Stronghold Digital Mining, Inc. (NASDAQ:SDIG) Q3 2023 Earnings Call Transcript

Stronghold Digital Mining, Inc. (NASDAQ:SDIG) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: Good morning, and welcome to Stronghold Digital Mining’s conference call for the third quarter ended September 30, 2023. My name is Liz, and I’ll be your operator this morning. Before this call, Stronghold issued its results for the third 2023 and announced the new business initiative in a press release which will be available in the Investors section of the company’s website at www.strongholddigitalmining.com. You can find a link in the Investors section at the top of the home page. Joining us on today’s call are Stronghold’s Chairman and Chief Executive Officer, Greg Beard; and CFO, Matt Smith. Following their remarks, we will open the call for questions. Before we begin, Alex Kovtun from Gateway Group will make a brief introductory statement. Mr. Kovtun, please proceed.

Alex Kovtun: Great. Thank you, operator. Good morning, everyone, and welcome. Today’s slide presentation, along with our earnings release and financial disclosures were posted to our website earlier today and can be accessed on our website at www.strongholddigitalmining.com. Some statements we’re making today may be considered forward-looking statements under securities law and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors, many of which are beyond our control, which could cause actual results and events to differ materially from those described in the forward-looking statements. For more detailed risks, uncertainties and the assumptions related to our forward-looking statements, please see the disclosures in our earnings release and public filings made with the Securities and Exchange Commission.

We disclaim any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and the reconciliation tables to applicable GAAP measures in our earnings release carefully as you consider these metrics. We expect to file our quarterly report on Form 10-Q on or prior to November 14, 2023, with the Securities and Exchange Commission, which sets forth detailed disclosures and descriptions of our business, as well as uncertainties and other variable circumstances, including, but not limited to risks and uncertainties identified under the caption, Risk Factors in our previously filed annual report on Form 10-K filed on April 3, 2023, and our subsequently filed quarterly report on Form 10-Q.

You may access Stronghold’s Securities and Exchange Commission filings for free by visiting the SEC website at www.sec.gov or Stronghold’s Investor Relations website at ir.strongholddigitalmining.com. I would like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of Stronghold’s website. Now, I would like to turn the call over to Stronghold’s Chairman and CEO, Greg Beard. Greg?

Gregory Beard: Good morning, everyone, and thank you for joining us in our announcement of our carbon capture initiative and our third quarter 2023 results. We will be referencing an associated slide presentation throughout the call that is available through the webcast and on the Investor Relations section of our corporate website. We’re also live today, so forgive any fumbles as we get through it, but we are really excited about what we’re presenting today, so hopefully they’ll come out in the slides and in the Q&A. So, let’s start on slide three. As a reminder to everyone joining us today, Stronghold is the only environmentally beneficial and vertically integrated public Bitcoin miner. We own and operate two mining waste-to-power facilities in Pennsylvania, Scrubgrass and Panther Creek, with aggregate power capacity of 165 megawatts.

Through our process, we’ve removed nearly 1.7 million tons of toxic mining waste from the environment since the beginning of 2022. Today, we have over 40,000 Bitcoin miners and continue to seek opportunities to expand our capacity by deploying 25 megawatts of owned end-to-end data center equipment. Moving to slide four. We are a Bitcoin miner and remain committed to Bitcoin mining. However, as a vertically integrated Bitcoin miner, we have a unique substantial asset base with significant potential for complementary revenue streams. We’ve talked a lot about our Ash Byproduct in the past year and have spent significant time testing it. I’m excited to tell you that this has created a potentially transformational opportunity. Our Ash can capture carbon dioxide directly out of the atmosphere and we are forming a highly complementary business, Stronghold carbon capture, around this discovery.

Slide five. We’re going to use the majority of this call to explain how our reclamation process results in potential to capture a significant amount of carbon directly from ambient air, the scale of this opportunity and also how we might be able to monetize it in the new carbon market. Slide six. Over the last few years, carbon markets have grown and developed. Both private markets and the federal government have established significant initiatives for those who capture carbon and/or reduce carbon emissions. The private market consists of registries that validate certain projects and upon validation, credits from those projects can be sold to buyers looking to offset their emissions. Additionally, the Inflation Reduction Act expanded IRS Section 45Q tax credits which can pay up to $180 per ton of carbon captured by qualifying direct air capture projects also known as DAC.

While it is not entirely clear if our project qualifies today where we are evaluating opportunities for qualification and believe our project is consistent with the intent of the IRA. Moving to slide seven. We have studied our ash extensively and over the past several months we learned to capture carbon. While we are in the early stages of the project and developing a better understanding of variables such as weather, construction, ash placement, we believe that we ultimately have the potential to capture about 100,000 tons of carbon from ambient air annually using the ash produced by our facilities. Assuming that we qualify for 45Q tax credits and we are able to sell voluntary carbon credits, this could drive up to $30 million of incremental annual EBITDA and reduce our net cost of power to as low as $16 per megawatt hour.

And importantly, while carbon capture is perceived to have significant technology risk, we believe that our project has relatively low technology risk because our process is just a combination of accepted chemistry and airflow. Moving to slide eight. I’d like to review our mining through waste to power process as this process is responsible for the production of our ash byproduct that can capture carbon. We own two reclamation facilities that utilize circulating fluidized beds to convert mining waste into electricity. So what does that mean? It means our primary source of fuel for these facilities is mining waste, which is sourced from the reclamation of some of the 840 mining waste piles littered across Pennsylvania. These large mountains of waste pollute the land, water and air and sometimes spontaneously combust.

Our unique purpose-built CFB power generation process takes this toxic waste from the environment, combines it with limestone to neutralize sulfur dioxide and creates electricity. The primary purpose is reclamation and the primary product is electricity. A calcium rich ash is the byproduct. Most of this ash is returned to mining waste piles to facilitate the reclamation and re-vegetation to the previously unusable land. Moving to slide nine. For those who think they are burning waste coal and pumping CO2 into the atmosphere, I want to highlight findings of recent third-party studies. Earlier this year both Lehigh University and TRC Environmental published studies examining the environmental impact of mining waste piles and the mining-waste-to-power industry.

Both studies concluded that our process is carbon negative, meaning, we reduce net greenhouse gas emissions by over 50% compared to expected emissions from mining waste had it not been removed from the environment. I’m not going to cover the mining waste crisis in Pennsylvania on the call today, but I encourage you to take a look at the appendix for a comprehensive overview. It includes a description of over 5,000 miles of contaminated waterways that extend to the Chesapeake Bay, the Ohio River, and more. Dozens of burning waste piles and hundreds of millions of tons of waste that are impacting some of the most economically disadvantaged counties in Pennsylvania. These studies underscore that not only do our plants reduce the harm associated with waterways, burning piles, and land pollution, but they’re also carbon negative.

Moving to slide 10. After extensive third-party testing of our Scrubgrass ash by our partners Karbonetiq over the last four months, which we conducted under conditions intended to replicate Scrubgrass weather conditions, we have determined that our ash can capture carbon at a capacity of up to 12% by starting weight of the ash. Our ash can capture carbon because it contains reactive calcium oxide, which bonds with carbon dioxide to form calcium carbonate. In other words, the ash pulls the carbon dioxide out of the air, creating a permanent geologically stable solid. We have worked with construction design and engineering partners to develop direct air capture technology. The technology uses the stack effect to drive air through the ash to facilitate and expedite this carbonation process.

We are excited to announce that our first direct air capture unit has been deployed at Scrubgrass, and while we anticipate iterating around design and process to maximize carbon capture and minimize costs, testing is currently underway. We expect field results within the next month in advance of our Investor Day that’s coming up this December. Moving to slide 11. Scrubgrass and Panther Creek facilities can produce 800,000 to 900,000 metric tons of ash per year when operating at baseload capacity, which equates to approximately 100,000 tons of carbon captured at 12% capture capacity. For reference, this is the same as eliminating the emissions from almost 22,000 cars, and it would take over 4.5 million mature trees to capture this much carbon.

Last Friday, we deployed our first carbon capture unit at Scrubgrass. Our partner Karbonetiq has branded these proprietary patent pending units as Karbolith. Very importantly, we have exclusivity with Karbonetiq. We’re the only group allowed to use this patent pending technology and intellectual property in connection with mining to waste power CFB facilities. The equipment cost for our first Karbolith was less than $100,000. Compared to other DAC projects in the U.S, we believe that ours has best-in-class capital efficiency currently estimated at $50 to $125 per ton of annual carbon capture capacity. Recall that Stronghold owns two specialized CFB plants with an estimated replacement cost in excess of $400 million. Historical investments in these facilities provide the foundation for this modest incremental investment that we believe is required to capture carbon.

In September, we engaged an environmental consulting firm called Carbonomics to advice on carbon capture verification, documentation, and listing our project on a registry to monetize carbon removals in the private markets. We are pursuing a listing on the Puro Registry, which is owned by NASDAQ, and we’re pleased to discover multiple existing methodologies that could be applicable to our project. Using a previously approved methodology can reduce lead time for generating high-value carbon credits from years to months. We’ve already submitted a concept paper to Puro, received supportive feedback, and plan to submit formal project design documentation with the goal of having the project listed in Q1 2024. We anticipate monetization efforts to follow shortly thereafter.

Moving to slide 12. Here we lay out our status quo ash removal operations and the new process incorporated in carbon capture. We typically remove ash from our facilities and transport it back to the mining waste piles where it is packed in the ground to neutralize the acidity of the site and revegetate the land. The current process allows for little carbonation given the ashes limited exposure to air. Our carbon capture project will simply be a new step added into the existing process. After the ash is produced by the plant, we will methodically distribute it among the Karbolith to drive air flow through the ash facilitating the absorption of carbon. Post-carbonation, the ash will follow our current process and be transported back to the mining waste sites.

We are also evaluating opportunities to sell our newly carbonated ash into new markets, such as green cement, to generate additional value from the process. Moving to slide 13. If our carbon capture process becomes fully operational as planned, it would be one of the largest announced direct air capture projects in the world, and it could be the largest operational U.S. direct air capture project in 2024. This slide also illustrates the two potential income streams resulting from this carbon capture opportunity, with the first being the sale of carbon credits into the private markets, and the second being receipt of 45Q tax credits. Both represent tremendous value potential for Stronghold. Initially, as we worked to qualify for 45Q tax credits under the IRS, we planned to sell into the private carbon credit markets, where the average index price for Puro Carbon removal credits in 2023 has ranged from approximately $130 to $190 per ton of carbon.

This range implies $13 million to $19 million in annual proceeds, assuming 100,000 tons of carbon captured annually. Qualification for $180 per ton 45Q tax credits would imply $18 million and additional annual proceeds at 100,000 tons of carbon removed annually. While it is not entirely clear that we will be able to qualify for 45Q tax credits, it is important to note that 45Q has a three-year look back. So even if we don’t qualify for a number of years, carbon capture before qualification could be eligible. I’ll now turn the call over to Matt Smith to discuss the financial impact of Stronghold carbon capture.

Matthew Smith: Thank you, Greg. We would remind you, as we discussed financial estimates, we would refer you to the presentation for various assumptions, qualifications, and risk factors. As you can see on slide 14, our carbon capture opportunity represents a compelling value proposition for Stronghold, as we have the potential to capture up to 100,000 tons of carbon dioxide annually. This could drive up to $30 million of incremental EBITDA, assuming receipt of 45Q tax credits, or up to $14 million of incremental EBITDA without tax credits. In terms of timing, we think that we will be positioned to start monetizing private carbon credits in 2024 at some level and in earnest in 2025. The earliest we would hope to receive 45Q tax credits is in 2025 with a higher likelihood in 2026.

Simply put, carbon capture has the potential to transform the cash flow profile of the business in an exponential way, further expanding optionality beyond the power in Bitcoin markets. Moving to slide 15, this slide details the financial benefit of carbon capture to our cost of power. Currently, we have guided to a net cost of power of $40 to $45 per megawatt hour. This carbon capture opportunity provides a significant potential reduction approaching $20 per megawatt hour, assuming receipt of 45Q tax credits. This would result in a pro forma cost of power of under $25 per megawatt hour. Lastly, on slide 16, as some may be aware, electricity is the largest cost to mine Bitcoin. Looking at the carbon capture opportunity through the Bitcoin mining lens, this initiative has the potential to reduce our cost of power to the lowest among public Bitcoin mining peers.

To close, I’d like to note that there are not many ways to express concentrated exposure to carbon capture in the public markets today. As we seek to create value with this initiative, we hope to become that opportunity for our investors. With that, I’ll turn the call back over to Greg for closing remarks and Q&A.

Gregory Beard: Thanks Matt. Hopefully, as you can tell, we are extremely excited about this new opportunity. We started in the environmental reclamation and power generation business and cleaning up toxic mining waste has always been and will continue to be a cornerstone of our business. A few years ago, in response to depressed power markets, we were innovative in entering the Bitcoin mining space, creating an alternative market for our power. We formed Stronghold around this strategy, producing our own power and having the option to either sell that power to the PGM grid or use it to mine Bitcoin, whichever is more beneficial to the company and its stakeholders. This opportunity was enabled by our plants. Now, ownership of these valuable assets has created yet another, a new opportunity that will help from carbon markets and the IRA and has the potential to transform our business once again.

What makes stronghold unique is that we can pursue reclamation, power generation, Bitcoin mining and carbon capture and all are completely complementary. From a Bitcoin mining perspective, producing power allows us to control costs and benefits from opportunistically selling power to the grid and carbon capture has the potential to reduce our net cost of power to best in class levels. From a power generation perspective, Bitcoin mining and carbon capture serve as additional revenue lines that boost the value of our power assets. From a carbon capture perspective, we have the potential to have one of the largest direct air capture projects in the world with relatively less technology risk and a shorter timeline than the other announced projects.

So, I think before we open this up to questions, obviously, we just want to recognize it’s a lot of work has gone into this over the past six months. Matt, who’s sitting at the table here with me, has shepherded a lot of the technology through testing, understanding the markets. We’ve got partners in California, Karbonetiq, Mike and Mark, with a shout out to them. Of course, we’ve got Bill Spence, our co-founder at Stronghold. He’s always thinking creatively about new opportunities to get the most out of our assets. And of course, the guys that are doing the tough reclamation work and keeping these plants running, that is really what gives us the optionality and the new business lines between making power, making Bitcoin and now capturing carbon.

So, hey, we’re excited about the future. And with that, I’ll open up to questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Our first question comes from a line of Lucas Pipes with B. Riley Securities.

Nick Giles: Yes. Thank you, operator. And good morning, everyone. This is Nick Giles on for Lucas and apologies he couldn’t join today with a hosted event on the metal side. But guys, congrats on the progress here. I know this is really affirmative of what’s long been your mission. So congratulations.

Gregory Beard: Thank you. Thank you.

Nick Giles: My first question was just, you noted the capital cost, I believe it was $50 to $125 per ton of CO2 capture. And just given it’s a pretty wide range, can you talk about what could get you to the low end or the high end?

Gregory Beard: Yes, I can take a stab at that and then that someone on the team can correct me when I get it wrong. But the biggest factor in the total CapEx cost will be the pace at which the ash is carbonated. And so, for example, if it takes only one week for the ash to reach the full carbonation at 12%, expect the number of Installed first Karbolith that to process that quantity of ash to be half of what it would be if it took two or three or four weeks to carbonate that same quantity of ash. So it’s really – the biggest factor is probably time to carbonate. And I can tell you having seen lab results in person where we were carbonating ash and using a solution that ash was carbonated in less than 10 minutes. And so obviously air capture is a much different process than a solution in a lab.

But hey, we are hopeful that the answer on CapEx will be lower because we’ll find ways to pump more air through the ash to then require less CapEx. But that’s really, and I can tell you we’re now running our first machine. I think there are pictures of it on our website and on Karbonetiq website in a month. I think on December 12th is our Investor Day. We’re going to know a lot more then about what the CapEx needed to capture all the carbon is. And we’ll iterate until we get it right.

Nick Giles: Okay, Greg, thanks for that. That’s really helpful. Maybe just a follow-up, when would you expect to receive the notice of qualification for the carbonated materials methodology, just that piece of it? And then secondly, Matt, you noted that as it relates to 45Q, that would likely be a 2025 or maybe a 2026 event. When would you expect to receive an update on whether you qualify for that?

Matthew Smith: Hey, this is Matt. So taking the private registry piece first, the next step in that process is submitting a PDD, a project design document for approval and then subsequently listing on the registry. That typically involves a bit of back and forth. It describes our project and how it attaches to the existing methodologies we’ve identified that may be applicable for our project. We respect a couple of rounds of comments, but we think at this point in time, we have a line of sight to being registered and listed on Poru in the first quarter of next year. Hopefully towards the earlier side of that, but it’ll take a couple of months, but we’re hopeful no longer than that. After that is done is when we can really attempt to start monetizing the credits on the private side.

So that would be the first real opportunity to recognize some revenue around this. On the 45Q side, that’ll be a little bit later. It requires an audit of a year’s worth of capture data. I think conservatively, I wouldn’t model this until 2026, but as we know, there’s a three-year look back that would allow us to utilize our capture from 2024, 2025 and into 2026 as well, even 2023 if we’re able to start getting something going in the next month or two this year. There’s the potential for IRA qualification in 2025, if things check out, but I think we refer you to our risk factors in the deck and otherwise that highlight some of the aspects of what would be involved in qualification there.

Nick Giles: Okay, great. That’s really helpful. I appreciate all the detail. I know there are a lot of questions, so I’ll jump back into queue, but congratulations again and best of luck.

Gregory Beard: You bet. Thank you.

Operator: Our next question will come from a line of Chase White with Compass Point Research.

Chase White: Good morning. Thanks for taking my question guys. So in terms of, and obviously, I think it’s pretty clear this is somewhat up in the air, but we’re just trying to understand the timeline to full deployment at both plants and what the cadence of spin would look like leading up to that and ultimately what could impact those type frames in terms of actual deployment?

Matthew Smith: Yes. So, Chase, I would link what Greg responded to the prior question with as a starting point. So, we’re going to use the data that comes out of this initial phase Karbolith test at Scrubgrass and the amount of time it takes to reach what we would view as similar outcome as what we saw in the laboratory simulating Scrubgrass’s environment. And we may iterate second time or third time or fourth time to try to perfect that process. As the data becomes supportive of the thesis, we would expect capital to follow, and the more constructive the data is if it matches a week to carbonation at 12%, then we would probably think about accelerating capital and deploying sooner. If we don’t see what we like, it may take more iterations, but importantly, there are a couple of things.

I would not expect the cost of the Karbolith to rise from what we shared. In fact, the first Karbolith we shared in the slide, it’s less than $100,000. The first Karbolith was around $70,000, and we’ve already made modifications in the field where we think it could approach a number that’s less than that, $50,000 to $60,000. And so, cost savings with the subsequent iterations, trying to maximize the exposure to the ash and the carbonation in as fast a period of time as possible are some of the things we will look to drive the answer to your question. Scrubgrass likely sees an entire rollout over the course of 2024, assuming the data supports what we think it will, which is deploying capital. The payback and returns on that are better than just about anything else we could put our money into right now.

And so, we’re quite excited about ramping at Scrubgrass and then testing and the opportunity to ramp at Santa Creek. But I would think about a 12-month to 15-month sort of process where we hope to be at a full run rate entering 2025.

Chase White: Got it. That’s helpful.