Cipher Mining Inc. (NASDAQ:CIFR) Q1 2023 Earnings Call Transcript May 14, 2023

Operator: Good morning, and welcome to the Cipher Mining First Quarter 2023 Conference Call. All lines have been placed on use to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I’d now like to welcome Joshua Kane with Investor Relations to begin the conference. Josh, over to you.

Josh Kane: Good morning. Thank you for joining us on this conference call to discuss Cipher Mining’s first quarter 2023 business update. Joining me on the call today are Tyler Page, Chief Executive Officer; and Ed Farrell, Chief Financial Officer. Please note that you may also review our press release and presentation, which can be found on the Investor Relations section of the company’s website. Please note that this call will also be simultaneously webcast on the Investor Relations section of the company’s website. This conference call is the property of Cipher Mining and any taping or other reproduction is expressly prohibited without prior consent. Before we start, I’d like to remind you that the following discussion, as well as our press release and presentation, contain forward-looking statements, including, but not limited to, Cipher’s financial outlook, business plans and objectives, and other future events and developments, including statements about the market potential of our business operations, potential competition and our goals and strategies.

The forward-looking statements and 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. Additionally, the following discussion may contain non-GAAP financial measures. We may use non-GAAP measures to describe the way in which we manage and operate our business. We reconcile non-GAAP measures to the most directly comparable GAAP measures, and you are encouraged to examine those reconciliations, which are found at the end of our earnings release issued earlier this morning. I will now turn the call over to Tyler. Tyler?

Tyler Page: Thanks, Josh. Hi. This is Tyler Page, CEO of Cipher Mining. Thank you very much for joining our first quarter 2023 business update call. Let me start with some key developments since our last update. In the brief period since our Q4 call, we’ve achieved several milestones. Most importantly, we recently announced that Cipher has achieved over 6 exahash per second of self-mining capacity across our portfolio. Over the last 1.5 years, we have financed, designed, built, and now operate one of the largest mining fleets in the world. With the completion of this first phase of growth, Cipher now operates over 59,000 machines. We’re extremely proud that we have done this in the time frame that we set out and without having to dilute shareholders or take on the burdensome debt that crippled many others in the industry.

Following the successful completion of this first phase of growth, we are delighted to announce today that we recently agreed to purchase another 11,000 miners to finalize the Odessa data center. We expect to complete this final phase of the data center by the end of Q3, which will bring our self-mining capacity to over 7.2 exahash per second across our portfolio. This purchase agreement secures rigs for Cipher in a very attractive pricing market and continues our track record of taking advantage of cyclical opportunities. We continue to evaluate the potential expansion at our Bayer and Chief data centers, and we are also reviewing a broad range of new data center opportunities. We are very excited about the new opportunities we are seeing today with the experience and expertise across our team from power origination to construction to operations to technology and finance, we are able to assess and potentially pursue transactions that would deliver similar returns to our existing portfolio.

As a reminder, our weighted average cost of power is approximately $0.027 per kilowatt hour and about 96% of our portfolio is energized through fixed-price power. Power represents roughly 80% of our operating costs and is a key driver of our best-in-class unit economics. Structuring favorable energy economics remains the most important element of any future opportunities we consider. This is a cyclical business. Managing through the cycle is a fundamental part of our philosophy and reflects the way we run every aspect of our business, whether that involves finding low-cost power or not overpaying for machines during bull markets, or avoiding overly burdensome debt. On Page 4, we give some key performance indicators that we currently observe in the business as we continue to ramp up.

Our self-mining hash rate is 6 exahash per second, and we expect to reach 7.2 exahash per second by the end of Q3 as we plug in the recently purchased additional 11,000 new rigs. Should we decide to expand at Bear and Chief, we could bring our self-mining capacity to 8.2 exahash per second by year-end 2023. We currently operate roughly 59,000 rigs, and our new purchase will bring our operating fleet to over 70,000 in the third quarter. Using newer and efficient machines with a low cost of power makes us a low-cost producer of Bitcoin, giving us resilience in the bear market and also operational leverage in a bull market. On the bottom of this slide, you can see some of our current production numbers. We continue to apply prudence to the management of our Bitcoin treasury and generally sell enough Bitcoin every month to fund our operating expenses.

Given current market conditions, we have also been funding our CapEx at Odessa through ongoing operations. We constantly assess the right approach to funding growth. But our best-in-class unit economics and strong balance sheet give us the flexibility to self-fund growth when debt and equity markets are less favorable. Before diving deeper into a market update, let me take a moment to remind everyone how our business model works. On Slide 5, you will see a simple overview of a bit clean mining business. We operate the box in the middle of the drawing that says mining equipment, which represents our data centers and mining rigs. As I discussed earlier, we spent the majority of our operating expenses on electricity, which our data centers convert into computing output.

Unlike traditional data centers, which operate a similar model and sell their computing output to enterprise clients for dollars, Cipher sells its computing output called hash rate to the Bitcoin network for Bitcoins. To make this model operate profitably, a Bitcoin mining company needs to control both its electricity costs and the capital it spends to build its data centers, including what it spends to purchase mining equipment. Controlling these costs enables a minor to be a lower-cost producer, and our focus at Cipher has always been on controlling these specific costs to produce the best possible unit economics. Let’s now turn to Page 6 and take a look at recent market events in the Bitcoin mining space and talk about Cipher’s approach to these volatile markets.

During the quarter, we have seen a rally in Bitcoin prices, which may be part of a flight to safe-haven assets condition between Bitcoin and safe-haven assets may lead to greater Bitcoin adoption in the coming years. However, accompanying this price increase has been a steady climb to an all-time high in Bitcoin network cash rate, which continues to suppress overall mining economics. With this market backdrop, we continue to believe that it’s a buyer’s market for rigs for those who can afford them. And as we announced, we have been focused on taking advantage of those conditions. On Slide 7, we give a portfolio overview of our data centers. We have completed the build-out of our Albors, Bayer, and Chief data centers and expect full completion of Odessa by the end of the third quarter.

Our cost of electricity per bitcoin generated at our sites are some of the lowest in the industry. And for those who are relatively new to the story, the chart on the right shows you the dramatic build-out in Cipher’s overall hash rate from Q4 2022 through today as well as the additional 1.2 exahash per second that we expect to come online with the completion of Odessa in the near future. Moving to more specific highlights on each data center. Slide 8 shows an overview of operational highlights at our Albors data center. Alborz is 100% powered by wind and is a joint venture that we share with our energy provider. It has a total operating capacity when the wind blows of 40 megawatts. That 40 megawatts powers roughly 1.3 exahash per second of rigs.

Albors can mine roughly 3.5 bitcoin per day, and year-to-date, the site has mined approximately 320 Bitcoin. Roughly half of that total capacity and production belongs to Cipher. Most importantly, our recent all-in electricity cost per bitcoin at Alborz was approximately $6,747 demonstrating our resilient low-cost structure. Slide 9 shows operational highlights from our Bear and Chief Data Centers. Bear and Chief were completed and made fully operational last October. Combined, the sites operate 20 megawatts, which power approximately 0.65 exahash per second and can generate roughly 1.76 bitcoins per day in current market conditions. Bear and Chief are also structured as joint ventures with similar shared economics to Alborz. Unlike our other sites, which have behind-the-meter power arrangements, Bear and Chief are set up in front of the meter in a location within Texas that typically features attractive market prices.

Our recent all-in electricity cost per bitcoin at the combined sites was approximately $5,927. Turning to our Odessa Data Center. Slide 10 includes our most recent production numbers as well as a timeline for the completion of our site build-out. At the end of April, we reported a hash rate of approximately five exahash per second at the site, generated using approximately 170 megawatts. We have mined roughly 1,306 bitcoin at the site year-to-date and had a recent daily mining capacity of approximately 13.6 bitcoins per day. Our recent all-in electricity cost to produce a Bitcoin at Odessa was approximately $7,309. As previously discussed, we expect to energize our newly purchased 11,000 rigs by the end of the third quarter, which will bring the full capacity at the Odessa site to 6.2 exahash per second.

Turning to Slide 11. I’d like to walk you through a case study to demonstrate some of the competitive advantages of our setup at Odessa. As the Odessa site ramps up, we are just beginning to see the tremendous positive impact that our power purchase agreement gives us in terms of mining economics and the upside potential from selling power. Slide 11 is a case study showing how we operated the Odessa data center on March 28 and 29. Our operations on these particular days illustrate how we monetize our flexibility on the power side. Under our Odessa contract, the power provider has the right to curtail our power use up to 5% of hours over the course of the year. They will generally try to do this when open market prices for power are high so that they can reap larger returns from selling power in the market as opposed to selling it to us at our low contracted fixed price.

We also have the right to self-curtail shut down our machines and sell the power we are then not using at our data center back into the market. The graph on Slide 11 has vertical bars that illustrate the open market floating price for power in 15-minute increments. It also features a blue horizontal line representing our fixed price for power and an orange horizontal line showing the then-current Bitcoin mining revenue priced in dollars per megawatt hour. It’s worth looking at the spread between these two horizontal lines to get a sense of our very attractive operating margins at Odessa. As you can see, the market price for power fluctuates wildly during the two days between negative $20 per megawatt hour, all the way up to $2,000 and beyond.

The white vertical lines show what the open market floating power prices were during times when Cipher was mined at the coin and paying the low fixed price represented by the blue horizontal line. For many of our competitors without a fixed price power contract, those tall spikes shown in the white lines would result in either loss-inducing Bitcoin mining operations or having to shut down to avoid losses. During these two days, we had a stretch of time where the power provider curtailed Cipher’s mining operations and have colored that time period in red. During this time period, we produced no revenue at the site. On the other hand, the green vertical lines represent the floating market power prices during times when Cipher opted to self-curtail voluntarily shut down our machines and sell power back into the market.

By doing this, we realized excess power trading profits above Bitcoin mining of over $145,000 in a period of less than three hours. On the whole, in this 2-day period, Cipher missed out on roughly 5 hours of mining profits when it was curtailed by our power provider, but we also made excess profits by self-curtailing and selling power back to the grid for 2.5 hours. The net result was a particularly strong one for our operations, where we made more money through managing curtailment than if we had been Bitcoin mining for 100% of the time. In this one 2-day period in March, you can see many of the favorable elements of our power arrangement at Odessa in action. You can see the value of locking in a cheap electricity price well below where floating prices can spike.

But you can also see the tremendous net value to Cipher of monetizing the flexibility of our data center. Our operations benefit from this ability to mine Bitcoin or resell power and pursue whatever strategy is most profitable. Also, the times when we happen to resell power are not only profitable but also coincide with the times when the grid needs that power the most. This phenomenon illustrates the tremendous symbiotic nature of adding flexible Bitcoin mining loads to grids overall. We expect to continue to see examples of this, especially in seasons like summer and winter when there is a greater likelihood of spikes in the market’s floating power prices. It’s also worth noting that for those of you who follow our monthly production report, we are not like many other Bitcoin miners where you can draw a straight line from Bitcoin production to revenues.

In our case, a lower Bitcoin production number may reflect periods where we self-curtail and take advantage of power sales to increase profitability. And even in cases where we are not mining because we are curtailed by the power provider that ultimately means we will have more optionality to optimize our profits later in the year as our counterparty uses up their annual curtailment allotment. This complex optimization process is only possible because of the prodigious skills we have assembled on our team and the tremendous industrial and technological operations they have built. With that, I’d like to turn it over to our Chief Financial Officer, Ed Farrell.

Ed Farrell: Thank you, Tyler, and hello to everyone on the call. Tyler talked about the impressive ramp-up in our operations that we have seen over the past several quarters, and we are now beginning to see that flow through to the financials. I’m happy to report for the three months ended March 31, 2023, that our production at our Odessa facility mined 947 Bitcoin, resulting in Cipher reporting $21.9 million in revenue. This, coupled with the 198 Bitcoin we earned at our JVs resulted in a total of 1,145 Bitcoin mined in the first quarter. Please note that the financial impact of the Bitcoin mined at our JVs is included in the equity investee account on the income statement. With the build-out of Odessa expected to be complete in the first half of 2023, we look forward to providing the market with greater detail on our financials, which we believe will highlight our best-in-class unit economics.

And at the corporate level, our philosophy towards our financial strategy mirrors our prudent approach to the rest of our business. This is a cyclical business, and we want to maintain a strong balance sheet and financial position that gives us maximum flexibility over the course of the cycle. We have no debt at the corporate level and one small equipment financing loan at the project level. As we have talked about in our monthly production reports, we are managing our Bitcoin treasury to fund both the remaining CapEx at Odessa and the day-to-day operations with current Bitcoin production. The ability to fund both capital expenditures and operating expenses while building a Bitcoin reserve reflects our best-in-class unit economics that will become more and more apparent as we get to a full run rate later in the year.

Now I’d like to turn to the Odessa PPA. On Slide 11, Tyler will walk through a very helpful case on the business opportunity that we have structured with illuminate power agreement. We believe the value of this PPA is not fully appreciated by the market. As a reminder, we began publishing a third-party mark for this agreement in the third quarter of 2022, which we believe underlies the fundamental value in the business. This market is shown as a derivative asset on the balance sheet and gets revalued each reporting period. It essentially reflects the in-the-money value of the contract relative to the current market the power prices at Odessa. On March 31, this asset was valued at $72 million or an increase of $5.3 million, which is recorded as a gain in our income statement.

Please note that this asset is in two components: $17 million is the current asset and $55 million as a noncurrent asset. For this period and future periods, the change in fair asset of this contract will flow through our GAAP earnings, and we will exclude the impact of non-GAAP reporting. Other significant assets include liquidity of $13.5 million. This includes $3.9 million in cash and Bitcoin of $9.6 million. Property and equipment of $263 million is primarily related to the Odessa facility, which includes miners of $135 billion, we sold improvements of $118 million, and construction in progress of $24.3 million. These items are offset by $15.4 million of accumulated depreciation. In addition, we have security deposits of $17.7 million that primarily relate to the collateral for our aluminum power agreement.

Our equity investments of $35.5 million relates to our JVs, Alborz, Bear, and Chief. Our current liquidity position is $14.8 million in cash and Bitcoin. Also to date, we have not utilized a $250 million ATM program because we believe it would be dilutive to shareholders in the current conditions. Because of our strong financial position and unit economics, we can fund our ongoing growth without tapping the ATM. We do believe the ATM is a useful tool, which we can access for the right opportunity and the right market conditions, but the hurdle for us is a project or opportunity that is accretive to the company and shareholders. Now let’s look at our GAAP operating results for the quarter ended March 31. We had a net loss of $6.6 million, resulting in a net loss of $0.03 per share versus the prior-year quarter, where we had a net loss of $17.5 million or a net loss of $0.07 per share.

Again, Bitcoin mining operations at our Odessa facility mined 947 bitcoin and generated $21.9 million for the three months ended March 31 at an average price per bitcoin of $23,000. On a comparative basis, the Odessa facility began mining operations in mid-November 2022. Therefore, the company did not earn revenue from Bitcoin mining during the three months ended March 31, 2022. The cost of revenue for the three months ended March 31, 2023, was $8.1 million and consisted primarily of power costs at the Odessa facility as well as maintenance expenses for mining operations. We did not incur power costs in the prior year’s quarter as again, the Odessa facility mining operations did not begin until late 2022. The change in fair value of our Odessa power agreement, which I mentioned earlier resulted in a gain of $5.3 million.

Equity and losses of equity investees totaled approximately $800,000 for the quarter ended March 31, an increase of $600,000 from the three months ended March 31, 2022. To remind everyone, the equity and losses of equity investees consist of our 49% share in the earnings or losses generated by our three partially owned mining sites. General and administrative expenses of $17.4 million for the current quarter remained flat from the previous year’s first quarter. Within G&A, the primary drivers are stock-based compensation of $8.8 million in the current quarter versus $9.5 million in the prior year’s quarter. Compensation and benefits of $3.1 million versus $725,000 in the prior quarter. This increase is attributed to building out the team over the course of the year.

Corporate insurance of $2 million in the current quarter versus $2.4 million in the prior year quarter. Professional fees of $1.5 million in the current quarter versus $2.6 million in the prior year quarter. Other G&A of $1.8 million that includes IT, occupancy, and other public company expenses versus $2.1 million for the three months ended March 31, 2022. Depreciation for the current quarter was $11.7 million versus an immaterial amount in the prior year quarter. Again, this is a result of our Odessa facility being energized in mid-November 2022. We had a realized gain on the sale of Bitcoin of $4 million in the current quarter. As I mentioned earlier, we began selling a portion of our Bitcoin holdings at the start of 2023 to support our operations and cash requirements.

We recognized a $1.8 million impairment on our Bitcoin holdings in the current quarter. The impairment of Bitcoin for the prior year quarter was immaterial. Finally, we recognized proceeds of approximately $2.3 million in the current quarter related to the sale of transferable coupons we received from a minor manufacturer. Now let’s move on to our non-GAAP financial measures. We are providing supplemental financial measures for non-GAAP from operations that excludes the impact of the depreciation of fixed assets, stock compensation, deferred tax expense, the nonrecurring gain on the sales machine coupons, and the noncash change in fair value of our derivative assets. These supplemental financial measures are not measurements of financial performance in accordance with U.S. GAAP, and as a result, these supplemental financial measures may not be comparable to similarly titled measures of other companies.

We believe that these non-GAAP measures are useful to investors in comparing our performance across the reporting periods on a consistent basis. Management uses these non-GAAP financial measures internally to help understand, manage, and evaluate business performance and help make operating decisions. So for the three months ended March 31, 2023, we had a non-GAAP net income of $6.4 million, resulting in non-GAAP net income of $0.03 per share versus a non-GAAP loss of $7.9 million or a net loss of $0.03 per share for the three months ended March 31, 2022. We have provided a reconciliation of GAAP versus non-GAAP results detailing the items and related amounts. In conclusion, our team is very proud of the success we’ve had in executing the plan we presented back in 2021.

We have delivered and executed on the initial four data centers we set out to build and now look forward to the next stages of growth for the company. We believe our financial position and best-in-class unit economics will give us opportunities to take advantage of the volatile markets we may expect to see over the coming years. In closing, we look forward to updating you in greater detail on the financial results as Odessa is completed and we begin to see the operations at a full run rate. I will pause, and Tyler and I are happy to answer your questions.

Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of John Todaro of Needham. Your line is open.

Operator: Your next question comes from the line of Joseph Vafi of Canaccord. Your line is open.

Operator: Your next question comes from the line of Will Carlson of Cantor Fitzgerald. Your line is open.

Operator: [Operator Instructions] There are no further questions at this time. I’d like to turn the call back over to Tyler.

Tyler Page: Thank you, as always, to everyone for your continuing support, and we look forward to updating you in August on the progress we’ve made then. Thanks again. Have a great day.

Operator: This now concludes today’s conference call. You may now disconnect.