CIFRW - Cipher Mining Inc. (CIFR) CEO Tyler Page on Q2 2022 Results - Earnings Call Transcript

Cipher Mining, Inc. (CIFR)

Q2 2022 Earnings Conference Call

August 9, 2022 8:00 AM ET

Company Participants

Lori Barker - Investor Relations

Tyler Page - Chief Executive Officer

Ed Farrel - Chief Financial Officer

Conference Call Participants

Kevin Dede - H.C. Wainwright

Presentation

Operator

Good morning. Thank you for standing by and welcome to Cipher Mining's Second Quarter 2022 Business Update Conference Call. Please be advised, today's conference is being recorded and a replay will be available on Cipher Mining's Investor Relations website.

I would now like to hand the conference over to Lori Barker, Investor Relations. Please go ahead.

Good morning, ladies and gentlemen, thank you for joining us on this conference call to discuss Cipher Mining's second quarter 2022 business update. Joining me on the call today are Tyler Page, Chief Executive Officer; and Ed Farrel, 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 website at investors.ciphermining.com.

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 and any taping or other reproduction is expressly prohibited without prior written consent.

Before we start, I'd like to remind you that the following discussion as well as our press release and presentation contains 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 risks in this conference call include 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 these reconciliations which are found at the end of our earnings release issued earlier this morning.

I will turn the call over to Tyler. Tyler?

Tyler Page

Hello, this is Tyler Page, the CEO of Cipher Mining, and thank you for joining us today on our second quarter business update call.

Let me begin today's call with some key highlights about our progress. First, we continue to deploy our new bitcoin mining data centers. Notably, we have completed the build-out of our Alborz data center, which is a 40 megawatt facility powered by wind. This site has machines capable of generating up to 1.3 exahash per second. Which on a windy day means the data can generate up to 5.7 bitcoins in current market conditions. In the coming months, we will continue to deploy further data centers as we complete our initial build-out.

We have industry-leading unit economics in our operations resulting from our low cost structure that I will walk through today. We believe these unit economics are the most important factor when evaluating a bitcoin mining company. Given our strong unit economics we have a business model that is more resilient than our competitors in the tougher bitcoin mining environment that we have seen in the past few months.

Let's talk a little more about our low cost operations in the large-scale we are building. As we roll out our data centers we expect to deploy up to 6.9 exahash per second by early 2023. And importantly, we will do that with a new fleet of machines that averages 32.1 joules per terahash in terms of efficiency and for which we paid an average price per terahash per second of $34.96. We source our power via five year power purchase agreements with an average fixed price of power of $0.273 cents per kilowatt hour. These power purchase agreements are longer than those typically contracted by our competitors and feature a low fixed-price as the contracted power is the most significant operating expense for a bitcoin miner. In the current expensive energy price environment these contracts are incredible assets to have.

Our anticipated cost for non-rig infrastructure per megawatt at our data centers is $450,000 and we anticipate completing another three data centers in addition to Alborz by early next year or in initial deployed capacity of 265 megawatts.

Now, let's turn to a broader market update for the time period roughly since our last business update call. There has been a fair amount of turmoil in a broader bitcoin ecosystem, particularly in the mining sector. We saw bitcoin prices drop approximately 50%, triggered by several alarming events in the industry that we've highlighted in the graph on page five. The shifts in the marketplace has had several serious implications for the mining sector. Specifically, we have seen the prices of mining rigs substantially reduced and have seen secondary market transactions in the 20s and 30s in terms of dollars per terahash per second.

Equipment financers to bitcoin miners have halted loan originations and several existing loans made to bitcoin miners have [indiscernible] schedules that presume a better mining profitability environment. This in turn has led to some miners liquidating their bitcoin treasuries to meet their debt obligations. Against this market backdrop, Cipher Mining has several key competitive advantages, the best in class power contracts and mining rig purchase contracts I mentioned earlier allow us to operate profitably in a lower Bitcoin price environment than most of our competitors.

Furthermore, our ability to sell power to the market at the largest mining facility in our portfolio. Hedges us against markets where it may become less profitable to mine bitcoin because of further price drops or large increases in network hash rate.

Let's take a moment to speak about unit economics and bitcoin mining and why this is such a focus for our management team? On the left side of slide six, you can see a graph of recent power prices per megawatt hour in the region of Texas where our Odessa data center is being built. As you would imagine, with the hot summer Texas has been experiencing, power prices have been high and these prices are somewhat indicative of power prices everywhere else. You can see the red dotted line on the graph that shows where our fixed price falls relative to these recent market prices.

On the right side of the slide, you can see a simple two-by-two matrix that shows revenue per megawatt hour generated assuming new mining rigs with bitcoin prices of $20,000 and $25,000 and a network hash rate of 200 exahash per second and 225 exahash per second. As you can see, in the current power and bitcoin price environments the cost of power for someone without a fixed price contract can exceed the revenue generated by mining bitcoin. The reason why we are so focused on our cost of power is illustrated here.

Let's compare Cipher with what might be called a typical competitor. With an average price of power at roughly $27 per megawatt hour Cipher can be very successful even in the current environment for bitcoin miner. Furthermore if the potential revenue for selling power exceeds the revenue that can be generated from mining bitcoin, we will sell that power to the grid rather than use it to operate our mining rigs. Our power contracts are fantastic assets.

Our CapEx that we need to pay back is lower than most competitors because we paid a very reasonable $34.96 per terahash per second for our machines. And we have no corporate debt. Our joint venture at Alborz has an equipment finance debt facility and our share is roughly $11 million in total. As a result, we believe Cipher has among the strongest unit economics in bitcoin mining.

Let's contrast that with our competitors. They pay higher energy or hosting costs at their data centers. We have seen recent quotes for hosting services that exceeds $70 per megawatt hour. Given that most of our competitors are older than us, they often have an older fleet of less efficient mining rigs that cannot produce the revenue numbers listed in the metrics. Many of them paid top of market prices for their mining rigs at $70, $80 or $90 per terahash per second. Furthermore, almost all of our competitors have significantly more debt than we do. And often arranged a high loan to value facility against those higher machine prices they paid. Given that most lenders in our space have structured their loans to amortize in advance of the 2024 halving, monthly debt payments can become extremely onerous. When combined with these other factors, many of our competitors have monthly payment obligations that exceed the revenue generated by their bitcoin production, irrespective of how large their total hash rate production may be. Mining is a cyclical business and Cipher Mining has been designed to succeed throughout the cycle.

Now let's turn to some milestones and updates on our company. We believe we have best-in-class data centers, construction processes and team members. As I mentioned, we have fully completed our first data center at Alborz with 1.3 exahash per second installed. Our second and third data centers Bear and Chief are nearing completion with all mining rigs and route to the sites. Those sites will soon bring roughly two-thirds of an exahash per second of hash rate online. Our construction team has been working feverishly over the past few months and our wholly owned Odessa site is scheduled to deploy throughout the second half of this year. Simultaneously, we are working on our next-generation data center design in evaluating immersion and liquid cooling designs as part of that process, as we plan our new 2023 data centers.

Our team has been growing and is now up to 20 senior members. Our most recent hires come from firms like Alphabet, Amazon, Met,. Morgan Stanley, Point72 Asset Management and Scotiabank. Those senior team members are overseeing and workforce of contractors at our sites of roughly 180 total people. One particularly influential group of new team members is our data science team who are building predictive wind models to enhance our operation. Someday in the future, we believe we may be able to expand upon their work and offer products and services to third parties to assist with managing the complexities associated with the intermittency of renewable power.

Next, I will discuss our implementation plan and strategy update. On page 10 you can see our 2022 updated site forecast timeline. As you can see, we expect to have three data centers operational by the end of Q3 and expect to be bringing our Odessa data center online throughout the second half of the year. Looking out to 2023 we have several interesting expansion opportunities, including our site at Andrews, Texas, which will be co-located with a new solar farm and several possible sites with our joint venture partner WindHQ.

Now, let's show our deployment progress. Here are some pictures of the completed Alborz data center. You can see that it is a very clean new site with the wind turbines in the distance bringing the power to our containers. Here are pictures of the Bear and Chief data centers. As you can see, there is ready to receive the mining rigs that should be arriving in the coming weeks and Chief will be next from a timing perspective. It's our hope that we will be showing you pictures of these datacenters completed at our next update. Here are pictures of the progress at Odessa. You can see our completed substation in the upper right hand corner. The other picture show various areas of the 54 acre site getting ready to receive our first batch of machine.

Let me close with some key statistics from our continued initial build out and some highlights of our liquidity profile. As I previously mentioned, we have paid a very competitive weighted average cost for our mining rigs of $34.96 per terahash per second. Those rigs will hash with an anticipated efficiency of 32.1 joules per terahash. Our weighted average power price is $0.273 per kilowatt hour and our anticipated infrastructure CapEx cost per megawatt is $450,000.

Some highlights of our strong liquidity profile include that we had approximately $30 million of cash and a $9 million receivable from our JV partner on August 1, 2022. We have adequate capital to complete the infrastructure build out all of our initial data centers. We have no corporate debt. Our mining rig contract with Bitmain is fully paid at this point and we have made a lot of progress on our MicroBT mining rig contract. Specifically, we have paid roughly $101 million so far out of a total contract estimated to be $200 million. We are currently in discussions with MicroBT to optimize our remaining payment and delivery schedule to match our data center deployments into 2023. Our remaining $99 million of purchases in future deliveries expected under the contract are secured by a roughly $9 million deposit.

In summary, we are very well positioned to weather today's challenging bitcoin mining market and we have good flexibility should conditions worsen. Most importantly, we understand managing through bitcoin mining cycles and can benefit quickly from market improvements when the cycle returns to a more favorable environment.

Now, let me hand it over to Ed.

Ed Farrel

Thank you, Tyler. And hello to everyone on the call. As evidenced in the photos that Tyler presented, you can see that not only did we complete the Alborz facility, but we continue to make significant progress in building out our data centers in the second quarter of 2022. This resulted in fulfilling the commitments we previously announced relating to purchasing mining rigs, electrical infrastructure, security deposits for our power purchase agreements and corporate related expenses to support our business.

During the quarter, we invested approximately $66 million on capital expenditures relating to the build-out of our data centers. Since inception we have invested $278 million related to CapEx, which is recorded on our balance sheet as deposits on equipment, property and equipment and investments in equity investee, the latter representing Cipher equity interest in the Alborz joint venture. On June 30, 2022 we had cash of approximately $37 million and a funded operations with equity and have no debt at the corporate level.

If we look at our GAAP operating results for the quarter ended June 30, 2022, we had a net loss of approximately $29.2 million resulting in a net loss of $0.12 per share. The primary drivers of this loss include stock-based compensation of $10.1 billion, we recognized a loss of $11.6 million related to the contribution of miners from Cipher to our JV Alborz due to the fair value being less than the cost we paid for the miners which is included in loss of equity investment on our income statement.

Corporate related expenses of approximately $6.6 million include insurance, professional fees, employee comp and benefits and other public company expenses. We believe non-GAAP financial measures are also helpful to investors in comparing our performance across reporting periods on a consistent basis. Our non-GAAP P&L and non-GAAP diluted earnings per share excludes the impact of certain noncash recurring items which include stock compensation expense, depreciation of fixed assets and the change in fair value of our warrant liability. These measures are not a substitute for GAAP results, but management will use these non-GAAP financial measures internally to help understand, manage and evaluate our business performance and to help us make operating decisions. So for the three months ended June 30, our non-GAAP loss is $19 million, resulting in a non-GAAP loss of $0.08 per share. We provided a reconciliation of our GAAP versus non-GAAP results.

Finally, we continue to achieve several key milestones in our business plan and we look forward to reporting our progress in future periods as we continue to scale Cipher’s operations.

I will stop there and Tyler and I are happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Kevin Dede. Your line is open.

Kevin Dede

Good morning, Tyler, Ed. Thanks so much for having me on the call.

Tyler Page

Hey, Kevin.

Kevin Dede

Congrats on. -- Yeah. Congrats on Alborz. Could you just sort of fill me in on where you are with Bitmain? My understanding and just remind me that 6.9 target for say March quarter ’23, what was the mix again of MicroBT versus Bitmain?

Tyler Page

Yeah. So that is -- let me start at the high level. We have a 27,000 machine contract with Bitmain. That I think we mentioned is paid off at this point, I think there's one more – technically, I think one more monthly payment due, but we actually have a credit with them as the prices are flexible and have been dropping. And then we have a 60,000 machine contract with MicroBT that is just beginning deliveries now.

Now, all of those 87,000 machines that is to cover our joint ventures at Alborz, Bear and Chief as well as Odessa, which we own 100% of. I mentioned that, because basically half the machines found for Alborz Bear and Chief are effectively sold through our JV partner. Right? So we have round numbers -- 13,000 machines at Alborz, so about 65,000 of those are ours. And then again back of the envelope, there will be about 65,000 machines going to Bear and Chief collectively. And again, half of those roughly will be our, 32,000, 50,000 or so. Does that answer your question.

Kevin Dede

Yeah. I have to juggle little puzzle pieces in my mind, but I think I’ll get there. The $99 million that you -- I think is still owed to MicroBT, that goes above and beyond what you have access to now. I didn't get through the balance sheet carefully.

Tyler Page

Yes. So, as we mentioned, right now we've got or as of August 1, I should say, $30 million of cash, we have a $9 million income in receivable from our JV partner that will come in shortly. And then, no corporate debt. And so, we are in current discussions with MicroBT to align the payments and deliveries of machines under our contract to better align with the readiness at the data centers. So, meaning, back of the envelope, we've paid for about, call it, roughly half of that 60,000 machine order thus far. Shipments are beginning so that we will have them on site and then we are in discussions with MicroBT to push the payment and delivery obligations at the back end of that contract into 2023.

So when we think about fulfilling that contract we can either pay for it with cash and then cash being generated from operations as the datacenter's spin up and continue to mine more bitcoin. We remain flexible with sort of capital markets transactions and potential debt, though the market has dried up a little bit for equipment finance over the last quarter, we are in current discussions with some lenders about potentially doing a secured debt facility against some of our data centers. So that could be an option as well. And if not, we also have the flexibility we will -- we have more than enough cash to build all of the non-rig infrastructure at Odessa. And so, we have flexibility on the remaining sort of unallocated machines, about -- the whole site will take about 60,000, there is about 40,000 that are accounted for between MicroBT and other machines we have coming from Bitmain. And so on that last, let's call it, one-third or so of the Odessa data center, we will have flexibility. We could do hosting, we could simply sell power, we do have the rights to sell power and we have a fixed price of $27 per megawatt. So we sort of prioritize flexibility just given the market backdrop. But those discussions with MicroBT are ongoing, we will have in all likelihood given our ambitious growth plans for 2023 more machines to be buying as well in the future. And so we're working with them on aligning the timing of payments just to match our own development plans as things come up and online.

Kevin Dede

Okay. And I understood you correctly, Tyler, in thinking that the infrastructure ally apart from the machines is all said and done.

Tyler Page

Yes.

Kevin Dede

Okay. Can you give us an update on where you think Bitfury development is and your relationship there?

Tyler Page

Yeah. I mean, we still have roughly six years left of a seven year master agreement with them that provides us the right of first refusal on their equipment, as well as a most favored nation pricing framework for that equipment. I think we've mentioned in the past that this year we did not flex the option to buy their equipment. But we think there is value and still having six years if we return to a machine market where it is difficult to acquire machines that should provide us a decent advantage, assuming they come out with competitive machines in the future. They remain roughly an 80% -- a slightly more than 80% shareholder of ours. But that's where it is.

Kevin Dede

Okay. The $9 million -- I know this is better for Ed. The $9 million due from the JV is on account of what the initial spool up at Alborz?

Tyler Page

Correct.

Ed Farrel

Yes. That's our contribution to Alborz that they will reimburse us for.

Kevin Dede

Okay. So it's primarily rigs that we contributed through the JV? Okay. Then -- all right. Yeah. Good. Okay. I'll hop back in the queue. Thanks so much, Tyler. I appreciate it. Good to talk to you both.

Tyler Page

Thank you, Kevin.

Ed Farrel

Thanks, Kevin.

Operator

There are no further questions at this time. Tyler, I turn the call back over to you.

Tyler Page

Thank you very much for joining our second quarter business update call and we look forward to the next one when we will hopefully have more great progress to report on. Please do check out our website ciphermining.com to learn more about us. Thank you very much.

Operator

This concludes today's conference call. You may now disconnect.

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