Bitfarms Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 15, 2023

There are 6 speakers on the call.

Operator

Morning, everyone, and welcome to the Bitfarms Limited First Quarter 2023 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 also note today's event is being recorded. At this time, I'd like to turn the floor over to David Barnard of LHA Investor Relations.

Operator

Sir, please go ahead.

Speaker 1

Thank you, Jamie. Good morning, everyone, and welcome to Bitfarms' conference call for the Q1 of 2023. With me on the call today is Jeff Morphy, President and Chief Executive Officer and Jeff Lucas, Before we begin, please note this call is being webcast live and accompanying the presentation. To watch along with the slides, you can log on to our website at www.bitfarms.com under the Investor Relations section under Presentations. If you prefer to listen to the call on your smartphone, you can download the presentation from there as well.

Speaker 1

I would like to remind you that this morning, Bit I'll remind everyone, Turning to Slide 2, that certain forward looking statements will be made during the call and that future results could differ from those implied in this statement. 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 on our website again at bitfarms.com under the Investor Relations section. 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. We invite listeners to refer to today's earnings release and the company's Q4 in the Q1 2023 MD and A for definitions of the aforementioned non to IFRS measures and their reconciliations to IFRS.

Speaker 1

Please note that all financial references are denominated in U. S. Dollars unless otherwise noted. During today's call, CEO, Jeff Morphy, will review our operations for the quarter CFO, Jeff Lucas, will follow with detailed financial review and Jeff Morphy will return for some closing remarks after the Q and A. And with that, turning to Slide 3, it's my pleasure to turn the call over to Jeff Morphy.

Speaker 2

Thank you for joining us today. I trust you will take away why Bitfarms is well positioned to capitalize on the improving Bitcoin mining economics. To this end, I would like you to take away 4 points. First, we have established the financial and operating discipline that gives us the strength and flexibility to achieve our existing growth plan on an accelerated schedule. 2nd, We have also and importantly updated our end of year 6 exahash per second target to the end of the Q3 2023.

Speaker 2

3rd, with our foundation and momentum, we expect to seize upon opportunities both today and around the next Bitcoin halving, which is approaching in April of 2024. 4th, during Q1 2023, we proved our balance sheet, and more recently, we resolved some significant hurdles in Argentina that unlock the best economics in the industry. As a low cost producer with relatively stable energy costs and a fixed operating structure, Bitfarms achieves asymmetrical upside with financial performance that exceeds Bitcoin performance. Turning to Slide 4. I'll review some of our accomplishments that took place in Q1 2023.

Speaker 2

We ended March 2023 with 4.8 exahash per second, up 7% from December 31, 2022 and up 78% from March 31, 2022. Subsequently, we have increased our hash rate another 4% to 5.0xahash per During Q1 2023, we mined 1297 Bitcoin, up 35% from Q1 2022. Then in April, we announced a major achievement of 21,000 bitcoin mined using 100 percent renewable energy. With the finite supply of 21,000,000 Bitcoin, Today, Bitfarms has mined over 1 1000th of all Bitcoin to be mined. We believe we are the 1st publicly traded miner in the industry to reach this milestone with Renewable Energy.

Speaker 2

Bitcoin prices are rising and drove Q1 2023 revenue to over $30,000,000 With our low cost operations, We delivered gross mining profit of $12,000,000 which represents a gross mining margin of 42%. Our direct cost of production of $12,500 and our all in cash cost of production of $17,600 support high margins and remain a strategic advantage as we approach the next having in less than a year. Adjusted EBITDA improved from $1,000,000 in Q4 2022 to $6,300,000 in Q1 2023. And looking ahead to the having, we have continued to deleverage our balance sheet and improved our financial flexibility. In a moment, Jeff will elaborate on our reduction of more than $140,000,000 of debt in 10 months to just $19,000,000 at April 30, 2023.

Speaker 2

Slide 5 Shows we have 10 farms located in 4 countries. In April, we reached 196 Megawatts in operating capacity, 91% of which is powered by sustainable hydroelectricity. I will now review our operations and development plans. Please turn to Slide 6. In Q1 2023, In Rio Cuerta, Argentina, we are transitioning from our start up phase.

Speaker 2

Now we have 18 megawatts currently online and an additional 32 megawatts of built capacity. In April, we made a lot of progress. First, our private power provider received its operating permit to power up to 100 Megawatts, triggering our miner acquisition plan at our built 50 Megawatt warehouse. 2nd, We energized 2,100 additional miners, bringing the total to 4,400 and expanded operating megawatts from 8 to 18. 3rd, with our power permit approved and miners on-site, We started drawing power under our power purchase agreement at prices approximately $0.03 per kilowatt hour.

Speaker 2

This is the lowest in our portfolio and reduced our overall corporate cost of production. 4th, we finished testing and brought online our substation, which has more than enough power enough capacity to power the permitted 100 megawatts. 5th, We purchased an additional 6,200 Bitmain and Microbt Miners. About half are in transit and the others will be shipped in the next couple of weeks. Upon their installation, the first warehouse will achieve over 75% capacity.

Speaker 2

As previously stated, we already received approval to import the MicroBT miners, and this morning, we received approval for the Bitmain miners. In each case, the importation approval was given in about 10 days of us making the submission. 6, we are working expeditiously to ramp production at our first 50 megawatt warehouse to full capacity by the end of Q3 2023. To this end, we are in the process of procuring 3,000 additional miners. 7.

Speaker 2

With this increased visibility in Argentina, we have accelerated our 6 exahash per second target from the end of Q4 2023 to the end of Q3. Turning to Slide 7. In Paraguay, in January 2023, we installed 2,888 new more efficient miners that boosted the farm's hash rate to 2.90 petahash per second. We are optimistic about future opportunities in the region and as it has abundant and underutilized hydropower. Also, we believe the country is on the verge of greater clarity about the industry.

Speaker 2

As the election concluded on April 30 and a new President will be inaugurated in August. In North America, we have 178 Megawatts with the option to tap another 10 Megawatts in Quebec. In Washington State, we have planned ongoing modifications and cost improvements through 2023. Each facility continues to run smoothly, reflected by our miner uptime defined as the actual production output versus the theoretical capacity of all our miners. Our proprietary MGMT miner and facilities monitoring system empowers Our team to optimize our return on assets.

Speaker 2

Our repair facilities excel at promptly getting miners back in action. Uptime varies with weather conditions, curtailment programs and other factors, such as parts availability. As we approach summer in North America, the Our uptime reached 97.7%, demonstrating what is possible with moderate weather, good contracts and optimized operations. In fact, operating reliability from both minor uptime and our power sourcing is a hallmark of Bitfarms and contributes to strong and consistent margins and cash flow. In Quebec, we are prudently executing our expansion strategy to accretively add megawatts and create operating synergies.

Speaker 2

In Bay Como, we entered into an agreement for a new farm for up to 22 megawatts of hydropower capacity. Our 2 phase plan slates 11 megawatts to come online in 2023 and another 11 megawatts in 2024. The transaction is expected to close by the end of Q2 2023, after which we will expect to increase our exahash projections. Please turn to Slide 8. I will now hand the call over to Jeff Lucas for the financial review.

Speaker 3

Thank you, Jeff. I want to begin my comments emphasizing 5 key elements of our financial position and strategy. First, Bitfarms has stable low cost power contracts that consistently place us among the lowest cost producers. 2nd, our financial liquidity creates flexibility. This is important as we are now less than a year away from the next halving event.

Speaker 3

3rd, In March, with improving economics and lower debt, we started to hold a portion of our free cash flow, reflecting our surplus cash flow from operations after our debt service. 4th, we've introduced a hedging program, furthering our flexibility and reducing some of the impact of the big client market conditions on our financial performance. And 5th, we have the balance sheet to finance our robust pipeline of opportunities and planned growth in 2023. I'll now review our mining economics, our performance and our balance sheet. Please turn to Slide 9.

Speaker 3

In the Q1 of 2023, Remind 12.97 Bitcoin compared to 14.34 Bitcoin in the Q4 of 'twenty 2 and 961 in the Q1 of 'twenty two. The quarterly difference is primarily due to the 13% increase in average total network difficulty. Our Q1 revenue was $30,000,000 comprised of $29,000,000 from our mining activities and $1,000,000 from our Volta electrical subsidiary. This compares to $27,000,000 in the Q4 of 'twenty two, reflecting a 24% increase in the average Bitcoin price quarter over quarter. This also reflects 10% pure Bitcoin mined during the quarter due to the increase in network difficulty, partially offset by our higher Hash rate.

Speaker 3

Focusing on Omani Economics, please turn to Slide 10. In the Q1 of 2023, Bitfarms' direct cost of Production per bitcoin remained among the lowest reported in the industry, averaging about $12,500 per bitcoin. That's up from $11,100 per bitcoin in the Q4 of 'twenty two. The change reflects a 13% increase in network difficulty and approximately 2% higher energy costs quarter over quarter. 1st quarter gross money profit was $12,000,000 or of $22,500 which is 24% higher than the average price of dollars 18,100 in the Q4 of last year.

Speaker 3

Our total cash cost of production, defined as direct mining costs plus the fixed cost of revenue, including rent and technician salaries, as well as overhead, such as cash, General and administrative expenses were $17,600 The majority of this $800 increase from the 4th quarter was due to the $1400 increase in direct mining costs. On the other hand, we are controlling our cash G and A cost, which decreased by 25% from the Q4. And on a recurring basis, removing a one time expense in the Q4 of last year, Our cash G and A decreased by $900,000 or 13% sequentially and 25% year over year. What's impressive is that even though fewer bitcoin were mined during the quarter, which typically increases overhead per bitcoin, We reduced mining costs even more, which is also positive in preparing for the havoc. Turning now to Slide 11.

Speaker 3

For the Q1, our operating loss improved to $15,000,000 compared to the operating loss of $20,000,000 in the Q4 of 'twenty two. Our net loss for the Q1 was $2,000,000 or $0.01 per basic and fully diluted share compared to a net loss for the Q4 of 'twenty two of $17,000,000 or $0.08 per basic and fully diluted share. The combination of our low cost mining operations and higher Bitcoin prices delivered improved profitability, with adjusted EBITDA rebounding from $1,000,000 in the 4th quarter to adjusted EBITDA of $6,000,000 in the Q1 of 2023. Turning now to Slide 12, I'll review the strength of our assets. We have 50 megawatts of built out and in place capacity at Rio Cueto.

Speaker 3

And as of today, we have $20,000,000 available under vendor credits. Therefore, we have minimal funding requirements for our planned growth in Argentina and in Bay Como. At March 31, We had cash of $29,000,000 and 4.35 Bitcoin valued at $12,000,000 for total liquidity of $41,000,000 compared to $38,000,000 of liquidity at December 31, 2022. During the Q1, As I mentioned, we mined 12.97 Bitcoin, deposited 30 Bitcoin into Treasury and sold 12.60 7 Bitcoin generating $29,000,000 of proceeds. In March, we launched hedging activities with the objective by reducing the variability of future cash flows and sales digital assets and bringing greater financial stability to the company.

Speaker 3

In April, we deposited another 30 bitcoin, increasing bitcoin in custody on April 30, 23 to 465, representing a total value of approximately $13,600,000 based on the Bitcoin price that day of $29,300 In the Q1 of 'twenty three, we also raised $16,000,000 in net proceeds from our ATM program. For the Q2 of 'twenty three through May 14, we have raised additional net proceeds of $5,000,000 These funds raised to the ATM are earmarked for existing growth initiatives and future opportunities. We continue to deleverage our balance sheet and reduced total indebtedness $21,000,000 at March 31, and then to $19,000,000 as of April 30. Turning now to Slide 13, I'll return the call back over to Jeff.

Speaker 2

Thank you, Jeff. Bitfarms remains focused on expanding operations prudently, and we continue to evaluate options to accretively diversify geographically, acquire sites, develop farms and optimize miner utilization. We plan to allocate capital to reinforce our key differentiators, which include Our competitive low cost structure, our stable and surplus sources of energy with attractive pricing, our proprietary mining and facility management software, our vertically integrated electrical subsidiary, and our exceptional management team. With this powerful combination, we expect to continue to improve efficiencies and scale operations. As such, we are strategically positioned to grow this year with minimal capital outlay to achieve our near term 6 exahash per second target and will be primed for the having in 2024.

Speaker 2

Importantly, we will continue to be well positioned to capitalize on opportunities that meet our criteria both before and after the having. Before I open the call for questions, I would like to invite you to meet us later this week at Bitcoin 2023 in Miami or virtually at the 18th Annual Needham Technology and Media Conference. Operator, we can now open the call for questions. Please go

Operator

ahead. Ladies and gentlemen, at this time, we'll begin the question and answer session. And telephone. Our first question today comes from Phil Pompanoxtu from Stifel, please go ahead with your question.

Speaker 4

Hi, good morning, gentlemen. Congrats on the solid performance

Speaker 5

Good morning, Bill.

Speaker 4

Good morning. So first, I just want to hit on cash operating expenses. The company saw a decrease in the quarter and the quarter over quarter delta was greater than what we were estimating on our end, which It will obviously help to produce an impressive $6,300,000 adjusted EBITDA. Can you speak to the drivers that caused the drop? It seems like it's mostly coming from Just wanting to gain a better understanding of whether this serves as a good or a more appropriate base For forecasting the upcoming quarters and any color you can provide with how expenses will ramp with Argentina coming online, that'd be great.

Speaker 4

Thanks.

Speaker 3

Sure. So let me start that and then Jeff can add to this as well. First of all, to give a bit of context here, the reason we actually generated surplus Cash during the quarter is largely because you brought down our debt service pretty dramatically, 1st and foremost. And then secondly, of course, we're helped by the Higher price for Bitcoin going forward, even though it's difficult to win up substantially as well. And by the way, in reference to your question here, when you look at our debt service right it's come down very dramatically.

Speaker 3

We've commented in the past that we had about $165,000,000 of debt about 9, 10 months ago, and today We have less than $19,000,000 What that implies is that our debt service requirements right now are about $2,000,000 a month, which is really about a third of what they have been In reference to your comment about the operating costs, the cash G and A expenses going forward, I think what we saw in the quarter that ended is a good Representation going forward. You're absolutely right in terms of what some of those savings that were achieved here. 1st and foremost is that we saved about $300,000 because actually we were because the cost of the replacement value of the miners, which we have coverage for, have fallen as they have of the market overall, the insurance The second point to keep in mind is you're right, we have a very sharp eye on our professional fees and generally we are in keeping an effort to tailoring those things dramatically going forward. I do just want to point out, Bill, that there can be a little bit of variability about that, because as we are exploring various new initiatives and projects, we naturally incur some professional service fees as part of the diligence, the analysis and things of that sort.

Speaker 3

There may be a little bit of variability that going forward, but I think generally again, the G and A that we incurred in the Q1 is a good representation going forward. We don't anticipate much of an increase really at all in terms of Argentina going forward for additional G and A costs. Really, the costs are going to be incurred here obviously, predominantly electricity costs. I do want to point out that in the quarter that ended, our cost of electricity were just under $0.05 per kilowatt hour. Now that we're actually drawing right from the provider here, as Jeff pointed out, we're anticipating costs coming down to a little under $0.03 per kilowatt hour.

Speaker 3

And also not only that, but in addition, we're anticipating Argentina that will be comprising of about 9% to 10% of our overall revenues and capacity going forward, that's going to help in general our overall cost of electricity.

Speaker 2

Great. Let me jump in there. Let me jump in just to you invited me to add some extra color. But Bill, We've talked about this and I've said it on previous earnings calls. Our focus was on expenses.

Speaker 2

This is a maturing industry. And as we saw last year, Prices came down, margins got squeezed, and we had put an investment starting about 1.5 years, 2 years ago into a new and higher caliber management team that could be scaled. And like we've had the runway now and the ramp up All those individuals to really get up to speed and running and we're seeing the benefits of it now. It's a highly productive team and they're eager. They know their roles and they help each other out and they really complement each other.

Speaker 2

So We built this team to scale. We're into the scaling process now, and we're now starting to deliver those results of that investment that was really started a couple of years ago. So we're really proud about it. And some of that was continues in that we shifted out of some of the professional fees and some of the consulting arrangements brought some of that in house and all that's making a difference. We like to control our variables.

Speaker 2

So I'll just add that.

Speaker 4

Great. Thank you guys for that color. Now for my second question, PetFarms had this equipment purchase credit going into 2023 that has obviously begun to be used to help fund near term Expansion, especially with the recent purchase of the ASICs. Now my understanding is that portion of the credit and the cash was used. Can you provide Color in terms of how much of that credit is remaining today?

Speaker 4

And then just talk about the prioritization of expansion projects in Argentina, Quebec. I believe you also got approval in Washington for 6 megawatts.

Speaker 2

Jeff, why don't you start with the financial aspect of this question?

Speaker 3

Yes. So we had the credit originally was around $22,400,000 As of today, we're a little under $20,000,000 and that includes the utilization of a portion of those credits, as we mentioned, as we're now building out the 1st warehouse in a real quarto.

Speaker 2

Okay. So let me jump in with In Real Corto, Argentina, so just to recap, we have 18 megawatts now operating there. So that's give or take 5 18 Petahash. We have 11 megawatts that we plan to bring on later this and that's from the MicroBT miners that were ordered and are in transit right now should add about 290 pet As I just updated in the comments this morning, we got importation approval for the Bitmain miners, which will probably arrive in around June and at another 11 megawatts. And those are slightly higher performance machines.

Speaker 2

So 384 petahash is generally what's expected there. That should bring us to about 40 megawatts, 75% of the capacity of that facility by the end of the quarter, June 30, and it should be operating at about 1.1, 1.2 exahash at that point. We then have 10 megawatts to go. We are out there looking for good purchase opportunities for miners. As we've said, the infrastructure is built, so we're just going to layer that in.

Speaker 2

Hopefully, they're there within the next few months. And really, that will bring about 50 megawatts on or about September 30, about 1.5x of Hash from that facility. So we're very excited about being able to roll that out. It seems to be a long time coming and now that the gates are up, we're rolling. Just to that vein, let me talk a bit about Baycomo.

Speaker 2

The deal is not yet finalized. We expect that to be done by June 30. But assuming that everything Fits into place as expected. We have 0 megawatts now. We're buying a company that possesses the electricity contract.

Speaker 2

So It's a bit of a greenfield and that we're going to take over a building, lease it and then to put our infrastructure in place. We expect 3 megawatts in early summer, which is approximately 85 Petahash, approximately 3 megawatts in the latter part of the summer, another 85 petahash and then 5 megawatts later in the year, probably about 140 petahash, sort of about 310 petahash in total for 11 megawatts in 2023. Please note that these numbers are not in our guidance because the deal hasn't closed yet. So as I said in the remarks, When the deal closes, we will update guidance accordingly. And then the second 11 megawatts, we're expecting to build and activate next year.

Speaker 2

So Bill, I went on there, but it's I know that's the type of stuff you like to hear.

Speaker 3

Yes, Bill, that's great. Thank you for

Speaker 4

the color. Makes my life And with that, I'll exit from the queue. Thank you.

Speaker 2

Thanks, Bill.

Speaker 3

Thanks.

Operator

And our next question comes from Kevin Dede from H. C. Wainwright. Please go ahead with your question.

Speaker 5

Thanks. Good morning, guys. A couple of things. The I think it might have been your remarks, Mr. Murphy, with regards to higher energy costs sequentially or maybe it was Mr.

Speaker 5

Lucas, and I was just wondering if you could and this was in a sequential comparison when you talked, I think yes, it was Mr. Lucas. When you talked about The increased costs in mining in March versus December. And I was just wondering if you could elaborate on what happened there and how you see that changing over the next couple of quarters?

Speaker 3

Okay. So first of all, what I mentioned was the increase in energy costs that was driven per Bitcoin was really the result of difficulty. And then there was a modest 2% increase overall in electricity prices, maybe that's what you're speaking to actually. It is exactly what I'm speaking to, yes. I'm glad I can answer your question here.

Speaker 3

So to be very specific, the cost of electricity for us in the Q4 was about $0.0427 per kilowatt hour overall. In the Q1, it was roughly $0.0441 per kilowatt hour. And that was really driven That modest increase that was driven there was by some increases in both in Paraguay, Washington and a modest increase as well that we saw in Canada overall. And so that was off and Argentina was substantially flat at just under $0.05 In terms of where we see electricity prices going Forward, actually turning to a kilowatt hour. The biggest factor here is, as I alluded to before, is the fact that we anticipate Argentina is going to be declining from about roughly about $0.047 per kilowatt hour, down to a little under $0.03 per kilowatt hour.

Speaker 3

Now that was about 5% of our total capacity in the Q1. As we are ramping up in the warehouse now, that will be more like around 10% in the second So what we're saying here is that we're 5% of the total capacity was around $0.05 in the Q1. In the Q2, now 10% of capacity will be actually at $0.03 So there's going to be, we envision savings at this point going forward.

Speaker 5

And the balance of that 90% going forward, you imagine to be fairly consistent, Jeff. I think that's kind of what I was looking at. I wasn't sure I guess what I had heard sort of Anecdotally is that overall gas prices were falling and I wasn't sure if that was Reflected in the hydropower costs that you're seeing in Washington and Paraguay?

Speaker 3

Generally, it does not. I mean, the true beauty for us, The fact that it's renewable energy, the true beauty of hydro is the stability actually of our energy costs is both when the markets are adverse, that is higher fossil fuel prices, but stability as well when prices also come down here. So what we are reflecting here though and what the numbers in the Q1 largely reflect is we did talk about an increase in electricity in Canada around 6% that happened in the Q1 here and also a modest increase that we saw in Washington as well, going up a little bit. But again, Washington is sort of a small percentage of our total overall production here. Paraguay has been relatively stable so far as we're seeing it.

Speaker 3

And again, Argentina, we expect to have a decrease.

Speaker 2

Yes. Let me jump in. In Washington, the electricity supplier It is affected by inflation, but also some rehabilitation projects, river re embankments and some to the hydro facilities and such. So they have quite a capital campaign that they've told us that they need to undertake over a number of years. It's not inexpensive and they are having to pass some of those costs on to the user base.

Speaker 2

So yes, we were hit with an increase there. The other thing I'd like just to add about Argentina is that unlike us in North America, they are heading into winter. So their costs of natural Gas are higher right now. We actually expect lower costs come give or take October of this year when they come out of their winter months, which when they consume more gas and they're adding infrastructure up to our site and beyond. So there's more gas that can flow through the pipelines there.

Speaker 2

So that will also help. But We expect that gas prices and thus electricity prices for Argentina project will actually decrease from where they are now sort of in a few months based on their seasonality. So thank you for letting me add that.

Speaker 5

Okay. Yes, yes. No, thanks for adding it. Do you is your private power supplier there also powering the grid, Jeff? Yes.

Speaker 2

Yes. They have numerous facilities and the one that we are located at has turbines that they can turn on, on a dispatchable basis to support the So they provide power to EPIC, which is the local electricity supplier and then there's Kamesa that also controls everything from the whole country standpoint and all the local distributors. But yes, they supply power to those guys as well. The which just brings up another point, Kevin, which is nice, because we have the buses, the electricity buses there, This provides us with some redundancy too. We're not just with an electricity supplier, but because of those buses, if something happens one way or the other, Those connections allow us to draw power from the grid should something happen with the turbines on that location.

Speaker 2

So It's a bit of an insurance policy too, but yes, our primary power will come from the private power producer right on-site and be transferred through those high voltage buses.

Speaker 5

The importation point you made, Jeff, About that reduction to 10 days, how did that compare to the first shipment of miners? Was that I know it was months, I just I've lost track of the time.

Speaker 2

Yes, we didn't. We were acutely aware of it. You couldn't just have an application under the old system, where you would get a beneficial exchange rate. We needed to use brokers and the brokers were given allocations on a periodic basis from the government for bringing equipment into the country. So you had to contact the brokers, you had to negotiate with them, you needed to get part of their allocation And then you were generally limited by that allocation.

Speaker 2

So unlike in North America where we can just bring in thousands of miners in a purchase order, We couldn't do that in Argentina. It would be go to the broker, negotiate the capital cost and number of units, get us back then and then generally would be probably 30 to 60 or so days, but just getting in there and the allocation of those brokers took time. Once you were in the allocation, then you could go ahead and make your logistics and make it happen. But It was cumbersome and very labor intensive. This new system where you basically get your packing list and you've split your application has turned out to be a lot Easier and now that we've had 2 successes, much more predictable.

Speaker 5

Okay. So the yes, just a little more insight on the 2 successes you've had or color rather on the 2 successes you've had And the one Bitmain shipment that you have in the works. Can you just, I mean, give us a little bit more of the play by play on that, so Maybe to instill a little more confidence in it and that happening?

Speaker 2

Okay. Well, the first order was for 2,982 Micro Bt Miners, M30s in this case. And in April, as soon as we received Approval to power up the facility. We also quite coincidentally got approval same day for our first Importation permit to be a direct importer, April 21 or something about that area. So they're in transit and hopefully there the miners will arrive Clear Customs within the next week or so.

Speaker 2

We really hope that we can get them plugged in and activated this month. We did not have all the details with the Bitmain Miners, so it was a little slower. We needed a packing list with the details of the miners and the equipment. So we put that in just over a week ago for 3,200 S19 Pro Pluses and it was turned around. So it's been under 10 days for that application.

Speaker 2

So we will figure out logistics and get them moving to the site. And as mentioned, we hope to activate them in June.

Speaker 5

Do you have your guys from your electrical company, your in house electrical company from Quebec down there Installing or is it other 3rd party contractors

Speaker 2

you have to use? 3rd party contractors. The subsidiary you're talking to is our wholly owned subsidiary called Volta that we've owned for 3 plus years now. There are 30 plus licensed electricians, but we're keeping them RISI in Quebec and they can also do residential and industrial. No, we have never moved any of those electricians down to South America.

Speaker 2

In fact, the standards down there and the measurements Sort of like standard versus metric. There's various different conventions within the trade. They certainly know what they're doing, but We've hired electricians locally in Argentina and improving our knowledge base down there. That's actually worked out pretty well. And There's the low voltage within the facility that's come along very well without a hitch.

Speaker 2

And then in April, we also commissioned the substation high voltage, where we switched from a 50 megawatt provisional line, which was a temporary line to get the first warehouse done, to a substation that has that was really built as part of the 210 Megawatt campus there and More than half of that's been constructed and it's ready to go for 100 megawatts. So much more redundant, multiple lines and much more control and that's where we got Epic and the local people and they needed to get trained up on Siemens and Some of the safety connections there and all of that was done in April and is done and works beautifully.

Speaker 5

Can we take a step back and look at the total Bitfarms network at 39 tools per Terahash? Can you talk a little bit about that $20,000,000 credit you have in reserve? Some of it obviously you've used to fill out Rio Corto and I guess the balance to get to your 40 megawatts. Can you talk to, I mean, the Some of the age of the older machines you have in the fleet and your philosophy about how You might work to sort of improve the overall fleet efficiency in front of the having?

Speaker 2

Sure. First, the credit of give or take $20,000,000 now. We have plans to utilize that fully this year and in a combination of Argentina and Bay Como and whatever else Might come later. So I don't think there's any fear about that. But we are as we've done in the past, Kevin, we're constantly updating the fleet.

Speaker 2

The fleet, for example, a number of our M20s were taken out of action and we've been selling them, getting some proceeds for them and putting it towards our new CapEx. But the whole system is M30s and S19s now, right across the board. That $39,000,000 joules per terra hash will fall, particularly as we bring in these miners that we just talked about, the 6,182 minuteers that are headed for Argentina now. That will drop To Jules, and then with the additional liners, we will move it down towards 30 later this year, and I would expect sub-thirty maybe around year end or next year. But it's more than just having machines that produce.

Speaker 2

It's the cost for Terahash that you have to look at. It's more than just buying hardware. It's more than just buying the high performance sports car. You want something that you're not paying premium dollar for, but getting a good getting immediate return from and a payback essentially. We could go and buy the real high performance miners and spend 2 or 3 times more for them, but the payback stretches out and stretches into the having period where it stretches even further out.

Speaker 2

So getting a minor performance combination that you can actually run and we run as you know Our performance and what we get out of our assets is amongst the top in the industry. In many cases, we get better performance out of our miners than even the higher performance miners that others are operating. And that's because of our MGMP system and the fact that we've got 5 plus years of operating, miners in the setting, we have repair centers. But we will be dropping that number. But as Capital costs allocate.

Speaker 2

We are prudent stewards of capital and you have to get a payback on your miners. So right now, These miners that we're getting have a less than 1 year payback with current economics. So we will have them pay back before the having. We will do similar analysis with as we build and possibly acquire and see other opportunities this year. We are actively looking for new opportunities now so that we can build and activate them before the next having.

Speaker 2

The next having is less than 12 months. So hopefully, whatever we build and do now, we can complete in 6 to 8 months ahead of the Having so everything is accretive and we are lean and mean.

Speaker 5

Can we talk a little bit about the hedging strategy?

Operator

I don't know that you've

Speaker 5

I have mentioned this before. I'm wondering what type of Derivatives you're using, how expensive it is, how comprehensive it is, could you give us a little more Insight on that?

Speaker 3

Sure. Let me speak to that. I'm more than glad to. We've actually been working on this for several months. And the first thing we've been doing for a couple of months is really making sure We really had the control processes and the practices in place here.

Speaker 3

We've actually got a risk committee here. We have a VP of Risk Management whom we brought on board beginning of the year, although he worked with us much of the latter part of last year here, to really look at the sort of risk exposures that we have and the enterprise Risk that we face overall, given the volatile nature of the business that we're in. Part of our thinking, Kevin, just to give you a bit of foundation here behind setting up this hedging We do recognize, as do all the companies in our space here, that there's a little control, a big deal of variability over our top line, dictated in large part, of course, the price of Bitcoin, of which we have almost no control here. So we asked what can we do here on our side here to sort of better provide stability, visibility and consistency to our earnings. And so with that thought in mind, we began embarking on this hedging practice.

Speaker 3

We're stepping in here very carefully and very thoughtful here. We're not And the goal here, quite frankly, is the means of insulating and protecting our downside here. And right now, we're doing that primarily either by writing or by buying options in place here, although we are looking for some other more sophisticated instruments as we get more advanced here. And also to a degree in the We do offset some of that premium cost by actually writing some dramatically out of the money calls here. So that's how we started it initially.

Speaker 3

Again, the goal here is for us to have greater visibility, predictability and stability through our top line into our earnings stream. Okay. I appreciate that, Jeff. Thanks.

Speaker 5

I know in addressing Bill's question earlier, you're expecting to see a little less cost in SG and A. Would these Hedging costs be reflected in that line?

Speaker 3

And No, first of Go ahead.

Speaker 5

Yes, Sure, go ahead. Yes, just give us some insight on that and maybe the size of the cost.

Speaker 3

Sure. So a couple of things here. First of all, in terms of the impact what G and A is going to look like going forward, I think my comments was that Where we were in the Q1 is a fair representation of where we're going to be going forward. There's a little bit of uncertainty there, clearly, particularly as we incur some professional In terms of the actual cost of the hedging itself, it's really been largely de minimis for us. Secondly, because we do not employ what is called hedge accounting, any of the P and L impact, the pickup in the gains or the losses that they may arise gets reflected in financing expense, and that's actually down below the operating income line.

Speaker 5

Okay. Yes. Okay. Good, good, good. Thank you for that.

Speaker 5

I appreciate it. Apologies for the ignorance. Can we talk a little bit about Bay Como? I Don't know what that site looks like, but I get the impression that there's one building there. Would that be needing retrofit or you have to build from scratch?

Speaker 2

For the 11 megawatts that we plan on doing this year, there's an existing building and We're frankly working on it already. We have a high confidence that the transaction will close by June 30. And so we are starting to work on the building now. As I think we've mentioned before, we get a real jump start on it because the some of the equipment that we pulled out of The Dela Pointe facility in Sherbrooke, we warehouse knowing that we would have future use for it. And lo and behold, here we are.

Speaker 2

So we are shipping that equipment up there and that will allow us to very quickly get 3 megawatts going in early summer and another 3 megawatts in the latter part of summer. But we expect to have 11 megawatts running there this year before September 30, hopefully. We just need the transaction to get closed to really turn our sights full bore there and we'll reset guidance accordingly. But it's a they come always is located further away than our Locations are farms right now. It's approximately an 8 hour drive from our existing facilities and it's further east, but it's an area with enormous amount of hydroelectricity.

Speaker 2

I think there's 4 or 5 Gigawatts of hydroelectricity. It's an area that was developed decades ago for the forestry, aluminum sectors. And there's a tremendous amount of hydro there. So not only is this strategic to go there because there's this contract, but we're hoping because we can go through where the electricity is and we're being a responsible corporate citizen in the province of Quebec that This is an area that they might open up for expansion in the future because the electricity is there and it's a long way to wheel it to population centers in Quebec and part of some of their wholesale contracts in the U. S.

Speaker 2

That they sell to. So it's strategic as well.

Speaker 5

Do you foresee I mean, I know there was some talk about Le Regis Offering maybe another as much as 280 megawatts. Do you think that could be one of the sites That they might allocate toward that?

Speaker 2

Fingers crossed. It would be a good site. It fits within their plan as do some of the other locations in Quebec that we've spent a fair bit of time and effort getting to know local towns and cities and mayors and councils and businesses throughout the province. But it's one of the areas where there's surplus electricity and it would make good sense also because we bring jobs. So we can bring a business case to the province for some of those locations where we can add value, jobs, tech jobs and capital investment.

Speaker 2

So we think there's more in the province, but the province is slow with that RFP as they re juggle their imperatives. There's the latest we're hearing just in the last week or 2 is that they plan to study it in more detail over the summer and make some announcements in the fall. We are behind the scenes providing Various numbers and statistics to support our value add in the province because like nobody else, We can curtail our power in high needs when it's very cold in most cases there. And I think that adaptability is important for the province and we plan to make that case and get them to know more about us. And It's something that we're investing a fair bit of time and effort in.

Speaker 5

Last question for me, gentlemen, and I'm sure you're relieved to hear that. Just give us an update on the installation facilities in Rio I know the one building is down at 50. I know you have 210 so that you could Go, I think, to 4 buildings in total. I was just kind of wondering where the other 3 stood And your timeline and strategic thinking.

Speaker 2

Kevin, thank you for that question. It's an update that is an important one. So yes, we have a 2 10 Megawatt power purchase agreement. And as originally envisioned, the campus was going to be 4 50 Megawatt warehouses. And we developed this back in 2021 when Bitcoin Economics were much more robust than they were last year and even as they are now.

Speaker 2

So we announced that we were changing the expectation we were going to scale it from 4 warehouses to 2, of which we're going to build the first and reevaluate the market when the gates were open and we could look at it again. So we're there. We're there now. We've got the first 50 megawatts warehouse. We are filling it over the next number of months as I've already described.

Speaker 2

And now we're taking a look at the 2nd warehouse and whether it makes sense. So the substation is built for it and it's ready to go. So capital in that regard has been spent. When we originally designed the whole campus, We put deposits down with steel people and transformer people and things like that. And some of those deposits are there.

Speaker 2

So it would be nice to actually take advantage of those deposits and why it makes sense that our capital cost for the balance of this year is Pretty trim because we've already invested in the future. So the second warehouse is there. It's designed. We are now in discussions with Alvin S. A.

Speaker 2

With the permitting people, with the suppliers for timelines, Because as you remember, what I said was, whatever we do now, we want it to be built and accretive ahead of the having. So if we cannot build it and have it being accretive by the having, then it will have to wait. But if we can get the ingredients in place That it makes sense, then we're going to go to the Board and seek approval for that. So it's a hot topic right now and we're looking at it. But Jeff Lucas, why don't you come in and add a few more details about that?

Speaker 3

I think a good point. Just a few points to add here is that for the 2nd warehouse here, as we anticipate that the cost It looks like that would be well below $300,000 per megawatt. I'll add though, because of some of the payments that are being made For the overall complex there, it will likely be the actual cash requirements going forward if you were indeed to build the 2nd warehouse, it will be more in range just a little north about $100,000 per megawatt here. But outside of that, I think we're pretty well positioned and we are now in the process of making the assessment and how to do this most economically going forward. Thank you, gentlemen.

Speaker 5

Yes, yes, yes. Thank you. Thank you. I'll turn it back over to

Speaker 3

you.

Operator

And ladies and gentlemen, in showing no additional questions. I'd like to turn the floor back over to the management team for any closing remarks.

Speaker 2

Thank you, Jamie. I would like to reiterate and leave you with 3 points about Bitfarms. 1st, Evidenced by the fact we've mined over 21,000 bitcoin with 100 percent renewable energy, we've proven our capabilities to scale the business. 2nd, we've maintained profitable mining operations each quarter as a result of our determination to maintain stable, low energy and operating costs. 3rd, with little capital outlay, we expect to reach 6x a hash per second by the end of Q3 from our existing portfolio with upside from the pending close of planned 22 Megawatt and 1 or more acquisitions will bring even further value to shareholders.

Speaker 2

Thank you all for attending today's conference call. We look forward to updating you with our monthly production reports as well as other developments and on our Q2 conference call in August. Thank you and have a good day.

Speaker 3

Thank you. Take care.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.

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Earnings Conference Call
Bitfarms Q1 2023
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