Cipher Digital Inc. Q4 FY2022 Earnings Call

Good morning and welcome to Cipher Mining Inc.'s Fourth Quarter and Full Year 2022 Business Update. All participants are in a listen-only mode. After the presentation, we will have a question-and-answer session. This conference call is being recorded. I will now hand the call over to Josh Kane with Investor Relations. Thank you. Please proceed.

Good morning. Thank you for joining us on this conference call to discuss Cipher Mining's fourth quarter and full year 2022 business update. Joining me on the call today are Tyler Page, Chief Executive Officer; and Ed Farrell, Chief Financial Officer. Please note that you may also review our press release and presentation, which can be found on the Investor Relations section of the company's website. Please note that this call will also be simultaneously webcast on the Investor Relations section of the company's website. This conference call is the property of Cipher Mining and any taping or other reproduction is expressly prohibited without prior consent. Before we start, I'd like to remind you that the following discussion, as well as our press release and presentation, contain forward-looking statements, including but not limited to Cipher's financial outlook, business plans and objectives and other future events and developments, including statements about market potential of our business operations, potential competition and our goals and strategies. The forward-looking statements and risks in this conference call, including responses to your questions, are based on current expectations as of today and Cipher assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. Additionally, the following discussion may contain non-GAAP financial measures. We may use non-GAAP measures to describe the way in which we manage and operate our business. We reconcile non-GAAP measures to the most directly comparable GAAP measure and you are encouraged to examine those reconciliations, which are found at the end of our earnings release issued earlier this morning. I will now turn the call over to Tyler.

Hi. This is Tyler Page, CEO of Cipher Mining. Thank you very much for joining our fourth quarter and full year 2022 business update call. Let me start with some key developments since our last call. As we moved towards completion of our four initial data centers, we began publishing monthly production reports. Page three gives a snapshot of our business, as of our most recent production report. At the end of February 2023, we reported 5.2 exahash per second of self-mining operations across all of our sites. This is well on the way to our initial build-out of 6 exahash per second of self-mining capacity across the portfolio. And later in this presentation, I will detail how we have the potential to expand to up to 8.2 exahash per second at our existing sites by year-end 2023 if we choose to pursue expansion. We have over 48,000 rigs operating and anticipate an additional 11,000 miners to be energized in the near future. In total, Cipher has now purchased and paid for over 59,000 machines, including 7,700 rigs that we announced in December 2022. As we mentioned at the time of that announcement, we were able to purchase these new rigs with minimal cash outlay, an important example of our focus on cost discipline and our ability to manage the cyclicality of prices in the Bitcoin Mining marketplace. The philosophy of managing through the cycle is one you'll hear me talk about a lot, because it is a fundamental part of the way we run every aspect of our business. In terms of production, you can see that we ended the month of February with the ability to mine over 15.5 bitcoin per day and that we held 465 bitcoin in reserve. Later on in the presentation, we will talk more about our philosophy around our Bitcoin reserve and treasury management. Turning to page 4, we think it's important to step back and take stock of the past year and the developments that have led to these very strong production numbers that we are now reporting. In 2022, we completed development on three of our four initial sites and began production at our fourth site Odessa, the largest data center in our current portfolio. It's a testament to the tremendous capability of our team that in roughly 15 months we were able to go from a group of greenfield projects on paper to operating four best-in-class data centers. Our Alborz, Bear and Chief Data centers were fully operational coming into the New Year. And here we have provided some cost estimates from our recent electricity bills that illustrate the low cost that Cipher pays on a per bitcoin basis at the sites. As a reminder, the large majority of operational costs paid by a Bitcoin miner are its electricity bills. As you can see, in January at Alborz, we paid about $5,143 in electricity per Bitcoin produced. While at Bear and Chief, we paid roughly $6,293 in electricity per Bitcoin produced. These costs are among the lowest we have seen for a Bitcoin miner in the current market and we believe demonstrate one of Cipher's greatest competitive strengths. In November, we announced that our Odessa data center began Bitcoin mining operations just 10 months after we broke ground at the site. As of the end of February, we have roughly 4.2 exahash per second of our self-mining operations at this site alone and we'll talk later in the presentation about our expansion plans. We also plan to report electricity cost for Bitcoin for Odessa in the future when it is operating at full scale. As you can see, we have now reached that critical inflection point in our business where we have gone from a development story to a story of large-scale bitcoin production combined with strong and resilient unit economics. You can see that reflected in our monthly reports. And in the coming quarters, we expect to demonstrate that best-in-class execution at full scale across all of our sites. Before diving deeper into a market update, let me take a moment to remind everyone how our business model works. On slide 5, you will see a simple overview of a Bitcoin mining business. We operate the box in the middle of the drawing that says mining equipment, which represents our data centers and mining rigs. As I discussed earlier, we spent the majority of our operating expenses on electricity, which our data centers convert into computing output. Unlike traditional data centers which operate a similar model and sell their computing output to enterprise clients for dollars, Cipher sells its computing output called Hash Rate to the Bitcoin network for Bitcoins. To make this model operate profitably, a Bitcoin mining company needs to control both its electricity costs and the capital it spends to build its data centers, including what it spends to purchase mining equipment. Controlling these costs enables a miner to be a lower-cost producer. And our focus at Cipher has always been on controlling these specific costs to produce the best possible unit economics. Now let's turn to page 6 and take a look at recent market events in the Bitcoin mining space and talk about Cipher's approach to these challenging markets. Our philosophy continues to be that as a low-cost producer, these markets present opportunities for us over the long term. Since our last business update, Bitcoin prices initially dropped significantly in the fourth quarter to the mid-teens thousands of dollars, before rallying to the mid-20,000s of dollars in early 2023. However, accompanying this price increase has been a steady climb to an all-time high in Bitcoin network cash rate, which continues to suppress overall mining economics. This market backdrop has led to several noteworthy news events for competitors in our industry, including the repossessions of competitors' mining rigs by equipment lenders, the sale of assets and M&A activity. While energy prices have softened recently, there continue to be many more mining rigs looking for a home than available sites with good mining cost economics. With our strong portfolio of data centers, Cipher is very well positioned. And with the strength of our balance sheet and the successful growth of our business, we've been approached with many different opportunities. But it's important to remember that cheap assets are only part of the equation and that many of the businesses that are now in distress have fundamental issues around their cost structure, that make them unattractive acquisition targets. So while we continue to look at a variety of distressed opportunities, our current view is that the best potential growth opportunities are already within our portfolio, beginning with finishing the initial build at Odessa and subsequently expanding to full capacity later this year at this site. We will continue to look for low-risk cyclical opportunities, where we can take advantage of our relative strengths and continue building a company that can withstand the storm. We believe we can ultimately emerge as the industry winner when brighter days return. As a final note on the market, big disruptions seem to coincide with our business updates. So it is challenging to keep up to the minute on this slide. Unfortunately, this quarter is no different with recent bank failures. I am happy to report that Cipher had no exposure to Silvergate or Silicon Valley Bank and we had less than $20,000 at Signature, which we are in the process of moving. Proactive counterparty risk management is a major focus for us. We currently have accounts with three of the largest 10 banks by assets in the United States, as well as other more niche-focused accounts. We see positives for Bitcoin in the long-run future coming from the recent turmoil and Cipher will help ensure that positive future. Moving to more specific highlights on our data centers. Slide seven shows some operational highlights from our Alborz data center. Alborz is 100% powered by wind and is a joint venture that we share with our energy provider. It has a total operating capacity when the wind blows of 40 megawatts. That 40 megawatts powers roughly 1.3 exahash per second of rigs. Alborz can mine almost four Bitcoin per day and year-to-date the site has mined approximately 186 Bitcoin. Roughly half of that total capacity in production belongs to Cipher. Most importantly, our recent all-in electricity cost per Bitcoin at Alborz was approximately $5143, demonstrating our resilient low-cost structure. Slide eight shows operational highlights from our Bear and Chief data centers. Bear and Chief were completed and made fully operational last October. Combined, the sites operate 20 megawatts, which powers approximately 0.65 exahash per second at the data centers and can generate roughly 2 bitcoins per day in current market conditions. Bear and Chief are also structured as joint ventures with similar shared economics to Alborz. Unlike our other sites, which have behind-the-meter power arrangements, Bear and Chief are set up in front of the meter in a location within Texas that typically features attractive market prices. Our recent all-in electricity cost per Bitcoin at the sites was approximately $6,293. Turning to our Odessa data center. Slide 9 includes our most recent production numbers as well as a timeline for the completion of our site build-out. At the end of February, we reported a exahash rate of approximately 4.2 exahash per second at the site, generated using approximately 143 megawatts. We have mined roughly 770 bitcoins at the site to date, and had a recent daily mining capacity of approximately 12.9 bitcoins per day. We continue to expand at the site every day and we expect it to reach approximately 4.7 exahash per second of capacity by the end of March and 5 exahash per second of capacity shortly thereafter. Beyond this initial machine deployment, we will also have completed the necessary infrastructure at the site to accommodate further machines capable of taking the site to a total of 6.2 exahash per second by year-end. In previous quarters, we have talked in detail about the Odessa power contract, but it's important to reiterate that because of our long-term low-cost fixed-price power contract at Odessa, we have an advantage that few other bitcoin miners have. We have the flexibility to resell our power capacity at market rates, and this flexibility can provide a hedge against potential future declines in bitcoin mining profitability. As a further hedge against deteriorating market conditions, our power purchase capabilities exceed our power purchase obligations under the contract. While we have the right to purchase 207 megawatts per hour under the contract, we are only required to purchase two-thirds of these hours per annum. So in possible situations where both bitcoin mining and reselling power to the market were not profitable, we will have limited our exposure. This feature of our power contract also sets Cipher up for growth potential while minimizing risky commitments, as I will explain on the next slide. Slide 10 provides further detail on the organic growth capacity at our current data centers. Though the potential for hash rate growth has not been as much of a focus for investors in our sector recently given choppy market conditions, we always keep an eye on the potential for growth into the future. Our goal is to identify opportunities for growth that feature favorable mining economics but minimal financial commitments so that we can remain flexible. Our existing portfolio of sites features the best expansion opportunities we have found and are detailed here. As I mentioned, our most immediate expansion opportunity will be to purchase mining rigs to utilize the full 207 megawatts available to us at Odessa. In advance of acquiring those machines, we can resell the megawatt hours we are not currently using to the market or elect not to take them at all. That is, we already have mining operations at the site that exceed our take-or-pay obligations under the contract. So if we need to, we can simply mine with our existing build-out and wait for better market conditions for expansion. In the coming months, it is our current intent to purchase rigs with the revenues we are generating from operations to fully utilize our 207 megawatts at Odessa. If we purchase current generation machines, we could add approximately 1.2 exahash per second of mining capacity to the site this year. However, given volatile market conditions, we want to be mindful of not overextending ourselves, so we will continue to evaluate expansion in light of market conditions. This near-term opportunity for growth with strong built-in unit economics but without operational spending commitments is one that few, if any, of our competitors have and demonstrate Cipher's continued approach to look for low-risk opportunities. Continuing with this same theme, our joint ventures at Bear and Chief have expansion potential in 2023 as well, and have mapped out 30 megawatts of expansion at each site. Again, Cipher has the right, but not the obligation to participate in this expansion. Should we choose to opportunistically participate, these expansions could add another one exahash of self-mining capacity to Cipher in 2023. Beyond 2023, Bear and Chief have further expansion potential and our joint venture at Alborz is exploring adding a grid connection to supplement the existing wind farm in the coming years, which would expand its capacity meaningfully. As you can see, we have the potential to expand to 8.2 exahash per second in 2023 and significant potential for further expansion beyond that in the years to come at the data centers we are already operating. We will manage this growth potential prudently as we navigate challenging markets and financing conditions. I will close my portion of the call by reiterating some key statistics of Cipher Mining that show how we are built to succeed through bear markets and bull markets. Our fleet of roughly 59,000 rigs operates at a very efficient 31.4 joules per terahash average and we power them with electricity purchased at a price of roughly $0.027 per kilowatt hour. Using newer and efficient machines with a low cost of power makes us a low-cost producer of Bitcoin, giving us resilience in the bear market and also operational leverage in a bull market. In this current tough market for Bitcoin miners, I'd like again to emphasize Cipher's strong liquidity profile. At the end of February, we had approximately $16.4 million of cash in Bitcoin. We do not have the debt service some of our competitors are experiencing and we have no further obligations to make any additional payments to mining rig manufacturers. As part of our prudent liquidity and balance sheet management, we also have access to a $250 million at-the-market equity shelf. We have yet to sell a single share from the shelf. In the last quarter, we passed on multiple offers for debt financing that we found to be unattractive and have continued to fund our remaining capital expenses at Odessa from our operations. We will prudently manage our Bitcoin treasury over time. While we plan to grow the Bitcoin treasury over time, we also liquidate Bitcoin to pay operational expenses and capital expenses and overhead when necessary. We currently anticipate funding all of the remaining infrastructure expenses at Odessa from our treasury and ongoing operations. And we expect to complete our initial build-out of infrastructure in the second quarter. When you combine our current liquidity profile, with our expanding Bitcoin production and strong unit economics, we believe Cipher is positioned to emerge from this challenging market as the true leader in the Bitcoin mining space. Now, I'd like to turn it over to our Chief Financial Officer, Ed Farrell.

Thank you, Tyler, and hello to everyone on the call. Our flagship data center, Odessa was energized in November. For the period from November 22, 2022 through December 31, we mined 180 Bitcoin at an average price of approximately $17,000 resulting in Cipher reporting $3 million in revenue for the year. With the ramp-up of Odessa in 2023, we look forward to providing the market with greater detail on our operations, which we believe will eliminate our best-in-class unit economics. Again, we have no burden from debt, and we are funding our operations with our current Bitcoin production. If you recall, we have recorded a derivative asset on our balance sheet in the third quarter driven by our Luminant Power agreement. The change in fair value of this derivative asset was $73.5 million for the year ended December 31, 2022. The $73.5 million includes $83.6 million of income recognized for the initial derivative asset fair value on July 1, 2022 offset by $11.8 million of expense recorded related to a decrease in fair value of the power agreement as of December 31, 2022. The change in fair value of the derivative asset in 2022 also included $1.7 million for our sales of electricity facilitated by Luminant. For this year, and future periods the change in fair value of this contract will flow through our GAAP earnings and will exclude the impact for non-GAAP reporting. Other significant assets include liquidity of $18.2 million. This includes cash of $11.9 million and Bitcoin of $6.3 million. Property and equipment of $191.8 million primarily related to our Odessa site, which includes miners of $80 million; leasehold improvements of $95 million; and construction in process of $20 million, offset by $4.2 million of depreciation. Deposits on equipment of $73 million is primarily related to miners, of which a sizable portion have been delivered in 2023. Security deposits of $17.7 million are primarily related to our collateral for our Luminant PPA. And our equity investment in our JVs Alborz Bear and Chief are $37.5 million. As Tyler stated earlier, our liquidity position at the end of February was approximately $16.4 million in cash and Bitcoin. Also to-date, we have not utilized our $250 million ATM shelf. But when market conditions improve, it will be additive to our liquidity profile. Now, let's look at our GAAP operating results for the year ended December 31. We had a net loss of $39.1 million, resulting in a net loss of $0.16 per share. Revenue for the year ended December 31, 2022 was $3 million and was generated entirely from Bitcoin mining operations. The change in fair value of our Odessa power agreement, which I mentioned earlier, resulted in a gain of $73.5 million. This was offset by equity losses of equity investees totaling $37 million for the year ended December 31st and primarily consisted of losses totaling $33.4 million, resulting from a contribution of miners to our JVs Alborz Bear and Chief between June and October 2022. This is due to the miners having fair values at the time of the contributions that were less than the cost paid to acquire the miners. We had general and administrative expenses of $70.8 million during the year ended December 31st. This includes stock-based compensation of $41.5 million; payroll and benefits of $4.3 million; corporate insurance of $9.5 million; professional fees of $5.2 million that include legal, accounting, audit, and tax services; and other G&A of $8.5 million that include IT, occupancy, consulting, and other public company expenses. We had $4.4 million of depreciation, primarily related to the assets put into service at Odessa. Our non-GAAP financial measures include supplemental financial measures for non-GAAP loss from operation that excludes the impact of depreciation of fixed assets, stock compensation expense, and the non-cash change in fair value of our derivative assets. These supplemental financial measures are not measurements of financial performance in accordance with US GAAP and as a result, may not be comparable to similarly titled measures of other companies. We believe that these non-GAAP measures are also useful to investors in comparing our performance across reporting periods on a consistent basis. So, for the year ended December 31st, 2022, we had a non-GAAP loss of $64 million, resulting in a non-GAAP net loss of $0.26 per share. We have provided a reconciliation of GAAP versus non-GAAP results for your review. Finally, our team takes great pride on continuing to deliver the plan we set out back in 2021 and we look forward to reporting our progress in future periods. I will stop there and Tyler and I are happy to take your questions.

Thank you. Our first question comes from Josh Siegler from Cantor Fitzgerald. Please go ahead, your line is open.

Good morning. Thanks for taking my question today. First off, how are you thinking about the CapEx spend needed to expand at Bear and Chief? And do you plan on funding this expansion through your operations? Thank you.

Thanks Josh. I think it remains to be seen. I think the reason why we highlight the sort of opportunistic flexibility that we have in our model is that these are choppy markets, right? And so at any given point in time, if you think about the levers we could easily tap for financing, we could look for debt financing, which I mentioned we've seen offers on some of our data centers, we could theoretically sell equity to fund it, or we could sell our Bitcoin effectively via operations. It kind of depends on market conditions and point in time. And so I can't give you a specific answer for this is the lever we're going to pull for those particular expansions. But that will be a question that will come more to the forefront in the coming months.

Understood. And it seems like you do have many levers and optionality around that. For my second question, I was wondering if you could discuss what prices you're currently seeing for rigs right now. And as you consider purchasing rigs earlier than the infrastructure is actually available to take advantage of the current low prices?

It's a constantly changing situation. Prices fluctuate daily. Currently, I haven't observed a significant price increase since the Bitcoin rally started this week, but the hash price remains low. We've witnessed a substantial rise in network cash rates. The latest prices I've encountered are in the low double digits per terahash, around 12 or 13 dollars, but these can vary daily and depend on the volume ordered. It's definitely a good time to buy rigs, assuming you have the financial resources. We will focus on this as we complete our build-out in Odessa. I believe we hold a significant advantage among miners because we have access to available infrastructure at a very low fixed cost. We're eager to buy rigs at prices that may even be lower than the cost of manufacturing. However, we need to be cautious as we finish our capital expenditures in Odessa to ensure the infrastructure is ready before shifting to purchasing rigs. I hope we can make those purchases soon.

Thank you very much. Appreciate that.

Thanks Josh.

Our next question comes from Reggie Smith from JPMorgan. Please go ahead, your line is open.

Good morning, and congratulations on the build-out. I have two quick questions. One of them may be difficult to answer, but if you could share your thought process, it would be very helpful. Regarding the $250 million shelf offering, what factors do you consider in deciding to tap into that versus the potential dilutive impact? Is there a rule of thumb that you or investors look at to determine if this is the right time to utilize it? When does it make sense, and what do those conditions look like?

It's challenging to provide a specific answer to that question, but it's something we consider frequently. In general, we would aim to use it in a way that is beneficial. I see it as a valuable option, especially in unpredictable markets. For instance, if Bitcoin were to drop significantly and the market were under pressure, it would serve as an additional resource we could utilize. However, we are more inclined to take advantage of it in a strategic manner, seeking opportunities that could enhance value. For example, if we find an outstanding deal on rigs to immediately deploy at Odessa, we would consider that beneficial for our shareholders. That's the kind of scenario we would evaluate. There are many factors to consider when thinking about this. Our liquidity is increasing in the market, but we must be cautious to avoid negatively affecting the stock while pursuing opportunities that add value.

Understood. I appreciate that there are different ways to look at this. One perspective I had in mind is to consider exahash per share outstanding and calculate it that way. When you conduct a shelf offering, it increases your shares outstanding but also adds exahash. Is this the correct way to consider accretion?

Yeah, it's an interesting angle, I think…

Or is it too complicated? I don't know.

It starts to get a little challenging. I think we probably fall back on a dollars-based profitability to drive value to shareholders. So exahash per share is I guess as a proxy, but it sort of ignores the hash price element of things, right? Because if we... the problem with that is what if network cash rate goes to 1,000 exahash or something like that? Like you have to sort of think of both of those things at the same time if it makes sense?

No, it does. It's a fascinating problem to solve, so we'll be watching there. If I could sneak one more question in, the energy price per Bitcoin numbers you posted are very impressive, the lowest I've seen among any Bitcoin miners, so hats off to you for that. My question is, how do you think about the unit economics below the energy line? What are you driving the business towards in that area? Additionally, is it overhead for you? What’s the right way for investors to think about that too? Thank you.

That's a great question, and I'm optimistic that in the future, when we are operating at full scale throughout a quarter, we will be able to provide more specific details on that. With electricity, it's quite simple; we can take a monthly bill and analyze how many Bitcoin we produced to determine the cost. Regarding our operations, we aim to leverage technology to enhance efficiency at the company level. This has been a significant advantage for us since we came public with an ambitious plan to build scale rather than incrementally expanding as miners. Starting from scratch, we've structured the company to operate with fewer, but more skilled employees, while utilizing technology effectively. In the future, alongside our low energy costs, you'll also see reduced overall operating expenses in alignment with that. However, it's important to note that electricity remains the major variable. Even if we achieve high efficiency in other operating expenses, the electricity price is what ultimately influences our overall cost structure.

Understood. That’s good color. Thank you.

Thanks, Reggie.

Our next question comes from John Todaro from Needham. Please go ahead. Your line is open.

Great. Thanks for taking my question. Congrats on the quarter. First question, so with Odessa getting a little bit further built out here, is the G&A spend is that kind of already in place? Should we be taking that Q4 number and thinking it holds at least for the first half of 2023?

I can take that. Hi, John. How are you? Yes, as Tyler mentioned, from a personnel perspective, we don’t anticipate a significant increase in headcount for 2023. Some of our early company expenses are behind us and are starting to stabilize. Therefore, if you examine the last two quarters, that could serve as a reasonable estimate for 2023.

Got it. Okay. Great. And then…

Is that helpful?

Yes, that is. I appreciate that. And then the second question. So, on the potential Alborz expansion, I believe that's the lowest power cost in the portfolio. Any expansion there? Could you just give us some more color on what those power contracts would look like today?

So, it's a little bit early. I think we wanted to put it on there to include it, because it is within the portfolio, but you will note that we don't have any of that marked for 2023. What we are exploring there is adding a grid connection. And so recall that Alborz operates as an off-the-grid wind farm only. And so when the wind blows, we mine and you can see why it's so attractive, because the electricity price is so low there. But of course, when the wind doesn't blow, our machines are not hashing. And also it is a 40-megawatt facility from a data center perspective, but it is co-located with a 165-megawatt wind farm. And so theoretically, we can go get a grid connection. There are some structuring hurdles and some things we need to go through. We need to map out the approvals process, et cetera. But what we would be doing then is adding the potential for 100% uptime there and also expansion. Now from a cost perspective, we would be buying that power front of the meter, right? We'd be buying it from the grid. So that would be the market price unless we opportunistically put in place a financial hedge. So, hard to forecast, but the point is it would be a floating price at least in as much as we're buying from the grid directly.

Got it. Okay. So just to make partially would still be wind and then part of it would be from the grid there. Okay. Correct. Still bring your average cost down. Quite a bit I would imagine?

It's hard to forecast right, because we have the exact same price when the wind is blowing. But when the wind stops, we would be tapping the power prices that we could get. So it probably would look something like a mix of the Bear and Chief power price plus the Alborz's power price, if that makes sense. So think about one-third the Alborz cost and about two-thirds of the Bear and Chief costs. But keep in mind, the Bear and Chief cost we put in the deck, but that can vary right because it's front of the meter. So if market prices go way up that could change, or conversely if they go down, same thing.

Okay. Got it. Understood. Thank you guys. Appreciate it.

Our next question comes from Mike Colonnese from H.C. Wainwright. Please go ahead. Your line is open.

Good morning guys. Thank you for taking my question this morning. First one for me. So in your slide presentation that you have 2.2 exahash and self-owned expandable capacity at three of your four sites so does Bear and Chief that you call out specific for 2023. How long would it take you guys to build out the additional capacity when you decide to do so? Really just trying to get a better sense on the timeline to scale organically during this calendar year?

Thanks, Mike. The 2.2 we discussed regarding Odessa, Bear, and Chief is all theoretically achievable within this calendar year. We are currently doing preliminary work at Bear and Chief, but we need to acquire rigs, get them delivered, and build the necessary infrastructure. We estimate that we can reach that capacity by the end of the year. For Odessa, it’s simply a question of acquiring the rigs after we complete the build-out, which will be finished in the next quarter.

Got it. Got it. That's helpful. Thank you, Tyler. And then the next one for me. You mentioned you're seeing a lot of acquisition opportunities right now. What type of deals would get you more excited to engage in M&A versus expanding organically?

We maintain a disciplined approach to modeling costs, profitability, and ROI. When considering an M&A opportunity or asset purchase, we evaluate it just like we would an expansion. There are additional risks associated with M&A that we need to account for, but ultimately, we have to weigh the opportunity. It's fair to say that I can't foresee an M&A opportunity being as advantageous as the expansion at Odessa. We have the lowest fixed costs in the industry just waiting for rigs there, so nothing could surpass that from an ROI perspective unless someone is in extreme distress. As we move closer to our goals, which is about a year or 13 months away, many miners with various cost approaches will face more stress, and we believe we will be in a sought-after position. We think others will be eager to partner with us. We will seek the best opportunities to grow wisely and deliver the best returns for our shareholders.

Make sense. Thank you for taking my question.

Thanks, Mike.

Our next question comes from Joseph Vafi from Canaccord. Please go ahead. Your line is open.

Hi, good morning and thank you for the update. I noted the mention of the Bear and Chief locations and their expansion, particularly regarding front of the meter. How do you view the price volatility of power at those sites and how does that influence your expansion plans? I have a quick follow-up as well.

Sure. Thanks, Joe. So Bear and Chief are located in very favorable front-of-the-meter locations. So if you look at the prices in that geographical location of the ERCOT grid, you can find very low front-of-the-meter prices because there's an abundance of supply. Historically, although it does bounce around of course with the weather and other conditions. The other thing is they're favorably located to minimize the various associated transmission and distribution charges. So, what I'd say is, you saw the prices we've paid with the floating prices which are in the deck. And so that gives an indication of how favorable those locations are. What I would also say is we always evaluate what we could find as a hedge. So, it is possible to get a financial hedge that we would put in place, but both Bear and Chief are in load zone west and that has a particularly low transmission and distribution tariff. So we always look for a hedge and think about locking a price, but the floating price is pretty favorable right now. So it could go either way. It's sort of market dependent.

Sure. That sounds fair. As you expand Odessa, it seems you are using your funds from operations to facilitate that growth. Could you provide some insight into the rate at which you can expand compared to your decision to hold some Bitcoin as a hedge? Specifically, I'm curious about how you mix operational funds that go back to the balance sheet for hedging and those that are allocated to increasing exahash capacity. Thank you.

Sure. It's a challenging question because it's somewhat dynamic in nature. In March, we will allocate a significant portion of our capital expenditures to complete the infrastructure at Odessa, which will taper off into April. There may be some final cleanup payments afterward, but overall, the spending will decline. Simultaneously, we will consider the opportunistic purchase of machines. If we were to fund these machines entirely from operations, we could potentially have a couple of million dollars each month available for that once we stop directing funds towards capital expenditure expansion. Regarding our Bitcoin inventory, we view it with a long-term perspective. If a compelling opportunity arises to enhance our Bitcoin production rate, we could sell some of our inventory. Our approach to building Bitcoin inventory is to proceed slowly and steadily over a long period while considering potential liquidation for operational expenditures as needed. The allocation between what we hold and what we use for capital expenditures and investments can vary based on market conditions.

Sure. Fair enough. Yes, lots of options always watching the opportunistic opportunities. I get it. Thanks a lot guys.

Thanks, Joe.

Our next question comes from Bill Papanastasiou from Stifel. Please go ahead. Your line is open.

Hi, good morning, everyone. Thank you for taking my questions. Just looking at the big point right here, it looks like mining economics are improving, so that's a great start to the day as well. My first question is in regards to fleet efficiency. We continue to see a premium for the latest generation of mining equipment, which seems to be largely as a result of mining operators that have exposure to higher electricity prices than companies like Cipher, looking for equipment that provide the highest implied breakeven cost of electricity. Given that Cipher is operating at 31 joules per terahash, curious to hear whether your team has any targeted fleet efficiency profiles, as we look at the having coming up later this year or later in 2024 rather and how that might look as you guys potentially pursue growth to 8.2 exahash? Thank you.

That's a great question. We typically don't consider fleet efficiency in isolation. Instead, it's part of a broader analysis when assessing the return on investment for a site. As you pointed out, more efficient machines will become essential for miners facing higher electricity costs. We have numerous options available. When evaluating the potential to acquire rigs, we consider whether the additional cost for the latest and most efficient machines is justifiable from an overall ROI standpoint. Many miners are constrained, and this constraint will intensify when they have no choice but to pay a premium due to rising operational costs. For us, it's a dynamic situation fueled by opportunities. I can foresee a scenario where the prices for the S-19 generation or the M30S++ generation decrease enough to provide a better forecasted return than the premiums we've previously deemed too high. This is why we haven't invested in the XP generation of machines. However, I believe this will put pressure on higher-cost producers. While we don't set specific targets, we are aware that maintaining fleet efficiency over time is crucial. We are positioned to maintain flexibility with our power costs.

Thank you for that insight. As we all know, bitcoin mining is competitive, so we need to monitor how other companies are expanding or contracting their operations. Cipher has the ability to explore more cost-effective models that might yield better return on investment. My next question is about the recent proposal from the US Treasury Department for a 30% excise tax on the total cost of electricity used for digital mining. What are the company's views on this? It seems somewhat unreasonable to also apply this excise tax to companies generating their own power off the grid. What are your thoughts on that?

So, it's a really interesting development. I'm not sure that our thoughts are fully baked at this point. I'd say, first of all, it's a proposal that our advisers have told me is unlikely to pass and people can get deep on thinking about taxing certain uses of energy. There's certainly a part as an element seemingly to that that I hope we avoid as it makes its way through the legislative process. What I'd say overall though is that, it always comes back to the same answer that it's good to pay the lowest electricity prices. So if that were to happen, we're still at the lower end of the cost spectrum. And given the competitive dynamics of the way network hash rate works, we would be better equipped to handle it than anyone else. But everything I have heard and read is that it's probably unlikely to materialize. We'll see.

Thank you. Really appreciate the color.

Thank you.

We have no further questions in the queue. I would like to turn the call back over to Tyler Page for closing remarks.

Thank you everyone for your time today. It's always exciting to update you guys on our progress, and we look forward to the next one. Thank you for your support, and we'll talk to you soon.

This concludes today's conference call. Thank you for your participation. You may now disconnect.