Cipher Digital Inc. Q3 FY2024 Earnings Call

Good day and thank you for standing by. Welcome to the Cipher Mining Third Quarter 2024 Business Update Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today. Josh Kane, Head of Investor Relations. Please go ahead.

Good morning and thank you for joining us on this conference call to address Cipher Mining’s third quarter 2024 business update. Joining me on the call today are Tyler Page, Chief Executive Officer, and Edward 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, and 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 the market potential of our business operations, potential competition, and our goals and strategies. 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 measures, and you are encouraged to examine those reconciliations, which are filed at the end of our earnings release issued earlier this morning. I will now turn the call over to Tyler Page. Tyler?

Thanks, Josh. Hello, this is Tyler Page, CEO of Cipher Mining. Thank you very much for joining our third quarter 2024 business update call. We have had an extremely busy few weeks recently at Cipher, and our business model has rapidly evolved from being just a Bitcoin miner to being a developer of HPC data centers with a natural built-in offtake via Bitcoin mining for prospective sites. We believe that we have found a truly unique niche by opportunistically investing in greenfield development sites, knowing that we can build and operate an HPC site for a tenant or if a high-quality HPC tenant fails to materialize, we can always continue to expand our Bitcoin mining footprint and put the sites to profitable use. We have closed five such deals to acquire greenfield data center development sites in the last two months. Our current primary intent for these sites is to develop them as HPC data centers, but all five sites are located in Texas and would also be excellent sites for Bitcoin mining as we can always use our proven ability to manage power curtailment and produce our own best-in-class electricity costs. Cipher combines expertise in site origination at the front end of the development funnel with an experienced team of construction and operations professionals that joined us from the hyperscalers. Our team has built some of the most high-tech data centers in the world and continues to innovate in both the HPC and Bitcoin mining space. Further downstream, we believe Cipher's talents in operating the technology and trading needed to manage energy prices and the curtailment process will bear fruit as the entire data center industry evolves. According to a recent research piece from JLL, data center industry demand is forecast to grow at a 23% compound annual growth rate through 2030. The demand for large-scale data centers driven by the rise of large language models and AI is seemingly growing even faster, and those sites are increasingly hard to find. Regulators and system operators are now suggesting hyperscalers match requests for new power interconnections with new generation development in order to receive required approvals. This trend will further extend waiting times for large interconnects. And this situation is juxtaposed against an environment where the chief executives of the hyperscalers are ramping up their CapEx spend in the race to be the winner in AI. It is against this backdrop that we launched our HPC vertical. We believe that large-scale interconnects available in the next few years are exceedingly rare and valuable, and I am excited to tell you more about our progress today. Before I talk about our new development portfolio, let me begin the call by updating some key metrics for Cipher as of the end of September 2024. While we have major growth coming in the near future with our new sites, we are also in the middle of a significant expansion of our Bitcoin mining business right now. We operated 9.3 exahash per second of self-mining capacity at quarter end and as of this morning, are in the middle of installing our Odessa upgrade and have grown to 10.5 exahash per second. By the end of the year, we expect our self-mining capacity to grow to 13.5 exahash per second with a fleet-wide efficiency of 18.9 joules per terahash. Cipher continues to manage a significant Bitcoin inventory, holding 1,508 as of the end of the third quarter, and we are probably best known in the Bitcoin mining industry for our very competitive all-in weighted average power price of $0.027 per kilowatt hour. Electricity represents the large majority of our operating costs and our low price is a key driver of our outstanding unit economics. In the next two months, as we complete the Odessa rig upgrade, we will be pumping the industry's cheapest electricity through one of its most efficient fleets. Now, let's move to a review of our current operations. On Slide 6, we give a portfolio overview of our existing data centers and a near-term timeline for expected scaling of our managed power capacity. Year-to-date, we paid an average all-in electricity cost of roughly $18,162 per Bitcoin produced at our data centers. We are very proud of this number. Please note that when we talk about all-in electricity costs, we mean the total cost to deliver electricity to our mining rigs. So, our numbers include all taxes, transmission and other charges, and our low numbers dramatically demonstrate our competitive advantage. On the left side of the slide, we show an overview of our production split across Odessa and our JV data centers, along with our all-in electricity cost per Bitcoin at the sites year-to-date. The chart on the right side of this slide gives you a graphic illustration of the number of megawatts we currently manage as well as the projected growth for the coming year. As you can see, we currently expect to manage 927 megawatts across six data centers in 2025 when we bring Black Pearl and Barber Lake online. At this point, we will turn to production by site. Slide 7 has a production summary of our Odessa facility. Odessa is the most significant part of our portfolio as it represented approximately 83% of our Bitcoin production in September. Recently, Odessa became the first Bitcoin mining data center to be awarded the Uptime Institute's stamp of approval for management and operations. Odessa is a wholly-owned facility in the middle of a five-year fixed price power purchase agreement and pays some of the lowest prices for power in the industry. As of quarter end, we generated approximately 7.1 exahash per second at the site, using approximately 207 megawatts. Those same 207 megawatts will generate roughly 11.3 exahash per second with the rig upgrade we are in the middle of executing now. On this page, we also provide the observed all-in electricity cost per Bitcoin at the site post halving, which was roughly $25,488. Even after the April halving reduced the number of new Bitcoin paid to miners, you can see how valuable it is for Cipher to have a cheap fixed price of power available on such a large portion of our portfolio. On Slide 8, we highlight our joint venture data centers of Alborz, Bear, and Chief. With the recent expansions at each of Bear and Chief, the sites now have a total power capacity of 120 megawatts and generate approximately 4.4 exahash per second. We own 49% of the JV sites, and our portion recently generated roughly 17% of our overall Bitcoin production. On this page, we also provide the observed all-in electricity cost per Bitcoin at the sites post-halving, which was roughly $34,160. As a reminder, both Bear and Chief operate as front-of-the-meter sites, so there will be some expected seasonal fluctuations with their electricity costs and summer months tend to be higher. Now, let's turn to an update on our development portfolio. Slides 10 and 11 show a rendering of the completed data center at Black Pearl and photos from the current site work underway. We are scheduled to energize the site in the second quarter of 2025. Everything for Phase 1, which is the first half of our building and the full 300-megawatt substation is progressing on schedule. Our current design envisions 250 megawatts of air-cooled and 50 megawatts of liquid-cooled Bitcoin mining. At full capacity, the site is anticipated to produce roughly 21.5 exahash per second of hash rate. We have continued to receive inquiries on our willingness to repurpose a portion of the data center for HPC hosting. Ultimately, our final design at the site will depend on what we think will produce the best outcome for shareholders. Slide 12 gives an overview of our new Barber Lake site that we acquired last month. We immediately recognized the potential for Barber Lake when we first saw it. The site has an approved capacity of 300 megawatts, and we purchased 250 acres of surrounding land. Perhaps most importantly, the site already has an existing energized substation, so any data center will be immediately available for use upon completion of construction. When you also consider that it is located next to the major fiber line running along I-20, this site is ideal to host a large HPC tenant. Every potential tenant who has seen it thus far has expressed interest given its optimal setup. We look forward to updating the market in more detail as we progress in our various discussions. Slide 13 shows an overview of the Reveille site, which is the first site in our medium-term pipeline as it is scheduled to energize in 2027. By the time we turn on Reveille, we will have already been managing our initial large HPC sites at Barber Lake and potentially Black Pearl. The site is located in Cotulla, Texas. It has been approved for 70 megawatts, but based on early discussions with the transmission service provider, we believe we can expand the site capacity to 200 megawatts by the time the site is energized. Given the timeline to energization, we have a lot of flexibility on Cipher's strategy for the site. We may choose to build a powered shell data center for a hyperscaler and secure a long-term lease from a high-quality tenant. But we also have the potential to expand our capabilities and we'll review a variety of potential business models, including more of a multi-tenant model or even managing our own fleet of GPUs. We have some time to watch the market develop and evolve before we complete our strategic planning. Slides 14 to 16 give overviews of the three sites covered by the purchase options that we recently acquired, Mikeska, Milsing, and McLennan or what we call the 3Ms for short. These sites are the furthest out in our development pipeline as they are pending final approval for interconnection, and we expect the results of approval processes for the sites to be finalized in the coming year. We hope to receive approval for up to 500 megawatts at each site. In addition to the interconnections, our purchase options also cover substantial parcels of land at each site. All three sites have the necessary characteristics for development of HPC data centers, but also sit in locations with demand response programs that would allow us to monetize the flexibility of curtailment used in Bitcoin mining operations, if necessary. With these sites, we have a lot of optionality, which is exactly where we like to be positioned in front of trends with the potential for massive growth. As you can see, our evolution as a development company has occurred rapidly so far. We are building on our demonstrated success of originating the best sites and power deals in Bitcoin mining and bringing that expertise to the traditional large-scale data center market. As that market is evolving and forcing large tenants to go to nontraditional areas for the scale they need now, it feels like the entire market is moving towards us. As we finalize our plans for Black Pearl and Barber Lake and define our long-term ambitions at the sites further out in the pipeline, we are extremely confident in our positioning. So why are we so confident in our positioning? While we don't yet have specifics to confirm today on our current HPC business negotiations, a simple review of current market conditions and the economics of operating GPUs demonstrates why there is so much interest in our sites. We have talked about the scarcity of overall capacity given the current and projected growth in the data center industry and the dearth of large-scale sites in particular. Against that backdrop, we have two of the largest suitable sites available that can be used as HPC data centers before the end of 2025. Hyperscalers that want their own large site have few options in the market if they want to operate within the next three years. And the general view among those companies is that they are in a race to win AI supremacy and need to accelerate development as quickly as possible. Mark Zuckerberg recently said that he would rather risk building capacity before it is needed rather than too late given the long lead-times for spinning up new infrastructure projects. Hyperscalers can currently generate tremendous revenue from investing in GPUs. This year, NVIDIA has estimated that companies can generate $5 to $7 of revenue over four years for every dollar spent on their GPUs. To our potential tenants, Cipher can offer two extra years of operations on up to 600 megawatts across our Black Pearl and Barber Lake sites at a critical point in the race compared to waiting for other sites to be ready. The additional potential profit for tenants from that time acceleration amounts to many billions of dollars. These are the exciting market dynamics that are currently driving interest in our data center sites and ultimately, giving us great confidence in the success of our HPC business. We expect to sign a long-term lease with a high-quality tenant that will generate substantial returns to Cipher shareholders, and I look forward to updating everyone when we have more specific details to share. With that, I'll turn it over to our Chief Financial Officer, Ed Farrell.

Thank you, Tyler, and hello to everyone on the call. I'd like to begin by sharing some high-level thoughts on our recent site acquisitions, which are a critical part of our HPC initiative and represent significant investments for us this quarter. As Tyler has mentioned, being a leader in this space requires not only great sites but also an experienced team and strong expertise in financing. The ability to secure such attractive sites is a direct result of the foundational work we did when we established the company. Although we are still in the early stages of our HPC initiative, we believe the strength of our team, our balance sheet, and our tech stack are key elements that will position us as a leading developer of HPC data centers. The strategic investments we've made in these areas have enabled us to act swiftly and capitalize on unique opportunities like Barber Lake. Turning to earnings, it comes as no surprise that the third quarter was a challenging one given that it was the industry's first full quarter post-halving. Revenues were down. However, we remain encouraged by the business's underlying performance and the company's overall growth trajectory. Our access to low-cost fixed price power and our strong balance sheet continue to be critical strengths in maintaining a solid financial position. Slides 19 and 20 give a snapshot, which we provide every quarter of some of our financial metrics on both sequential and year-over-year basis. Let's move on to Slide 21 and dive into the numbers in more detail. Similar to last quarter, we encountered significant industry headwinds, including a record low hash price and a rising network hash rate. For the quarter, we recorded a GAAP net loss of $87 million compared to a loss of $15 million in the prior quarter and $19 million in the same quarter last year. In the current quarter, we mined 396 Bitcoin, generating revenues of $24 million at an average price per Bitcoin of $61,000. This compares to 563 Bitcoin mined in Q2 2024 at an average price of $65,000, resulting in $37 million in revenue, a sequential decrease of 35%. Year-over-year, revenues decreased by 20%, primarily due to the halving, the decline in Bitcoin prices, and the increase in the network hash rate. As I mentioned earlier, our fixed price power remains a critical factor in maintaining attractive unit economics. In the current quarter, our cost of revenues increased by 5% sequentially. This increase was primarily driven by one-off expenses related to the fleet upgrade at Odessa. Excluding these, our cost of revenues remained flat quarter-over-quarter, thanks to our fixed price PPA at Odessa. We'll discuss the quarterly pricing of the PPA in more detail later, but its true value is evident in the low-cost fixed price power, which is reflected in our cost of revenues. Moving on, as you recall, we adopted the new crypto fair value accounting standard in 2023. And with the drop in Bitcoin price in the quarter, we recorded an unrealized loss of $22 million on the fair value of our Bitcoin holdings. However, this mark-to-market loss was offset by $20 million of realized gains from the sale of Bitcoin in the period. This resulted in a net loss of $2 million, which is reported in the financials. Our philosophy towards the growth of our Bitcoin inventory and our approach to treasury management has not changed. We maintain an opportunistic approach, continuously evaluating various funding options to support our growth initiatives. While our general aim is to grow our Bitcoin inventory over time, our decisions are driven by market conditions and our overall capital allocation strategy. We actively assess the markets to identify the most attractive sources of capital, carefully considering the advantages and disadvantages of different funding methods to support our business and expansion plans efficiently. This may involve using our cash reserves, Bitcoin holdings, or issuing equity. An example of this approach during the quarter was the acquisition of Barber Lake, which we funded through the sale of part of our Bitcoin inventory. While we remain highly constructive on Bitcoin, using our Bitcoin holdings to fund the acquisition was an optimal choice. As Tyler has said, we exchanged one rare and valuable asset for an even more rare and valuable one. As of September 30th, we held 1,508 Bitcoin in our treasury. As in previous quarters, I'd like to spend a minute on G&A expenses and our philosophy for managing these costs. On a quarter-over-quarter basis, these expenses remained relatively flat. Compensation and benefits decreased $1 million sequentially to $15 million. This was primarily driven by a decrease in share-based compensation. The current quarter versus the prior year quarter decreased 14%, also due to a decrease in share-based compensation expense. Now, on to general and administrative expenses, which include IT, corporate insurance, professional fees, occupancy, and other public company expenses. Sequentially, these costs remain relatively flat. On the current year quarter versus the prior year quarter, these expenses were up 31%, driven by professional fees and public company expenses, primarily related to Sarbanes-Oxley compliance. As we've discussed last quarter, we have made significant investments in both our team and technology stack, which we believe are crucial to our long-term success. These investments have already proven to be key differentiators in the early stages of our HPC initiative. We expect them to continue to drive future top-line growth, ultimately having a positive impact on our bottom line. Depreciation and amortization expense totaled $29 million, an increase of $9 million or 41% from the prior quarter and a 77% rise compared to the third quarter of 2023. The sequential increase was driven by the recent change in our depreciation schedule for our mining rigs. As a reminder, we had previously accounted for the depreciation of rigs over a 5-year period. However, given our recent fleet upgrade and rapid efficiency gains with next-generation rigs, we now believe that the three-year depreciation schedule is more appropriate. Our expectations for upgrade cycles and our ability to purchase and install much more efficient machines have evolved, and we believe this should be reflected in our accounting treatment of the entire fleet. We made this change in the second quarter and accounted for it prospectively. Now, let's turn to our non-GAAP measure slide where we reconcile our adjusted earnings. As always, I'd like to remind you that adjusted earnings exclude the impact of depreciation and amortization, the non-cash changes in the fair value of our derivative asset, deferred income tax expense, the non-cash change in the fair value of the warrant liability, share-based compensation, and other non-recurring gains. These supplemental financial measures are not measurements of financial performance in accordance with U.S. GAAP. However, we believe that these non-GAAP measures may be useful to investors for comparing our performance across reporting periods consistently. Internally, management uses these non-GAAP financial measures to better understand, manage, and evaluate our business performance and to facilitate operational decisions. When adjusting our third quarter GAAP net loss, we had $84 million for the items I just listed. This brings us to an adjusted net loss of $3 million for the quarter compared to an adjusted net loss of $3 million in the prior quarter and $2 million of net income in the third quarter of last year. Now, let's turn our attention to the balance sheet at September 30th. Our total current assets amounted to $152 million. Our cash position came down to $25 million, a decrease of $97 million from the close of the second quarter of 2024. Our liquidity position as of September 30th is $121 million, comprised of $25 million in cash and $95 million worth of Bitcoin. During the quarter, we made significant investments with the purchase of Barber Lake for $67.5 million, $94 million in deposits for miners, and $36 million for the development of Black Pearl. I'll quickly cover some of our balance sheet line items at September 30th. Prepaid expenses amounted to $3 million. This is primarily related to corporate insurance. We reported a Bitcoin balance of $95 million, reflecting the 1,508 Bitcoin held in treasury. This figure marks an increase from the 780 Bitcoin held at year-end 2023 valued at $33 million. In the third quarter, we liquidated 1,167 Bitcoin or $69 million. Now, I'd like to turn our attention to the value of our Odessa power contract, which we record as a derivative asset. As we've discussed previously, this contract provides us with significant competitive advantage, enabling us to be a low-cost producer of Bitcoin. To recap, we began reporting a third-party mark for this agreement in the third quarter of 2022. This mark is recorded as a derivative asset on our balance sheet and is reevaluated each reporting period. Essentially, it represents the in-the-money value of the contract based on time value and prevailing forward power prices at our Odessa facility. As we remind investors each quarter, seasonality and the gradual expiry of the contract impact the asset's pricing, leading to expected fluctuations in quarterly valuation. Given the unexpectedly mild summer we experienced in Texas and the corresponding drop in forward power curve, we have seen a significant quarter-over-quarter decline in valuation. However, while this lower mark is reflected on our balance sheet, in no way diminishes the substantial value and competitive advantage the contract provides by securing low-cost fixed price power at our Odessa site. As of September 30th, this asset was valued at $74 million, reflecting a $49 million decrease in the third quarter and a decrease of $19 million from year-end. This change is recorded as a loss on our statement of operations. As always, fluctuations in the fair value of this contract will impact our GAAP earnings, but we exclude it from adjusted earnings. This is particularly important to note given the lower mark contributes to more than half of the net GAAP loss for the quarter. Other significant assets include property and equipment totaling $311 million, primarily attributable to our Odessa facility. Within this category, mining rigs and related equipment account for $182 million, leasehold improvements are valued at $138 million, land of $25 million, infrastructure of $33 million, and construction in progress of $56 million. These figures are net of $123 million in accumulated depreciation. Deposits on equipment of $145 million primarily consist of progress payments we've made in accordance with previously announced mining rig purchases. Additionally, we hold intangible assets totaling $26 million with $24 million attributed to the ERCOT approval at Black Pearl and Barber Lake and the remaining $2 million related to capitalized software. At the end of the third quarter, our equity investee interest in Alborz, Bear and Chief JVs stands at $55 million, and we had operating lease obligations of $11 million. We had security deposits totaling $15 million, which represent the encore deposits related to the construction of our Black Pearl and Barber Lake data centers. There were no significant changes to the liability side of the balance sheet from year-end. And as we've reported in the past, we have no debt that hinges our capital structure. As always, we look forward to updating you in greater detail on our growth plans over the coming quarters. I will pause now and Tyler and I are happy to answer your questions.

Thank you. Our first question comes from Mike Grondahl with Northland. Your line is open.

Thank you, and congratulations on the development pipeline. You've made a great deal of progress recently. Tyler, I wanted to ask how you are considering capital allocation going forward between Bitcoin mining projects and HPC projects, given the two good opportunities. How are you thinking about that?

Thanks for the question, Mike. It's a relevant topic that’s been on our minds a lot. The best way to respond is to say we’re focused on maximizing shareholder returns, which drives our decision-making. Both Bitcoin mining and HPC hosting are strong operating verticals, but they differ significantly. Bitcoin mining is influenced by a cyclical market with events like halving, chip upgrades, and market fluctuations. In contrast, the HPC hosting business is more stable, as we aim to establish long-term leases with high-quality counterparties, leading to dependable cash flows that can be financed through debt. Bitcoin mining faces challenges because it is viewed as volatile, with significant correlated risks associated with hash price fluctuations and Bitcoin value. The HPC business presents a different risk profile. If you have solid counterparties, you can achieve high loan-to-cost ratios. Our focus is on maximizing value; these revenue streams will be perceived differently by investors, but they complement Bitcoin mining well. Recently, we've excelled at identifying large-scale sites that may have been overlooked, and the market dynamics are shifting, with HPC needs overlapping with areas traditionally used for Bitcoin mining. As we look ahead, Cipher is positioning itself as a data center development company with a built-in hedge. If the HPC market cools, we have sites suitable for Bitcoin mining, which we can manage effectively. I anticipate continuing both business streams, focusing on specific opportunities as they arise.

Got it. That's helpful. And then in terms of some of your initial discussions with HPC customers, hyperscalers and really financing partners, I mean, are you getting past the initial stages of those discussions? Kind of where are those? And how are they developing?

Let me provide a general overview, as I need to be cautious about the specifics. In the marketplace, you typically have a client looking for a long-term lease, around 15 years or more, and they will pay a percentage of the total cost to build at the site, which includes the site's value. This percentage will generally range from the high single digits to the mid-double digits annually. There are additional complexities, such as the value of the sites you're contributing, which might differ from what you originally paid, since we acquired them at advantageous prices. For instance, we've had several offers for Barber Lake that significantly exceed our purchase price. The terms of the lease depend on the credit quality of the client; better credit could mean a lower percentage of the lease payment, while those further down the credit quality scale might see rates in the double digits. The financing market is robust, especially with a solid lease in place and a known client. The financing capacity is influenced by the credit quality and specifics of the deal. I can say we’ve received considerable interest and are engaged in advanced discussions. While I can’t share too many details, we are confident in the marketplace and the interest we've garnered will help us finalize these initiatives successfully.

Great to hear. Thanks again.

Our next question comes from Paul Golding from Macquarie. Your line is open.

Thank you very much and congratulations on the development pipeline. I have a quick question about Black Pearl. Considering the discussions you are having with potential HPC tenants, has there been any change in your perspective on Black Pearl regarding the possibility of integrating some HPC earlier if there is sufficient demand? I also have a follow-up question. Thank you.

Sure. So, the way we are operating right now is that Black Pearl construction is going full speed ahead with the envisioned 300-megawatt Bitcoin mining data center that we have planned, and everything is on track. I think that large-scale sites that are energized in 2025 are so rare that we have received a lot of unsolicited reverse inquiry on the site for hosting HPC. And so what I'd say is we're flexible. Again, we're kind of driven by what we think will produce the best returns for the company. If someone wants to offer the moon and the stars for Black Pearl, and we think it will produce a better investment return than building the Bitcoin facility there, we'll certainly entertain those offers. So, it's hard to say what may happen all the way at the end when it's up and running, but nothing has changed about our process, and we've got hundreds of folks working out there every day making the progress that we showed in the pictures of the presentation.

Thanks. And then when I think about Black Pearl, it has 250 air-cooled, 50-megawatt split for liquid cooled. Is there anything to glean from that in terms of how you see data center development bifurcating? Is there the potential for that site to pivot maybe more over time towards liquid cooled if you're looking to be positioned well for GPUs, direct-to-chip, et cetera? How should we think about maybe more macro for your whole fleet in terms of how you're approaching liquids since historically you've been air cooled? Thanks.

Great question. So, we view it as really important to have hydro as something that we do. Candidly, when we have modeled out investment returns and you look at the difference in CapEx and the spend for hydro, I'm not sure you're going to make it back in Bitcoin mining. And so that's why we have generally favored doing air-cooled. We just think the ROI works better. We're pretty good at managing a fleet of air-cooled machines. That said, the industry more broadly, the data center industry is certainly moving there over time. And I think given that we've got such a large-scale site at Black Pearl, it was our view that we should do something meaningful there in hydro so that we have credible experience managing that. And exactly as you suggested, Paul, we want to be prepared for a world where everything is direct-to-chip cooled, and we've got operational experience that we can show off doing that. And it will be interesting to see how that progresses and to check in on where the ROIs are over time on those megawatts versus the other megawatts to check our assumptions in our modeling.

Our next question comes from Mike Colonnese with H.C. Wainwright. Your line is open.

Hey good morning guys. First one for me is a bit of a follow-up to the previous question there. So it sounds like you're open to utilizing a portion of the capacity at Black Pearl for HPC. So, I'm curious how that would impact your 2025 hash rate outlook, which currently calls for 35 exahash a second, assuming you find a great deal on the HPC side?

Thanks, Mike. The projection of 35 exahash by the end of next year includes the complete build-out for Bitcoin mining at Black Pearl, which is estimated to contribute around 21.5 exahash to that total. To address your question, the impact on our hash rate outlook would depend on how much of that capacity we allocate to HPC, which would lead us to reduce the hash rate proportionately based on the repurposing of the site. From our standpoint, we are not altering our scheduling or the progress we’re making. The market is still determining the pricing for large-scale sites that can be operational by 2025, and the trend is consistently positive, showcasing significant enthusiasm for such sites. Therefore, we want to emphasize that if a more advantageous opportunity arises, we may consider reallocating a part of that hash rate for a better option. However, as currently anticipated, we expect to achieve 21.5 exahash from Black Pearl by the end of next year.

Understood. I appreciate the information. Could you please remind us of the remaining capital expenditure needed to complete the full build-out at Black Pearl and how that figure could change, particularly if part of that capacity is designated for high-performance computing, as we move through the upcoming quarters?

It's difficult to provide exact details on what might happen. However, I can share some insights regarding Black Pearl from a Bitcoin mining viewpoint, which is clearer. This site operates at the front of the meter, meaning we don't have any take-or-pay commitments aside from meeting certain minimum megawatt levels for specific deposits we've made. For the first phase, which covers the initial 150 megawatts, we still need to invest around $77 million in infrastructure. If we plan to expand to the full 300 megawatts for Bitcoin mining, that cost would roughly double, excluding the mining rigs. Regarding the rigs, if we go for the complete build-out to reach 21.5 exahash as intended, we have options to purchase rigs at competitive prices, including the S21 XPs from Bitmain and the latest Canon machines. If we decide to acquire all those next-gen machines, the total cost would be about $340 million. However, these options are not mandatory. Currently, we're upgrading Odessa and disconnecting around 4.5 exahash of machines that can be repurposed elsewhere. At a front-of-the-meter site, we can run curtailment and still operate profitably. Our aim is to fully invest, secure state-of-the-art machines, and leverage what we anticipate to be a Bitcoin and Bitcoin mining bull market next year. If situations change or do not meet our expectations, we have manageable obligations, allowing us to adjust our plans as needed.

Really helpful color. Appreciate taking my questions, Ed.

Our next question comes from Bill Papanastasiou with Stifel. Your line is open.

Yes, good morning gentlemen. Congrats on the recent developments with your hyperscaler discussions and thanks in advance for answering my questions. For the first one, just hoping you could share some more color, Tyler, on the amount of capacity that these hyperscalers are looking for demanding. Do you have a potential customer in mind that is considering multiple sites? I'm just curious to hear how advantaged it has been to have one of the largest pipelines in the Bitcoin mining space? Thanks.

Let me give some color. So, at least in some of the discussions we have had, there seems to be a very outsized focus on 2025 capacity that effectively like near-term quotas have not been met at some of those very large users of compute. And so the real focus has been on what's available sooner in the pipeline. That lines up very well for us, as I mentioned, that we can sort of potentially expand to other pieces of that business over time. But our first attempts will be, let's call it, on a little bit more just the vanilla hosting kind of version of the business. Most of them screen for sites that are at least 100 megawatts. I think that's a general screen and sometimes it's even bigger, 150 megawatts. I don't know how much more color I can give than that other than we've got, I don't know, a half dozen folks have expressed interest. Some of that has been reverse inquiry and they found us. And certainly, as I've mentioned with Black Pearl, we really went into those discussions knowing how fantastic and rare Barber Lake is. It's only after some of those discussions progressed and they got to know us that people have been pretty aggressively asking also about Black Pearl. But that's generally kind of the state of the world.

Okay. Awesome. I appreciate the color there. And then just sticking with the power portfolio or power strategy, can you share some data points in terms of how the level of difficulty has changed to secure greenfield sites in Texas over the recent quarters? And how important will it be to secure more capacity at this point now that you have roughly 2 gigawatts of unallocated power, yet you're seeing a number of hyperscalers getting anxious due to the long lead-times? Thanks.

Certainly. Having a portfolio of 2.5 gigawatts is substantial, and we’ve identified numerous opportunities because Bitcoin miners often use these large sites. We have developed expertise in locating them, but it’s becoming increasingly difficult to find new ones. The sites we do discover often come with some complexities. While we actively participate in broker deals and regularly submit bids, we've never reached the final bidding stage for heavily marketed properties, which aren't our focus. We typically focus on sites that require quick closure and have complicated histories that involve various stakeholders struggling to reach an agreement. These situations allow us to create significant value. Our track record in site acquisitions has been strong, allowing us to successfully secure sites, although we may not win every bid. Looking at our recent progress, it’s evident that finding sites is getting tougher. The options for the three sites we mentioned are at an earlier development stage than we usually engage with. Normally, we acquire greenfield sites that have approved interconnections, but due to the tightening market conditions where all aspects seem to complicate access, we are entering development cycles earlier. We have managed to secure favorable rates for these data centers, albeit with some uncertainty regarding their overall approval size. We are confident these three sites will successfully secure significant interconnects, with each applying for 500 megawatts, and our pricing is fixed based on the megawatts approved. As I noted earlier, speaking with system operators reveals that hyperscalers are heavily pursuing large-scale sites, and grid operators are indicating that this demand is beyond what they can accommodate without ensuring generation matches the load. This shift is evident in actions like Microsoft’s acquisition of Three Mile Island, which reflects their desire to ensure sufficient power generation aligns with their grid usage. If this trend continues, obtaining large-scale interconnects will become increasingly difficult, which enhances the value of the sites we are acquiring. While there’s currently less pressure from hyperscalers regarding the 2027 sites—they're chiefly focused on immediate needs—we anticipate this will evolve, prompting us to act earlier in securing future capacity.

Thanks Tyler. That’s great. Appreciate it.

Our next question comes from John Todaro with Needham & Co. Your line is open.

Thank you for taking my question. I have two questions for you. First, in the prepared remarks, Tyler mentioned several potential paths for HPC. It appears to be a significant capital expenditure, so I'm curious if you plan to allocate any capital towards creating a dedicated site without having a lease in place from a customer or a major lease. I also have a follow-up question.

I believe we will incur some basic capital expenditures to prepare a site, such as grading and similar tasks. For future locations, we may also need to set up a substation. The infrastructure for high-voltage to mid-voltage looks similar across different sites. We are unlikely to construct a data center without a tenant in mind at this stage in our development, as discussions reveal that tenant-specific design and construction requirements are crucial. Thus, building something speculative and hoping it meets potential tenant needs is probably not the approach we would take now. Instead, I envision that we would secure a term sheet or letter of intent with a tenant that clearly outlines their design and build requirements. Progress would be made towards finalizing an executed lease, and when it comes to financing, we would aim to cover as much of the build cost through debt as possible. While we anticipate some expenditures between securing a letter of intent and finalizing a lease, we believe there are numerous options to secure that funding. Several parties have approached us with various financing solutions for these capital expenditures, so we find those options very accessible.

I understand. That's helpful. I have a follow-up question. There has been some discussion about 2025 HPC. It seems like we would need to move quickly. Are we looking at something that would be finalized in 2025, with revenue generation starting for the customer or through the lease more likely in 2026? It feels like there might not be enough time to establish a site to meet the 2025 demand.

Yes. No doubt that if you're starting from scratch, that's going to be challenging. But the thing about Barber Lake, of course, is that the substation is sitting there and humming. So, it's really the downstream construction from there, and that is typically a long lead-time gating item. After that to figure out a time line, it's a little bit build and customer specific. If it's a customer that wants five 9s of uptime from day one, the long lead time item is going to be generators and you're probably not going to be getting generators in 2025 until maybe you'd get some at the very end of 2025. But that would be the other question. If they are willing to run with, say, three 9s of uptime forever or in advance of receiving generators, you could be up and running by late next year, at least you could be getting started, theoretically, but you would have to move quickly. I think the one other thing to mention is there's a lot of different models of this business. There are some clients that have their own design and all their own equipment, and you're not procuring it. You are providing basically the land and constructing the shell for them on a build-to-suit basis, but they may be sitting on an inventory of generators. So, in that case, it's really just the construction time line, which admittedly is many months. It's going to be very late 2025, but that is doable. So, it depends a little bit on the tenant.

Understood. Appreciate that. Thanks guys.

Our next question comes from Reggie Smith with JPMorgan. Your line is open.

Hey, thanks for taking the questions. Todd, a question for you. Obviously, there's a lot of interest in HPC. We've seen some longer-range deals from nuclear plants announced. We've seen, I guess, one big deal of Core Scientific announced with CoreWeave. But I guess my question for you, Tyler, are you surprised and it kind of builds on the last question. Are you surprised at the pace of development in kind of the near term? Because again, like if things aren't signed soon, it becomes very hard for something to be up by 2025. What do you think is causing HPC application users to hesitate? Or why hasn't a deal been signed yet? Is it just nailing down the pricing? Or like what are some of the things that are kind of going through their heads as you kind of see it?

Well, I mean, I'd say based on our experience, there is a fair amount of diligence. So, there are site visits. There's a fair amount of study of geotech studies, things like that, understanding the sites, the risks. The companies that are spending billions of dollars on this also tend to be very large companies with hundreds of thousands of employees. And frankly, while there's a lot of enthusiasm to go quickly, and again, if you listen to the earnings calls of the hyperscalers, you can hear about the revenue, the CapEx investments, et cetera, related to their cloud services. So, I think that's kind of the big picture driver of why they're in a hurry. I think between diligence and just working with large organizations, these things take time. These leases are complex. It's not we're a very nimble company that does self-mining. So, it's very easy for us to execute quickly here. Other things are a little bit more bureaucratic. I mean also, not for nothing, there is a bit of a dating process. They've got to get to know us. I would say, look, broadly speaking, the Bitcoin mining industry in general has, by design, built things on the cheap. We are at the low end of the revenue spectrum for data centers, often very high margin, but that margin is driven by squeezing costs out of builds. And that is very different than the high end of the revenue spectrum where building five 9s of uptime requires a level of attention to detail and craftsmanship that I would say not every company in this space has. We happen to be blessed with a very talented and experienced construction and operations team that have worked at places like Google and Meta on their data centers. And so I think in the diligence process, we show very well. It's part of the reason for my confidence in addition to having these great sites is we have a team that impresses. And so I think overall, since your question is kind of about the industry, I think those are some of the reasons I would imagine. And I would imagine if we're not leading the charge, I know there are other folks that are involved in these types of discussions as well. And given just the setup in the marketplace, I'm confident you'll probably see multiple folks with these deals, but I'm extremely confident in our prospects.

Thank you. Our final question comes from Greg Lewis with BTIG. Your line is open.

Yes, good morning and thank you for having me. I'll keep it brief. Tyler and Ed, you mentioned the write-down in power. Could you share your thoughts on the potential power book as we consider the 2026 electricity pricing in Texas? It seems to be at a two-year low within a certain range. How are we approaching this? Will we continue on this path? I've heard from some miners that prices are low, and they feel it's better to be in the spot market rather than hedging as much as we previously considered.

It's a good question. We're always looking for the best ways to secure margins. Sometimes that means participating in the spot market, and sometimes we get the chance to enter into fixed price contracts. Regarding the contract and the situation in ERCOT, it's important to mention that the power contract is marked to market each quarter, influenced by the time left and the forward pricing curve for the upcoming years. This contract has consistently been beneficial for us, as we've hedged at favorable prices. Last summer, in the second quarter, forward prices reached peaks not seen before, which significantly affected the contract value. We always adjust our earnings by removing that mark-to-market aspect as it is a non-cash item and tends to fluctuate. The main takeaway is that we are still paying $0.027 per kilowatt hour for power, which highlights the contract's true value in our ongoing operations. Recently, forward prices decreased from their summer highs, and we have also seen a decrease in the time value on the contract. On a broader scale, the market is continually evolving, impacting both the Bitcoin mining sector and potential developments in high-performance computing. If grid operators resist large loads without sufficient generation, and high-performance computing users do not want to wait for new generation capacity, we might see scenarios where, especially in Texas, solar generation peaks in the afternoons during hot summer days, leading to price spikes. In such cases, we could potentially switch between generators and backup power without relying on the grid, thus managing HPC loads more effectively. We're optimistic about advancements like this since we have extensive experience in Bitcoin mining and believe we can leverage that expertise. This past summer highlighted significant growth in battery usage in Texas, altering power dynamics that will continue to progress. Our adaptability has always been a strong asset, and we anticipate it will remain so.

Thank you. I'll turn it back to Tyler for any closing remarks.

Yes. Thank you, everyone, again, for joining. We're very excited about the future and look forward to providing more updates as soon as we can. Thank you. Happy Halloween.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.