Q3 2023 Cipher Mining Inc Earnings Call
Yes.
Good day and thank you for standing by welcome to the site for mining third quarter 2023 business update conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
You will then hear an automated message advising that your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your Speaker Josh Kane. Please go ahead.
Good morning. Thank.
Thank you for joining us on this conference call to discuss site for Mining's third quarter 2023 business update.
Joining me on the call today are toddler page, Chief Executive Officer, and Ed Farrell, Chief Financial Officer.
Please note that you May also review our press release and presentation, which can be found on the Investor Relations section of the company's website.
Please note that this call will also be simultaneously webcast on the Investor Relations section of the company's website.
This conference call is the property insight for mining and any taping or other reproduction is expressly prohibited without prior consent.
Before we start I'd like to remind you that the following discussion as well as our press release and presentation contain forward looking statements, including but not limited to Cypress financial outlook business plans and objectives and other future events and developments, including statements about the market potential of our business operations potential competition.
And our goals and strategies are forward looking statements and risks in this conference call, including responses to your questions are based on current expectations as of today and Cypress assumes no obligation to update or revise them, whether that as a result of new developments or otherwise except as required by law. Additionally.
Additionally, the following discussion may contain non-GAAP financial measures, we may use non-GAAP measures to describe the way in which we manage and operate our business. We reconciling non-GAAP measures to the most directly comparable GAAP measures and you are encouraged to examine those reconciliations which are found at the end of our earnings press release issued earlier this.
Morning.
Now I'll turn the call over to Tyler Tyler.
Thanks, Josh Hi, This is Tyler page CEO aside from mining. Thank you very much for joining our third quarter 2023 business update call.
We've got some exciting growth updates that we are delighted to announce but before we walk through those I'd like to spend a few minutes on Q3 and our recent accomplishments.
During the third quarter, we reached several significant milestones with the completion of our Odessa data Center, we have achieved seven two <unk> per second of self mining capacity across our portfolio.
With all four initial sites now up and running approximately 96% of our portfolio is energized through fixed price power and we believe our cost of electricity at a price of roughly $2 27 per kilowatt hour is among the lowest in the entire industry.
As a reminder, electricity represents the majority of our operating costs and our low price is a key driver of our best in class unit economics.
And now that the first chapter of our growth story is completed I'm very happy to report that we will soon embark on the next major phase of expansion. We are delighted to announce that we have just agreed to acquire a Texas based greenfield site with conditional ERCOT interconnection approval for up to 300 megawatts called <unk>.
<unk> Pearl.
Seifer, we've long prided ourselves on prudently managing the cyclical nature of the bitcoin mining industry and.
And as I have stated on our last few business update calls we have been patiently reviewing many deals for the past several months looking for the right one.
Black Pearl is that rate was.
It is a front of the meter site that we hope to bring online in 2025.
Note that due to the nature of the site, we have no take or pay obligations for purchasing a minimum amount of power and we will build our data center at the pace, we deem most appropriate.
It is our current intention to build the full 300 megawatts over time, but we will likely build it out in incremental stages and are currently deciding on the most appropriate schedule.
We intend to fund the build out of the new data center with a combination of cash generated from ongoing bitcoin mining operations as.
As well as from our bitcoin inventory or equity sales from our after market equity shelf to the extent market conditions make that an attractive option for the company.
We will also continue our ongoing discussions with construction and equipment lenders as well as consider other favorable debt financing opportunities.
Once the data center is built we intend to participate in ancillary services in ERCOT and we hope to generate supplemental revenues from optimizing our operations and using our data center to help with grid stability by providing capacity back to the market in times of need.
Continuing the theme of timing the cycle when investing in growth I'm also pleased to announce that we recently purchased one two <unk> per second of <unk> latest generation S 21 rigs for $14 per <unk>, which are scheduled to be delivered in the first half of 2024.
This was an opportunity to acquire very efficient cutting edge machines at a great price.
Current plan, it's the cycle these machines into service at Odessa, as they arise and to either replace machines that are in the process of being repaired or upgrade our operations by swapping them in for our least efficient rigs.
Finally, we have talked in previous quarters about the attractive organic growth opportunities at our existing sites.
And we've continued to make progress on that front as well.
At our board, we recently received ERCOT approval for a supplemental grid connection that will allow us to increase our targeted operational uptime significantly.
We expect this back feed to be in place in the first half of 2024.
We are at an important inflection point for the company as we pivot to the next stage of growth and we are excited to be expanding and investing in advance of what we hope will be a bull market for bitcoin in the months and years to come.
Now, let's turn to some specifics on the current state of the business.
On page four we highlight key performance indicators as of the end of October.
These metrics should give you a sense of our current production and the potential growth, we hope to see over the near and medium term.
Our current self mining hatch rate is seven two exit hash per second and with the acquisition of the new main rigs. We now have a total capacity in service or under contract of $8 four exit hedge per second.
With the addition of black Pearl we have the potential to expand to 23.5.
Per second by the end of 2025.
On the bottom of this slide you can see some of our current and year to date production numbers, which reflect the growth of our production over the past several quarters.
We are often asked about our treasury management philosophy.
These kpis give some insight into how we approach our bitcoin inventory.
In the middle of the page you can see our bitcoin held which has risen quarter over quarter.
We manage our bitcoin treasury by generally selling enough bitcoin every month to fund our operating expenses and existing capex commitments.
Beyond those sales, we may choose to sell more bitcoin for dollars to invest in expansion opportunities.
To hedge our inventory with futures or options.
Or to hold excess bitcoin to build our overall treasury balance.
It is our goal to build our bitcoin inventory over time, but we also believe that our monthly free cash flow generation gives us greater flexibility to take advantage of growth opportunities in periods, where other financing alternatives are less attractive.
Yeah.
Slide five is a high level overview of our bitcoin mining business that we'd like to include each quarter to remind everyone. How our business model works.
We operate the box in the middle of the drawing that says mining equipment, which represents our datacenters in mining rigs.
I discussed earlier, we spend the majority of our operating expenses on electricity, which are data centers convert into computing output.
Unlike traditional data centers, which operate a similar model and sell their computing output to enterprise clients for dollars.
<unk> sells its computing output called hatch rate to the Bitcoin network for bitcoins.
To make this model operate profitably a bitcoin mining company needs to control both its electricity and the capital is spent to build data centers.
Including what expense to purchase mining equipment.
Controlling these costs enables a minor to be a lower cost producer and our focus at <unk> has always been on controlling these specific costs to produce the best possible unit economics.
That illustration hopefully gives you a good sense of a straightforward bitcoin mining business.
Seifer, However, does have an additional element to our business that is incredibly valuable.
We have the ability to sell power back to the grid.
Our power purchase agreement.
Gives us a combination of downside risk protection as well as upside optionality to our revenue streams that doesn't exist for many bitcoin miners.
Now, let's turn to page six and look at some recent bitcoin market events.
The news flow for miners has been mixed over the last four months.
Much like last quarter, we've seen positive headline speculating on the approval of a bitcoin spot Etfs by the SEC.
That's speculation has driven a recent rally in bitcoin price to the current level close to $35000.
But against this backdrop. There has also been a steady climb to an all time high in overall bitcoin network cash rate, which continues to suppress overall mining economics.
We have also seen announcements from the rig manufacturers of their next generation machines, which feature dramatic improvements in efficiency.
While announcements of new rigs have typically been paired with new premium pricing arrangements in the past. This time, the manufacturers have announced very aggressive pricing dynamics.
As with many other facets of the bitcoin mining business rig pricing can be cyclical.
Prudent minor will acquire rigs when pricing is cheap.
And the last bull market rigs were pricing at many multiples higher than current prices.
Against this market backdrop, as we head toward the having in 2024.
<unk> is focused on acquiring vital assets like new data center sites inefficient mining rigs at cyclical lows.
And optimizing our power use trading and bitcoin production.
On slide seven we give a portfolio overview of our data centers.
Year to date through September we have paid an average all in electricity cost of $8 $379 per bitcoin produced.
We are very proud of this number and it drives our best in class unit economics.
On the left side of the slide you have a snapshot of our four current data centers, along with our all in electricity cost per bit coin at the respective sites.
The chart on the right side of the Slide gives you a graphic illustration of the current cipher hatch rate as well as the additional potential growth opportunity through 2025.
At this point, we will turn to production by site.
On slide eight you can see a picture of our Odessa facility that we completed in the third quarter.
Yes. It is clearly the most significant part of our portfolio as it represents approximately 90% of our bitcoin production.
Oh definitely is a wholly owned facility with a five year fixed price power purchase agreement and some of the lowest cost power in the industry.
As of the third quarter last year, we began reporting a third party independent valuation to give investors a sense of how much value is represented in the power contract alone.
As always and we'll talk more about it in his remarks.
At the end of September we generated approximately $6 two exit cash per second at the site using approximately 207 megawatts we.
We have mined roughly 3531 bitcoins appetite through October 31, and had a recent maximum daily mining capacity of approximately $12 nine bitcoins per day.
We will be hosting an investor day at Odessa next week and look forward to showcasing the operations and team now that the build out of the site is complete.
On slide nine we show a picture and highlights from our <unk> data Center, which we believe is a truly unique site.
Outwards is 100% powered by wind and as a joint venture that we share with our energy provider.
It currently has a total operating capacity of 40 megawatts when the wind blows.
That 40 megawatts Power's roughly one three <unk> per second of rigs.
Our <unk> mine, a maximum of roughly $2 seven bitcoin per day and current market conditions and year to date. The site is mined approximately 603 bitcoin through October 31.
Roughly half of that total capacity insight protection along to safer.
Most importantly, our year to date all in electricity costs per bitcoin at <unk> was approximately $6794 demonstrating our resilient low cost setup.
We are working to supplement the wind production at <unk> with a grid connection which would allow us to increase our uptime and generate more bitcoin with the existing equipment at the site and we hope to have that arrangement in place in the first half of 2024.
Slide 10 shows the operational highlights from our bare and chief data centers combined the sites operate 20 megawatts, which power approximately 0.65 <unk> per second and can generate roughly $1 four bitcoins per day and current market conditions.
Barron Chief are also structured as joint ventures and feature shared economics similar to <unk>.
Unlike our other two sites, which have behind the meter power arrangements bear and chief are set up in front of the meter at a location in Texas that typically features attractive market prices.
Our year to date, all intellectual city cost per bit coin at the combined sites was approximately $10448.
Now I'll turn it over to our Chief Financial Officer, Ed Farrell.
Okay.
Thank you Tyler and Hello to everyone on the call.
Before I move on to my remarks on the quarter I'd like to remind everyone that I will be referring to the reported financial results for the three months and nine months ended September 30th.
Looking back at the third quarter, we are extremely pleased with the performance of the company during our first full summer of operations in Texas.
As Tyler mentioned, we achieved two very significant milestones.
<unk> about that Sir.
And our near term target of seven to exit hash of mining capacity across our portfolio.
Looking back at the third quarter, we expect the summer months to be seasonally the most challenging operating environment.
With record heat significant curtailment from a power provider the team did an outstanding job of optimizing the performance of our mining rate.
Over the course of Q3, our operations and technology team gained greater insight into our minor portfolio and continued to put into place improvements in our process, which we expect to bolster performance over time.
Despite the challenging operating environment. The third quarter was characterized by solid top line free cash flow and improved liquidity.
I am happy to report for the three months ended September 32023 that our Odessa facility mind, 1091, bitcoin, resulting in sight for reporting $33 million Gregg.
And for the nine months ended September 30th Odessa, mined 3162, bitcoin, resulting in $83 $4 million in revenue.
This coupled with the 113 bitcoin we earned at our JV resulted in a total of 1203 bitcoin mined in the third quarter and for the nine months, our JV is 457 bitcoin.
Total of 3020 bitcoin.
Please note that the financial impact of the Bitcoin minded. Our JV is included in the equity invest the account on the income statement.
Yeah.
Before diving further into the numbers I do want to mention a few important points on the corporate side.
Just as we do across all our business our infrastructure teams strive to be best in class and leverage technology.
As part of that process, we have begun to implement additional technology solutions, which enhance our control and reporting processes.
As an example, we will be implementing workday for our financial management and human resource teams.
On the Treasury side, we announced a $10 million credit facility with coinbase.
We believe these are all indications of the strength of our business and growing confidence of our Counterparties as we continue to mature as a public company.
Now I'd like to turn to you that the PPA, we have talked extensively about the competitive advantage our power contract that Odessa gives us.
As a reminder, we began publishing a third party mark for this agreement in the third quarter of 2022, which we believe underlines the fundamental value in the business.
That market is shown as a derivative out asset on our balance sheet that gets revalued at each reporting period.
It essentially reflects the in the money value of the contract relative to the current market for power prices at Odessa.
As of September 30, this asset was valued at $80 million or.
Or an increase of $4 7 billion.
Which is recorded as a gain on our income statement.
Please note that this asset is in two components on the balance sheet.
<unk> $33 million has a current asset and $46 9 million as a non current asset.
For this period in future period, the change in fair value of this contract will flow through our GAAP earnings and will exclude the impact for non-GAAP reporting.
Our other significant assets as at the end of the quarter include liquidity of $17 million.
This includes cash of $3 3 million and bitcoin of $13 7 million.
Pretty equipment of $258 $3 million.
Primarily related to the Odessa facility, which includes binders of $160 4 million lethal.
Leasehold improvements of $135 7 million and other fixed assets of $5 million.
These items are offset by $42 $8 million of accumulated depreciation.
In addition, we have security deposits of $17 $6 million that primarily.
Really relate to the collateral posted to our deaths apparel provider.
Our equity investment of $33 6 million relates to a JV outboards bear and chief.
Our current liquidity position is $19 6 million comprised of two 5 million in cash and $17 one in bitcoin.
In the third quarter, we utilized the ATM and issued approximately $2 8 million shares at an average fair market value of $3 12 per share or $8 6 million net of issuance fees.
Our philosophy continues to be that we believe the ATM to be useful tool, which we can access in the right market conditions and for the right growth opportunities.
Now, let's look at our GAAP operating results for the quarter ended September 30.
We had a net loss of $17 7 million or a net loss of <unk> <unk> per share.
This is compared to the prior year's third quarter, where we had a net gain of $59 3 million or a net gain of 24 per share.
Please note that in the prior year quarter is when we initially valued our aluminum PPA and recorded a gain of $85 7 billion.
Again, our Odessa facility mind, 1091, bitcoin and generated $30 3 million for the three months ended September 30.
Using an average price per bit decline of approximately $28000.
Cost of revenue for the three months ended September 32023 was $13 million and consisted primarily of power costs at the Odessa facility as well as maintenance expenses for mining operations.
In addition, we have reported power sales at $2 7 million for the quarter.
The change in fair value of our desktop power agreement, which I mentioned earlier resulted in a gain of $4 7 million.
Equity in losses of equity Investees totaled approximately $2 million for the quarter ended September 30, a decrease of $6 3 million for the three months ended September 32022.
To remind everyone equity in losses of equity Investees consist our 49% share in the earnings or losses generated by our three partially owned mining sites.
General and administrative expenses totaled $23 9 billion for the current quarter versus $17 8 million from the previous year's quarter.
Our team remains the single most important asset and competitive advantage as we continue to invest in the business and have made several hires in the current year.
Within G&A. The primary drivers are stock based compensation of $10 7 million in the current quarter.
$10 five in the prior year quarter.
Compensation and benefits of $6 3 million versus $1 4 million in the prior year quarter.
This increase is attributed to the building out of the team over the course of the year.
We currently have 33 employees versus 20, a year ago.
We believe there is significant operational leverage as we continue to grow operation.
Corporate insurance totaled $2 million in the current quarter versus $2 4 million in the prior year quarter professional fees totaled $2 million, which is flat versus the prior year quarter and other G&A of $2 $3 million includes.
Occupancy and other public company expenses versus two four for the three months ended September 32022.
Depreciation for the third quarter was $16 2 million versus an immaterial amount in the prior year third quarter.
This is because in the third quarter of 2022, we hadn't yet guided mining at both asset depreciation of equipment was minimal.
We had a realized gain on the sale of bitcoin, a $2 5 million in the third quarter as I mentioned on previous calls we began selling a portion of our bitcoin holdings at the start of 2023 to support our operations and cash requirements.
Finally, we recognized a $3 4 million impairment on our Bitcoin holdings in the third quarter versus $300000 in the previous year's quarter.
Let's move on to our non-GAAP financial measures.
We are providing supplemental financial measures for non-GAAP income from operation that excludes the impact of depreciation of fixed assets.
Share based compensation expense.
The noncash change in the fair value of our warrant liability deferred tax expense and the noncash change in fair value of our derivative asset, which again is the power contract at Odessa.
These supplemental financial measures are not measurement of financial performance in accordance with U S GAAP and as such they may not be comparable to similarly titled measures of other companies.
We believe that these non-GAAP measures may be useful to investors in comparing our performance across reporting periods on a consistent basis.
Management uses these non-GAAP financial measures internally to help understand manage and evaluate our business performance and to help make operating decisions.
So for the three months ended September 32023, we had non-GAAP net income of $5 $9 million <unk> per share.
This compares to a non-GAAP net loss of $16 3 million or a net loss of <unk> <unk> per share in the previous year's third quarter.
I encourage you to review our earnings release, where we have provided a reconciliation of the GAAP versus non-GAAP results.
I will close out my remarks by saying we are pleased with the financial performance in Q3 and excited about the next stage of growth for the company.
We have talked about the importance of maintaining a strong balance sheet to give us maximum flexibility going into the having and beyond.
With our current financial position free cash flow generation and best in class unit Economics, We believe we should be well positioned to move forward with our next stage of growth.
We look forward to updating you greater detail on the financial results without that now fully up and running and we can begin to put in place our next leg of growth for the company.
I will pause and.
Tyler and I are happy to answer your question.
Certainly as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
And one moment for our first question.
Again, one moment, while we compile the Q&A roster.
And our first question will come from John <unk> of Needham Your line is open.
Great. Thanks for taking my question Congrats on the quarter guys I have a couple here if you don't my first one.
Can you just talk a little bit more about that operational leverage you see as you grow top line with new horsepower coming and what it means for G&A spend moving forward.
Yes sure John This is Ed.
Thanks for the question.
As you heard Tyler and I, both speak we're going through a period of growth. We have we have we've just announced some additional growth this morning.
And as we continue to build out our infrastructure and technology stack, we've been looking at some of the third party.
Contractors that we've hired to help support our operations and we're building up the team now take like bring some word that in house and have more control over it which we believe over time will be less expensive than having contractors do the work. So this is something that result.
Which we have currently but I expect that to flatten out over the next through 2024 as we're making some of these strategic investments on people and technology stack.
Got it thanks for that.
Yes that does.
One more question so on the black prostate.
Is this going to be kind of call. It sub three per kilowatt hour as well and then just on the Capex. So if it's three.
300 megawatts, we assume maybe around 400 grams per megawatt should we be thinking $120 million ballpark capex.
Hey, John I'll take that one thanks for the question.
I think the real key to understand.
If you're going to understand the value of black Pearl it's really the flexibility at the site right. So first of all it's a front of the meter site. So it's going to pay the floating rates of electricity.
Yes, we were down at some point put in a financial hedge of some sort, but we probably wouldnt in these current markets.
But the flexibility to draw power when it's cheap means that probably the pricing will look closer.
I mean, it will be large scale, but closer to like Barrett chief.
That said keep in mind, we will also be able to participate and ancillary services at scale I know that some of our competitors had a summer this summer with record breaking demand for power in Texas, where that produced some significant revenues for them. So this is a diversification of the kinds of sites. We have in that there will be revenue.
Stream. So there's some seasonality to that as you know there will be times when the price of power might be high, but youre also giving up capacity and being paid for that so I think overall, we view it to be in line generally with our portfolio, but it will float over time I think the key to understanding on the on the kind of the Capex side.
I'd say number one.
First of all we just signed the agreement to purchase the site about a day ago. So we're still working on thinking about the phasing and how we build out and what the cost will be.
It would probably be a little bit more expensive than you're estimating number one just because when you look back just with inflation and everything else, where it's running I would expect the cost to be higher on the capex side than they were for Odessa and Thats, mostly just a time function. The other thing is we are considering other technologies. There we have spent money on RF.
D and looked at quite a bit of hydro and immersion and other things we're still trying to figure out how we will parcel out the 300 megawatts in terms of the types of mining we do those all have different capex spend we're going to be driven by ROI and so whatever is going to produce the best return to shareholders over time.
B, how we do it but I would guess that those non rig in for costs. You cited are probably a little bit low to be determined.
The real key here, though is that unlike say Odessa, where we final long term power purchase agreement that requires us to draw a certain amount of power and we start getting billed at a certain point.
That is not the setup here right. So we can optimize when we're drawing power and when we're not and also the pace at which we build out the data center. So certainly it's our goal to build out the full 300 megawatts frankly as quickly as possible, but we can still choose to be opportunistic in how we find.
That we can wait for the market to come to us Theres no requirement that it's all 300 megawatts by a certain day it could be 50 megawatts or 100 megawatts in stages, but it's certainly our goal and I do think we will be heavily incentivized, obviously to get the production up as quickly as we can but its that flexibility that I think and in.
Addition to just the terms at which we acquired the site that make this a really exciting.
Other thing is from a diversification standpoint. This is a site that has a ground lease of 50 years on it are as up to 50 years, So really a different kind of site and gives our overall portfolio a lot of resilience, we're very excited about it.
Great Thanks for that Tyler.
And one moment for our next question.
Our next question will come from Reggie Smith of Jpmorgan. Your line is open.
Hey, Good morning, guys. This is Charlie on <unk>. This morning.
Congrats on a black Pearl announcement very exciting as well.
If you could talk about how you're prioritizing investment in the JV versus black problem moving forward.
Yes.
Sure. Thanks, Charlie that's a great question.
I'd say right now.
Subject to things evolving every day, our priority is going to be black Pearl just because we own 100% of that site and we will be very focused and we don't while we have a great JV partner at the three JV sites. That's of course, a collective decision as you know as well as I do lots.
Of moving parts in the Bitcoin mining universe, as we talked about on the call.
Excitement around the ETF driving price net of our cash rate going higher new rigs all of very complicated decision, making process for how to allocate capital from our perspective Black Pearl will be our priority for now.
Not to say, we're not focused on the other sites.
But I think the flexibility and the ability to move quickly and make decisions probably put black Pearl at the top of our priority stack.
That said as I mentioned.
Our boards within the JV is probably our priority there and that starts because with the backfill or pardon me the backseat agreement.
We can attach a grid connection and bring our production up on the existing equipment. There. So that's the priority there and I still fully expect that we will do the expansions at al <unk> <unk>, chief overtime, but from a prioritization perspective black hurdles at the top.
Got it that's helpful.
And then with the announcement of the new rig purchases is there like a target fleet efficiency, we should be thinking about for the new.
$8 four ex ash. Thanks.
Yes, I can get so I think when you add the $1 two exit hash of the new rigs, we will be about 29 joules per taro has across the entire fleet.
When that's plugged in.
Perfect.
As we make and certainly as we make more rig purchases I mean as I indicated on the call. This is a cyclically favorable time to do rig purchases.
We add more I would expect obviously that efficiency will drop lower and lower in terms of jewels for taro.
Got it thanks.
One moment for our next question.
Our next question will be coming from Gregory Lewis.
<unk> Gregory your line is open hey, thanks, and good morning, everybody and thanks for taking my question I'm Tyler I just wanted to follow up on the last question around the one point to access any sense for the timing of evidence of how we should we think about those rigs coming online in <unk>.
Generating cash capacity.
Sure. Thanks for the question.
Delivery schedule is the first half of next year. So it's monthly batches January to June that's when they shift so figure delivery the following months.
And those orders are back loaded so its about one third in the first quarter and two thirds in the second quarter.
I think if you do the math, it's about 6000 rigs or so.
And so as those arrive.
We will certainly make sure they are plugged in as soon as possible just because they're so powerful.
And as I indicated earlier on the call I think.
The main point on that rig purchases that at $14 of Terra hash and I should also mention the last 20% of the purchase price on that contract is actually financed basically by <unk> and is not due until a year after the rigs arrived.
So it's really a fabulous deal I mean, I think it's just a very accretive purchase but at the scale at which they will arrive in the number of rigs.
I think we will start with the prioritization that look when you run a 70000 rig fleet, there's always a couple of hundred rigs and repairs. So we will make sure to get all the most powerful rigs plugged in and then I think we would look to prioritize as they arrived swapping out in all likelihood our least efficient rigs to make sure.
The most efficient ones are plugged in.
That's super helpful color and I didn't realize that could could you talk a little bit more how that dynamic has changed with at least cipher in terms of the ability to the timing of <unk>.
Payments for rigs and how that's shifting and is that something that kind of where youre seeing across the market or was that kind of specific to this transaction.
I think in this case, well, let me speak more broadly about it because I think it's helpful. Yes, sure any investor or any investor in this space to understand because it.
This is what drives the big Capex number on our site and ultimately drives the rois that we all care so much about and as you probably remember in the bull market of a year or two years ago.
Really two years ago at this point.
These rigs were 567 times as expensive.
Crazy.
More expensive and very hard to earn and ROI and with that pricing also was very much a seller's market right and so it was really about how do we get access to these rigs and that was really the story two years ago.
Whats evolved and certainly been a very high priority for me personally has been to develop a relationship with the C suite of the three big rig manufacturers that are all Chinese companies that came in I think has relocated to Singapore at this point, but.
It wasn't easy and in the days of Covid.
In the bull market and so what I'd say is cipher has struck some deals in the past that I think others have not certainly people in the industry know about and we have talked about in previous calls our deal with Canaan, where we got some financing on those rigs, which was really first of its kind where rigs were delivered in <unk>.
Advance of being fully paid for I think the reputation we've built with the rig manufacturers as well.
One where they understand we are going to be around for a long time. When you think about what's most important to our rig manufacturer.
Stability of purchases over time, so that they can reserve capacity at the fab.
I think it speaks very highly of sypher that we've consistently been able to strike deals, indicating a belief.
As a counterparty.
Now to the specific deal.
I do think there's been a couple other folks that struck similar deals I think that you had to be a big known purchaser to bit mean to be offered these terms than you had to move quickly.
But I do think these terms were offered to a few of our competitors as well so very favorable for large well known counterparties a bit name. This one in particular is not individuals' decipher, but it would not surprise me if going forward in the near future. We do find deals that are particular to safer because we are in regular contact with the C suite of all <unk>.
Three rig manufacturers.
Okay Super helpful. Thanks, and realizing it sounds like the ink on the Black Pearl acquisition was really just signed yesterday.
As we think about the.
Infrastructure and lead times any kind of rough estimates because I think you mentioned that.
2025 startup target.
How should we be thinking about long long lead items and when we probably need to order those to be able to and maybe this is for black pearl but across the industry as well how are we thinking about supply chain and the ability to source things like transformers and things that will be needed.
Power out bar Black Pearl.
Great question.
I would say that generally the longest lead items for a greenfield site or.
Identifying and acquiring the building just substation.
I think we hear estimates across the industry that that can be 12 months to 18 months I will say not unlike the.
The rig manufacturers, we have focused a lot on building relationships over the last year or two.
And I think we can get that timeline significantly shortened based on our.
Relationships now from a deployment of black Pearl again, it's really early like we're still going through the different scheduling and options and how much do you build in each phase et cetera, but I think our goal would be to get it online and it will take the first piece energize, probably second quarter of <unk>.
2025.
It's very early on that subject to move around I mean literally the ink is still dry but that's when we would hope to have something energized and that gives us plenty of time to appropriately lay out and frankly negotiate attractive prices on both the infrastructure and the rigs you may remember Greg during the bull market.
We got a really really cheap price for our fleet.
At times when the spot prices for rigs were $90 $100 of Terra Ash, we were sub 40, and thats, because we leveraged our longer lead time for a greenfield site that we were building. So I think again that consistency of a future order is a great thing to have and think about what's it's very valuable from the <unk>.
Rig manufacturer's perspective also value for the other <unk>, we have time to stretch it out but what I would say is overall I'm sure at our next quarterly update we will have a lot more specifics around timelines and maybe even in the interim but right now its just early other than that generalized target.
And we think we can easily lineup the timelines to be ready for that.
Super helpful. Thank you very much.
One moment for our next question.
And our next question will be coming from Chase White of Compass point research and trading Chase. Your line is open.
Thanks, Good morning, guys. Thanks for taking my questions.
So first of all could you guys give us a sense of what the JV EBITDA was.
Total.
Hi Chase.
That's a bit of a challenge there I mean, if you look at our loss that we have.
There was about 2 million $2 million or so so keep in mind we were.
From a GAAP perspective were 49% of that.
I don't have in front of me at this point in time the exact.
All they are all the data they have on the on the on the Jv's, but it's something that we can look into.
Gotcha.
One thing one thing to add to that Jay just keep in mind.
We do have the last few bits of a block by rig loan.
At Albert <unk>.
We'll be rolling off in the first quarter of the new year. So that is at least a payment that will will go away on a monthly basis.
Yes, and I would just add to that the results of that all the Tvs and.
Our share of those results will be much better than they have been in the previous quarters because of that.
Okay. So thats helpful and then.
Given you're swapping out rigs for the 'twenty ones, how should we think about your net total ash rate when all said and done in 2024, and presumably it's not going to be $8 four ex ash at this point or am I not thinking about that correctly.
I think it's tough to forecast because the answer is it depends I think theres a lot of moving parts.
But youre right net net it depends exactly on how we deploy the one point to exit hash of rigs.
If we were to completely swap it out we would probably be swapping it out for the least efficient rigs that Odessa, which are micro bts <unk> and I think average about 38 jewels of Terra hash.
So I haven't done the math to give you a forecast, but you can probably piece. It together, we plug in one point too and on the plug in equivalent power draw 38, Jules <unk> machine.
I think also keep in mind like.
Again at this scale.
No joke that repairs can vary wildly and we could have 1000 machines in the shop. So.
Having an extra fleet probably generates more production all the time.
Like you can imagine a world, where we've swapped out <unk>, but theyre sitting there and if something comes in for a repair we immediately plug something in rather than have it out of commission.
Got you, but there's not like extra capacity somewhere out there that youre going to be able to like plug and above and beyond yet.
Not not basically 70000 rigs to operate.
Not currently there is a lot for sale out there.
Gotcha.
Thank you guys.
And one moment for our next question.
Our next.
<unk> will come from Josh <unk> of Cantor Fitzgerald. Your line is open.
Yes, hi, guys. Thanks for taking my question today nice to see the announcement of the Black Pearl.
I'm curious if youre getting engaged in a hedging strategy on power at the Black Pearl site.
Smith of the energy cost over time.
Let me speak at a real high level about and I know Josh you know this from from a lot of folks that have large scale front of the meter setups.
You can think of hedging in a couple of different buckets. The simple if it might be in a different pricing regime for power, we could effectively put in a financial hedge that would even though we're paying market prices at the site could fix are priced at a lower level, we wouldnt do that in the current pricing regime.
Because power prices are generally elevated right now in the higher part of the cycle. So in the same way that we have a fixed price at Odessa and a big part of that in addition to the unique elements of the contract was a different pricing regime for power.
Probably wouldn't lock that in but over time, there will be cycles, there may be times, when we do that.
I think the other way to think about hedging is if you're participating.
And ancillary services, there will be things like day ahead capacity markets.
If we get another hot summer like we had this past summer and Youre breaking demands for power. We can think about hedging in the sense of seeing the prices of day ahead being high.
And selling the capacity forward effectively our offering that capacity up I think a better way to say it.
Instead of planning to mine and netting that out as a way of effectively hedging our power price does that makes sense.
Yes very helpful. Thank you.
And for my follow up obviously, you have many different funding sources to use.
Ramp up Black Girl I was curious kind of if you would.
Embrace potentially tapping the hurdle to help pay for it.
Yes, absolutely I mean, I think look we're always going to if you think about all the levers we can pull.
We have a bitcoin inventory and the price bounces around.
We can tap equity markets or we can tap that market.
Constantly think about the returns on all of those again I think if you've got.
Truly great opportunity to lock in a price for something at a cyclical low in the market.
It's easy to draw down on some of the treasury balance and Bitcoin. If you know that our production is coming in every day and you see the strong production numbers every day.
You can replace that so absolutely we would think about spending it we're not religious our goal is to optimize our dollar based return for shareholders.
So it's not impossible. It is our goal to build that inventory over time, so we're always going to weigh the cost of the different ways.
We can raise capital I would say in general.
And I indicated this in my earlier remarks, but.
I would say as the enthusiasm seems to build around bitcoin price may be an ETF, there's institutional interest.
I would say in general there are.
The early stages of big Investor conversations coming back to miners I think our story around power optimization puts us in a unique category, where we've got some investors talking to us that may not be talking to other bitcoin miners and we'll just have to see how that develops.
But I view over the long term safer as part of a disruptive technology.
Power generation and I think power generators started to think this way before all the kind of broader crypto market shenanigans of 2022, if we see a bull market for bitcoin. It would not surprise me for them to come back to be very interested in this space and I do think.
There's a lot of pools of capital at much larger pools of capital invest in that space, then invest in bitcoin mining and so we'll see I think we're always going to look at what all the options are but it's really this flexibility at black Pearl that enables us to find the most opportunistic way and timing to build out the full data center.
<unk>.
Great. Thank you Tyler I appreciate the update and looking forward to hearing more about Blackrock.
Thanks, Jeff.
One moment for our next question.
Okay.
Our next question will come from Mike colonies of HC Wainwright <unk> Company. Your line is open.
Hi, Good morning, guys, Congrats on black Pearl and I. Thank you for taking my questions. This morning.
Can you talk to the expected timeline for the organic expansion projects at El <unk> bear in chief to ensure that you have sufficient capacity, it's really taken those net new rigs.
That will get you to the quoted eight <unk> you have in your deck there over the $7 to deploy today.
Yes.
Yes, so I think on the JV side again, the priority is the backseat at <unk>, which is no new rigs thats, just producing more bitcoin from the rigs that are already there.
I'd love to flip it on Tomorrow I know, we've got hundreds of pages of agreements that our teams got to go through and negotiate to get that but we're confident that will be done sometime in the first half of 2024.
Beyond that again, no time pressure for expansion on any of those and that will be a joint decision based on market conditions with our JV partner Linda HQ.
So again, the new rigs, we will probably look to cycle in on 100% of the hash rate.
Of at Odessa.
And we will do is it will become sort of a total fleet management exercise.
But I think the real the real strong point for those rig purchases is that a net price of $14 per Terra hash is an awesome price to buy rigs and so we're very excited to have those efficient rigs in front of the having but again current plans would be to cycle the minute Odessa actually subject to mark.
Defecation, if we decide we're going to expand or we have a new site or something like that we can always reposition them there'll be delivered January to June of next year.
Great I appreciate that clarification, Tyler so it sounds like maintaining that optionality.
The JV sites there.
And second one for me in your conversations with investors and potential Cypress shareholders. How are you positioning your approach to ESG you have <unk>, which is 100% powered by wind.
Great connections at other sites. So the power mix is actually a bit more diverse so it'd be good to get a refresher on ciphers ESG strategy here.
Yes, it's a great question, Thanks, Mike I think.
Always answering this question, let me start by saying that.
Two thirds of those initials.
Yes in the GE.
Seifer is very strong as a strong on as a company.
And I think bitcoin and bitcoin mining.
Isn't it incredibly strong industry. So usually the question behind the question. There is on the E part and so I can highlight how we think about that.
Yes, as you mentioned.
We're very proud that as far as I know, we run the only off grid wind farm co located data center.
On Earth as far as I know bitcoin mining or otherwise.
And Thats a live example of what a lot of folks in this industry talk about is the future ESG credential of this industry that it is a way.
To make the returns on investing in more renewables more viable.
Without government subsidies right. This is a free market solution to produce better investment returns for greater renewables. So overall the industry and safer in particular is really leading the charge on that I think for the industry overall and our innovations.
As such a shape as such a site show what can be done.
Overall again, we're now expanding further in Texas, just I know everyone thinks of Texas is the energy capital of the United States, if not the world keep in mind that there is over 40 Gigawatts of wind and I think about 13 gigawatts of solar in Texas, it's over a quarter of the United States Wind energy production. So this.
As a grid with lots of renewables and a lot of the questions around the peak demand over the summer have to do with the intermittent nature of renewables and so by expanding in Texas and being able to offer our capacity.
From our studies, the sort of utilizing the instantly curtailed nature of a bitcoin mining data center further supports.
Carbonization of the grid overall, so I think overall in the industry and ciphers approach is extremely strong.
Based on our location and how we're developing.
I'd say as a further note we've talked about in the past things like carbon offsets we have done a fair amount of research into that space. At this point were not purchasing offsets if you look at our.
Carbon output across our portfolio, it's about one half of the typical carbon output, although electricity user in the United States.
So the legitimate output the actual physical output of carbon from from our sites is lower than average in the United States.
So we haven't loved what we've seen in the carbon offset market and so we are not pursuing that currently just to round out that question because I know lots of miners talk about that in their ESG strategy, but really it's just an offset strategy.
That's great. Thanks Tyler.
Yes.
Again, ladies and gentlemen, if you do have a question. Please press star one on your telephone and wait for your name to be announced.
Our next question will be coming from Joseph <unk> of Canaccord. Joseph Your line is open.
Hey, guys good morning.
Nice progress on the business.
Congrats on that as well.
Congrats on Black Pearl.
Just at a high level 300 megawatts is a lot.
So there is halving of that coming up we do have some lead time here.
I think I know the answer the question, but I thought I'd throw it out anyway. Other miners are starting to explore some optionality to the business model, including perhaps HTC and AI for some of their.
Their power and I was just wondering if you're at all considering that.
<unk> with black procurement exercise, Rob a quick follow up.
Sure. That's a great question. So I would say this let me I will get to the actual answer, but let me take a little bit of a roundabout way to get there one of the priorities for our construction team is to think about the evolution of bitcoin mining data centers over time, and how they evolve and how do we make them more future.
Proof.
I had the privilege of going to look at <unk>.
<unk> original immersion facility. This last quarter I went to <unk> C and I saw it and one of the things that that was a very innovative design data center, but one of the things that struck me is.
How do you make things less customized and more standardized so that you can swap out things for example, evolving bitcoin mining to more of like a standard rack Mount and the design overtime. So that you could do things like potentially swap out other.
Users of HBC et cetera, and have a very standardized <unk>.
<unk> proposition at the data center, we are certainly doing that in the design I think with 300 megawatts of capacity keep in mind, we can take that down over time. So of course, it's not how do you scale. This 300 megawatt mountain, it's sort of what are the bite sizes youre going to take piece by piece, but I think we are considering all kinds of optionality.
Joe I think we've talked about in the past.
We are not the biggest fans or have not been the biggest fans of the hosting business for example in mining.
But.
Post, having with three or four years before the next having and new generations of rigs and frankly growth and hash rate and not necessarily a commensurate growth in plugs available for them. That's the strategy. We could also consider with 300 megawatts. There is all kinds of flexibility, but yes.
We have had some early discussions about what if part of this data site was dedicated to other.
Uses for compute I don't know if we'll get there I don't think Thats core to our business strategy, we're really more focused on.
The intersection of power generation.
Trading and bitcoin generation.
But that said certainly as we talk to investors folks like to see that Optionality. So that door is open I, just don't know where it's going to lead yet.
Sure Fair enough.
There is there is some lead time and things can change so.
We'll be we'll we'll keep asking that question Tyler and see if there's any change there for black Pearl and then just quickly I guess on our board.
Getting your your plug in to the grid to keep it going.
Any any sense at this point kind of what that power cost might be.
Relative to kind of your overall average thanks a lot.
Yes, I think it probably will end up being slightly higher than the overall average and here's why.
Again al Gore's draws directly from our co located wind farm that has basically the cheapest power in our portfolio and you can see that in the electricity cost per bitcoin at the site that we list.
What's so attractive about that site now recall that cited the big Engineering challenge because if the wind is not blowing or not.
Bitcoin and we designed the datacenter targeting about 75% uptime, which is lower than you typically hear for bitcoin mining, but again with the economics, we can have at that site.
It makes plenty of sense to only have 75% uptime. So when we have a back feed there conceivably.
Rest of the time, we would have access to power.
Now keep in mind, if the wind's not blowing.
Typically in West Texas.
If the wind not blowing market prices are higher because that 40 gigawatts of wind some portion of it might be offline. So I'd say, we're still going to optimize and it will bring the uptime up but of course, our tech stack always operates with a business logic that we only mind when it's profitable the revenue from mining has to be.
Higher than the cost of power so what I'd say is.
On average because we're going to be drawing power when the wind is not blowing.
The market price there will be at the higher end of our portfolio, but we're only going to mind when it's profitable to do so.
Fair enough, yes, the rigs are in there right. So yes.
Getting more incremental.
Output for the rigs.
Profitable thanks, a lot guys.
Thank you.
And I'm showing no further questions I would now like to turn the conference back to Tyler page for closing remarks.
Well. Thank you once again for everyone dialing in and the great questions for those of you that will be in Odessa next week at our Investor day at our tour of the site. We look forward to seeing you and showing it off and trying to give a sense of why we're so excited about the next generation that we're going to build it at black Pearl.
Thanks again for your support and we'll talk to you soon.
This concludes today's conference. Thank you for participating you may now disconnect.
Okay.
[music].
Okay.
Okay.