Cipher Digital Inc.

Good morning. Thank you for standing by and welcome to CipherMining's second quarter 2022 business update conference call. Please be advised today's conference is being recorded and a replay will be available on CipherMining's investor relations website. I would now like to hand the conference over to Lori Barker, investor relations. Please go ahead.

Good morning, ladies and gentlemen. Thank you for joining us on this conference call to discuss Cypher Mining's second quarter 2022 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 website at investors at cyphermining.com. Please note that that this call will be simultaneously webcast on the investor relations section of the company's corporate website. The conference call is the property of Cypher Mining and any taping or other reproduction is expressly prohibited without prior written consent. Before we start, I'd like to remind you that the following discussion, as well as our press release and presentation, contain forward-looking statements including but not limited to Cypher's financial outlook, business plans and objectives, and other future events and developments, including statements about the market potential of our business operations, potential competition, and our goals and strategies. The forward-looking statements and risks in this conference call include responses to your questions are based on current expectations as of today, and CIFR assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. Additionally, the following discussion may contain non-GAAP financial measures. We may use non-GAAP measures to describe the way in which we manage and operate our business. We reconcile non-GAAP measures to the most directly comparable GAAP measures, and you are encouraged to examine these reconciliations, which are found at the end of our earnings release issued earlier this morning. I will turn the call over to Tyler. Tyler?

Hello, this is Tyler Page, the CEO of Cypher Mining, and thank you for joining us today on our second quarter business update call. Let me begin today's call with some key highlights about our progress. First, we continue to deploy our new Bitcoin mining data centers. Notably, we have completed the build out of our Alborz data center, which is a 40 megawatt facility powered by wind. This site has machines capable of generating up to 1.3 exahash per second, which on a windy day means the data center can generate up to 5.7 bitcoins in current market conditions. In the coming months, we will continue to deploy further data centers as we complete our initial build-out. We have industry-leading unit economics in our operations, resulting from our low-cost structure that I will walk through today. We believe these unit economics are the most important factor when evaluating a Bitcoin mining company. Given our strong unit economics, we have a business model that is more resilient than our competitors in the tougher Bitcoin mining environment that we have seen in the past few months. Let's talk a little more about our low-cost operations and the large scale we are building. As we roll out our data centers, we expect to deploy up to 6.9 exahash per second by early 2023. And importantly, we will do that with a new fleet of machines that averages 32.1 joules per terahash in terms of efficiency, and for which we paid an average price per terahash per second of $34.96. We source our power via five-year power purchase agreements with an average fixed price of power of 2.73 cents per kilowatt hour. These power purchase agreements are longer than those typically contracted by our competitors and feature a low fixed price. As the cost of power is the most significant operating expense for a Bitcoin miner, in the current expensive energy price environment, these contracts are incredible assets to have. Our anticipated cost for non-rig infrastructure per megawatt at our data centers is $450,000. And we anticipate completing another three data centers in addition to Alborz by early next year for an initial deployed capacity of 265 megawatts. Now, let's turn to a broader market update for the time period roughly since our last business update call. There has been a fair amount of turmoil in the broader Bitcoin ecosystem, particularly in the mining sector. We saw Bitcoin prices drop approximately 50% triggered by several alarming events in the industry that we've highlighted in the graph on page five. The shifts in the marketplace have had several serious implications for the mining sector. Specifically, We have seen the prices of mining rigs substantially reduced and have seen secondary market transactions in the 20s and 30s in terms of dollars per terahash per second. Equipment financiers to Bitcoin miners have halted loan originations, and several existing loans made to Bitcoin miners have payback schedules that presume a better mining profitability environment. This, in turn, has led to some miners liquidating their Bitcoin treasuries to meet their debt obligations. Against this market backdrop, cipher mining has several key competitive advantages. The best-in-class power contracts and mining rig purchase contracts I mentioned earlier allow us to operate profitably in a lower Bitcoin price environment than most of our competitors. Furthermore, our ability to sell power to the market at the largest mining facility in our portfolio hedges us against markets where it may become less profitable to mine Bitcoin because of further price drops or large increases in network hash rate. Let's take a moment to speak about unit economics and Bitcoin mining and why this is such a focus for our management team. On the left side of slide six, you can see a graph of recent power prices per megawatt hour in the region of Texas where our ODESA data center is being built. As you would imagine, with the hot summer Texas has been experiencing, power prices have been high. And these prices are somewhat indicative of power prices everywhere else. You can see the red dotted line on the graph that shows where our fixed price falls relative to these recent market prices. On the right side of the slide, you can see a simple two-by-two matrix that shows revenue per megawatt hour generated assuming new mining rigs with Bitcoin prices of $20,000 and $25,000 and a network hash rate of 200 exahash per second and 225 exahash per second. As you can see, in the current power and Bitcoin price environments, the cost of power for someone without a fixed price contract can exceed the revenue generated by mining Bitcoin. The reason why we are so focused on our cost of power is illustrated here. Let's compare Cypher with what might be called a typical competitor. With an average price of power of roughly $27 per megawatt hour, Cypher can be very successful even in the current environment for Bitcoin mining. Furthermore, if the potential revenue for selling power exceeds the revenue that can be generated from mining Bitcoin, we will sell that power to the grid rather than use it to operate our mining rigs. Our power contracts are fantastic assets. Our capex that we need to pay back is lower than most competitors because we paid a very reasonable $34.96 per terahash per second for our machines. And we have no corporate debt. Our joint venture at Alborz has an equipment finance debt facility, and our share is roughly $11 million in total. As a result, we believe Cypher has among the strongest unit economics in Bitcoin mining. Let's contrast that with our competitors. They pay higher energy or hosting costs at their data centers. We have seen recent quotes for hosting services that exceed $70 per megawatt hour. Given that most of our competitors are older than us, they often have an older fleet of less efficient mining rigs that cannot produce the revenue numbers listed in the matrix. Many of them paid top of market prices for their mining rigs at 70, 80, or $90 per terahash per second. Furthermore, almost all of our competitors have significantly more debt than we do and often arranged a high loan to value facility against those higher machine prices they paid. Given that most lenders in our space have structured their loans to amortize in advance of the 2024 halving, monthly debt payments can become extremely onerous. When combined with these other factors, many of our competitors have monthly payment obligations that exceed the revenue generated by their Bitcoin production, irrespective of how large their total hash rate production may be. Mining is a cyclical business, and cyber mining has been designed to succeed throughout the cycle. Now let's turn to some milestones and updates on our company. We believe we have best-in-class data centers, construction processes, and team members. As I mentioned, we have fully completed our first data center at Alborz with 1.3 exahash per second installed. Our second and third data centers, Bayer and Chief, are nearing completion with all mining rigs en route to the sites. Those sites will soon bring roughly two-thirds of an exahash per second of hash rate online. Our construction team has been working feverishly over the past few months, and our wholly owned Odessa site is scheduled to deploy throughout the second half of this year. Simultaneously, we are working on our next-generation data center design and evaluating immersion and liquid cooling designs simultaneously. part of that process as we plan our new 2023 data centers. Our team has been growing and is now up to 20 senior members. Our most recent hires come from firms like Alphabet, Amazon, Meta, Morgan Stanley, Point72 Asset Management, and Scotiabank. Those senior team members are overseeing a workforce of contractors at our sites of roughly 180 total people. One particularly influential group of new team members is our data science team, who are building predictive wind models to enhance our operations. Someday in the future, we believe we may be able to expand upon their work and offer products and services to third parties to assist with managing the complexities associated with the intermittency of renewable power. Next, I will discuss our implementation plan and strategy updates. On page 10, you can see our 2022 updated site forecast timeline. As you can see, we expect to have three data centers operational by the end of Q3 and expect to be bringing our ODESA data center online throughout the second half of the year. Looking out to 2023, we have several interesting expansion opportunities, including our site at Andrews, Texas, which will be co-located with a new solar farm and several possible sites with our joint venture partner, WindHQ. Now, let's show our deployment progress. Here are some pictures of the completed Alborz data center. You can see that it is a very clean new site with the wind turbines in the distance bringing the power to our containers. Here are pictures of the Bear and Chief data centers. As you can see, BEAR is ready to receive the mining rigs that should be arriving in the coming weeks and CHIEF will be next from a timing perspective. It's our hope that we will be showing you pictures of these data centers completed at our next update. Here are pictures of the progress at Odessa. You can see our completed substation in the upper right-hand corner. The other pictures show various areas of the 54-acre site getting ready to receive our first batch of machines. Let me close with some key statistics from our continued initial build-out and some highlights of our liquidity profile. As I previously mentioned, we have paid a very competitive weighted average cost for our mining rigs of $34.96 per terahash per second. Those rigs will hash with an anticipated efficiency of 32.1 joules per terahatch. Our rated average power price is 2.73 cents per kilowatt hour, and our anticipated infrastructure capex cost per megawatt is $450,000. Some highlights of our strong liquidity profile include that we had approximately $30 million of cash and a $9 million receivable from our JV partner on August 1st, 2022. We have adequate capital to complete the infrastructure build-out at all of our initial data centers. We have no corporate debt. Our mining rig contract with Bitmain is fully paid at this point, and we have made a lot of progress on our micro-BT mining rig contract. Specifically, we have paid roughly $101 million so far out of a total contract estimated to be $200 million. We are currently in discussions with MicroVT to optimize our remaining payment and delivery schedule to match our data center deployments into 2023. Our remaining $99 million of purchases and future deliveries expected under the contract are secured by a roughly $9 million deposit. In summary, We are very well positioned to weather today's challenging Bitcoin mining market, and we have good flexibility should conditions worsen. Most importantly, we understand managing through Bitcoin mining cycles and can benefit quickly from market improvements when the cycle returns to a more favorable environment.