Earnings Call Transcript - ARBK Q1 2024

Operator, Operator

Good afternoon, and welcome to the Argo Blockchain plc Q1 update. Throughout this recorded meeting, investors will be in listen-only mode. The company may not be in a position to answer every question received during the meeting itself, though the company can view all questions submitted today and publish responses where it's appropriate to do so. Before we go, we'd like to submit the following poll. I'd now like to hand over to Markella Zarifi, Argo's Financial Communications Representative. Good afternoon.

Markella Zarifi, Financial Communications Representative

Thank you, Paul. Before we begin, I'd like to remind everyone that today's presentation and remarks may contain forward-looking statements. Please see our Form 20-F filed with the Securities and Exchange Commission for our full risk disclosures. With us today for our discussion of Q1 2024 results are Thomas Chippas, Argo's Chief Executive Officer; and Jim MacCallum, Argo's Chief Financial Officer. And now I'll turn it over to Thomas for some introductory remarks.

Thomas Chippas, CEO

Thank you, Markella, and thank you, everyone, for joining us today. We recently shared our 2023 full year results, and I'm excited to update you on our progress since then for this quarter. As everyone is aware, the fourth bitcoin halving occurred just over a month ago, and Argo exited the halving with a stronger balance sheet and leaner operations. As seen here, financial discipline, including deleveraging; operational excellence; and certainly, growth and strategic partnerships, are our three priorities. And they guide us on a daily basis for the sustainable future of Argo. By concentrating on these goals, we're optimistic about the ongoing growth and development opportunities for Argo. We have a clear objective of delivering shareholder value. I'm certainly excited to continue with the great work the team is doing and tell you more about what we've been up to. A few comments first on the macro front. With the 2024 halving complete, the block subsidy that miners collect now stands at 3.125 bitcoin, down from 6.25. The launch of spot ETFs for bitcoin were certainly big drivers of price from $40,000 to $75,000. But after the halving, ETF holders began selling, and it actually resulted in about 7 days of net outflows, a reversal of the day after day of net inflows for those ETFs. Although initially, there was a spike in transaction fees post-halving, it was short-lived and fees declined in the subsequent weeks. Runes, one of the drivers of fees in the initial period post-halving, are now generating far lower fees than regular transactions compared to the weeks succeeding the halving. As a result, fees per day have dropped below the first quarter's average of 64.39 bitcoin. Hash price is coming down for us post-halving, with Runes driven high. Concurrently, the network hash rate reached an all-time high of 654 exahash before the halving but dropped to 580 over the following 3 weeks. This reduction can be attributed to miners adjusting efficiency settings in their machines and some temporarily shutting down. This might appear significant, but such a decline is not out of the ordinary; this happened on two occasions previously this year. Going forward, the hash rate is likely to oscillate as hash price changes. However, for the near term, due to highly compressed mining margins and the upcoming summer months here in the U.S., hash rate growth will likely be restrained. Looking beyond bitcoin for a moment, the head of the U.S. Federal Reserve has suggested that the Central Bank might have hit its peak rate cycle height, which is promising for bitcoin mining because it suggests a more favorable environment with potential for increasing bitcoin prices. So with that, we can talk a little bit about our 2024 results. We generated approximately $17 million of revenue in Q1, which was an increase of 4% from the last quarter of 2023, driven by elevated hash price. At the end of the first quarter, our cash in hand stood at $12.4 million, an increase from the $7.4 million at the end of 2023. As mentioned previously, we had some significant balance sheet events occur in Q1 2024, including an equity raise of nearly $10 million in January and the sale of our Mirabel facility in Quebec in March. The proceeds were used to repay the facility's existing mortgage and pay down some of the debt owed to Galaxy. Let's move on to the next slide; we can talk a little bit more about debt reduction in further detail. As discussed on the previous call, debt reduction has been a focus for us since we sold Helios and restructured our debt at the end of 2022. As noted, we executed two significant transactions in the first quarter of '24, bolstering our cash position in addition to reducing our debt, that being the equity raise and the Mirabel sale. The Mirabel sale was a great transaction for several reasons. First, we realized an attractive exit on the asset with a $6.1 million sale price. Second, consolidating our Quebec fleet to Baie-Comeau allowed us to streamline operations with minimal impact on revenue. We were able to execute the move quickly, and we realized an annualized reduction in OpEx of about $700,000 per annum. Now let me turn it over to Jim for a deeper dive into Q1 financial results. Over to you, Jim.

Jim MacCallum, CFO

Thank you, Tom. During the first quarter, we mined 319 bitcoin, and our mining margin percentage for the quarter was 38%, which is an increase from the 34% achieved in Q4 of 2023. We generated revenue of $16.8 million and $0.6 million in power credits from economic curtailment in Texas. This curtailment helped us achieve a mining margin of 38% this quarter with an average direct cost per bitcoin mined of approximately $32,000. We raised $9.9 million of gross proceeds through an equity raise in January, of which we used a portion to pay down our Galaxy debt. As Tom mentioned previously, we also sold our Mirabel facility in March for $6.1 million. The accounting gain net of tax for this transaction was $3 million. Our adjusted EBITDA has increased almost twofold over the last year and was $3.8 million during Q1 2024. This slide shows our cash flow from December 31, 2023, to March 31, 2024. We continue to have a strong focus on cash flow generation and strengthening the balance sheet. In Q1, our cash flow from operations, including working capital changes, was $3.7 million. We used that for debt reduction and paid $1.7 million of interest during the period. During the first quarter of 2024, we improved our cash position by $5 million to over $12 million while simultaneously paying down our debt by over $12 million. With that, I'll turn it back over to Tom.

Thomas Chippas, CEO

Thanks, Jim. Since our last full year results, we have streamlined our operations in Quebec by consolidating the fleet to Baie-Comeau, following the situation with Mirabel. As part of that consolidation, we took the opportunity to decommission and sell some older machines, which reduced our total hash rate from 2.8 to 2.7 exahash. We still maintain the majority of our fleet, approximately 2.4 exahash in total hash rate capacity, located at Helios in Texas. Looking ahead for growth, the sector is focused on transitioning to clean energy, which has always been our priority at Argo. This transition requires investment in the power grid and demand response technology. We believe bitcoin miners can play a significant role in this shift. Bitcoin miners are highly adaptable and well-suited for load-balancing initiatives. By functioning as a flexible load, bitcoin mining can assist in balancing the grid by quickly adjusting operations as needed. Argo is exploring ways to integrate our operational capabilities with those of energy companies, and we look forward to providing updates on those discussions in the future. As we pursue our mission of powering an innovative and sustainable blockchain infrastructure, these three pillars will remain our focus. Now, back to Markella for any questions. Thank you.

Markella Zarifi, Financial Communications Representative

Thank you, Thomas. Thank you, everyone. The first question is from Kevin Dede from H.C. Wainwright, and it's directed to Thomas. Can you elaborate on the Galaxy relationship, their plans for the Helios site, and how you expect mining to progress through the hot summer months, including the potential for curtailing? Additionally, are we given the opportunity to overclock? And if so, have you taken advantage of it?

Thomas Chippas, CEO

Thanks for your question, Kevin. A compelling aspect of our operations at Helios is, of course, the facility's ability to curtail during periods of high power prices. For most of 2023, we procured electricity through fixed-price power purchase agreements which ensured a stable cost of power. However, when market prices are high, of course, we can curtail or shut down operations and sell electricity back on the open market, a process known as economic curtailment. As we discussed in the previous call, it generated about $7.2 million in power credits, directly reducing our cost of mining. The curtailment helped us achieve a mining margin of about 38% this quarter with an average direct cost per bitcoin mined of about $31,000. During the hot summer months, we expect to continue practicing economic curtailment when necessary. Additionally, we do have the opportunity to overclock our rigs to optimize for performance, and we'll do so when conditions are favorable. Thank you for that, Kevin.

Markella Zarifi, Financial Communications Representative

Thank you, Thomas. The next question was pre-submitted in the chat and it's directed to Jim. Will Argo invest in infrastructure again, or only focus on machines?

Jim MacCallum, CFO

Yes. Thanks for the question. Yes, currently, we have both hosted machines at Helios in Texas and owned machines at our Baie-Comeau site in Quebec, where we can also expand our capacity. As the market evolves, we think there will be opportunities in both the hosted space and investing in infrastructure, and we'll evaluate these decisions on a case-by-case basis.

Markella Zarifi, Financial Communications Representative

Thank you, Jim. The next question was again pre-submitted, and it's directed to Thomas. What can you say about the growth opportunities you are seeking out for Argo? Any details on the size, type, timing?

Thomas Chippas, CEO

Thank you for that. We cannot get into details right now, but given Argo's size and market position, we believe that smaller sites with unique power cost and availability characteristics could fit well into our portfolio. There are certainly many groups on the hunt for power resources right now, not just bitcoin miners. We think our size may be an advantage here as we flesh out opportunities. Certainly, we'll have more to say when we can about those.

Markella Zarifi, Financial Communications Representative

Thank you, Thomas. The next question is from Kevin Dede at H.C. Wainwright once more, and it's directed to Jim. How do you plan to return to growth while balancing debt obligations?

Jim MacCallum, CFO

Yes. Thanks, Kevin. We've had a strong focus on costs over the past year and feel that the heavy lifting has been successfully completed here. Our run rate, as we said, for non-mining operating expenses has trended to approximately $1 million per month, and we believe that's a reasonable outlook for the balance of the year. Our new vision centers on optimizing operational efficiency, strengthening the balance sheet, and reducing debt. We aim to leverage strategic partnerships and explore sustainable growth projects while maintaining our commitment to renewable energy sources. Given that we exited the bitcoin halving with cash of just over $12 million and reduced our debt by over $12 million during the first quarter, Argo is in a strong position, and the company is in a growth mindset now. We'll continue to focus on fiscal responsibility.

Markella Zarifi, Financial Communications Representative

Thank you. Our next question is pre-submitted and directed to Jim. Can you speak to power prices for the second quarter?

Jim MacCallum, CFO

Yes. We can't go into too much detail here, but power prices during the second quarter, which include the early part of the summer, are subject to significant volatility which we certainly saw last year. This period often sees heightened uncertainty due to the potential for heat waves which can drive up demand and consequently prices. To navigate these fluctuations, we have to remain agile and capitalize on any economic curtailment programs that may arise. We can give some color. April was clearly a strong month for bitcoin economics. For May, despite the bitcoin halving, through lower power prices and optimization of our fleet's efficiency settings, we have seen mining margins in the 30% range, albeit on lower revenue resulting from the halving. We will closely monitor market trends and price movements, and this proactive approach will enable us to adjust our strategies in real-time and optimize our mining profitability while mitigating the risks of hash price and energy cost volatility.

Markella Zarifi, Financial Communications Representative

Thank you, Jim. The next question was submitted in the chat, directed to Thomas. Does Argo have any plans to branch into AI data centers?

Thomas Chippas, CEO

Thank you for that. Regarding AI and HPC, this is certainly a very topical area among miners. We understand the demand for HPC processing in the market. However, I think it's a different business than operating a bitcoin mining facility. We have explored the possibility and are certainly not ruling it out for the future. However, our current strategy remains centered on bitcoin mining operations.

Markella Zarifi, Financial Communications Representative

Thank you, Thomas. Next question is submitted by Bill Papanastasiou of Stifel and it's directed to Thomas. We have seen mining economics weaken following the halving event. How is management approaching the capital allocation strategy of balancing expense management with growing, upgrading the fleet? Is there any near-term path of a shift towards growth in the future?

Thomas Chippas, CEO

Thanks for that, Bill. Argo's fleet operates flexibly, allowing us to adjust power consumption through over- or under-clocking like a dimmer switch allows you to control the brightness of a light. Jim referenced that in his comments about Q2 power. In the current market and recognizing the weaker mining economics, this adaptability is essential. We fully appreciate the capabilities of newer generation machines and the efficiency they bring. Our growth strategy regarding the fleet will always consider hash price, rig availability, and energy costs among other factors. As I've said, we're shifting back to a growth mindset. We want to leverage our size to target sites that may be less appealing to larger miners and explore what opportunities we can there. We'll find the right fleet for those opportunities when they present themselves. Our capital allocation strategy will balance expense management with fleet upgrades, ensuring that we can remain competitive and ready for future opportunities as they arise in the industry.

Markella Zarifi, Financial Communications Representative

Thank you, Thomas. Next question was also pre-submitted and directed to Jim. How does Argo plan to manage its debt, and what are the prospects for refinancing?

Jim MacCallum, CFO

Yes. Thanks for that question. We're pleased with how we've managed our Galaxy debt. Over the past year, we paid it down from $35 million. We paid it down $23 million or approximately two-thirds of the total balance over the last 12 months. At March 31, we reported cash of over $12 million, and our Galaxy debt has been substantially reduced to $12.8 million. We exited the halving in a strong fiscal position and continue to focus on paying down this debt and strengthening the balance sheet.

Markella Zarifi, Financial Communications Representative

Thank you, Jim. Another pre-submitted question for Thomas this time. What are your plans for increasing efficiency and reducing the recent downtime at several bitcoin mining facilities?

Thomas Chippas, CEO

Thank you for that question. With the relocation to Baie-Comeau, as I noted, we consolidated our infrastructure. The downtime was minimal and had minimal impact on revenue. In response to the downtime we saw in February, as we also noted on the previous call, there was some maintenance upstream by power providers that was beyond our control. When you look at our operations team, they're doing a very good job of maintaining uptime across the fleet, and they continually work to improve operational efficiency. You can observe that with the 5% increase in daily bitcoin production in March of '24 compared to February of '24. We'll continue to look for ways to enhance efficiency and reduce our susceptibility to downtime events on an ongoing basis.

Markella Zarifi, Financial Communications Representative

Thank you, Thomas. Another pre-submitted question directed to Thomas once more. Can you give an update on where hash rate currently stands across all facilities? Additionally, assuming hash prices normalize post-halving, what strategies can you implement to lower your direct and all-in cost per BTC mined to mitigate losses?

Thomas Chippas, CEO

Thank you for that. Our hash rate capacity at Baie-Comeau is about 300 petahash. That's the ePIC BlockMiners, and the efficiency on the nameplate for those machines is anywhere from 30 to 35 joules per terahash. At Helios, we have about 2.4 exahash, running the S19j Pros. The nameplate efficiency is about the same in the 30 to 35 range. To lower our direct and all-in cost per bitcoin mined, we'll continue to optimize the fleet for operational efficiency and leverage economic curtailment during high power prices. Going forward, we're open-minded about strategic opportunities for equipment acquisition, site acquisition, and so on. We'll continue to focus in the interim on maintaining cost-effective operations to ensure we're getting the best out of the fleet that we can.

Markella Zarifi, Financial Communications Representative

Thanks, Thomas. I think we have time for one last question. So with this one, let's wrap that up. Last question, pre-submitted, directed to Jim. What was the thought process around selling the Mirabel facility?

Jim MacCallum, CFO

Yes. There were clearly a number of factors that went into the sales decision. Firstly, we were very happy with the price. The sale price of $6.1 million, which equates to approximately $1.2 million per megawatt for that site, was significantly more than what it would cost to develop a facility in North America. We're pleased with the price, first of all. Secondly, the sale provided an opportunity, as Tom mentioned, to consolidate our operations into the Baie-Comeau facility, going from two facilities in Quebec to one, allowing us to reduce our overhead and operational expenses, contributing to greater overall efficiency for Argo. Lastly, the consolidation has had minimal impact on our overall hash rate and revenue generation from relocating the machines. We maintained our hash rate capacity while streamlining our Quebec operations, allowing us to focus resources and management efforts more effectively. The net proceeds from the sale strengthened our financial position, supported our growth initiatives, and reduced our interest expense going forward, which is important. These were the primary factors in deciding to sell the Mirabel facility.

Thomas Chippas, CEO

Okay. Well, thank you, everyone, for joining us today. It goes without saying that it’s certainly an exciting time in the mining space and we think an exciting time for Argo. We look forward to speaking with everyone again in a few weeks at our Annual General Meeting on June 6. Thank you very much for your time.

Operator, Operator

Fantastic. Thank you very much for updating investors today. On behalf of the management team of Argo Blockchain plc, we would like to thank you for attending today's presentation. That concludes today's session, and good afternoon to you all.