Earnings Call Transcript - MARA Q3 2023

Operator, Operator

Good day, ladies and gentlemen. And welcome to Marathon Digital Holdings Third Quarter Earnings Webcast and Conference Call. I would now like to turn the call over to your host, Chris Brendler, Vice President of Investor Relations. Please go ahead.

Chris Brendler, Vice President of Investor Relations

Thank you, Sherry. Good afternoon and welcome to Marathon Digital Holdings third quarter 2023 earnings call. Thank you for joining us for our call today. With me on today's call are our Chairman and Chief Executive Officer, Fred Thiel, and our Chief Financial Officer, Salman Khan. Before we get started, I'd like to remind everyone that our prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties. We may make additional forward-looking statements during the question-and-answer session. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially. When used in this call, the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project, and similar expressions as they relate to Marathon Digital Holdings are forward-looking statements. Please refer to our earnings release for a full reconciliation of our forward-looking statements. Investors are advised that all forward-looking statements involve risks, which may cause actual results to differ materially from those anticipated by Marathon at this time. In addition, other risks are more fully described in Marathon's public filings with the US Securities and Exchange Commission, which can be viewed at www.sec.gov and ir.mara.com. Finally, please note that on today's call, we will refer to certain non-GAAP financial measures in which Marathon excludes certain items from financial results. Please refer to our company's periodic reports on Form 10-K and 10-Q and to our website for a full affiliation of non-GAAP performance measures to the most comparable GAAP financial measures. We'll begin today's call with prepared remarks from Fred and Salman. After their comments, we'll address some popular questions from investors before transitioning to a live Q&A with our covering analysts. And with that out of the way, I'm going to turn the call over to Fred to kick things off. Fred?

Fred Thiel, Chairman and CEO

Thank you, Chris. The third quarter was a landmark quarter for Marathon as we achieved several key milestones. To start the quarter, our first international facility in Abu Dhabi powered up just six months after signing contracts, even though this is the first site that was designed and built by Marathon together with our joint venture partner. In August, we reached our stated goal of 23 exahashes and established Marathon as one of the largest Bitcoin miners globally. In September, we proactively restructured our convertible debt to further strengthen our balance sheet and prepare for opportunities that may arise from next year's halving. In addition to these key milestones, we also reported strong financial results with record revenue, lower cost per coin mined, and improving margins. Much of this success was the direct result of measurable progress on our 2023 priorities, which are energizing more capacity and optimizing our mining operations. Let me provide some more detail. In the third quarter, we increased our energized hash rate 8% from 17.7 exahashes to 19.1 exahashes. Over the same period, our average operational hash rate for the quarter increased 18%. The faster growth in realized hash rate was due to improved uptime that helped drive record Bitcoin production of 3,490 Bitcoin, up 19% from the prior quarter, alongside lower cost per coin. The increase in uptime was due to our optimization strategy and a more proactive approach to managing our domestic operations and hosting partners. Over the course of 2023, we have built up our operations team, adding key talent across site operations, power, hardware, software, networks, repair, and cooling. We are now directly managing our hosting partners to improve efficiency and increase uptime. Our approach has included onsite Marathon resources to direct operations, upgrade equipment, optimize network design, and deploy our proprietary firmware. By way of example, uptime in McCamey, Texas increased by approximately 20% in the third quarter, even with an approximately 84% increase in curtailment hours relative to the second quarter. This progress is critically important as the improved operating efficiency lowered our direct cost per Bitcoin mined by 9% sequentially, excluding depreciation and amortization, despite a 9% increase in average network difficulty in the third quarter. Our all-in cost per coin, which includes G&A without stock-based compensation, dropped to 12% quarter-over-quarter and 41% year-over-year. This significant improvement is not just the result of optimization; it also reflects the substantial scale benefits we have achieved that helped lower our all-in cost per coin. On a year-over-year basis, Bitcoin mined grew 467% in the third quarter, as Marathon's block rewards represented 4% of the total available miner rewards in the third quarter. Energization of more efficient mining rigs is also lowering our electricity consumption on a per hash basis. Our mining fleet is already among the most efficient in the industry, and growing our hash rate with ever more efficient machines will continue to lower our cost per coin. This process is encouraging. Our operational priorities remain unchanged, and we are still focusing on growing our market share in the most efficient and sustainable methods possible, while optimizing our operations to continually drive lower costs. In a few minutes, I'll provide an update on our growth plans and how we're innovating to drive lower costs. But first, I'm going to turn the call over to Salman to discuss our financial results for the third quarter. Salman?

Salman Khan, CFO

We had an excellent third quarter with record Bitcoin production and higher margins. The company reported net income attributable to common stockholders of $64.1 million or $0.35 per diluted common share in the quarter, compared with a net loss of $72.5 million or $0.62 per share in the prior year quarter. On a sequential basis, we grew net income by $85.4 million versus the second quarter of 2023. The sequential improvement in profitability was partially due to a one-time net gain on extinguishment of debt for $82.6 million due to the notes payable exchange transaction. Third quarter revenues were a record $97.8 million, significantly higher than prior year revenues of $12.7 million. Average daily Bitcoin production grew to 38 Bitcoin per day, compared to 7 Bitcoin in the third quarter of 2022, and up 18% from prior quarter levels. Revenue also benefited from a 32% higher average Bitcoin price compared to last year's third quarter. Our hosting and energy costs for the three months ended September 30 were $59.6 million compared to $13.8 million last year. The increase was due to significantly higher Bitcoin production, partially offset by lower production costs per coin and one-time exit costs for our Hardin, Montana facility last year. Total cost of revenues, which includes depreciation and amortization, was $113.2 million compared to $40.1 million last year, which is an increase of 182%. Depreciation and amortization this quarter was $53.5 million, increasing by $27.3 million compared to the same quarter last year. As Fred mentioned, we have grown our mining rig fleet significantly since last year, and as a result, increased our energized hash rate from 3.8 exahashes in the third quarter of 2022 to 19.1 exahashes in the third quarter of 2023. We also had one-time accelerated depreciation of our Hardin, Montana facility of $5.7 million last year. Gain on digital assets was $31 million in the current year quarter versus none in the prior year third quarter. Impairment of digital assets, on the other hand, increased by $10.5 million year-over-year to $11.9 million, reflecting the increased size of our Bitcoin holdings, which was up 29% year-over-year. I want to note that the company's non-GAAP total margin, excluding depreciation and amortization, was $38.2 million this quarter, up $39.3 million compared with the same quarter last year. This represents our increased hash rate and our strategy to systematically improve efficiency, as mentioned by Fred earlier, along with higher Bitcoin prices in 2023. Adjusted EBITDA improved to $43.7 million versus a $6.1 million loss in the prior year period. The drivers of the adjusted EBITDA improvement include total margin improvement, excluding depreciation and amortization, and the net realized gains on Bitcoin sales net of impairment, partially offset by an $8 million year-over-year increase in general and administrative expenses to support the growth of our business. General and administrative expenses, excluding stock-based compensation, were $14.6 million in the current period, compared with $8.7 million in the prior year period. This increase in expenses was primarily due to the increasing scale of the business, including payroll, benefits, professional fees, and other costs. At the end of the third quarter, we had 48 employees, up from 20 a year ago, as we continue to opportunistically add talent across the organization. Turning to our Bitcoin Holdings and cash position. Unrestricted cash and cash equivalents totaled $101.2 million at September 30, which was up $37 million compared to last year. Also at September 30, we held approximately 13,716 Bitcoin with a carrying value of $287 million on the balance sheet. The fair value of our holdings was approximately $370 million at quarter-end. The Company's combined balance sheet of unrestricted cash and cash equivalents along with the fair value of Bitcoin was approximately $470 million. We sold 2,300 Bitcoin during the quarter, realizing cash proceeds of $65.6 million. These proceeds were utilized to fund operating expenses during the quarter, including the cost of revenues for energy hosting and other cash operating expenses. During the quarter, we generated $37 million from at-the-market equity sales, which we intend to use for growth capital. Also during the quarter, we took advantage of an opportunity to strengthen our balance sheet by exchanging $417 million in convertible notes for approximately $329 million in equity. This transaction reduced our debt by 56% and will save approximately $101 million or $0.55 per share in cash for our shareholders for principal and interest reduction. The combined cash and cash equivalents and Bitcoin on our balance sheet, along with reduced debt and access to at-the-market facility, provide us ample liquidity and optionality to strategically evaluate opportunities as we approach next year's halving. The increased value of combined cash and Bitcoin, along with reduced debt, is prudent risk management and a source of strength for the company's balance sheet as we enter what could be a turbulent time for the industry during the halving next year. In fact, we have already started to see less efficient and undercapitalized miners looking to be acquired prior to the halving. As mentioned in our October production report, our unrestricted cash balance as of October 31 was $156 million, and we held approximately 13,396 Bitcoin with a fair value of $464 million. In total, we had over $0.6 billion in unrestricted cash and Bitcoin at the end of last month. In addition, during the third quarter, we began making enhancements to our treasury management strategy. Specifically, we began hedging a portion of our Bitcoin holdings. For those who are less familiar with this concept, hedging is designed to mitigate the impacts of extreme volatility in the near term, while maintaining the long-term strategy of maximizing the size and value of our treasury. It is designed with predefined risk terms and protects Marathon from sharp downward price movements, while still allowing us to take advantage of upside gains. Hedging is likely to have an impact on our earnings going forward as we recognize gains or losses from such hedging activity. Given Bitcoin’s historical volatility, we believe this strategy is integral to improving the resilience of our organization, providing downside risk protection during volatile market conditions, and maximizing our Bitcoin valuation potential. We expect our future Bitcoin holdings will generally increase, but will fluctuate depending on operating and market conditions. We intend to add to our Bitcoin holdings primarily through our production activities, and we will also continue to sell Bitcoin as a means of generating cash to fund monthly operating costs and for general corporate purposes. And that completes my update. I will now turn it back over to Fred, who will talk more about our operations and our ongoing plan. Fred?

Fred Thiel, Chairman and CEO

Thanks, Salman. Our strong results this quarter represent the culmination of several years of hard work. When we first detailed our asset-light strategy in 2021, we believed investing in mining hardware over infrastructure was the most capital-efficient way to scale quickly. Today, we are proud to say that this strategy has worked, as Marathon is now the leading public Bitcoin miner in the US. In Q3, we mined 18% more Bitcoin and ended with 27% more hash rate than our closest competitor. This outstanding growth would not have been possible without our asset-light strategy. We estimate the company was able to invest 30% more capital in hash rate growth while our competitors were building infrastructure. Marathon has now entered a new phase, one that prioritizes both capital and operating efficiencies. Early in the third quarter, our joint venture in Abu Dhabi powered up, marking our first designed and operated site as well as our first international location. This site began hashing less than six months after we signed the contracts, a testament to the strength of both our operations team and our joint venture partner. Last month, our second site in Masdar City began energizing, and the entire 250 megawatts from both UAE locations are still on track to be fully energized by the end of the year. In addition to proving out Marathon's technical expertise and execution capabilities, our success in the UAE is also helping shape the energy debate. At the official ribbon cutting last month in Masdar City, we heard firsthand how Marathon's UAE venture's ability to collaborate with the local grid operator has been a resounding success. But this is just the beginning. As more countries become aware of Bitcoin mining's unique capabilities to support grid stabilization and monetize stranded energy, we expect to see continued international growth towards our target of diversifying our hash rate globally. Furthermore, our UAE success also demonstrates how our immersion technology can unlock stranded energy even in the most challenging climate. In fact, a number of leading competitors recently requested to visit our Abu Dhabi facility to see for themselves how we achieved 99% uptime in such a challenging operating environment. Our success in the UAE has opened new international opportunities in Africa and Latin America, most recently in Paraguay, as we announced yesterday. This new joint venture is powered by the Itaipu Dam, one of the largest hydroelectric power plants in the world. Paraguay produces approximately 32 terawatt hours of surplus energy per year, and Bitcoin miners have the unique ability to co-locate right at the source and take advantage of the stranded energy. This helps local power generators monetize excess energy which otherwise would have been wasted or sold at a loss, without having to build expensive transmission lines and additional infrastructure. For Marathon, it provides attractive power costs for base load renewable energy. It is truly a win-win for both sides. Closer to home, we recently announced a pilot project in Utah that is exclusively powered by landfill methane gas. Methane is 80 times more damaging to the environment than carbon dioxide, and Marathon is uniquely positioned to capture and convert this environmentally harmful gas into inexpensive renewable energy. This initial pilot is expected to have all-in hosting costs below $0.04 per kilowatt hour, significantly below the average cost to mine in the US. But we think we can do even better. Our ultimate goal is zero-cost energy. You may ask, how is this possible? In addition to creating innovative ways to leverage energy that was previously inaccessible, we can repurpose the heat generated by Bitcoin mining towards revenue-generating projects such as heating greenhouses, shrimp farming, and other forms of low-grade industrial heat processes. We look forward to sharing more of the innovative projects that we're exploring in the months ahead. Why are we still focused on low-cost or even zero-cost energy? Well, as many of you know, Bitcoin mining revenues are impacted by the halving events that occur every four years when block reward subsidies are reduced by 50% to Bitcoin terms. The next halving is less than six months away. Over time, Bitcoin miners must reduce their reliance on block subsidies and increasing Bitcoin prices. We believe that in the long term, we can operate profitably by consuming wasted energy while monetizing heat offtake. The early results of our initial pilots look very promising. By reducing our dependence on block subsidies, we greatly improve the long-term viability of the enterprise. So what is Marathon doing to prepare? Our strategy has been to reduce costs and lower our risk profile as we continue to grow our hash rate. In addition to strong operating results, we also improved our financial profile this quarter. As Salman mentioned, we took advantage of the steep discount in our convertible debt to strengthen our balance sheet. We believe this traction was accretive to our existing shareholders, as the 21% on the principal amount due more than offset the additional equity issued. It also positions Marathon to capitalize on any near-term turbulence in the Bitcoin mining sector. Our balance sheet is now a source of strength that allows us to focus on further increasing efficiency and lowering costs. In the meantime, we are still focused on growth. We expect to reach 26 exahashes by the end of 2023 and plan to grow our hash rate by approximately 30% in 2024. We will maintain a flexible approach leveraging hosting providers and local experts to quickly test deployments in new geographies, while we continue to prioritize owned and operated sites for major deployment. We will also continue to innovate and continue to seek new ways of lowering costs by unlocking stranded energy and leveraging heat offtake. With our strong results in recent progress on these strategic priorities, we believe we are on track to become one of the largest, most efficient and technically advanced Bitcoin mining operations in the world. Combined, Marathon is well positioned for the halving, regardless of where Bitcoin prices are heading next year. Let me be clear, we've never been more bullish on Bitcoin. The sustained growth in adoption, use cases, and overall acceptance is very encouraging for the long-term prospects, and we're excited about our future.

Chris Brendler, Vice President of Investor Relations

Thanks, Fred. We will now begin the Q&A segment of today’s call. We'll start by addressing some of the most frequently asked questions submitted by investors through our Q&A platform. Our first question is from CK, who asked a two-part question. The first part is, why do analysts still prefer Riot and CleanSpark over Marathon after we took significant measures to eliminate long-term debt in the third quarter? Fred?

Fred Thiel, Chairman and CEO

Marathon still has more debt than our peers, and we're transitioning our business model. Our reported cost per Bitcoin is also higher, and we aim to close this gap in 2024. Also, as you look at our business, we believe that optimizing our costs through the benefit of some of the opportunities that will be available post-halving will enable us to continue to drive costs down significantly.

Chris Brendler, Vice President of Investor Relations

Great. The second part is if diluting to reduce debt in the mid $9 range is accretive to shareholders, why have no insiders bought common stock when the stock has dipped into the 8s? Do you also want to take that, Fred?

Fred Thiel, Chairman and CEO

Sure. So, SEC rules restrict insider buying under certain conditions, especially when executives and insiders are party to material non-public information. Typically, public companies like Marathon would have a window that is open to buy stock that starts typically a few days after earnings releases and closes around one month before the end of a quarter, which is a very small window. As we stated before, we have a lot of major initiatives underway, which means that the management team is currently very much in hold of or has knowledge of material non-public information, which could potentially lead to a violation if we were in the market buying. That said, we remain very bullish on the stock, and we continue to look forward to seeing how we can drive shareholder value going forward.

Chris Brendler, Vice President of Investor Relations

Our next question comes from Garrett A, who asks, why has MARA stock not increased to the degree that Bitcoin has in the past months? It's only a timely topic. Fred, you want to give your thoughts?

Fred Thiel, Chairman and CEO

Again, as we said earlier, we are very focused on lowering our cost and leveraging our strong balance sheet. We believe that shareholders are starting to look at the halving. And as you look across the whole mining sector, many of our peers have also seen their share prices declining, especially in the most recent few weeks. We believe that there are certain concerns regarding the ETF launching and the impact that that may have on Bitcoin miners as well. But as I said earlier, we remain very bullish and we think that this is going to be an excellent opportunity for Marathon to continue to grow.

Chris Brendler, Vice President of Investor Relations

Good. Let's move to our third question from Logan W, who asks, will you continue to dilute the shares? I'm sure you've heard this one a lot recently. Salman, you want to start on this one?

Salman Khan, CFO

Sure, Logan. Thank you for the question. We use equity capital for accretive growth capital projects. And as Fred had mentioned earlier in the call, we have a very strong pipeline of growth projects that we as a company and management team are very excited about. We have the option to source the growth either through selling Bitcoin or accessing capital markets. And what our internal analysis shows is a combination of Bitcoin sales to fund operating costs and equity for growth capital is the best source of capital. Any additional shares that we sell through our at-the-market offerings are for accretive growth projects. And those projects have to meet our internal double-digit hurdle rate, which means that the rate of returns must be accretive to the shares that we issue. Our management team meets once a month to revisit our sources of capital, and this strategy has worked well for our Company, but can be changed with changing market conditions and the Bitcoin pricing situation, for which we will adjust accordingly. This has allowed us to grow our Bitcoin holdings. As you know, we now have approximately $0.5 billion worth of Bitcoin on our balance sheet or dollar equivalent. And we have proven our ability to find and invest in attractive growth opportunities, as Fred alluded to earlier. In summary, everything we do has only one overarching goal: to maximize shareholder value. Hopefully, this answered your questions.

Chris Brendler, Vice President of Investor Relations

Great. Our next question comes from Derek G, who asks, why did Marathon choose to buy back the convertible debt instead of buying Bitcoin and increasing the hurdle value up to the debt level? Maybe a good way of looking at it. Maybe, Salman, you can start on this one? And Fred, you can finish it up?

Salman Khan, CFO

Sure. Thank you, Derek, for the question. We are the largest Bitcoin holder in the public company mining space. So we truly believe in Bitcoin and we hold to that HODL strategy as much as we can after paying for our operating costs. We continue to grow our Bitcoin holding beyond meeting our operating cash cost needs. As we went through the bear market analysis last year, it became important to reduce our debt and prepare for the next bear market. We felt it was prudent balance sheet risk management to reduce the debt to prepare for turbulent times. As I said earlier, we are long on Bitcoin price, yet we want to be prepared to weather the volatility that could result during the halving given the concerning macroeconomic environment. While we hope the Bitcoin price will act like previous halvings, the data shows us otherwise. Hope is never a good strategy, as it's said, and certainly we hope that the prices behave like they did in the previous halvings. But we want to be prepared for any bear market while being ready to grow as pricing stabilizes. A stronger balance sheet with reduced debt provides us options and the ability to act strategically when other inefficient or undercapitalized miners may not be able to survive. The short-term drop in Bitcoin could be devastating for companies not appropriately capitalized, as we talked about earlier. In addition to risk management, the economics of the notes exchange were attractive for us and resulted in over $100 million of shareholder value creation in real cash cost savings, which was icing on the cake.

Chris Brendler, Vice President of Investor Relations

Excellent. Fred, do you want to add anything to that?

Fred Thiel, Chairman and CEO

I think that if we were to buy Bitcoin with equity, we would simply be copying MicroStrategy's approach, which involves leveraging their balance sheet to purchase Bitcoin, making that the main factor behind their company's value. As a Bitcoin miner, we believe we create significantly more value by investing our capital in growth. Looking at our current position and the growth opportunities ahead, along with the initiatives we are pursuing, we are well-equipped to capitalize on both organic and inorganic opportunities as they arise. As we've previously mentioned, we anticipate numerous inorganic opportunities to acquire low-cost assets, particularly attractive power contracts, in the potentially volatile times following the halving.

Chris Brendler, Vice President of Investor Relations

Great. That leads right into our last question from our shareholders, which is from Edgar M, who asks, what makes this company the best option when it comes to Bitcoin mining? What makes you different? I'll let you do that one, Fred.

Fred Thiel, Chairman and CEO

I think it really comes down to a combination of things. Scale for the largest Bitcoin miner out there from a self-mining perspective that will continue to grow. That also gives us certain advantages in that partners want to work with us. It provides us the ability to do joint ventures with excellent partners like our partner in Abu Dhabi and others. As we continue to grow, especially in these new market areas, whether it be landfill natural gas or other locations, we will continue to leverage this concept as a way to grow in an accelerated way, optimizing our balance sheet leverage in the most capital-efficient way. The other thing is our tech stack. We are very unique in the mining space in that we have a fully vertically integrated tech stack. As can be seen by what we've done in Abu Dhabi, our ability to deploy single-phase immersion technology for cooling in one of the most grueling environments in the world for Bitcoin miners has been a resounding success. Excellent uptime and very efficient mining. We believe that sets the stage for how we'll expand with immersion going forward. But that's not all. We also have proprietary firmware, which allows us, post-halving, to operate our miners in a more power-efficient way, lowering our cost to mine Bitcoin, whereas others will have to run stock firmware on their miners and not be able to dial back their power consumption, keeping their miners running even if it may not be profitable to mine. Our balance sheet is extremely strong, with $600 million between cash and Bitcoin at today's prices. We have great liquidity in our stock, which gives us the ability to be very opportunistic should attractive growth opportunities arise in the market. We also have optionality as we’re continually focused on lowering our cost per coin while transitioning. We can grow, energize new capacity, and optimize our existing capacity, which positively affects our results, as you can see in the most recent quarter. Lastly, our people. I believe we have one of the best management teams in the industry and some of the best talent across our organization. There are not many companies that can execute as effectively as our team has executed this year, especially with as few people as we have, generating the results we've achieved. I'm very proud of our people and grateful for all the hard work they put in.

Chris Brendler, Vice President of Investor Relations

Couldn't agree more. Well done. In the interest of time, I think we'll wrap up this section of the Q&A. Again, we really appreciate the questions and interest. I'm now going to turn the call back to our operator to open the line to questions from our covering analysts. Sherry, back to you.

Operator, Operator

Thank you. Our first question is from Chase White with Compass Point. Please proceed.

Chase White, Analyst

Thanks for taking my questions. My rough calculations suggest that your hosting cost for the quarter was around $0.057 per kilowatt hour, which is an improvement compared to previous quarters. This aligns with your 18% growth in average operating hash rate while costs only increased by 8%. How should we consider that hosting cost on a per kilowatt hour basis for the US fleet as we move into 2024?

Fred Thiel, Chairman and CEO

Great question. Obviously, when you begin an optimization effort like we did recently, there's some low-hanging fruit, and we've been able to take advantage of that, hence the great results we had. There are still more opportunities to harvest. We think as we continue to work with our hosting partners and actively manage them, there are still opportunities to drive further efficiencies in what we're doing. There are also opportunities for us to work with hosting partners to renegotiate some of the agreements, especially as we are taking on a greater and greater responsibility for the operation of sites and the optimization. I believe the combination of more owned and operated, together with more efficiently managed sites, is going to continue to drive a decrease in cost to mine Bitcoin.

Chase White, Analyst

Got it. That's helpful. And you mentioned 30% hash rate growth in 2024 from the expected 26 exahash at the end of this year. Could you just give us a sense of a roadmap for that 30% hash rate growth in 2024 and what pieces kind of drive that?

Fred Thiel, Chairman and CEO

We've already talked a little bit about the Paraguay expansion. There are other opportunities that we haven’t announced yet, but we're pretty far down the road in finalizing agreements and projects that will bear fruit in the first half of next year, as well as in the back half of next year. So it’s going to be a little lumpy, to be fair. You'll see a few exahash in the first half of the year and then the balance kind of backloaded towards the second half of the year. The goal is really focusing on the cost side of it as we expand this capacity.

Chase White, Analyst

Got you. Very helpful, thank you.

Operator, Operator

Our next question is from Lucas Pipes with B.Riley Securities. Please proceed.

Nick Giles, Analyst

Yeah, hi. Thank you very much, operator. This is actually Nick Giles on the call asking a question for Lucas. Fred and team, just wanted to get your sense of how would you frame up a hurdle rate for the sector in terms of new projects?

Fred Thiel, Chairman and CEO

I think each miner has their own individual weighted cost of capital. So I'm not going to opine on our colleagues in the industry. We're looking typically at projects that return north of 20%.

Nick Giles, Analyst

That's helpful, Fred. I know one of your peers had called out a hurdle rate of around closer to 30% or 35%. So I was just trying to understand what your take was. But yes, thank you very much for that. I'll return to the queue for now.

Operator, Operator

Our next question is from Kevin Dede with HC Wainwright. Please proceed.

Kevin Dede, Analyst

Hi, Fred, Salman. Thanks for taking my questions. I have quite a few for you, Fred, and I’ll try to keep them focused. Can you provide more details about the five exahash you just purchased, including your projections and the relevance to Chase's question? Additionally, could you share some information regarding your hedging strategy?

Fred Thiel, Chairman and CEO

Just to start, I'll defer the hedging question to Salman, but on the growth perspective, you've gotten a little taste of what we're doing as we look at these pilots. We have a number of growth initiatives in mind. Instead of committing large amounts of capital to an initiative before it's proven, we're conducting numerous pilots. When a pilot proves itself, we can have the confidence to deploy capital. It also allows us to compare and contrast different potential opportunities, optimizing the best return on our capital. We have set a pretty high hurdle for this year to hit our 23 exahash goal, and I think we learned that the market would appreciate us to talk less about our growth plans specifically and more about our actual execution.

Chris Brendler, Vice President of Investor Relations

With that, I'll let Salman answer the question about the hedges.

Salman Khan, CFO

Sure, thank you, Fred. Thanks, Kevin, for asking this question. Our hedging strategy is normal business practice from a financial risk management standpoint. This is a newer industry, but in more established and sophisticated industries that are exposed to commodity prices, like oil and gas or gold, you see hedging strategies deployed by companies to manage their portfolios. In our case, we view that as a good risk management practice from a balance sheet perspective. Given we have a sizable holding of Bitcoin on our balance sheet, this requires us to deploy certain prudent practices, and this is part of that. So the way to view that is we look at our near-term cash flow needs and try to target a certain percentage of our holdings, using costless callers that protect us from downside risk while maintaining upside potential. These are costless callers, meaning that if the price remains within a certain range, we will end up being essentially costless. In a situation where the price lands between the downside protection and the ceiling between the swaps or options, there could be a cost to us, while still providing us the upside on the Bitcoin on the balance sheet and protecting against downside risks.

Operator, Operator

Thank you. At this point, there are no further questions. I'm going to turn the call back over to Chris Brendler for closing remarks.

Chris Brendler, Vice President of Investor Relations

Okay, well thank you all for your time today. If you have any questions that were not answered during our call, please feel free to contact our Investor Relations team at ir@mara.com. Thank you and enjoy the rest of your day.

Operator, Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.