Hut 8 Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 14, 2023

There are 6 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to Hut 8's Second Quarter 2023 Financial Results Analyst and Investor Call. In addition to the media release issued earlier today, you can find Hut 8's financial statements and MD and A on the company's website at www.hut8. Io under the company's SEDAR profile at www.sedar.com and under the company's EDGAR profile at www.sec.gov. Unless noted otherwise, all amounts referred to during this call are denominated in Canadian dollars.

Operator

Any comments made during this call may include forward looking statements within the meaning of applicable securities legislation regarding the future performance of Hut 8 Mining Corp and its subsidiaries. That could cause actual results to differ materially from current expectations. These risks and uncertainties include, but are not limited to, the factors discussed in Hut 8's annual information form for the year ended December 31, 2022, and the company's other continuous disclosure documents. Except as required by applicable law, Hut 8 undertakes no obligation to publicly update or review any forward looking statement. During the call, management may also make reference to certain non IFRS measures that are not separately defined under IFRS, such as adjusted EBITDA and Mining Profit.

Operator

Management believes that non IFRS financial information taken in conjunction with IFRS Financial Measures, provide useful information for both management and investors. Reconciliations between IFRS and non IFRS results are presented in the tables accompanying our press release, which can be viewed on our website. I would now like to turn the call over to Hut 8 CEO, Jamie Leverton, please go ahead.

Speaker 1

Thank you, Michelle. Good morning, everyone. Welcome to today's call where we will discuss Hut 8's Results for the Q2 of 2023. The Q2 was a challenging one on the mining side. While our Medicine Hat update, we continue to see issues at the site, primarily stemming from high energy input levels that have been causing miners to fail.

Speaker 1

As a result, operations are currently at approximately 20% of our installed hash rate in Drumheller. The team has implemented new custom firmware across All minor models designed to lower the power supply's maximum output voltage, ensuring our equipment operates within safe limits, Increased repair staff added an additional repair center shift and procured new hardware to expedite repairs and accelerate the speed at which we bring miners back online. The electrical issues have been compounded by high energy rates, which further increased curtailment at the site. In addition to remediation efforts that are underway in Drumheller, in late July, the team utilized mutually beneficial terms in the electric service agreement covering our Medicine Hat site, which provides the opportunity for both parties to benefit from high prices in the Alberta power market. In our HPC business, we created Some momentum in Q2 as we signed an agreement with Interior Health, one of British Columbia's health authorities, to provide them with colocation services at our flagship data center in Kelowna over the next 5 years.

Speaker 1

We will begin to see that revenue reflected on our financial statements in Q4. We continue to see demand increasing for high performance computing solutions that will support AI, machine learning, visual effects and rendering workloads. We are prepared to support these high intensity customer workloads and currently have compute services with 200 GPUs available at our Mississauga and Kelowna data centers to accommodate customers looking to rent capacity for short or long term HPP projects, particularly in the visual computing space. We are able to accommodate clients quickly and begin processing their workloads in a matter of days, which is a significant advantage over other data centers that are still building out similar infrastructure and a key benefit for clients that want their projects completed as soon as possible. We also have additional capacity in both Central and Western Canada that we can quickly allocate with minimal investment to accommodate clients that have up to an equivalent of 85 HDX class server chassis with GPU cards.

Speaker 1

This is noteworthy because of constrained infrastructure supply, especially for high performance computing capacity required for intensive workloads like AI, And we are able to support clients that may have their own GPUs on hand, but need access to build out infrastructure on a very tight turnaround. We are very committed to capitalizing on these opportunities in HPC and will continue to cater to these growth areas in the coming quarters. Moving on to our stack, I'm confident that you are all very well acquainted with Hut 8's commitment to hodling our Bitcoin mine. And this year, While we worked to close the transaction with USPTC, we were fortunate as we've only sold the Bitcoin we produced in 2023. We have not dipped into anything mined or huddled prior to 2023.

Speaker 1

This approach was very intentional. We remain bullish on Bitcoin, are committed to our treasury strategy and continue to believe that this is a powerful differentiator for us. Not only did this strategy factor prominently in our ability to and believe that our STACK will continue to deliver value, flexibility and optionality. Last week, Standard Chartered Bank published a research report stating that Bitcoin could rise to USD50,000 by the end of 2023 and up to $120,000 by year end 2024. Taking a much more conservative view, if the value of Bitcoin increased by just 30%, We would see a lift of approximately $111,000,000 in the value of our stack.

Speaker 1

When we consider that increase against Capital time and effort it would take to order miners, deploy them and generate a similar return by mining Bitcoin, especially in light of the halving, The value and flexibility that our SAC offers us remains incredibly compelling. As I'm sure many of you saw, Last week, we announced that we entered into a transaction support agreement with Macquarie Equipment Finance Limited, a subsidiary of Macquarie Group Limited, in support of an opportunity to potentially acquire certain assets of Validus Power Corp and substantially all of the assets and operations of Validus subsidiaries. Macquarie is a secured creditor of the Validus entities under an existing secured lease and participation agreement. Validus was previously a supplier of energy to the company's mining facility in North Bay, Ontario. Subject to the satisfaction of certain conditions under the terms of the support agreement, A stocking horse bid is to be submitted to the receiver in support of a proposed sale and investment solicitation process to be carried out in respect of the Validus entities.

Speaker 1

Of note, if ultimately successful, the stocking horse bid is expected to result in a full and final resolution of all litigation claims and Counter claims currently pending between Hut 8 and certain Validus entities. In addition to managing our operations, we remain We are extremely focused on completing our transaction with US BTC and continued to make progress since our last call. In June, We filed an amended S-four registration statement with the SEC confirming that Newhut's expected installed self mining capacity will be 7.5 exahash, which is up a nice bump from 5.6 exahash, which we had previously disclosed, thanks to energizing additional miners at U. S. BTC site.

Speaker 1

In mid July, we filed a further amended S-four registration statement and continue to collaborate with the SEC to secure their clearance for New Hut's registration statement. And earlier today, we announced that we have filed our management information circular and will be holding our shareholder meeting to seek approval for the proposed transaction on September 12, which we believe will be an important step in closing the transaction. Before I turn it over to our CFO, Shanif Visran, I would like to thank Our investors for their continued commitment to Hut 8, our team for their grit and dedication across the business and our Board for their support and guidance. Thank you, and over to you, Janice.

Speaker 2

Thanks, Jamie, and good morning, everyone. Q2 was a challenging quarter from an operational perspective as we continued to work through the electrical issues at Drumheller and continued our suspension of mining activity at North Bay. Both of these had an impact on our Q2 results. We achieved revenue of $19,200,000 for Q2 2023, A $24,600,000 decrease relative to the same quarter prior year of $43,800,000 This year over year decrease was driven by a combination of lower Bitcoin mine and a reduction in the price of Bitcoin. Revenue from digital asset mining activities was $15,000,000 as we mined 399 new Bitcoin.

Speaker 2

This compares with $39,100,000 of digital asset mining revenue in Q2 2022 when we mined 946 Bitcoin. This year over year reduction in new Bitcoin mine was driven by a combination of An increase in network difficulty, impacts of electrical issues at Drumheller site resulting in less mining activities, The completion of GPU Ethereum Mining, which we were doing in Q2 2022 and the impact of the suspension of mining activity at North Revenue was also negatively impacted by the price of Bitcoin with the daily average closing Bitcoin price of in the prior year quarter. Our high performance computing business contributed an additional $4,200,000 of revenue In Q2 2023 compared to $4,700,000 in Q2 2022, The Q2 2022 results included revenue from low margin products and services that have been discontinued since the end of Q2 2020 Q2 2023 was also impacted by client churn, which was anticipated to occur in the 2nd quarter. As Jamie mentioned, we will see the revenue from the Interior Health contract starting in Q4. Cost of revenue for Q2 2023 was Depreciation expense decreased to $9,500,000 during the Q2 of 2023 compared to $29,800,000 in the same quarter in 2022.

Speaker 2

The decrease was due to the lower net book value Digital Asset Mining Assets after the recognition of the non cash impairment charge in Q4 2022. Site operating costs of $14,300,000 was lower than the same quarter prior year by $12,500,000 Within the digital asset mining operation, site operating costs reduced by $12,700,000 mainly due to lower power costs. The average cost per bitcoin for the Q2 of 2023 was approximately CAD29600 compared to approximately CAD25600 per bitcoin In the prior year for the same quarter, the increase was due to higher power consumption per Bitcoin mined and the ongoing electrical issues at the Durham Hela facility, which was partly offset by the company's decision to curtail Lower average energy prices and increased efficiencies in the miners deployed compared to prior year same quarter. We incurred $2,500,000 in operating costs related to the high performance computing operations compared to $2,300,000 In Q2 2022, due to increased repairs and maintenance to improve the company's facilities, The $200,000 increase is attributed to improving our preventative maintenance regime to align with industry standards and drive higher capacity and customer service. In terms of margins, our digital asset mining operation generated mining profit of $3,200,000 in Q2 2023 versus $14,900,000 in the prior year same quarter.

Speaker 2

The decrease in mining profit is due to the decrease in the price of Bitcoin, lower quantity of Bitcoin mined due to increased network difficulty, Suspension of mining activity in North Bay and the ongoing electrical issues at Drumheller, offset partially by lower average price of power. General and administrative costs were $12,500,000 for the quarter compared to $12,300,000 for the same quarter prior year. The key drivers in the increase was the inclusion of one time transaction costs in the Q2 of 2023 Related to the merger with U. S. BTC, excluding these one time transaction costs, our general and administrative costs were down $2,600,000 compared to Q2 2022 due to lower sales tax expenses, Lower professional fees and other expenses.

Speaker 2

We recorded a net loss of $16,700,000 for Q2 2023 compared to a net loss of $88,100,000 in Q2 2022. In Q2 2022, We booked a non cash loss on the revaluation of our digital assets of $104,900,000 to income or loss due to a reduction in Bitcoin prices during the quarter. Also, Q2 2022 included a non cash gain on the reevaluation of warrant liability for $43,300,000 Reflecting the operating results discussed previously, Hut 8 achieved adjusted EBITDA of negative $2,700,000 in Q2 2023 compared to a negative adjusted EBITDA of $98,100,000 in Q2 2022, primarily driven by a lower loss on the reevaluation of digital assets, partially offset by a lower digital asset mining profit and the aforementioned electrical issues at the company's Trumbhller facility. Our balance sheet remains healthy with manageable levels of debt and a cash balance of $26,700,000 as of June 30, 2023. As previously announced, The company entered into a US50 $1,000,000 credit facility with Coinbase Credit Inc.

Speaker 2

On June 26, 2023, which has drawdowns available in 3 tranches. At the end of Q2 2023, the company has CAD 19,100,000 Canadian of loans outstanding, net of deferred financing costs related to this facility. Our Bitcoin holdings are marked at fair value and totaled $368,700,000 as of June 30, 2023, based on 9,136 Bitcoin held in reserve. Of this total, 8,289 bitcoin valued at $334,500,000 remain unencumbered. As previously announced, the company has continued to sell Bitcoin production to help fund operations while we work on closing the merger with U.

Speaker 2

S. BTC. In the current quarter, we mined 399 Bitcoin and sold 396 resulting in our Bitcoin held in reserve increasing by 3. Thank you. With that, I will turn the call back to our operator for analyst Q and A.

Operator

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. Your first question will come from Mike Colonnais at H. C. Wainwright.

Operator

Please go ahead.

Speaker 3

Hi, good morning guys and thank you for taking my questions today. First one for me, I know you guys are actively working to bring miners back online at Drumheller With your efforts there, if you could just give us a timeline as to when you think the electrical issues will be fully resolved and all miners back online and hashing at the facility?

Speaker 1

It's really difficult to give a timeline. We do expect Full resolution within the calendar year, but it's difficult to get more specific than that, Mike.

Speaker 3

Got it. Fair enough. And second one for me. If you could just provide a little more color on the transaction support agreement you recently entered into here. What needs to happen for that transaction to actually go through to potentially acquire the assets from Validus?

Speaker 3

And what specific assets Would you be acquiring and the approximate cost of those assets there?

Speaker 1

Right. It's too soon to disclose more than we already have in the press release. But rest assured, Mike, as soon as updated information is publicly available, we'll press release accordingly.

Speaker 3

Got it. Well, thank you for taking the questions and best of luck with completing the merger here.

Speaker 1

Thanks so much, Mike.

Operator

Your next question will come from Bill Papinostacio at Stifel. Please go ahead.

Speaker 4

Hi, good morning, James. Look, there's a lot of in the hopper. I just wanted to In your outlook, Jamie, on how the mining industry is going to evolve beyond having, Hut 8 was one of the first public miners Obviously diversifying to more stable recurring business segments. And I'm curious to hear whether you believe We could see more of this type of activity follow suit. How do you look at The way that miners will kind of be positioned in the future, will we gradually move away from a complete self pure play mining model?

Speaker 1

Look, I think it's really difficult to predict at an industry level. Certainly, I think we'll see more diversification among the miners, Which has started to play out more significantly in the last quarter in particular. But I think certainly for the As we go into the having and this next cycle, I think we'll continue to see some miners remain as Pure play self minors. As you mentioned, we diversified early into the HPC space. And one of the things we really, really like about The U.

Speaker 1

S. BTC business are their Fiat based revenue lines with their hosting business as well as their managed infrastructure operations. So For us, we're very much we're bullish on a diversified strategy. But I think Across our space, you're going to just continue to see miners evolve their businesses in different ways. And I think it's really important That when people look at this space, they look at really the differences that are starting to emerge and becoming increasingly significant within the names of our space.

Speaker 4

Thanks for that detail. And for my last Question, we're just hoping to get a little bit more color on the newly signed 5 year agreement with Interior Health. How should we look at modeling contribution from this contract? And how much co location capacity remains pro form a of this contract at the Terrego facilities?

Speaker 1

Yes. So the that revenue, as we mentioned, we'll start to see in Q4, and it is a 5 year contract. So You'll get more detail in our Q4 financials with respect to that contract specifically and we did press release That deal when it was signed a number of weeks ago. As far as the broader Within the HPC business, we do obviously believe there's a lot of opportunity in this market. We have just over a megawatt of readily available And infrastructure within the our HPC fleet.

Speaker 1

And if you're kind of thinking about the market, We see across the North American industry, more than 2 gigawatts of data center leases have been signed in the past 90 days. And we believe that providers who have large wholesale capacity online in less than 24 months will be able to charge a premium given How much demand we're seeing in the space, and we believe that operators with access to economical and 0 emission and renewable energy such as our Kelowna And British Columbia site is a distinct advantage for

Speaker 4

us. Thanks, Jamie. Look forward to hearing more details about transaction Support agreement and hopefully seeing Hut 8 being one of the truly vertically integrated miners. Thank you.

Speaker 1

My pleasure. Anytime. Thank you.

Operator

Your next question will come from Joseph Vafi at Canaccord. Please go ahead.

Speaker 1

Good morning, Joe.

Speaker 5

Hey, Jamie. Good morning. Hey, everybody. Just on the U. S.

Speaker 5

BTC I know you mentioned Jamie that you're going to distribute the management circular, I guess maybe Coming up here soon. Just wondering if you have confidence on getting that S1 effective and that's why you're moving forward with Getting the circular ready to distribute.

Speaker 1

We as I mentioned, we continue to make good progress And feel confident that we could send out the circular, schedule the vote for September, September 12, and we continue to target having it closed by the end of September.

Speaker 5

Okay. Great. Good luck with that, Jamie. And then secondly, I know you said you bumped up the expected Exahash output in that document up to I think about 7.4. I was just curious where that extra may have come from here and perhaps where the capital came from Maybe be acquiring more miners there relative to what's in that document.

Speaker 1

Yes. So that came from the U. S. BTC side. They had already ordered miners That were just being delivered and coming online, and so that's where that incremental exahash came from at their existing South Mining Facilities.

Speaker 1

And yes, we did reference that in one of our updated S-four registration statements.

Speaker 5

Great. Thanks very much and good luck with getting some of these various transactions done.

Speaker 1

Thanks, Joe. Appreciate it.

Operator

There are no further questions. At this time, I will turn the conference back to your hosts for any closing remarks.

Speaker 1

Thank you so much everyone again for joining today and we look Back to you, Michelle.

Operator

Thank you. Ladies and gentlemen, this does conclude your conference call for

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Hut 8 Q2 2023
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