Cipher Mining Inc (CIFR) 2023 Q3 法說會逐字稿

Good day and thank you for standing by. Welcome to the Cipher Mining’s Third Quarter 2023 Business Update Conference Call. (Operator Instructions) Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your speaker, Josh Kane. Please go ahead.

Good morning. Thank you for joining us on this conference call to discuss Cipher Mining’s third quarter 2023 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 company’s website. Please note that this call will also be simultaneously webcast on the Investor Relations section of the company’s website. This conference call is the property of Cipher Mining and any taping or other reproduction is expressly prohibited without prior consent.

Before we start, I’d like to remind you that the following discussion, as well as our press release and presentation, contain forward-looking statements, including, but not limited to, 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. 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 measures and you are encouraged to examine those reconciliations, which are found at the end of our earnings release issued earlier this morning.

I will now turn the call over to Tyler. Tyler?

Thanks Josh. Hi, this is Tyler Page, CEO of Cipher Mining. Thank you very much for joining our third quarter 2023 business update call. We’ve got some exciting growth updates that we are delighted to announce, but before we walk through those, I’d like to spend a few minutes on Q3 and our recent accomplishments.

During the third quarter, we reached several significant milestones. With the completion of our Odessa Data Center, we have achieved 7.2 exahash per second of self-mining capacity across our portfolio. With all 4 initial sites now up and running, approximately 96% of our portfolio is energized through fixed price power and we believe our cost of electricity at a price of roughly $0.027 per kilowatt hour is among the lowest in the entire industry. As a reminder, electricity represents the majority of our operating costs, and our low price is a key driver of our best-in-class unit economics.

And now that the first chapter of our growth story is completed, I am very happy to report that we will soon embark on the next major phase of expansion. We are delighted to announce that we have just agreed to acquire a Texas-based greenfield site with conditional ERCOT interconnection approval for up to 300 megawatts called Black Pearl. At Cipher, we have long prided ourselves on prudently managing the cyclical nature of the bitcoin mining industry. And as I have stated on our last few business update calls, we have been patiently reviewing many deals for the past several months looking for the right one.

Black Pearl, is that right one. It is a front of the meter site that we hope to bring online in 2025. Note that due to the nature of the site, we have no take or pay obligations for purchasing a minimum amount of power and will build our data center at the pace we deem most appropriate. It is our current intention to build the full 300 megawatts over time, but we will likely build it out in incremental stages and are currently deciding on the most appropriate schedule.

We intend to fund the build-out of the new data center with a combination of cash generated from ongoing bitcoin mining operations as well as from our bitcoin inventory or equity sales from our at-the-market equity shelf to the extent market conditions make that an attractive option for the company. We will also continue our ongoing discussions with construction and equipment lenders, as well as consider other favorable debt financing opportunities.

Once the data center is built, we intend to participate in ancillary services in ERCOT and we hope to generate supplemental revenues from optimizing our operations and using our data center to help with grid stability by providing capacity back to the market in times of need.

Continuing the theme of timing the cycle when investing in growth, I’m also pleased to announce that we recently purchased 1.2 exahash per second of Bitmain’s latest generation S21 rigs for $14 per terahash, which are scheduled to be delivered in the first half of 2024. This was an opportunity to acquire very efficient, cutting edge machines at a great price. Our current plan is to cycle these machines into service at Odessa as they arrive, and either replace machines that are in the process of being repaired or upgrade our operations by swapping them in for our least efficient rigs.

Finally, we have talked in previous quarters about the attractive organic growth opportunities at our existing sites, and we’ve continued to make progress on that front as well. At Alborz, we recently received ERCOT approval for a supplemental grid connection that will allow us to increase our targeted operational uptime significantly. We expect this back feed to be in place in the first half of 2024.

We are at an important inflection point for the company as we pivot to the next stage of growth, and we are excited to be expanding and investing in advance of what we hope will be a bull market for bitcoin in the months and years to come.

Now let’s turn to some specifics on the current state of the business. On Page 4, we highlight key performance indicators as of the end of October. These metrics should give you a sense of our current production and the potential growth we hope to see over the near and medium term. Our current self mining hash rate is 7.2 exahash per second and with the acquisition of the new Bitmain rigs, we now have a total capacity in service or under contract of 8.4 exahash per second.

With the addition of Black Pearl, we have the potential to expand to 23.5 exahash per second by the end of 2025. On the bottom of this slide you can see some of our current and year-to-date production numbers, which reflect the growth of our production over the past several quarters. We are often asked about our treasury management philosophy. These KPIs give some insight into how we approach our bitcoin inventory.

In the middle of the page you can see our bitcoin held, which has risen quarter-over-quarter. We manage our bitcoin treasury by generally selling enough bitcoin every month to fund our operating expenses and existing CapEx commitments. Beyond those sales, we may choose to sell more bitcoin for dollars to invest in expansion opportunities, to hedge our inventory with futures or options, or to hold excess bitcoin to build our overall treasury balance. It’s our goal to build our bitcoin inventory over time, but we also believe that our monthly free cash flow generation gives us greater flexibility to take advantage of growth opportunities in periods where other financing alternatives are less attractive.

Slide 5 is a high level overview of a bitcoin mining business that we like to include each quarter to remind everyone how our business model works. We operate the box in the middle of the drawing that says mining equipment, which represents our data centers and mining rigs. As I discussed earlier, we spend the majority of our operating expenses on electricity, which our data centers convert into computing output. Unlike traditional data centers, which operate a similar model and sell their computing output to enterprise clients for dollars, Cipher sells its computing output, called hashrate to the bitcoin network for bitcoins.

To make this model operate profitably, a bitcoin mining company needs to control both its electricity and the capital it spends to build data centers, including what it spends to purchase mining equipment. Controlling these costs enables a miner to be a lower cost producer, and our focus at Cipher has always been on controlling these specific costs to produce the best possible unit economics. That illustration hopefully gives you a good sense of a straightforward bitcoin mining business.

Cipher, however, does have an additional element to our business that is incredibly valuable. We have the ability to sell power back to the grid. Our Power Purchase Agreement gives us a combination of downside risk protection as well as upside optionality to our revenue streams that doesn’t exist for many bitcoin miners.

Now, let’s turn to Page 6, and look at some recent bitcoin market events. The news flow for miners has been mixed over the last four months. Much like last quarter, we’ve seen positive headlines speculating on the approval of a Bitcoin Spot ETF by the SEC. That speculation has driven a recent rally in bitcoin price to the current level, close to $35,000. But against this backdrop, there has also been a steady climb to an all-time high in overall bitcoin network hash rate, which continues to suppress overall mining economics.

We have also seen announcements from the rig manufacturers of their next-generation machines, which feature dramatic improvements in efficiency. While announcements of new rigs have typically been paired with new premium pricing arrangements in the past, this time the manufacturers have announced very aggressive pricing dynamics. As with many other facets of the bitcoin mining business, rig pricing can be cyclical, and a prudent miner will acquire rigs when pricing is cheap.

In the last bull market, rigs were pricing at many multiples higher than current prices. Against this market backdrop, as we head toward the having in 2024. Cipher is focused on acquiring vital assets like new data center sites and efficient mining rigs at cyclical lows, and optimizing our power use trading and bitcoin production.

On Slide 7, we give a portfolio overview of our data centers. Year-to-date through September, we have paid an average all-in electricity cost of $8,379 per bitcoin produced. We are very proud of this number, and it drives our best-in-class unit economics. On the left side of the slide you have a snapshot of our 4 current data centers, along with our all-in electricity costs per bitcoin at the respective sites. The chart on the right side of the slide gives you a graphic illustration of the current Cipher hash rate as well as the additional potential growth opportunity through 2025.

At this point we will turn to production by site. On Slide 8 you can see a picture of our Odessa facility that we completed in the third quarter. Odessa is clearly the most significant part of our portfolio as it represents approximately 90% of our bitcoin production. Odessa is a wholly-owned facility with a 5-year fixed price Power Purchase Agreement and some of the lowest cost power in the industry. As of the third quarter last year we began reporting a third party independent valuation to give investors a sense of how much value is represented in the power contract alone. As always, Ed will talk more about it in his remarks.

At the end of September, we generated approximately 6.2 exahash per second at the site using approximately 207 megawatts. We have mined roughly 3,531 bitcoins at the site through October 31 and had a recent maximum daily mining capacity of approximately 12.9 bitcoins per day. We will be hosting an Investor Day at Odessa next week and look forward to showcasing the operations and team now that the build-out of the site is complete.

On Slide 9 we show a picture and highlights from our Alborz data center, which we believe is a truly unique site. Alborz is 100% powered by wind and is a joint venture that we share with our energy provider. It currently has a total operating capacity of 40 megawatts when the wind blows. That 40 megawatts powers roughly 1.3 exahash per second of rigs. Alborz can mine a maximum of roughly 2.7 bitcoin per day in current market conditions and year-to-date, the site has mined approximately 603 bitcoin through October 31. Roughly half of that total capacity and site protection belong to Cipher.

Most importantly, our year-to-date all-in electricity cost per bitcoin at Alborz was approximately $6,794, demonstrating our resilient low cost setup. We are working to supplement the wind production at Alborz with a grid connection, which would allow us to increase our uptime and generate more bitcoin with the existing equipment at the site, and we hope to have that arrangement in place in the first half of 2024.

Slide 10 shows operational highlights from our Bear and Chief data centers. Combined, the sites operate 20 megawatts, which power approximately 0.65 exahash per second and can generate roughly 1.4 bitcoins per day in current market conditions. Bear and Chief are also structured as joint ventures and feature shared economics similar to Alborz.

Unlike our other 2 sites, which have behind the meter power arrangements, Bear and Chief are set up in front of the meter at a location in Texas that typically features attractive market prices. Our year-to-date, all-in electricity cost per bitcoin at the combined sites was approximately $10,448.

Now, I’ll turn it over to our Chief Financial Officer, Ed Farrell.

Thank you, Tyler, and hello to everyone on the call. Before I move on to my remarks on the quarter, I’d like to remind everyone that I will be referring to the reported financial results for the 3 months and 9 months ended September 30.

Looking back at the third quarter, we are extremely pleased with the performance of the company during our first full summer of operations in Texas. As Tyler mentioned, we achieved 2 very significant milestones, the completion of Odessa and our near term target of 7.2 exahash of self-mining capacity across our portfolio.

Looking back at the third quarter, we expect the summer months to be seasonally the most challenging operating environment. With record heat and significant curtailment from our power provider, the team did an outstanding job of optimizing the performance of our mining rigs. Over the course of Q3, our operations and technology teams gained greater insight into our minor portfolio and continued to put into place improvements in our process, which we expect to bolster performance over time.

Despite the challenging operating environment, the third quarter was characterized by solid top line free cash flow and improved liquidity. I am happy to report for the 3 months ended September 30, 2023 that our Odessa facility mined 1,091 bitcoin, resulting in Cipher reporting $30.3 million in revenue, and for the 9 months ended September 30, Odessa mined 3,162 bitcoin, resulting in $83.4 million in revenue. This, coupled with the 113 bitcoin we earned at our JVs, resulted in a total of 1,203 bitcoin mined in the third quarter, and for the 9 months our JVs earned 457 bitcoin for a total of 3,020 bitcoin. Please note that the financial impact of the bitcoin mined at our JVs is included in the equity investee account on the income statement.

Before diving further into the numbers, I do want to mention a few important points on the corporate side. Just as we do across all our business, our infrastructure teams strive to be best-in-class and leverage technology. As part of that process, we’ve begun to implement additional technology solutions, which enhance our control and reporting processes. As an example, we will be implementing workday for our financial management and human resource teams.

On the treasury side, we announced a $10 million credit facility with Coinbase. We believe these are all-indications of the strength of our business and growing confidence of our counterparties as we continue to mature as a public company.

Now, I’d like to turn to the Odessa PPA. We have talked extensively about the competitive advantage our power contract that Odessa gives us. As a reminder, we began publishing a third-party mark for this agreement in the third quarter of 2022, which we believe underlines the fundamental value in the business. That mark is shown as a derivative asset on our balance sheet that gets revalued each reporting period. It essentially reflects the in the money value of the contract relative to the current market for power prices at Odessa.

As of September 30, this asset was valued at $80 million or an increase of $4.7 million, which is recorded as a gain on our income statement. Please note that this asset is in two components on the balance sheet, $33 million as a current asset and $46.9 million as a noncurrent asset. For this period and future periods. The change in fair value of this contract will flow through our GAAP earnings and will exclude the impact for non-GAAP reporting.

Our other significant assets as of the end of the quarter include liquidity of $17 million. This includes cash of $3.3 million and bitcoin of 13.7 million. Property and equipment of $258.3 million is primarily related to the Odessa facility, which includes miners of $160.4 million, leasehold improvements of $135.7 million, and other fixed assets of $5 million. These items are offset by $42.8 million of accumulated depreciation.

In addition, we have security deposits of $17.6 million that primarily relate to the collateral posted to our Odessa power provider. Our equity investment of $33.6 million relates to our JVs Alborz, Bear and Chief. Our current liquidity position is $19.6 million, comprised of $2.5 million in cash and 17.1 in bitcoin. In the third quarter, we utilized the ATM and issued approximately 2.8 million shares at an average fair market value of $3.12 per share or $8.6 million net of issuance fees. Our philosophy continues to be that we believe the ATM is a useful tool which we can access in the right market conditions and for the right growth opportunities.

Now, let’s look at our GAAP operating results for the quarter ended September 30. We had a net loss of $17.7 million or a net loss of $0.07 per share. This is compared to the prior year’s third quarter where we had a net gain of $59.3 million or a net gain of $0.24 per share. Please note that in the prior year quarter is when we initially valued our aluminum PPA and recorded a gain of $85.7 million.

Again, our Odessa facility mined 1091 bitcoin and generated $30.3 million for the 3 months ended September 30, using an average price per bitcoin of approximately $28,000. Cost of revenue for the 3 months ended September 30, 2023 was $13 million and consisted primarily of power costs at the Odessa facility as well as maintenance expenses for mining operations. In addition, we have reported power sales at $2.7 million for the quarter.

The change in fair value of our Odessa power agreement, which I mentioned earlier, resulted in a gain of $4.7 million. Equity and losses of equity investees totaled approximately $2 million for the quarter ended September 30, a decrease of $6.3 million for the 3 months ended September 30, 2022. To remind everyone, equity and losses of equity investees consist our 49% share in the earnings or losses generated by our 3 partially owned mining sites.

General and administrative expenses totaled $23.9 million for the current quarter versus $17.8 million for the previous year’s quarter. Our team remains our single most important asset and competitive advantage as we continue to invest in the business and have made several hires in the current year. Within G&A, the primary drivers are stock-based compensation of $10.7 million in the current quarter versus $10.5 in the prior year’s quarter.

Compensation and benefits of $6.3 million versus $1.4 million in the prior year quarter. This increase is attributed to the building out of the team over the course of the year. We currently have 33 employees versus 20 a year ago. We believe there is significant operational leverage as we continue to grow operations.

Corporate insurance totaled $2 million in the current quarter versus $2.4 million in the prior year quarter. Professional fees totaled $2 million, which is flat versus the prior year quarter, and other G&A of $2.3 million includes IT, occupancy and other public company expenses versus $2.4 million for the 3 months ended September 30, 2022.

Depreciation for the third quarter was $16.2 million versus an immaterial amount in the prior year’s third quarter. This is because in the third quarter of 2022 we hadn’t yet started mining at Odessa, so the depreciation on equipment was minimal. We had a realized gain on the sale of bitcoin of $2.5 million in the third quarter. As I mentioned on previous calls, we began selling a portion of our bitcoin holdings at the start of 2023 to support our operations and cash requirements. Finally, we recognized a $3.4 million impairment on our bitcoin holdings in the third quarter versus $300,000 in the previous year’s quarter.

Let’s move on to our non-GAAP financial measures. We are providing supplemental financial measures for non-GAAP income from operations that excludes the impact of depreciation of fixed assets, share based compensation expense, the non-cash change in the fair value of our warrant liability, deferred tax expense, and the non-cash change in fair value of our derivative asset, which again is the power contract at Odessa.

These supplemental financial measures are not measurements of financial performance in accordance with U.S. GAAP, and as such they may not be comparable to similarly titled measures of other companies. We believe that these non-GAAP measures may be useful to investors in comparing our performance across reporting periods on a consistent basis. Management uses these non-GAAP financial measures internally to help understand, manage and evaluate our business performance and to help make operating decisions.

So, for the 3 months ended September 30, 2023, we had non-GAAP net income of $5.9 million, or $0.02 per share. This compares to a non-GAAP net loss of $16.3 million, or a net loss of $0.07 per share for the previous year’s third quarter. I encourage you to review our earnings release where we have provided a reconciliation of these GAAP versus non-GAAP results.

I would close out my remarks by saying we are pleased with the financial performance in Q3 and excited about the next stage of growth for the company. We have talked about the importance of maintaining a strong balance sheet to give us maximum flexibility going into the having and beyond. With our current financial position, free cash flow generation, and best-in-class unit economics, we believe we should be well positioned to move forward with our next stage of growth.

We look forward to updating you in greater detail on the financial results with Odessa now fully up and running and we begin to put in place our next leg of growth for the company.

I will pause and Tyler and I are happy to answer your questions.

(Operator Instructions) And our first question will come from John Todaro of Needham.

Congrats on the quarter, guys. I have a couple here, if you don’t mind. First one, can you just talk a little bit more about that operational leverage you see as you grow top line with new hash power coming and what it means for G&A spend moving forward?

Yes, sure John. This is Ed. Thanks for the question. As you heard, Tyler and I both speak, we’re going through a period of growth.

We’ve just announced some additional growth this morning, and as we continue to build out our infrastructure and technology stack, we’ve been looking at some of the third party contractors that we’ve hired to help support our operations. And we’re building up the team now to bring some more of that in-house and have more control over it, which we believe over time will be less expensive than having contractors do the work. So this is something that is all which we have currently, but I expect that to flatten out over the next through 2024 as we’re making some of these strategic investments on people and technology stack. Got it?

Got it. Yes, that does. One more question. So, on the Black Pearl site, is this going to be kind of call it sub $0.03 per kilowatt hour as well? And then just on the CapEx, so if it’s 300 megawatts, we assume maybe around 400 grant per megawatt. Should we be thinking $120 million ballpark CapEx.

Hey, John, I’ll take that one. Thanks for the question. I think the real key to understand, if you’re going to understand the value at Black Pearl, it’s really the flexibility at the site. Right.

So first of all, it’s a front of the meter site, so it’s going to pay the floating rate of electricity unless we were to at some point put in a financial hedge of some sort. But we probably wouldn’t in these current markets. But the flexibility to draw power when it’s cheap means that probably the pricing will look closer.

I mean, it’ll be large scale, but closer to, like, Bear and Chief. That said, keep in mind we will also be able to participate in ancillary services at scale. I know that some of our competitors had a summer, this summer with record breaking demand for power in Texas, where that produced some significant revenues for them. So this is a diversification of the kinds of sites we have in that there will be revenue streams. So there’s some seasonality to that. As you know, there will be times when the price of power might be high, but you’re also giving up capacity and being paid for that.

So I think overall, we view it to be in line generally with our portfolio, but it will float over time. I think the key to understanding on the kind of the CapEx side, I would say number one, first of all, we just signed the agreement to purchase this site about a day ago. So we’re still working on thinking about the phasing and how we build out and what the costs will be. I do think it’ll probably be a little bit more expensive than you’re estimating. Number one, just because when you look back, just with inflation and everything else where it’s running, I would expect the costs to be higher on the CapEx side than they were for Odessa. And that’s mostly just a time function.

The other thing is, we are considering other technologies there. We have spent money on R&D and looked at quite a bit of hydro and immersion and other things. We’re still trying to figure out how we will parcel out the 300 megawatts in terms of the types of mining we do. Those all have different CapEx spends. We’re going to be driven by ROI. And so whatever is going to produce the best return to shareholders over time will be how we do it.

But I would guess that those non-rig infra costs you cited are probably a little bit low to be determined. The real key here though, is that unlike, say, Odessa, where we sign a long term Power Purchase Agreement, that requires us to draw a certain amount of power and we start getting billed at a certain point. That is not the set up here, right? So we can optimize when we’re drawing power and when we’re not, and also the pace at which we build out the data center.

So certainly it’s our goal to build out the full 300 megawatts, frankly, as quickly as possible. But we can still choose to be opportunistic in how we finance that. We can wait for the market to come to us. There’s no requirement that it’s all 300 megawatts by a certain date. It could be 50 megawatts or 100 megawatts in stages, but it’s certainly our goal. And I do think we will be heavily incentivized, obviously, to get the production up as quickly as we can. But it’s that flexibility that I think, in addition to just the terms at which we acquired the site, that make this site really exciting.

The other thing is, from a diversification standpoint, this is a site that has a ground lease of 50 years on it, or it’s up to 50 years. So really a different kind of site and gives our overall portfolio a lot of resilience. We’re very excited about it.

(Operator Instructions) Our next question will come from Reggie Smith of JPMorgan.

This is Charlie on for Reggie this morning. Congrats on the Black Pearl announcement. Very exciting. I was wondering if you could talk about how you’re prioritizing investment in the JVs versus Black Pearl moving forward?

Sure. Thanks, Charlie. It’s a great question, I’d say. Right now, subject to things evolving every day. Our priority is going to be Black Pearl, just because we own 100% of that site and we will be very focused and we don’t. And while we have a great JV partner at the 3 JV sites, that’s, of course, a collective decision. As you know as well as I do, lots of moving parts in the bitcoin mining universe. As we talked about on the call, excitement around the ETF driving price, network hash rate going higher, new rigs, all a very complicated decision making process for how to allocate capital.

From our perspective, Black Pearl will be our priority for now. That’s not to say, we’re not focused on the other sites, but I think the flexibility and the ability to move quickly and make decisions probably put Black Pearl at the top of our priority stack. That said, as I mentioned, Alborz within the JVs is probably our priority there. And that starts because with the backfill, pardon me, the backseat agreement, we can attach a grid connection and bring our production up on the existing equipment there. So that’s the priority there. And I still fully expect that we will do the expansions at Alborz, Bear and Chief over time. But from a prioritization perspective, Black Pearl is at the top.

And then with the announcement of the new rig purchases, is there like a target fleet efficiency we should be thinking about for the new 8.4 exahash?

Yes. So I think when you add the 1.2 exahash of the new rigs, we will be about 29 joules per terahash across the entire fleet. When that’s plugged in.

And certainly as we make more rig purchases, I mean as I indicated on the call, this is a cyclically favorable time to do rig purchases. As we add more, I would expect, obviously, that efficiency will drop lower and lower in terms of joules per terahash.

(Operator Instructions) Our next question will be coming from Gregory Lewis of BTIG.

Tyler, I just wanted to follow up on the last question around the 1.2 exahash. Any sense for the timing of how we should be thinking about those rigs coming online and generating hash capacity?

Sure. Thanks for the question. The delivery schedule is the first half of next year. So it’s monthly batches January to June. That’s when they ship. So figured delivery the following month, and those orders are backloaded. So it’s about one-third in the first quarter and 2-thirds in the second quarter. I think if you do the math, it’s about 6,000 rigs or so. And so as those arrive, we will certainly make sure they are plugged in as soon as possible, just because they’re so powerful.

And as I indicated earlier on the call, I mean I think the main point on that rig purchase is that at $14 a terahash, and I should also mention the last 20% of the purchase price on that contract is actually financed basically by Bitmain and is not due until a year after the rigs arrive. So it’s really a fabulous deal. I mean, I think it’s just a very accretive purchase. But at the scale at which they will arrive and the number of rigs, I think we’ll start with a prioritization that, look, when you run a 70,000 rig fleet, there’s always a couple of hundred rigs in repairs. So we will make sure to get all the most powerful rigs plugged in. And then I think we would look to prioritize as they arrive, swapping out, in all likelihood, our least efficient rigs to make sure the most efficient ones are plugged in.

Tyler, and I didn’t realize that. Could you talk a little bit more how that dynamic has changed with at least Cipher in terms of the ability, the timing of payments for rigs and how that’s shifting? And is that something that kind of you’re seeing across the market or was that kind of specific to this transaction?

I think it’s in this case. Well, let me speak more broadly about it, because I think it’s helpful for any investor in this space to understand, because this is what drives the big CapEx number on a site and ultimately drives the ROIs that we all care so much about. And as you probably remember, in the bull market of a year, 2 years ago, really 2 years ago at this point, these rigs were 5 times, 6 times, 7 times as expensive, crazy more expensive and very hard to earn an ROI. And with that pricing also, it was very much a seller’s market. Right. And so it was really about how do we get access to these rigs? And that was really the story 2 years ago.

I think what’s evolved, and certainly been a very high priority for me personally has been to develop a relationship with the C-suite of the 3 big rig manufacturers that are all Chinese companies. And Canaan, I think is relocated to Singapore at this point, but wasn’t easy in the days of COVID and in the bull market. And so what I’d say is Cipher has struck some deals in the past that I think others have not. Certainly people in the industry know about and we have talked about in previous calls, our deal with Canaan, where we got some financing on those rigs, which was really first of its kind, where rigs were delivered in advance of being fully paid for.

I think the reputation we’ve built with the rig manufacturers is one where they understand we are going to be around for a long time. When you think about what’s most important to a rig manufacturer, it’s the stability of purchases over time so that they can reserve capacity at the fab. I think it speaks very highly of Cipher that we’ve consistently been able to strike deals indicating a belief in us as a counterparty.

And so now to this specific deal. I do think there’s been a couple other folks that struck similar deals. I think that you had to be a big known purchaser to Bitmain to be offered these terms and you had to move quickly. But I do think these terms were offered to a few of our competitors as well. So very favorable for large, well known counterparties of Bitmain. This one in particular is not individual to Cipher, but it would not surprise me if going forward in the near future we do find deals that are particular to Cipher because we are in regular contact with the C-suite of all 3 rig manufacturers.

And realizing it sounds like the ink on the Black Pearl acquisition was really just signed yesterday. As we think about the infrastructure in lead times, any kind of rough estimates? Because I think you mentioned the 2025 startup target. How should we be thinking about long lead items and when we probably need to order those to be able to. And then maybe this is for Black Pearl, but across the industry as well. How are we thinking about supply chain and the ability to source things like transformers and things that will be needed to power up Black Pearl?

Great question. I would say that generally the longest lead items for a greenfield site are identifying and acquiring, building the substation. I think we hear estimates across the industry that can be 12 months to 18 months. I will say, not unlike the rig manufacturers, we have focused a lot on building relationships over the last year or 2, and I think we can get that timeline significantly shortened based on our relationships.

Now from a deployment of Black Pearl, again, it’s really early. Like we’re still going through the different scheduling and options and how much do you build in each phase, et cetera. But I think our goal would be to get it online and like the first piece energized probably second quarter of 2025. It’s very early on that, that’s subject to move around. I mean, literally the ink is still dry, but that’s when we would hope to have something energized. And that gives us plenty of time to appropriately lay out and frankly negotiate attractive prices on both the infrastructure and the rigs.

You may remember, Greg, during the bull market, we got a really, really cheap price for our fleet. At times when the spot prices for rigs were $90, $100 a terahash, we were sub 40 and that’s because we leveraged our longer lead time for a greenfield site that we were building. So I think, again, that consistency of a future order is a great thing to have and think about that’s very valuable from the rig manufacturer’s perspective. Also value for the other info, we have time to stretch it out.

But what I would say is overall, I’m sure at our next quarterly update, we will have a lot more specifics around timelines and maybe even in the interim. But right now it’s just early other than that, generalized target, and we think we can easily line up the timelines to be ready for that.

And our next question will be coming from Chase White of Compass Point Research & Trading.

So, first of all, could you guys give us a sense of what the JV EBITDA was in total?

Chase, that’s a bit of a challenge there. I mean, if you look at our loss that we have there, it was about $2 million or so. So keep in mind, we were from a GAAP perspective, we’re 49% of that. I don’t have in front of me at this point in time the exact, all the data they have on the JVs, but it’s something that we could look into.

One thing to add to that, Chase, just keep in mind we do have the last few bits of a BlockFi rig loan at Alborz that will be rolling off in the first quarter of the new year. So that is at least a payment that will go away on a monthly basis.

Yes, and I would just add to that the results of that all the JVs and our share of those results will be much better than that they have been in previous quarters because of that.

And then given you’re swapping out rigs for the S21s, how should we think about your net total hash rate when all said and done in 2024? I think presumably it’s not going to be 8.4 exahash at this point, right? Or am I not thinking about that correctly?

I think it’s tough to forecast, because the answer is it depends. I think there’s a lot of moving parts. But you’re right, met-net. It depends exactly on how we deploy the 1.2 exahash of rigs. If we were to completely swap it out, we would probably be swapping it out for the least efficient rigs at Odessa, which are MicroBT M30s and I think average about 38 joules a terahash. So I haven’t done the math to give you a forecast, but you can probably piece it together if we plug in 1.2 and unplug an equivalent power draw of 38 joules per terahash machine.

I think also keep in mind, Chase that like again at this scale, it’s no joke that repairs can vary wildly and we could have 1000 machines in the shop. So I think having an extra fleet probably generates more production all the time. Like you can imagine a world where we’ve swapped out M30s but they’re sitting there and if something comes in for a repair, we immediately plug something in rather than have it out of commission.

But there’s not like extra capacity somewhere out there that you’re going to be able to plug in above and beyond. You have the ability basically 70,000 rigs to operate.

Not currently. There’s a lot for sale out there.

(Operator Instructions) Our next question will come from Josh Siegler of Cantor Fitzgerald.

Nice to see the announcement on the Black Pearl. I’m curious if you can engage in a hedging strategy on power at the Black Pearl site to smooth out the energy cost over time.

Let me speak at a real high level about. And I know, Josh, you know this from a lot of folks that have large scale front of the meter setups. You can think of hedging in a couple different buckets. The simplest might be in a different pricing regime for power we could effectively put in a financial hedge that would, even though we’re paying market prices at the site, could fix our price at a lower level. We wouldn’t do that in the current pricing regime, because power prices are generally elevated right now and at the higher part of the cycle.

So in the same way that we have a fixed price at Odessa, and a big part of that, in addition to the unique elements of the contract was a different pricing regime for power. We probably wouldn’t lock that in. But over time, there will be cycles, there may be times when we do that. I think the other way to think about hedging is, if you’re participating in ancillary services, there will be things like day ahead capacity markets. If we get another hot summer like we had this past summer, and you’re breaking demands for power, we can think about hedging in the sense of seeing the prices a day ahead being high and selling the capacity forward effectively, or offering the capacity up. I think a better way to say it, instead of planning to mine and netting that out as a way of effectively hedging our power price. Does that make sense?

And for my follow up, obviously, there are many different funding sources to use as you ramp up Black Pearl, I was curious kind of, if you would embrace potentially tapping the hoddle to help pay for it.

Yes, absolutely. I mean, I think, look, we’re always being a – if you think about all the levers we can pull, we have a bitcoin inventory and the price bounces around. We can tap equity markets or we can tap debt markets. We constantly think about the returns on all of those. Again, I think if you’ve got a truly great opportunity to lock in a price for something at a cyclical low in the market, it’s easy to draw down on some of the treasury balance in bitcoin. If you know that our production is coming in every day, and you see the strong production numbers every day, you can replace that. So absolutely, we would think about spending it. We’re not religious. Our goal is to optimize our dollar based return for shareholders.

So it’s not impossible. It is our goal to build that inventory over time. So we’re always going to weigh the costs of the different ways we can raise capital. I would say in general, and I indicated this in my earlier remarks, but I would say as the enthusiasm seems to build around bitcoin price, maybe an ETF, there’s institutional interest, I would say in general, there are the early stages of big investor conversations coming back to miners. I think our story around power optimization puts us in a unique category where we’ve got some investors talking to us that may not be talking to other bitcoin miners, and we’ll just have to see how that develops.

But I view over the long term, Cipher is part of a disruptive technology to power generation. And I think power generators started to think this way before all the kind of broader crypto market shenanigans of 2022. If we see a bull market for bitcoin, it would not surprise me for them to come back to be very interested in this space. And I do think there’s a lot of pools of capital, much larger pools of capital invest in that space than invest in bitcoin mining. And so we’ll see. I think we’re always going to look at what all the options are, but it’s really this flexibility at Black Pearl that enables us to find the most opportunistic way and timing to build out the full data center.

Appreciate the update. I’m looking forward to hearing more about Black Pearl.

(Operator Instructions) Our next question will come from Mike Colonnese of H.C. Wainwright & Company.

Congrats on Black Pearl. Can you talk to the expected timeline for the organic expansion projects at Alborz Bear and Chief to ensure that you have sufficient capacity to really take in those net new rigs that will get you to the quoted 8.7 exahash you have in your deck there over the 7.2 deployed today?

Yes. So I think on the JV side, again, the priority is the backseat at Alborz, which is no new rigs. That’s just producing more bitcoin from the rigs that are already there. I’d love to flip it on tomorrow. I know we’ve got hundreds of pages of agreements that our team’s got to go through and negotiate to get that, but we’re confident that’ll be done sometime in the first half of 2024. Beyond that, again, no time pressure for expansion on any of those, and that’ll be a joint decision based on market conditions with our JV partner WindHQ.

So again, the new rigs we will probably look to cycle in own 100% of the hash rate of at Odessa and we will do – it’ll become sort of a total fleet management exercise. But I think the real strong point for those rig purchases is that a net price of $14 per terahash is an awesome price to buy rigs. And so we’re very excited to have those efficient rigs in front of the having. But again, current plans would be to cycle them in at Odessa actually. Subject to modification, if we decide we’re going to expand or we have a new site or something like that, we can always reposition them. They’ll be delivered January to June of next year.

Appreciate that clarification, Tyler. So it sounds like maintaining that optionality at some of the JV sites there. And second one for me, in your conversations with investors and potential Cipher’s shareholders, how are you positioning your approach to ESG? You have Alborz, which is 100% powered by Wind, but great connections at other sites. So the power mix is naturally a bit more diverse. So it’d be good to get a refresher on Cipher’s ESG strategy here.

That’s a great question. Thanks, Mike. I think, always answering this question, let me start by saying that 2-thirds of those initials, the S and the G, Cipher, is very strong on as a company. And I think bitcoin and bitcoin mining is an incredibly strong industry. So usually the question behind the question there is on the E part, and so I can highlight how we think about that. Yes, as you mentioned, we’re very proud that as far as I know, we run the only off grid wind farm co located data center on Earth, as far as I know, bitcoin mining or otherwise. And that’s a live example of what a lot of folks in this industry talk about as the future ESG credential of this industry. That it is a way to make the returns on investing in more renewables more viable without government subsidies. Right. This is a free market solution to produce better investment returns for greater renewables.

So overall, the industry, and Cipher in particular is really leading the charge on that, I think for the industry overall and our innovations at such a site show what can be done. Overall, again, we’re now expanding further in Texas, just I know everyone thinks of Texas as the energy capital of the United States, if not the world. Keep in mind, there’s over 40 gigawatts of wind, and I think about 13 gigawatts of solar in Texas. It’s over a quarter of the United States wind energy production. So this is a grid with lots of renewable, and a lot of the questions around the peak demand over the summer have to do with the intermittent nature of renewables.

And so by expanding in Texas and being able to offer our capacity from our sites, the sort of utilizing the instantly curtailable nature of a bitcoin mining data center further supports decarbonization of the grid overall. So, I think overall in the industry and Cipher’s approach is extremely strong based on our location, and how we’re developing, I would say as a further note, we’ve talked about in the past things like carbon offsets. We have done a fair amount of research into that space. At this point, we’re not purchasing offsets. If you look at our carbon output across our portfolio, it’s about one half of the typical carbon output of an electricity user in the United States.

So the legitimate output, the actual physical output of carbon from our sites is lower than average in the United States. And so we haven’t loved what we’ve seen in the carbon offset market and so we are not pursuing that currently just to round out that question, because I know lots of miners talk about that in their ESG strategy, but really it’s just an offset strategy.

(Operator Instructions) Our next question will be coming from Joseph Vafi of Canaccord.

Nice progress on the business. So my congrats on that as well. Just congrats on Black Pearl. And just at a high level, 300 megawatts is a lot. There is the having event coming up. You do have some lead time here, I think I know the answer to the question, but I thought I’d throw it out anyway. Other miners are starting to explore some optionality to the business model, including perhaps HPC and AI for some of their power. And I was just wondering if you’re at all considering that optionality with Black Pearl, given its size. And then I’ll have a quick follow up.

Sure, that’s a great question. So I would say this, I will get to the actual answer, but let me take a little bit of a roundabout way to get there. One of the priorities for our construction team is to think about the evolution of bitcoin mining data centers over time and how they evolve and how do we make them more future proof. I had the privilege of going to look at Bitfury’s original immersion facility this last quarter, I went to Tbilisi and I saw and one of the things that, that was a very innovative design data center. But one of the things that struck me is, how do you make things less customized and more standardized so that you can swap out things.

For example, evolving bitcoin minings to more of like a standard rack mount in the design over time. So that you could do things like potentially swap out other users of HPC, et cetera, and have a very standardized value proposition at the data center? We are certainly doing that in the design, I think with 300 megawatts of capacity keep in mind we can take that down over time. So of course, its not how do you scale this 300 megawatt mountain? It’s sort of, what are the bite sizes you’re going to take piece by piece.

But I think we are considering all kinds of optionality. I mean, Joe, I think we’ve talked about in the past, we are not the biggest fans, or have not been the biggest fans of the hosting business, for example, in mining, but post having with 3 years, 4 years before the next having, and new generations of rigs and frankly, growth in hash rate, and not necessarily a commensurate growth in plugs available for them. That’s a strategy we could also consider. With 300 megawatts, there’s all kinds of flexibility. But yes, we have had some early discussions about what if part of this data site was dedicated to other uses for compute. I don’t know if we’ll get there. I don’t think that’s core to our business strategy. We’re really more focused on the intersection of power generation sort of trading and bitcoin generation. But that said, certainly, as we talk to investors, folks like to see that optionality. So that door is open. I just don’t know where it’s going to lead yet.

Sure. Fair enough. Yes, I mean, there is some lead time and things can change. So we’ll keep asking the question, Tyler, to see if there’s any change there for Black Pearl.

And then just quickly, I guess, on Alborz, getting your plug-in to the grid to keep it going. Any sense at this point kind of what that power cost might be relative to kind of your overall average?

Yes, I think it probably will end up being slightly higher than the overall average. And here’s why. Again, Alborz draws directly from a colocated wind farm that has basically the cheapest power in our portfolio. And you can see that in the electricity cost per bitcoin at the site that we list. That’s what’s so attractive about that site. Now, recall, that site is a big engineering challenge because if the wind’s not blowing, we’re not mining bitcoin. And we designed the data center targeting about 75% uptime, which is lower than you typically hear for bitcoin mining. But again, with the economics we can have at that site, it makes plenty of sense to only have 75% uptime.

So when we have a back feed there, conceivably the rest of the time, we would have access to power. Now, keep in mind, if the wind’s not blowing, typically in West Texas, if the wind’s not blowing, market prices are higher, because that 40 gigawatts of wind, some portion of it might be offline. So, I’d say we’re still going to optimize and it will bring the uptime up. But of course, our tech stack always operates with a business logic that we only mine when it’s profitable. The revenue from mining has to be higher than the cost of power.

So what I’d say is, on average, because we’re going to be drawing power when the wind’s not blowing. The market price there will be at the higher end of our portfolio, but we’re only going to mine when it’s profitable to do so.

Fair enough. Yes, the rigs are in there, right? So it’s just getting more incremental output for the rigs and a profitable output.

And I’m showing no further questions. I would now like to turn the conference back to Tyler Page for closing remarks.

Well, thank you once again for everyone dialing in and the great questions for those of you that will be in Odessa next week at our Investor Day, at our tour of the site, we look forward to seeing you and showing it off and trying to give a sense of why we’re so excited about the next generation that we’re going to build it at Black Pearl. Thanks again for your support, and we’ll talk to you soon.

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