Cipher Digital Inc.

Good day and thank you for standing by. Welcome to the Cipher Mining Third Quarter 2023 Business Update Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Josh Kane. Please go ahead.

Good morning. Thank you for joining us on this conference call to discuss CypherMining's third quarter 2023 business update. Joining me on the call today are Tyler Page, Chief Executive Officer, and Ed Farrell, Chief Financial Officer. Please note that you may also review our press release and presentation, which can be found on the investor relations section of the company's website. Please note that this call will also be simultaneously webcast on the investor relations section of the company's website. This conference call is the property of Cipher Mining, and any taping or other reproduction is expressly prohibited without prior consent. Before we start, I'd like to remind you that the following discussion, as well as our press release and presentation, contain forward-looking statements, including, but not limited to, Cipher's financial outlook, business plans and objectives, and other future events and developments. including statements about the market potential of our business operations, potential competition, and our goals and strategies. The forward-looking statements and risks in this conference call, including responses to your questions, are based on current expectations as of today, and CIFR assumes no obligation to update or revise them, whether that as a result of new developments or otherwise, except as required by law. Additionally, the following discussion may contain non-GAAP financial measures. We may use non-GAAP measures to describe the way in which we manage and operate our business. We reconcile non-GAAP measures to the most directly comparable GAAP measures, and you are encouraged to examine those reconciliations, which are found at the end of our earnings press release issued earlier this morning. I will now turn the call over to Tyler. Tyler?

Thanks, Josh. Hi. This is Tyler Page, CEO of Cypher Mining. Thank you very much for joining our third quarter 2023 business update call. We've got some exciting growth updates that we're delighted to announce, but before we walk through those, I'd like to spend a few minutes on Q3 and our recent accomplishments. During the third quarter, we reached several significant milestones. With the completion of our ODESA data center, we have achieved 7.2 exit hash per second of self-mining capacity across our portfolio. With all four initial sites now up and running, approximately 96% of our portfolio is energized through fixed price power. And we believe our cost of electricity at a price of roughly 2.7 cents per kilowatt hour is among the lowest in the entire industry. As a reminder, electricity represents the majority of our operating costs and our low price is a key driver of our best in class unit economics. And now that the first chapter of our growth story is completed, I am very happy to report that we will soon embark on the next major phase of expansion. We are delighted to announce that we have just agreed to acquire a Texas-based Greenfield site with conditional or cot interconnection approval for up to 300 megawatts called Black Pearl. At Cypher, we have long prided ourselves on prudently managing the cyclical nature of the Bitcoin mining industry. And as I have stated on our last few business update calls, we have been patiently reviewing many deals for the past several months, looking for the right one. Black Pearl is that right one. It is a front of the meter site that we hope to bring online in 2025. Note that due to the nature of the site, we have no take or pay obligations for purchasing a minimum amount of power. and we'll build our data center at the pace we deem most appropriate. It is our current intention to build the full 300 megawatts over time, but we will likely build it out in incremental stages and are currently deciding on the most appropriate schedule. We intend to fund the build out of the new data center with a combination of cash generated from ongoing Bitcoin mining operations, as well as from our Bitcoin inventory, or equity sales from our at-the-market equity shelf to the extent market conditions make that an attractive option for the company. We will also continue our ongoing discussions with construction and equipment lenders, as well as consider other favorable debt financing opportunities. Once the data center is built, we intend to participate in ancillary services in ERCOT, and we hope to generate supplemental revenues from optimizing our operations and using our data center to help with grid stability by providing capacity back to the market in times of need. Continuing theme of timing the cycle when investing in growth, I'm also pleased to announce that we recently purchased 1.2 exahash per second of Bitmain's latest generation S21 rigs for $14 per terahash, which are scheduled to be delivered in the first half of 2024. This was an opportunity to acquire very efficient, cutting-edge machines at a great price. Our current plan is to cycle these machines into service at ODESA as they arrive and either replace machines that are in the process of being repaired or upgrade our operations by swapping them in for our least efficient rigs. Finally, we have talked in previous quarters about the attractive organic growth opportunities at our existing sites. And we've continued to make progress on that front as well. At Alborz, we recently received ERCOT approval for a supplemental grid connection that will allow us to increase our targeted operational uptime significantly. We expect this backfeed to be in place in the first half of 2024. We are at an important inflection point for the company as we pivot to the next stage of growth. And we are excited to be expanding and investing in advance of what we hope will be a bull market for Bitcoin in the months and years to come. Now let's turn to some specifics on the current state of the business. On page four, we highlight key performance indicators as of the end of October. These metrics should give you a sense of our current production and the potential growth we hope to see over the near and medium term. Our current self-mining hash rate is 7.2 exahash per second, and with the acquisition of the new Bitmain rigs, we now have a total capacity in service or under contract of 8.4 exahash per second. With the addition of Black Pearl, we have the potential to expand to 23.5 exahash per second by the end of 2025. On the bottom of this slide, you can see some of our current and year-to-date production numbers, which reflect the growth of our production over the past several quarters. We are often asked about our treasury management philosophy. These KPIs give some insight into how we approach our Bitcoin inventory. In the middle of the page, you can see our Bitcoin held, which has risen quarter over quarter. We manage our Bitcoin treasury by generally selling enough Bitcoin every month to fund our operating expenses and existing CapEx commitments. Beyond those sales, we may choose to sell more Bitcoin for dollars to invest in expansion opportunities, to hedge our inventory with futures or options, or to hold excess Bitcoin to build our overall treasury balance. It's our goal to build our Bitcoin inventory over time, But we also believe that our monthly free cash flow generation gives us greater flexibility to take advantage of growth opportunities in periods where other financing alternatives are less attractive. Slide five is a high-level overview of a Bitcoin mining business that we like to include each quarter to remind everyone how our business model works. We operate the box in the middle of the drawing that says mining equipment, which represents our data centers and mining rigs. As I discussed earlier, we spend the majority of our operating expenses on electricity, which our data centers convert into computing output. Unlike traditional data centers, which operate a similar model and sell their computing output to enterprise clients for dollars, Cypher sells its computing output, called hash rate, to the Bitcoin network for Bitcoins. To make this model operate profitably, a Bitcoin mining company needs to control both its electricity and the capital it spends to build data centers, including what it spends to purchase mining equipment. Controlling these costs enables a miner to be a lower cost producer. And our focus at Cypher has always been on controlling these specific costs to produce the best possible unit economics. That illustration hopefully gives you a good sense of a straightforward Bitcoin mining business. Cipher, however, does have an additional element to our business that is incredibly valuable. We have the ability to sell power back to the grid. Our power purchase agreement gives us a combination of downside risk protection as well as upside optionality to our revenue streams that doesn't exist for many Bitcoin miners. Now let's turn to page six and look at some recent Bitcoin market events. The news flow for miners has been mixed over the last four months. Much like last quarter, we've seen positive headlines speculating on the approval of a Bitcoin spot ETF by the SEC. That speculation has driven a recent rally in Bitcoin price to the current level close to $35,000. But against this backdrop, there has also been a steady climb to an all-time high in overall Bitcoin network cash rate, which continues to suppress overall mining economics. We have also seen announcements from the rig manufacturers of their next generation machines, which feature dramatic improvements in efficiency. While announcements of new rigs have typically been paired with new premium pricing arrangements in the past, this time the manufacturers have announced very aggressive pricing dynamics. As with many other facets of the Bitcoin mining business, rig pricing can be cyclical, and a prudent miner will acquire rigs when pricing is cheap, In the last bull market, rigs were pricing at many multiples higher than current prices. Against this market backdrop, as we head toward the halving in 2024, Cypher is focused on acquiring vital assets like new data center sites and efficient mining rigs at cyclical lows and optimizing our power use, trading, and Bitcoin production. On slide seven, we give a portfolio overview of our data centers. Year to date through September, we have paid an average all-in electricity cost of $8,379 per Bitcoin produced. We are very proud of this number, and it drives our best-in-class unit economics. On the left side of the slide, you have a snapshot of our four current data centers, along with our all-in electricity cost per Bitcoin at the respective sites The chart on the right side of the slide gives you a graphic illustration of the current cipher hash rate, as well as the additional potential growth opportunity through 2025. At this point, we will turn to production by site. On slide eight, you can see a picture of our ODESA facility that we completed in the third quarter. Odessa is clearly the most significant part of our portfolio as it represents approximately 90% of our Bitcoin production. Odessa is a wholly owned facility with a five year fixed price power purchase agreement and some of the lowest cost power in the industry. As of the third quarter last year, we began reporting a third party independent valuation to give investors a sense of how much value is represented in the power contract alone. As always, Ed will talk more about it in his remarks. At the end of September, we generated approximately 6.2 exahash per second at the site using approximately 207 megawatts. We have mined roughly 3,531 Bitcoins at the site through October 31st and had a recent maximum daily mining capacity of approximately 12.9 Bitcoins per day. We will be hosting an investor day at Odessa next week and look forward to showcasing the operations and team now that the build out of the site is complete. On slide nine, we show a picture and highlights from our Alborz data center, which we believe is a truly unique site. Alborz is 100% powered by wind and is a joint venture that we share with our energy provider. It currently has a total operating capacity of 40 megawatts when the wind blows. That 40 megawatts powers roughly 1.3 exahash per second of rigs. Alborz can mine a maximum of roughly 2.7 Bitcoin per day in current market conditions. And year-to-date, the site has mined approximately 603 Bitcoin through October 31st. Roughly half of that total capacity and site production belong to Cypher. Most importantly, our year-to-date all-in electricity cost per Bitcoin at Alborz was approximately $6,794, demonstrating our resilient, low-cost setup. We are working to supplement the wind production at Alborz with a grid connection, which would allow us to increase our uptime and generate more Bitcoin with the existing equipment at the site. And we hope to have that arrangement in place in the first half of 2024. Slide 10 shows operational highlights from our Bear and Chief data centers. Combined, the sites operate 20 megawatts, which power approximately 0.65 exahash per second and can generate roughly 1.4 bitcoins per day in current market conditions. Bear and Chief are also structured as joint ventures and feature shared economics similar to Albor's. Unlike our other two sites, which have behind-the-meter power arrangements, Bear and Chief are set up in front of the meter at a location in Texas that typically features attractive market prices. Our year-to-date all-in electricity cost per Bitcoin at the combined sites was approximately $10,448. Now, I'll turn it over to our Chief Financial Officer, Ed Farrell.