Stronghold Digital Mining Inc (SDIG) 2022 Q2 法說會逐字稿

Good afternoon, and welcome to Stronghold Digital Mining's conference call for the second quarter ended June 30, 2022. My name is Mandeep, and I will be your operator this afternoon.

Before this call, Stronghold issued its results for the second quarter 2022 in a press release, which is available in the Investors section of the company's website at www.strongholddigitalmining.com. You can find a link to the Investors section at the top of the home page.

Joining us on today's call are Stronghold's Co-Chairman and CEO, Greg Beard; and CFO, Matt Smith. Following their remarks, we will open the call for questions. Before we begin, Jeff Grampp from Gateway Group will make a brief introductory statement. Mr. Grampp, please proceed.

Thank you, Mandeep. Good afternoon, everyone, and welcome. Today's slide presentation, along with our earnings release and financial disclosures were posted to our website earlier today and can be accessed on our website at strongholddigitalmining.com. Some statements we're making today may be considered forward-looking statements under securities law and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors, many of which are beyond our control, which could cause actual results and events to differ materially from those described in the forward-looking statements. For more detailed risks, uncertainties and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and public filings made with the Securities and Exchange Commission. We disclaim any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law.

We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and the reconciliation tables to applicable GAAP measures in our earnings release carefully as you consider these metrics. We expect to file today our quarterly report on Form 10-Q with the Securities and Exchange Commission, which sets forth detailed disclosures and descriptions of our business as well as uncertainties and other variable circumstances, including, but not limited to, risks and uncertainties identified under the caption Risk Factors in our quarterly reports on Form 10-Q filed on May 16, 2022, and August 16, 2022, an annual report on Form 10-K filed on March 29, 2022. You may get Stronghold Securities and Exchange Commission filings for free by visiting the SEC website at sec.gov or Stronghold's Investor Relations website at ir.strongholddigitalmining.com. I would like to remind everyone that this call is being recorded and will be made available for replay via link available in the Investor Relations section of Stronghold's website.

Now I would like to turn the call over to Stronghold's Co-Chairman and CEO, Greg Beard. Sir, please proceed.

Thank you, Jeff. Good afternoon, everyone. So once again, apologies that we are a live call today. It is not a recording. I think we've got -- I'm joined on the table by team. It's been working hard for weeks and really months on what is a series of transformative transactions for the company. And you'll hear about how we are much better on the other side of it. So excited to walk you through this call today, and apologies that it took us a little longer to get all this news out. But we've got -- it was quite an achievement with the -- about half a dozen counterparties that were all [co-contingent] upon each other to get it signed, but it just took longer than what we had hoped. But anyway, we're happy to be through and done today. So thanks, everyone, for joining us.

For today's call, we're going to reference an associated slide presentation that is available through the webcast and on the IR portion of our corporate website. So I'm going to start on Slide 3 of that presentation to discuss our vertical integration, which is a foundational piece of our strategy and a source of significant value for Stronghold. This slide provides visibility for how we think about our business and our ability to toggle between Bitcoin mining and selling power to the grid, which is an intrinsic advantage of power asset ownership. We can pull from the grid when grid prices are lower than our variable cost of power, and we can sell power to the grid when grid prices are more attractive than Bitcoin mining economics.

Most recently, the latter has materialized as we have seen very strong power prices over the past few months, with our power pricing averaging over $100 per megawatt over the last month and even higher during on-peak hours. This near record pricing is expected to continue for at least the next 6 months with forward prices over $100 a megawatt on average, and we're going to explain how that relates to Bitcoin mining economics as well.

So if you see the tables on the top right, they're intended to provide insight as to how to think about Bitcoin prices in dollar per megawatt terms and vice versa for a few recent vintage miners. For Bitcoin prices between $20,000 and $25,000, we would expect a MicroBT M30S to generate revenue between $92 and $115 per megawatt hour. For a more efficient Bitmain S19j Pro, we'd expect this range to increase to $114 to $143 per megawatt hour. On the bottom chart, we are showing the inverse, how grid pricing translates into Bitcoin prices. At $125 a megawatt, which is in line with the average on-peak price over the next 6 months, you'll see that the implied Bitcoin price ranges from $22,000 to $27,000 across the miner types shown. So we expect to sell power to grid over mining Bitcoin with frequency during the next several months. Additionally, we have developed a proprietary software that allows us to take advantage of intraday power price movements by turning our data center off within minutes, allowing us to divert that power to be sold.

As a reminder, when we went public last year, Bitcoin prices were substantially higher and grid prices substantially lower than where they currently are. So the economics of the power business represented a more theoretical downside protection. We didn't expect the power business to be a meaningful driver of value for at least a couple of years, but it's critical now. At current pricing levels of Bitcoin and the power markets, our power business offers returns that are attractive and oftentimes superior to our Bitcoin mining business. Consequently, there is a high probability that a meaningful portion of our power generation will be allocated to selling power to the grid, irrespective of our hash rate capacity, which brings me to our next slide to discuss the recent agreements we have made in the context of current market dynamics.

So now turning to Page 4. When we initially capitalized the business, we structured it to operate in a $30,000 downside Bitcoin pricing case. We took out equipment level loans, nonrecourse of Stronghold, knowing Bitcoin could drop even further. This structure has provided us with significant flexibility in this prolonged downturn.

Over the past few weeks, we worked with our lenders to restructure all debt outstanding of NYDIG and WhiteHawk with these ends in mind. We believe this restructuring is transformational for Stronghold in terms of capitalization, liquidity, leverage and ultimately, equity value. We have entered into an agreement to eliminate all debt outstanding with NYDIG, nearly $70 million in exchange for approximately 2.5 exahash of miners that we believe has a replacement value closer to $50 million. So we view this effectively as an asset sale at a meaningful premium to the current market value. We were able to achieve this outcome due to the structural security of the agreements we negotiated, which were with LLCs and were nonrecourse to Stronghold Inc.

Additionally, we executed a commitment letter with WhiteHawk, which will convert our equipment financing into a first lien note more than double tenure to 36 months and provide a $20 million line of credit accordion that is undrawn today. WhiteHawk will receive 2 million warrants as a part of the financing. Lastly, we have extinguished approximately $11 million of principal from the convertible notes by reducing the strike price on the warrants. We will also equitize the remaining principal over the next few quarters with a total reduction of cash interest and principal payments by $25 million.

So to summarize, this is an immediate $79 million reduction in debt and a $113 million reduction in cash principal and interest payments through 2023. In exchange, we will be transferring away approximately 26,000 miners and issuing 2 million warrants. This move is uniquely advantageous to Stronghold as it vertically integrated Bitcoin miner. Since we generate our own power, we can almost instantly toggle from Bitcoin mining to selling power to the grid, allowing us to continue earning revenue and largely offset the divested mining capacity for at least 6 months.

So turning to Slide 5. To further illustrate the continued revenue generation capabilities of our business, which has given our uniquely vertically integrated model that has the ability to toggle between Bitcoin mining and selling power. Accordingly, we estimate a minimal impact on our revenue as a result of our reduction in miner fleet. While our mining fleet has been reduced, our power sales can step up to fill in that revenue gap since there is no more power generation available to sell into the grid. And as we have previously discussed, future power prices through winter 2023 are currently quite high, so the power generation that is being reallocated to the grid can continue to earn attractive returns for us.

So in this example on this slide, we are only trading off $9 million of revenue during this period in exchange for the significant debt and interest reduction we previously discussed in a period when cash flow is extremely important.

Now compare that to a traditional Bitcoin-only business model that does not have the ability to toggle sales to the grid, you can see that Stronghold can generate 95% of the revenue with 15,000 miners than a Bitcoin-only business model could generate with 40,000 miners. Over time, of course, we expect to opportunistically replace the [26,000] empty slots. I will now hand the call over to our CFO, Matt Smith, to discuss in more detail the financial impact, debt restructuring and our financial position.

Thank you, Greg. Good evening, everyone. Slide 6 provides additional detail about the impact of these agreements to our liquidity and financial profile. Restructuring is highly attractive from a financial perspective. The left-hand chart shows our debt over time before and after restructuring, our principal outstanding will be reduced from $144 million to [$65 million], and it remains at a very manageable level through 2023 and into the having in 2024, importantly.

The right-hand graph illustrates the quarterly and cumulative impact on our debt service cash flow -- cash outflows and estimated forecasted cash flow impact. Quarterly debt servicing cash outflows were set to peak at around $30 million, but it has now decreased to about $5 million, as we have eliminated converted or restructured the vast majority of our outstanding debt. Through year-end 2022, cumulative debt servicing cash outflows are reduced by $82 million from $100 million to $18 million. And through the end of 2023, cumulative debt servicing cash outflows are reduced by $113 million from $140 million to $26 million. This decrease in debt service, along with continued revenue generation from our power business and mining fleet will allow us to generate more cash flow than we otherwise would have without these agreements. We estimate these transactions collectively improve our cash flow by about $40 million through year-end 2023 relative to our base case internal projections before these transactions. And this assumes no benefit to value we can create from prudently and potentially filling 25,000 open mining slots that we have fully developed and are energized.

Given robust power markets, we are not in a rush to fill these slots, and you can expect us to be patient and opportunistic when looking to add to our mining fleet over the coming quarters as we expect to build to being a low-cost Bitcoin miner with scale. In a world where capital availability is somewhere between tight and nonexistent for Bitcoin miners, we believe having a self-sufficient business is critical. Accordingly, we expect this self-sufficiency to provide us with opportunities to create meaningful shareholder value through accretive transactions that regrow our mining fleet in an intelligent way.

Slide 7 provides a high-level overview of our second quarter 2022 results. As we previously announced, we mined 637 gross Bitcoin during the quarter, representing a sequential increase of 45%. In the first half of the year, we mined 1,075 Bitcoin. Revenue for the second quarter was $29.2 million, a 2% sequential increase despite the material decrease in Bitcoin pricing in the second quarter, with the increase being driven by our increased Bitcoin production and relative stability in our power business. Adjusted EBITDA during the quarter was negative $1 million compared to $4 million in the first quarter of 2022.

I would note that during the quarter, we recorded a $5.2 million noncash impairment associated with our digital currency holdings and a $5.7 million noncash impairment associated with our Bitcoin mining assets. Both of these impairments were due to the significant decrease in Bitcoin pricing during the second quarter and again, are noncash in nature.

During the quarter, we continued our positive environmental impact, removing approximately 241,000 tons of coal refuse from piles and returning approximately 168,000 tons of beneficial use ash to remediate these toxic coal piles. Lastly, to properly calibrate your models, I want to remind everyone that there will be planned downtime that will occur in the third quarter at both of our plants.

During September, we plan to conduct our annual plant maintenance at both Scrubgrass and Panther Creek, resulting in approximately 2 weeks of downtime at each plant. This will reduce our power generation in the third quarter relative to a quarter without the maintenance, and we will record incremental operating expenses of around $5 million, which is unchanged from prior expectations related to the turnaround. These turnaround events are normal course operations for baseload power plants, and they ensure long-term reliability and the performance of the assets into very tight power markets as we look forward in the winter and into 2023.

We strategically scheduled the outage during the second half of September, which should have lower power prices compared to peak summer or winter, which allows us to still import power to mine Bitcoin as long as Bitcoin margins remain higher than import costs.

I will now turn the call back over to Greg for closing remarks.

Great. Thanks, Matt. So I'll now turn to Slide 8 and just to give you a view of our strengthened path forward for the company. First, we're going to focus on power in the near term. This is our lifeblood of our business, and we expect to largely focus on selling power to the grid with over 100 megawatts of excess power capacity availability to sell after allocating power to our mining fleet, which will generate approximately 1.4 exahash and consume about 50 to 55 megawatts of power.

As I alluded to earlier, we did not expect power economics to compete with Bitcoin economics until potentially the having in 2024. While we always plan to invest in our plants over time to bring them back to baseload, we did not think it would be as important so quickly.

We have experienced reliability issues in plant operations for making significant progress and are confident in go-forward operations. We will be taking the 1- to 2-week outages at both plants in September, the work at Panther Creek is expected to be less significant in nature and Scrubgrass improvements remain a primary objective for us.

To that end, we are continuing to progress the Scrubgrass upgrades. We've spent about $3 million in 2022 and expect to spend about another $2 million to complete the remaining work in late September, early October, at which point we anticipate Scrubgrass will run baseload with more consistency.

On the Bitcoin mining side of the business, we plan to be patient but opportunistic buyers in an extremely oversupplied market. We estimate there are over 0.5 million miners on plugs in North America and buyers are few and far between -- given the distress in the space. As we have shown since our IPO, this is an extremely creative and motivated team.

So in addition to open market purchases, we are evaluating JV and M&A opportunities that leverage our core capabilities, including power and infrastructure ownership and operatorship. We are long infrastructure and short miners, and the industry is generally the exact -- in the exact opposite position. As we have long said, owning your own power and infrastructure assets provide key advantages that we plan to leverage to the benefit of our shareholders.

Lastly, we plan to aggressively review our cost structure to identify redundancies in areas for efficiency improvements to lower our cash costs and improve profitability. We estimate there are between $5 million to $10 million of annual savings potential in our current cost structure and will begin cutting over the coming quarters. As you all know, we came out of our IPO in hyper-growth mode, which put significant pressure on the company to scale its capabilities and operations. As we have matured, this has given us time to reassess our business needs and have accordingly identified opportunities to eliminate these redundancies in our cost structure.

Looking ahead, we expect Stronghold to be an optimized operator of power assets that provide power to both the grid and to our Bitcoin mining operations with the ability to toggle between business units and optimize profitability and also provide stability to the grid. We expect to continue to delever and enhance our capitalization. We will also have a strong capital efficiency through the prudent acquisition of mining assets and related equipment to generate attractive full cycle returns on our capital.

Lastly, we will be an efficient operator, running our power plants with high uptime and low cost and maintaining a Bitcoin mining fleet with strong utilization. Thank you, everyone, for taking the time to dial in. We're now ready to take your questions. Operator?

(Operator Instructions) Now our first question will come from Chase White from Compass Point Research & Trading.

So first question -- I have a few questions, but just to make sure there's no impact to the miners in the Northern Data JV to the reduction in miners, Greg?

No. Yes, we gave them back to (inaudible). So yes, we have -- we need to -- we have a bunch of miners that we are going to put -- that we already have (inaudible) that we're going to put into that JV to replace them. And (inaudible) near term, we'll have those 14,000 miners replacing the JV.

Got you. And then how should we think about the ramp-up to full capacity at Scrubgrass going forward once you guys start (inaudible) work?

Yes. part of like, hey, our dream scenario would have been to get on this call and say, "Hey, we extinguished [and I dig that] refinanced the WhiteHawk debt, equitize the convertible note." And had we been able to, we would have also said we've already replaced all these miners, but we couldn't. It was not -- we weren't -- our documents didn't allow us to do that. That would have been viewed as sort of circumvention of our [debt docks], and so we couldn't do it. So I think that was the -- that would have been like the [churn on top].

So I think you need to recognize over time, with all of these miners in the market, we have a very strong sense for where -- what's in the cost and the time frame to prudently replace these miners, but I don't think you could call about any mining broker in the world. And you will find that there is a glut of miners out there. And we already get a lot of phone calls about buying equipment. And so I don't have any -- I have no anxiety about refilling the Northern Data JV quickly with that issue with them and prudently filling up the [26,000] slots that are nearly empty. But I would say, because the power prices are so high, if -- I'd say we've got more than 6 months to do it because we're not really losing any revenue along the way. So as much (inaudible).

I was more talking about the -- sorry, I was more talking about the actual power capacity, like to get to nameplate at Scrubgrass.

So you know what, I would say, give us -- so we're going to be out late September, early October. I guess we talked about it. There's a lot of equipment that we ordered about a year ago that's finally here. And we're going to sell it at the end of December. And give us 45 days to get all of that fresh equipment going. It will have about $5 million of new capital in the plant this year. We've got it way overstaffed right now just to make sure that we get it sort of on solid footing. So it give us 45 days after the reboot to show you how reliable it could be, but it's got 20-plus years of operating data on it that shows that as an extremely viable plant when all the equipment is up to date, and that's where we expect to be. So I would say, give us -- let's look in November. That's sort of the probably the beginning of a fair test for where Scrubgrass can end up, but it's the nameplate capacity (inaudible) megawatts on that plant.

Got you. That's helpful. And if I may, one more. The reduction in the exposure of the capacity markets, does that impact the -- how could that impact the future electricity sales revenues, the pricing that you received, you said have reduced it? And then on top of that, is your designation as a (inaudible) impacted by this at all?

Yes. So we were getting a capacity payment. You guys help me, I think it was like about a $7 million of capacity payment between both plants on an annualized basis. I think that was what we expected, and that number might have been going down next year. So we opted to come out of that market, so we'll no longer get that capacity payment.

The reason we opted out is that there is a regulatory rule called cost capping. And we were finding that we were effectively not able to sell power at the spot price because the grid operator was limiting, was declaring grid congestion or other, like, I would say, electro-physical issues with the system. That then gave them a reason to say you can only sell power for your cost plus 10% as opposed to selling power for market pricing, and that was effectively lapping the cream off of the peaks of the market pricing.

And so we're very, very thankful that we opted out. So we gave up the capacity payments in exchange for the ability to take advantage of the peaks in power pricing. And I can say, given some of the prices that we've seen this summer, that's kind of repaid -- expect that to be repaid manyfold.

Yes. Just -- sorry, just to nail that home. We were -- many days, we were stuck selling in the day-ahead market versus the real-time market. And if you are a close observer of those markets, I think you'll find in recent days, for instance, at Panther Creek, a week ago, prices reached $2,000 a megawatt, whereas the day-ahead market was stuck in the low hundreds. And so I think you'll find significant dynamic response and revenue opportunities in the real-time markets that just weren't available to us previously. So when we think about the revenue opportunity and the convexity, that's where you want to be.

Our next question comes from Lucas Pipes from B. Riley Securities.

The first one is in terms of the 1.4 exahash that are remaining, what's the utilization rate that we should be thinking about for that for the second half of the year? And on the power side, more broadly, what's a good range for the cost -- cash cost per megawatt hour?

So I think what we're modeling for utilization for the (inaudible) I think we should -- I'd like to say 1 or 2 model out 90% for the miner fleet. And I'm sure that we can beat that given that we have a lot of techs that once they recover for moving out 26,000 miners, we'll have a smaller fleet to manage until we grow it again. And then what was your question, Lucas, on the power side?

Cash cost per megawatt hour?

I think I assume for the third quarter, like relatively high cash costs, and they should be declining pretty meaningfully, hopefully, in the fourth quarter post downtime. What numbers do we have for the fourth quarter?

So if you look at the variable cost of power, we want to be careful, we purposely avoided getting explicit guidance here because of the volatility of the markets for ammonia and limestone locally and then obviously diesel is an input in -- with surcharges related to transportation -- transporting the coal refuse that we use as primary fuel in our plants. We have -- I think you can find we've seen kind of, we'll call it between $50 and $80 per megawatt of cost. It's been quite volatile as we sort of work through the recent months from a maintenance perspective. It depends on how you treat certain of those costs within O&M. And that would be before [REC] sales.

And so we -- as we think about the fourth quarter and beyond this period where we're coming out of a period of relatively low utilization, the fixed cost amortization picks up considerably. We've seen upward pressure in virtually every one of our variable costs abate. And so we're pretty optimistic about how that fixed cost absorption plus the variable cost kind of mitigation and topping and you can look at most of those costs I just mentioned that they've all come off. We're pretty optimistic about meaningfully getting our cost of power down in 2023.

That would be sub-50 or maybe even lower than that?

I would say, I mean, that's definitely impossible. But I think you should probably look more at the margins. So if power prices are through the roof again next year, expect some of our variable costs to also be higher. So it's a -- I think we should probably start to introduce the idea of a power margin being more important than our cash costs. They're so [correlated].

Yes. People in the crypto universe focused on the cash cost, the cost of electricity, and they compare it to Bitcoin price. But when you're selling power at a Bitcoin equivalent price of $100,000 to $250,000 during peak days in the summertime, you just -- you don't focus as much on this, and you focus on margins. So I think we're pretty optimistic as we look at the winter forward power curve, and our opportunities to deliver reliability to the grid, and it just happens to be the case that when the grid is vulnerable and calling for your electricity, it's also the most profitable to deliver it. I think we'll look forward to demonstrating those lower costs coming out of these planned downtime events. And -- but I think margins are going to be quite strong as a result of the revenue opportunity as well as the costs coming down.

That's very helpful. And my second question is a bit higher level in regards to the transactions you announced. So if I gotten all the details, right? I think in about 24,000 BTC, you're better off at the end of 2023 from a cash flow perspective, having done these transactions today. How high would the Bitcoin price have to be, and no specific number just ballpark, for you to have been better off not having done these transactions? -- you see what I'm getting at, like how great of a BTC environment would we have to be living in (inaudible).

We just -- yes, we -- the risk that we have right now, that's -- if Bitcoin rips tomorrow and opens up at $100,000 a coin, obviously, we probably would rather have (inaudible) now we would now need to rebuy them and it may be more expensive to do that if the price rips. So I think our view is we have a quarters and quarters of a mining supply blood to work through. So we think we have an advantage there.

But -- and I don't really view a -- from our perspective, we just capitalized on an opportunity to replace our fleet a big discount to the debt outstanding. And that is going to be true at any Bitcoin price. And so I think we have -- that debt elimination accrues straight the equity. And so I think really, it's a -- by our math, this is a value capture transaction in addition to a liquidity and optionality enhancing one regard the Bitcoin price.

And then I would focus you on 2024 when we go into April 2024 and the having in the Bitcoin markets, obviously, history would suggest that there's a positive Bitcoin price response to offset the step function lower and capital efficiency for miners. But when you wake up in April 2024 and every one of your Bitcoin miners produces half as much Bitcoin, our power revenue and EBITDA generation opportunities don't have.

And so I think when we think about this, it's beyond this, we'll call it sort of myopic view of Bitcoin price versus cost of electricity. It's how do you optimize for selling power or importing power when power prices are depressed. And how do you think about dynamically switching over to mining for Bitcoin at night or during the day or during seasonal or shorter months. And then ultimately, over multiple years, how does that look?

And I think we like our chances of being seriously on offense and being able to sit back and look for opportunities, [distressed] equipment, which we are seeing meaningful signs of and certainly moving our cost down, there are lots of low-hanging fruit. And all those things suggest that Bitcoin needs to be $40,000-plus, $45,000-plus from where we were, where debt amortization was asphyxiating. And now that's largely relieved and clear skies ahead. So we're really optimistic.

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

Congratulations on this. There's a lot of work, I imagine actually. So on the -- just the current state of mining operation, I see you have 25,000 open slots. We've obviously seen quite a bit of pressure on rig prices and there's some fire sales out there that some folks have jumped on. What's the hesitation here? Do you think miner prices are going lower? Or do you not really have the capacity on the power side to plug in at this point? Maybe are we expecting something on the mining side soon? Or are we going to wait to see if Bitcoin price can go higher?

Yes, I think we -- this may be -- we may be isolated, I think we're really structurally positive on blockchain technology and on Bitcoin over the 4- or 5-year horizon. But I think we want to have ultimate flexibility as we move through '23 and '24 is having to take advantage of the volatility. And so when we think about what we just did to restructure the business and put ourselves in a better footing, I think the last thing we're going to do is rush into a market timing call on equipment.

When -- our research shows that there are potentially 0.5 million landed brand-new Bitcoin mining rigs. And they can't find plugs or that are waiting for plugs to be built out. That is a material contrast to the actual plugs themselves, or the value of fully built out, energized plugs and data centers has exploded as a result of scarcity with too many miners and 2 few power plants with plugs given the lack of investment in power plants over the last multiple decades.

So when we think about spending our dear investor capital to buy miners today, we're going to prudently think about opportunities. We're going to stand back and look for pain points, and we're going to frankly reflect on the lessons from the last 9 months since -- almost a year since the IPO. And we're going to be seriously on offense thinking about how to create value.

The opportunity cost is almost nothing because the power markets are so strong that if we don't buy -- if you don't replace these [26,000] slots in the next 6 months, you're not going to see a big difference in revenue. It's negligible. (inaudible) sort of lever up to not make any more money.

And where -- not my area of expertise, but where would the Bitcoin equivalent price be before the power markets went crazy with all the disruptions in 2022? Where would power -- where were the Bitcoin equivalent price be last year?

So I think last year, we had kind of the opposite. We had fantastic Bitcoin mining margins where we're making equivalents like $250 per megawatt, and power prices were in the high 20s, low 30s. And so in those cases, we could have decided to shut the power plant down and just buy power from the grid and use that power (inaudible) the data centers. And now we're in exactly the opposite position, where we are selling power and a sense of divesting of a large portion of the miner fleet because power price is now averaging $120 during the day.

I think what we're expecting is probably a period of time where we are running the data center during the day. I'm sorry, we're putting the data center in sleep mode during the day and selling power. And at night, when power prices are significantly cheaper, running the data center. So like our -- we have software to tie all the data center off and on. We do have to satisfy the grid for a [Reg A test] that we pass. We also do it for ourselves just to take advantage of power pricing spikes, which we've seen in the past few weeks, kind of amazing pricing levels for power that makes you once you shut the data center off quickly.

Yes. Not to belabor it, but just -- I just want to drive one thing on that I think is lost a bit in the discussion, which is in PJM, our power market or you look at markets like ERCOT, where natural gas is the marginal fuel and you think about the average heat rate of a modern CCGT natural gas plant, it's about a 10 -- we'll call it about a 10 heat rate.

And so when you think about power prices, and you look back at 2021 or prior years where we're coming out of a sort of generational lows in U.S. energy prices. That led to a generation of underinvestment in fossil production, and that is coming home to roost as we speak. And so I think we're sort of dubious of calling for a top in power prices. I think we really like our exposure, our net long exposure and think about the convection that we can capture in the power markets by providing the group with reliability is something that's very, very positive. And so we're going to do everything we can to exploit that. And these material transactions are a key part of that.

Yes, it makes a total sense. I want to follow up, I think Lucas' question on power price or is there a cost of power, what you're generating now. I think that was like the best part in my view of the whole Stronghold story because you've given what's going on in the world today, where you've got high natural gas prices, you're not really align directly on natural gas. It sounds like a lot of your inputs have risen in price. But can you just walk us through potentially like where you sit today roughly versus the IPO or guidance of 2 -- sub $0.02. Is that even a possibility today? Or -- and what has changed in the last year that makes that not a possibility?

So if you look at the cost of generating power almost anywhere in the world, the input costs are up 3x, 4x, 5x. If you look at our power costs, they've risen too, far, far less. And so if you look at -- when Greg mentioned earlier that our plants were being called on through the end of May, and "cost capped" by PJM as a capacity resource. That's because, by definition, PJM views us as a low-cost provider of energy. And we get called on to be -- to provide -- we got called on to provide that service to the grid. We're now out from under that and selling in the real-time market starting in June. We talked about the uplift there.

But when you think about the cost recovery, it's just not -- it cannot be isolated from the overall revenue opportunity and the prices of power where margins have exploded relative to the cost of power. And so I think we're -- our costs have risen. If you think about -- you can sort of go through the trailing 3 quarters of O&M and cost of fuel, our costs have risen above $50 a megawatt into the $60, $70 megawatt range. That's not a secret. You can back into that math.

But that's due to significant O&M investment in the plants where -- because we're not elongating the life of our plants with our investments, they have to be expensed and they're not capitalized. We're in a typical business they'd be capitalized. And so our O&M has been pretty heavy handed.

But as we move out of these downtime -- out of these planned downtime periods, we should see significant fixed cost absorption. And then as I mentioned before, we've seen a number of our input costs from a variable cost -- cash cost perspective have started to come off meaningfully as we track into the shorter months. And so I think we're quite optimistic about $40, $50 cost of power being a more sustainable level as we go into '23 than some of the onerous parts of the cost structure as we -- as some of the input costs exploded, and we were just not yet set up to be the baseload provider that we wanted to be.

I appreciate that, Matt. Last quick one for me. I saw an update on MinerVa, it sounds like you made some progress there. Could you give us some details?

Sure. I think we've got -- I think what we've disclosed was we received about half of the contract value. And good news is instead of receiving MinerVas, we are receiving replacement cash break in the form of Bitmain S19j Pros. And so we've been -- as we've been putting pressure on MinerVa to continue to shift the replacement hash rate. And I'll say it again, do not model in a bunch of upside from MinerVa, but we will gladly report it as (inaudible) in.

Our next question comes from Jacob Roberts from TPH.

Just kind of a follow-up on the cost question. I appreciate that the inputs are elevated to some extent. But looking ahead, can you guys talk about the ability or willingness to maybe lock in the variable cost as you're looking forward to an elevated power market over the next 6 to 12 months?

So there aren't really liquid forward prices for ammonia, limestone, and we don't want to buy trucks and increase our fixed cost investment. And so we're happy to be price takers because we're way more than making up for it with power prices when it comes to surcharges to truck, coal refuse or waste coal out of the hills of Pennsylvania into our plants. But as we think about -- as we really think about that cost structure, I think what I'm sensing is there's -- we're just -- there's a little bit of loss perspective given the focus on it.

Our costs have gone up 2x, maybe 2.5x over last year. Now ammonia is up 5x, diesel is up 100%. And then when you think about coal refuse is effectively flat price, but some of those other variable expenses that would drive the variable cost higher. Variable cost is probably plus or minus $45 a megawatt.

And so when I talk about the fixed cost absorption dramatically improving out of our 2 plant turnarounds in September, it's a very serious and fairly straightforward mathematical equation where the fixed cost absorption picks up as the utilization of the plants drives into the wintertime. And we've seen almost every variable cost category start to come off or in a couple of cases, has come off decently. And so we're -- again, we're pretty optimistic about $40 to $50 cost of power as we look into our future in the not-too-distant period. And so it's hard to lock that in because they aren't liquid forwards for the cost inputs. We're -- I would say we're exuberant about the margin opportunity.

Okay. I appreciate that. And then maybe the second question, just curious, you guys talked about [0.5 million] -- the miner is available on the market, brand-new landed miners. I'm just curious, can you give me a sense of how that market is transacting? And really what I'm after is, if we think about you guys replacing that fleet over a given period of time, should we expect a material uplift in miner efficiency?

Yes. So we -- it's a pretty small set of people who transact in miners in large size. And so we try to make sure we're dialed into that group of people. I think we would characterize in recent months that the market is more or less frozen with expanding bid-asks on equipment, where Bitcoin bulls don't want to part ways with higher efficient machines.

And there's a lot of machines that were purchased after all the ASIC chip ramp-up that happened and the machines that were ordered. Those machines are not getting plugged in because plugs are scarce. I think we've seen kind of a market that's frozen, waiting to see what direction Bitcoin will move over the next 4, 5, 6 months. And I think the real is we are a price taker when it comes to making and selling Bitcoin and making and selling power, and we were just not in a sustainable place with our cap structure.

But now we sure is heck are where we can take our time buying efficient machines, high-grading the fleet every day, improving utilization, both at the plants and the data centers and so between the low-hanging fruit and kind of being very careful about how we bring miners back into our data centers. I think we're looking to improve our game in every way. And that miner oversupply is not something we see ending anytime soon.

Our next question comes from Mike Grondahl from Northland Securities.

Just continuing on the 25,000 open slots. Is it fair to say that the 2 most important variables kind of in your thought process on replacing those is kind of the forward curve? And two, just the price of miners out there. .

Yes. I think that's right. Obviously, right now, the forward curve is still high for power that it says (inaudible) a rush. So it doesn't make sense to go (inaudible) rush to buy miners to fill those slots and then maybe run them maybe not because they're expensive.

So I think for us, if you're -- if you don't own your own power plant and can't take advantage of the curve, you would never have given up the miners in the first place. But for us, we gave them up because it didn't mean that we're going to make a lot less revenue. And obviously, it impacted very -- in a very positive way, our liquidity and financial position. So it's really an easy decision for us.

And so I think I just want to make sure that the market understands that we are not going to -- you're not going to see us relever up to make ourselves a potential -- to put ourselves in potentially a tough position again if Bitcoin prices don't stay high. But we do have empty slots. Will they be empty in a year? It is highly unlikely. We will find ways to opportunistically buy miners, but we're just not going to do it in a hurry.

So I really can't at this point, where this is fresh for maybe 1.5 hours, where I think we actually have all these deals done. Ask again in a couple of weeks, and we'll probably have a better answer for timing for how to expect these slots to be filled. But right now, I can say, hey, they're going to get filled because it's not -- it does make sense to have the option to mine Bitcoin. But I think the good news is it's not going to make us much more money at this point, if we did it. So the bar to do that is extremely high.

Our next question comes from Stephen Glagola from Cowen.

I just wanted to touch on the constituents of the current miner rig fleet. So the 1.4 exahash, I think you said like 15,000 to 16,000 rigs. What's the makeup of that? And I know you made some comments around MinerVa. I believe in the press release, it said you took delivery of 8,500 MinerVa rigs. Is that -- are those Bitmain rigs or the MinerVa rigs? And why were you able to get Bitmain rigs from MinerVa?

Yes. Just to drive something on the press release explicitly states that we have received value from MinerVa in the form of cash, leading -- industry-leading brand new. In this case, we mentioned S19j Pros on the call here. We took possession of about 3,400 MinerVa. But since then, most of the value we've received from MinerVa are results of they are doing swaps and us receiving brand-new machines that are hashing at 100 terahash per second. And so we're -- make no mistake, the MinerVa number are capped, the 3,400 that we've sort of previously disclosed and the rest have been really good machines, brand-new Bitmain machines. Sorry, that's related to the Minerva question.

Okay. That's helpful. And then, I guess, two, maybe I want to tackle just this question of getting the scale in another way on mining Bitcoin, a value of a hash rate today is arguably more than deployed than the value of hash rate deployed a year from now. And so how do you think of that strategically as you're going to market prior to the next having and balancing that with sort of this new focus now on just selling power back to the grid?

There's just really one answer. It's patience. We don't have to do anything. We have incredible convexity to the power markets that we just open ourselves up to. And you eloquently said it in 2024, the revenue generation from a single miner is cut in half. And so we're going to be really thoughtful about how we approach that and keep flexibility and try to be on offense every day.

At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Beard for his closing remarks.

All right. Guys, thanks for the questions. Thanks for the -- our investor base for joining us for those that did. Thanks to the patience in let us get all this news out, and we look forward to the coming months and quarters as we take advantage of our newfound position of strength. Talk soon. Good night.

Thank you for joining us today for Stronghold's earnings call. You may now disconnect.