IREN Ltd Q3 FY2022 Earnings Call

Thank you for joining us for the Iris Energy Limited March Quarter Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. I would now like to turn the conference over to Mr. Kane Doyle, Senior Manager, Investor Relations. Please proceed.

Thank you. Good afternoon for those of you in North America and good morning for those of you in Australia and welcome to the Iris Energy earnings conference call for the third quarter ended March 31, 2022. I am Kane Doyle, Senior Manager, Investor Relations and with me on the call today is Daniel Roberts, Co-Founder and Co-CEO; Lindsay Ward, President; and Anne Hayes, our Interim Vice President of Finance. Before we begin, please note this call is being webcast live with an accompanying presentation and includes the ability for participants to ask a question via the live chat box. For those that have dialed in by phone, you can elect to ask a question via the moderator after our presentation. I'd like to remind you that certain statements that we make during the conference call may constitute forward-looking statements and Iris Energy cautions listeners that forward-looking information and statements are based on certain assumptions and risk factors that could cause actual results to differ materially from the expectations of the company. Listeners should not place undue reliance on forward-looking information or statements. Please refer to the disclaimer on slide two within the accompanying presentation. Thank you and I'll now turn the call over to Dan Roberts.

Thank you, Kane. Hello everyone. I appreciate you joining us for our earnings call today. The past few days have certainly been eventful. I'd like to start by providing an update on our hash rate development. As you know, we went public on NASDAQ last November and discussed our operational growth plans. I'm pleased to reaffirm that we are on track with our commitments. Our first site at Canal Flats, which we originally expected to complete by December last year, was finished ahead of schedule by mid-September and is now operating at about 850 peta-hash, exceeding the initial forecast of 700 peta-hash. Additionally, we achieved operational capacity at our second site in Mackenzie, British Columbia, on April 12th, with the first nine megawatts energized ahead of schedule. Looking ahead, Lindsay will provide more specific details on our various sites and their ramp-up profiles, but we are maintaining our earlier guidance regarding construction and the chip installations, aiming for 10 exa-hash by early next year and the full 15 exa-hash per our contract with Bitmain. Regarding our team, although the $1 billion required for our 15 exa-hash project is a significant investment, we have a strong legacy of delivering large-scale energy and infrastructure projects. Our team consists of over 100 professionals worldwide, equipped with extensive experience in this field. This includes David Bartholomew, who has considerable experience in the energy sector, and Lindsay Ward, our President, who has a wealth of expertise in managing infrastructure businesses. We're focused on building long-lasting assets in bitcoin mining data centers, as we strongly believe in the future of bitcoin despite its volatility. We’ve maintained a proprietary approach to designing our data centers, avoiding conventional solutions like shipping containers or warehouses, and focusing on our unique ventilation systems for optimal performance and longevity of our equipment. In terms of financing, we successfully launched our IPO last November with JPMorgan, Canaccord, and Citi leading the charge. We are cultivating good relationships with our financial partners, and have secured approximately $750 million of the $1 billion required through equity, some debt, and reinvested operational cash flow, while still pursuing additional funding. Our debt processes have remained resilient despite recent market fluctuations, and our balance sheet is in great shape with non-recourse debt secured against some of our computers. We're strategically positioning ourselves to layer in debt funding, capitalizing on our operational success and cash flow generation. As a publicly listed company, our journey has been quite remarkable. We’re ramping up our hash rate effectively and have committed to providing detailed monthly updates on our operational metrics and project timelines. Currently, we're trading below our peers, but we're confident in our position, especially with our plans to achieve 10 exa-hash this year and the full 15 exa-hash by September next year. We've emphasized treating this business as a cash flow operation. We're selling bitcoin regularly and will continue to reinvest our cash flow into building our capacity. The long-term cash flow potential at both 10 and 15 exa-hash is promising for our stakeholders. There is a link available in the notes for a calculator to explore various assumptions related to bitcoin pricing and operational costs that underscore our business model. Now, I’ll hand things over to Lindsay Ward, our President, for a deeper dive into our operational sites.

Thank you, Dan. My role today is to provide a comprehensive overview of our operating sites, our management of supply chain challenges, a focus on ESG, and our execution strategy. Not long ago, we launched our first site at Canal Flats in British Columbia. Today, we're making significant progress on constructing three additional sites across North America. Currently, we have 1.1 exahash of computing power operational. As Dan mentioned, we're actively working towards deploying another 14 exahash by the third quarter of 2023. Our business is straightforward and hinges on our ability to execute our strategy, deployment schedule, construction efforts, and operational performance. A key component of our success is the internal construction and operating teams we've assembled, which we are continuously expanding by adding senior executives, support staff, engineers, and more. We have a great mix of talent with diverse experience, and we enjoy collaborating with one another while focusing on building our sites. I’ll now provide more details about our operating and construction sites, starting with Canal Flats, our inaugural site. It is a 30-megawatt facility primarily powered by hydroelectricity, and we're consistently achieving about 0.85 to 0.87 exahash, which exceeds our initial expectations of 0.7 exahash. This success reflects our commitment to optimizing our operations, and we're proud of the progress. Our highly efficient proprietary data center has been recognized as one of the top-performing bitcoin mines per exahash by independent analysts. We have allocated substantial resources for continual optimization and development at Canal Flats, which serves as our center of excellence for research and development. One of our advantages is our cooling system design, utilizing large exhaust fans that adjust their speed based on ambient temperature to enhance miner performance. Our innovative method of recirculating hot air from the miners helps maintain consistent temperatures, benefiting both equipment lifespan and chip performance. We’re implementing the optimized designs from Canal Flats at our other sites in Prince George, Mackenzie, and Childress. Speaking of Mackenzie, it is also located in British Columbia. We successfully commissioned the initial 0.3 exahash of capacity in April, ahead of schedule, and it has been operating smoothly. Construction continues on track, with plans to add the remaining 1.5 exahash by the third quarter of this calendar year and an additional 0.9 exahash in 2023. Like Canal Flats, Mackenzie is powered primarily by hydro energy. Our Prince George site is progressing well, with steel erected for the first data center and foundation work underway for the second and third data centers. We anticipate completing this site by the third quarter of 2022, with an expected output of around 1.4 to 1.5 exahash, and an additional 1 exahash to be operational in 2023. The close proximity to Mackenzie offers labor efficiencies and shared expertise, contributing to our operational consistency. In Texas, at our Childress site, we are making solid progress with site preparations and community support. We have secured a contract with AEP for 600 megawatts, raising our global capacity to 795 megawatts. This significant facility will accommodate the majority of our 15 exahash miners and has the potential for expansion up to 23 exahash combined with our British Columbia sites due to the state's abundant renewable energy sources. Addressing execution risks, we recognize industry-wide supply chain challenges but believe our focused approach to execution and supply chain management sets us apart. We have a skilled team with extensive construction and operational experience, allowing us to manage risks effectively. Ensuring we have multiple suppliers for critical components is essential to our strategy. We prioritize internal supply chain management, which helps us maintain innovation and meet delivery timelines. Finally, we are committed to our social license to operate as it integrates into our ESG strategies. Our team's backgrounds in fund management make us acutely aware of the importance of ESG initiatives. We engage actively with communities where we operate, including in Childress, where we have been working on community grant programs to support local projects that may not have access to funding. Risk management is a core part of our daily operations, assured through rigorous audit and risk oversight from our board. We cultivate a positive work environment that fosters loyalty and satisfaction among our team. This serves as an overview of our operational and construction updates, along with our supply chain efforts and commitment to ESG. I’ll now turn it over to Anne Hayes, our Vice President of Finance, to discuss our financial performance.

Thanks, Lindsay, and hello, everyone. I will discuss the financial performance for Iris. As Dan and Lindsay mentioned, the organization has experienced significant growth over the past year. In the quarter ending March, we mined 357 bitcoin, which marks a 449% increase compared to the same period last year, supported by a 686% rise in our operating hash rate. We achieved revenue of $15.2 million and adjusted EBITDA of $7.3 million, both of which are substantial increases from the previous year, resulting in a 48% adjusted EBITDA margin for the quarter. In this slide, we present our adjusted EBITDA reconciliation, which the management team utilizes to assess our underlying performance. This allows us to exclude one-time and non-cash items from our profit and loss account. We are reviewing metrics for the nine-month period, which offers a clearer perspective on our growth. We generated $45.6 million in revenue during this timeframe, nearly ten times the revenue from the first nine months of our financial year 2021. Our adjusted EBITDA for the nine-month period reached $27.3 million, a significant increase from just under $1 million in 2021. I previously mentioned a 48% EBITDA margin for the quarter, but the year-to-date margin stands at 60%, which is a notable improvement over the prior year. Now, let’s look at our statutory financial profit and loss account, which is included in our financial statements. I want to highlight the non-cash items that impact our profit and loss account, as we discussed in Q2. These items include the amortization of share-based payments and the mark-to-market impact of our convertible notes when the IPO was completed, which significantly affects our bottom line. Lastly, regarding our balance sheet, we concluded the period with $158 million in cash and cash equivalents and total assets amounting to $557 million. In the third quarter, our property, plant, and equipment rose by $113 million, and our mining hardware prepayments increased by $15 million since the end of quarter two. This growth in assets was financed by our cash reserves at the beginning of the quarter and an additional $71 million in asset financing in collaboration with NYDIG. As a result of this deal, our current and non-current borrowings have also increased. That’s a brief overview of our financial results, and I appreciate you all attending. I will now pass it back to Dan for his closing remarks. Thank you.

Thanks Anne. Just dropping off mute. So thanks everyone for dialing in. That's the end of the formal presentation from myself, Lindsay, and Anne. Again, once again thanks for all your ongoing support. We're pleased now to open it up to live Q& A.

Thank you. Your first question comes from Paul Golding from Macquarie Capital. Please go ahead.

Great. Thanks so much. I had a question around – power as we get closer to Prince George being fully energized and Childress, what's the sort of power market out there right now in these respective locations in terms of PPAs timing associated with that? And just trying to understand how the market may be getting crowded with entrants in terms of looking for some of this power? And then I have a follow-up. Thanks so much.

So there's two key markets for projects that we've announced, the three projects in British Columbia, Canal Flats, which has been operating for the last few years; Mackenzie, which was energized last month in the first phase; and then Prince George. As you mentioned Paul, that is expected to be commissioned Q3 this year. The fourth site in Texas in Childress Country where Lindsay is at the moment. There's two separate markets there. In British Columbia, it's a very stable energy market. It's a regulated market which means we pay the same price for every kilowatt hour of energy we consume 24/7, 365 days of the year. It's 98% renewable. The underlying market we then take that to 100% renewable through the purchase of some renewable energy certificates. But that is an extremely predictable market by virtue of its regulated nature. In Texas, probably a more familiar market for many on the call in the sector, it's a deregulated market which means that market pricing is subject to market forces supply and demand. As many of you are aware our site in Childress is in West Texas up in the Panhandle, where there's an enormous amount of renewables built as Lindsay mentioned earlier. Something like 32 gigawatts of capacity and transmission line capacity for only like 12 gigawatts to export that down to the load centers in the Southeast. So there's a massive oversupply of renewable energy up in the region in which we're specifically located. In terms of the specifics around power price, what we've said to the market and we expect, you can see that average power prices on a baseload basis in Texas are around $0.03 to $0.035 per kilowatt hour with the opportunity to drive that substantially lower through our operational levers. The ability to participate in demand response programs, there's a number of them available. The ability to throttle down the frequency of these chips dynamically in response to market price events where the power price might peak for a few hours or a day, a year. There are a lot of operational levers we can pull to drive that even lower. This is partly why we own and control the full stack of our infrastructure. Not only do we own and control our proprietary data centers and the computers within it, we own the land. But importantly, we own all the electrical infrastructure, not just the low-voltage transformers, but we build the high-voltage substations that connect directly into these networks. What this does in terms of prepaying those expenses is it obviates an expense line on an ongoing basis. But importantly, it gives us direct access into the market where we can control our interface with that market. In terms of the specifics as to where we contract for that power, we've just conducted a detailed RFP process. We had a number of proponents for proposals. We're now in negotiations with a shortlist of those parties and expect to lock that in over the coming months. Given where we're at with the Childress construction, we have a bit of time to work through exactly how we're going to manage our power price in the Texas market.

Thanks for that Daniel. And so I guess just based on your comments, it sounds like the market is holding in a favorable place for you despite all the interest in this renewable in West Texas, right? In terms of your conversations with the power providers, you feel that the dynamics are holding still in this sort of favorable spot that you were describing in terms of the Texas rates?

I agree, Paul. When we look at the bigger picture, Texas is a significant market for us. However, Bitcoin remains a relatively small global market. Estimates suggest there are around 6 to 10 gigawatts of power used by Bitcoin worldwide, which is a small fraction compared to what's being developed in Texas. We haven't seen any effect on our forecasts. As Lindsay pointed out, there are about 40 gigawatts of renewable energy projects currently in the permitting phase, indicating there's plenty of power available. Texas operates in a market-driven manner and reacts to price signals. Although I don't believe there's evidence suggesting prices will rise, it’s not a major concern for us right now, Paul.

Great. And if I could sneak one more in. I was wondering if you could give some color on what your thoughts are in terms of where the network hash rate may be going. We've talked about how locking in low-cost power is leveraged in a volatile bitcoin price environment or sort of there. So I just wanted to get your thoughts on what you expect, what your predictions, projections are in terms of global network cash rate at these levels? Thanks.

No problems. Look we haven't published forecasts about global hash rate. We have views on some of the upward pressures and the downward pressures, which I'm happy to share. But as a business, we focus on what we can do and what we can control and that's execute on our construction plan and operate what we believe to be one of the most efficient data center bitcoin mining businesses in the industry. We can't control the hash rate, we can't control the Bitcoin price but we can control our operations. In terms of the way we think about the global hash rate, I think purely and simply I'm not aware of many hardware orders that have been placed in the last six months from memory. The last ones may have been the Bitmain XPs about five, six months ago at $80 per terahash not for enormous volume. Yes, there's some capacity that was procured six, twelve even more months ago where people sourced the capital procured the miners for whatever reason they haven't been installed yet. Maybe that hits the market in the short-term and hashrate floats higher. That being said, you’ve also got to overlay a couple of other risks. The fact that a large portion of the industry still uses older facilities, warehouses where you see a degradation in the hashrate coming out of those facilities due to the conditions in which they're operating, dust, humidity, heat, et cetera. And then of course there's still geopolitical risk. Anecdotally we hear that there's still a substantial portion of the hashrate in China. We understand there's a large portion in Kazakhstan where it's got its own challenges. There's this ongoing dynamic and tension I think between the hashrate wanting to float higher as a result of historical hardware purchases and people looking to try and install them combined with the downwards pressure of reality in the real world and what we operate in.

Good morning gentlemen. I appreciate all of the color. I was hoping to dig in a little bit on the financing update slide. I appreciate the color there you can show us $1 billion in total spend. Curious how much have you guys spent thus far. And that would include the hard CapEx as well as deposits. Just trying to get a sense of where you are and what the gap is there?

Sure. I'm happy to take this. Yes, no problems. So, to-date, we've spent a little bit over $400 million in CapEx. We've then got close to $150 million might be $140 million today of cash on balance sheet. We've then got some undrawn debt under the NYDIG facility that will be drawn down over the next few months of another $20-odd million. So there's a substantial amount of capital that's been spent to-date, but also a substantial amount that's currently in our control in the bank account and being allocated on a week-to-week basis towards scaling up to that 15 exahash. What that leaves is around $400 million to hit that $1 billion of CapEx, I mentioned earlier, of which a portion will be funded through ongoing operational cash flow. Again we're profitable, we've been profitable for a while. That profitability is likely to scale up substantially as Mackenzie and Prince George come online over the next few months. The ability to reinvest that to plug a substantial portion of the $400 million in remaining CapEx above what we've spent and above our cash and undrawn debt facilities puts us in a really good position particularly in the context.

Hey guys. Good morning. Nice to see the good progress here, I just thought, we'd start and kind of revisit some of your comments Dan on, the size of the team which is great building it out. It feels like the size of a team that big may be focused on continued business model expansion kind of just beyond where we are. I didn't know if you had any commentary on how you're looking at the medium term and the size of your team at this point? And then, I'll have a follow-up. Thanks.

Maybe I'll, answer part of that.

Hi Joe, sorry go ahead.

Sorry for the slight delay. Dan, I want to add a bit to that question before handing it back to you. To provide some context, the current number of 100 includes our on-site teams who are actively working on the construction of Prince George and Mackenzie. We are directly managing both projects without intermediaries. When considering that number, keep in mind we have operational facilities at Canal Flats and Mackenzie, along with ongoing construction at Mackenzie and Prince George. We are also expanding into Texas, where we are collaborating with Wood Group as our EPCM contractor due to a shortage of labor for self-delivery. This partnership is helping us grow our Texas team. An Australian gentleman named Giles Walsh has already begun work on-site, and during my visit to Childress, we hired our second employee from the USA, marking the beginning of our team expansion there. It's important to note that the 100 includes not only corporate operations but also the contracted construction personnel necessary for managing those projects in British Columbia.

Sure. That makes a lot of sense.

Maybe just to add a couple of comments on that.

Much appreciate, yes.

I think if you look at what's required to operate the 15 exa-hash once it's installed, that's one set of operational resourcing and that's one set of corporate resourcing. But given the stage of where we're at as a business, A, we're going through a very large construction program which Lindsay has spoken about; and B, we've also resourced a lot of development people in corporate to focus on our future outlook which is far greater than just the 15 exa-hash. We've got substantial experience in infrastructure renewable energy development looking globally at new sites, new growth opportunities, etc. And that's in our corporate cost line today and a function of the growth actions that we have. Thanks Joe. Look we've always said we're open to it. But every decision we make, we want to be a good use of capital. And sitting here today, I don't like it necessarily being described as a great call to be selling Bitcoin high. We're not really in the business of speculating on Bitcoin; we're in the business of building owning and operating really efficient data centers to mine Bitcoin and generate operational performance from that asset base. We believe in Bitcoin. We've spent four, five years of our lives building a business that is nothing but dedicated to Bitcoin. And personally, we've got a lot of conviction with Bitcoin as an asset outside the platform. But as we sit here today, the competitive advantage we have as a business is not speculating day-to-day on the price of Bitcoin. We're not traders. Our competitive advantage is the substantial experience and capability of our team in delivering operating infrastructure and data centers monetize its emerging and exponential technology. Do we hold Bitcoin at some point in the future? Sure. Like we're certainly open to it as part of a treasury management policy, but today when we can reinvest every Bitcoin we’re mining today to generate whatever it is six, seven, eight more Bitcoin every 12 months from this point the compounding strategy and the shareholder value we believe we're delivering over the medium let alone long-term in continuing to scale this business by reinvesting those Bitcoin revenue line, we believe is a really sound strategy.

Good morning gentlemen. I appreciate all of the color. I was hoping to dig in a little bit on the financing update slide. I appreciate the color there you can show us $1 billion in total spend. Curious how much have you guys spent thus far. That would include the hard CapEx as well as deposits. Just trying to get a sense of where you are and what the gap is there?

Regarding our Childress location, we have been in discussions with AEP for several months, well before Christmas. All our studies have been submitted and reviewed, and we do not anticipate any delays in our plan to deliver the first 100 megawatts of buildings by December this year, with energization expected in early 2023. We submitted all our studies proactively and did not wait for the connection agreement to be finalized. We do not foresee any impacts from our side.

Wonderful. The other point just to some of the power pricing is, remember there's a lot of negative price power in some of these markets. We see it in Southeast Asia, Asia Pac where we've got development sites. We see it in Texas. There are scenarios in some markets where you can operate with two profit centers and no cost center. One you get paid to take negative power, two, you get paid to monetize that power into Bitcoin. Again, this strategy of targeting low-cost excess renewables in these markets that frankly have overbuilt renewables and then controlling our own platform and the ability to monetize that is exactly why we've pursued that strategy. Thank you for everyone dialing in to recap. The next 12 months or so are going to be simply transformational for our company. The Bitcoin price has corrected recently with a lot of the rest of the market, but our business remains profitable. It has been profitable. That profitability will scale substantially as the remainder of Mackenzie and Prince George comes online in the next few months. We remain focused on doing what we said we would do at the IPO, before the IPO. We control the delivery. We're working hard. We will deliver and that's been our focus. We've had a focus on risk. We look to really manage that first. We know the returns are there. We don’t rely on hosting. We don’t rely on wheeling agreements to get access to transformers behind the meter. We're putting our destiny in other people's hands. We own and control our own destiny and manage the risk. We're in this for the long run. We're looking at building and we continue to build an institutional-grade data center platform and monetize that platform over time through the highest and best use applications. Thanks for everyone again for dialing in and look forward to catching up with many of you in the near future.