Hut 8 Mining Corp. Q1 2023 Earnings Call

Speaker 1: energy input levels at the site have been causing equipment failures. In response, we began implementing multiple versions of custom firmware across all of our minor models. This firmware is designed to lower the power supply's maximum output voltage, ensuring our equipment operates within safe limits.

Speaker 1: Our teams at both Drumheller and Medicine Hat are actively engaged in repairing damaged equipment and remediating the issues at site. We are actively increasing repair staff, are adding an additional repair center shift, and have procured new hardware to expedite repairs and accelerate the speed at which we bring miners back online.

Speaker 1: At this point, we expect to have the site restored within 10 to 12 weeks. We are closely monitoring the situation and will continue to make the necessary adjustments as needed to restore, safeguard and optimize our equipment. At the same time, our operations team is actively finalizing options to operationalize the bulk of the approximately 7,000 miners.

Speaker 1: that were removed from our North Bay site.

Speaker 1: We were also pleased to report an all-time operating high for our medicine's site of 1.72 Exahash after energizing nearly 1,000 additional miners transferred from our North Bay site. As previously discussed, 428 Bitcoin were sold in Q1 to continue to support our operational costs.

Speaker 1: In addition to managing our operations, we are laser focused on completing our transaction with USPTC and have made solid progress on that front. We recently filed an amended F4 registration statement with the FCC confirming that Newhut's expected installed self-mining capacity will be 7.02 exahash, a nice bump from the 5.6 exahash which we previously disclosed, thanks to energizing additional miners at USPTC's site.

Speaker 1: USPTC entered into a settlement with the City of Niagara Falls in early April , concluding all claims and paving the way to resuming mining activity at the site. We also received a no action letter from the Canadian Commissioner of Competition, which confirms they do not intend to challenge the transaction before the competition tribunal.

Speaker 1: And finally, the waiting period under US HSR antitrust legislation with respect to the business combination expired in early March, which is another step toward closing the transaction.

Speaker 1: Over the past quarter, discussion has increased around the halving, which is now less than a year away. In that context, our business combination with USPTC is a very strategic one. Under new hut, we will create geographic diversity in our self-mining business, which will include differentiated energy sources in Texas.

Speaker 1: for growth in new fiat revenue lines of business, including the 220 megawatt hosting business and 680 megawatt managed infrastructure operations business, with opportunities to amplify it further. I believe that in a post-having world, single-threaded miners are more likely to struggle to stay competitive.

Speaker 1: and will have more exposure to diminishing returns given the continued increase in global hash rate and the expectation that more sovereign nations and large enterprises with deep pockets will continue entering the mining space. We believe that having business lines that are CapEx light and scalable will prove to be a great benefit after the halving.

Speaker 1: Until then, we will continue to strategically grow our sack of Bitcoin. We will also work on capturing increasing HPC market share. This week, we launched vulnerability scanning for current and future customers, which leverages automated tools and techniques to assess and identify potential security vulnerabilities before they can be exploited by hackers.

Speaker 1: We are also focused on growing our HPC customer base in the AI space. Our liquid stack, other GPUs, and additional infrastructure sets us apart from traditional data center peers in this space, and we are able to manage the shorter-term, higher-demand requirements of these unique customers.

Speaker 1: Before I turn it over to our CFO , Shenez Visram, I would like to thank our board for their support and guidance, our executive team for their leadership, our team for their execution across the business, and our investors for their continued commitment to Huddate. Thank you and over to you, Shenez. Thanks, Jamie, and good morning, everyone.

Q1 was a challenging quarter from an operational perspective as we worked through the electrical issues at Drumheller and explored options for our miners that were displaced from our North Bay site due to the ongoing legal disputes.

Both of these had an impact on our Q1 results.

We achieved revenue of $19 million for Q1 2023, a $34.3 million decrease relative to the same quarter prior year of $53.3 million.

The year-over-year decrease was driven by a combination of lower Bitcoin mined and reduction in the price of Bitcoin, which more than offset the incremental contributions from the high-performance computing business we acquired at the end of January 2022.

Revenue from digital asset mining activities was $14.5 million as we mined 475 new Bitcoins.

This compares with $49.3 million of digital asset mining revenue in Q1 2022 when we mined 942 Bitcoin.

The year-over-year reduction in new Bitcoin mined was driven by a combination of impacts of electrical issues at the Drumheller site, resulting in less mining activity.

the completion of GPU mining, which we were doing in Q1 2022, and an increase in network difficulty.

Our high performance computing business contributed an additional $4.5 million of revenue in Q1 2023 compared to $3.3 million in Q1 2022. The increase was due to having one extra month of revenue in the current quarter.

It is worth noting that Q1 2022 revenue included revenue from low-margin products and services that were eliminated during Q2 2022.

Cost of revenue for Q1-23 was $25.2 million, lower than the prior year by $11.7 million.

and consists of depreciation and site operating costs.

The appreciation expense decreased to $10.9 million during the first quarter of 2023, compared to $18.4 million in the same quarter in 2022.

The decrease was due to the lower netbook value of digital asset mining assets after the recognition of the non-cash impairment charge in Q4 2022. This reduction was partially offset by a $1.3 million increase in additional depreciation from the HPC business.

Site operating cost of $14.4 million was lower than the same quarter prior year by $4.1 million.

Within the digital asset mining operation, site operating costs reduced by $4.8 million, mainly due to lower power costs.

The average cost of mining each Bitcoin for the first quarter of 2023 was approximately $25,100 CAD compared to approximately $18,000 per Bitcoin in the prior year for the same quarter.

The increase was due to higher power consumption per Bitcoin mined, increased energy prices, and ongoing electrical issues at the Drumheller facility, which was partly offset by the company's decision to curtail and increase efficiencies in the miners deployed compared to the prior year's same quarter.

We incurred $2.4 million in operating costs related to the high-performance computing operation compared to $1.6 million in Q1 2022 due to the one additional month of operations in the current quarter.

In terms of margins, our digital asset mining operation generated a mining profit of $2.6 million in Q1-23 versus $32.9 million in the prior year's same quarter.

The decrease in mining profits is due to the reduction of Bitcoin price, increased network difficulty year over year, and the ongoing electrical issues at Drumheller.

General and administrative costs were $24.3 million for the quarter, compared to $11.5 million for the same quarter prior year.

The key drivers in the increase was the inclusion of one-time transaction costs in first quarter of 2023 related to the merger with USBTC along with one-time costs related to the decommissioning of our North Bay site.

We recorded net income of $108.5 million for Q1-23 compared to net income of $55.7 million in Q1-22. In Q1-23, we booked a gain on the re-evaluation of our digital assets and the net income of $75.7 million.

of $134.8 million due to the increase in Bitcoin prices since December 31, 2022.

No gain was booked in the same quarter prior year.

Q123 included a loss on the re-evaluation of warranty liability of $0.1 million.

Q1 2022 included a gain of $54.1 million.

Excluding these two items in both periods, net income in the current quarter was $27.7 million lower than prior year same quarter due to the lower revenue from Bitcoin mining and the inclusion of transaction costs related to the US BTC merger.

Reflecting the operating results discussed previously, HUD-8 achieved adjusted EBITDA of negative $3.7 million in Q1-23 compared to a positive adjusted EBITDA of 27.1 in Q1 2022. Our balance sheet remains healthy with minimal debt and a cash balance of 15.5% in Q1 2322.

deserve.

As previously announced, the company will be selling Bitcoin production to help fund operations while we work on closing the merger with USBTC. In the current quarter, while we mined 475 Bitcoin, our Bitcoin held in reserve increased by 47 as the remaining 428 were sold.

Thank you. With that, I will turn the call back to our operator for analyst Q&A. Thank you, Jamie and Sinek. We will now move on to the Q&A portion of the call. If you would like to ask a question, press star then the number 1 on your telephone keypad.

If you would like to withdraw your question, please press star followed by two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. Your first question comes from Mike from H.C. Wainwright. Please go ahead. Good morning. Thank you for taking my questions. Good morning, guys. Thank you.

Nothing. Nothing. It's perfect. Thank you. So… Wait. One more time.

Great, great. Well, yeah, first question for me. You mentioned Drumheller is operating at 15 percent of installed capacity currently. If you could just remind us of the total installed capacity at the site currently and if any portion of your mining fleet has been permanently damaged from the ongoing energy issues at the facility. Okay, I've been ahead of time.

We believe everything will be able to be fully repaired in that 10 to 12 week interval. And the Drumheller site operates at just under 900 petahash at full capacity. Got it. Got it. That's great to hear things back up online in the near term here. I can't tell you that today.

and these new entrants that could come into the space.

Yeah, I mean, I think we've seen new entrants continue to come into the space even during these difficult bear market conditions. We continue to see network hash rate hitting all time highs. And from my perspective, just based on what we're hearing and continuing to see, I think that that hash rate is going.

medium term in particular from the oil and gas sector. So obviously the halving brings a 50% reduction in the block reward and with our expectation that we're going to continue to see new entrants that have lower sensitivity in some cases to operating expenses and in some cases

So obviously, started with our HPC business last year, and USPTC has done a great job building out their hosting business, as well as the new category, which is managed infrastructure operations. So we very much like the optionality the diversification gives us in a post-having world. And as I mentioned, we continue.

to believe in holding our Bitcoin on balance sheet and think that that will continue to be a source of advantage for us as we move past the halving.

Really interesting color. I appreciate your views and good luck with completing the merger here.

Really interesting color appreciate your views and good luck with completing the merger here. Thank you so much. I really appreciate it Mike

Your next question comes from Joseph Baffee from Canaccord..

Hey guys, good morning. Thanks for taking the questions. I was just wondering, going back to comments on cost per Bitcoin, if you could perhaps parse out how much of the electrical infrastructure issue at Drumheller,

It was a combination of issues. So where we did see power rates increase was specifically in that location. At our medicine hat location, year over year, our power costs per kilowatt hour were roughly the same. So, you know, the bulk of the increase from a power rate perspective was from the Drum Heller location. In our next video, we will discuss Contemporary Science, encouragement, growth, and efficiency give strategies for low cost medicine and take an galvanic effect. We aim towards addressing low cost genetics through ourUNSC

The other piece that we saw the increase in the overall cost is just the number of kilowatt hours we're using to actually mine the Bitcoin which is really a reflection of the network.

growth across the Bitcoin along with the fact that some of our more productive miners were offline in drug hell or as we fix them.

So that's kind of at a high level what drove the increase there. I'm happy to take on a follow on if needed.

That's good color and then maybe just on the USB TC merger

I know that you're in the middle of it still. Could you provide us maybe perhaps a timeline around when that amended document went into the FCC and how extensive was their commentary first time around, just trying to get a feel for...

perhaps, you know, this scrutiny of the FCC may be putting on this before it gets done.

Yeah, I mean, we submitted the updated S4 nearly three weeks ago. And we can't give specific color to SEC commentary. I can say that we're still working toward closing the transaction in late Q2, possibly early Q3, just given where we are in the process.

Sure, that's enough caller Jamie. And then maybe we get a little more deep dive update on how USBTC is doing right now and perhaps some progress they made in the quarter here before the merger. Thanks a lot guys.

Yeah, so I touched on as much as I can touch on, which is

Yeah, so I touched on as much as I can touch on, which is we're now expecting

7.02 exahash on the other side of a successful merger from a self-mining perspective. And then I also touched on the successful resolution that they had at the site in Niagara Falls. But that's really as much as I can give with respect to their progress over the last three months.

Sure, that's great. Thanks a lot, Jamie. No, my pleasure. Thanks, Joe. Your next question comes from Bill Papamistasio from Staple. Bill, please go ahead.

Good morning, Bill. Hi, Doug. Hi. Good morning. Thank you for taking my questions.

Just had some questions related to kind of the outlook of the market.

Bitcoin. You know recently we've seen an increase in the appetite to mine Bitcoin outside of North America. Jamie perhaps you can speak to how management views geographic diversification and whether it's becoming an increasing importance to the company.

Have there been any markets recently that, you know, I've seen ExaHash come online that have caught your attention? Well, look, I think for us, we were the only scaled publicly traded miner that had a high

operations entirely based in Canada. And so for us when we were looking at at the merger partner that we thought made the most sense, bringing geographic diversity was certainly a key component of that. And in the case of US BTC, that brings some diversity within the US as well.

their sites being in Nebraska, Texas, as well as New York. And so certainly that was our primary jurisdiction that we were looking to expand into and really looking forward to getting to the other side of this transaction. And I've looked at a number of geographies over the last couple of years.

of hashrated interest in coming out of South America, which is a more recent expansion of development. And as we've seen recently,

interest really in all things blockchain and crypto is very much at the forefront within the UAE and we expect to see to see that focus and attention continue.

Great, thank you for that. And then for my second question, if I may, we've recently seen significant demand for block space with introduction of ordinals and kind of this new token standard, the RC20, which has led to substantial increases in transaction fees and has greatly...

I'm hoping you can share your thoughts on the matter and its implications to the network and HUTAID in the long run. We're very excited about the promise of ordinals, which is truly the first iteration of this type of transaction that we think we'll eventually continue to see on the blockchain.

As you're kind of alluding to, we did see production double on May 7th, 8th, when transaction fees hit a two-year high because of the ordinal activity. As we move closer to the halving, we do think an increase in the volume and amount of transaction fees provides a good incentive for miners like us to continue securing the network.

And frankly, this has been a debate that's existed.

Really since the beginning, we know that the last Bitcoin won't come into circulation until the year 2140, but when it does, miners will be entirely dependent on transaction fees in order to continue to have that monetary incentive to process transactions and secure the Bitcoin blockchain.

I think for us to kind of see for the very first time transaction fees hit a level equivalent to block rewards in this most recent cycle of ordinal activity is encouraging for the long-term prospects of the network and certainly the long-term viability of miners that are coming into this space or will continue to come into the space over the next.

hundred years or so. So I think yeah that's really our perspective I think obviously this debate about block size is an age-old one when it comes to Bitcoin and I think what we'll see over the short and medium term is a significant increase in

development across the ecosystem on layer twos and we'll have to get more efficient in how we manage this type of activity in the Bitcoin ecosystem. But I think it's really, really exciting for us as an industry to see so much innovation and development happening directly on Bitcoin.

Thank you, Jamie. You know, I've asked several management teams that same question and yours has been the most well informed. Thank you. They're calling you the guru. That's all the questions I have. So lovely. Oh my gosh, thank you so much. That's great.

Thank you. There are no further questions at this time. I will turn it back to you, Jamie, for closing the recording.

Okay, well look, thank you so much everybody for joining us on the first quarter 2023 call, and we look forward to continuing to update you as things progress over the balance of the year. But again, thank you for your time this morning.

This concludes the call. A transcript of this call will be available on the HUT8 website in the investor section. Thank you for joining us at the HUT8 first quarter 2023 financial results analyst and investor call. You may now hang up.