Earnings Call Transcript - ARBK Q3 2023

Operator, Operator

Good afternoon, and welcome to the Argo Blockchain plc Q3 Update Investor Presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged and can be submitted at any time by using the Q&A tab situated on the right-hand corner of your screen. Click Q&A, scroll to the bottom, type your question, and press send. Given the large attendance on today's call, the Company will not be in a position to answer every question received during the meeting itself. However, the Company will review all questions submitted today and will publish responses where it's appropriate to do so. Before we begin, I would like to submit the following poll. I'd now like to hand you over to Tom Divine, Vice President of Investor Relations. Good afternoon.

Tom Divine, Vice President of Investor Relations

Thank you, Paul. Before we begin, I'd like to remind everyone that today's presentation and remarks may contain forward-looking statements. For our full risk factors, please see our Form 20-F filed with the Securities and Exchange Commission for the year 2022. With us today for our discussion of Q3 2023 results are Seif El-Bakly, Argo's Interim Chief Executive Officer; and Jim MacCallum, Argo's Chief Financial Officer. And now I'll turn it over to Seif.

Seif El-Bakly, Interim CEO

Thanks, Tom. Hi, everyone. Thanks for joining us today to discuss our Q3 results. It was a strong quarter for us, and I'm excited to dive into the numbers. Just a quick reminder for everyone of our three key priorities that helped guide us on a daily basis. We continue to focus on financial discipline and deleveraging, operational excellence, and growth and strategic partnerships for the sustainable future of this company. I hope you're seeing how these priorities have manifested in the performance of the business over the last couple of quarters. Before we dive into the Q3 results, I want to take a few minutes to discuss the current macro environment and some recent trends that we're seeing. The network hashrate continues to increase at a fairly rapid pace. The global network started the year at roughly 270 exahash per second, and it has grown approximately 70% over the course of the year. Over the last two years, we've seen some seasonality emerge in hashrate and network difficulty, partly due to the large amount of hashrate going online in Texas. During the summer months, we saw instances where hashrate decreased as Texas miners curtailed operations in response to high power prices. This is something we experienced at Helios, which generated significant proceeds in the form of power credits. I'll go into more detail on that a little bit later. But that seasonality does have an impact on network difficulty and hash price, so it's something that we monitor closely, especially as we head into winter months where cold weather can also impact grid conditions and power prices. Overall, the third quarter saw hash price trend down, bottoming out at around $60 per petahash per day during August and September, but it's rebounded strongly in late October and so far into November, rising to over $90 per petahash per day. We've historically seen those temporary spikes from ordinal mint before, which drive up transaction fees. We do expect hash price to stabilize as the backlog of transactions is processed. Hash price takes into account the price of Bitcoin, the network difficulty, and transaction fees at any given time. It's a metric that we pay close attention to. Every $10 increase in the dollar per petahash per day has the potential to generate approximately an incremental $840,000 of revenue per month or $2.5 million per quarter based on Argo's total hashrate capacity. We're also paying close attention to some upcoming events that we believe will impact our business. For one, if approved by the SEC, we believe that a spot Bitcoin ETF will bring large institutional cash inflow into the space and will ultimately increase demand for Bitcoin. And of course, we have the 2024 halving approaching in late April of next year. As everyone knows, the halving is a feature of the Bitcoin protocol whereby the block reward is reduced by 50%. As we approach the halving, our key focus is on three things: fleet efficiency, cost structure, and the strength of our balance sheet. Argo has a strong fleet efficiency of right around 30 joules per terahash, and we've had attractive power and hosting costs at an average of $0.045 per kilowatt hour so far this year. This combination of fleet efficiency, low power costs, and hosting costs positions us well for the halving. On the balance sheet front, we have stated repeatedly that one of our main priorities is reducing our debt and interest payments in order to strengthen the balance sheet to be well positioned for that halving. Turning to our third quarter results. We mined 370 Bitcoin and generated revenue of $10.4 million, which is a decrease of 17% compared to our revenue from Q2. This decrease was primarily driven by economic curtailment we experienced at Helios during August and September. However, through this curtailment, we accrued $4.4 million of power credits through power trading activities at Helios, which more than offset our decrease in revenue versus Q2. On the next slide, I'll go into some more details about economic curtailment and how that benefits us, as we've received a lot of questions from investors pertaining to this source of net revenue. Simply put, the power credits we accrued helped us achieve an overall power and hosting cost of less than $0.04 per kilowatt hour. For the quarter, our mining margin was 58%, translating into an average direct cost per Bitcoin of $11,736. We also continued to focus on cost reduction, and we reduced our non-mining operating expenses by 11%. Our adjusted EBITDA for the quarter was $3.1 million, which is an improvement from the $1.1 million of adjusted EBITDA that we generated in Q2. In July, we strengthened our balance sheet by raising $7.5 million in gross proceeds through an equity raise with primarily institutional investors in the U.K. and also reduced our Galaxy debt by $5 million. At the end of September, our cash balance was $8 million. Given our strategic decision to mine in Texas, I'd like to give a little more color on economic curtailment there. So on the screen is a slide that came out of an ERCOT presentation during the September meeting of its Large Flexible Load Task Force. That's the group within ERCOT that is tasked with integrating large power demands, such as Bitcoin mining, into the Texas grid. The slide shows the impact of elevated power prices and the use of power by Bitcoin miners on September 6. If you follow the screen, Bitcoin mining usage is in blue, and the gray line shows the power price throughout the day. So you can see a very strong negative correlation between the price of power and the consumption of power from Bitcoin miners. As power prices increased, it became less profitable to mine, incentivizing miners to curtail their operations. From this chart, it demonstrates how the majority of miners were shut off during peak hours of power price. As power prices came down in the evening, you can see miners ramp up their operations and their consumption increasing again. This data is important as it demonstrates how flexible Bitcoin miners are and how quickly they can reduce power consumption when demand is high. As soon as prices spike above their breakeven point, miners turn off. This is what is meant by flexible load. When the market price of power spikes to a maximum amount of $5,000 per megawatt hour, as it did on September 6, miners who are not hedged will simply shut down and stop mining. The miners who have locked in their power prices can make a decision. They can either use that power for their operations and continue to mine or they can sell that power on the open market and make a profit from the difference in the prevailing market price and the price at which they've locked in their power. In essence, that's what happens at Helios, and through our hosting agreement, we share in those proceeds. For this quarter, those power credits amounted to $4.4 million. That being said, let me turn it over to Jim to provide some additional comments on our financial results for the quarter.

Jim MacCallum, CFO

Thank you, Seif. As you mentioned, we generated $10.4 million of revenue for the quarter, a decrease of 17% from Q2 resulting from economic curtailment. However, the power credits that we generated from the curtailment reduced our net power costs significantly and increased our mining profit to $6.1 million. Our mining margin percentage was 58% for Q3, an increase over the 36% mining margin we achieved in Q2. During the quarter, we recorded a one-time noncash provision of $1.2 million related to prior year sales tax expected to be received from the Canadian tax authorities. This is the majority of the $1.5 million of nonrecurring expenses that we added back to adjusted EBITDA. We generated adjusted EBITDA of $3.1 million, which is a strong improvement from the second quarter. For the nine-month period ended September 30, we generated $5.3 million of adjusted EBITDA. At the end of the quarter, we had $8 million of cash on hand. As Seif mentioned, we've seen a significant increase in hash price in October and so far into November. With our total hashrate capacity, every $10 increase in hash price results in approximately $2.5 million of incremental revenue per quarter, which dramatically improves our profitability and cash flow. This slide shows our cash flow from the end of June to the end of September. Our cash flow from operations, excluding working capital changes, was $1.5 million. As Seif mentioned, we raised $7.5 million in gross proceeds from the sale of equity, and we paid down $7.8 million in principal and interest on our debt. At the end of the quarter, we had a net power receivable of $2.8 million. Adding that to the $8 million closing cash balance would have given us $10.8 million at September 30 compared to $9.1 million at June 30. We are pleased that we continue to improve our operating cash flow with our focus on operations and cost reduction. As we've shown in prior quarters, we continue to scrutinize all of our non-mining operating expenses and find ways to reduce costs. In Q3, we reduced our recurring non-mining operating expenses by 11% compared to Q2. Since the second half of 2022, we've cut our non-mining operating expenses by more than 70%. This cost reduction is important because it improves our overall margin and cash flow generation. Again, one of our key priorities is to reduce debt, which is critically important as we approach the halving. In Q3, we reduced our debt owed to Galaxy by $5 million to $27 million, and we ended the quarter with $70 million in debt. We are also in advanced discussions to sell certain noncore assets, which is an important part of our deleveraging strategy. We anticipate announcing further details by the end of the year. With that, I'll pass it back to Seif.

Seif El-Bakly, Interim CEO

Thanks, Jim. In Quebec, we've now completed the deployment of our ePIC BlockMiners numbering around 2,700. This represents around 300 petahash of additional capacity, bringing our total hashrate capacity to 2.8 exahash per second. We're seeing really good performance from these machines, and we're excited to have added them to our fleet just in time to take advantage of the recent run-up in hash price. So all in all, and in summary, it was a great quarter for Argo. We increased our mining margin, our adjusted EBITDA, and our total hashrate capacity, all the while continuing to cut costs and reduce debt. I'm also really optimistic about the trends that we've been seeing in the market with increases in both Bitcoin and hash price. Argo is well positioned to capitalize on these trends as we move forward into 2024. With that, back to you, Paul and Tom, for any questions. Thanks, everybody.

Operator, Operator

I'd like to remind you that a recording of the presentation, along with a copy of the slides and the published Q&A, can be accessed through your Investor dashboard. We have received several questions submitted during the presentation as well as pre-submitted ones. Tom, I'll turn it back to you to read those questions where appropriate, and I'll take over at the end.

Tom Divine, Vice President of Investor Relations

Great. Thanks, Paul. Our first question comes from Bill Papanastasiou at Stifel. Hash price has been rebounding lately with the recent appreciation in the Bitcoin spot price. Can you speak to the improvements in Q4 '23 and elaborate on how it is impacting cash flow?

Seif El-Bakly, Interim CEO

Yes, sure. I'll take that. Thanks, Tom. Thanks, Bill. Yes, the hash price is something that obviously we're paying very close attention to. It's come down a bit from its most recent peak at $90, but it's still significantly higher than the Q3 average of $67. So I mentioned this during our remarks, but really, for every $10 increase in hash price, based on our total hashrate capacity of 2.8 exahash, we're generating an additional $2.5 million per quarter. So we did just have a difficulty increase of around 3.5%. So that tempers a little bit with the hashrate, but it's actually smaller than the difficulty adjustment we were expecting a week ago.

Tom Divine, Vice President of Investor Relations

Our next question comes from Kevin Dede at H.C. Wainwright, and this is for Jim. Can you remind me how you reduced the debt by $5 million? Did that come from operating cash flow?

Jim MacCallum, CFO

Yes. Thanks, Kevin. In July, you'll recall, we raised around $7 million of net proceeds, and immediately, 25% of that went to reduce the debt. Plus, we had another three amortization payments of roughly $1.1 million each, and that came out of our operating cash flow and cash on hand. So that's the three plus the $1.7 million is $4.8 million or approximately $5 million there.

Tom Divine, Vice President of Investor Relations

Thanks, Jim. Our next question comes from Chase White at Compass Point. Seif, now that all your machines are installed and operations are going well, do you have any visibility into future growth options? Is there a time frame for making any decisions?

Seif El-Bakly, Interim CEO

Yes, absolutely. Thanks, Chase. Look, we're continuing our discussions with some key strategic partners and hope to share some updates with you on our next call. Right now, we're focused on reducing our debt and cost structure, which will allow us to be opportunistic as we think about the halving. I believe we'll see a lot of opportunities in the market as a lot of unprofitable miners come offline, and we're prepared to take advantage of that from an operational, financial, or strategic partnership perspective.

Tom Divine, Vice President of Investor Relations

Our next question was submitted in the chat. How were the non-mining expenses reduced by 11%? And is that reduction stable going forward?

Jim MacCallum, CFO

Yes, I can take that. As I mentioned earlier, we were able to reduce our recurring non-mining operating expenses by around 11% from the prior quarter. This was primarily driven by lower insurance costs, lower professional fees, and lower salaries due to reduced headcount. So yes, we believe this is going to be an ongoing reduction going forward.

Tom Divine, Vice President of Investor Relations

Thanks. Our next question for Seif from Kevin Dede again from H.C. Wainwright. Can you speak a little bit about how the ePIC BlockMiner machines are performing in Quebec?

Seif El-Bakly, Interim CEO

Yes. Thanks, Kevin. Performance is just better than expected. We're seeing really good results, especially when we overclock them to about 130 terahash per unit. Currently, they're averaging about 114 terahash through the fleet. So they're representing about 11% of our overall hashrate capacity right now. Efficiencies are on par with the S19J Pros. They're capable of achieving good efficiency when we downclock them. Downclocking them brings them to about 27 joules per terahash. Uptime is outstanding, thanks to Quebec's reliable power. We're entering our curtailment season in Quebec, so minimal downtime is expected despite that. Firmware-wise, it's stable and performing as expected. ePIC has been providing us with all the right updates, and the installation process was amazing thanks to our team. I must give kudos to our operations team here. I think the rigs were deployed within 48 hours once they arrived at the data centers. So all in all, Kevin, I would say that they're performing better than expected.

Tom Divine, Vice President of Investor Relations

Thanks, Seif. Our next question is for Jim. This comes from Jason F. in the chat. Can you comment on Argo's capital structure and how you plan to continue addressing debt?

Jim MacCallum, CFO

Yes. Thanks, Jason. Yes, we continue to focus on paying down our debt. We've made significant progress in paying down our Galaxy debt especially, and we are continuing to look for other ways to strengthen the balance sheet. Some of the avenues we're exploring include noncore asset sales and potential refinancing of our existing debt. We have seen, with the improvement in Bitcoin mining economics over the past month, a greater appetite for debt and equity financing from the capital markets. So we're having lots of conversations on that front as well.

Tom Divine, Vice President of Investor Relations

Another question that we've received several times in the chat, how do you plan on, or do you plan on expanding the mining capabilities in Canada? And do we plan on renewing our contract with Galaxy and continue to mine at Helios once the two-year contract expires?

Seif El-Bakly, Interim CEO

Yes, I'll take that. So good question. Given Argo's history beginning in Canada, we know it, understand it, and love the reliability of power here. But we're also nimble, flexible, and most importantly, mobile, which makes us geographically agnostic. When we're thinking about growth and opportunity, we're really looking at anything from hydropower in Quebec to Texas or the deserts of Oman. We remain opportunistic and flexible accordingly.

Tom Divine, Vice President of Investor Relations

Thanks, Seif. Another question that we've received several times, including from Sabir B., Sagar S., and Satish P., when should we expect to hear more about the discussions mentioned on the asset sales?

Seif El-Bakly, Interim CEO

Yes. Thanks, Sabir, Sagar, and everybody else. I appreciate everyone's patience on this. As Jim mentioned, we're still in advanced discussions with partners. We're genuinely making good progress here, and we anticipate sharing something hopefully by the end of the year.

Tom Divine, Vice President of Investor Relations

Our next question comes from Bill Papanastasiou. What are your network hashrate forecasts post halving, and how will ARBK remain competitive?

Seif El-Bakly, Interim CEO

Yes. Good question, Bill. Thanks. We're expecting to see a lot of hashrate come offline as miners with older-generation machines find it increasingly difficult to mine profitably due to expensive mining and power contracts. As we've seen in past halving cycles, I believe the difficulty adjustment will fluctuate as the network flushes out miners that are just barely profitable or operating at a loss. Our focus is on what we can control, which is why I emphasized our commitment to efficiency and cost management earlier. In relation to the entire network, we have an efficient fleet. We're competitive from a power and hosting cost perspective. Year-to-date, our power hosting has been all in at around $0.045 per kilowatt hour. We're again looking at efficiency in operations and potential hedging opportunities using derivatives, which I believe everyone in this space should consider. Those factors that are within our control will enable us to remain competitive and continue mining profitably after the halving. So thanks for the question, Bill. It's an important one, and we're well aware of it.

Tom Divine, Vice President of Investor Relations

And this will be our last question from Kevin Dede at H.C. Wainwright. Seif, can you clarify when you reached 2.8 exahash, did that come from the BlockMiner machines?

Seif El-Bakly, Interim CEO

Yes. So thanks, Kevin. In our September monthly operational update, we announced that we had completed the deployment of our ePIC blockchain machines. They represent around 300 petahash of hashrate capacity, which enabled us to grow from 2.5 to 2.8 exahash. So the BlockMiners have been online and hashing since the end of September.

Tom Divine, Vice President of Investor Relations

Great. Thank you, Seif. Paul?

Operator, Operator

Fantastic. Thank you very much indeed for addressing those questions. Of course, the Company will review all questions submitted today and will publish responses on the Investor Meet Company platform. Before redirecting investors to provide you with their feedback, which is particularly important to the Company, Seif, if I could just ask you for a few closing comments, please.

Seif El-Bakly, Interim CEO

Yes. Thank you, Paul. I just want to thank everyone around the world for tuning into our earnings call today. Again, it was a great quarter for Argo with improvements in mining margin, adjusted EBITDA, and hashrates. We continue to focus on deleveraging and reducing costs and look forward to our next call to give everybody more updates. So thank you, everybody. Be well. Thank you, Paul. Thank you, Tom. Thank you, Jim. Thanks, team.

Operator, Operator

Thank you all for updating investors today. Could I please ask investors not to close the session as you'll be automatically redirected to provide your feedback in order for the team to better understand your views and expectations? This will only take a few moments to complete and is greatly valued by the Company. On behalf of the management team of our Argo Blockchain plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.