Q3 2023 Bitfarms Ltd Earnings Call
Speaker 1: during the call and future results could differ from those implied in these statements. The forward-looking information is based on certain assumptions and is subject to risks and uncertainties and I invite you to consult BitParm's mDNA for a complete list of these.
Speaker 1: Also, during the call, reference will be made to supporting slides and you can find the presentation again on our website at bitfarms.com under the investor related section.
Speaker 1: The company will also refer to certain measures not recognized under IFRS and that did not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other companies.
Speaker 1: We invite listeners to refer to today's press release and the company's third quarter of 2023, MD&A for definitions of the aforementioned non-IFR measures and their reconciliation to IFR measures. Please note that all financial records are denominated in U.S. dollars unless otherwise noted.
Speaker 1: During today's call, Jeff Morphy will review our operations for the quarter, and CFO Jeff Lucas will follow a detailed financial review, and Jeff Morphy will return for some closing remarks after the Q&A.
Speaker 1: We have also requested investors to send questions in advance, which I will open for management after we open the call to those interested in the live Q&A. Turning to slide four, slide three, and then on to slide four, it's my pleasure to turn the call to Jeff Morphy. Thank you for your questions and yes, we're moving into the next question, Renaissance
Speaker 2: Thank you for joining us today.
Speaker 1: I'm excited to review highlights of our third quarter performance and our strategic outlook with you.
Speaker 1: The timing of capital investments is the most important factor of the four-year Bitcoin mining cycle.
Speaker 1: As such, we continue to follow a disciplined plan, stressing an attractive ROI hurdle for upgrades and new projects.
Speaker 1: so that we are best positioned for the having in April of 2024 and beyond.
Speaker 1: We plan to move aggressively to capitalize on improving market conditions going into the halving, and capture market share consolidation opportunities that will likely arise post halving.
Speaker 1: This, in conjunction with sustained and predictable costs of operation, we believe, will drive long-term value.
Speaker 3: I'll elaborate.
Speaker 1: First.
Speaker 2: Until the last 30 days, we deemed miners to be at unacceptably high prices.
Speaker 2: To avoid overzealous spending to achieve high growth targets with unacceptable returns, we exercise patience and discipline.
Speaker 1: 2.
Speaker 2: Throughout 2023, we prudently fortified our balance sheet and made modest, opportunistic expansion moves, such as at Bay Como and in Paraguay.
Speaker 2: Three.
Speaker 4: We remain committed to investing in new facilities and minor upgrades.
Speaker 4: Now with the Bitcoin rally and the recent introduction of new high performance miners at lower costs.
Speaker 4: We are focusing on opportunities to take advantage of more competitive pricing for equipment upgrades. We are focusing on opportunities to take advantage of more competitive pricing for equipment upgrades.
Speaker 5: smells
Speaker 4: Combined with years of international development, in securing surplus energy, and realizing low direct costs while reducing overhead, we are well positioned to continue our expansion and further reduce corporate operating costs.
Speaker 4: On 25
Speaker 4: I'll review some of our accomplishments for Q3 2023 and post third quarter events.
Speaker 4: In September , we fully energized our first warehouse in Rio Corto, increasing ExaHash per second to 6.1 at quarter close, up 15% from June 30, 2023, and up 45% from September 30, 2022.
Speaker 4: In October in Bae Como, we completed the first phase of expansion, increasing from five megawatts to 11 megawatts, bringing our corporate hash rate to 6.3X a hash per second.
Speaker 4: During Q3 2023, we earned 1172 Bitcoin, compared to 1223 earned in Q2 2023, reflecting increased network difficulty.
Speaker 4: Q3 2023 revenue remained consistent at $35 million compared to Q2 2023.
Speaker 4: reflecting network difficulty increases.
Speaker 4: offset mainly by our hashrate increase.
Speaker 4: Adjusted EBITDA was $7 million for Q3 2023, and our Bitcoin holdings increased to 703 at September 30, 2023.
Speaker 4: Slide 6 shows a summary of our operating capacity and installed miners.
Speaker 4: Our diversified portfolio comprises 11 operating farms in four countries as well as two more in development.
Speaker 4: In October 2023, we reached 240 megawatts in operating capacity.
Speaker 4: up 32% from a year ago.
Speaker 4: with long-term and low-cost energy contracts totaling 573 MW.
Speaker 4: Only 42% of contracted capacity has been placed into operation.
Speaker 4: highlighting are considerable.
Speaker 4: Embedded Development Runway
Speaker 4: I will now review our operations and development plans.
Speaker 4: Turning to slide seven.
Speaker 4: in Paraguay.
Speaker 5: We acquired two hydropower purchase agreements.
Speaker 4: one for 50 megawatts at Passo Pei, adjacent to our Villarica farm, and another for 100 megawatts at Igua-Su.
Speaker 4: We expect the new Passo Pay 50 MW farm construction to be completed in Q1 2024 and development is progressing quickly.
Speaker 4: For civil work, we have been preparing the site.
Speaker 4: improving the access road, and constructing the high voltage substation connection.
Speaker 4: We anticipate completing most of the substation building and the production buildings by year-end 2023.
Speaker 4: For equipment, we purchased 20 megawatts of micro BT hydro cooling miners and related containers.
Speaker 6: primarily employing 19 million of vendor credits.
Speaker 6: substantially reducing the capital lit lag for this farm.
Speaker 6: These hydro miners utilize the latest mining technology and feature among the best efficiencies in the industry, which will drive significantly lower costs of operations.
Speaker 6: The additional 30 megawatts of capacity would be housed in two air-cooled warehouses currently under construction.
Speaker 6: For nominal added cost, we purchased the high voltage transformer rated at 80 megawatts, creating optionality for more expansion at Passo Pay.
Speaker 6: I'll add that the timely delivery of this transformer is key in meeting our Q1 2024 targeting target.
Speaker 6: and progress reports from the manufacturer indicated as on schedule.
Speaker 7: at Igua Su.
Speaker 6: The site selection process is going well.
Speaker 6: And the final decision will be reached that fully aligns with our timeline in 2024.
Speaker 2: Turning to slide 8.
Speaker 6: in real cuarto Argentina.
Speaker 6: By modifying the rack layout, we managed to expand capacity from 50 megawatts to 54 megawatts.
Speaker 6: or 8% beyond original design.
Speaker 6: With 7,500 new miners installed in Q3 2023, we added 800 petahash per second and brought our hashrate to over 1.6 exahash per second in October .
Speaker 6: Notably, in Argentina, October 1 marked the start of the summer season, when natural gas is typically less expensive.
Speaker 6: During this seven month period, we expect fully loaded energy costs at Rio Cuarto to be reliably below three cents per kilowatt hour.
Speaker 6: compared to between three and three and a half cents during the winter months.
Speaker 6: This makes Rio Corto amongst the lowest cost operating facilities in the industry.
Speaker 6: As this farm represents about 23% of our operating capacity, it will reduce our direct cost per Bitcoin.
Speaker 6: which is one of our strategic goals.
Speaker 6: In summary, our lat-time investments are poised for growth in the coming investment cycle.
BitFarms benefits from exceptionally low costs in this region and there are significant barriers to entry to LATAM, uniquely positioning us in this region to capitalize on low-cost expansion opportunities.
For example, we have paid our dues in Argentina and others looking to duplicate our development efforts in this low-cost country.
will face many organizational and logistical challenges.
We have a track record and a strong team.
We have also achieved qualification as a self-importer of miners and retain an additional 156 megawatts of contracted low-cost power for future development in Rio Coronado.
In short, we remain excited about the long-term prospects for further development in the country.
And in parabola...
We have one operating farm and 150 megawatts under development.
In Canada, in early July , we closed the purchase of Baycomo and initiated operation at 5 MW.
In October , we achieved our plan of activating the first 11 MW of operating capacity.
We plan to complete the construction of the additional 11 megawatts in the second half of 2024, coincident with the delivery of power to the facility.
In MAGOG, we further optimized the facility as we imported and installed approximately 2900 high-efficiency S19 ProPlus miners.
We concurrently relocated the older miners to the Bay Como facility.
By increasing the density of rack miners at both farms, we netted an increase of 110 petahash per second at Magog and provided a cost-effective cattle deployment at Baycomo.
In Washington State, we upgraded ventilation and cooling systems, increasing average uptime.
Well, we took two megawatts offline, reducing total operating capacity to 18 megawatts.
We are in the process of various facility modifications and improvements.
To elaborate, we are adding fiber optics to reduce latency between buildings and constructing a new warehouse.
These improvements in operating practices will result in greater efficiencies in early 2024.
Please turn the slide now. Please turn the slide now.
With that, I will now hand the call over to Jeff Lucas for the financial review.
Thank you, Jeff. I'll begin by highlighting some key elements of our financial strategy and position.
We have efficient operations, predicated on our operational excellence, and, with the majority of our energy from green hydropower, stable and predictable energy rates that are not subject to the variability associated with fossil fuels and, in the case of Argentina, which derives its energy from natural gas, a positive contribution overall with the lowest energy cost of our portfolio.
We have a laser focus on return on investment at the individual project level and rapid payback of capital at the corporate level.
We've achieved our 2023 Growth Plan by the end of October , and for 2024, we have a minor upgrade in Infrastructure Expansion Plan that will provide significant growth to our hashrate in our competitive efficiency.
And we have maintained throughout this a strong balance sheet that now positions us to utilize our operational expertise to take advantage of these fleet upgrades now and the attractive growth opportunities arising from the unpredictable economics of the having.
I'll now review our financial performance for the quarter, production economics, and our balance sheet.
Turning to slide 10.
In the third quarter of 2023, as Jeff pointed out, we earned 1172 Bitcoin, we paid 1,223 Bitcoin in the second quarter of 2023, and 1515 in the third quarter of 2022.
Our hashrate was 15% higher sequentially and 45% higher year over year.
This achievement was offset in part by increases in average network difficulty of 9% over the second quarter 23 and 82% year over year.
Our third quarter total revenue was $35 million, comprised of $33 million from our mining activities and $2 million from our electrical subsidiary, Volta.
This compares to $35 million overall in the second quarter of 23 and reflects slightly higher average Bitcoin price quarter over quarter and 4% through a Bitcoin earn during the quarter due to the difficulty.
focusing on our production economics as illustrated on slide 11.
In the third quarter of 23, Bitcoin's direct cost of production per Bitcoin was $16,900, up from $15,700 per Bitcoin in the second quarter of 23.
This change reflects the increased network difficulty offset in part by approximately 3% no electricity rates quarter over quarter.
While our total direct cost was up to $2323, at Rio Cuerto, the site with our lowest cost power, it was in fact under $12,000 for the quarter for Bitcoin.
And we should benefit more fully going forward as Rio Cuerca wasn't fully energized to its 50 plus megawatt capacity until September and has become a larger portion of our overall portfolio.
As on our last call, I'd add one more caveat to those building financial models. Our direct cost since February 2022 includes a 15% value-added tax on Canadian energy costs as a result of recent legislation.
We firmly believe that we are exempt from the sentimental tax in our pursuing a revenue ruling with the Canadian and the Quebec tax authorities to formalize our exempt status.
More to come in this matter, but I will state that without this tax, our direct cost per BTC in the third quarter would have been about $15,200, $1,700 less in our reported direct cost per BTC overall.
Their quarter gross mining profit was $13 million. Our 38% of mining revenue compared to $14 million, a 42% of mining revenue in the second quarter of 23. Great.
As with the reduction in our production economics, it's decreasing the growth mining margin which would likely be increasing network difficulty. This is not the basic salary forOne project.
The total cash cost for BTC was $22,700 in the third quarter of 23, up from $21,800 in the second quarter. Higher network difficulty was the primary driver, leading to fewer Bitcoin during the quarter and higher energy cost for Bitcoin.
Dental and administrative expenses, or G&A, decrease compared to the prior quarter, which largely reflects our focus on reducing operating expenses, including savings and insurance costs, attribute both to lower replacement values for our fleet, and risk mitigation measures implemented company-wide.
Going forward, we plan to tackle the combined effects of the having in the increase in difficulty by upgrading the money fleet with some of the recently announced highly efficient money models. And reducing our GNA cost rupture, including lowering professional fees and discretionary spending.
Moving now to Slide 12.
For the third quarter, our operating loss is $19 million. This includes non-cash depreciation expense of $22 million.
This also compares to the second quarter operating loss of $25 million, which includes depreciation expense of $21 million and an impairment charge on short-term prepaid deposits and property, plant and equipment of $10 million.
Our net loss for the third quarter was $19 million dollars or 7 cents per basic and fully diluted share compared to a net loss for the second quarter of 23 of $25 million dollars or 10 cents per basic and fully diluted share.
As previously noted, slightly higher average decline prices were offset by increases in network difficulty, which impacted the bottom line.
adjusted EBITDA was $7 million in the third quarter of 23 as compared to $8 million in the second quarter of 23. The adjusted EBITDA equates the profitability per Bitcoin about $5,900 in the third quarter versus $6,300 in the second quarter.
Turning now to slide 13.
At September 30th, we held cash of $47 million and Bitcoin valued at $19 million for a total liquidity of $66 million.
This compares to $31 million cash and $48 million total liquidity at June 30, 2023.
During the third quarter of 2023, of the 1172 Bitcoin we earned, we sold 1,018 to generate $28 million of proceeds to fund our operating and debt service requirements.
and deposited 154 BTC in the treasury with a September month in value of a little over $4 million.
In October , we deposited another 57 Bitcoin, increasing Bitcoin in custody on October 31st to 760 Bitcoin, representing a total value of approximately $26 million based on the Bitcoin price that day of $34,200.
In the third quarter of 23, we raised $31 million in net proceeds from an ATM program which expired on September 12. The monies we raised under our ATM are specifically earmarked for the growth initiatives about which Jeff spoke. Microsoft Mechanics www.microsoft.com colors Skype www.microsoft.com
We continue to use cash generated from operations to de-leverage our balance sheet.
Total indebtedness was reduced to $10 million on September 30 and to under $8 million on October 31. For more information on COVID-19 vaccines, visit www.covid19.com
As we've noted in previous earnings calls, our debt related to our Bitcoin activities is scheduled to be fully repaid by the end of February 24, well in advance of the having.
Before I hand the call back to Jeff, I'll take a moment to highlight one of our new initiatives, the synthetic hodl.
At our analyst day in September , we introduced our concept of using the synthetic hodl to achieve a capital efficient portfolio.
the primary objective of the synthetic HODL to enable us to accumulate BTC in treasury and increase the company's BTC exposure in a manner that is risk-managed and capital-efficient.
With it, we maintain discretion to dynamically adjust our hedge and synthetic huddle ratios within risk limits to respond to market factors.
In October , we initiated our strategy with the purchase of long-dated BTC call options.
As of November 6th, using the synthetic hodl, the company has increased its upsides to BTC prices by 35 BTC equivalent exposure.
During the slide 14, I'll now turn the call back over to Jeff.
Thank you Jeff.
Before I open the call for questions, I would like to mention some upcoming events, including the Benzinga Future of Crypto Conference in New York on November 14th, and the Blockchain Jungle Conference in Costa Rica on November the 16th.
We're throwing to slide 16.
In summary.
We are following a highly disciplined capital allocation strategy with projects to be completed ahead of the halving in April .
Fleet upgrades will reduce our cost.
costs of operation and the patients we exercised in 2023 we expect will pay off well in 2024.
Over the past 12 months, we've increased our hash rate 45%, achieving our 2023 target of 6.3X a hash in October .
The first 50 megawatts of our 150 megawatt expansion in Paraguay is underway. An opportunity that meet our criteria for growth and lowering our costs both before and after the having are abundant.
We expect to achieve 7x a hash in Q1 2024 with the energization of hydro miners currently on order for Passo Pay, with additional capacity there coming from the 30 MW air-cooled warehouses.
With newly signed PPAs, we have significant and low-cost expansion projects to develop when conditions warrant following the halving.
This is an exciting time in the industry cycle and we are well positioned to leverage our core competencies and advanced bit farms global operations in a new phase of diversified and accretive growth while working strategically and steadfastly to reduce our production costs.
Operator.
We can now open the call for questions.
Over to you, David.
Please go ahead. Thanks, Jeff. Just before we go to the analyst Q&A, there's two questions that we got.
from online in advance of the call. I'll just read out the first one to you.
You seem to be more positive in your outlook today than in your analyst day back in mid-September. Do you elaborate on why?
I'd be happy to take that one
Well, the climate is different now. It's much more positive. Let me elaborate.
Like Bitcoin, which was trading sideways for the longest time, $26,000, $27,000, $28,000, is now $34,000, $35,000.
That's 26 to 30 percent higher than it was.
The hash price that we saw...
Not very long ago, it was six cents and a little bit under six cents per tee. Now it's over seven. That helps the margins and certainly helps our optimism.
We are reading and seeing record inflows of cash going into the exchanges with new excitement.
coming around the Bitcoin and Bitcoin purchases and I think that's fueling some of the price increases.
Part of that is also all the news about the ETFs coming. It sure sounds like there's gonna be approvals coming in December .
and probably them going live early in the new year. And that's going to be a phenomenal.
opportunity for the whole industry in terms of credibility and adoption and more investment.
Then, just in the last two weeks, we have multiple manufacturers announcing new miners that will be released in the first quarter of next year at less cost and sub 20 joules per tera hash performance. That adds up to a lot of optimism in our eyes. As we've said in the past, we want to be opportunistic, and it sure looks like this is a good time to be opportunistic. opportunistic.
Great, thanks, Jeff. And I'll just give you the one other one from the online community. You seem to be accelerating the pace of growth in Latin. What is motivating this move over further growth in Canada?
Jeff Lucas, do you want to start with that one?
Here I'm glad to do so here. So the biggest driver for us, actually, is the lowest energy cost. And currently, you know, Canada's costs are a little north of four and a half cents. I'll be it when that bad tack is removed, it'll be probably a little below four cents. But for us right now, the most opportunistic region of the world and where we have a very strong foot hold is in Latin America and particularly, province of Paraguay. So really the driving force behind that is the fact that we have electricity right now in Paraguay. That's a little north of 3.8 cents or so. Further opportunities we believe for additional cost reductions. Into us, it's the most promising region in the most economically compelling region at this point in time.
Okay, upper, I think we can go to the Q&A.
Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys.
If at any time your question has been addressed and you would like to withdraw your question, please press star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Bill Papanastasio with Stifel. Please go ahead.
Hi gentlemen, good morning. Thank you for taking my questions.
Bye, Bill.
I really appreciate the commentary at the beginning on the importance of timing your capital investment.
Clearly, Bitfarmers has a very strong balance sheet with a ton of liquidity and debt that's going to be paid off in the new year prior to that happening. You also have the situation of attractive pricing, which you alluded to. I'm curious to hear whether you can share more details in terms of what hardware models look most attractive to your team today.
Your team has been very diligent with calculating payback periods and so just hoping to get an update to that end.
Sure. Well, I think the industry has all been very much keen on these new miners being announced. In particular, the Bitmain S21s and T21s are very attractive.
The pricing is very good, and sub-20.
WHAT is...
is really changing the landscape. The pricing and performance is better than the last generation of miners, which we thought were just too expensive. While other people were just growing and buying these models, we just said, it's hard to get the payback, particularly at $600,000.
Thanks, Peter.
in terms of hash price and those paybacks were long and it was not a good use of capital. So we had to hold back, but we think now the environment is much better.
And we are looking at this new generation of minor, which will be available starting early next year. And to put in some of our facilities and also upgrade the fleet as people have commented in the past, we have to point a number of M30s and M31s. So...
Some of the replacements there, if we can do it, would be quite remarkable in terms of our performance.
Great, thank you for that color. And then for my final question, you've been able to optimize and kind of maximize every square inch at the first warehouse in Argentina.
and it's a no-brainer right, very attractive low-cost power. I'm just wondering whether the appetite or the outlook for further expansion and large and team that has changed at all. I understand your team is heads down on the Parably expansion, but
Just hoping to get some more outlook to that end.
Bill, it's great to have flexibility and it's great to have good people in all of our local markets. It really opens up opportunities for us.
As we said, we paid our dues in Argentina. We have a superb team in Buenos Aires managing the region. We have a superb team in Rio Cuarto that's now well-trained. We were able to put another row of miners in there, take full advantage of the primary transformer there and move that up by 6-8% and all with new miners. We're at 1.6 exa-hash per second there now. It's quite remarkable.
I think it's an area which we've learned. Sometimes by mistakes and sometimes by good fortune, but...
We are.
We keep trying hard and then figuring out sort of how to adjust things along the way. So until we got ourselves up and really primarily using all the output from that transformer, sort of 50 megawatts.
The facility wasn't optimized.
And we were always saying when we optimize facility, we could bring the cost out.
so
In the summertime we were seeing sort of 3.6 cents per kilowatt hour after the translation.
September had dropped below three cents and now we're in the summer months. We're gonna be a seven months
Probably price probably, price is closer to two and a half cents than three. But once again, let's see what actually materializes. And we also have the same situation. Let's see what materializes from the election coming on November the 19th.
So it's an area that we're excited for because the costs are low. But we want to walk before we run and make sure that we don't make any expensive mistakes. So once we get a little more confidence that it really could open up this opportunity and.
At some point in 24 when the economics are right and 25.
sort of beyond for sure, but we have the land, we have the contracts.
It really represents a very low cost opportunity. We're 23% of the overall book right now, and that's bringing down our cost of production, and that's a real strategic goal for us is bringing those costs down.
I appreciate that color. Thank you, gentlemen. I look forward to seeing that hard-earned cache.
being used towards them. From C upgrades, thank you. Ha ha ha.
Very good.
Our next question comes from Josh Seaglow with cancer effects. Let's go ahead.
Hi, guys. Thanks for taking my call today. Congrats on the lower G&A. Great to see that profitability improvement. For my first question, I wanted to touch on financing. So obviously, you've been paying down the debt and improving the balance sheet over time. Would you ever consider taking on additional debt burden if it made the right sense from a financing perspective? And can you give an update on whether those debt markets have opened up to you?
Let me speak to that here. We have seen some pretty interesting instruments out there primarily from I think hedge funds, convertible debt outstanding here. And look in a general picture there is room for debt in the balance sheet to a degree in the sense that it lowers your overall cost of capital, particularly on a tax adjusted basis here.
You know we estimate both for our own calculations that the cost of equity for the sector and for us It's between 30 and 35 percent so if you can indeed get debt But it all in cost or maybe 15 to 18 percent here You know that and then that tax adjusted afterwards that doesn't make it attractive of course given the variability in the volatility of industry In which we operate and the fact that the biggest drivers ie Bitcoin pricing and network difficulty allows you beyond our control
We do that very very good at your place
At this point in time, Josh, we don't have any immediate plans to incur debt on the balance sheet, but again, if conditions change and for the right opportunity, we would consider that on a limited basis.
Hey Josh, and I'll remind people that coming into the halving we expect a...
That's right. Network correction and things like that. We've said before, we do not want any debt obligations at that point. Any debt obligations at that point.
We don't know how severe this can get because it depends on pricing which is out of our control. So we want to be as lean as possible so we can take maximum advantage of opportunities coast having.
Great, no, I appreciate the color there, Jeff, and it actually leads into my next question, which is around the halving. So obviously, you guys are uniquely positioned to replace some of your older legacy machines with some more highly efficient machines, which can both, you know, improve your efficiency overall and increase your hash. I was curious how you're thinking about the timing of that come halving. Would you look to be aggressive as we enter the halving, or is it really a wait-and-see approach to see what's happening across the network? Yeah, it's a waste of time. Okay, so I guess the army is fully flexible and it highlights smart smart energy, right? Oh, no, it's because oil is so expensive that the mechanical manufacturing HOLIDAYS like Teachgrill for electric, we have invented a optimizing system which will work in all
Thank you.
Well, as we've said many times, we want to have the balance sheet and margins and management team to be able to be opportunistic.
and opportunistic means that really this window is really only opened in the last...
two, maybe two and a half weeks with the announcement of these miners. We're looking at things very closely.
The having is very much.
in focus for April 15th, 16th, 21st, whenever the mathematicians have the best estimate right now.
We have opportunities to plug them in before the halving.
It would be nice to be able to do that, but there's no commitments and no decisions made just yet. But we're working on a variety of scenarios.
Got it. Thank you, Jeff.
Our next question comes from Chase White with Compass Point Research. Please go ahead.Bye.
Thanks for taking my questions. So a couple if I may. First is a housekeeping question. So what were the, and apologies if I missed this, but what were the power costs in Argentina during the quarter? Somead.
the average cost.
So generally, the cost for the quarter were just a little – overall, were a little over $0.03. But what I want to underscore here is that one, that did include the winter months to the degree of – you know, that came into play here a little bit. And then secondly, during this quarter, we did revert over entirely to the – you know, getting the energy cost and private producer, where there was earlier in the quarter some contribution from the grid itself as we were making that transition, which was higher cost. So again, overall, though, for Argentina, we were just over $0.03 for the quarter. And by the way, I'm going to add here that in September , and some of it being foreign exchange influence, our cost was about $0.028 of energy for Argentina.
Got it, that's helpful. And you know, how should we think about CapEx for the remainder of this year, and how much should be left over as we head into next year? Obviously, you've got some minor purchases that you need to make and don't necessarily know the exact pricing for that, but in terms of the infrastructure and then how many miners you would contemplate putting in there. Any comments on that? Thanks.
Yep.
Let me start this off and in Jeff you can see the filling in terms of the minor count there if you wish.
So first of all, I'm just going to speak to what we have in terms of our...
Disclosed and communicated cat-back to their growth plans.
We have other initiatives about what we spoke to regarding
You know, what we're doing with the mine up here, think of that sort here.
But the thoughts to keep in mind at this point here is that the major project we really have here is developing a passal tape.
which as Jeff indicated will be up and running and by the end of the first quarter of 2024. He also had what's going on with identified, they come off that was a $22 million record, a $22 megawatt record, which we announced in April .
We've got the first 11 up and running, and we're scheduled to have the second 11 in the second half of 2024. We also have some smaller projects in the works, $1 million or less, and Washington's improvements there, it even some minor modifications as well that we have going for another million or so. So overall, what we're looking for to be very specific here is about $70 million of CAPS commitment that we've identified between now and the end of 2024. Of that amount, just to be clear here, roughly $50 to $55 of that is going to be cost-effective.
We're going to play again up and running by the end of March.
And we have the Bay Combo, the second 11 megawatts, maybe an additional $10 to $15 million. That'll be in the second half.
of 2024 and in the additional, you know, little dogs and cats, so to speak that we have, they're going to filter out through the remaining months here.
Yeah, Chase, as Jeff mentioned, the Paso Pay facility, we've got 20 megawatts spoken for with the Hydro Miners, which is fantastic that we're going into that new technology there, but we haven't announced to the 30 megawatts that are from the air cooled facilities. So great opportunity to do our own mining, our own hashing at that location with those 30 megawatts.
The other upgrades that Jeff mentioned are later in the year. But sooner than that, if we can really put things together, a fleet upgrade, we have over 16,000 M30s and 31s that are primarily in Quebec, like talking about the opportunity for rapid increases in hash rate and rapid improvements in efficiency by replacing some of those M30s and M31s with...
with T21, Z21, that type of series of minor. You're talking 46, 50% improvement in efficiencies right away. So we're looking at that very keenly.
Yeah that dog was thinking about.
The next question comes from Kevin Dede with H7 Drive Tsc ahead.
Hi, Jim. Thanks for taking my question.
Good morning, Kevin. Yeah, it's happened.
I'm-
You tell them in alluded to a seven X to hash target. I think for the, did you say the N, Jeff the end of the first quarter?
Thank you. Thank you.
WE ARE HIST?
Okay. Could you give us a little more detail on how you see, I think what not word about 6.3 now. Can you just walk through the step function improvement there and given that some of that is a function of the...
The M50 and M56 order, I'm just trying to figure out my little brain on...
Shipman at the point.
Well, we've announced a lot of new miners, but most of them are now into Argentina and plugged in now. So you're not really going to see a little bit more coming from Rio Cuarto, Argentina, but really this is all about Passo Pay and the 20 megawatts dedicated to the hydro miners and the hydro containers that we have there. That's really the step function that will get you to 7x a hash. The 30 megawatts in the air cooled.
Facilities there, we're building the air-cooled warehouses, but we have not announced what's going in there yet or how it's gonna be configured. So that does not go into the 7X hash. Arguably, if we put our own minors in those air-cooled facilities, then we could be...
probably up to the 8 exahash area and perhaps a little more. But right now that's how we get to the 7.
So what machines do you have ordered, Jeff? Just to seven, right? So if you go to eight, you'd have to place orders.
Correct.
Okay, just along that line, have you fully utilized the credits that the manufacturers that have offered you, or do you still have more on the books?
We sure have. Jeff, do you want to comment on the 19 million?
Sure, we did. We actually had around $15, $16 million in meaning, and we fully utilized that as the pass of pay. But the hydrocooler is gonna come to the miners and it can paint it because of the good debt. So that pretty much utilized fully the remaining credits that we had Kevin.
Okay, so when we look at the December balance sheet, you'll have zero.
Machine dread it.
Correct. Okay.
You mentioned Jeff this
situation with the Quebec tax authorities.
or maybe it's I guess the full Canadian picture. I just want to understand what exactly is going on there and where your confidence comes in that.
Kaki there goes way and maybe previous
Allocations are refunded. How should I think about that?
So first of all, this legislation was originally proposed back in February 2022. And at that point in time, we began accruing the expenses at VAT. So in essence here, we have a 15% value added tax on the energy costs. Normally, we can actually apply for a refund or historically apply for a refund and recover that VAT. Effective actually in February , that's when this proposed legislation was put forth, February 2022, indicating that that recovery or that refund would no longer be available to a Bitcoin miner.
So that's why we've actually been incurring that additional cost and accruing to that additional cost here since that's plenty of time.
About two months ago or so, the legislation was officially passed, actually, that removed that opportunity with certain exceptions.
including where if you are actually selling
If you are selling your computing power capacity to a third party pool, as we do actually with Foundry, which is located in New York here, you actually can therefore recover those VHE taxes that are implemented here.
So what we are actually now doing is that we're getting a specific revenue ruling that makes it completely clear, 100%, that we indeed had the recovery of that refund here.
And as a matter of fact, if we get that back, what will happen is rather than recording roughly 4.7 cents per kilowatt hour, as you did in Canada in the third quarter, you'll be down to a little under 4 cents, more like around 3.9 cents in that going forward. In addition, speaking to your second question here, Kevin, as a matter of fact, we've actually paid around $16 million.
of that tax is since February , actually a little more, about $17 million at this point. And we will get a refund for that amount.
not banking money yet, not putting into our projections. It's something we feel we're very entitled to. The legislation implies we should get it, and that we're going to be pursuing that very vigorously.
Hopefully that addressed your questions.
Right, and just help me understand which authority that is that's beyond the...
territory, province of Quebec, right? That's for the entire country? It's the Canadian Revenue Authority and also it's at the provincial level, the MRQ as well.
Okay.
It's their harmonized between most of the provinces and the federal government. But yes, this is a federal government initiative. It's their lead it's the interpretation from them that we need to clear this up and
We've been trying to be patient but they seem to be taking an awfully long time getting this crystallized for us.
Can you just maybe offer a little more color on your confidence and the ruling going your way?
We're highly confident. I don't think I can be any more, I don't think we're beneficial to be more specific than that, but we have every expectation. As we read the regulations, as our attorneys read the regulations, it seems very clear to us that we are indeed entitled to have that refund.
Are there a slew of other Bitcoin miners operating in Canada? Are they in a similar position with offering their hash to a US resident pool?
I'm only going to speak to our situation here.
Fair enough, fair enough. The synthetic HODL that you've put in place, right, I'd imagine that's 35 contracts, right? You spoke to 35 Bitcoin.
In essence, that's correct. That's right. That's right.
Okay, that's all since the September quarter closed.
That's right.
Okay, how would we see that shown on the balance sheet?
December . Yeah that's a good question. So we do not practice hedge accounting here. There are some complications and wrinkles associated with it at this point in time here. So where you actually see the results of the impact of that is going to be actually in the below the opposite income line and sort of financial income and expense.
So we'll be breaking that out in the detail there and in the future reporting you'll see it broken out in that section and in the footnote.
Okay.
When obviously you general scrutinize the capital allocation decisions carefully.
Can you offer just a little insight on?
on the factors that led you to deploy capital in that vein, given the improvement that Mr. Morphy addressed in the hash price.
and the purchase or at least the utilization of the equipment credit.
I.
Well, let me start off here. First of all, we utilize equipment credits because we were going to get it actually, you know, it was a great price for us in terms of the equivalent value for what we're doing. Secondly, obviously, we do want to husband our cash as carefully as we can here, give me a student coming up with a having overall here.
But I think what's important to keep in mind, just to step back and give you a little more color here, as I pointed out at the beginning here, our cost of equity for the industry overall is around 35%. So we do have a pretty high hurdle here in terms of what we're looking for when we're turning our projects.
And we find though, however, some of the economics, such as what we're seeing in Paraguay, is very, very compelling at this point in time. And while, sure, there's greater uncertainty and greater risk, it can turn warrants a higher hurdle rate for that part of the world here, we find that even so, that the potential returns that we can achieve here in that part of the world make it very compelling for us to sort of continue to make investments of that nature.
Does that address your question? I want to make sure I'm being thorough here.
It definitely helps Jeff, thank you I Maybe you could speak a little bit more specifically to the power prices that you're seeing in the PPAs I as I understand that there are two separate ones went right. There's one for Villarica and there's another one for
for Andes. So Pele Gua Soo. Yeah. Yeah.
So maybe you could speak to that. Clearly, one of your competitors is working with a partner in that jurisdiction that I know you must be intimately familiar with. So maybe you could just help us for not just myself, but all my colleagues here in understanding that power price scheme.
Okay, well first.
First, our first 10 megawatts that we put in in January of 22 was that in Veerika. And our contract is with...
a private franchise owner within
Paraguay the only one like it and it's called Cliffsa
And it's been about 3.6 cents. There's been a few changes to it, but it's pretty steady at 3.6 cents consistent.
now, but we can't get any more.
power or production from that site because
and a distributor which is the national, Paraguay national distributor of power.
CLIFSA only gets so much, so our allocation is there.
So, for future growth, we've gone to Ande itself, just like the competitor that you mentioned just moments ago, Kevin. And pretty much all of these contracts are very similar in terms of rate. There's high voltage rates and there's medium voltage rates. We're taking the high voltage rates that put us in about 3.9 cents per kilowatt hour, not subject to indexation with inflation. And all green power and all consistent and all done in a very harmonious partnership with Adam.
with the government and national distributor. It's working well and I think the other guys will have similar arrangements. We're not privy to their contract, but unless they are taking smaller amounts and under the media voltage tariff, that would have a higher rate.
When you sort of take a step back and look at Ande's source, right, I think they have, what, 50% of the
of the, what, 14 megawatts that come out of that dam, how much do you think they're willing to allocate to?
to crypto.
rounding their boats and trying not to speak for them, but it sure seems like it's about
sort of 550 or so high voltage and about 100 megawatts medium voltage.
Okay, I think they want to make sure that they have good, strong, committed power from that. I think they want to make sure that they have good, strong, committed power from that.
to the dam up there. There is some variation season to season. I don't think they want to get into that all that much. I think they want to make sure that they can sign these contracts, get it into production, and see what it looks like before going any further.
Okay, I'm sure you're happy to hear last question from me. Could you just give us a little more color, Jeff, please, on the Iguazu site selection.
on the timeline and
maybe how you're thinking about narrowing it down.
Sure.
Igua, Sousa.
100 megawatts. We know Ande likes to do it with 80 megawatts.
Transformers, it's their choice, that's why we put one in in Passo Pay and hoping that we might be able to get a little more there at some point. But Igua Su, umm...
We are looking for real estate up in that area, fairly close to the substation up there. That's the main transmission corridor. So there's a lot of power up there. It's recently been upgraded as well, so it's a nice new substation there. And we are going through...
multiple sites right now in terms of selection. Some have been ruled out, some are still in the running but they're relatively close and you basically measure which ones are high and dry, which ones are fairly close so that you can run less electrical cable which is a big factor. The electrical cable can cost more than the actual site itself.
So we're going through that, as we said in the script, it's all fitting in within the timeline for next year, but I think we should be able to hopefully identify a preferred site this year, hopefully secure it. And then we'll start laying out plans for the substation to reduce the voltage there. And we haven't announced any plans in terms of
hydro miners or containers or air cooled yet that's all part of design and development plans for next year.
Thank you.
By the way, Kevin, let me just add a little comment here. You made a statement about the size of the Atapu Dam. It's actually a 12 gigawatt dam.
It's been running now for about 40 years or so. Half of the power is allocated to Brazil, half of it goes to Paraguay. Paraguay is actually using less than 10% of it for their own purposes here, and the other 40% of their share actually, they sort of sell back to Brazil at about 1 cent per kilowatt hour.
So clearly it's very compelling and strongly in their government's interest to try to expand the use of it locally including opportunities you know after Bitcoin mining which is why one of our pair of companies is Following us as you're looking at opportunities in that area.
Great comment to add. Thank you very much, Jeff. As always, gentlemen, I'm very appreciative of taking my questions. Thank you.
Thank you, Kevin.
Thanks, Kevin.
Thank you all for being here and our next engaging isn't over!
Your ID please go ahead.
Lucas, is your line muted?
No, thank you, operator. Sorry, I didn't hear my name. Hey, good morning, everyone. Thank you very much for all the color. Very informative call. Just a few quick questions.
The first is kind of on the hash price assumption post-tabbing. What do you think is a reasonable level to assume to clear that hurdle rate you indicated earlier?
Well, it's...
The sixth sense is something that we've been really sort of maneuvering around in our analysis.
for some time. If it's better than that, then we can make some investment decisions with some half decent payback periods.
We're watching the network hashrate, which continues to set new records in terms of increases.
Boy, we've had 45% growth over the last year in terms of our hash price, but difficulties and the network is up.
sort of almost double that. It's quite phenomenal.
But this excitement here, the ETF excitement, you know, I hope we can see Bitcoin prices of sort of 45, maybe 50 going into the halving that will produce that type of hash prices that we're looking for. We will see.
Okay.
That's helpful. When you think about the power cost distribution across the industry.
Again, this is an industry question, but I would appreciate your perspective.
Where do you think the midpoint is in terms of dollars per megawatt hour? Where would you put the bottom 25%?
the top 25%. Thank you very much.
Wow.
I think probably, and there's people with a lot more.
a lot better data than I am, but it's probably a
Average being sort of five, five and a half cents US per kilowatt hour is probably sort of where the average is. You see a lot of hosting contracts.
I'd rather have it more than that.
click, enter, right here.
when we go through the halving.
it cleans a lot of inefficiency up and we do expect a radical adjustment here and where 15-20% of the network hashrate will probably fall off.
for a few months and it just depends where Bitcoin price is and
some of these new miners in adoption, how quickly it is replaced, but it will be replaced.
I
This is why…
I'll repeat it again, like through this whole script and what we're talking about here is we are really pushing for
improving our cost of production. We're bringing down our G&A and the biggest factor is electricity costs. So we are expanding in areas where there's low-cost electricity. Argentina and Paraguay is cheaper than where it is in North America.
And while there's no demand response that can pad your EBITDA and your earnings, just in pure margin on Bitcoin play, you need lower cost electricity. And that's why we are seeking earnestly anything under $0.04 per kilowatt hour. And that's why we think Paraguay with their dynamics.
3.6 and 3.9 cents now and with the potential for some improvement there, like in reduction. And then we've got Argentina right now that's less than 3 cents.
If you're going to be successful going forward, you need to be in low-cost areas. Being able to get four, four and a half cents going forward, especially subject to inflation, it's not a good recipe for longevity.
I appreciate the color. Thank you then. One last one. On the election in Argentina, any potential fallout and what it could mean for you doing business there?
We've decided to go slow there. We've said this many times that we want to see what the election brings.
So, we've seen with the...
Forbes article just most recently where it said both remaining candidates are pro-Bitcoin.
I think how they go about it will be different.
We have one more radical candidate that talks about dollarizing the economy and things like that. It's going to be interesting to play through, but it's one of the reasons why we have not put our capital budget dollars
towards Rio Cuarto at this time because we want to make sure that we can continue to get the lower cost electricity and
and just have.
confidence in continuing capital investments in the country. But even I think in that Forbes article they talked about the government perhaps getting into Bitcoin mining and in a particular area down there which we've looked at. They think it's a novel idea but we were looking at it two years ago and it does represent some of the great opportunity in in the country of Argentina going forward provided that we can
put the capital and the right people to play in that area.
Jeff, it seems like lots of folks are copying you. I'll turn it over, continue fast.
Hey Lucas.
This concludes the question and answer session. I would now like to turn the call back over to Jeff Markey for any closing remarks.
Thank you, operator.
We were especially excited about the industry, as the having cycle is coming in about five months.
Positive developments include
increasing confidence that Bitcoin ETFs will be announced later this year and activated in early 2024.
And...
2. In public sentiment that Bitcoin is being recognized as a store of value given heightened world uncertainty.
We believe these factors may boost the sector and increase its credibility along with increases to Bitcoin prices sooner than expected and put the wind at our back as we execute our plan to 1. grow low-cost operating capacity to 290 megawatts in Q1 2024.