Earnings Call Transcript - ARBK Q3 2024

Operator, Operator

Good afternoon, ladies and gentlemen, and welcome to the Argo Blockchain plc Q3 Results Investor Presentation. Throughout this recorded presentation, investors will be in listen-only mode. I would now like to hand over to Markella, Financial Communications Representative of Argo Blockchain.

Markella Zarifi, Financial Communications Representative

Thank you, Mark. Before we begin, I would 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. And with us today for our discussion of Q3 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 to everyone for joining us today as we talk about our progress so far this quarter and this year. Argo remains focused on our three key pillars: financial discipline, operational excellence, and growth through strategic partnerships. By maintaining this focus, we're steadily positioning the company to seize new opportunities for growth and development as well as weather some of the sector headwinds we'll talk about. We're committed to creating long-term shareholder value and we continue to make positive steps both for debt repayment and growth. First, a few comments on the macro environment. In Q3 2024, the macroeconomic environment impacted the Bitcoin mining sector, presenting third quarter challenges that have been felt across the sector, including by Argo. The industry continues to grapple with the lasting impact of the Block Reward Halving in April 2024. The decrease in block issuance revenue strained mining profit margins sector-wide. Argo has shown resilience in this post-halving environment where the average cost to produce one Bitcoin increased due to mining difficulty and fluctuating hash prices. Our primary challenge facing miners in Q3 was the increasing cost of production as mining difficulty rose and hash prices declined. The network's daily profitability dropped to around 50% of pre-halving levels. Elsewhere, the Bitcoin network difficulty metric reached historically high levels in September. Monetary policy in Q3 has also played a role in shaping the sector's trajectory. The Fed lowered interest rates for the first time in four years in September by 50 basis points, the first reduction since the central bank began increasing rates in an effort to curb decades-high inflation following the global pandemic. The pause in interest rate hikes previously provided a reprieve to risk assets like Bitcoin, and recent moves increase the attractiveness of alternative investments like Bitcoin. This shift in policy has likewise created a more stable environment for miners as borrowing costs for infrastructure expansion and energy pricing become less volatile. While inflation pressures have eased in some areas, they do remain a significant concern. Bitcoin miners have been forced to adapt their strategies to sustain profitability amid fluctuating costs. Elsewhere, the peaks of the US Spot Bitcoin ETF's Q1 rally did not repeat in Q3 despite ETF purchases rebounding at the beginning of the quarter. In July, total net BTC inflows to ETFs spiked from 250,000 to 300,000 Bitcoin. After dipping below the 300,000 mark, demand strength was also seen in late September and, of course, in the days and weeks post the US elections, we have seen strong demand for Bitcoin and ETFs. Recent political developments have raised expectations for more favorable regulatory changes that could further support the industry, notwithstanding energy market volatility and mining difficulty remaining key factors influencing the sector's trajectory into Q4. A key future theme is set to be innovation and diversification. Now let's turn to our highlights for the third quarter of 2024. In Q3, we mined 123 Bitcoin or approximately 1.3 Bitcoin per day and generated $7.5 million in revenue. For the nine months ended September 30, we generated $36.7 million in revenue. Our mining margin for the quarter was 8% compared to 58% in the same period last year, reflecting the impact of lower Bitcoin prices and higher energy costs. For the nine months ended September 30, 2024, the mining margin was 33% compared to 47% for the prior year period. The prior year benefited from significant power credits due to economic curtailments. We reported a net loss of $6.3 million for the quarter and $39.2 million for the nine months ended September 30, 2024. Adjusted EBITDA was negative $2.1 million for Q3 and positive $3.9 million for the nine months compared to positive $2.4 million and $5.2 million respectively in the prior year periods. During the quarter, we reduced our debt by $12.4 million, including the full repayment of the Galaxy loan, further deleveraging our balance sheet. We ended the quarter with $2.5 million in cash and four Bitcoin equivalents held. Post-quarter on the 11th of October 2024, we were pleased to announce the dismissal of the class action lawsuit, Murphy versus Argo Blockchain, which was dismissed with prejudice and without leave to amend. We entered into a non-binding letter of intent with the BE Group to explore a High-Performance Computing Expansion at Baie-Comeau and commenced discussions with our lender regarding the expansion of the Baie-Comeau mortgage facility. Finally, we received notice from Galaxy that they will not be renewing the hosting agreement at Helios beyond December 2024. While this marks a change for a hosted fleet of 23,000 S19J Pro Miners, we are actively exploring alternative arrangements to maximize the value of these rigs. Let's now move to the next slide and Jim will discuss the comparison of our quarterly results and capital structure.

Jim MacCallum, CFO

Thank you, Tom. Our revenue for Q3 was $7.5 million, a decrease compared to $12.4 million in Q2 2024 and $10.4 million in Q3 2023. This decrease was primarily driven by lower Bitcoin production and the lower hash price achieved during the quarter. Despite the Q3 headwinds, our revenue for the nine months ended September 30, 2024, reached $36.7 million, reflecting growth compared to the $34.4 million achieved in the same period last year. Our mining margin for Q3 was 8%, reflecting the challenging hash price environment and higher power costs, which resulted in higher costs per Bitcoin mined. The margin decreased from 41% in Q2. Our overall mining profit decreased to $0.6 million from $5.1 million in Q2. However, we remain confident in our operational strategy and continue to optimize our fleet for maximum efficiency. As indicated in our October operational update, we saw improved results in October and November is also strong. Non-mining operating expenses continued to trend lower reflecting our focus on cost discipline and operational streamlining. Total non-mining operating expenses decreased by approximately 12% year-over-year. As Tom mentioned, adjusted EBITDA for the quarter was negative $2.1 million compared to $2.6 million in Q2 2024, reflecting the challenging mining conditions during Q3. For the nine months, adjusted EBITDA is positive $4.0 million compared to $5.2 million for the prior year. We fully repaid the $12.4 million Galaxy loan during the quarter, and we ended the quarter with $2.5 million in cash and held four Bitcoin. Looking ahead, we are optimistic about our recent initiatives, including the non-binding LOI with the BE Group to explore a significant HPC expansion at Baie-Comeau, which will help diversify our revenue streams. Let's now move to the next slide where we will review our capital structure in more detail. As we discussed during our Q2 earnings call, we fully repaid the Galaxy loan in August. This achievement was made possible through a combination of non-core asset sales like the Mirabel site, operational cash flows, and the 8.3 million equity raise completed in July. The early repayment came four months ahead of schedule and nearly 18 months ahead of the original plan. This repayment reduces our financial liabilities, eliminates $1.1 million in monthly amortization payments, and improves our cash flow. Most importantly, it strengthens our balance sheet and provides the financial flexibility to focus on future growth initiatives, including our HPC expansion at Baie-Comeau. Repaying the Galaxy loan marks a key milestone for Argo. Successfully paying off $35 million in high-interest debt ahead of schedule highlights Argo's strong financial discipline. With the Galaxy loan fully repaid, our remaining debt obligations include $40 million in unsecured notes, which mature in November 2026, and a $1 million mortgage on our Baie-Comeau facility. With that, I'll pass it back to Tom.

Thomas Chippas, CEO

Thanks, Jim. So regarding Helios, our hosting agreement concludes at the end of December 2024. This marks a significant transition for the fleet of 23,000 S19J Pro Miners, and we're exploring various options, including finding alternative hosting solutions or selling the machines. We're actively engaging with the market as well as reviewing hosting proposals to determine the most cost-effective and strategic path forward. Our priority is to ensure operational continuity while aligning with our long-term goals. With respect to Baie-Comeau and HPC, let's discuss our progress with High-Performance Computing. We recently signed a non-binding letter of intent with the BE Group, a specialist in HPC solutions, to explore a significant expansion at Baie-Comeau. The recently completed feasibility study confirms that we can adapt 12 megawatts of our existing infrastructure to support AI servers with the potential to expand by an additional 11 megawatts, bringing the total potential capacity there to 23 megawatts. Our immediate focus is on finalizing the project planning and design, securing definitive agreements with BE, and acquiring customers. We're also working on funding for the project CapEx and, based upon what we know today, aiming for a go-live in April of 2025. This initiative is a key step in diversifying our revenue streams and tapping into high-growth markets such as AI and related data processing. Furthering our conversation around growth and partnerships as demand from hyperscalers grows, HPC facilities are crucial for supporting sectors like AI and data analytics. Bitcoin miners are uniquely positioned to meet this demand, leveraging their access to scalable power and extensive experience in data center operations. These strengths position Argo to support hyperscalers and drive growth in this rapidly expanding market. We're also focused on securing low-cost, reliable power to maintain sustainable growth and ensure competitive operations. In this context, our commitment to operational flexibility will be vital as we navigate evolving market conditions and energy dynamics. For the remainder of 2024, the company will remain focused on its three core pillars: financial discipline, operational excellence, and growth through strategic partnerships. On behalf of everyone at Argo, I would like to extend our gratitude to all shareholders, stakeholders, and the incredible Argo team. We remain committed to optimizing our capital structure and delivering value for our shareholders. With that, I'll now pass it back to Investor Meet to Markella for any questions. Thank you.

Operator, Operator

That's great. Thomas, Jim, thank you very much for updating Investor Day. Markella, as you can see, you've received several questions from investors today. Thank you to everyone for your engagement this afternoon. I will hand it back to you to review those questions and lead us through the Q&A session, and I'll pick up from you at the end.

Markella Zarifi, Financial Communications Representative

Thank you, Mark, and thank you, everyone. The first question comes from Kevin Dede from H.C. Wainwright. Have you made any further decisions regarding the 2.4 exahash fleets at Helios after year-end? Additionally, how should you think of Argo's hash rate trajectory heading into next year? And that should be directed to Thomas.

Thomas Chippas, CEO

Thanks, Markella, and thanks, Kevin, for following up with this. As noted previously, we're actively exploring options for the 2.4 exahash fleet currently at Helios. Since Galaxy notified us that they will not renew the hosting agreement beyond December of '24, we've been evaluating various pathways to ensure the continued operation of the fleet, including alternative hosting arrangements, strategic opportunities, or potential asset sales. At this stage, we have not made a final decision, but our focus remains on identifying the option that provides the best balance of operational efficiency and financial flexibility. As we move forward, we will certainly keep shareholders and stakeholders updated on our plans. Regarding the second part of your question, the hash rate outlook for next year will largely depend on the chosen path for the Helios fleet and our broader growth initiatives, including the potential HPC expansion just discussed. These initiatives aim to diversify and strengthen our operations, which we think will support shareholder value. But thanks, Kevin. I appreciate the question.

Markella Zarifi, Financial Communications Representative

And thank you, Thomas. The next question again from Kevin Dede, this time directed to Jim. The big issue is always capital allocation. What are Argo's priorities in this regard? Quebec site development, alternative site acquisitions, rig purchases. What are the company's priorities? And what progress has been made securing inroads in the HPC ecosystem with JPU's customer financing? What is the timeline of execution investors might set as milestones in monitoring Argo's performance here?

Jim MacCallum, CFO

Yeah. Thanks, Kevin. Our capital allocation focuses on initiatives that we've mentioned that will drive sustainable growth and diversification. We signed this non-binding LOI with the BE Group, which outlines our plans to repurpose 12 megawatts of our existing infrastructure for HPC and also the possible expansion for an additional 11 megawatts. This aligns with our strategy to leverage current assets while capitalizing on the growing demand for HPC services. In parallel, we are advancing our position in the HPC ecosystem with the goal of bringing operations online in the first half of 2025. Regarding our Bitcoin mining operations, decisions around redeploying or potentially selling the 2.4 exahash fleet from Helios will be guided by market dynamics and long-term value consideration. We're committed to keeping investors informed on our progress as we achieve key milestones across both HPC and Bitcoin mining. Thank you.

Markella Zarifi, Financial Communications Representative

Thank you, Jim. Next question comes from Bill Papanastasiou from Stifel and would be directed to Thomas. What plans are in store for the fleet that was at Helios? Are there any short-term hosting options available? What could the process look like?

Thomas Chippas, CEO

Thanks, Bill. I don't want to repeat everything I said in response to Kevin's question, but our hosting agreement is set to conclude at the end of December '24. As I stated in the presentation, this will be a big transition for that fleet. We are carefully evaluating all the options, and we want to make sure that we prioritize the choice and strategy that best aligns with our long-term objectives and delivers maximum value. So we're trying to be flexible as we explore all those, and we'll keep our focus on ensuring the continuity and best positioning for our future growth opportunities.

Markella Zarifi, Financial Communications Representative

Thank you, Thomas. Next question, again from Bill Papanastasiou. This time directed to Jim. When may we expect a definitive agreement, and what's the timeline to bringing the HPC operations online? What are you able to discuss regarding the CapEx, financing, and economics of the deal?

Jim MacCallum, CFO

Thanks, Bill. We're excited about the potential HPC expansion at Baie-Comeau. While still in the early stages, significant progress has been made, including the signing of a non-binding letter of intent with the BE Group, which is an HPC specialist, to explore a substantial deployment of infrastructure at the site. Discussions are now in the advanced stages as we continue with due diligence and financing evaluations working toward a definitive agreement. Based on current timelines, we anticipate bringing HPC capabilities online by approximately April 2025. Although it is too early to pinpoint specific revenue contributions, we expect this expansion to begin adding value relatively quickly once operational. This initiative represents a pivotal step in our strategy to diversify and strengthen our revenue streams, providing a balanced and resilient foundation alongside our Bitcoin mining operations. Thank you.

Markella Zarifi, Financial Communications Representative

Thank you, Jim. The next question was pre-submitted ahead of the earnings call and would be directed again for you. Could you share an update on Argo's current debt position and any steps being taken to strengthen the balance sheet?

Jim MacCallum, CFO

Yeah. Thanks for the question. As noted previously, we have retired the Galaxy debt, leaving the unsecured notes as our primary outstanding debt, which are non-amortizing and mature in November 2026. Our debt service costs are greatly reduced as the bonds, which mature in late '26 are interest-only. We have a small mortgage remaining on the Baie-Comeau facility that we are looking to expand to help finance a potential HPC expansion at Baie-Comeau. Strengthening our balance sheet remains a priority, and we'll keep shareholders updated as we progress.

Markella Zarifi, Financial Communications Representative

Thank you, Jim. Next question is directed to Thomas, again a pre-submitted one in the chat. With both Bitcoin mining and High Performance Computing now part of Argo's strategy, how is the company planning to allocate resources between the two segments to maximize shareholder value?

Thomas Chippas, CEO

Thanks, Markella. Our capital allocation strategy is focused on generating long-term shareholder returns while balancing the dynamics of Bitcoin mining and HPC. We see Bitcoin mining remaining part of our operations, and as we build out HPC capabilities, we're going to leverage our infrastructure to access additional revenue streams. This diversification should enhance our ability to generate returns across different market conditions. Our approach is to allocate capital where it creates the greatest value and aligns with our strengths in energy and infrastructure management, which should position us to thrive in both segments as opportunities evolve.

Markella Zarifi, Financial Communications Representative

Thank you, Thomas. Next question is a pre-submitted one ahead of the earnings call and directed to Jim. How does Argo plan to manage the potential volatility of the Bitcoin price in relation to its broader business model, particularly with the added HPC component?

Jim MacCallum, CFO

Thanks, Markella, for the question. The Bitcoin market does have inherent volatility, which impacts miners' earnings, but our approach to managing this includes building a more resilient business model. By exploring HPC at Baie-Comeau, we're positioning Argo to benefit from diversified revenue streams beyond Bitcoin. The HPC expansion would complement our mining operations by enabling us to leverage our infrastructure for high-growth computational markets such as AI and data processing, which offer more predictable income. This diversification reduces our exposure to Bitcoin price fluctuations and enhances our ability to generate value across multiple sectors. As a result, the addition of HPC helps balance our portfolio, creating a stronger foundation to support growth regardless of cryptocurrency market conditions.

Markella Zarifi, Financial Communications Representative

Thank you, Jim. Another pre-submitted question directed for you: Are there any plans to start paying dividends?

Jim MacCallum, CFO

Yeah. Thanks. Currently, we have no plans to initiate a dividend. Excess cash will be directed towards strengthening our balance sheet and supporting strategic growth initiatives to drive future growth.

Markella Zarifi, Financial Communications Representative

Thank you, Jim. Another pre-submitted question for you again: Could you provide an update on the recent status of the class action lawsuit?

Jim MacCallum, CFO

Yeah. As Tom mentioned and as we RNSed previously, we're pleased to report that the class action lawsuit was dismissed in early October by the Southern District of New York, both without prejudice and without leave to amend. So we were very pleased with this resolution.

Markella Zarifi, Financial Communications Representative

Thank you, Jim. Next question is directed to Thomas and another pre-submitted one. Could you speak on fleet efficiency and the current hash rate environment?

Thomas Chippas, CEO

Certainly. So our current fleet efficiency is about 30 joules per terahash across the two sites with flexibility to downclock those machines for even greater efficiency when necessary. Certainly, this adaptability allows us to optimize the performance of the fleet in response to new changes in hash rate and energy environments, ensuring that the current fleet remains cost-effective.

Markella Zarifi, Financial Communications Representative

Thank you, Thomas. Next question also pre-submitted and addressing you is exploring the switch to HPC, hinting at a shift in the company's operations.

Thomas Chippas, CEO

Thanks, Markella. As noted, Argo continues to evaluate strategic opportunities and market conditions and we are open-minded and committed to exploring all options. We see significant potential in High-Performance Computing as the demand for computational power continues to grow and we see it as an opportunity to diversify our revenue streams. So as we look ahead, we're keeping an open mind about what the appropriate mix of HPC and mining might be and will certainly firm up our opinion in this regard as we further our conversations with BE and as more data becomes available.

Markella Zarifi, Financial Communications Representative

Thank you, Thomas. The next question is also pre-submitted and directed to Jim. Is Argo considering the possibility of raising capital in the future, and how would such a move impact shareholders?

Jim MacCallum, CFO

Thanks, Markella. Raising capital, whether through debt or equity, is always a strategic decision aimed at driving sustainable growth. While issuing new shares can result in dilution, it's important to consider the long-term value such funding can deliver. Many of our peers in the industry have successfully raised capital to expand operations, enhance infrastructure, and enter high-growth markets like HPC and AI. Similarly, any capital we raise in the future would be carefully targeted to accelerate growth and ensure Argo remains competitive. By balancing short-term impacts with long-term opportunities, we aim to create sustainable value for our shareholders.

Markella Zarifi, Financial Communications Representative

Thank you, Jim. I believe we have time for one more question, which is also one of the pre-submitted ones and directed to Thomas. How is Argo approaching the evolving regulatory landscape for Bitcoin mining in the US, particularly in light of the recent political changes?

Thomas Chippas, CEO

Thanks, Markella. The political landscape surrounding Bitcoin mining remains complex, but the recent post-election environment has certainly brought renewed optimism; we can see that with Bitcoin having hit some record price highs. The incoming administration is anticipated to be crypto-friendly, and that could foster a more stable regulatory environment, which would benefit Argo and the broader industry. It's kind of early to predict specific regulatory changes, and there's no lack of proposals floating around, but we're closely monitoring those developments. Ultimately, we believe Bitcoin mining with its capacity to support grid stability and renewable energy projects will continue to present significant opportunities and appeal. The potential addition of HPC to our portfolio further diversifies our revenue streams, giving us flexibility under whatever political or regulatory shifts may come in the future. And I think, Markella, you said that was the last question, so I'll just take a moment and say thank you for everyone who submitted questions today. We appreciate it.

Operator, Operator

That's great. Thank you, Thomas, Markella, and Jim for updating investors. Could I please ask investors, therefore, not to close this session as we'll now automatically redirect you for the opportunity to provide your feedback in order that the company can better understand your views and expectations. So it may take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of Argo Blockchain plc, we'd like to thank you for attending today's presentation.