Earnings Call Transcript - CIFR Q3 2021

Operator, Operator

Good day. And thank you for standing by. Welcome to the Cipher Mining Third Quarter 2021 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 note that this call will be simultaneously webcast on the Investor Relations section of the Company’s corporate website. The conference call is the property of Cipher Mining; any taping or other reproduction is expressly prohibited without prior consent. Before we start, I would like to remind you that the following discussion as well as our press releases 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. These forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in Cipher’s periodic and other SEC filings. The forward-looking statements and risks in this conference call, including responses to your questions, are based on current expectations as of today, and Cipher assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. Now, I will turn the call over to Tyler.

Lori Barker, Speaker

Good morning, ladies and gentlemen. Thank you for joining us on this conference call to discuss Cipher Mining’s third quarter 2021 business update. Joining me on the call today is Tyler Page, Chief Executive Officer; and Ed Farrell, Chief Financial Officer. You may also review our press release and presentation, which can be found on the Investor Relations section of the website at investors.ciphermining.com. Now let’s begin our discussion.

Tyler Page, CEO

Thank you, Lori. Hello. This is Tyler Page, the CEO of Cipher Mining, and I’m going to discuss our third quarter today. So, I’m going to begin our discussion by reminding everyone that Cipher Mining is a U.S.-based industrial scale Bitcoin mining company. We recently completed listing on NASDAQ with the ticker CIFR. In our transaction to go public and close our PIPE deal, we raised net proceeds of $391 million. We are currently executing a strategy to develop and deploy five data centers where Bitcoin production is expected to ramp up significantly throughout the course of 2022. When we think about Cipher compared to the competitive landscape, we have a series of long-term competitive advantages, namely our five-year power purchase agreements which have a compelling weighted average power price of 2.72 cents per kWh. We also have purchase agreements that we have executed for mining rigs that are capable of generating up to 19.5 Exahash per second. Those machines are scheduled to be delivered over the course of 2022. And we have a long-term agreement with the experienced team at Bitfury for operational services and equipment. When you think about us versus the competition, focusing on the key needs of any successful large-scale miner, we feel we are particularly strong in terms of our access to power at a cheap price, our access to new equipment with the delivery scheduled for next year, and then our access to a best-in-class operations and services team. Before we get started, it’s helpful just to reset everyone’s awareness of Cipher Mining in the context of what has been a very busy year for Bitcoin. Just recall that Bitcoin came into the year at the beginning of the year, around $30,000. There was a fair amount of enthusiasm early in the year and it was up over 100%, hitting an early year peak around the time of the Coinbase IPO back in April, where it was as high as the mid-60,000s. Over the summer, we saw some doldrums in the price. A particularly newsworthy story for us was that China shut down most of its mining capacity over the summer which was wonderful for us considering that we came to market as a U.S.-based Bitcoin miner, and we have always preached a focus on the United States becoming the real head of Bitcoin hashrate in the world. Recently, Bitcoin prices have peaked back up. We’ve had a series of interesting events in the marketplace, including a futures-based ETF. In fact, just this week, we have made all-time highs in Bitcoin. A lot has happened in the short year. When you think about Cipher Mining, a lot has happened for us as well. Cipher is a newer company. We were created in January of 2021 as a spinoff from Bitfury, a European-based privately held Bitcoin Mining Company. We went public via a SPAC. We have completed the entire SPAC timeline, merging with a company called Good Works Acquisition Company earlier in the year. That business combination was approved in late August, and we began trading on NASDAQ on August 30th as our standalone public company under the ticker CIFR. It’s important to remember that a lot has happened this year for Bitcoin and for us, and we are coming to market as a greenfield company. We had an outstanding opportunity to capitalize on building data centers in the United States and to establish a U.S.-based Bitcoin mining champion. We planned to take our transaction proceeds from the closing and implement that plan. So, we’ve had a very busy start to our lives, completing our first quarter at the end of September. Between going public and now, we have entered into pre-material contracts for equipment purchases from a diversified group of mining rig suppliers, namely Bitmain, MicroBT, and Bitfury. Looking ahead to leverage our long-term advantages, we now are a publicly listed company and will have access to ongoing capital, which is crucial for building a large-scale Bitcoin miner. From an operational standpoint, being a successful large-scale miner requires access to power, and we have that with up to 910 megawatts from our current counterparties, supported by long-term agreements. Additionally, our pipeline of future deals is robust, as the energy industry, particularly in the U.S., has become increasingly interested in Bitcoin mining. We have structured our relationship with one of our current power providers as a joint venture. In that partnership, we work together to build a Bitcoin mining operation, showing that scalability could be strong as we engage with other potential partners seeking a turnkey solution for accessing Bitcoin mining. On the equipment side, we have a seven-year framework agreement with Bitfury granting us a right of first refusal on new machines, as well as the most favored nation pricing framework for purchasing those machines. Lastly, operational expertise is crucial for a successful Bitcoin miner—capital secured, power contracted, equipment on order, and then operational services to optimize everything. We will leverage the experienced team at Bitfury for those services, which is critical since Bitfury has over a decade of success running Bitcoin mining operations. Regarding our approach to environmental issues, I’d like to highlight key points when evaluating sites from an environmental perspective. Cipher has no direct purchase agreements with coal power generation facilities since coal-based electricity has high carbon emissions. In our materials, you can see that coal generates more emissions than the average U.S. electricity generation. In addition to avoiding coal altogether, we prefer renewable power sources or nuclear. Our first planned site is a wind farm utilizing 100% wind-generated power, followed by a nuclear power facility with no emissions. Our initial deployment set aims for about half the total carbon emissions of the average U.S. electricity user. We are starting off on the right foot, seeking to measure and report emissions and targeting carbon neutrality in our mining operations by 2023. We are currently evaluating providers of carbon offsets and will implement an offset plan for our emissions as we measure them. With that overview of Cipher and our outlook, let’s discuss our implementation plan and strategy. First, about site readiness: we are currently focusing on five sites. We break it into three phases: power readiness, which entails securing the necessary power connections and agreements; infrastructure readiness, which is about building the necessary electrical infrastructure; and mining rig readiness—having machines on-site. For our deployment, we project a total megawatt build-out of 60 megawatts across our first three sites in the first quarter of 2022. The sites are subject to our joint venture model. In Q2, we’ll add on Coshocton, a nuclear facility in Ohio with a capacity of 40 megawatts, which we will own entirely. This will bring our total deployment to 100 megawatts by the end of Q2 2022, and we expect to ramp up further into Q3 with additional capacities. Overall, we plan to have 379 megawatts ready by the end of Q3 2022, with a substantial percentage belonging to Cipher. This is a best guess, but given supply chain challenges and COVID, changes are possible. Regarding mining rig readiness, we’re maintaining a price discipline as we analyze costs per terahash. We anticipate paying $38.58 per terahash across our portfolio of three providers—Bitmain, MicroBT, and Bitfury. This approach ensures a strong return on investment and aligns with our long-term competitive advantages. I will reiterate some key statistics to keep in mind as we build out our operations. Our pricing discipline, average rig efficiency, weighted average power price, and anticipated CapEx costs per megawatt all remain critical as we move forward. With that, I will conclude my remarks and pass the floor to Ed Farrell, our CFO.

Ed Farrell, CFO

Thank you, Tyler, and hello to everyone on the call. First, let me remind everyone that we closed the transaction in late August. As Tyler mentioned earlier, we received net proceeds of $391 million and immediately commenced our deployment plan to build the data centers to support our Bitcoin mining activity. We are a greenfield company that, as of September 30th, had been in operation for about 30 days. Thus, our financials are relatively benign. That said, I’d like to walk you through some of the more significant items on our balance sheet that are critical in supporting our plan. Within days of closing and receiving the proceeds from the transaction, we entered into agreements to purchase a total of 87,000 latest-gen mining machines from both Bitmain and MicroBT. Consequently, we had $74 million in deposits on the balance sheet related to those agreements and expect delivery in batches from January 2022 through December 2022. We committed capital to support obligations required to becoming a public company. Additionally, we have security and collateral deposits of $9.4 million relating to power purchase agreements with one of our energy providers for data center buildout. Lastly, we had $282 million in cash at the end of the quarter. Subsequent to September 30th, we entered into an agreement with Bitfury for 28,000 to 56,000 next-gen mining machines, with delivery commencing in June 2022 through December 2022. The deposit for this order was $10 million. In conclusion, I would reiterate that Cipher, as a greenfield Bitcoin mining company, is well on its way to becoming an industrial-scale Bitcoin mining entity dedicated to expanding and strengthening the Bitcoin network’s critical infrastructure in the United States. I’ll stop there, and Tyler and I are happy to take your questions.

Operator, Operator

Thank you. We have a question from Aaron Rakers with Wells Fargo. Your line is open.

Aaron Rakers, Analyst

Congrats on the first earnings call; hopefully, on the path to many more. I want to ask about the progression of the miner deployments. What are you seeing today in terms of progression towards delivery, given the broad array of industry supply constraints? Following that, if I look at your planned terahash capacity at the end of 2022, can you help us understand the importance of the Bitfury systems as they come into the model? What’s the capacity of those systems relative to the MicroBT and the Bitmain systems? Just trying to understand how you can leverage that Bitfury relationship strategically?

Tyler Page, CEO

Sure. Yes. Thanks, Aaron. Regarding mining rigs, starting with supply chain reliability, I think this is a significant reason why we are working with multiple suppliers. By having suppliers from various global locations using different foundries and with both proven and tested machines and newer machines, we can manage the deployment risks. As for our deployment perspective, we’re aligning many work streams, having five different sites in various phases of construction and preparation. Our plan is to line up machine deliveries at the different sites according to schedule, although some flexibility exists. The Bitfury component of our order is substantial and represents about a third to half of the power we’ve ordered. We’re excited about this relationship, as it has ensured we receive competitive prices across all contracts.

Aaron Rakers, Analyst

What is the terahash capacity of those systems relative to the other ones in the call, which I believe are in the 100 to 110 terahash per second capacity range?

Tyler Page, CEO

In the contracts with Bitfury, we expect capacity of approximately 195 terahash per second estimated. As is typical, there’s a variance of about plus-minus 5% for particular machines. Those machines draw more power, so from an efficiency and physical standpoint, we evaluate things per terahash. This is essential as we manage costs across our array of machines from our other suppliers, which tend to be around 100 terahash.

Aaron Rakers, Analyst

What dictates the range of 28,000 versus 56,000 for your Bitfury contract? I assume your focus is on a quick buildout. What determines whether you go for the low or high end?

Tyler Page, CEO

Looking far into the future, we anticipate bringing online more sites, but they may not yet be at the stage where we’re ready to report that power and infrastructure readiness. Our pipeline is robust, with current providers and additional potential sites for later in 2022 being discussed. There are emerging opportunities in the U.S. energy industry, with large power producers taking Bitcoin mining seriously. The flexibility built into that contract allows us to adapt if appealing opportunities arise.

Operator, Operator

And we have a question from Kevin Dede with HCW. Your line is open.

Kevin Dede, Analyst

Could you share a bit more on your supply reliability? Are you planning to airfreight your Bitmain and MicroBT machines?

Tyler Page, CEO

Indeed, we are anticipating airfreight for all our machines. We frequently check in with our suppliers to re-evaluate delivery schedules as represented in this presentation. I am aware of some recent delivery challenges faced by our competitors and their creative solutions. However, managing our diversified supplier approach and maintaining contact with them is our best way to mitigate risks. If needed, we will be creative about getting machines as we proceed.

Kevin Dede, Analyst

I want to know about the progress of Bitfury's machine design. I know your last update suggested the chip design was set, but there have been challenges with wafer starts. How do you see their fab progressing?

Tyler Page, CEO

While Bitfury is our largest shareholder and significant to us, I no longer have insider foreknowledge of their design and manufacturing. However, I can say we now have a purchase contract with them. The chip has completed essential parts of the tape-out process and they continue working with their fab to adhere to the timelines specified in the contract, anticipating machine delivery between June and December.

Kevin Dede, Analyst

Do you have any recourse in your Bitfury contract, given the $10 million deposit? Are there rebates tied to meeting their schedule?

Tyler Page, CEO

The easiest answer is that Bitfury, as our majority shareholders, have their interests aligned with ours regarding machine delivery. I don't have specific details on the initial contract but we do purchase multiple products from Bitfury—services included. Therefore, I'm generally not concerned about recourse on our deposit.

Kevin Dede, Analyst

Can you share how Bitfury's operational team brings all this together?

Tyler Page, CEO

Our contract for services with Bitfury utilizes a cost-plus framework, which is advantageous. A concentrated team of about six people oversees site work, with many more involved at various levels. Bitfury manages subcontractors for specific tasks like fabricating containers, meaning dozens of contractors work on our order across multiple organizations. It’s complex but designed to ensure efficiency and quality management.

Operator, Operator

Thank you. And there are no further questions in the queue. I’d like to turn the call back to Tyler Page for closing remarks.

Tyler Page, CEO

Thank you very much for everyone that dialed in. I just wanted to close with a quick message to say that the team at Cipher Mining is near the beginning of a very ambitious journey in a rapidly evolving Bitcoin mining environment. We see potential for this environment to expand in the long term. We believe we have positioned ourselves well to take advantage of forthcoming trends. Every day is exciting for the management team, and we appreciate the trust and support of our shareholders. So, thank you very much.

Operator, Operator

This concludes today’s conference call. Thank you for participating. You may now disconnect.