Bitfarms Ltd.

Everyone and welcome to the Bitfarm's third quarter financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to David Barnard, LHA Investor Relations. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to BitFarm's conference call for the third quarter of 2023. With me on the call today is Jeff Morphy, President and Chief Executive Officer, and Jeff Lucas, Chief Financial Officer. Before we begin, please note this call is being webcast live in an accompanying presentation. To watch along with the slides, you can log on to our website at www.bitfarms.com under the Investor's Presentation section. If you prefer to listen to the call on your smartphone, you can download the presentation from there as well. I would like to remind you that this morning, Bitfarm's issued a press release announcing its third quarter 2003 financial results. Turning to slide two, I'll remind everyone that certain forward-looking statements will be made during the call, and future results could differ from those implied in these statements. The forward-looking information is based on certain assumptions and is subject to risks and uncertainties, and I invite you to consult BitFarm's MD&A for a complete list of these. Also, during the call, reference will be made to supporting slides, and you can find the presentation again on our website at bitfarms.com under the Investor Relations section. The company will also refer to certain measures not recognized under IFRS and that did not have the standardized meaning prescribed by IFRS. and therefore may not be comparable to similar measures presented by other companies. We invite listeners to refer to today's press release and the company's third quarter 2023 MD&A for definitions of the aforementioned non-IFR measures and their reconciliation to IFR measures. Please note that all financial records are denominated in U.S. dollars unless otherwise noted. During today's call, Jeff Morphy will review our operations for the quarter, and CFO Jeff Lukens will follow a detailed financial review, and Jeff Morphy will return for some closing remarks after the Q&A. We have also requested investors to send questions in advance, which I will ask for management after we open the call to those interested in the live Q&A. Turning to slide four, slide three, and then on to slide four, it's my pleasure to turn the call to Jeff Morphy.

Thank you for joining us today. I'm excited to review highlights of our third quarter performance and our strategic outlook with you. The timing of capital investments is the most important factor of the four year Bitcoin mining cycle. As such, we continue to follow a disciplined plan, stressing an attractive ROI hurdle for upgrades and new projects so that we are best positioned for the having in April of 2024 and beyond. We plan to move aggressively to capitalize on improving market conditions going into the halving and capture market share consolidation opportunities that will likely arise post-halving. This, in conjunction with sustained and predictable costs of operation, we believe will drive long-term value. I'll elaborate. First, until the last 30 days, we deemed miners to be at unacceptably high prices. To avoid overzealous spending to achieve high growth targets with unacceptable returns, we exercise patience and discipline. Two, throughout 2023, we prudently fortified our balance sheet and made modest opportunistic expansion moves, such as at Baycomo and in Paraguay. Three, we remain committed to investing in new facilities and minor upgrades. Now with the Bitcoin rally and the recent introduction of new high performance miners at lower costs, we are focusing on opportunities to take advantage of more competitive pricing for equipment upgrades. Four, combined with years of international development in securing surplus energy and realizing low direct costs while reducing overhead, we are well positioned to continue our expansion and further reduce corporate operating costs. On slide five, I'll review some of our accomplishments for Q3 2023 and post third quarter events. In September, we fully energized our first warehouse in Rio Cuarto, increasing X a hash per second to 6.1 at quarter close, up 15% from June 30th, 2023, and up 45% from September 30th, 2022. In October, In Baycomo, we completed the first phase of expansion, increasing from 5 megawatts to 11 megawatts, bringing our corporate hash rate to 6.3 exahash per second. During Q3 2023, we earned 1,172 Bitcoin, compared to 1,223 earned in Q2 2023, reflecting increased network difficulty. Q3 2023 revenue remain consistent at $35 million compared to Q2 2023, reflecting network difficulty increases, offset mainly by our hash rate increase. Adjusted EBITDA was $7 million for Q3 2023, and our Bitcoin holdings increased to 703 at September 30th, 2023. Slide six shows a summary of our operating capacity and installed miners. Our diversified portfolio comprises 11 operating farms in four countries, as well as two more in development. In October 2023, we reached 240 megawatts in operating capacity, up 32% from a year ago. With long-term and low-cost energy contracts totaling 573 megawatts, only 42% of contracted capacity has been placed into operation, highlighting our considerable embedded development runway. I will now review our operations and development plans. Turning to slide seven. In Paraguay, we acquired two hydropower purchase agreements, one for 50 megawatts at Paso Pei, adjacent to our Villarica farm, and another for 100 megawatts at Iguazu. We expect the new Paso Pei 50 megawatt farm construction to be completed in Q1 2024 and development is progressing quickly. For civil work, we have been preparing the site, improving the access road and constructing the high voltage substation connection. We anticipate completing most of the substation building and the production buildings by year end 2023. For equipment, we purchased 20 megawatts of micro BT hydro cooling miners and related containers, primarily employing 19 million of vendor credits, substantially reducing the capital outlay for this farm. These hydro miners utilize the latest mining technology and feature among the best efficiencies in the industry, which will drive significantly lower costs of operations. The additional 30 megawatts of capacity would be housed in two air-cooled warehouses currently under construction. For nominal added cost, we purchased the high-voltage transformer rated at 80 megawatts, creating optionality for more expansion at Paso Pei. I'll add that the timely delivery of this transformer is key in meeting our Q1 2024 operating target, and progress reports from the manufacturer indicate it is on schedule. At Iguazu, The site selection process is going well, and the final decision will be reached that fully aligns with our timeline in 2024. Turning to slide eight. En Río Cuarto, Argentina. By modifying the rack layout, we managed to expand capacity from 50 megawatts to 54 megawatts, or 8% beyond original design. With 7,500 new miners installed in Q3 2023, we added 800 petahash per second and brought our hash rate to over 1.6 exahash per second in October. Notably, in Argentina, October 1st marked the start of the summer season when natural gas is typically less expensive. During this seven-month period, we expect fully loaded energy costs at Rio Cuarto to be reliably below 3 cents per kilowatt hour, compared to between 3 and 3.5 cents during the winter months. This makes Rio Cuarto amongst the lowest cost operating facilities in the industry. As this farm represents about 23% of our operating capacity, it will reduce our direct cost for Bitcoin, which is one of our strategic goals. In summary, our LATAM investments are poised for growth in the coming investment cycle. Bitfarm's benefits from exceptionally low costs in this region and there are significant barriers to entry to LATAM, uniquely positioning us in this region to capitalize on low cost expansion opportunities. For example, we have paid our dues in Argentina and others looking to duplicate our development efforts in this low cost country will face many organizational and logistical challenges. We have a track record and a strong team We have also achieved qualification as a self-importer of miners and retain an additional 156 megawatts of contracted low-cost power for future development in Rio Cuarto. In short, we remain excited about the long-term prospects for further development in the country. And in Paraguay, we have one operating farm and 150 megawatts under development. In Canada, in early July, we closed the purchase of Baycomo and initiated operation at five megawatts. In October, we achieved our plan of activating the first 11 megawatts of operating capacity. We plan to complete the construction of the additional 11 megawatts in the second half of 2024, coincident with the delivery of power to the facility. In Magog, we further optimized the facility as we imported and installed approximately 2,900 high-efficiency S19 ProPlus miners. We concurrently relocated the older miners to the Bay Como facility. By increasing the density of rack miners at both farms, we netted an increase of 110 petahash per second at Magog and provided a cost-effective cattle deployment at Bay Como. In Washington State, we upgraded ventilation and cooling systems, increasing average uptime. While we took two megawatts offline, reducing total operating capacity to 18 megawatts, we are in the process of various facility modifications and improvements. To elaborate, we are adding fiber optics to reduce latency between buildings and constructing a new warehouse. These improvements and operating practices will result in greater efficiencies in early 2024. Please turn to slide now, slide nine. With that, I will now hand the call over to Jeff Lucas for the financial review.

Thank you, Jeff. I'll begin by highlighting some key elements of our financial strategy and position. We have efficient operations predicated on our operational excellence, and with the majority of our energy from green hydropower, stable and predictable energy rates that are not subject to the variability associated with fossil fuels. And in the case of Argentina, which derives its energy from natural gas, a positive contribution overall with the lowest energy cost of our portfolio. We have a laser focus on return on investment at the individual project level and rapid payback of capital at the corporate level. We've achieved our 2023 growth plan by the end of October. And for 2024, we have a minor upgrade in infrastructure expansion plan that will provide significant growth to our hash rate and our competitive efficiency. And we have maintained throughout this a strong balance sheet that now positions us to utilize our operational expertise to take advantage of these fleet upgrades now in the attractive growth opportunities arising from unpredictable economics of the having. I'll now review our financial performance for the quarter, production economics, and our balance sheet. Turning to slide 10. In the third quarter of 2023, as Jeff pointed out, we earned 1,172 Bitcoin compared to 1,223 Bitcoin in the second quarter of 23, and 1,515 in the third quarter of 2022. Our hash rate was 15% higher sequentially and 45% higher year over year. This achievement was offset in part by increases in average network difficulty of 9% over the second quarter of 23 and 82% year over year. Our third quarter total revenue was $35 million, comprised of $33 million from our mining activities and $2 million from our electrical subsidiary, Volta. This compares to $35 million overall in the second quarter of 23 and reflects slightly higher average Bitcoin price quarter over quarter and 4% of Bitcoin earned during the quarter due to the difficulty. Focusing on our production economics as illustrated on slide 11, in the third quarter of 23, Bitfarm's direct cost of production for Bitcoin was $16,900 up from $15,700 per Bitcoin in the second quarter of 23. This change reflects the increased network difficulty, offset in part by approximately 3% low electricity rates quarter over quarter. While our total direct cost was up in Q3 23, at Rio Cuerto, the site with our lowest cost power, it was in fact under $12,000 for the quarter for Bitcoin. And we should benefit more fully going forward, as Rio Cuarta wasn't fully energized to its 50-plus megawatt capacity until September and has become a larger portion of our overall portfolio. As on our last call, I'd add one more caveat to those building financial models. Our direct cost since February 2022 includes a 15% value-added tax on Canadian energy costs as a result of recent legislation. We firmly believe that we are exempt from this incremental tax and are pursuing a revenue ruling with the Canadian and Quebec tax authorities to formalize our exempt status. More to come in this matter, but I will state that without this tax, our direct cost for BTC in the third quarter would have been about $15,200, $1,700 less than our reported direct cost of BTC overall. Third quarter gross mining profit was $13 million. Our 38% of mining revenue compared to $14 million of 42% of mining revenue in the second quarter of 23. As with the reduction in our production economics, the decrease in the growth mining margin reflected the increase in network difficulty. The total cash cost for BTC was $22,700 in the third quarter of 23, up from $21,800 in the second quarter. Higher network difficulty was the primary driver leading to fewer Bitcoin during the quarter and higher energy costs for Bitcoin. General and administrative expenses, or G&A, decreased compared to the prior quarter, which largely reflects our focus on reducing operating expenses, including savings and insurance costs, attributable to lower replacement values for our fleet, and risk mitigation measures implemented company-wide. Going forward, we plan to tackle the combined effects of the halving and the increase in difficulty by upgrading the mining fleet with some of the recently announced and highly efficient mining models and reducing our G&A cost structure, including lowering professional fees and discretionary spending. Moving now to slide 12. For the third quarter, our operating loss was $19 million. This includes non-cash depreciation expense of $22 million. This also compares to the second quarter operating loss of $25 million, which included depreciation expense of $21 million and an impairment charge on short-term prepaid deposits and property, plant, and equipment of $10 million. Our net loss for the third quarter was $19 million, or $0.07 per basic and fully diluted share, compared to our net loss for the second quarter of 2023 of $25 million, or $0.10 per basic and fully diluted share. As previously noted, slightly higher average Bitcoin prices were offset by increases in network difficulty, which impacted the bottom line. Adjusted EBITDA was $7 million in the third quarter of 23 as compared to $8 million in the second quarter of 23. The adjusted EBITDA equates to profitability per Bitcoin about $5,900 in the third quarter versus $6,300 in the second quarter. Turning now to slide 13. At September 30th, we held cash of $47 million and Bitcoin valued at $19 million for total liquidity of $66 million. This compares to $31 million cash and $48 million total liquidity at June 30th, 2023. During the third quarter of 2023, of the 1172 Bitcoin we earned, we sold 1,018 to generate $28 million of proceeds to fund our operating and debt service requirements and deposited 154 BTC into treasury for the September month end value of a little over $4 million. In October, we deposited another 57 Bitcoin, increasing Bitcoin in custody on October 31st to 760 Bitcoin, representing a total value of approximately $26 million, based on the Bitcoin price that day of $34,200. In the third quarter of 23, we raised $31 million in net proceeds from our ATM program, which expired on September 12th. The monies we raised under our ATM specifically earmarked for the growth initiatives about which Jeff spoke. We continue to use cash generated from operations to deleverage our balance sheet. Total indebtedness was reduced to $10 million on September 30th and to under $8 million on October 31st. As we've noted in previous earnings calls, our debt related to our Bitcoin activities is scheduled to be fully repaid by the end of February 24, well in advance of the habit. Before I hand the call back to Jeff, I'll take a moment to highlight one of our new initiatives, the synthetic HODL. At our analyst day in September, we introduced our concept of using the synthetic HODL to achieve a capital-efficient portfolio. The primary objective of the synthetic HODL is to enable us to accumulate BTC and treasury and increase the company's BTC exposure in a manner that is risk-managed and capital-efficient. With it, we maintain discretion to dynamically adjust our hedge and synthetic HODL ratios within risk limits to respond to market factors. In October, we initiated our strategy with the purchase of long-dated BTC call options. As of November 6, using the synthetic hodl, the company has increased its upside to BTC prices by 35 BTC equivalent exposure. Turning to slide 14, I'll now turn the call back over to Jeff.

Thank you, Jeff. Before I open the call for questions, I would like to mention some upcoming events, including the Benzinga Future of Crypto Conference in New York on November 14th and the Blockchain Jungle Conference in Costa Rica on November the 16th. Referring to slide 16, in summary, we are following a highly disciplined capital allocation strategy with projects to be completed ahead of the halving in April. Fleet upgrades will reduce our costs of operation and the patients we exercised in 2023 we expect will pay off well in 2024. Over the past 12 months, we've increased our hash rate 45%, achieving our 2023 target of 6.3 exahash in October. The first 50 megawatts of our 150 megawatt expansion in Paraguay is underway, and opportunities that meet our criteria for growth and lowering our costs both before and after the halving are abundant. We expect to achieve 7x a hash in Q1 2024 with the energization of hydro miners currently on order for PasoPay with additional capacity there coming from the 30 megawatt air-cooled warehouses. With newly signed PPAs, we have significant and low-cost expansion projects to develop when conditions warrant following the halving. This is an exciting time in the industry cycle and we are well positioned to leverage our core competencies and advance Bitfarm's global operations in a new phase of diversified and accretive growth while working strategically and steadfastly to reduce our production costs. Operator, we can now open the call for questions. Over to you, David. Please go ahead.

Okay. Thanks, Jeff. Yeah, just before we go to the analyst Q&A, there's two questions that we got from from online in advance of the call. I'll just read out the first one to you. You seem to be more positive in your outlook today than at your analyst day back in mid-September. Could you elaborate on why?

I'd be happy to take that one. Well, the climate's different now. It's much more positive. Let me elaborate. Bitcoin, which was trading sideways for the longest time, $26,000, $27,000, $28,000, is now $34,000, $35,000 now. That's 26 to 30% higher than it was. The hash price that we saw not very long ago was six cents and a little bit under six cents per T. Now it's over seven. That helps the margins and certainly helps our optimism. We are reading and seeing record inflows of cash going into the exchanges with new excitement coming around the Bitcoin. around Bitcoin and Bitcoin purchases. And I think that's fueling some of the price increases. Part of that is also all the news about the ETFs coming. It sure sounds like there's going to be approvals coming in December and probably them going live early in the new year. And that's going to be a phenomenal opportunity for the whole industry in terms of credibility and adoption and more investment. And then Just in the last two weeks, we have multiple manufacturers announcing new miners that will be released in the first quarter of next year at less cost and sub-20 joules per terahash performance. That adds up to a lot of optimism in our eyes, and as we've said in the past, we want to be opportunistic, and it sure looks like this is a good time to be opportunistic.

Great. Thanks, Jeff. And I'll just give you the one other one from the online community. You seem to be accelerating the pace of growth in LATAM. What is motivating this move over further growth in Canada?

Jeff Lucas, do you want to start with that one?

Sure. I'm glad to do so here. So the biggest driver for us, naturally, is the lowest energy cost. And currently, you know, Canada's costs are a little north of four and a half cents. albeit when that VAT tax is removed, it'll be probably a little below $0.04. But for us right now, the most opportunistic region in the world, and where we have a very strong foothold, is in Latin America, and particularly the province of Paraguay. So really the driving force behind that is the fact that we have electricity right now in Paraguay. That's a little north of $0.03, $0.03 or so. Further opportunities, we believe, for additional cost reductions. And to us, it's the most promising region and the most economically compelling region at this point in time.

Okay, Opera, I think we can go to the Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Bill Papanastasio with Stifel. Please go ahead.

Hi, gentlemen. Good morning. Thank you for taking my questions. Hi, Bill. Yeah, I really appreciate the commentary at the beginning on the importance of timing your capital investment. And, you know, clearly Bitfarmers has a very strong balance sheet with a ton of liquidity and debt that's going to be paid off in the new year prior to the halving. And you also have the situation of attractive pricing, which you alluded to. I'm curious to hear whether you could share more details in terms of what hardware models look most attractive to your team today. I know your team has been very diligent with calculating payback periods. And so just hoping to get an update to that end. Sure.

Well, I think the industry has all been very much keen on these new miners being announced. In particular, the Bitmain S21s and T21s are very attractive. The pricing is very good, and sub-20 watts is really changing the landscape. The pricing and performance is better than the last generation of miners, which we thought were just too expensive. While other people were just growing and buying these models, we just said it's hard to get the payback, particularly at six cents per in terms of hash price. And those paybacks were long and it was not a good use of capital. So we had to help hold back. But we think now the environment is much better and we are looking at this new generation of miner, which will be available starting early next year and to put in some of our facilities and also upgrade the fleet. As people have commented in the past, we have put in a number of M30s and M31s, so some of the replacements there, if we can do it, would be quite remarkable in terms of our performance.

Great, thank you for that, Collar. And then for my final question, You know, you've been able to optimize and kind of maximize every square inch at the first warehouse in Argentina. And it's a no-brainer, right? Very attractive, low-cost power. I'm just wondering whether the appetite or the outlook for further expansion in Argentina has changed at all. I understand your team is heads down on the Paraguay expansion, but just hoping to get some more outlook to that end.

Bill, it's great to have flexibility and it's great to have good people in all of our local markets. It really opens up opportunities for us. I guess we said we paid our dues in Argentina. We have a superb team in Buenos Aires managing the region. We have a superb team in Rio Corto that's now well-trained and we were able to put another row of miners in there, take full advantage of the the primary transformer there and move that up by six, 8% and all with all with new miners. So like we're 1.6 exahash per second there now. Quite remarkable. And I think it's, it's an area which we've learned sometimes by mistakes and sometimes by good fortune, but we are, we keep trying hard and then figuring out sort of how to adjust things along the way. So until we got ourselves up and really primarily using all the output from that transformer, sort of 50 megawatts, the facility wasn't optimized. And we were always saying when we optimize facility, we could bring the cost down. So like in the summertime, we were seeing sort of 3.6 cents per kilowatt hour after the translation. September, it dropped below 3 cents. And now we're in the summer months, we're gonna get seven months probably price probably prices closer to two and a half cents than three. But once again, it's let's see what actually materializes. And we also have the same situation. Let's see what materializes from the election coming on November the 19th. So it's an area that we're excited for because the costs are low. But we want to walk before we run and make sure that we don't make any expensive mistakes. So Uh, once we get a little more confidence that it really could open up this opportunity. And at some point in 24, when the economics are right and, uh, 25, uh, sort of in beyond for sure, but, uh, we have the land, we have the contracts. Uh, it really represents a very low cost opportunity. We're 23% of the overall book right now, and that's bringing down our cost of production. And that's a real strategic goal for us is bringing those costs down.

I appreciate that color. Thank you, gentlemen. I look forward to seeing that hard-earned cash being used towards some key upgrades. Thank you. Very good.

Our next question comes from Josh Siegler with . Please go ahead.

Yeah. Hi, guys. Thanks for taking my call today. Congrats on the lower G&A. Great to see that profitability improvement. For my first question, I wanted to touch on financing. Obviously, you've been paying down the debt and improving the balance sheet over time. Would you ever consider taking on additional debt burden if, you know, it made the right sense around financing perspective? And can you give an update on whether those debt markets have opened up to you?

Sure. Josh, let me speak to that here if I can. You know, we have seen some pretty interesting instruments out there, primarily from, I think, hedge funds, you know, convertible debt outstanding here. And look, in a general picture, there is room for debt in the balance sheet to a degree in the sense that it lowers your overall cost of capital, particularly on a tax-adjusted basis here. We estimate, both for our own calculations, that the cost of equity for the sector and for us is between 30% and 35%. So if you can indeed get debt with an all-in cost of maybe 15% to 18% here, and then that's tax-adjusted afterwards, that doesn't make it attractive. Of course, given the variability and the volatility of the industry in which we operate and the fact that the biggest drivers, i.e., Bitcoin pricing and network difficulty are largely beyond our control, we do that very, very judiciously. At this point in time, Josh, we don't have any immediate plans to incur debt on the balance sheet, but again, if conditions change and for the right opportunity, we would consider that on a limited basis.

Hey, Josh, and I'll remind people that Coming into the halving, we expect a network correction and things like that. We've said before, we do not want any debt obligations at that point. We don't know how severe this can get because it depends on pricing, which is out of our control. So we want to be as lean as possible so we can take maximum advantage of opportunities post-halving.

Great. No, I appreciate the call there, Jeff. And it actually leads into my next question, which is around the halving. So obviously you guys are uniquely positioned to replace some of your older legacy machines with some more highly efficient machines, which can both, you know, improve your efficiency overall and increase your hash. I was curious how you're thinking about the timing of that come halving. Would you look to be aggressive as we enter the halving or is it really a wait and see approach to see what's happening across the network?

Well, as we've said many times, we want to have the balance sheet and margins and management team to be able to be opportunistic. And opportunistic means that really this window is really only opened in the last two, maybe two and a half weeks with the announcement of these miners. We're looking at things very closely. The halving is very much in focus for April 15th, 16th, 21st, whenever the mathematicians have best estimated right now but um we have opportunities to plug them in before before the having it'd be nice to be able to do that but there's no commitments and no decisions made just yet but we're working on a variety of scenarios got it thank you jeff our next question comes from chris white with compass point research please go ahead

Thanks for taking my questions. So a couple, if I may. First is a housekeeping question. So what were the, and apologies if I missed this, but what were the power costs in Argentina during the quarter, the average cost?

So generally the cost for the quarter were just a little, overall were a little over three cents. But what I want to underscore here is that one, that did include the winter months to degree of, you know, that came into play here a little bit. And then secondly, during this quarter, we did revert over entirely to, um, the, the, you know, getting the energy costs and private producer where there was earlier in the quarter, some contribution from the grid itself as we were making that transition, which is higher cost. So again, overall though, for Argentina, we were just over 3 cents, uh, for the quarter. And, uh, by the way, I'm going to add here that in September, instead of being foreign exchange influence, our cost was about 2.8 cents of energy for Argentina.

Got it. That's helpful. And, you know, how should we think about CapEx for the remainder of this year? And how much should be left over as we head into next year? Obviously, you've got the minor purchases that you need to make and don't necessarily know the exact pricing for that. But in terms of the infrastructure and then how many minors you would contemplate putting in there, any comments on that? Thanks.

Sure. Let me start this off. And, Jeff, you can certainly fill in in terms of some of the minor counts there if you wish. So first of all, I'm just going to speak to what we have in terms of our disclosed and communicated CapEx and our growth plans. We have other initiatives about which we spoke to regarding, you know, what we're doing with the minor fleet and things of that sort here. But the thoughts to keep in mind at this point here is that the major project we really have here is the development of PasoPay, which as Jeff indicated, will be up and running by the end of the first quarter of 2024. We also have what's going on, we've identified Baycomo, that was a 22 megawatt acquisition we announced in April. We've got the first 11 up and running, and we're scheduled to have the second 11 in the second half of 2024. We also have some smaller projects in the works, generally a million dollars or less. In Washington, some improvements there, and even some sort of minor modifications as well that we have going for another million or so. So overall, what we're looking for, to be very specific here, is about $70 million of CapEx commitment that we've identified between now and the end of 2024. Of that amount, just to be clear here, roughly 50 to 55 of that is going to be possible pay. We're going to play again up and running by the end of March. Then we have the Bay Como, the second 11 megawatts, maybe an additional $10 to $15 million. That'll be in the second half of 2024. And then the additional, you know, little dogs and cats, so to speak, that we have that are going to filter out through the remaining months here.

Yeah, Chase, as Jeff mentioned, the Paso Pei facility, we've got 20 megawatts spoken for with the hydro miners, which is fantastic that we're going into that new technology there. But we haven't announced the 30 megawatts that are from the air-cooled facilities. So great opportunity to do our own mining, our own hashing, at that location with those 30 megawatts the other the other upgrades that jeff mentioned are later in the year but sooner than that if if if we can really put things together a fleet upgrade we have over 16 000 m30s and 31s that are primarily in quebec like talking about the opportunity for rapid uh increases in hash rate and rapid uh improvements in efficiency by replacing Some of those M30s and M31s with T21s, S21s, that type of series of miner, like you're talking 46, 50% improvement in efficiencies right away. So we're looking at that very keenly.

Yeah, that's helpful. Thank you.

The next question comes from Kevin Deedy with HC Windride. Please go ahead.

Hi, gents. Thanks for taking my question. Good morning, Kevin. Yeah. You gentlemen alluded to a seven extra hash target. I think for the, did you say the end, Jeff, the end of the first quarter next year?

Correct.

Okay. Could you give us a little more detail on how you see, I think, what not we're at about 6.3 now can you just walk through the step function improvement there and given that some of that is a function of the um the m50 and m56 order i'm just kind of trying to figure it out my little brain on um shipment and deployment well we we've announced a lot a lot of new miners but most of them are now into argentina and plugged in now so you're not really going to see

You're going to see a little bit more coming from Rio Cuarto, Argentina, but really this is all about PasoPay and the 20 megawatts dedicated to the hydro miners and the hydro containers that we have there. That's really the step function that will get you to 7x a hash. The 30 megawatts in the air-cooled facilities there, we're building the air-cooled warehouses, but we have not announced what's going in there yet or how it's going to be configured, so that does not go into the 7x a hash. Arguably, if you... If we put our own miners in those air-cooled facilities, then we could be probably up to the 8 exahash area and perhaps a little more. But right now, that's how we get to the 7.

So what machines do you have ordered, Jeff, just to 7, right? So if you go to 8, you'd have to place orders.

Correct.

Okay. Okay. Just along that line, have you fully utilized the credits that the manufacturers have offered you, or do you still have more on the books?

We sure have. Jeff, do you want to comment on the $19 million?

Sure, we did. We actually had around $15 million, $16 million remaining, and we fully utilized that actually for the passive pay for the hydrocoolers and for the miners and the containers associated with that. So that pretty much utilized fully the remaining credits that we had, Kevin.

Okay, so when we look at the December balance sheet, you'll have zero machine credits.

Correct.

Okay. You mentioned, Jeff, this situation with the Quebec tax authorities, or maybe it's, I guess, the full Canadian picture. I just want to understand what exactly is going on there and where your confidence comes in that – Tax either goes away and maybe previous allocations are refunded. How should I think about that?

Sure. So, first of all, this legislation was originally proposed back in February 2022. And at that point in time, we began accruing the expense of that VAT. So, in essence here, we have a 15% value-added tax on the energy costs. Normally we can actually apply for a refund or historically we can apply for a refund and recover that VAT. Effective actually in February, that's when this proposed legislation was put forth, February 2022, indicating that that recovery or that refund would no longer be available to Bitcoin miners. So that's why we've actually been incurring that additional cost and accruing to that additional cost here since that point in time. About two months ago or so, the legislation was officially passed actually that remove that opportunity with certain exceptions, including where if you are actually selling, if you are selling your computing power capacity to a third-party pool, as we do actually with Foundry, which is located in New York here, you actually can therefore recover those VAT taxes that are inputted here. So what we are actually now doing is that we're getting a specific revenue ruling that makes it completely clear, 100%, that we indeed had the recovery of that refund here. And as a matter of fact, if we get that back, what will happen is rather than recording roughly 4.7 cents for a couple of odd hours, we did in Canada in the third quarter, it would be down to a little under 4 cents, more like around 3.9 cents in that going forward. In addition, speaking to your second question here, Kevin, as a matter of fact, we've actually paid around $16 million of that tax's since February, actually a little more, about $17 million at this point, and we would get a refund for that amount. Not banking on it yet, not putting into our projections, but it's something we feel we're very entitled to. The legislation implies we should get it, and that we're going to be pursuing that very vigorously. Hopefully that addressed your questions.

Right. And just help me understand which authority that is. That's beyond the territory province of Quebec, right? That's for the entire country?

It's the Canadian Revenue Authority. And also it's at the provincial level, the MRQ as well.

Okay.

They're harmonized between most of the provinces and the federal government. But, yes, this is a federal government initiative. It's their lead. It's the interpretation from them that we need to clear this up. And we've been trying to be patient, but they seem to be taking an awfully long time in getting this crystallized for us.

Can you just maybe offer a little more color on your confidence in the ruling going your way?

We're highly confident. I don't think I can be any more – I don't think benefits would be more specific than that. But we have every expectation. As we read the regulations, as our attorneys read the regulations, it seems very clear to us that we are indeed entitled to that VAT refund.

There are a slew of other Bitcoin miners operating in Canada. Are they in a similar position, you think, with offering their hash to a U.S. resident pool?

I'm only going to speak to our situation here.

Fair enough. Fair enough. The synthetic hodl that you've put in place, right, I'd imagine that's 35 contracts, right? You spoke to 35 Bitcoin.

That's correct. In essence, that's correct. That's right.

Okay. That's all since the September quarter closed. That's right. Okay. How would we see that show in the balance sheet in December?

Yeah, that's a good question. So we do not practice hedge accounting here. There are some complications and wrinkles associated with it at this point in time here. So where you actually see the results or the impact of that is going to be actually below the operating income line and sort of financial income and expense. So we'll be breaking that out in the detail there. And in future reporting, you'll see it broken out in that section and in the footnotes.

Okay. Obviously, you gentlemen scrutinize the capital allocation decisions carefully. Can you offer just a little insight on the factors that led you to deploy capital in that vein given the improvement that Mr. Morphy addressed in the hash price and the purchase or at least the utilization of the equipment credits?

Well, let me – I'll start off here. First of all, we utilized equipment credits because we were getting – we were going to get – actually, you know, it was great. It was a great price for us in terms of the equivalent value for what we're doing. Secondly, obviously, we do want to husband our cash as carefully as we can here, given the uncertainty coming up with the halving overall here. But I think what's important to keep in mind, just sort of step back and give you a little more color here. As I pointed out at the beginning here, our cost of equity for the industry overall is around 35%. So we do have, you know, a pretty high hurdle here in terms of what we're looking for on a return on our projects. And we find, however, some of the economics, such as what we're seeing in Paraguay, is very, very compelling at this point in time. And while, sure, there's greater uncertainty and greater risk, which in turn warrants a higher hurdle rate for that part of the world here, we find that even so, that the potential returns that we can achieve here in that part of the world make it very compelling for us to sort of continue to make investments of that nature. Does that address your question? Kevin, I want to make sure I'm being thorough here.

Yeah, it definitely helps, Jeff. Thank you. Maybe you could speak a little bit more specifically to the power prices that you're seeing in the PPAs. As I understand it, there are two separate ones, right? There's one for Villarica, and there's another one for Ande. Paso Pei and Iguazu. Yeah. Yeah. So maybe you could speak to that. Clearly, one of your competitors is working with a partner in that jurisdiction that I know you must be intimately familiar with. So maybe you could just help us, not just myself, but all my colleagues here, in understanding that power price scheme.

Okay. Well, first, our first 10 megawatts that we put in in January of 22 was in Villarica, and our contract is with a private franchise owner within Paraguay, the only one like it, and it's called Clifsa. And it's been about 3.6 cents. There's been a few changes to it, but it's pretty steady at 3.6 cents, consistent now. But we can't get any more power or production from that site because Andei distributes, which is the national, Paraguay national distributor of power, Clifso only gets so much, so our allocation is there. So for future growth, we've gone to Ande itself, just like the competitor that you mentioned just moments ago, Kevin. And pretty much all of these contracts are very similar in terms of rate. There's high voltage rates and there's medium voltage rates. We're taking the high voltage rates that put us in about 3.9 cents per kilowatt hour, not subject to indexation with inflation. and all green power and all consistent and all done in a very harmonious partnership with the with the government and national distributor uh it's working well and i think the the other guys will have similar arrangements uh we're not privy to their contract but unless they are taking smaller amounts and under the media voltage tariff and that that would have a higher rate when you

sort of take a step back and look at Ande's source, right? I think they have, what, 50% of the, what, 14 megawatts that come out of that dam. How much do you think they're willing to allocate to crypto?

Rounding thereabouts and trying not to speak for them, but it sure seems like it's about sort of 550 or so high voltage and about 100 megawatts medium voltage. I think they want to make sure that they have good, strong, committed power from that. They're making a commitment to the dam up there. But there is some variation season to season, and I don't think they want to get into that all that much. So I think they want to make sure that they can sign these contracts, get it into production, and see what it looks like before going any further.

Okay, I'm sure you're happy to hear a last question from me. Could you just give us a little more color, Jeff, please, on the Iguazu site selection on the timeline and, you know, maybe how you're thinking about narrowing it down?

Sure. Iguazu is 100 megawatts. We know Ande likes to do it with 80 megawatts. transformers it's their choice that's why we put one in Paso Pei and hoping that we might be able to get a little more there at some point but Iguazu we are looking for real estate up in that area fairly close to the substation up there that's the main transmission corridor so there's a lot of power up there it's recently been upgraded as well so it's a nice new substation there and we are going through multiple sites right now in terms of selection some have been ruled out some are still in the running but they're relatively close and you basically measure which ones are high and dry which ones are fairly close so that you can run less electrical cable which is a big factor the electrical cable can cost more than the actual site itself so we're going through that as as we said in the script It's all fitting in within the timeline for next year, but I think we should be able to hopefully identify a preferred site this year, hopefully secure it. And then we'll start laying out plans for the substation to reduce the voltage there. And we haven't announced any plans in terms of hydro miners or containers or air cooled yet. That's all part of design and development plans for next year.

By the way, Kevin, let me just add a little comment here. You made a statement about the size of the Itapu Dam. It's actually a 12-gigawatt dam. It's been running now for about 40 years or so. Half of the power is allocated to Brazil. Half of it goes to Paraguay. Paraguay is actually using less than 10% of it for their own purposes here. And the other 40% of their share, actually, they sort of sell back to Brazil at about 1 cent per kilowatt hour. So clearly it's very compelling and strongly in their government's interest. to try to expand the use of it locally, including opportunities, you know, after Bitcoin mining, which is why one of our parent companies is following us as they're looking at opportunities in that area.

Great comment to add. Thank you very much, Jeff. As always, gentlemen, very appreciative for taking my questions. Thank you.

Thank you, Kevin.

Thanks, Kevin.

And our next Q&A, please go ahead. Lucas, is your line muted?

No, thank you, operator. Sorry, I didn't hear my name. Hey, good morning, everyone. Thank you very much for all the color, very informative call. Just a few quick questions. The first is kind of on the hash price assumption post-halving. What do you think is a reasonable level to assume to clear that hurdle rate you indicated earlier?

Well, the six cents is something that we've been really sort of maneuvering around in our analysis for some time. If it's better than that, then we can make some investment decisions with some half-decent payback periods. We're watching the network hash rate, which continues to set new records in terms of increases. Boy, we've had 45% growth over the last, year in terms of our hash price, but difficulties in the network is up sort of almost double that. It's quite phenomenal. But this excitement here, the ETF excitement, you know, I hope we can see Bitcoin prices of sort of 45, maybe 50 going into the halving that'll produce that type of hash prices that we're looking for. We will see.

Okay. That's helpful. And then when you think about kind of the power cost distribution across the industry, again, this is an industry question, but I would appreciate your perspective. Where do you think the midpoint is in terms of dollars per megawatt hour? Where would you kind of put the bottom 25 percent? Where would you put the top 25 percent? Thank you very much. Wow.

I think probably, and there's people with a lot more, a lot better data than I am, but it's probably average being sort of five and a half cents US per kilowatt hour is probably sort of where the average is. You see a lot of hosting contracts that are a fair bit more than that. When we go through the halving, it cleans a lot of inefficiency up and we do expect a radical adjustment here and where 15, 20% of the network hash rate will probably fall off for a few months. And it just depends where Bitcoin prices and some of these new miners and adoption, how quickly it is replaced, but it will be replaced. I think this is, this is why, I'll repeat it again, like through this whole script and what we're talking about here is we are really pushing for improving our cost of production. We're bringing down our GNA and like the biggest factor is electricity costs. So we are expanding in areas where there's low cost electricity. Argentina and Paraguay is cheaper than where it is in North America. And while there's no demand response that can pad your EBITDA and your earnings, just in pure margin on Bitcoin play, you need lower cost electricity. And that's why we are seeking earnestly anything under 4 cents per kilowatt hour. And that's why we think Paraguay with their dynamics, it's 3.6 and 3.9 cents now and with the potential for some improvement there, like in reduction. And then we've got Argentina right now that's less than 3 cents. That's If you're going to be successful going forward, you need to be in low-cost areas. Being able to get four, four and a half cents going forward, especially subject to inflation, it's not a good recipe for longevity.

I appreciate the call. Thank you, then. One last one. On the election in Argentina, any potential fallout and what it could mean for you doing business there?

We've decided to go slow there. We've said this many times that we want to see what the election brings, but we've seen with a Forbes article just most recently where it said both remaining candidates are pro-Bitcoin. I think how they go about it will be different. We have one more radical candidate that talks about... dollarizing the economy and things like that it's going to be interesting to to play through but it's one of the reasons why we have not put our capital budget dollars towards uh real quarto at this time because we want to make sure that we can continue to get the lower cost electricity and and just have confidence in in continuing capital investments in the country But even I think in that Forbes article, they talked about the government perhaps getting into Bitcoin mining in a particular area down there, which we've looked at. They think it's a novel idea, but we were looking at it two years ago. And it does represent some of the great opportunity in the country of Argentina going forward, provided that we can put the capital and the right people to play in that area.

Jeff, seems like lots of folks are copying you. I'll turn it over, continue best of luck.

Thank you, Lucas.

This concludes our question and answer session. I would now like to turn the call back over to Jeff Murphy for any closing remarks.

Thank you, operator. We are especially excited about the industry as the halving cycle is coming in about five months. Positive developments include increasing confidence that Bitcoin ETFs will be announced later this year and activated in early 2024. And two, in public sentiment that Bitcoin is being recognized as a store of value given heightened world uncertainty. We believe these factors may boost the sector and increase its credibility along with increases to Bitcoin prices sooner than expected and put the wind at our back as we execute our plan to One, grow low cost operating capacity to 290 megawatts in Q1 2024. Two, maintain top decile performance from mining assets and reduce costs as a result of additional sources of stable, lower cost energy. Three, develop more of our 573 megawatts of contracted yet undeveloped capacity of which only 240 megawatts are currently in operation. Four, Increase productivity with timely and cost-effective fleet upgrades. And five, remain one of the most highly productive and geographically diverse pure-play Bitcoin mining companies in the world and embark upon an accelerated phase of smart expansion as and when conditions present themselves. Thank you all for attending today's conference call. We look forward to updating you with our monthly reports as well as our other developments and at our Q4 conference call in March. Thank you. Thank you all.