into the first quarter with power, but a pretty material offset has been the expansion of hash price and Bitcoin price as we've moved into 2023. We're not going to give first quarter guidance today on the call, but we're glad that the business model has the flexibility to...

if doesn't make sense to sell power to convert it to Bitcoin and We're glad we have the flexibility to import electricity instead of make it Which which give us you know a pretty good buffer with our gross margins and that's going to be pretty constructive We think especially relative to peers as we go through 2023 Okay, that's helpful color. Um, it's a related question like the way

As we think about the trade-off between mining and selling power, I think you were giving some converted metrics, like what kind of Bitcoin price we're looking at in terms of where that line is. I don't know if I missed it this quarter, but can you talk about, given the extreme volatility, I think we've seen in power prices, where's the Bitcoin equivalent today and what does it look like on the forward curve? So go ahead, Greg. I know everyone sort of speaks in Bitcoin. That's probably seen in this call.

on those efficient machines. The benefit we see today is that if you look at like PGM pricing, like right now as I'm speaking, it's below $20 a megawatt hour. So we think that's a cost advantage that few other miners would have. So as we've talked about, in cases like now, we have, we're focused not on making power, but on buying it at that cheap price from the grid and converting it to Bitcoin.

So, when prices are super high or I think above $100 a megawatt, expect us to sell to the grid. When prices are low, expect us to buy. And then there's obviously the cases in between. Ironically, a little bit, one of the impacts that we see over the immediate, medium and definitely long term, is the impact of renewable energy installations into PGM, our grid.

is having the effect of increasing pricing during some periods and decreasing it in others. So it's like we're creating a grid that is that is a little bit less stable because we're taking out, you know, it's what you'd call base load fossil fuel plants and replacing them with intermittent solar and wind assets. So when power is cheap, it can even go, it can go negative.

And so we're in a great position to take advantage of what is quickly becoming sort of the new reality in the power market. And hopefully, we'll have others agree with us that this is a really valuable option. Long way to answer this question, but there you go. That's great, Connor. Great. Thank you. I'm going to squeeze in one more. I guess I'm surprised and pleased to see the progress with minor VA and I think next week is very exciting.

Minerva and how these you've almost gotten all the value out of that contract. Yeah, you know, you mentioned that they're they're performing largely in line. Is there a significant difference between the rest of your fleet and those machines in terms of efficiency and uptime or is it actually pretty close?

You know, they still lag a little bit. I think if you think about the Minerva deliveries, the first batch we got was really the disastrous batch and that the uptime with those early machines was low. We had problems with the power supply units that they sent. And I think if you were to grade Minerva on the later deliveries, their performance is more in line with what we would expect from a...

a sort of more seasoned manufacturer. And also I think credit to our own engineering team. We've sorted out what the ticks are for the machines and can now get them to be.

a little bit higher. So I think overall the performance would say is pretty close to what was originally

bit higher. So I think overall the performance would say is pretty close to what was originally

expected. I would say they are in line with those expectations, but I think it took a little more work to get there. That's great, Thanks so much and congrats on the progress.

Thanks. And thank you. And one moment for our next question. One moment, please. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced.

To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.

To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. One more moment for our next question.

And our next question comes from Lucas Pike from B Riley. Your line is now open. Yeah, thank you, operator. This is Nick calling in for Lucas. Appreciate all the colors so far. I think most of my questions have been answered, but you noted building the fleet through purchases of distressed rigs, and we're just hoping to get some color on kind of where you see pricing today. For some reason, but maybe not for lack of help.

Have you seen prices kick up with the recent BTC recovery or is kind of the oversupply holding holding prices at the lower levels? Yeah, so hey Lucas, our next, sorry, with regards to Lucas, we haven't seen prices return to, you know, they're anywhere near their prior levels, you know, we would just describe them as the market is still oversupplied.

with miners and I would say, you know, pricing hasn't fallen further, but I would say it's stabilized at the moment levels. But yeah, I think it's those that have the means to pay for miners, it's still all you need to say for them to view if you want them. Great, great, Greg, that's really helpful.

Maybe just one follow up on that. Would you be looking at a similar miner that you have in the fleet today, call it an S19J Pro, or would you be looking for something more like a S19XP where you might realize some more power efficiency? You know what, I think the XP's haven't been that interesting to us. They're still expensive on a ProteoHash base as well, due to what we think the value is versus the other, also more efficient machines.

I think what we're really focused on is – and you should be too – is if you understand the leverage in our model, getting to 4X a hash is important to us. We can dramatically increase cash flow by refilling our data centers. We have all this infrastructure in the power plants, all the infrastructure in the fully built out data centers. And so we're now carrying a cost that reflects the ability to house 4X a hash of data centers.

data center miners and we're only at 2.6x a half today. And so it's just the incentives and the accretion by filling data centers is so strong. They were mostly focused on, hey, just get it filled. And then the secondary question is, can we get it filled with as efficient a miner as possible? And we think we will be able to do that. So I think not quite XPs, but you know.

close is would be the internal word looking at right now. Got it. Got it. Well, that's very clear. So thanks again and continue best of luck. Okay, thank you. And thank you. And one moment, our next question. And our next question comes from Kevin Deedy from HC Wainwright. Your line is now open.

would be the answer on what we're looking at right now. Got it. Got it. Well, that's very clear. So thanks again and continue best of luck. Okay. Thank you. And thank you. And one moment for our next question. And our next question comes from Kevin Deedy from HC Wainwright. Your line is now open. Thank you gentlemen.

Greg and Matt, you guys have done a great job laying out the power profile and the opportunities that you have in different scenarios. I guess what I'm wondering is when you look back over the past, say, 21, 22 operating timeframes, how often have you seen those power prices dip below that sort of $45 to $11,000? Okay.

per megawatt threshold that sort of suggests your opportunity to buy power versus mine? And then how would you suggest we look at that going forward, given sort of the downturn in the power curve? And then how do you evaluate that time it takes to get to that point?

to wind the plant down and then spin it back up again? Sure, so I would just set the table by saying that we were price takers in the power markets.

and that comes with a fair amount of volatility and so there are always gonna be opportunities like there were last summer, like there were over the course of the winter to capture that pricing convexity, that upside. And that's why you invest in the plan so that when you want to capture that and deliver power to the grid and reliability to the grid, you can do that reliably. And, excuse me, when you think about the forward curve as price takers, the forward curve is between 40 and $45.

in our pricing notes within BJM over the course of the next 12 months. And so that means, you know, embedded in that are going to be peak hours in July and August and December , January , and February of the winter, sort of end of 23 into 24. You're going to have times where you're selling as much power to the grid as possible. April , May, and June , September , October , November , those are the shorter months where seasonally demand collapses relative to the summer and winter and the power market solution. So we're at the very beginning.

of what looks to be an incredibly loose power market in April , May, and June . And so we expect to be able to import purchase power at a very low price. The forward power curve is currently I think high 20s, low 30s as we move into the shorter months. The last week and a half we've been capturing price that's half that for a big chunk of each day. So we actually think that we're optimistic about the ability to import power and lower our variable cost.

lower our overall cost of power over the next three months and then in the shorter. But we still want to be prepared and able to deliver power to the grid when the power is called for via price during those peak seasonal periods. And so for us, we're in the energy arbitrage business. We want to be able to have the lowest possible cost and we have the ability to have two different revenue sources and optimize. And that will continue to be the case.

we can easily and quickly divert that power to the grid within seconds, which we've applied for and received our designations from the grid operator, demonstrating that we have the ability to do that within seconds, which is a very stabilizing tool for the grid to have access to that power. So thank you.

I think you don't think about it as just a binary option. It's a multi-way option on power. Both high power pricing gives us a great opportunity. Low power pricing is a great opportunity. And then because we can toggle that data center on and off, we can take advantage in between as well.

Yeah, I just thought I was trying to look at. It's happening, like looking backward, the grid on a go forward basis isn't the same grid that we saw years ago. You know, the trillions of dollars of infrastructure bill spending is making it into, you know, our national power grid.

and it's causing for higher power pricing on one end at certain time frames and lower power pricing at the other end. So in a way, our plants are perfectly situated for that, the environment that we're entering given the modifications in power infrastructure that we have.

The solution for the grid would be to install industrial scale batteries, which is really very polluting and is in that way a great solution. Or you can do things like demand response for big data centers like ours, which is what we think is going to happen more and more. Go ahead, sorry, I interrupted you. Yeah, no, no, no. I was sort of looking at it from an operating point of view.

curve that looks really beneficial for buying power. So my takeaway is hey, shut the power plants down. Right? If you're not going to need them until summer peak months, right? Do you just go cold? Yeah, I think that's what you can expect. We may end up running, you know, it's not, it's almost that simple, but because we have something called demand charges and we have the need to sell more power to the grid.

then we buy from it across two plants. There are nuances to that answer, but yeah, a generality is yes. If over the next period of time, we're expecting the power prices to be in the 20s, it makes sense to shut them down and to buy power.

With the caveat being, hey, there might be situations where we need to make power to quote, net out and deliver more power that we're consuming. And that could end up saving us more on a net basis than just buying power in that way, which is as a generator, it's unique to us. I think a lot of Bitcoin miners.

are under PPAs, they don't have this kind of flexibility. And they probably aren't as transparent as we are in terms of what the net power costs are, given our costs we can describe as an all-in basis and include transmission, include taxes, include transfer fees that others might not be disclosing.

So I think if you were to study us over a period of time, I think you would determine that we have to have among the lowest cost of power of any miner, given our asset base. Okay, fair enough. We've alluded to having maybe 14,000 to 15,000 plugs available.

I'm wondering how you might characterize Foundry's appetite and whether or not we might expect them to go from the 4500 miners you said they've deployed with you to using more of those plugs or how should we think about

Your timeline to purchase given your for X to hash target Yeah, so I think the guidance that we're giving is is toward the end of the year They will have it Will have the data center full, but it was certainly I don't want to make any any comments on any other

on whether they're going to host with us, expand with us or not. That's sort of bad for them. They should answer their own questions as to what they want to do. It's publicly known that these slots are available, and we intend to fill them. If we can fill them, there are a variety of ways to do that. One is just to go buy the miners. A second would be to do a host and deal like we've done with Foundry.

A third could be a blended deal where you could say do a minor for equity exchange. And then probably a variety that I'm not even mentioning here in between. But I think it's to have the slots empty in conjunction with the slots being empty with our low cost of power.

expect them to be filled by the end of the year. That's what we aspire to do. Fair enough. Matt mentioned an additional 25 megawatts. Is that at, is that at Panthor? Complete inventory ready to power or supply another 25 watts from megawatts for mining?

Yeah, so I think what we're referencing there is we don't have room for that 25 megawatts at our existing data centers. So we're looking at a variety of...

to state where that 25 megawatts will come from. Sure enough, I'm gonna press you a little bit more on that, Greg. Your next 12 months forecast looked favorable, right, from an adjusted EBITDA perspective. It seems to me that, I've given you work really hard to de-lever, how would you consider adding a third power plant?

which I seem to remember was part of Stronghold's original plan, I think, going back to 21. No, we obviously right now, we have no interest in re-leveling the balance sheet, so do not put that in the new model. We're going to stay... I wasn't going to go there, I just wanted to know how you thought about it.

Yeah, and I think what you would expect is, hey, there are a number of Bitcoin mining operations that got halfway done that maybe entered into or got close to entering into power purchase agreements, even in our own neighborhood, which is probably where we want to stay. So, to expect us to have that 25 megawatts.

at a site that we don't own where we buy power, you know, on maybe a subcontracted basis from either another miner or from a power producer. It's not, it's really a, you know, it would be significant for us to go from 4x to five. And so we're focused on that, but.

But we're not going to buy another power plant to do it. We think there are opportunities in our neighborhood to to plug that infrastructure in and just buy the power. It'll probably cost us more than if we were to make it ourselves owning the plant, but that's not a that's not going to happen this year. Okay, thank you. Thanks for for entertaining my questions. Appreciate it.

No, thank you. Thanks for your interest. And thank you. And if you would like to ask a question that is star 11. Again, if you would like to ask a question that is star 11. And I am showing no further questions. At this time, this concludes our question and answer session. I'd now like to turn the call to

Restructuring is the deal with our lenders. We're thankful to them as well. In addition, just one of our vendors. So. We are, I'm happy to say that we are through the woods here. And have a lot of upside to our model. There's a lot of accretion that we can have with the GLEF activities that we're working on, and we look forward to the posting the market.

Also, hey, thank you to our teams at the power plants, at the data centers, from the finance team. Thank you to my partner, Bill. So we're happy that we will have sunnier skies ahead here, and we are positioned to take advantage of it. So thank you, everyone. We have a lot of China in the US at least right now.

Thank you for joining us today for Stronghold's Earnings Call. You may now disconnect.

Q4 2022 Stronghold Digital Mining Inc Earnings Call

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