Q3 2024 Cipher Mining Inc Earnings Call

Good day and thank you for standing by.

Speaker Change: Welcome to the Scythramining Third Quarter 2024 Business Update Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, they'll be a question in the answer session. To ask the question during the session you need to press star 1 on your telephone. You'll then hear an automated message advising your hand is raised.

Speaker Change: to withdraw your question, please first start one one again.

Speaker Change: Please be advised so that these conferences are being recorded. I would not like to hand the Comps over to your speaker today. Josh Kane, head of the Investor Relations, please go ahead.

Josh Kane: Good morning and thank you for joining us on this conference call to address Cypher Minus, third quarter 2024, Business Update.

Josh Kane: Joining me on the call today of Tyler Page, Chief Executive Officer, and Edward Farrell, Chief Financial Officer.

Josh Kane: Please note that you may also review our press release and presentation, which can be found on the industrial relations section of the company's website.

Josh Kane: Please note that this call will also be simultaneously webcast on the investigation of the company's website. In this call, it's called the property of safe mining and any taping or other reproduction is expressed superherited with out prior concepts.

Josh Kane: Before we start, I'd like to remind you that the poem discussion, as well as our press release and presentation, can change forward looking statements.

Josh Kane: including the government, including the government's including statements about potential, about business operations, potential competition, in our goal of strategies.

Josh Kane: For looking statement in where St. Louis Carvins call, including responses to your questions based on current expectations as of today.

Josh Kane: and South Christians know obligation to update early by-friend, whether as resulted in new developments or otherwise, except as required by law. Additionally, the following discussion may contain non-gap financial measures.

Josh Kane: We made use of non-gap measures to describe the language we manage and operate our business. We work in soil non-gap measures to the most directly culpable gap measures, and you are encouraged to examine the recommendations which were filed at the end of all bone injuries issued earlier this morning.

Speaker Change: I will now turn the color of the 12 C.E.L. Tyler Page, Tyler.

Speaker Change: Thanks Josh. Hello, this is Tyler Page CEO of Save for My Name. Thank you very much for joining our third quarter 2024 Business Update Call.

Tyler Page: We've had an extremely busy few weeks recently at Cypher and our business model has rapidly evolved from being just a Bitcoin miner to being a developer of HPC data centers with a natural built-in off-take the Bitcoin mining for prospective sites.

Tyler Page: We believe that we have found a truly unique niche by opportunistically investing in greenfield development sites.

Tyler Page: Knowing that we can build and operate an HPC site for a tenant, or if a high quality HPC tenant fails to materialize, we can always continue to expand our Bitcoin mining footprint and put the sites to profitable use.

Tyler Page: We have closed five such deals to acquire greenfield data center development sites in the last two months.

Tyler Page: Our current primary intent for these sites is developed them as HPC data centers.

Tyler Page: But all five sites are located in Texas and would also be excellent sites for Bitcoin mining, as we can always use our proven ability to manage power curtailment and produce our own best-in-class electricity costs.

Tyler Page: Cypher combines expertise in site origination at the front end of the development funnel with an experienced team of construction and operations professionals that joined us from the hyperscalers.

Tyler Page: Our team has built some of the most high tech data centers in the world and continues to innovate in both the HPC and Bitcoin mining space.

Tyler Page: Further downstream, we believe Cyprus talents in operating the technology and trading needed to manage energy prices and the curtailment process will bear fruit as the entire data center industry evolves.

Tyler Page: According to a recent research piece from JLL, data center industry demand is forecast to grow at a 23% compound annual growth rate through 2030.

Tyler Page: The demand for large-scale data centers driven by the rise of large-language models in AI is seemingly growing even faster, and those sites are increasingly hard to find.

Tyler Page: Regulators and system operators are now suggesting hyper-scaler's match-requests for new power interconnections with new generation development in order to receive required approvals.

Tyler Page: This trend will further extend waiting times for large interconnects.

Tyler Page: And this situation is juxtaposed against an environment where the chief executives of the hyper-stailers are ramping up their cap-ac spend in the race to be the winner in AI.

Tyler Page: It is against this backdrop that we launched our HPC vertical. We believe that large scale interconnects available in the next few years are exceedingly rare and valuable and I am excited to tell you more about our progress today.

Tyler Page: Before I talk about our new development portfolio, let me begin the call by updating some key metrics for Cypher as of the end of September 2024.

Tyler Page: While we have major growth coming in the near future with our new sites, we are also in the middle of a significant expansion of our Bitcoin mining business right now.

Tyler Page: We operated 9.3 Exahash per second of self-mining capacity at quarter end, and as of this morning, our in the middle of installing our Odessa upgrade and have grown to 10.5 Exahash per second.

Tyler Page: By the end of the year, we expect our self-mining capacity to grow to 13.5x per second with a fleet-wide efficiency of 18.9 joules per terror hash.

Tyler Page: Cypher continues to manage a significant Bitcoin inventory, holding 1558 as of the end of the third quarter. And we are probably best known in the Bitcoin mining industry for our very competitive all-in-weighted average power price of 2.7 cents per kilowatt hour.

Tyler Page: Electricity represents the large majority of our operating costs, and our low price is a key driver of our outstanding unit economics.

Tyler Page: In the next two months as we complete the Odessa Rig upgrade, we will be pumping the industry's cheapest electricity through one of its most efficient fleets.

Tyler Page: Now let's move to a review of our current operations.

Tyler Page: On slide 6, we give a portfolio overview of our existing data centers in a near-term timeline for expected scaling of our managed power capacity.

Tyler Page: Year to date, we paid an average all in electricity cost of roughly $18,162 per Bitcoin produced at our data centers.

Tyler Page: We are very proud of this number.

Tyler Page: Please note that when we talk about all in electricity costs, we mean the total cost to deliver electricity to our mining rigs. So our numbers include all taxes, transmission, and other charges, and our low numbers dramatically demonstrate our competitive advantage.

Tyler Page: On the left side of the slide, we show an overview of our productions split across Odessa and our JV data centers along with our all-in-electricity cost per bit coin at the site year to date.

Tyler Page: The chart on the right side of this slide gives you a graphic illustration of the number of mega-lots we currently manage, as well as the projected growth for the coming year.

Tyler Page: As you can see, we currently expect to manage 927 megawatts across six data centers in 2025 when we bring black pearl and barber lake online.

Tyler Page: At this point we will turn the production by site.

Tyler Page: Flight 7 has a production summary of our Odessa facility.

Tyler Page: Odessa is the most significant part of our portfolio as it represented approximately 83% of our Bitcoin production in September.

Tyler Page: Recently Odessa became the first Bitcoin mining data center to be awarded the Uptime Institute's stamp of approval for management and operations.

Tyler Page: Odessa is a wholly owned facility in the middle of a five-year, fixed-priced power purchase agreement and pays some of the lowest prices for power in the industry.

Tyler Page: As of quarter end, we generated approximately 7.1 Exahash per second at the site.

Tyler Page: [inaudible]

Tyler Page: On this page we also provide the observed all-in-electricity cost per Bitcoin at the site, post-having, which was roughly $25,488.

Tyler Page: Even after the April having reduced the number of new Bitcoin paid to miners, you can see how valuable it is for Cypher to have a cheap, fixed price of power available on such a large portion of our portfolio.

Tyler Page: On slide 8, we highlight our joint venture data centers of Albor's Bear and Chief.

Tyler Page: With the recent expansions that each of Barron Chief, the sites now have a total power capacity of 120 megawatts and generate approximately 4.4 Exahash per second.

Tyler Page: We own 49% of the JV sites in our portion recently generated roughly 17% of our overall Bitcoin production.

Tyler Page: On this page, we also provide the observed all-in electricity cost per Bitcoin at the site's post-having, which was roughly $34,160.

Tyler Page: As a reminder, both Barron Chief operate as front of the meter sites, so there will be some expected seasonal fluctuations with their electricity costs and some are months 10 to be higher.

Tyler Page: Now let's turn to an update on our development portfolio.

Tyler Page: Lides 10 and 11 show a rendering of the completed data center at Black Pearl and photos from the current site work underway.

Tyler Page: We are scheduled to energize the site in the second quarter of 2025.

Tyler Page: Everything for Phase One, which is the first half of our building and the full 300 megawatts sub station, is progressing on schedule.

Tyler Page: Our current design envisions 250 megawatts of air cooled and 50 megawatts of liquid cooled Bitcoin mining.

Tyler Page: At full capacity, the site is anticipated to produce roughly 21.5x-per second of hash rate.

Tyler Page: We have continued to receive inquiries on our willingness to repurpose a portion of the data center for HPC hosting.

Tyler Page: And ultimately our final design at the site will depend on what we think will produce the best outcome for shareholders.

Speaker Change: Why 12 gives an overview of our new Barber Lake site that we acquired last month?

Speaker Change: We immediately recognize the potential for Barbara Lake when we first saw it.

Speaker Change: The site has an approved capacity of 300 megawatts and we purchased 250 acres of surrounding land. Perhaps most importantly, the site already has an existing energized substation, so any data center will be immediately available for use upon completion of construction.

Speaker Change: When you also consider that it is located next to the major fiber line running along I-20, this site is ideal to host a large HPC tenant.

Speaker Change: Every potential tenant who has seen it thus far has expressed interest given its optimal setup.

Speaker Change: We look forward to updating the market in more detail as we progress in our various discussions.

Speaker Change: Flight 13 shows an overview of the Rebelly site, which is the first site in our medium-term pipeline as it is scheduled to energize in 2027.

Speaker Change: By the time we turn on Reveley, we will have already been managing our initial large HPC sites at Barbara Lake and potentially Black Pearl.

Speaker Change: The site is located in Kutula, Texas.

Speaker Change: It has been approved for 70 megawatts, but based on early discussions with the transmission service provider, we believe we can expand the site capacity to 200 megawatts by the time the site is energized.

Speaker Change: Given the timeline to energization, we have a lot of flexibility on cypress strategy for the cypress.

Speaker Change: We made use to build a powered shell data center for a hyperscaler and secure a long-term lease from a high-quality tenant.

Speaker Change: But we also have the potential to expand our capabilities and we'll review a variety of potential business models, including more of a multi-tenant model, or even managing our own fleet of GPUs.

Speaker Change: We have some time to watch the market develop and evolve before we complete our strategic planning.

Speaker Change: Toides 14-16 give overviews of the three sites covered by the purchase options that we recently acquired. Mekeska, Nilsing and McClennon, or what we call the three M's for short.

Speaker Change: These sites are the furthest out in our development pipeline as they are pending final approval for interconnection. And we expect the results of approval processes for the sites to be finalized in the coming year.

Speaker Change: We hope to receive approval for up to 500 megawatts at each site.

Speaker Change: In addition to the interconnections, our purchase options also cover substantial parcels of land that each site.

Speaker Change: All three sites have the necessary characteristics for development of HPC data centers, but also sit in locations with demand response programs that would allow us to monetize the flexibility of curtailment used in bitcoin mining operations if necessary.

Speaker Change: With these sites, we have a lot of optionality, which is exactly where we like to be positioned in front of trends with the potential for massive growth.

Speaker Change: As you can see, our evolution as a development company has occurred rapidly so far. We are building on our demonstrated success of originating the best sites and power deals in Bitcoin mining and bringing that expertise to the traditional large-scale data center market.

Speaker Change: As that market is evolving and forcing large tenants to go to non-traditional areas for the scale they need now, it feels like the entire market is moving towards us.

Speaker Change: As we finalize our plans for Black Pearl and Barber Lake, and define our long-term ambitions at the site further out in the pipeline.

Speaker Change: We are extremely confident in our positioning.

Speaker Change: So why are we so confident in our positioning? While we don't yet have specifics to confirm today on our current HPC business negotiations.

Speaker Change: A simple review of current market conditions and the economics of operating GPUs demonstrates why there is so much interest in our sites.

Speaker Change: We have talked about the scarcity of overall capacity given the current and projected growth in the data center industry and the birth of large scale sites in particular.

Speaker Change: Against that backdrop, we have two of the largest suitable sites available that can be used as HPC data centers before the end of 2025.

Speaker Change: Hyper-Scalors that want their own large site have few options in the market if they want to operate within the next three years. And the general view among those companies is that they are in a race to win AI supremacy and need to accelerate development as quickly as possible.

Speaker Change: Mark Zuckerberg recently said that he would quote, rather risk building capacity before it is needed, rather than too late given the long lead times for spinning up new infrastructure projects.

Speaker Change: Hyper-Scalers can currently generate tremendous revenue from the best NGP use. This year in video has estimated the companies can generate five to seven dollars of revenue over four years for every dollar spent on their GPUs.

Speaker Change: To our potential tenants, Cypher can offer two extra years of operations on up to 600 megawatts across our Black Pearl and Barber Lake sites at a critical point in the race compared to waiting for other sites to be ready.

Speaker Change: The additional potential profit for tenants from that time acceleration amounts to many billions of dollars.

Speaker Change: These are the exciting market dynamics that are currently driving interest in our data center sites, and ultimately giving us great confidence in the success of our HPC business.

Speaker Change: We expect to sign a long-term lease with a high-quality tenant that will generate substantial returns to cyber shareholders. And I look forward to updating everyone when we have more specific details to share.

Speaker Change: With that, I'll turn it over to our chief financial officer, Ed Farrell.

Ed Farrell: Thank you Tyler and hello to everyone on the call. I'd like to begin by sharing some high-level thoughts on our recent site tech positions.

Ed Farrell: which are a critical part of our HPC initiative and represent significant investments for us this quarter.

Ed Farrell: As Tyler has mentioned, being a leader in this space requires not only great sites, but also an experienced team in strong expertise in financing.

Ed Farrell: The ability to secure such attractive sites is a direct result of the foundational work we did when we established the company.

Ed Farrell: Although we are still in the early stages of our HPC initiative, we believe the strength of our team are balancing our tech stack and our key element-sepal position as a leading developer of HPC data centers.

Ed Farrell: The strategic investments we've made in these areas have enabled us to exquithly and capitalize on unique opportunities like Farrell Lake.

Ed Farrell: Turning to earnings, it comes as no surprise that the third quarter was a challenging one, given that it was the industry's first full quarter of post-having. Revenue's were down. However, we remain encouraged by the business underlying performance and the company's overall growth trajectory.

Ed Farrell: Our access to low-cost six-price power and our strong balance sheet continues to be critical strengths in maintaining a solid financial position.

Ed Farrell: Flight 19 in 20, give a snapshot which we provide every quarter of some of our financial metrics on both sequential and year-over-year basis.

Ed Farrell: Let's move on to slide 21 and dive into the numbers in more detail. The most last quarter we encountered significant industry headwinds, including a record low hash price and a rising network cash rate.

Ed Farrell: So the quarter we recorded to Gap Net loss of $87 million, compared to a loss of $15 million in the prior quarter and $19 million in the same quarter last year.

Ed Farrell: In the current quarter we mind $396 Bitcoin generating revenues of $24 million at an average price for Bitcoin of $61,000.

Ed Farrell: This compares to 563 Bitcoin-minded Q2 2024 at an average price of $65,000 resulting in $37 million in revenue.

Ed Farrell: is a sequential decrease of 35%.

Ed Farrell: year-over-year revenues decreased by 20% primarily due to the having the decline in Bitcoin prices and the increase in hit network cash rate.

Ed Farrell: As I mentioned earlier, how six price power remains a critical factor in maintaining attractive unit economics. In the current quarter, a cost of revenues increased by five percent sequentially.

Ed Farrell: This increase was primarily driven by one off expenses related to the fleet upgrade at Odessa.

Ed Farrell: Including these Al Costa revenues remain flat quarter of a quarter thanks to our fixed price TPA at Odessa

Ed Farrell: We'll discuss the quarterly pricing of the PPA and more detail later, but its true value is evident in the low cost, six price power, which is reflected in our cost of revenues.

Ed Farrell: Moving on, as you recall, we adopted the new crypto fair value accounting standard in 2023, and with the drop in Bitcoin price in the quarter we recorded an unrealized loss of $22 million on the fair value of Bitcoin and holdings.

Ed Farrell: However, this mark to market loss was offset by $20 million of the life gains from the sale of Bitcoin in the period.

Ed Farrell: This resulted in a net loss of $2 million which is reported in the financials.

Ed Farrell: How philosophy towards the growth of our Bitcoin inventory and our approach to treasury management has not changed.

Ed Farrell: We maintain an opportunistic approach continuously, evaluating various funding options to support our gross initiatives.

Ed Farrell: While our General AIM is to grow a Bitcoin inventory over time, our decisions are driven by market conditions and our overall capital allocation strategy.

Ed Farrell: We actively assess the markets to identify the most attractive sources of capital, carefully considering the advantages and disadvantages of different funding methods to support our business and expansion plans efficiently.

Ed Farrell: This may involve using our cash reserves, big cleanholdings, or issuing equity.

Ed Farrell: An example of this approach during the court was the acquisition of Barbel Lake which we funded through the sale of part of our Bitcoin inventory.

Ed Farrell: Well, we remain highly constructive on Bitcoin using our Bitcoin holdings to fund the acquisition with an optimal choice.

Speaker Change: As Tyler has said, we exchange one rare invaluable asset for an even more rare invaluable one.

Speaker Change: As of September 30, we held 1500 in 8th Bitcoin in our treasury.

Speaker Change: As in previous quarters, I'd like to spend a minute on GNA expenses and our philosophy for managing these costs.

Speaker Change: On a quarter of a quarter basis, these expenses remain relatively flat. Compensation of benefits decreased 1 million sequentially to 15 million dollars.

Speaker Change: This was primarily driven by a decrease in share-based compensation.

Speaker Change: and current quarter versus prior year, quarter decreased 14% also due decrease in share-based compensation expense.

Speaker Change: Now I want to general administrative expenses.

Speaker Change: which include IT, corporate insurance, professional fees, occupancy and other public company expenses.

Speaker Change: The quenchily these costs remain relatively flat. On a current year quarter versus a prior quarter these expenses were up 31% driven by professional fees and public company expenses. Primarily related to Sarveins' Oxley compliance.

Speaker Change: As we discussed last quarter, we have made significant investments in both our team and technology stack, which we believe are crucial to our long-term success.

Speaker Change: These investments have already proven to be key differentiators in early stages of our HPC initiative.

Speaker Change: We expect them to continue to drive future top line growth, ultimately having a positive impact on our bottom line.

Speaker Change: Depreciation and amortization expense total $29 million and increase of $9 million or 41% from the prior quarter and a 77% rise compared to the third quarter of 2023.

Speaker Change: The sequential increase was driven by the recent change in our depreciation schedule for our mining rigs.

Speaker Change: As a reminder, we had previously accounted for the depreciation of rigs over a five-year period. However, given our recent fleet upgrade and rapid efficiency gains with next generation rigs, we now believe that the three-year depreciation schedule is more appropriate.

Speaker Change: Our expectations for upgrade cycles and our ability to purchase and install much more efficient machines have evolved and we believe this should be reflected in our counting treatment of the entire fleet.

Speaker Change: We made this change in the second quarter in the counter-fork perspective.

Speaker Change: Now let's turn to our non-gap mid-reslide where we reconcile our justed earnings.

Speaker Change: As always, I'd like to remind you that adjusted earnings exclude the impact of depreciation and amazation.

Speaker Change: The non-cast changes in the fair value of our derivative asset.

Speaker Change: Deferred income tax expense, the non-cash change in the fair value of the warrant liability, share base compensation, and other non-recurring gains.

Speaker Change: These supplemental financial measures are not measurements of financial performance in accordance with US gap. However, we believe that these non-gap measures may be useful to investors for comparing our performance across reporting periods consistently.

Speaker Change: Internally management uses these non-gap financial measures to better understand manage and evaluate our business performance.

Speaker Change: and to facilitate operational decisions.

Speaker Change: When adjusting our third quarter gap net loss, we had 84 million for the items I just listed. This brings us to an adjusted net loss of $3 million for the quarter compared to an adjusted net loss of $3 million in the prior quarter and 2 million of net income in the third quarter of last year.

Speaker Change: Now let's turn our attention to the balance sheet at September 30th.

Speaker Change: Our total current assets amounted to $152 million, our cash position came down to $25 million, a decrease of $97 million from the clothes of the second quarter of 2024.

Speaker Change: Power will acquitted a position as of September 30th is $121 million in price of $25 million in cash and $95 million worth of Bitcoin.

Speaker Change: During the quarter we made significant investments with the purchase of Barbel Lake for $67.5 million, 94 million in deposits for miners and 36 million for the development of Black Pearl.

Speaker Change: I'll quickly cover some of a balance sheet line items at September 30th. Prepaid expenses amounted to $3 million. This is primarily related to corporate insurance.

Speaker Change: We reported a Bitcoin balance of $95 million reflecting that $1,500 Bitcoin held in Treasury.

Speaker Change: This figure marks an increase from the 780 Bitcoin held at year end, 2023 valued at $33 million.

Speaker Change: In the third court, we liquidated 1167 Bitcoin or $69 million.

Speaker Change: Now I'd like to turn our attention to the value of our Odessa Power Contract which we record as a derivative asset.

Speaker Change: As we've discussed previously, this contract provides us with significant competitive advantage enabling us to be a low-cost producer of Bitcoin.

Speaker Change: 3.3.3.3.3.4.22.

Speaker Change: This mark is recorded as a derivative asset on our balance sheet and is reevaluated each reporting period.

Speaker Change: Essentially it represents the end of money value of the contract based on time value and prevailing forward power prices at our disability.

Speaker Change: As we remind investors each quarter, seasonality and gradual expiry of the contract impact the assets pricing leading to expected fluctuations in quarterly valuation.

Speaker Change: Given the unexpectedly mild summer we experience in Texas and the car-sponding drop and Ford Pile Curve, we have seen a significant quarter over-quarter decline in valuation.

Speaker Change: However, while this lower mark is reflected on our balance sheet, it didn't know way diminishes the substantial value and competitive advantage the contract provides by securing low cost, 6 price power at our deficit site.

Speaker Change: As of September 30, this asset was valued at $74 million, reflecting a $49 million decrease in the third quarter and a decrease of $19 million from year end.

Speaker Change: This changes the recorded as the loss on our statement of operations.

Speaker Change: As always, fluctuations in the fair value of this contract will impact our gap earnings, but we excluded from adjusted earnings.

Speaker Change: This is particularly important to note given the lower mark contributes to more than half of the net gap loss for the quarter.

Speaker Change: Other significant assets include property, equipment, total and $311 million, primarily were attributable to our death facility.

Speaker Change: Within this category, mining rigs and related equipment account for 182 million. These sole improvements are valued at 138 million, land of 25 million, infrastructure of 33 million, and construction in progress of 56 million.

Speaker Change: These figures are net of 123 million in the cumulative depreciation.

Speaker Change: The posthumment of 145 million primarily consistent progress payments we've made in accordance with previously announced mining rig purchases.

Speaker Change: Additionally, we hold in tangible assets totaling 26 million with 24 million attributed to the EUR COT approval at Black Pearl in Barbell Lake and the remaining 2 million related to capitalized software.

Speaker Change: At the end of the third quarter, our equity investing interest in Albor's bear in chief JV's standard $55 million and we had operating lease obligations of $11 million.

Speaker Change: We had security deposits totaling 15 million which represent the on-court deposits related to the construction of our Black Pearl in Barberlake Data Centers.

Speaker Change: There were no significant changes to the liability side of the balance sheet from year end, and as we've reported in the past, we have no debt that hinges our capital structure.

Speaker Change: As always, we look forward to updating you in greater detail on our growth plans over the coming quarters.

Speaker Change: I will pause now and Tyler and I are happy to answer your questions.

Speaker Change: Thank you, ladies and gentlemen. If you have a question or a comment at the time, please press star 1 on your telephone. If your question has been answered, you will receive a result from the Q. Please press star 1 and 1 again. In the interest of time, we have to chill in with your self-added two questions. We will pause for a moment while we compile our Q&A roster.

Speaker Change: First question comes to Mike Randall with Northanger Light has opened.

Mike Randall: Hey, thanks guys. In congratulations on the development pipeline. You guys have made just a ton of progress there recently.

Mike Randall: and related to that Tyler, I wanted to ask.

Mike Randall: How are you with two good opportunities? How are you thinking about allocating capital going forward between...

Mike Randall: Bitcoin mining projects and HPC projects. How are you thinking about that?

Tyler Page: Hey Mike, thanks for the question. So, and it's a good one, because it's one that's occupying a lot of our headspace.

Speaker Change: I think the easiest way to answer that is to say that we're focused on what's going to drive the greatest shareholder returns.

Speaker Change: We're driven on getting the stock value higher and the decision making goes around that. I think they're both very good operating verticals to have. They're just very different. As you know, well, the Bitcoin mining...

Speaker Change: Process is really subject to kind of a cyclical market. We go through four year havings.

Speaker Change: We get chip upgrade cycles, we get booms and busts and bull markets and bear markets.

Speaker Change: I think of the HPC hosting business is a very different kind of profile. That is a business that you're going to have, at least a way we are playing it, looking to have a really high quality counterparty on a long-term lease.

Speaker Change: So, very reliable cash flows that can be heavily debt financed from a cap ex perspective. It's just a completely different profile than Bitcoin mining.

Speaker Change: I think one of the challenges of Bitcoin mining, at least where the market is today.

Speaker Change: is that lenders and a lot of investors...

Speaker Change: and the view it is obviously volatile but also having a lot of...

Speaker Change: is correlated risk.

Speaker Change: and a lot of it is wrong way risk if you look at some of these miners in the sense that their business relies on hash price.

Speaker Change: The value of the equipment they own is related to that. And if they have a Bitcoin Treasury, that's correlated as well. And so what's interesting about the HBC Business is it really is a completely different profile. If you've got a high quality counterparty.

Speaker Change: You can be looking at loan to cost percentages north of 80% even. And so...

Speaker Change: I think when we look out, we're really driven on what drives the most value that revenue stream will be value differently by investors. But I think it's very complimentary to Bitcoin mining. I think what's been interesting about the way the market has developed over the last couple months is...

Speaker Change: We have developed great strengths at finding large-scale sites that may be overlooked. And again, Bitcoin mining traditionally was in different locations than HPC tenants were looking.

Speaker Change: That is changing because they need such larger sites now and so that market has really kind of come to us.

Speaker Change: So, you know, as we go forward, I think of Cypher really as a data center development company that has this built in.

Speaker Change: kind of hedge that...

Speaker Change: Let's say, you know, HPC turns and it's not as hot as it clearly is right now. We've got these sites that work great for Bitcoin mining if you can manage curtailment, which we do.

Speaker Change: So I expect to have both businesses. It's really just a question of site-specific, market-specific, and where can we be the most opportunistic?

Speaker Change: Got it, that's helpful and then...

Speaker Change: You know, in terms of some of your initial discussions.

Speaker Change: with HPC customers, hyper-scalers, and really financing partners. Are you getting past the initial stages of those discussions? Where are those and how are they developing?

Speaker Change: So let me speak really broadly and generally because I'm obligated to not get too specific on some of those discussions.

Speaker Change: Look, if you look at that whole marketplace, I will oversimplify it. It is more complicated than this.

Speaker Change: You know, roughly speaking, you're going to have a client that wants a long-term lease, say, 15 plus years.

Speaker Change: and they are going to pay some percentage of the total cost to build at the site, including the value of the site.

Speaker Change: and the percentage they're going to pay and that lease is going to be somewhere from the high single digits, you know, to the mid double digits. Paranum and there are elements, you know, to that it's a little bit more complicated in that you're, you know.

Speaker Change: You know, you're contributing these sites probably at a different value than we paid for them, for example, because we got such a great deal. I mean, at Barbara Lake, we've had multiple offers to buy it for multiples of what we paid for it already.

Speaker Change: So, you know, that's basically how that business is going to work depending on the credit quality of the counterparty, you know, they would pay a lower percent on the lease and if they're a little bit further out on the credit quality spectrum, they'd be more in the double digits.

Speaker Change: and then your ability to finance that market is pretty deep with an executed lease with a known counterparty.

Speaker Change: The amount that can be financed is somewhat driven by that credit quality and the...

Speaker Change: specifics, but I would say, you know.

Speaker Change: We have a lot of interest. We've gotten...

Speaker Change: We've had many discussions, I would say we're pretty advanced. So, you know, I can't give too many more specifics than that, but like I said, you heard in the comments at the beginning of the call, we're very confident in this marketplace and the level of interest. We've received that we will get it all the way to the finish one.

Speaker Change: Great to hear. Thanks again.

Speaker Change: Thanks, Mike. One more moment for our next question.

Speaker Change: The next question comes from Paul Golding from Aquaria, your line is open.

Paul Golding: Thanks so much, Jim, congrats on all the development pipeline. I had a quick question on.

Paul Golding: and Black Pearl, given all the conversations you're having with potential HPC tenants, is there any change to how you're thinking about Black Pearl on a higher level in terms of whether there's optionality to...

Paul Golding: and Slot in some HPC earlier if demand is there and then I have a follow up. Thanks.

Speaker Change: Sure. So the way we are operating right now is that Black Pearl construction is going full speed ahead with the envisioned 300 megawatt Bitcoin mining data center that we have planned. And everything is on track.

Speaker Change: I think that large scale sites that are energized in 2025 are so rare that we have received a lot of unsolicited reverse inquiry on the site for hosting HPC. And so what I'd say is...

Speaker Change: War flexible again, we're kind of driven by what we think will produce the best returns for the company.

Speaker Change: If someone wants to offer the moon in the stars for Black Pearl, and we think it will produce a better investment return than building the Bitcoin facility there.

Speaker Change: Will certainly entertain those offers. So it's hard to say what may happen all the way at the end when it's up and running, but nothing has changed about our process and we've got hundreds of folks working out there every day, making the progress that we showed in the pictures of the presentation.

Speaker Change: Thanks Tyler and then when I think about Black Pearl it has 250 air cooled 50 megawatts split for liquid cooled. Is there anything to do?

Speaker Change: Glean from that in terms of how you see

Speaker Change: Data Center Development, Bifurcating is there, is there the potential for that site to pivot maybe.

Speaker Change: More over time towards liquid cooled if you're looking to be positioned well for GPUs, direct to chip, etc. How should we think about maybe more macro for your whole fleet in terms of how you're approaching liquid since historically you've been air cooled? Thanks.

Speaker Change: Great question. So, you know, we view it as really important to have a hydro as something that we do. Candidally, when we have modeled out investment returns and you look at the difference in capex and the spend for hydro.

Speaker Change: I'm not sure you're going to make it back in Bitcoin mining and so that's why we have generally favored doing air cooled. We just think the ROI works better, we're pretty good at managing a fleet of air cooled machines.

Speaker Change: That said, you know, the industry more broadly, the data center industry is certainly moving there over time. And I think given that we've got such a large-scale site at Black Pearl, it was our view that we should do something meaningful there in Hyde Rose so that we have...

Paul Golding: Credible Experience Managing That, and exactly as you suggested Paul.

Paul Golding: We want to be prepared for a world where everything is directed, ship, cool then we've got operational experience that we can show off doing that. And it will be interesting to see how that progresses and to check in on where the ROI is over time.

Paul Golding: on those megawatts versus the other megawatts to check our assumptions in our modeling.

Speaker Change: Great, thanks so much, Hala.

Speaker Change: One moment for our next question.

Speaker Change: Next question comes from my colonel with ATC Wayne right your line is open.

Speaker Change: Hey, good morning guys. First one for me is a bit of a follow-up to the previous question there. So it sounds like you're open to utilizing a portion of the capacity of Black Pearl for HPC. So I'm curious how that would impact your 2025 hash rate outlook, which currently calls for 35 x x 2. Assuming you'll find a great deal on the HPC size.

Speaker Change: Thanks Mike. So the 35 projection, the 35 XHP projection by the end of next year, in visions, the full build out for Bitcoin mining.

Speaker Change: at Black Pearl and Black Pearl represents an estimated 21 and a half-ish of...

Mike Randall: that Exahash calculation. So to answer your question, it would depend on what portion would end up being HPC and it would proportionally ramp that down, depending on how much of the site we would potentially repurpose for HPC.

Mike Randall: again.

Mike Randall: I think from our perspective, we are not changing anything about our scheduling, the progress we're making, etc. It's just if someone, I think the market is still kind of defining the pricing for large-scale sites that can be energized in 2025.

Mike Randall: and it only keeps moving in one direction and there's just an astounding amount of enthusiasm for sites like that which is why, you know, we want everyone to be knowledgeable that we're open to if we see something much better giving up a portion of that hash rate for something even better.

Mike Randall: But as you're projected, you know, 21 and a half ex-a-hache coming out of black pearl by the end of next year.

Speaker Change: Understa appreciate the color there. And as you can just remind us of the remaining capex needed to complete the full buildout at a black pearl and really how assuming a portion of that capacity is allocated HPC, how that figure could be impacted as we progress through the coming quarters.

Speaker Change: Sure, so it's hard to give exact specifics on what could end up there, but let me talk about Black Pearl as we're thinking about it from the Bitcoin mining perspective because that's a little bit more well defined.

Speaker Change: Let me remind you that it's a front of the meter site so we don't have any kind of take or pay obligations there Beyond hitting some minimum megawattage for certain deposits we've put down.

Speaker Change: The first phase, which is the first 150 megawatts of the site, has about $77 million of infrastructure spending left to go.

Speaker Change: and you could roughly double that if you were assuming the build out for the full 300 megawatts of Bitcoin mining. Now that's just that sort of everything but the mining rigs.

Speaker Change: The reason why I'm giving some flexibility on the rigs is if you do the full buildout of the 21 and a half eggs of hash as envisioned.

Speaker Change: Recall that we have deposits down on options to buy rigs at very attractive prices, both the S21XPs from Bitmain and the next generation Kanean Machines.

Speaker Change: If we were to buy all of those next gen machines to get to that 21 and a half exahtion at the site, we'd be paying about $340 million for those rigs.

Speaker Change: That said, those are options. It's not an obligation and I'll remind you that we're currently upgrading Odessa and unplugging.

Speaker Change: About four and a half eggs and a half machines that we could go repurposed somewhere else. And at a front of the meter site, we could of course just run curtailment and operate them profitably. All my way of saying that our plan is to do the full spend get the really...

Speaker Change: Cutting Edge machines to get that full strength going into what we expect to be a Bitcoin and Bitcoin mining bull market next year.

Speaker Change: Well, if conditions didn't materialize or something like that, we do not have excessive obligations, and so can kind of manage that opportunistically.

Speaker Change: really helpful and probably appreciate taking my questions out of.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from Bill Poppin, Astu with Stiefly Your Line is Open.

Bill Poppin: Good morning, gentlemen. Congrats on the recent developments with your hyper-skilled discussions and things that can in advance for answering my questions.

Bill Poppin: For the first one, just hoping you could share some more color taller on the amount of capacity that these hyper-scalers are looking forward to manding. Do you have a potential customer in mind that is considering multiple sites?

Speaker Change: I'm just curious to hear how advantage it has been to have one of the large pipelines in the Bitcoin mining space.

Speaker Change: Let me give some color. So at least in some of the discussions we have had, there seems to be a very outside focus on 20, 25 capacity that effectively near-term quotas have not been met at some of those very large users of compute.

Speaker Change: and so the real focus has been on what's available sooner in the pipeline that lines up very well for us as I mentioned that we can sort of...

Speaker Change: Potentially expand to other pieces of that business over time, but our first attempts will be what's called it on a little bit more just of vanilla hosting.

Speaker Change: and kind of version of the business.

Speaker Change: I've, you know, most of them screen for sites that are at least 100 megawatts.

Speaker Change: I think that's a general screen, sometimes it's even bigger, 150 megawatts.

Speaker Change: I don't know how much more color I can give than that other than you know we've got I don't know I have to as in folks have expressed interest some of that has been reversing query and they've found us and certainly as I've mentioned with Black Pearl

Speaker Change: We really went into those discussions knowing how fantastic and rare barber lake is.

Speaker Change: It's only after some of those discussions progressed and they got to know us that people have been pretty aggressively asking also about Black Pearl.

Speaker Change: but that's generally kind of the state of the world.

Speaker Change: Okay, awesome, appreciate the color there. And then just sticking with the power portfolio of power strategy.

Speaker Change: Can you share some data points in terms of how the level of difficulty has changed to secure green field sites and Texas over the recent quarters and how important will it be to secure more capacity at this point now, but you have roughly two gigawatts of an allocated power.

Speaker Change: yet, you know, you're seeing a number of hyperscalers getting answered. Anxious due to the long lead times. Thanks.

Speaker Change: Sure, so I mean, obviously for context, I'm sure as everyone probably knows, having a 2 1 1, gigawatts is a very large portfolio.

Speaker Change: We have found a lot of opportunities, just because historically Bitcoin miners have used these big sites. So we've got some expertise in looking for them. I do think it's getting more challenging to find them the sites we have found that they tend to be kind of...

Speaker Change: Sticky situations. I don't think though we have been very active in participating in broker deals, we always get a call and a look and we typically will go through and provide bids.

Speaker Change: I'm not sure we've even ever made a final round of bidding for a heavily marketed site. That's not really our sweet spot. Our sweet spot has tended to be...

Speaker Change: Sites that again for whatever reason they need to close quickly. There's been some history at the sites that's complicated, maybe there's various...

Speaker Change: constituents that are having challenges getting to agreement, whatever, we've been able to kind of swoop in and those have been sites where we've been able to really extract a lot of value. If you look at what we have paid for sites.

Speaker Change: We've done a really, really good job on it. That means we don't get as many sites as we did on, but we do tend to source these.

Speaker Change: I think if you look at our progress over the last.

Speaker Change: and Carter in how we look at different timelines.

Speaker Change: It's sort of as indicative that it's getting more challenging to find sites. The options on the three M sites we mentioned are earlier in the development process than we have ever gone. So typically we have bought sites that are greenfield, but they have and approved interconnection.

Speaker Change: In the case of the 3M's, because we see this market getting tighter and tighter and tighter and every element of the marketplace seems to be making them harder to get.

Speaker Change: We've gone earlier in the development cycle to participate and we've been able to again lock in extraordinarily favorable race to acquire those data centers.

Speaker Change: With some risk of the overall sizing of what gets approved, again, we're confident that those three sites will be very successful in securing large interconnects. They are applying for 500 megawatts each and our pricing framework is fixed.

Speaker Change: Based on the number of megawatts that get approved. So I do think sites are going to be harder and harder to get. As I mentioned earlier, if you speak to some of the system operators and maybe you've seen some of the quotes in the press.

Speaker Change: David.

David: Hyper-Scaleers now want these very large-scale sites.

David: and the operators of the grid are saying, you know, that is not a curtailable load.

David: Typically, the way they are run and that's a lot of power that's being drawn off of our system. Please think about providing generation to match. And that's why you've seen things like...

David: Microsoft buying through my own aisle or restarting through my own aisle.

David: It's to have these discussions where they can match that generation with the load that they're putting on the grid.

David: If that continues to go the way...

David: It seems to be going, you know, it's going to be harder and harder.

Speaker Change: to get large-scale interconnection, and we think that puts even more value on the sites we're securing. As we look out to the 2027 sites, again, there's not as much market pressure from the business development folks at the Hyper-Scaleers on 2027. They're so focused on the near-term.

Speaker Change: But we see that changing over time and that's why we've moved earlier and earlier.

Speaker Change: Thanks Tyler, that's great. Appreciate it.

Speaker Change: My next question comes from John Tudor with Needed Me Company, your line is open.

John Tudor: Hey, great. Thanks for taking my question. Two for you guys. So first off in the prepare to mark Tyler's sounds like there's a few different avenues you guys can go down with HPC. Obviously it's a big cat-backs with.

John Tudor: So, wondering if you're going to put any cap extra dollars towards building a dedicated site without a leasing place from a customer or a major lease at that, and then I have a follow-up question.

Speaker Change: So I think there's some basic capex we would spend, you know, preparing a site, grading, etc. And for future sites, doing things like arranging to build a substation that can be used, you know, a lot of the sort of high voltage, the mid voltage infrastructure looks the same at both.

Speaker Change: and the kind of things we would do.

Speaker Change: We probably would not build a data center on spec without a tenant in mind at least at this point in our evolution, because based on our discussions,

Speaker Change: There are very particular design and build requirements depending on the perspective tenant.

Speaker Change: and so to sort of build something on spec and hope that they like it is again at this point in our evolution is probably not what we're going to do. We would look to, you know, I think what you should expect would be we would get a term sheet letter of intent kind of thing in place with a tenant.

Speaker Change: that would have the design and build requirements envisioned. We would make progress on that as we come towards an executed final leaf. And then on the leaf we would look at that finance as much as possible that build cost.

Speaker Change: So I do think we would have some spending in the months between a letter of intent and executed lease.

Speaker Change: But, Farrell says there are a lot of avenues to provide that. There are many folks have been calling us up offering all different ways to sort of finance that capex. So I think it's all easily within reach.

Speaker Change: Got it, understood that's helpful. And then just to follow up, we spent some talk of 20, 25 HPC, but in less you kind of...

Speaker Change: It almost seems like we'll be breaking ground pretty quickly here.

Speaker Change: He did more so that something would be signed in 25 and be more so generating revenue for the customer or generating revenue in the lease in more so like a 26 because it just seems like a very short time frame to get a site pop and running for it to catch a 25 demand.

Speaker Change: You know, if you're starting from scratch, that's going to be challenging. But the thing about Barber Lake, of course, is that the substation is sitting there and humming. So it's really the downstream construction from there. And that is typically a long lead time gating item.

Speaker Change: After that, to figure out a timeline, it's a little bit build and customer specific.

Speaker Change: If it's a customer that wants five nines of uptime from day one

Speaker Change: The long lead time item is going to be generators and you're probably not going to be getting generators in 2025 until maybe you'd get some at the very end of 2025.

Speaker Change: but that would be the other...

Speaker Change: Question, if they're willing to run with say three nines of uptime...

Speaker Change: Forever or in advance of receiving generators, you could be up and running by late next year, at least you could be getting started.

Speaker Change: theoretically, but you would have to move quickly. I think the one other thing to mention is, there's a lot of different models of this business. There are some clients that have their own design and all their own equipment and you're not procuring it.

Speaker Change: You are providing basically the land and constructing the shell for them.

Speaker Change: on a build-to-suit basis, but they may be sitting on an inventory of generators.

Speaker Change: So in that case, it's really just a construction timeline, which admittedly is many months, it's going to be very late 25, but that is doable. So it depends a little bit on the tenets.

Speaker Change: I appreciate that, thanks guys.

Speaker Change: Our next question comes from Reggie Smith with JP Morgan, your line is open.

Reggie Smith: Thanks for the question. Question for you.

Reggie Smith: He has a lot of interest in HUC, we've seen some longer range deals from nuclear plants announced, we've seen this one big deal, of course, I think it could now support. We've seen there's some questions for you, are you surprised and the kind of deals on the last question? Are you surprised at the pace of development and the near-term?

Speaker Change: Because again, if things aren't signed soon, it becomes very hard for something to be at about 2025. What do you think is causing HPC?

Speaker Change: Application users to hesitate or what hasn't, you know, a deal been signed yet. It's just kneeling down the pricing or like, what are some of the things that are kind of going through their heads as you kind of see it?

Speaker Change: Well, I mean, I'd say based on our experience, there is a firm amount of diligence.

Speaker Change: There are sight visits, there's a fair amount of study of geotext studies, things like that, understanding the sights, the risks.

Speaker Change: The company that are spending billions of dollars on this also tend to be very large companies with hundreds of thousands of employees in frankly.

Speaker Change: While there's a lot of enthusiasm to go quickly and again if you listen to the earnings calls of the hyperscalers you can hear about

Speaker Change: The revenue, the capex investments, etc. related to their cloud services.

Speaker Change: So I think that's kind of the big picture driver of why they're in a hurry. I think between diligence and just working with large organizations, these things take time, you know, these leases are complex. It's not.

Speaker Change: We're a very nimble company that does self-mining, so it's very easy for us to execute quickly here. Other things are a little bit more bureaucratic. I mean, also not for nothing, there is a bit of a dating process. They've got to get to know us.

Speaker Change: I would say, you know, look broadly speaking, the Bitcoin mining industry in general has by design built things on the cheap. We are at the low end of the revenue spectrum for data centers.

Speaker Change: Often very high margin, but that margin is driven by squeezing costs out of builds.

Speaker Change: and that is very different than the high end of the revenue spectrum, where building five-nines of uptime requires a level of attention to detail and craftsmanship.

Speaker Change: that I would say not every company in this space has.

Speaker Change: We happen to be blessed with a very talented and experienced construction and operations team that have worked at places like Google and Meta on their data centers. And so I think in the diligence process we show very well, it's part of the reason for my confidence in addition to having these great sites is we have a team that impresses.

Speaker Change: and so I think overall since your question is kind of about the industry.

Speaker Change: I think those are some of the reasons I would imagine and I would imagine, you know, if we're not leading the charge, I know there are other folks that are involved in these types of discussions as well.

Speaker Change: Thank you one moment for our next question.

Speaker Change: Our final question comes from Greg Lewis with BTIG, your line is open.

Greg Lewis: Yeah, thank you, Good morning. Thanks for getting me in here. I guess we're on the hour. I'll just keep the to one.

Greg Lewis: Tyler, and I guess Ed, is like you kind of caught out the right down in power. You know, because you just give us a little bit of thoughts around how you're thinking about, you know, the potential power, just, you know, as we look at, you know, if we were to look at, like, 26 electricity pricing and, you know, in Texas, it looks like it's kind of like down at it's like...

Greg Lewis: and two year low if we were looking at a range. And it's kind of how we think about that. Is this something that we're going to continue to do? Or just as we think about what's been hearing from some miners that, prices are low and really we can just kind of be in the spot market and maybe not look to hedge as much as maybe.

Greg Lewis: No.

Greg Lewis: We might have thought about doing it in the past.

Speaker Change: I think that's a good question. I think that, listen, we're always going to look for the most favorable way to lock in margins.

Speaker Change: Sometimes that's floating in the spot market sometimes.

Speaker Change: The market presents you with an opportunity to do a fixed price contract. Let me speak to the contract and give some context on Erknot. Of course, I'm sure everyone knows this, but the power contract is marked to market each quarter, and that's going to depend on how much time is left and what the forward pricing curve is over those coming years.

Speaker Change: and so the contract has always been in the money we have hedged at a very cheap price.

Speaker Change: Over the summer, I believe in the second quarter.

Speaker Change: On a forward basis, those prices hit the highest they have, I think maybe ever been, but certainly at least on a local high, on a forward basis and so the contract marked up quite a bit. Of course, we have always stripped out that mark to market in our adjusted earnings.

Speaker Change: Because it is a non-cash item, it moves around a lot. I think the bigger thing is nothing changes about the fact that we're paying 2.7 cents per kilowatt hour for power.

Speaker Change: and that's really the value of that contract is in the ongoing operation. So it came down those prices on a forward basis, came down from...

Speaker Change: Heyes over the summer, and of course we expired another quarter of time value remaining and that's the mark to mark it on the contract on that specific question.

Speaker Change: More broadly speaking.

Speaker Change: You know, look, the market continues to develop and it has implications for both the Bitcoin mining industry and potentially where HPC goes over time.

Speaker Change: Again, if grid operators are not going to want these huge loads coming on to their grids without generation, and the users of the HBC are not going to want to wait for the time it would take to build generation.

Speaker Change: You could imagine a world where perhaps if you look at Texas dynamics

Speaker Change: you get a solar ramp in the afternoon in the summer and it's hot and prices spike. You could potentially manage going between generators, backed up power and not drawing from the grid for a couple hours and bringing kind of curtailment to an HPC load.

Speaker Change: We're very excited about things like that because we've been doing that business for a long time in Bitcoin mining and think we can bring a lot of expertise.

Speaker Change: It depends. This summer showed a lot of growth in batteries in Texas and so power dynamics were really different and will continue to evolve. But I think that's always been one of our great strengths and we expect it to be going forward.

Speaker Change: Thank you all turn to Beth the Tyler for any closing remarks.

Speaker Change: Thank you everyone again for joining. We're very excited about the future and look forward to providing more updates as soon as we can. Thank you. Happy Halloween. Ladies and gentlemen, so I've some clue today's presentation. You may now disconnect and have a wonderful day.