Bitfarms Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 9 speakers on the call.

Operator

Day, everyone, and welcome to the PetPharm's Third Quarter Financial Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to David Barnard, LHA Investor Relations.

Operator

Please go ahead, sir.

Speaker 1

Thank you. Good morning, everyone, and welcome to Bitfarms' conference call for the Q3 of 2023. With me on the call today is Jeff Morphy, President and Chief Executive Officer and Jeff Lucas, Chief Financial Officer. Before we begin, please note this call is being webcast live and an accompanying presentation. To watch along with the slides, you can log on to our website at w ww.bitfarms.com under the Investors Presentation section.

Speaker 1

If you prefer to listen to the call on your smartphone, you can download the presentation from there as well. I would like to remind you that this morning, Bitfarms issued a press release announcing its Q3 financial results. Turning to Slide 2, I'll remind everyone that certain forward looking statements will be made during the call and future results could differ from those implied in these statements. The forward looking information is based on certain assumptions and is subject to risks and uncertainties, and I invite you to consult Bitfarms MD and A for a complete list of these. Also during the call, reference will be made to supporting slides and you can find the presentation again on our website at bitfarms.com under the Investor Relations The company will also refer to certain measures not recognized under IFRS and that do not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other companies.

Speaker 1

We invite listeners to refer to today's press release and the company's 3rd Quarter 2023 MD and A for definitions of the aforementioned non IFRS measures and their reconciliation to IFRS measures. Please note that all financial results are denominated in U. S. Dollars unless otherwise noted. During today's call, Jeff Morphy will review our operations And CFO, Jeff Lukens, will follow a detailed financial review and Jeff Morfin will return for some closing remarks after to the Q and A.

Speaker 1

We have also requested investors to send questions in advance, which I will ask management after we open the call to those interested in the live Q and A. Turning to Slide 4 Slide 3 and then on to Slide 4, it's my pleasure to turn the call over to Jeff Morphy.

Speaker 2

Thank you for joining us today. I'm excited to review highlights of our Q3 performance and our strategic outlook with you. The timing of capital investments is the most important factor of the 4 year Bitcoin mining cycle. As such, we continue to follow a disciplined plan, stressing an attractive ROI hurdle for upgrades and new projects, so that we are best positioned for the having in April of 2024 and beyond. We plan to move aggressively to capitalize on improving market conditions going into the having and capture market share consolidation opportunities that will likely arise post having.

Speaker 2

This, in conjunction with sustained and predictable cost of operation, we believe will drive long term value. I'll elaborate. 1st, until the last 30 days, we deem miners to be at unacceptably high prices. To avoid overzealous spending to achieve high growth targets with unacceptable returns, we exercise patience and discipline. 2, throughout 2023, we prudently fortified our balance sheet and made modest opportunistic expansion moves, such as at Bay Como and in Paraguay.

Speaker 2

3, we remain committed to investing in new facilities and minor upgrades. Now with the Bitcoin rally and the recent introduction of new high performance miners at lower costs, we are focusing on opportunities to take advantage of More competitive pricing for equipment upgrades. 4, combined with years of international development In securing surplus energy and realizing low direct costs while reducing overhead, we are well positioned to continue our expansion And further reduce corporate operating costs. On Slide 5, I'll review some of our accomplishments for Q3 2023 and post third quarter events. In September, We fully energized our first warehouse in Rio Cuarto, increasing exahash per second to 6.1 at quarter close, up 15% from June 30, 2023 and up 45% from September 30, 2022.

Speaker 2

In October, in Bay Como, we completed the 1st phase of expansion, increasing from 5 megawatts to 11 megawatts, Bringing our corporate hash rate to 6.3 exahash per second. During Q3 2023, we earned 11.72 compared to $12.23 earned in Q2 2023, reflecting increased network difficulty. Q3 2023 revenue remained consistent at $35,000,000 compared to Q2 2023, reflecting network difficulty increases, offset mainly by our Hash rate increase. Adjusted EBITDA was $7,000,000 for Q3 2023 and our Bitcoin holdings increased to 703 at September 30, 2023. Slide 6 shows a summary of our operating capacity and installed miners.

Speaker 2

Our diversified portfolio comprises 11 operating farms in 4 countries as well as 2 more in development. In October 2023, we reached 240 Megawatts in operating capacity, up 32% from a year ago, With long term and low cost energy contracts totaling 573 Megawatts, only 42 of contracted capacity has been placed into operation, highlighting our considerable embedded development runway. I will now review our operations and development plans. Turning to Slide 7. In Paraguay, we acquired 2 hydropower purchase agreements, 1 for 50 Megawatts at Paso Pay, adjacent to our The Eureka Farm and another for 100 Megawatts at Iguazu.

Speaker 2

We expect the New Paso Pay 50 Megawatt Farm Construction Be completed in Q1, 2024 and development is progressing quickly. For civil work, we have been preparing the site, Improving the access road and constructing the high voltage substation connection. We anticipate completing most of the substation building and the production buildings by year end 2023. For equipment, We purchased 20 megawatts of MicroBT hydro cooling miners and related containers, primarily employing $19,000,000 of vendor credits, Substantially reducing the capital outlay for this farm. These hydro miners utilize the latest mining Technology and feature among the best efficiencies in the industry, which will drive significantly lower cost of operations.

Speaker 2

The additional 30 megawatts of capacity will be housed in 2 air cooled warehouses currently under construction. For nominal added cost, we purchased the high voltage transformer rated at 80 megawatts, creating optionality for more expansion at Paso Pay. I'll add that the timely delivery of this transformer is key in meeting our Q1 2024 operating target And progress reports from the manufacturer indicated is on schedule. At Iguazu, The site selection process is going well, and the final decision will be reached that fully aligns with our timeline in 2024. Turning to Slide 8.

Speaker 2

In Rio Cueto, Argentina, by modifying the rack layout, We managed to expand capacity from 50 megawatts to 54 megawatts or 8% beyond original design. With 7,500 new miners installed in Q3 2023, we added 800 petahash per second and brought our hash rate to over 1.6 exahash per second in October. Notably, in Argentina, October 1 marked the start of the summer season, when natural gas is typically less expensive. During this 7 month period, we expect fully loaded energy costs at Real Corto to be reliably below $0.03 per kilowatt hour compared to between $0.03 $0.035 during the winter months. This makes Real Corto amongst the lowest cost operating facilities in the industry.

Speaker 2

As this farm represents about 23% of our operating capacity, it will reduce our direct cost per Bitcoin, which is one of our strategic goals. In summary, our LatAm investments are poised for growth in the coming investment cycle. Kit Farms benefits from exceptionally low costs in this region and there are significant barriers to entry to LatAm, uniquely positioning us in this region to capitalize on low cost expansion opportunities. For example, we have paid our dues in Argentina And others looking to duplicate our development efforts in this low cost country will face many organizational and logistical challenges. We have a track record and a strong team.

Speaker 2

We have also achieved qualification as a self importer of miners And retain an additional 156 megawatts of contracted low cost power for future development in RioQuarto. In short, we remain excited about the long term prospects for further development in the country. And in Paraguay, we have 1 operating farm and 150 megawatts under development. In Canada, in early July, we closed the purchase of Baycomo and initiated operation at 5 Megawatts. In October, we achieved our plan of activating the first 11 megawatts of operating capacity.

Speaker 2

We plan to complete of the additional 11 megawatts in the second half of twenty twenty four, coincident with the delivery of power to the facility. In Magog, we further optimized the facility as we imported and installed approximately 2,900 High efficiency S-nineteen Pro Plus Miners. We concurrently relocated the older miners to the Bay Como facility. By increasing the density of rack miners at both farms, we netted an increase of 110 petahash per second at Magog And provided a cost effective capital deployment at Bay Como. In Washington State, we upgraded ventilation and cooling systems, Increasing average uptime.

Speaker 2

While we took 2 megawatts offline, reducing total operating capacity to 18 megawatts, We are in the process of various facility modifications and improvements. To elaborate, we are adding fiber optics to reduce latency between buildings and Constructing a new warehouse. These improvements in operating practices will result in greater efficiencies in early 2024. Please turn to Slide 9. With that, I will now hand the call over to Jeff Lucas for the financial review.

Speaker 3

Thank you, Jeff. I'll begin by highlighting some key elements of our financial strategy and position. We have efficient operations Overall, with the lowest energy cost of our portfolio. We have a laser focus on return on investment at the individual project level and rapid payback of capital at the corporate level. We've achieved our 2023 growth plan by the end of October And for 2024, we have a minor upgrade and infrastructure expansion plan that will provide significant growth to our Hash rate and our competitive efficiency.

Speaker 3

And we have maintained throughout this a strong balance sheet that now positions us to utilize our operational expertise to take advantage of these fleet upgrades now in and the attractive growth opportunities arising from unpredictable economics of the having. I'll now review our financial performance for the quarter, Production Economics and our balance sheet. Turning to Slide 10. In the Q3 of 2023, as Jeff pointed out, we earned 11 72 bitcoin compared to 1223 bitcoin in the Q2 of 'twenty 3 and 1515 in the Q3 of 2022. Our Hash rate was 15% higher sequentially and 45% higher year over year.

Speaker 3

This achievement was offset in part by increase Our 3rd quarter total revenue was $35,000,000 comprised of $33,000,000 from our mining activities and $2,000,000 from our This compares to $35,000,000 overall in the Q2 of 'twenty three and reflects slightly higher average bitcoin price Quarter over quarter and 4% through a Bitcoin earned during the quarter due to the difficulty. Focusing on our production economics as illustrated on Slide In the Q3 of 'twenty three, Bitfarma's direct cost of production per bitcoin was $16,900 up from $15,700 per bitcoin in the Q2 of 'twenty three. This change reflects the increased network difficulty, offset in part by approximately 3% no electricity rates quarter over quarter. While our total direct cost was up In Q3 'twenty three, at Rio Cueto, the site with our lowest cost power, it was in fact under $12,000 for the quarter for Bitcoin. And we should benefit more fully going forward as Rio Acorda wasn't fully energized to its 50 plus megawatt capacity until September and has become a larger portion of our overall portfolio.

Speaker 3

As on our last call, I'd add one more caveat for those building financial models. Our direct costs since February 2022 includes a 15% value added tax on Canadian energy costs as a result of recent legislation. We firmly believe that we are exempt from this incremental tax and are pursuing a revenue ruling with the Canadian and Quebec tax authorities to formalize our exempt status. More to come in this matter, but I will state that without this tax, our direct Cost per BTC in the 3rd quarter would have been about $15,200 less than our reported direct cost per BTC overall. 3rd quarter gross mining profit was $13,000,000 or 38% of mining revenue compared to $14,000,000 or 42% of mining revenue in the Q2 of 'twenty 3.

Speaker 3

As with the reduction in our production economics, the decrease in the gross mining margin reflecting the increase in network difficulty. The total cash cost for BTC was $22,700 in the Q3 of 'twenty three, Up from $21,800 in the 2nd quarter. Higher network difficulty was a primary driver, leading to fewer Bitcoin during the quarter and higher Energy costs for Bitcoin. General and administrative expenses, or G and A, decreased compared to the prior quarter, Which largely reflects our focus on reducing operating expenses, including savings and insurance costs attributable to lower replacement values for our fleet and risk mitigation measures implemented company wide. Going forward, we plan to tackle the combined effects of the having And increasing difficulty by upgrading the mining fleet with some of the recently announced and highly efficient mining models and reducing our G and A cost structure, including lowering professional fees and discretionary spending.

Speaker 3

Moving now to Slide 12. For the 3rd quarter, Our operating loss was $19,000,000 This includes non cash depreciation expense of $22,000,000 This also compares to the 2nd quarter operating loss of $25,000,000 which includes depreciation expense of $21,000,000 And an impairment charge with short term prepaid deposits and property, plant and equipment of $10,000,000 Our net loss for the Q3 was $19,000,000 or $0.07 per basic and full diluted share compared to a net loss For the Q2 of $23,000,000 of $25,000,000 or $0.10 per basic and fully diluted share. As previously noted, Slightly higher average Bitcoin prices were offset by increases in network difficulty, which impacted the bottom line. Adjusted EBITDA was $7,000,000 in the 3rd Quarter of 'twenty three as compared to $8,000,000 in the Q2 of 'twenty three. The adjusted EBITDA equates to profitability per bitcoin About $5,900 in the 3rd quarter versus $6,300 in the 2nd quarter.

Speaker 3

Turning now to Slide 13. At September 30, we held Cash of $47,000,000 and Bitcoin valued at $19,000,000 for total liquidity of $66,000,000 This compares to $31,000,000 cash and $48,000,000 for liquidity at June 30, 2023. During the Q3 of the 11.72 Bitcoin we earned, we sold $10.18 to generate $28,000,000 of proceeds to fund our operating and debt service requirements and deposited 154 BTC in the treasury for the September month end value of a little over for $4,000,000 In October, we deposited another 57 bitcoin, increasing bitcoin in custody on October 31 The 760 bitcoin representing a total value of approximately $26,000,000 based on the bitcoin price that day at $34,200 In the Q3 of 'twenty three, we raised $31,000,000 in net proceeds from the ATM program, which expired on September 12. The monies we raised under our ATM are specifically earmarked for the growth initiatives about which Jeff spoke. We continue to use cash generated from operations to deleverage our balance sheet.

Speaker 3

Total indebtedness was reduced to $10,000,000 at December 30 and to under $8,000,000 at October 31. As we've noted in previous earnings calls, our debt related to our Activity is scheduled to be fully repaid by the end of February 24, well in advance of the happy. Before I hand the call back to Jeff, I'll take a moment to highlight one of our new initiatives, the synthetic huddle. At our Analyst Day in September, We introduced our concept of using the synthetic hodl to achieve a capital efficient portfolio. The primary objective of the synthetic hodl is to enable us Accumulate BTC and Treasury and increase the company's BTC exposure in a manner that is risk managed and capital efficient.

Speaker 3

With it, we maintain discretion to dynamically adjust our hedge and synthetic huddle ratios within risk limits to respond to market factors. In October, we initiated our strategy with the purchase of long dated B2C call options. As of November 6, Using the synthetic huddle, the company has increased its upside to B2C prices by 35 B2C equivalent exposure. Turning to Slide 14, I'll now turn the call back over to Jeff.

Speaker 2

Thank you, Jeff. Before I open the call for questions, I would like to mention some upcoming events, including the Banzinga Future of Crypto Conference in New York on November 14 And the Blockchain Jungle Conference in Costa Rica on November 16th. Referring to Slide 16. In summary, We are following a highly disciplined capital allocation strategy with projects to be completed ahead of the having in April. Fleet upgrades will reduce our costs of operation and the patience we exercised in 2023, We expect will pay off well in 2024.

Speaker 2

Over the past 12 months, we've increased our hash rate 45%, Achieving our 2023 target of 6.3 exahash in October. The first 50 megawatts Of our 150 Megawatt Expansion in Paraguay is underway and opportunities that meet our criteria for growth and lowering our costs both before and after the having are abundant. We expect to achieve 7 exahash In Q1, 2024, with the energization of hydrominers currently on order for Paso Pay, with additional capacity there Coming from the 30 Megawatt Air Cooled Warehouses. With newly signed PPAs, we have significant and low cost expansion projects to develop when conditions warrant following the having. This is an exciting time in the industry cycle, And we are well positioned to leverage our core competencies and advance Bitfarms global operations in a new phase of diversified and accretive growth, while working strategically and steadfastly to reduce our production costs.

Speaker 2

Operator, we can now open the call for questions. Over to you, David. Please go ahead.

Speaker 1

Okay. Thanks, Jeff. Yes, just before we go to the analyst Q and A, there's 2 questions that we got From online in advance of the call, I'll just read out the first one to you. You seem to be more positive in your outlook Today, then at your Analyst Day back in mid September, could you elaborate on why?

Speaker 2

I'd be happy to take that one. Well, the climate is different now. It's much more positive. Let me elaborate. Like Bitcoin, which was trading sideways for the longest time, $26,000 $27,000 $28,000 is now $34,000 $35,000 That's 26% to 30% higher than it was.

Speaker 2

Our hash the hash price that we saw not very long ago was $0.06 and a little bit under $0.06 per tea. Now it's over 7. That helps the margins and certainly helps our optimism. We are reading and seeing record inflows Cash going into the exchanges with new excitement coming around the bitcoin around bitcoin and bitcoin purchases and I think that's fueling some of the price increases. Part of that is also the all the news about the ETFs coming.

Speaker 2

It sure sounds like there's going to be approvals coming in December And probably, them going live early in the New Year. And that's going to be a phenomenal opportunity for the whole industry in terms of credibility And adoption and more investment. And then just in the last two weeks, we have multiple manufacturers Announcing new miners that will be released in the Q1 of next year at less cost and sub 20 joules per terahash performance, that adds up to a lot of optimism in our eyes. And as we've said in the past, We want to be opportunistic and it sure looks like this is a good time to be opportunistic.

Speaker 1

Great. Thanks, Thanks, Jeff. And I'll just give you the one other one from the online community. You seem to be accelerating the pace of growth in LatAm. What is motivating this move over further growth in Canada?

Speaker 2

Jeff Lucas, do you want to start with that one?

Speaker 3

Sure. I'm glad to do so here. So the biggest driver for us naturally is the lowest energy costs. And currently Canada's Costs are a little north of $0.045 albeit when that VAT tax is removed, it will be probably a little below $0.04 But for us right now, the most region of the world and where we have a very strong foothold is in Latin America and particularly developments in Paraguay. So really the driving force Behind that is the fact that we have electricity right now in Paraguay that's a little north of $0.03 or so, further opportunities we believe for And to us, it's the most promising region and the most economically compelling region at this point in time.

Speaker 1

Okay. Operator, I think we can go to the Q and A.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Bill Papinacchio with Stifel. Please go ahead.

Speaker 4

Hi, gentlemen. Good morning. Thank you for taking my questions. Hi, Bill. Yes, I really appreciate the commentary at the beginning on the importance of timing your capital investments.

Speaker 4

And clearly, Bitfarms has a very strong balance sheet with a ton of liquidity and debt that's going to be paid off in the New Year prior to the halving. And you also have the situation of attractive pricing, which you alluded to. I'm curious to hear whether you could share more details in terms of what hardware models Look most attractive to your team today. I know you've been your team has been very diligent with calculating payback periods. And so Just hoping to get an update to that end.

Speaker 2

Sure. Well, I think the industry has all been Very much keen on these new miners being announced, in particularly the Bitmain S-21s and T-21s are very attractive. The pricing is very good and sub-twenty Watts is really changing the landscape. The pricing and performance It's better than the last generation of miners and which we thought were just too expensive. And while other people were just Growing and buying these models, we just said it's hard to get the paybacks, particularly at $0.06 per And times our hash price and those paybacks were long and it was not a good use of capital.

Speaker 2

So we had to help hold back, We think now the environment is much better and we are looking at this new generation of miner, which will be available starting Early next year and to put in some of our facilities and also upgrade the fleet. As People have commented in the past, we have deployed a number of M30s and M31s. So some of the replacements there, We can do it. It would be quite remarkable in terms of our performance.

Speaker 4

Great. Thank you for that color. And then for my final question, you've been able to optimize and kind of maximize every square inch at the first warehouse in Tina, and it's a no brainer, right? Very attractive low cost power. I'm just wondering whether the appetite or the outlook for further Expansion in Argentina has changed at all.

Speaker 4

I understand your team is heads down on the Paraguay expansion, but Just hoping to get some more outlook to that end.

Speaker 2

Bill, it's great to have flexibility and it's great to have good people in All of our local markets. It really opens up opportunities for us. I guess we said, we paid our dues. In Argentina, we have a superb team in Buenos Aires, managing the region. We have a superb team in Rio Corto that's now well trained.

Speaker 2

And We were able to push put another row of miners in there, take full advantage of the primary transformer there And move that up by 6%, 8% and all with new miners. So like we're 1.6 exahash For a second there now. Quite remarkable. And I think it's an area which we've learned sometimes By mistakes and sometimes by good fortune, but we are we keep trying hard and then Figuring out sort of how to adjust things along the way. So until we got ourselves up and really primarily using all the output from that transformer at Sort of 50 megawatts.

Speaker 2

The facility wasn't optimized. And we were always saying when we optimize facility, we could bring the cost down. So like in the summertime, we were seeing sort of $0.036 per kilowatt hour after the translation. September, it dropped below $0.03 and now we're in the summer months, we're going to get 7 months probably price probably price is closer to $0.025 than 0.03. But once again, it's let's see what actually materializes.

Speaker 2

And we also have the same situation. Let's see what materializes from the election coming on November 19. So it's an area that we're excited for because the costs are low, but we want to walk before we run and make sure that we don't make any Expensive mistakes. So once we get a little more confidence, then this really could open up this opportunity At some point in 'twenty four when the economics are right and 'twenty five sort of and beyond for sure. But we have the land, we have the contracts.

Speaker 2

It really represents a very low cost opportunity. We're 23% of the overall book right now, and that's bringing down Our cost of production and that's a real strategic goal for us is to bring those costs down.

Speaker 4

I appreciate that color. Thank you, gentlemen. I look forward to seeing that hard earned cash being used towards some fee upgrades. Thank you.

Speaker 3

Very good.

Operator

Our next question comes from Josh Siegal with Cantor Fitzgerald. Please go ahead.

Speaker 5

Yes. Hi, guys. Thanks for taking my call today. Congrats on the lower G and A. Great to see that profitability improvement.

Speaker 5

For my first question, I wanted to touch on financing. So obviously, you've been paying down the debt and improving the balance sheet over time. Would you ever consider taking on additional debt burden It made the right sense from a financing perspective, but can you give an update on whether those debt markets have opened up to you?

Speaker 3

Sure. Let me Josh, let me speak to that here, if I can. We have seen some pretty interesting instruments out there, primarily from, I think, hedge So I'm seeing a convertible debt outstanding here. And look, in a general picture, there is room for debt in the balance sheet to a degree in the sense that it lowers your overall cost Capital, particularly on a tax adjusted basis here. We estimate both for our own calculations that the Cost of equity for the sector and for us is between 30% 35%.

Speaker 3

So if you can indeed get debt with an all in cost of maybe 15% to 18% here, That and then that tax adjusted afterwards, that doesn't make it attractive. Of course, given the variability and the volatility of the industry in which we operate and the fact that the biggest drivers, I. E. Bitcoin pricing and network difficulty are largely beyond our control. We do that very, very judiciously.

Speaker 3

At this point in time, Josh, We don't have any immediate plans to incur debt on the balance sheet. But again, if conditions change and for the right opportunity, We would consider that on a limited basis.

Speaker 2

Hey, Josh, and I'll remind people that Coming into the having, we expect to take a That's right. Network correction and things like that. We've said before, We do not want any debt obligations at that point. Any like we don't know how severe this can get because it depends on pricing, which is out of our control. So We want to be as lean as possible, so we can take maximum advantage of opportunities Post having.

Speaker 5

Great. No, I appreciate the color there, Jeff. And it actually leads into my next question, which is around the halving. So obviously, you guys are uniquely positioned To replace some of your older legacy machines with some more highly efficient machines, which can both improve your efficiency overall and increase your Hash. I was curious how you're thinking about the timing of that come having.

Speaker 5

Would you look to be aggressive as we enter the having or is it really a wait and see approach to see what's happening across the network.

Speaker 2

Well, as we've said many times, we want to have the balance sheet and margins and management Team to be able to be opportunistic. And opportunistic means that really this window is really only opened in the last 2, maybe two and a half weeks with the announcement of these miners. We're looking at things very closely. The having is very much In focus for April 15, 16, 21, whenever the mathematicians have the best estimate it right now. But We have opportunities to plug them in before the having.

Speaker 2

It would be nice to be able to do that, but there's no commitments and no decisions made just yet, But we're working on a variety of scenarios.

Speaker 5

Got it. Thank you, Jeff.

Operator

Our next question comes from Chase White with Compass Point Research. Please go ahead.

Speaker 6

Thanks for taking my questions.

Speaker 7

So a couple if

Speaker 6

I may. First is a housekeeping question. So What were the and apologies if I missed this, but what were the power costs in Argentina during the quarter, the average cost?

Speaker 3

So generally, the costs for the quarter were just a little overall, were a little over $0.03 But what I want to underscore here is that one that did include the winter months The degree of that came into play here a little bit. And then secondly, during this quarter, we did revert over entirely to The beginning of getting the energy costs from the product producer where there was earlier in the quarter some contribution from the grid itself as we're making that transition, which is higher cost. So again, overall though, for Argentina, we were just over $0.03 for the quarter. And by the way, I'm going to add here that in September, And some of it being foreign exchange influenced, our cost was about $0.028 of energy for Argentina.

Speaker 7

Got it. That's helpful.

Speaker 6

And how should we think about CapEx for the remainder of this year? And how much should be left over as we head into next year? Obviously, you've got some minor purchases that you need to make and don't necessarily know the exact pricing for that. But In terms of the infrastructure and then how many miners you would contemplate putting in there, any comments on that? Thanks.

Speaker 3

Yes. Let me start this off and Jeff you can certainly fill in in terms of some of the minor counts there if you wish. So first of all, I'm just going to speak to what we have in terms of Disclosed and communicated CapEx in our growth plans. We have other initiatives about which we spoke to regarding what we're doing with the minor fleet and things of that sort here. But the thoughts to keep in mind at this point here is that the major project we really have here is development of Paso PAY, which as As Jeff indicated, we'll be up and running by the end of Q1 of 2024.

Speaker 3

We also have what's going on, we've identified Baycomo that was a 22 Megawatt acquisition we announced in April. We've got the first 11 up and running and we're scheduled to have the second 11 in the second half of 2024. We also have some smaller projects in the works, generally $1,000,000 or less. In Washington, some improvements there And even some sort of minor modifications as well that we have going for another $1,000,000 or so. So overall, what we're looking for to be very specific here It's about $70,000,000 of CapEx commitment that we've identified between now and the end of 2024.

Speaker 3

Of that amount, just to be clear here, Roughly $50,000,000 to $55,000,000 of that is going to be Papa Perry. We're bringing the play again up and running by the end of March. And we have the Bay Como, the second 11 megawatts, Maybe an additional $10,000,000 to $15,000,000 that will be in the second half of twenty twenty four. And then the additional little dogs and cats, so to We have the bigger filter out for the remaining months here.

Speaker 2

Yes. Chase, as Jeff mentioned, the Paso Pay facility, We've got 20 megawatts spoken for with the hydro miners, which is fantastic that we're going into that new technology there. But we haven't announced the 30 megawatts from the air cooled facilities. So great opportunity to do our own mining, our own hashing at that location with those 30 megawatts. The other upgrades that Jeff mentioned are later in the year.

Speaker 2

But sooner than that, If we can really put things together, a fleet upgrade, we have over 16,000 M30s, M30s that are primarily in Quebec. Like Talking about the opportunity for rapid increases in hash rate and rapid improvements in efficiency By replacing some of those M30s and M30s with T21s, S21s, that type of series of minor, You're talking 46%, 50% improvement in efficiencies right away. So we're looking at that very keenly.

Speaker 7

That's helpful. Thanks guys.

Operator

The next question comes from Kevin Dede with H. C. Windray, please go ahead.

Speaker 8

Hi, gents. Thanks for taking my question.

Speaker 2

Good morning, Kevin.

Speaker 3

Yes. Hey, Kevin.

Speaker 8

You gentlemen alluded to a 7 ExterHash target, I think for the did you say the end, Jeff, the end of the Q1 next year?

Speaker 2

Correct.

Speaker 8

Okay. Could you give us a little more detail on how you see, I think what not word about 6.3 now. Can you just Walk through the step function improvement there. And given that some of that is a function of The M50 and M56 order, I'm just kind of trying to figure it out in my little brain on shipment and deployment.

Speaker 2

Well, we've announced a lot of new miners, but most of them are now into Argentina and plugged in now. So you're not really going to You're going to see a little bit more coming from Rio Corto, Argentina, but really this is all about Paso Pay and the 20 megawatts dedicated to the hydro miners And the hydro containers that we have there. That's really the step function that will get you to 7 exahash. The 30 megawatts in the air cooled Facility is there. We're building the air cooled warehouses, but we have not announced what's going in there yet or how it's going to be configured.

Speaker 2

So that does not go into 7 ex of Hash. Arguably, if you if we put our own miners in that in those air cooled facilities, then we could be Probably up to the 8 ex Hash area and perhaps a little more. But right now, that's how we get to the 7.

Speaker 8

So what machines do you have ordered, Jeff, just to 7, right? So if you go to 8, you'd have to place orders?

Speaker 2

Correct.

Speaker 8

Okay. Just along that line, have you fully utilized the credits that manufacturers that have offered you? Or do you still have more on the

Speaker 2

We sure have. Jeff, do you want to comment on the $19,000,000

Speaker 3

Sure, we did. We actually had around $15,000,000 $16,000,000 remaining and we fully utilize that asset for the pass of pay for the hydro coolers and the miners and the containers associated with that. That pretty much utilized fully the remaining credits that we had, Kevin. Okay.

Speaker 8

So when we look at the December balance sheet, you'll have 0 Machine credits?

Speaker 3

Correct.

Speaker 8

Okay. You mentioned, Jeff, this situation with the Quebec tax authorities or maybe it's, I guess, the full Canadian picture. I just want to understand what exactly is going on there and where your confidence comes in that Tax either goes away and maybe previous allocations are refunded. How should I think about that?

Speaker 3

Sure. So first of all, this legislation was originally proposed back in February 2022. And at that point in time, We began accruing the expense of that VAT. So in essence here, we have a 15% value added tax on the energy cost. Normally, we can Apply for a refund or historically applied for a refund and recovered at the AT.

Speaker 3

Effective actually in February, that's when the Proposed legislation for 4th February 2022 indicate that that recovery or that refund will no longer be available The Bitcoin miners here. So that's why we've actually been incurring that additional cost and accruing to that additional cost here, I think that's a point in time. About 2 months ago or so, the legislation was officially passed, Ashley, that removed that opportunity with certain exceptions, Including where if you are actually selling if you are selling your including power capacity to a 3rd party pool As we do actually with Foundry, which is located in New York here, you actually can therefore recover those VAT taxes that are inputted here. So what we are actually now doing is that we're getting a specific revenue ruling that makes it completely clear, 100% And we had the recovery of that refund here. And as a matter of fact, if we get that back, what will happen is rather than recording With $0.047 per kilowatt hours you did in Canada in the 3rd quarter, EBITDA down to a little under $0.04 more like around $0.39 And that's going forward.

Speaker 3

In addition, speaking to your second question here, Kevin, as a matter of fact, we've actually paid around $16,000,000 That fact is since February, we're actually a little more, about $17,000,000 at this point, and we will get a refund for that amount. Not banking on it yet, not putting to our projections, but it's something we feel we're very entitled to. The legislation implies we should get it And that we're going to be pursuing that very vigorously. Hopefully that addressed your questions.

Speaker 8

Great. Just help me understand which authority that is. That's Beyond the territory or province of Quebec, right? That's for the entire country?

Speaker 3

It's the Canadian Revenue Authority and also it's at Provincial level, the MRQ as well.

Speaker 2

Okay. They're harmonized between most of the provinces and the federal government. But yes, this is a federal government initiative. It's their lead. It's the interpretation from them that we need to clear this up.

Speaker 2

And we've been trying to be patient, but They seem to be taking an awfully long time in getting this crystallized for us.

Speaker 8

Can you just Maybe offer a little more color on your confidence in the ruling going your way?

Speaker 3

We're highly confident. I don't think I can be anymore. So I don't think it would beneficial to be more specific than that, but we have every expectation as we read The regulations as our attorneys with the regulations, it seems very clear to us that we are indeed entitled to that VAT refund.

Speaker 8

There are a slew of other Bitcoin miners operating in Canada. Are they in a similar position you think with Offering their hash to a U. S. Resident pool?

Speaker 3

I'm only going to speak to our situation here.

Speaker 8

Fair enough. The synthetic HODL that you've put in place, right, I'd imagine that's 35 contracts, right? You spoke to 35 Bitcoin?

Speaker 3

That's correct. In essence, that's correct. That's right.

Speaker 8

Okay. That's all since the September quarter closed?

Speaker 3

That's right.

Speaker 8

Okay. How would we see that show on the balance sheet in December?

Speaker 3

Yes, that's a good question. So we do not practice hedge accounting here. There are some complications and wrinkles associated with it at this point in time here. So where you're asked to see the results of the impact of that is going to be actually in the below the operating income line and sort of financial income and expense. So we'll be breaking that out in the detail there.

Speaker 3

And in future reporting, you'll see it broken out in that section and in the footnote.

Speaker 5

Okay.

Speaker 8

Obviously, you gentlemen scrutinize the capital allocation decisions carefully. I can you offer just a little insight On the factors that led you to deploy capital in that vein, given the improvement That Mr. Morphy addressed in the hash price and the purchase or at least the utilization of the equipment credits?

Speaker 3

Well, let me I'll start off here. First of all, we utilize equipment credits because we're getting it we're going to get it actually it was a great It was a great price for us in terms of the equivalent value for what we're doing. Secondly, obviously, we do want to husband our cash as carefully as we can here, given the uncertainty coming up But I think what's important to keep in mind, just sort of step back and give a little more color here. As I pointed out at the beginning here, our cost of equity The industry overall is around 35%. So we do have a pretty high hurdle here in terms of what we're looking for on our return on our projects.

Speaker 3

And we find that, however, some of the economics, such as what we're seeing in Paraguay, is very, very compelling at this point in time. And while I'm sure there's greater uncertainty and greater risk, In turn, warrants higher hurdle rate for that part of the world here, we find that even so, The potential returns that we can achieve here in that part of the world make it very compelling for us to sort of to continue to make investments of that nature. Does that address your question, Kevin? I want to make sure I'm being thorough here.

Speaker 8

Yes, it definitely helps, Jeff. Thank you. Maybe you could speak a little bit more specifically to the power prices that you're seeing in the PPAs. As I understand that there are 2 separate ones, right? There's one for Villa Rica and there's another one for

Speaker 2

Ande. Ande.

Speaker 8

Ande. Yes. So maybe you could speak to that. Clearly, one of your competitors Is working with a partner in that jurisdiction that I know you must be intimately familiar with. So maybe you could just help us For all of them, for my not just myself, but all my colleagues here and understanding the power price scheme.

Speaker 2

Okay. Well, First, our first 10 megawatts that we put in, in January of 'twenty two was in Via Rica. And our contract is with A private franchise owner within Paraguay, the only one like it and it's called Cliffsa. And it's been about $0.036 There's been a few changes to it, but it's pretty steady at $0.03 consistent Now, but we can't get any more power or production from that site because the ANDA distributes, which is the national, Paraguay National is a distributor of power, Cliffs only get so much, so our allocation is there. So for future growth, we've gone to ANDA itself.

Speaker 2

Just like the competitor that you mentioned just moments ago, Kevin, and pretty much all of these contracts are very similar in terms of rate. There's high voltage rates and there's medium voltage rates. We're taking the high voltage rates that put us in about $0.39 Per kilowatt hour, not subject to indexation with inflation and all green power and And all consistent and all done in a very harmonious partnership with the government and national distributor. It's working well, and I think The other guys will have similar arrangements. We're not privy to their contract, but unless they are taking smaller amounts and under the media voltage tariff And that would have a higher rate.

Speaker 8

When you sort of take a step back and you look at Ande's source, right, I think they have, What, 50% of the, what, 14 megawatts that come out of that dam? How much do you think they're willing to allocate To crypto?

Speaker 2

Rounding thereabouts and trying not to speak for them, but It sure seems like it's about sort of 5.50 or so high voltage and about 100 megawatts medium voltage.

Speaker 7

Okay.

Speaker 2

I think they want to make sure that they have good strong committed power from that. They're making a commitment To the dam up there and but there is some variation season to season. I don't think they want to get into that All that much. So I think they want to make sure that they can sign these contracts, get it into production and see what it looks like before going any further.

Speaker 8

Okay. I'm sure you're happy to hear a last question for me. Could you just give us a little more color, Jeff, please on the Iguazu site selection On the timeline and maybe how you're thinking about narrowing it down?

Speaker 2

Sure. Iguacu is 100 Megawatts. We know Ande likes to do it with 80 Megawatt transformers, it's their choice. That's why we put one in, in Paso Pay and hopefully we might be able to get a little more there at some point. But Iguacu, we are looking for real estate up in that area, fairly close to the substation up there.

Speaker 2

That's The main transmission corridor, so there's a lot of power up there. It's recently been upgraded as well. So it's a nice new substation there. And We are going through multiple sites right now in terms of selection. Some have been ruled out, Some are still in the running, but they're relatively close and you basically measure which ones are high and dry, which ones are fairly close So that you can run less electrical cable, which is a big factor.

Speaker 2

The electrical cable can cost more than the actual site itself. So we're going through that. As we said in the script, it's all fitting in within the timeline for next year. I think we should be able to hopefully identify a preferred site this year, hopefully secure it. And then we'll start laying out plans for the substation to reduce the voltage there.

Speaker 2

And we haven't announced any plans in terms of hydro miners or containers or air cooled yet. That's all part of Design and development plans for next year.

Speaker 3

By the way, Kevin, let me just add a little comment here. You made a statement about the size of the Atapu Dam. It's actually a 12 gigawatt dam. It's been running now for about 40 years or so. Half of the power is allocated to Brazil, half of it goes to Paraguay.

Speaker 3

Paraguay is actually using less than 10% of it for their own purposes here And the other 40% of their share actually, they sort of sell back to Brazil at about $0.01 per kilowatt hour. So clearly, it's very and strongly in their government's interest to try to expand the use of it locally, including opportunities after Bitcoin Mining, which is why one of our parent companies is following us as they're looking at opportunities in that area.

Speaker 8

Great comment to add. Thank you very much, Jeff. As always, gentlemen, very appreciate you taking my questions. Thank you.

Speaker 2

Thank you, Kevin. Thanks, Kevin.

Operator

Lucas, is your line muted?

Speaker 7

No. Thank you, operator. Sorry, I didn't hear my name. Hey, good morning, everyone. Thank you very much for all the color, very informative call.

Speaker 7

Just a few quick questions. The first is kind of on the hash price assumption post having. What do you think is a reasonable level to assume to clear that hurdle rate you indicated earlier?

Speaker 2

Well, it's the $0.06 is something that we've been really sort of maneuvering around In our analysis, for some time, if it's better than that, then we can make some investment decisions with some half decent payback periods. We're watching the network cash rate, which continues to set new records In terms of increases, boy, we've had 45% growth over the last year in terms of our hash price, but difficulties in the network is up Sort of almost double that. It's quite phenomenal. But this excitement here, the ETF excitement, I hope we can see Bitcoin prices of sort of 45, maybe 50 going into the having that will produce that type of Hash prices that we're looking for, we will see.

Speaker 8

Okay.

Speaker 7

That's helpful. And then when you think about kind of the power cost distribution across the industry, What again, this is an industry question, but I would appreciate your perspective. Where do you think the midpoint is In terms of dollars per megawatt hour, where would you kind of put the bottom 25%, where would you put the top 25%? Thank you very much.

Speaker 2

Wow. I think probably, and there's people with a lot more A lot better data than I am, but it's probably average being sort of $0.05 $0.05 per kilowatt hour is probably sort of Where the average is, you see a lot of hosting contracts that are fair bit more than that. Like When we go through the having, it cleans a lot of inefficiency up. And we do expect a radical adjustment And where 15%, 20% of the network hash rate will probably fall off for a few months And it just depends where Bitcoin price is and some of these new miners and adoption, how quickly It is replaced, but it will be replaced. This is why I'll repeat it again like through this whole script and what we're talking about here is we are really pushing for Improving our cost of production.

Speaker 2

We're bringing down our G and A and like the biggest factor is electricity costs. So we are Expanding in areas where there's low cost electricity. Argentina and Paraguay is cheaper than where it is in North America. And while there's no demand response that can pad your EBITDA Done your earnings. I think just in pure margin on Bitcoin play, you need lower cost electricity.

Speaker 2

And that's why we are seeking Earnestly, anything under $0.04 per kilowatt hour and that's why we think Paraguay with their dynamics, it's $0.36 $0.03 $0.03 now and with the potential for some improvement there, like in reduction. And then we've got Argentina right now that's less than $0.03 That's if you're going to be successful going forward, you need to be in low cost areas. Being able to guess $4,045 going forward, especially subject to inflation. It's not a good recipe for longevity.

Speaker 7

I appreciate the color. Thank you, then. One last one. On the election in Argentina, any potential fallout And what it could mean for you doing business there?

Speaker 2

We've decided to go slow there. We've been We've said this many times that we want to see what the election brings, but we've seen with A Forbes article just most recently where it said both remaining candidates are pro Bitcoin. I think how they go about it will be different. We have one more radical candidate that talks about dollar rising the economy and things like that. It's going to be interesting to play through, but it's one of the reasons why we have not put our capital budget dollars Towards, Rio Quarto at this time because we want to make sure that we can continue to get the lower cost electricity and just have Confidence in continuing capital investments in the country.

Speaker 2

But even I think in that Forbes article, they talked about the government perhaps Getting into Bitcoin mining in a particular area down there, which we've looked at, they think it's a novel idea, but we were looking at it 2 years ago. And It does represent some of the great opportunity in the country of Argentina going forward, provided that we can Put the capital and the right people to play in that area.

Speaker 7

Jeff, seems like lots of folks are copying you. I'll turn it over. Continue

Speaker 2

Thanks, Lucas.

Operator

This concludes the question and answer session. I would now like to turn the call back over to Jeff Markey for any closing remarks.

Speaker 2

Thank you, operator. We are especially excited about the industry as the having cycle is coming in about 5 months. Positive developments include Increasing confidence that Bitcoin ETFs will be announced later this year and activated in early 2024 and 2, in public sentiment that Bitcoin is being recognized as a store of value given heightened world uncertainty. We believe these factors may boost the sector and increase its credibility along with increases to Bitcoin prices sooner than expected And put the wind at our back as we execute our plan to: 1, grow low cost operating capacity to 2 90 megawatts in Q1, 2024 2, maintain top decile performance from mining assets and reduce costs as a result of additional sources of stable lower cost energy 3, develop more of our 573 megawatts of contracted Yet undeveloped capacity, of which only 2 40 megawatts are currently in operation 4, increased productivity with timely and cost effective fleet upgrades and 5, remain one of the most highly productive and geographically diverse pure play Bitcoin mining companies in the world and embark upon an accelerated phase of smart expansion as and when conditions present themselves. Thank you all for attending today's conference call.

Speaker 2

We look forward to updating you with our monthly reports as well as our other developments and at our Q4 conference call in March. Thank you. Thank you all.

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Earnings Conference Call
Bitfarms Q3 2023
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