Hut 8 Corp (HUT) 2022 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

a cash balance of $33 million as at September 30, 2022.

On August 17, 2022, we entered into an equity distribution agreement pursuant to which we established an aftermarket equity program with maximum proceeds of up to USD 200 million or approximately CAD 270 million. To date, we've raised USD 2 million or approximately CAD 2.6 million in net proceeds under this program.

In light of the challenging capital markets environment generally, combined with ongoing volatility impacting the digital asset space, we remain committed to our conservative approach to balance sheet management. We are pleased with the modest level of nonrecourse equipment financing we have in place and that our substantial digital asset holdings remain fully unencumbered.

Our decline holdings are marked at fair value and totaled $223.4 million as at September 30, 2022, based on 8,388 bitcoin held in reserve. Our conservative approach to balance sheet management means we've been able to continue our long-term holding strategy. We have not sold any bitcoins since early 2021.

With that, I will turn the call back to Colin for analyst Q&A.

Thank you. Ladies and gentlemen, we'll now conduct a question-and-answer session. (Operator Instructions) Okay. Your first question comes from Joseph Vafi from Canaccord Genuity.

Nice to see your conservative strategy shining right here today. Maybe we'll just start with looking as we are sitting here, getting ready to exit '22, when we look to next year, I mean, there's a lot of uncertainty out there relative to bitcoin, the macro, et cetera. And I know you're staying conservative. I was just wondering if you could provide some insight for us and what the plan may be for next year in terms of maybe increasing hash rate or power capacity or continuing to diversify the business, maybe over in the high compute side? And then I have a quick follow-up.

I'll take that. Thanks so much, Joe. We've been transparent since really a year ago now with our strategy to be opportunistic for both organic and inorganic growth. So, obviously, I can't give any guidance, but that continues to be our plan.

Got it. I think that short answer to us today a lot. So maybe I'll just kind of follow up on that, Jaime. And how do you -- when you look at the industry, there's clearly some distress out there in the industry today. How do you think this industry evolves in '23 given what's happening, do you expect to see merger activity accelerate industry-wide or perhaps some other dynamics. And what do you think happens with this hash rate with bitcoin down here. It's been kind of a very resilient hash rate? So just any comments you have on that would be great.

Yes. No, my pleasure. I think the hash rate has continued to surprise us all. I mean it's not -- it isn't -- it isn't behaving the way we would have thought it would behave, given the continued pressure on the price of bitcoin and the increases we've seen in the energy market. So really, really difficult to predict whether it will continue kind of defying expectations and continue to climb or start to behave in a more expected manner. So we really -- it's impossible to guide, Joe. It's quite a dynamic situation more so now than I think we've seen in cycles in the past. .

And I think with respect to your first question, inevitably, we will see consolidation in this space. I think we've seen a number of announcements come out from various parties in the space that are struggling on the leverage side of their business. So I do think over the next 6 to 12 months, we inevitably will see consolidation.

Your next question comes from Gus Gala from Truist. .

I wanted to follow up on Validus. I mean it seems -- I just want to get the sense, does this maybe push us strategically to consider further getting further vertical, maybe look at the power generation side of things. And I just wanted to unpack like the dynamics of what's going on with Validus exactly. Is essentially they are -- they offered a price that are not be able obtain in the power markets themselves. Is that essentially like the nature of what's going on? And is there any chance we're able to actually retain that nice pricing they had previously offered?

Yes. So it's difficult for us to comment on it, given that it is an active and live negotiation. But as we have updates on how the situation evolves, of course, we'll share them. .

But do we consider getting further vertical? I mean, just strategically, we have

there's a bit of a nice pile -- cash pile there. I know that things are distressed out there. It just plays into that type of question.

Yes. So we are actively looking at a variety of different opportunities, and it's really difficult to say at this point what's going to be the most strategic opportunistic path forward.

Got you. That's sure. And I think just as we look into next year, on balance, how are we feeling if we were going to invest in either the HPC business or the self-mining. Right now, where do you think the best returns are?

That's an incredibly difficult question, again. It's really -- it's opportunity-specific. So I don't think -- I think it's fair to say there's more distressed in the mining space right now. But I'll continue to look at opportunities in both areas, again, looking for the best strategic alternatives. .

Your next question comes from Bill Papanastasiou from Stifel.

Nice print today. We've seen a lot of crazy events happened in the space this week, especially when it comes from the 2 exchanges, FTX and Binance. We also have a lot of miners to stress in this space. Just wondering what -- what do you think the implications to what's going on and what happened this week. Will be on the bitcoin mining space, especially when it comes to the distressed miners, we've heard news from Core Scientific and Argo and probably we'll continue to hear more news on that end. Just wondering what your perspective is.

Yes. I think one of the struggles for the industry right now on the back of what we're seeing happen with FTX in particular in Alameda is we really don't understand what the contagion is going to be as a result of that. We don't know where all of the exposed counterparties are. And so for the industry, it's really going to depend where new holes show up. As I mentioned in my opening comments, we've made the determination to continue to keep our stack in cold storage again until we really under -- have a good understanding of where the potential contagion goes and where the counterparty risks are, our view is that we just -- we need to continue to be conservative and let it shake out.

Great. And then congrats on wrapping up the the hash rate capacity to 3.1 exahash. Just wondering, given the news with North Bay and and what's going on there. Has guidance changed at all? Does it still remain at 3.6 exahash by the end of the year?

Well, obviously, that becomes a bit fluid given the North Bay situation. So we're really going to have to wait and see how North Bay plays out.

Your next question comes from Chris Brendler from D.A. Davidson.

I'd like to -- I think I heard that the cost per coin went down 30% sequentially. And I just wondered if you could sort of give you a little more detail on what drove that? Obviously, costs are a huge focus today. Was it sort of moving to North Bay, which sounds like that may not be the case anymore? Or is it just lower cost seasonal costs for power? Just help me think about the improvement in cost per coin?

Yes. I'll let Shane take that one.

Perfect. Good question, Chris. And it's sort of a combination of the above. So getting operations spun up at North Bay was a modest net contributor there. And the real point though is that as everyone is really aware is almost globally almost that in the Q2 period, there was really a real spike in power costs, natural gas impacting us in a lot of ways as a result of the global macro situation more in Ukraine and Russia and so forth. And yes, seeing that as we were sort of hoping and expecting, seeing that normalize somewhat in -- over the course of Q3 what was a big sort of quarterly sequential drivers. That would be the biggest piece.

Okay. And then like the summer weather versus winter weather, does that also have an impact? Like should we expect it to go back up in the fourth quarter or stay around here?

Well, that gets to a broader question. Typically in Alberta or primary markets, there is some seasonality to power markets, but not particularly large or dramatic. So it's needless to say, unfortunately, it's difficult to handicap in light of the broader uncertainty in global markets today. But again, as of now, we've been comforted in seeing things sort of normalize relative to where they were in the middle part of this year.

Okay. One last one for me. On the same lines, looks like the gross margin in the HPC business came down a little bit. Is that power related or something else?

On the HPC side, no, I would say not power related. We continue to -- the rationalizations that we sort of announced and spoke to as part of earnings really taking hold here in Q3, i.e., it was very late in Q2 that some of those sort of product rationalizations occurred. So yes, think of it as sort of a very modest and anticipated impact on margins in Q3 and then really points back to that same message that we've delivered previously that this sort of an intentional move on our part, and we really do think positions us well for growth as we head into 2023.

Your next question comes from Kevin Dede from HCW.

Can we drill in a little bit, pardon the pun on North Bay, where -- how much of the almost 3.1 exahash is there? And how much of that is at risk? What sort of time line do you think you can offer with regard to your negotiation with Validus? And if everything goes sort of the ugly scenario way, I guess, what of that 3.6 target is something that we shouldn't consider hashing maybe the early part of next year? As much of that as you can quantify, please.

Yes. So as we previously disclosed, North Bay was running at approximately 25 megawatts compared to our Alberta sites, which are combined over 100 megawatts. So it's been our smallest site. And I can't give you a time line. It's really difficult to handicap how long this will take to resolve with Validus.

So of that 25%, is it all running now? How much of it ran through the third quarter? .

It is running now? And it...

Okay. Okay.

It's running right now. and it has been running consistently through -- it ran consistently throughout the third quarter.

Okay. I have .

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There was an expansion option for you there was it to go to 100 or something I can't remember.

Yes. Yes, the PPA was for up to 100 megawatts with the first phase being 35 megawatts.

Okay. Okay. Have you considered at all, I guess, given how the energy markets royal you sort of trying to hedge your power costs in Alberta?

We have explored options. None that we've pursued at the present time.

Okay. And given you're very comfortable in cold storage. When do you think you might consider putting your bitcoin to work again?

Yes. I mean we were hopeful that we'd be in a different position, frankly, but as a result of the incidents that kicked off over the weekend, we just really don't feel comfortable again until we see that contagion run through. So my guess is we'll revisit towards the end of this year, beginning of next year. But again, very, very much about the state of the market where we think the risks are because, obviously, protecting that stack is critically important.

Appreciate it, Jaime. I think the potential for the tether on hedge is pretty ugly, too. So I think everyone on the call is with you on that. Thank you very much. .

Thank you. Thanks, Kevin. Our pleasure.

There are no further questions at this time. I'll turn it back to you for closing remarks.

Okay. Thank you so much, Colin. Thank you again, everybody, for joining, for your continued support. We really truly appreciate it, and we'll talk to you soon. .

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.