Cipher Mining Inc (CIFR) 2021 Q4 法說會逐字稿

Good morning. Thank you for standing by. And welcome to the Cipher Mining Inc. Fourth Quarter 2021 Business Update Conference Call. Please be advised today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to Lori Barker, Investor Relations.

Good morning ladies, and gentlemen. Thank you for joining us on this conference call to discuss Cipher Mining's Fourth Quarter 2021 Business Update. Joining me on the call today are Tyler Page, Chief Executive Officer, and Ed Farrell, Chief Financial Officer.

Please note that you may also review our press release and presentation which can be found on the Investor Relations section of the website at investors@ciphermining.com. Please note that this call will be simultaneously webcast on the Investor Relations section of the Company's corporate website.

This conference calls the property of Cipher Mining and any taping or other reproduction is expressly prohibited without prior written consent.

Before we start, I'd like to remind you that the following discussion as well as our press release and presentation contain forward-looking statements including but not limited to Cipher's financial outlook, business plans and objectives, and other future events, and developments including statements about the market potential of our business operations, potential competition, and our goals and strategies.

These forward looking statements involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in Cipher's periodic and other SEC filings..

The forward-looking statements and risks in this conference call including responses to your questions are based on current expectations as of today and Cipher assumes no obligation to update or revise them whether as a result of new developments or otherwise except as required by law.

Additionally the following discussion may contain non-GAAP financial measures. We may use non-GAAP measures to describe the way in which we manage and operate our business. We reconcile non-GAAP measures to the most directly comparable GAAP measure and you are encouraged to examine those reconciliations which are found at the end of our earnings release issued earlier this morning. I will turn the call over to Tyler. Tyler?

Hello. This is Tyler Page, the CEO of Cipher Mining. Let me say thank you for joining our fourth quarter earnings call and I look forward to providing a business update. Let's start with an overview of Cipher Mining. We are a U.S.-based, large scale, Bitcoin miner, with key competitive advantages in power, equipment, and operations.

After going public in the third quarter of last year as a greenfield company, we have made great progress. We commenced our Bitcoin mining operations in February of 2022, and we have significant build-out plans for 2022 and 2023.

Notably we have a business positioned to withstand cyclicality in Bitcoin mining profitability. We do this by focusing on the main cost drivers of opex and capex in the business. In Bitcoin mining apex is dominated by the cost of power. And capex is largely the cost of mining rigs.

We have a portfolio of long-term power purchase agreements with a compelling weighted average price of $0.273 per kilowatt hour. And we have a series of mining rig purchase contracts where our average price is $42.81 cents per terahash. We believe these costs are extremely competitive versus our peers.

As we look forward we believe Cipher Mining will be the preferred platform for the U.S. power industry to access Bitcoin mining. And I am excited to discuss some term sheets for new potential data-center deals that we have signed since our last business update. Let's discuss some milestones Cipher has achieved since our last call.

Most importantly we are no longer a pre-revenue company. We began mining bitcoin at our Alborz data Center in late February. Our Alborz data center is expected to continue to receive our initial shipments of mining rigs for the first five months of the year. The January shipment arrived and was installed on time.

The February shipment has shipped on time and we anticipate the machines will be installed this month. Alborz is 100% powered by wind. Additionally, we have been very busy arranging deals for our future pipeline of data centers. I will focus on two deals for which we recently executed term sheets.

First we signed a joint venture term sheet with a private investor group for a new 80 megawatt grid-connected site in Texas where Cipher will own 51% of the economics. Assuming we close the deal we anticipate that the site will be ready from a power and infrastructure perspective to accept mining rigs later in 2022.

Second we signed a term sheet for a new power purchase agreement with Luminant which is an affiliate of Vistra for a 200-megawatt facility that will draw power sourced from solar and will be supplemented by a grid connection. This will be our second deal with Luminant and will feature both a longer-term 15-year power purchase agreement as well as unique features that allow us to align our incentives with the power provider.

Perhaps most excitingly this project will be a prime example of how the economics of Bitcoin mining can provide the necessary incentives to unlock the construction of new renewables facilities.

We continue to be innovative in our deal structuring so that we can get a more closely aligned relationship with our power providers and ultimately be positioned as the preferred provider in the market for accessing Bitcoin mining.

Let's take a moment to discuss the evolving bitcoin-mining landscape. There are many changes happening in this industry and we are positioning Cipher to take advantage of the way we think the market will evolve.

Let's start with the somewhat obvious observation that there are tremendous advantages to having economies of scale in Bitcoin mining, primarily related to negotiating better pricing for power and mining rigs. Given that, we have observed mining companies going public to access larger pools of capital. Cipher helped lead this trend, going public last year.

The main focus for much of the industry in 2021 was securing mining rigs in a world dominated by chip shortages. Today we see the main challenge for the industry as being infrastructure execution and deployment. When it comes to execution we anticipate that Cipher will be well positioned as we continue to scale up our infrastructure at sites throughout the year.

What we see developing in the market today is an increasing level of interest from the U.S. power industry as they would like to benefit from the economics of Bitcoin mining. We believe that this trend will continue and are positioning Cipher to be the preferred partner for power providers.

Our JV platform can provide unique benefits, and our flexibility in deal structuring continues to give us a strong pipeline of opportunities. We are trying to be in front of what we think is a significant trend.

Lastly, we think it is likely that there will be greater downstream integration for miners to the broader crypto and financial services markets in the future. We think that Cipher Mining will be the B2B platform for the U.S. power industry.

In addition to the new joint venture term sheets I discussed earlier we have a series of joint ventures to deploy new data centers with our partner WindHQ that will be coming online this year and into the future.

We also continue to extend our relationship with Vistra with a new term sheet that envisions an innovative structure which further aligns our incentives at a second large site we will look to build in 2023.

Beyond these opportunities we have a significant pipeline of potential deals we are in the process of negotiating. Aligning incentives with a joint venture structure our custom PPA features makes sense to Cipher because we can ensure the most competitive prices for power.

These structures make sense for the power provider because we have a turnkey JV model that is scalable and can address the complexities of handling bitcoin. This allows them to access potentially higher margins than simply selling power for a dollar-based markup.

Over time we believe building connections to a wide variety of power partners will be a big part of our future success. Next let's talk about our updated implementation plan and strategy. First let's begin with an overall market update.

Since our last business update call, bitcoin prices have been volatile and moved downward. Bitcoin prices have lost about a third of their value since touching all-time highs last November. Against that backdrop we have also seen indications that deploying infrastructure seems to be a choke point for putting mining rigs to work with some other mining companies.

And we have received inquiries about hosting miners for others at our sites as they are deployed. While we do not currently have plans to offer hosting, this interest reconfirmed the importance of our primary focus on continued timely deployment at our data centers.

At the same time we are seeing clear signs that the mining rig market is evolving. New generations of miners are being launched from traditional players and notably Intel is broadly rumored to be launching its own competitive mining rig with the possibility of fixed prices.

When you combine that news with increasingly competitive pricing that we are seeing in the rig secondary market, we believe there is the possibility that we are at the beginning of a new market environment. It is hard to predict but we believe that maintaining flexibility will be of paramount importance going forward.

There may be opportunities to purchase rigs on a shorter-term delivery schedule for lower prices in the future and we will be watching this development closely. Let's look at our currently forecasted schedule for site readiness.

Recall that we think of site readiness in three phases. Power readiness, infrastructure readiness, and mining rig availability. Here is a bar chart showing our forecast for power and infrastructure availability at our data centers and the associated megawatts being available.

There are a few changes since our last update. We have added the anticipated 80 megawatt JV for which we recently signed a term sheet in the fourth quarter. And we have made some small tweaks on sizing and expansions for Bear and Chief. Note that we are also now expecting a change in our timeline to deploy at our first site with Standard Power.

We currently anticipate that we will target deployment at our first site with them in 2023. Alborz is now up and running with its first rigs and we anticipate Bear in Chief will be ready from a power and infrastructure perspective by month end.

Odessa's deployment currently remains on track for the third quarter. In a marketplace that seems to be somewhat short of quality sites ready to accept rigs, we are building a strong portfolio of sites with compelling economics. Let's talk about our anticipated minor delivery schedule.

We have placed a focus on cost discipline when it comes to purchasing machines and currently having anticipated weighted average cost of $42.81 per terahash across our portfolio. That positions us well in the evolving marketplace for mining rigs and we are looking to be as flexible as possible to take advantage of potential opportunities that may arise.

Recall that we have contractual relationships with three different providers of mining rigs, Bitmain, MicroBT, and Bitfury.

Our Bitfury contract is structured as a seven-year arrangement that provides flexibility given that we have a right of first refusal on machines and a most-favored nation pricing arrangement in the contract. Thus when rigs are in high demand and hard to source we have the potential to secure them from Bitfury at a competitive price.

When the marketplace has lots of rigs available and there is not as much of a premium on securing supply, we can optimize across other suppliers and Bitfury has the potential to sell their rigs to others at market prices.

Given our belief that upcoming market conditions may warrant a premium on flexibility, we have decided to continue to push forward with our Bitmain and MicroBT contracts but not Bitfury's rigs for 2022 delivery. This reduces the baseline amount of hash rate that we currently are expected to receive in 2022 to 7.2 exahash but allows us the flexibility to be nimble and potentially capture opportunities in a fast-moving market.

If the mining rig market provides opportunities for us to acquire machines later this year at attractive prices, we anticipate having the capacity at our site in 2022 to accommodate machines with the potential to generate an additional 1.9 exahash to Cipher.

Let me share some pictures of our deployment progress. Here are some pictures of our data center site at Alborz that is now mining bitcoin. You can see the big wind turbines in the background.

Here are some other perspectives on our containers at Alborz. Here's a picture of the hot side of one of our containers as well as our chief construction officer, hard at work, racking and stacking the initial rigs at Alborz.

Here is an exciting picture. This is the now-cleared area where our data center will be located at Odessa. You can see the power generation facility in the background. To give some perspective. This site has had about 54 acres cleared and 3,000 dump truck loads of dirt removed. We have new containers being fabricated and our work streams are currently tracking toward an on time deployment.

Lastly, let me reiterate some key statistics to note about Cipher. Our anticipated weighted average cost for mining rigs is $42.81 per terahash. Our anticipated weighted average mining rig efficiency is 33.8 joules per terahash.

Our anticipated weighted average power price is $0.273 per kilowatt hour. And our anticipated infrastructure capex costs per megawatt, excluding mining rigs, is $450,000. Now I will pass it off to Cipher CFO, Ed Farrell.

Thank you, Tyler. And hello to everyone on the call. As Tyler stated, in the fourth quarter of 2021, we made significant progress in our deployment plan of building out our data centers. This resulted in fulfilling the commitments we previously announced relating to purchasing mining rigs, electrical infrastructure, security deposits for our power agreements, and corporate-related expenses to support our business.

We closed on the merger back in August 2021 and immediately we commenced our deployment plan. This included making schedule payments relating to mining rigs of approximately a $115 million that is recorded as deposits on machines on our balance sheet.

We made progress payments for property and equipment which includes transformers and switched gears of $5 million; security and collateral deposits of $10 million to one of our energy providers; and $16 million for corporate-related prepaid expenses.

On December 31st, 2021, we had cash of approximately $210 million and since then we have continued invest in capital as our plan progresses.

If we look at our GAAP operating results, for the 11 months ended December 31st, we had a net loss of approximately $72.1 million. The primary drivers of this loss include approximately 63.8 million of stock-based compensation; corporate-related expenses of approximately $8.3 million which include insurance, professional fees, and employee compensation, and benefits.

We believe non-GAAP financial measures are also helpful to investors in comparing our performance across reporting periods on a consistent basis. Our non-GAAP P&L and non-GAAP diluted earnings per share excludes the impact of certain non-cash recurring items which include depreciation of fixed assets, change in fair value of warrant liability, and stock compensation expense.

These measures are not a substitute for our GAAP results but management will use these non-GAAP financial measures internally to help understand, manage, and evaluate our business performance and to help us make operating decisions.

So for the 11 months ended December 31st, our non-GAAP loss is approximately $8.4 million. We have provided a reconciliation of our GAAP versus non-GAAP results.

Finally, we are very pleased with the progress we've made executing our plan, and look forward to continue building our business and reporting our progress and successes in the first quarter related to our Bitcoin mining operations. I'll stop there. Tyler and I are happy to take your questions.

Thank you. (Operator Instructions) Our first question is from Kevin Dede with H.C. Wainwright. Your line is open.

Good morning, Tyler and Ed. Thanks so much for taking my question. Would you mind just spending a little bit more time on the Bitfury situation if you -- if you. If you could, could you just peel back the onion a little bit, give us your read on their chipset development and when you think they might have rigs to enter the market?

Sure. Hey Kevin, how are you? So I think you know, we are under a seven-year contract with them to have options to purchase their rigs and with the 2022 allocation we have a pre-order arrangement that I know is filed with the SEC so it's public. And that envisioned delivery in the second half of 2022.

As we mentioned on the call, we are exercising our right to be flexible and not move forward on that 2022 purchase but they have received their chips from Samsung. And as far as I know they are on track to deploy those machines in the second half of 2022 as we had contracted for.

And Alborz again, apologies Tyler because I know you've held my hand through this before but Alborz obviously driven by wind. There's got to be a grid connection as well?

No. There's not. There's actually a back-to-back PPA there where Alborz only purchases power from the wind farm. And let me tell you I think I know the question behind the question which is thinking about how do you do that? What if the wind is not blowing? There's really two steps there.

The first is that the wind farm itself is much larger than our data center. It's about a 165 megawatt wind farm. Our data center is sized appropriately at 40 megawatts. And then on an ongoing basis we anticipate there will be less uptime there than there would be at our typical site with power availability all the time.

And so what we've done there is look at the historical wind production and use that in our sizing of both the size of the data center as well as the modeled up time.

And when you look at the overall cost structure at Alborz it's a -- it's a fantastic opportunity because basically being a wind site there's a mid-voltage connection point there and so the needs for the costs of a substation are not present lowering the capex. And also we have a fabulous price on power there. And so as we think about it, we model about 75% uptime there.

Is there an opportunity to sell access to the grid?

In that particular opportunity it's -- it's our a little bit of a complex setup so we can only draw power and we do not have a grid connection. So it's...

Okay.

... you've got to back to back PPA because you're in a regulated area of Texas. And so we can only draw power from the wind farm.

Okay. And then -- thanks a lot for including the pictures of the sites. They're very, very helpful. The Odessa one includes the power plant. Could you just give us a little more color on that type of power plant?

Yes. It's -- it's a natural gas facility. And that's with our partner Luminant.

Right. Okay.

And so...

Okay.

... you know, we've got the components being fabricated. All major sort of work streams are tracking towards deployment there. It's obviously a large site that's -- as I mentioned it's about 54 acres in that picture.

And so there's a lot of containers going there but if you look at our delivery schedule, the current anticipated plan is to put our MicroBT deliveries there. And so you know, we will be effectively phasing in that site as the machines arrive.

So...

There will be...

... with seven point coming...

... to full size by you know, over the course of the rest of the year, starting you know, in the second half.

... Right, right, right. That one chart you offered is very helpful. The 7.2 exahash target this year, could you give us a rough idea on your renewable mix in total energy consumption for 2022, year end.

Yes. Is it -- so I know we've shifted some pieces around in terms of the deployment timeline so overall I think if you're thinking about an emissions -- let me step back. Our -- recall that our ER approach to ESG is that we've got on our roadmap to target carbon neutrality via offsets by the end of 2023.

We don't work with coal facilities and largely you know, our output of emissions in 2022 depending on timing will be driven by the natural gas facility at Odessa. And so if you look at kind of an anticipated mix of what we've got from an emissions perspective, we come in and about half the typical emissions per megawatt hour in the United States.

So we're starting from a place we think is pretty strong. And then we're targeting offsets by the end of 2023 to have neutrality.

You know, it's wind power at Alborz. It's a grid connection at Bear and Chief. Odessa is natural gas. And the new PBJ site that is under term sheet at this point is a grid connection.

Thank you very much, Tyler. Congrats on...

Thank you, Kevin.

... all the program.

Thank you very much.

Thank you. (Operator Instructions) Our next question comes from Aaron Rakers with Wells Fargo. Your line is open.

Yes. Thanks, thanks Tyler, for taking the question. I guess I just want to go back to kind of the rig deployment you know, just so I can be clear.

It looks like what you've done is just kind of taken out the Bitfury you know, contributions to the model. Has there been any change as far as the timing or the allocation or supply for that matter of the Bitmain and MicroBT systems' deployments at this point?

No. Those are -- those are -- the first two shipments from Bitmain are on track. And no alterations to that schedule. So currently under contract to purchase 87,000 rigs; 27,000 from Bitmain; and 60,000 from MicroBT. And there's been no change to those plans.

And then I noticed and I know it's a small you know, small change but your average you know, anticipated weighted average cost of mining rigs has gone up. It looks like about 10% or 11% relative to back in November. You know, given your contractual commitments can you help us understand are you -- are you seeing...

Sure.

... inflationary pricing on the...

No. That's just...

... cost deployment?

... you know, that is the actual downside. You know, as we weigh the pros and cons, that is the downside of removing the Bitfury rigs. And so you know, we have a most-favored nation pricing arrangement with the team at Bitfury.

And so by choosing the path of flexibility and focusing to move forward with the other two providers, the effect on the portfolio is that you are removing that number of more cheaply priced machines. But...

Yes.

... again as we...

That's helpful.

... as we think about it, the flexibility is -- was the most important thing to us.

And I know this is probably a tough question to answer but I'm just curious so like you know, as you look at the industry dynamics you know, how are you thinking about you know, has there been any changes, what are you kind of watching from the regulator perspective at this point, anything we should be keeping our eyes on?

Sure. Let me give overall context that you know, we've got a shifting landscape on a geopolitical front, a macroeconomic front and...

Yes.

... somewhat an industry front, right so just the heavy caveat that you know, lots of events happen in everyday, right. I think currently from a regulatory standpoint we feel good about where we are. It feels very stable to me, that's coming from a perspective of having worked in in crypto for you know, over five years now.

And the reason why I say that is geopolitical and microeconomic events are going to bring crypto to the highest level of discussion and debate from a legislative perspective.

But I think what I see and you know, I was watching Chairman Powell's testimony yesterday. And then watched a lot of the congressional testimony over the last few months, there does seem to be a growing our knowledge when that you know, bitcoin and in particular is part of the landscape now.

In the fact that that seems to be conceded with regulators, even if they have a broader debate about regulating the space and how do they target bad actors et cetera, to me feels very good. So I -- we do not anticipate changes on that front but the...

(inaudible).

... world's a very volatile place.

Thank you.

Yes.

Thank you. (Operator Instructions) And I'm currently showing no further questions at this time. I'll turn the call back over the Tyler Page, for closing remarks.

Okay. Well, thank you to everyone who could join the call. You know, we are very excited about our continuing execution. And I think that frankly the volatile conditions and the shifting landscape in the world really reinforces our approach to have cost discipline as of the most important way to manage our way forward.

And I think her long-term strategy is distinguishable from the rest of the marketplace and placed to our unique strengths so we're very excited to keep our heads down and continue executing. And thank you for your time today.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.