Earnings Call
Cipher Digital Inc. (CIFR)
Earnings Call Transcript - CIFR Q1 2024
Operator, Operator
Good day and thank you for standing by. Welcome to the Cipher Mining First Quarter 2024 Business Update Call. Please be advised that 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.
Joshua Kane, Head of Investor Relations
Good morning. And thank you for joining us on this conference call to discuss Cipher Mining's first quarter 2024 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 the market potential of our business operations, potential competition, and our goals and strategies. The forward-looking statements and risk 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?
Tyler Page, CEO
Thanks, Josh. Hello, this is Tyler Page, CEO of Cipher Mining. Thank you very much for joining our first quarter 2024 business update call. Let me begin the call with a few summary financial statistics from our outstanding first quarter of 2024. Our CFO, Ed Farrell, will give a full breakdown of our numbers during his portion of the call. But I wanted to highlight our continued strong performance during the first quarter upfront, because it represents our second quarter of operating our full initial data center portfolio, and it is our second sequential quarter of growth in positive revenues, GAAP net earnings, and adjusted earnings. We continue to believe that the best way to evaluate the success of a public Bitcoin mining company is to look at the financials the company files with the SEC. There are important growth narratives and key performance indicators that are not always encapsulated in backward-looking numbers, but ultimately, it's the numbers that validate the story. Cipher's progress continues at full pace. Quarter-over-quarter we improved revenues from $43 million to $48 million, GAAP net earnings from $11 million to $40 million, and adjusted earnings from $28 million to $63 million. We are very proud of our continued record-breaking numbers, and with the fourth Bitcoin Halving now behind us, we believe that the relative advantages of being a low-cost producer of Bitcoin will only increase going forward. As of the end of April, Cipher held 2,033 Bitcoin in inventory, and $96 million of cash, while our total self-mining hash rate has grown to 7.7 EH/s. For the literary minded among you, you will recall that T.S. Eliot shared that April is the cruelest month, and he may as well have been speaking about Bitcoin miners in 2024, as the halving reduced the block rewards of new Bitcoin to 3.125 bitcoin per block. In order to address this known impact to Bitcoin revenues, Cipher has been built to succeed with approximately 96% of our portfolio energized through fixed price power, and an industry low cost of electricity of roughly $0.027 per kilowatt hour. As a reminder, electricity represents the large majority of our operating costs, and our low price is a key driver of our best-in-class unit economics. As we bring online our planned site expansions at our Bear & Chief data centers, and complete the full Black Pearl site in 2025, we expect our overall rig fleet efficiency will improve from 29 J/TH currently to 22 J/TH. With a combination of cheap hedged power costs and an efficient fleet of rigs, Cipher has a sustainable business model that is positioned to survive downturns while benefiting from operational leverage in rising profitability environments. We have been very busy expanding our production capacity over the last few months. Slide 5 shows construction progress at our Bear & Chief Data Centers. Bear's infrastructure is now complete, and the first new rigs will be delivered onsite this week, with full completion of the expansion expected to be completed this month. Chief's infrastructure is expected to be completed in June, and we expect full energization and operations at the site by the end of June. These two on-time expansions will add a total of roughly 1.25 EH/s of self-mining to our portfolio. Once we are finished with the Bear & Chief expansions, our full attention will be on Black Pearl. But before we began a progress update of Black Pearl, I want to take a detour into our past with some pictures from the progress we made while constructing our Odessa Data Center. Odessa began life as 50 acres of dirt and mosquito in late 2021, and a year later, our team of construction experts transformed it into our flagship data center. Take a look at just how different a site can look and operate in a year's time. With that in mind, let's turn to Black Pearl. The next two slides showed the beginning of work at Black Pearl, and a rendering of what we expect the completed data center to look like. Remember that we are scheduled to energize the site in the second quarter of 2025. The time difference between now and our scheduled energization at Black Pearl is about the same as the time difference between the pictures on the previous slide of the Odessa Data Center construction. We have done this exercise before with the same team. Long lead time items are secured, and we fully intend and expect to continue our habit of on-time execution. Within the Bitcoin mining industry, Cipher has proven uniquely capable of identifying and negotiating the acquisition of Greenfield sites, structuring optimal power arrangements, and then building best-in-class data centers all the way to completion. This process takes longer than simply signing a hosting agreement or buying a completed facility, but we believe it delivers the best return on investment in the long run. With an eye toward delivering the best returns to our shareholders, I am pleased to share that we have accelerated our building plans at the site and plan to energize in 2025, not only the first half of our total capacity of Black Pearl, but the full 300 megawatts available. Slide 8 shows a 3D rendering of the data center we expect to see at Black Pearl in 2025. Slide 9 is a high-level overview of a Bitcoin Mining Business that we like to include each quarter to remind everyone how our business model works. 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, the majority of our operating expenses is 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 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. That illustration hopefully gives you a good sense of a straightforward Bitcoin Mining Business. Cipher however does have an additional element to our business that is incredibly valuable. We have the ability to sell power back to the grid at our Odessa facility. Our power purchase agreement gives us a combination of downside risk protection, as well as upside optionality to our revenue streams that doesn't exist for most Bitcoin miners. Let's now turn to Page 10 and look at some recent Bitcoin market events. A lot has happened since our last business update. We have seen all-time highs in both bitcoin price and network cash rate, as well as the halving and a brief period of skyrocketing transaction fees related to the launch of the Runes Protocol thereafter. Now that the halving has passed, we are seeing the anticipated squeeze on minor economics, and we at Cipher are witnessing firsthand the benefits of being a large low-cost producer in real-time. We believe that the supply and demand dynamics of Bitcoin, given the halving of new supply coming to market, will likely eventually produce Bitcoin price appreciation as seen in previous halvings. We have also been encouraged by the enthusiasm for the U.S. Bitcoin ETFs thus far, as a driver of potential new demand. With the squeeze on minor economics, we have seen a pickup in acquisition discussions over the last several weeks, and we are engaged in several ongoing reviews of opportunities. We continue to have a disciplined focus on potential return on investment in our evaluation, and we are looking for opportunities where Cipher's unique strengths can unlock extra value. As we move forward, Cipher is focused on finishing the expansions at Bear & Chief while ramping up the build-out of Black Pearl, and selectively looking for new growth opportunities via acquisition. On Slide 11, we give a portfolio overview of our existing data centers and the timeline for expected scaling of our data centers and expansion in our self-mining hash rate. In the first quarter, we paid an average all-in electricity cost of $11,912 per bitcoin produced at our data centers. We are very proud of this number, and it drives our best-in-class unit economics. Please note that when some of our competitors talk about these costs, they only include electricity and not transmission and other charges. In contrast, 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 transmission and other charges, and our low numbers dramatically demonstrate our competitive advantage. On the left side of this slide, you have an overview of our 4 current data centers, along with our all-in electricity cost per bitcoin at the respective sites for the first quarter. The charts on the right side of the slide give you a graphic illustration of the amount of megawatts we manage related to our self-mining operations and the hash rate produced by those operations, as well as the additional growth opportunities in the coming 1.5 years. As discussed, in 2025, we anticipate bringing on the full capacity of the Black Pearl site. At this point, we will turn to production by site. On Slide 12, you can see a picture of our Odessa facility. Odessa is the most significant part of our portfolio as it represents approximately 90% of our Bitcoin production. Odessa is a wholly-owned facility with a 5-year fixed price power purchase agreement and some of the lowest cost power in the industry. We report a third-party independent valuation to give investors a sense of how much value is represented in the fixed-price power contract alone, and that contract continues to be valuable and differentiating for us. As always, Ed will talk more about it in his remarks. We currently generate approximately 6.7 EH/s at the site, utilizing approximately 207 megawatts. We have mined roughly 1,183 bitcoins at the site year-to-date through April 30. On Slide 13, we show a picture and highlights from our Alborz Data Center, which we believe is a truly unique site. Alborz is 100% powered by wind and is a joint venture that we share with our energy provider. It currently has a total operating capacity of 40 megawatts when the wind blows. That 40 megawatts powers roughly 1.3 EH/s of rigs. Alborz has mined approximately 168 bitcoins year-to-date through April 30. Roughly half of that total capacity in site production belongs to Cipher. We expect to supplement the wind production at Alborz with a grid connection by the end of the second quarter. This grid connection will allow us to bring our uptime at Alborz in line with Bear & Chief, and most importantly, generate more Bitcoin with the existing equipment at the site. We currently target roughly 75% uptime at the site. And with the supplemental grid connection, we anticipate our uptime will be closer to roughly 95%. Slide 14 shows operational highlights from our Bear & Chief Data Centers. Combined, the sites operate 20 megawatts, which can generate approximately 0.7 EH/s. Bear & Chief are also structured as joint ventures and feature shared economics similar to Alborz. Unlike our other sites, which have behind-the-meter power arrangements, Bear & Chief are set up in front of the meter at a location in Texas that typically features attractive market prices, and we are excited to report on their production next quarter when they will each be 4x their current size. As you can see, we are extremely busy at Cipher, as always. We have been a company focused on long-term success since day one, and our disciplined approach, strategic decision-making continues to differentiate us. In the post-halving environment, the value of our low-cost producer model is clear. We believe our ability to identify attractive electrical interconnection opportunities at greenfield locations, and manage their evolution all the way to the state-of-the-art data centers we operate makes us unique. We are thrilled to have 2 consecutive quarters of GAAP profits. And the way we are going to celebrate is to keep investing in the expansion of the business. At this point, I'll turn it over to our Chief Financial Officer, Ed Farrell.
Edward Farrell, CFO
Thank you, Tyler, and hello to everyone on the call. Tyler has already discussed some of the key financial metrics for the first quarter. Before we proceed with the walkthrough of the balance sheet and statement of operations, I'd like to add some further insights and context. Last quarter, we emphasized the importance of having all four of our data centers fully deployed, and we saw the beneficial effects of this reflected in our earnings. In the first quarter, we observed the continuation of many of these favorable trends, amplified by a tailwind from higher Bitcoin prices. Slide 16 and 17 are some financial metrics on both a sequential and year-over-year basis, highlighting our performance and strength of our underlying business. As you can see for both comparisons, the trends are favorable. Let's move on to Slide 18 and drill down on the numbers in more detail. In the first quarter, we experienced top-line growth, which translated into significant bottom-line results. For the second consecutive quarter, we had GAAP net income reporting $39.9 million this quarter, a sequential increase of 277% and a 976% increase from the prior year quarter when we reported a net loss of $4.6 million. In the current quarter, we mined 924 bitcoins, resulting in $48.1 million in revenues, a sequential increase of 11%. Year-over-year, our revenues increased from $21.9 million to $48.1 million, a 120% increase. A critical contributor to this revenue-to-profit conversion is our previously discussed power costs, which in the current quarter increased in step with the growth in revenues. In the current quarter, it's worth noting the cost of revenues included $1.1 million of nonrecurring costs to purchase upgrade parts to increase the efficiency of our miners. When comparing revenues in the current quarter versus the same quarter in the prior year, you can see that the cost of power on a percentage basis was well below the increase in revenues. This is primarily attributable to our fixed-price power contract at Odessa. The value of that contract rose by over $7.3 million this quarter alone, underscoring the inherent value of the power arrangement we secured at Odessa. As you recall, we adopted the new crypto fair value accounting standard in 2023, and in the first quarter of 2024, we had a fair value gain on our Bitcoin inventory of $40.6 million. I'd like to talk a bit about our G&A expenses and our philosophy for managing these costs. To provide greater transparency into our financials, starting this quarter, we further broke down our G&A expenses into compensation and benefits, and general administrative on the phase of statement of operations. In the first quarter of 2024, compensation and benefit costs were $13 million, representing a decrease of $2.7 million compared to the last quarter of 2023. Comparing the first quarter of 2024 against the first quarter of 2023, compensation and benefits increased by $1.1 million, primarily due to the rise in headcount as we grew the company in 2023. Now on to general and administrative expenses, which include IT, corporate insurance, professional fees, occupancy, and other public company expenses. We reduced these costs by $700,000 or 11% compared to the prior quarter and increased $600,000 or 11% from the first quarter of 2023, again, due to the growth in our business. Depreciation and amortization expense of $17.2 million was up $400,000 or 3% from the prior quarter and up 48% comparing the first quarter of 2024 to the first quarter of 2023. That was driven by both the full year of service for some mining rigs, infrastructure, and some new rigs that were placed into service in 2024. As Tyler mentioned, we view our ability to find greenfield sites and quickly turn them into best-in-class data centers as differentiating and our best return on investment in the long run. Right from Cipher's earliest days, we have invested in both personnel and technology because we think our model scales as we expand the aggregate amount of megawatts we manage. We believe those early investments will drive top-line growth for the future and in turn flow through to our bottom line. Now let's turn to our slide on non-GAAP measurements we used to reconcile our adjusted earnings. Allow me to remind everyone that our adjusted earnings exclude the impact of depreciation of fixed assets, the change in fair value of our derivative asset, deferred income tax expense, the change in fair value of the warrant liability, stock compensation expense, and other nonrecurring gains and losses. These supplemental financial measures are not measurements of financial performance in accordance with U.S. GAAP, and as such, they may not be comparable to similarly titled measures of other companies. We believe that these non-GAAP measures may be useful to investors in comparing our performance across reporting periods on a consistent basis. Management uses these non-GAAP financial measures internally to help understand, manage, and evaluate our business performance and to help make operating decisions. When we adjust our first quarter GAAP net income, we had $23.1 million for those items I just listed. That brings us to adjusted net income of $63 million for the quarter versus an adjusted net income of $27.8 million in the prior quarter, and $8.4 million in last year's first quarter. Thanks to our top-line growth, our discipline on costs, and our industry-leading power arrangements, the first quarter showcased strong free cash flow. These conditions, along with our access to capital through our strategic use of our ATM shelf to fund accretive expansion opportunities contributed to a significant improvement in our liquidity position and further bolstered our balance sheet and liquidity outlook. We closed the quarter with over $200 million in cash and Bitcoin holdings. Now let's turn our attention to the consolidated balance sheet. As of March 31, our total assets amounted to $250 million, an increase of $95 million from $156 million at the end of 2023. Our cash position remained relatively flat at $88.7 million, up a little bit from the $86.1 million at the close of 2023. I'll quickly touch on some of our balance sheet line items. Accounts receivable totaled $680,000 compared to $622,000 at year-end, while prepaid expenses amounted to $2.9 million, down from $3.7 million at the end of 2023. It's worth mentioning that most of these prepaid expenses are related to corporate insurance. And as discussed last quarter, we were able to significantly reduce our D&O insurance premiums. We reported a Bitcoin balance of $123.3 million, reflecting the 1,730 bitcoin held in treasury as of March 31. This figure marks an increase from the 780 bitcoins held at year-end 2023 valued at $33 million. We did not sell any Bitcoin during the quarter. Our treasury management philosophy remains a frequent topic of inquiry and our stance remains consistent. We maintain an opportunistic approach continually assessing various funding avenues for our growth initiatives. While we generally aim to increase the size of our Bitcoin inventory over time, our decisions are guided by the markets in our overarching capital allocation strategy. We constantly assess the markets looking for the most attractive forms of capital available, and we weigh the pros and cons of all the various ways to fund our business and expansion plans efficiently. This may be through our cash reserves, our Bitcoin holdings, or issuing equity. Through this constant evaluation process, we determine our estimated cost of capital and manage our treasury dynamically. We try not to be dogmatic; though we sold Bitcoin this quarter, there may be times when we sell more of our Bitcoin holdings to fund accretive growth plans. Now I'd like to shift focus to the value of our Odessa power contract, which we recorded as a derivative asset. We consistently emphasized the substantial competitive advantage afforded by our power contract at Odessa. As a refresher, we began publishing a third-party mark for this agreement in the third quarter of 2022. This mark is depicted as a derivative asset on our balance sheet, subject to revaluation each reporting period. Essentially, it reflects the in-the-money value of the contract in relation to the time value of the contract and prevailing forward power prices at our Odessa facility. As of March 31, this asset was valued at $101 million, reflecting a $7.4 million increase since the end of 2023. This change is recorded as a gain on the statement of operations. It is important to highlight that this asset is categorized into two components on the balance sheet, $34.2 million as a current asset and $66.7 million as a noncurrent asset. As always, fluctuations in the fair value of this contract will impact our GAAP earnings, but we exclude it from our adjusted earnings. Our other significant assets comprise property and equipment totaling $238.5 million, primarily attributable to our Odessa facility. Within this figure, mining rigs and related equipment account for $168.7 million, while leasehold improvements are valued at $137.5 million. These amounts are net of $75.9 million of accumulated depreciation. We also hold intangible assets amounting to $8.2 million, with $7 million attributable to the Black Pearl site and associated ERCOT approval, and the remaining $1.4 million relating to capitalized software. These amounts are net of $270,000 of amortization. At the end of the first quarter, our equity investee interest in the Alborz, Bear & Chief JVs stands at $52.6 million, and we had operating lease obligations of $6.8 million. We had security deposits totaling $23.9 million, which include the $12.5 million of collateral posted to our Odessa power provider and a $6.3 million deposit to on-core related to the construction of our new Black Pearl Data Center. There were no significant changes to the liability side in the balance sheet from year-end, and we have no debt that hinders our capital structure. Our current liquidity position as of April 30 is $213 million, comprised of $96 million in cash and $117 million worth of bitcoin. I will close my remarks by saying we're extremely pleased with our financial performance in Q1, and excited about our position as we enter this new halving epoch. From day one, we have been disciplined and relentlessly focused on our unit economics while also delivering a prudent growth strategy. These financial results reflect the value of all the careful decisions we have made. Now that the halving is behind us, I hope we'll see the markets recognize that we have deliberately built Cipher to be different from other miners. As Tyler stated, Cipher is built to survive market downturns and to benefit from operational leverage and rising profitability environments. 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.
Operator, Operator
Our first question comes from Josh Siegler of Cantor.
Josh Siegler, Analyst
Great results here. It's encouraging to see continued execution. For my first question, could you share your insights on post-halving dynamics? Have you noticed any changes in the types of deals being presented to you or how your competitors are responding? Any insights on that would be appreciated.
Tyler Page, CEO
Thank you, Josh, and good evening. I'm currently speaking from Hong Kong, where I am with Will, our Co-President, meeting with rig manufacturers and investors. I apologize if there's a slight delay on my line; I'll try to be clear in my responses. It's been intriguing to observe the dynamics following the halving. If we set aside the brief spike in transaction fees and the record daily USD revenue for miners right after the halving, the economics have settled in pretty much as we anticipated. Looking at hash price, which indicates what miners earn for their computational contributions to the network, we saw it hit an all-time daily low about a week after the halving but it has since fluctuated. It dipped to around $0.045 per terahash and has since recovered to over $0.05 per terahash per day. This development suggests a squeeze on miners; it's the lowest revenue they've experienced in terms of dollar earnings for computation. To succeed in this environment, miners need a growth strategy, the ability to upgrade their fleets, and access to capital markets for expansion; otherwise, they risk being pinched by these economics. The interplay between hash price and the cost to produce that hash indicates a tight or even negative situation for many miners. While Cipher has maintained a positive position since the halving, others are feeling more pressure. I can't specify how each company is adapting to this, but it’s clear that, as expected and in line with historical trends post-halving, the economic situation for miners is challenging. We've observed a number of other miners seeking strategic plans, largely influenced by their power costs. If those costs are high, they could face cash flow issues and need to reassess their strategies. I believe we'll likely see an increase in acquisition activities because it raises the question of how long miners with less favorable economics can endure these conditions. There’s also the potential of battening down the hatches, as historically, Bitcoin often reaches all-time highs a few months following a halving, which could alleviate some of the economic pressures on miners. Nonetheless, many are considering their future plans.
Josh Siegler, Analyst
I was wondering if you could elaborate on your plans for raising capital for the full year 2025, particularly for Black Pearl. Now that you've strengthened your balance, are you considering selling Bitcoin to fund that expansion?
Tyler Page, CEO
Let me discuss Black Pearl, and our projections are largely consistent with previous communications. For the 300 megawatt site, we estimate the construction costs to be around $420 million, which includes approximately $200 million for non-rig infrastructure and $220 million for rigs. The $220 million figure is quite reasonable, as it is based on our contract with Bitmain for 300 megawatts of rigs. We have made deposits on these rigs and have already funded some site work and payments for substations, totaling around $30 million. Our current Bitcoin balance, along with cash, amounts to about $226 million in liquidity. This leaves us with a financing gap of roughly $164 million over the next five quarters. We are confident that our positive cash flow operations, existing Bitcoin holdings, and potential access to equity or debt markets can manage this gap. Additionally, we have an equity shelf with ample capacity if we decide to utilize it. This is how we view the funding for Black Pearl, which reassures us of our ability to construct the complete data center. Regarding our approach to utilizing Bitcoin versus other capital sources, we remain consistent with our philosophy focused on building a Bitcoin treasury over time. We don't expect this to be a straightforward process; there will be instances when we may sell Bitcoin, which shouldn't be seen negatively. It doesn't reflect a shift in our long-term belief in Bitcoin's potential, but rather a strategic decision to optimize capital sourcing. We carefully assess the Bitcoin price relative to our financing options, including debt and equity, and occasionally hedge our Bitcoin as previously mentioned. We actively manage our treasury, and while some expenses for Black Pearl will likely be covered with Bitcoin in the future, our current position and the hedges we've implemented leave us confident in our treasury management, which held 2,033 Bitcoin at the end of last month.
Operator, Operator
Our next question comes from Mike Colonnese of H.C. Wainright.
Michael Colonnese, Analyst
Nice quarter here, great to see. First question for me, Tyler, if you could just walk us through your thought process in deciding to do the full 300-megawatt build-out at Odessa by the end of next year? And how the full infrastructure build influences your decision to exercise all or part of your purchase options for the T21s under your purchase order with Bitmain?
Tyler Page, CEO
We always aim to maintain flexibility in finding the best opportunities for our shareholders. It might seem straightforward that we have a contract to buy enough rigs to cover all of the 300 megawatts. However, after my meetings in Hong Kong with all the rig manufacturers next week, I'll have a clearer understanding of the market dynamics. Currently, our purchase contract is for T21 at $14 per terahash, while the market rate is approximately 15% higher, making our contract advantageous. Regarding timing and opportunity, I believe our strongest advantage compared to other miners is our ability to identify greenfield sites, establish favorable power arrangements, and manage the lengthy construction process to operate data centers requiring active power management. Most of our competitors do not manage the entire value chain, and those who do tend to follow our lead. The chance to build Black Pearl really capitalizes on those strengths. It's set to begin operations in the second quarter of next year. The decision to proceed relies primarily on the infrastructure, which takes longer to implement than rig acquisition. The rigs will be waiting for us to decide when to purchase them. Evaluating the infrastructure first is vital, especially as recent research highlights the value of having interconnection for substantial electricity loads and ensuring those assets are ready for use with necessary approvals. Therefore, moving forward with infrastructure appears logical and beneficial. On the rig side, we'll ultimately decide when to exercise our purchase option, which gives us about eight months to monitor market trends. This timeframe allows us to reconsider early acquisitions if we find another upgrade opportunity. Alternatively, we can rely on the Black Pearl, which provides us with plenty of flexibility and aligns with our key strengths. We've consistently mentioned on our earnings calls the approaching cash flow challenges, and we've structured our business to adapt. If enticing opportunities arise to acquire sites that we can upgrade more affordably through our purchase option, we will pursue them, and then decide if we need additional rigs for Black Pearl. As we develop Black Pearl over the next year, we have the option's time value to observe the market and evaluate Bitcoin prices and network cash rates in several months, allowing us to make informed strategic decisions. We have options, and this is the framework guiding our approach to maximizing our strengths.
Michael Colonnese, Analyst
And just a follow-up for me. And I appreciate the $420 million CapEx number to fully build out Black Pearl. But how should we think about the cadence of the CapEx-related spend as you continue to build out Black Pearl over the coming quarters, be it between the remaining rig payments of Bitmain, but obviously, again, on the infrastructure side as well?
Tyler Page, CEO
So let me give some color and then, Ed, if you have any other color, feel free to jump in or pass. But we're now in the steady drumbeat of construction. You saw the pictures there. Also, now that we are just about done with Bear & Chief, we will be bringing the full brunt of our capabilities to build Black Pearl. And so the cost is month by month, right, because you're paying for labor at different stages of construction. The biggest payment, the chunkiest payments are related to rigs. And so there is a payment schedule there where, within the Bitmain contracts, large payments are made 6 months out from delivery and 1 month out from delivery. So there will be payments made towards the end of the year because, again, in general, when we build a site from a greenfield, we try to make the various stages work with a just-in-time sequencing and then pretty much the last step is having the rigs show up on-site to then be installed. And so we would anticipate those being delivered in the second quarter of next year, which means those chunkier payments are later in the year. Specifically, on the Bitmain contracts, we put 10% down on each contract. And then the two remaining payments are 45% and 45%.
Operator, Operator
And our next question comes from John Todaro of Needham & Company.
John Todaro, Analyst
I have two questions. First, regarding G&A expenses, which have decreased compared to the second half of 2023. I understand some of the factors contributing to this change, but I’m curious if this represents the new quarterly rate we should expect or if there are any factors that might alter this for the remainder of the year. My second question concerns the hash rate, which has decreased slightly. Tyler, it sounds like you might be suggesting this situation is still developing; could you clarify whether this decline was an expected adjustment, or do you think it was a significant drop of around 6% from its peak?
Edward Farrell, CFO
John, it's Ed here. In response to your question about general and administrative expenses, this quarter we are breaking out compensation, benefits, and G&A to provide clearer insights into our true costs and expenses. While G&A is down this quarter, it has increased compared to a year ago due to additional staffing we've added to expand our team, which we plan to utilize as we develop Black Pearl. I anticipate that G&A will remain relatively stable, with the possibility of one or two strategic hires in 2024 as we continue to grow Black Pearl. We are also looking to bring more services in-house, moving away from relying heavily on third-party providers. Overall, I do not expect significant changes in G&A over the next two to three quarters.
Tyler Page, CEO
I can share insights on hash rate. I think it's important to mention that I've discussed with many investors recently the dynamics of SG&A, particularly concerning Bitcoin mining companies as we approach the halving, the M&A landscape, and the hash rate issue you raised. There are various types of companies in this sector. We believe it remains a growth industry and are optimistic about Bitcoin prices increasing over time as network adoption grows. We see many indicators of supply and demand imbalances, which fuels our bullish outlook. Our goal is to identify more opportunities to acquire affordable sites with significant power interconnection potential for development and operation. As a development-focused company, we're building more sites in this growth sector, which gives us a different perspective on SG&A compared to companies that operate just one or two sites without expanding. In those cases, SG&A becomes more critical, especially given the current hash rate and pressures on miner economics. We differentiate between a growth-oriented development company and one that's merely maintaining its operations. From an SG&A standpoint, I prefer to assess efficiency in relation to megawatts, whether currently operating or under construction, because we need to continue compensating our talented team that sources opportunities and negotiates power contracts. Thus, evaluating SG&A efficiency on a per megawatt basis is necessary and relevant to broader questions regarding the hash rate. We're targeting 566 megawatts of self-mining, which contextualizes our SG&A outlook as we believe our tech investments will scale well. Specifically regarding hash rate, it has a time aspect that influences how long the hash price remains at its current level. Last I checked, it was above $0.05 but had dipped to around $0.045, which starts to pressure the cash flow for most Bitcoin miners. Many larger companies can endure this for a short period, but if it persists or decreases further, it could lead to significant challenges. While a Bitcoin price surge is possible later this year, it might require some time of challenging miner economics, influencing hash rate availability. Interestingly, after the halving, we experienced our highest revenue day ever, and even in the following days, revenues remained decent. After a subsequent difficulty adjustment, which came a couple of days later, the immediate minor economics looked favorable, so not many operators turned off their rigs beforehand. We have another adjustment approaching shortly, anticipated to reflect a difficulty reduction of approximately 4.5% due to lower network hash rates. In response to your question, we will closely monitor the next difficulty adjustment in about 15 days, as it should provide a clearer picture of sustained hash price dynamics and miner reactions. It’s going to be hard to gauge the situation accurately. Previously, we suggested that only a small fraction of hash rate would come offline, and we’re currently hovering around that estimate. This current hash price squeeze is challenging for many miners, particularly as we enter summer, and we have a significant hash rate presence in Texas. We may see further moderation in hash rate in the coming months, but the next difficulty adjustment in two weeks will offer crucial insights into this trend.
Operator, Operator
And our next question comes from Greg Lewis of BTIG.
Greg Lewis, Analyst
Tyler, I have a quick question regarding rig pricing. You mentioned that the pricing for your upcoming purchases is up about 15% on a terahash basis. I'm interested in understanding the market's response regarding older generation rigs, particularly those around the 30 J/TH range. Is there still demand for those, and how has that situation been evolving?
Tyler Page, CEO
I think the real question there is how deep would the secondary market be for rigs at that efficiency or at worse efficiencies, because there are various secondary markets that get made by some different players where you see prices, they're obviously down because, again, if hash price is $0.05 or $0.055 or even especially if it's $0.045, you start looking at an efficiency curve where you have to have really low power prices to make less efficient rigs operate profitably in that environment. So I would say that the question that's hard to say is it's still too early because I don't know anyone moving large quantities of those rigs. And so could you sell a rig with the 30 J/TH? Absolutely. The price would be probably lower than it had been, but I'm sure you could get probably mid- to high single digits per terahash dollars, if I had to guess. But the question would be how much could you sell? I mean, could you sell 100 of them, probably. If you try to sell 25,000 of them, I think the price would probably go lower, but that could also change really quickly depending on this next, like, difficulty. A part of it is everyone is trying to predict this question about what's going to happen to hash rates? Is it going to go more or going to come off? And so it's just hard to say that there's a lot of questions to that. So I'd say it's easy to say it's less than it was. It's probably high single-digit dollars or mid-single-digit dollars per terahash, and that could change a lot in a month depending on the next difficulty adjustment or two.
Greg Lewis, Analyst
AI data centers have become a popular topic among companies with power access. It seems everyone wants to discuss them during earnings calls across the energy and industrial sectors. My main question is about our progress with Black Pearl. As you noted, establishing a data center typically takes a couple of years from inception to operation. Are we beginning to encounter price inflation for potential data center locations, potentially due to competitive bids from companies like Cipher or others in the industry?
Tyler Page, CEO
That's a great question. We've had many discussions about AI-related data centers, especially in the last month or two. We have been approached by people seeking capacity for AI at Black Pearl, but we have no plans to pursue that. Our stance on operating AI data centers remains unchanged, as it is clearly a significant growth market. However, it depends on which segment of the market you want to engage in; GPUs are quite expensive and speculating on their future performance can be risky when so much capital is being invested in the equipment. Additionally, building a data center equipped for AI is generally more costly. There are also opportunities within that market as it evolves, such as managing curtailment, which becomes more appealing to us. However, our main challenge in entering the AI space right now is related to funding costs. We've been approached by some who suggest that we could establish access to low-cost debt for AI data centers by creating a special purpose vehicle. We're monitoring the situation. Recently, a prominent Wall Street research analyst noted that the delays and challenges involved in setting up interconnections could make those connections extremely valuable, making us attractive to potential buyers for our off-site portfolio. This would be beneficial and act as an additional option for us if it materializes, but we recognize that obtaining approvals for interconnections takes a considerable amount of time, suggesting that having these connections could be highly valuable if they become a bottleneck.
Operator, Operator
And our next question comes from Joseph Vafi of Canaccord Genuity.
Joseph Vafi, Analyst
Nice results. Tyler, you've mentioned M&A several times during this call, which is more than before. You seem to indicate what you're considering regarding the halving and how it might pressure other operators to merge. Can you share your thoughts on how this might play out? Are there sites with appealing power costs, or is it more about the timing for increasing hash rate profitably, considering your mining rig contracts? I would appreciate more insight into how M&A could work for you. I have a follow-up question as well.
Tyler Page, CEO
Sure. So I'd say we are casting a broad net because we, again, I feel like we've been planning for this time period for a while and so excited to see things develop. So we look at everything, but in general, I'd say the two buckets of opportunities we see are, if there are greenfield sites where a developer is basically running out of time, they've got the interconnection and the approvals and so forth, and they're set up, maybe their financing didn't come through or they don't have access to capital, that really plays to our greatest strength. Now that's what we'll call the longer-term story. Again, over time, I think we probably produce the most value and the highest return on investment in those situations. So from the starting point, those tend to be our favorites. That said, there's a second bucket, which is more what you alluded to, and a little bit more related to the shorter-term crunch on existing mining operators where, maybe, they have a site and again, maybe the power setup is decent, but they don't have as much access to capital, they're private or for whatever reason, they're having challenges, maybe they have debt, whatever. And their rigs might be getting older. And so there could be situations where we find a site, we do have access to new generation rigs. We have access to capital. And maybe it's win-win because we can get a site that we can upgrade and make very profitable in the current environment, and they cannot. And so I'd say that's the second bucket of opportunities. But I'd say those opportunities have been a little bit more reluctant to move over the past few months, and we'll have to see. Maybe they become more interesting in the coming weeks and months.
Joseph Vafi, Analyst
Would M&A potentially impact the Black Pearl timeline if the right opportunities arose and you decided to pursue them? Could it influence the overall capital commitments, both organic and inorganic?
Tyler Page, CEO
Anything is possible. We're really enthusiastic about Black Pearl and moving forward at full speed. One potential impact on our strategic planning could arise if we identify an opportunity where we can significantly enhance value by exercising our current purchase option with Bitmain to upgrade a site. This could enable us to acquire more rigs or reconsider how we plan the latter part of Black Pearl. It will be intriguing to monitor the cost of rigs and the overall hash price situation since historically, rig manufacturers set their prices based on mining profitability. We might find a window for favorable rig prices, which could lead to a reorganization of our planning regarding rig allocation. Ultimately, it all depends on whether we decide to proceed with certain actions and what that deal would entail. However, our primary plan remains to construct all of Black Pearl with the rigs we currently have on order.
Operator, Operator
And our last question today comes from Regi Smith of JPMorgan.
Reginald Smith, Analyst
This is a long call, so I'll keep it brief. I wanted to ask a follow-up about AI. I'm curious how you think the AI investment wave could impact the Bitcoin mining industry in terms of whether you will still be able to build 300 megawatt sites. Do you think you might need to scale down to get things done? How does this affect access to towers and the ability to get approvals?
Tyler Page, CEO
It's a good question, and I believe it's a bit premature to provide a definitive answer. On one hand, we are exploring several promising opportunities. I am aware that these opportunities exist, particularly for those who can find them and develop them from scratch. However, I think there’s a segment within Bitcoin mining that may struggle to operate if they rely on hosting providers. It seems that those in the hosting sector are increasingly focused on AI, which could create challenges for businesses solely planning to purchase Bitcoin mining equipment and connect to other sites. Additionally, I know that AWS made a substantial investment in a site at Susquehanna last quarter, and Microsoft recently announced a significant partnership with Brookfield for building data centers worth $10 billion. Larger sites, especially for AI, necessitate a much higher capital expenditure. Hyperscalers have the budget to invest and access to favorable financing, which might put pressure on the smaller end of the industry. However, when I consider our company’s ability to identify opportunities and manage the entire process, I believe this actually enhances the value of our business. We will need to monitor how much we are affected by larger sites, but at this moment, I don’t see any indications suggesting we will face significant challenges.
Reginald Smith, Analyst
Just to clarify regarding the size of future sites, what would you consider the minimum effective capacity? Is it 100 megawatts or 200 megawatts? Do you think the industry might evolve to that standard?
Tyler Page, CEO
I think generally we would look at a minimum of 50 typically. And then there's questions around operational synergies. Is it in places where we can trade power and monetize the flexibility of our load? Also operationally, does it work with where our people are? Is it easy to get to, et cetera? So it's a little bit of a dynamic matrix. But in general, I'd say 50 megawatts is where we start to get interested.
Operator, Operator
And our last question comes from Bill Papanastasiou of Stifel.
Bill Papanastasiou, Analyst
Congratulations on the quarter and the strong unit economics once again. Tyler, for my first question, you mentioned M&A opportunities and the increased need for some smaller peers to rethink their strategies. I'm interested to know where the most attractive opportunities currently lie. Are they in operations linked to ERCOT? Is there a possibility of targeting other regions, or is Texas still your primary focus?
Tyler Page, CEO
Texas presents significant potential for us because we believe we can effectively leverage the unique aspect of Bitcoin mining that allows for instant curtailment. In a market like Texas with fluctuating power prices, the ability to consume a large amount of power and rapidly disconnect is highly valuable. This capability not only benefits our returns but also contributes to overall grid stability. However, we are primarily focused on Texas and are eager to explore expansion into other regions. We have evaluated opportunities both within the United States and internationally. It’s important for us to consider the risks associated with any location. We usually begin by examining the power dynamics, looking for demand response options and methods to monetize our flexibility. Then, we conduct a risk assessment that includes the legal environment, contract enforcement, property rights, and physical conditions for operating computers. Overall, while we are interested in diversifying our operations, we still see Texas as a fantastic market with ample opportunities for diversification within the state itself. Sure. So the forward curve for power in general in Texas has been going up. You can see that even though we keep losing time value on our contracted Odessa, it keeps going up every quarter seemingly in value. But again, what's interesting about Texas is the wide dispersion of those prices and the high volatility of those prices. And so we would expect Black Pearl to look a lot like Bear & Chief, in that it's a front of the meter site. So it's going to be paying market prices. But if you effectively recreate what we do at Odessa, which is, recall that in the Odessa contract, our power counterparty has a 5% curtailment option. So 5% of the time, they can curtail our use to keep the power, and that's because 5% of the time, prices are very elevated in Texas. We create effectively the same thing when we manage the front of the meter site, which is, if we avoid those most expensive times, which is what we do with Bear & Chief, you'll get prices that we would forecast to be in the mid, call it, $0.03 to $0.04 per kilowatt hour range, $0.035, something like that would be what we would expect. Then beyond that, being such a large site, it will have opportunities to participate in ancillary services down in Texas, which is making your capacity available for curtailment to the grid operator, and you can potentially get paid quite a bit for doing that. And there's a fair amount of nuance to that, doing it a day-ahead markets or real-time. And so let's call it the active management and trading of that capacity, we think will produce value above and beyond just avoiding those high prices. And when you net out the payments we hope to make there, we would hope to drive the overall power price at Black Pearl down to close to what our portfolio average is today. So sub-$0.03, but that will require active management and trading, and we won't always get there, but we're confident we will be able to get there.
Operator, Operator
Thank you. This concludes our question-and-answer session. I'd now like to turn it back to Tyler Page for closing remarks.
Tyler Page, CEO
Thank you, everyone, for your time and continued interest in Cipher Mining. This is the moment we've been waiting for. So we're very excited about all the opportunities we've got in front of us, and I look forward to speaking to you again soon.
Operator, Operator
This concludes today's conference call. Thank you for participating, and you may now disconnect.