Stronghold Digital Mining, Inc.

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

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 assumptions, Relating 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 Strongholds Securities Exchange Commission filing for free by visiting the SEC website at www.sec.gov or Strongholds 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 Strongholds website. Now, I would like to turn the call over to Strongholds Chairman and CEO, Greg Mute. Greg?

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 that will 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 have 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. As a vertically integrated Bitcoin miner, we have a unique, substantial asset base with significant potential for complementary revenue streams. We have talked a lot about our Ash by a product 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. 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 DEC. While it is not entirely clear if our project qualifies today, 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 it can 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 to 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 that 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 revegetation to the previously unusable land. Moving to slide nine. For those who think they were 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-powered 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 scrub grass ash by our partners, Carbonetic, over the last four months, which we conducted under conditions intended to replicate scrub grass 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 base load capacity, which equates to approximately 100,000 tons of carbon captured at 12 percent 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, Carbonetic, has branded these proprietary patent-pending units as carboless. Very importantly, we have exclusivity with Carbonetic. 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 carbolith 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 advise 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 have 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 incorporating 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 ash's 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 carbo lifts 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 were to qualify for 45Q tax credits under the IRS, we planned to sell into the private carbon credit markets with the average index price for pure carbon removal credits in 2023 has ranged from approximately $130 to $190 per ton of carbon. This range implies $13 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 in 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.

Thank you, Greg. We will remind you As we discuss 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 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.

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 benefit 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 a lot of work has gone into this over the past six months. Matt Usen, 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, Carbonetic, 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 it up to questions. Operator?

As a reminder, if you'd like to ask a question at this time, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Lucas Pipes with B. Reilly Securities.

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

Yeah, I can take a stab at that, and then 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 the number of carbo lists 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, you know, 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, you know, I can tell you that we're now running our first I think there are pictures of it on our website and on Carbonetics' website in a month. I think 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.

Okay, Greg. Thanks for that. That's really helpful. Maybe just to 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?

Hey, this is Matt Houston. 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 subsequent listing on the registry. You know, 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 would expect a couple rounds of comments, but, you know, we think at this point in time we have line of sight to being registered and listed on PERO 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's You know, that'll be a little bit later. It requires an audit of a year's worth of, you know, capture data. I think conservatively, I wouldn't model this until 2026. But, you know, as we know, there's a three-year look back that would allow us to, you know, utilize our capture data. from 24, 25, and into 26 as well, even 23, if we're able to start, you know, 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, you know, aspects of what would be involved in qualification there.

Okay, great. That's all really helpful. I appreciate all the detail. I know there are a lot of questions, so I'll jump back in the queue, but congratulations again and best of luck. You bet. Thank you.

Our next question will come from the line of Chase White with Compass Point Research.

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 spend would look like leading up to that and ultimately what could impact those timeframes in terms of actual deployment.

Chase, I would link what Greg responded to the prior question with as a starting point. we're going to use the data that comes out of this initial phase carbolith test at ScrubRAS and the amount of time it takes to reach what we would view as similar outcome as what we saw in the laboratory simulating ScrubRAS's environment. And, you know, we may iterate a second time or a third time or a fourth time to try to perfect that process. As the data becomes supportive of the thesis, we would expect capital to follow. And, you know, the more constructive the data is, if it matches a week decarbonation at 12 percent, then we would probably think about accelerating capital and deploying sooner. If we don't see what we like, you know, it may take more iterations. But importantly, There are a couple of things. I would not expect the cost of the carbolith to rise from what we shared. In fact, the first carbolith we shared in the slide that's less than $100,000, the first carbolith 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, $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 to drive the answer to your question. Scrubgrass likely sees an entire rollout over the course of 24, 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 Panther Creek. But I would think about a kind of a 12 month to 15 month sort of process where we hope to be at a full run rate entering 2025.

Got it, that's helpful.

And it's important that we don't expect like equipment delays This stuff is mostly off the shelf. We can assemble them pretty rapidly. And so this is not something where you order something and you get it six months or a year later. So it's just going to be data-driven.

Got it. That's helpful. And then kind of changing gears a little bit, I mean, how should we think about the benefits associated with and also the OPEX associated with the frontier agreements?

Yeah, I can start. So I think we have not had the mining uptime that we aspire to, which is at the same time we've known the Frontier team for a couple of years and have really respected their work. And so I think we have entered into an agreement that essentially outsources the management and uptime of the data centers at Frontier. And in the first month of operations, they have shown a marked improvement over the status quo prior to them working on our behalf. And I think it essentially is going to allow us to hopefully enter the top quartile for uptime versus our industry peers. And I think I can say I would expect that to happen over the next three months. I'm sure Arlind is would agree with that. And he's incentivized to do so. The frontier deal has rewards for hitting uptime metrics that includes both cash and stock.

Chase, I would just add that we spent significant capital this year, all of which is funded with no sort of incremental capex required down the road. And we did that to upgrade the efficiency of the fleet And as we got through the summer, we weren't hitting with the stride we expected in terms of uptime on the miners. And so Arlen, when you spreadsheet it, Arlen and the Frontier team represented a, we'll call it a $5 to $10 million revenue pie over the next 12 months at a consistent hash price with today versus hiring a team of people to do the same thing you know, technology stack experts with, you know, firmware and other expertise. And so for us, it was a, in our view, a no-brainer mathematically to bring in the Frontier team, and we've already seen the fruits of that start to play out. And so we're quite excited about that, you know, kind of meaningfully improving our revenue generation.

Got it. Thanks, guys. Yep.

Our next question will come from the line of Kevin Deed with HC Wainwright.

Good morning, guys. Kevin Deedy. Congrats for thinking outside of the Bitcoin mining box on the carbon capture plan. I guess I'm kind of curious about your your go, sort of no-go decision tree. I mean, as it is now, you're rolling out your first big real-life test. And I understand you'd like to go. I understand Matt's comments. You can't see a better option in using your CapEx. But I'd just like to hear your take on the variables, the inputs that you get from this test, and how you rationalize those inputs in making your deployment decision.

Yeah, hey, Kevin, thanks for your interest and for the compliments. Let me just start with just a bit of like a history lesson on the plants. Like part of why this opportunity is here is that we have these legacy plants that are, you know, worth hundreds of millions of dollars. That's very much part of the process. So I appreciate the compliment, but what makes us different as a Bitcoin miner is, yes, we also have 40,000 rapidly depreciating Bitcoin mining machines, but we have options around power and now around carbon capture. And so we have this first carbolith, this first device that we have constructed. This isn't, you know, while it's our first big field test, We, from my perspective, we've shown a lot of discipline before coming out to the market and explaining what we're doing. And now we're only doing it after really extensive testing, lab testing with, you know, I can just tell you bucket after bucket, after bucket after bucket of our ash. You know, we're shipping this stuff out to a lab in California. And they have simulated conditions that will emulate what we have in Pennsylvania. And it's not great weather in Pennsylvania. So we are past the point where we say, well, hey, we'll see what amount of carbon the ash can capture. We know the amount it's going to capture. The only question is the pace that it captures it. because this chemistry, you know, when we describe the process to, you know, guys that are geologists or chemists, they're like, well, of course your ash captures carbon. You know, you use line center as a part of the process and it's, it's not a, it's not a giant mystery. Um, it's a chemical certainty that carbon is going to bind, uh, with this process and, and be permanently in geologically, you know, removed from the air. Um, The only question we have is how long does it take? And then how long does it take under certain temperature conditions, under certain wind conditions? We need to study the airflow that the carbolith creates. And by the way, even as I'm thinking and sitting here, who knows if we end up sticking 50 Bitcoin mining machines inside of a carbolith to help that airflow along. We are going to make this airflow through this ash and it's going to capture the carbon. It's just a matter of iterating around it. And I don't know. Hey, we're motivated, and we have a bunch of creatively-minded people, and I think we have all the ingredients for a great project. But, hey, sitting next to a lawyer is like, hey, but it's not done. We've got to do the work. We have to test it. But I can tell you how the story ends. It ends with this ash capturing all this carbon, The timeline is the only question, and we're going to know a lot, you know, by the end of today. We're going to know more tomorrow. And we'll have a, we've announced sort of an analyst investor day December 12th. My bet is we'll put out some news before then. But I think just given the data that we have from the tests, I won't understand it if we don't have a fairly rapid carbon capture just with our current setup. And then I think we'll still say, well, how do we make it faster? How do we make it better? How do we make the process cheaper? How do we make the design of these things cheaper? But I think we're already really capital efficient because the big project cost was spent, you know, $400 million was spent decades ago to build the plants. That was the big expense. And that's tough to get part of the process. The The COBRA list, and this part is the relatively easy part. And we're just iterating around it. So I know I didn't, you're looking for a day that's in, you know, an answer that's in days. And we can't give you that yet.

No, no, I wasn't really looking for that. I appreciated the way you responded to the question, Greg. I just wanted to hear about your thinking. And I appreciate that.

No, it's like, I think my... You'll know it's over when we've won. That's when it's over.

Well, winning is only temporary, Greg. It's a fight every day. I'll tell you, I don't think you want to put your miners in one of these carburetors. I mean, I can see piping maybe some immersion heat over to it. That would make sense. But I think dust and machines just don't mix well. Come and check it out in person.

And then we'd love to get your engineering advice.

Yeah, well, I think you have far sharper minds than mine on it. Can you give us an update on that potential third facility, the 25 megawatt one you guys have alluded to in the past?

Yeah, so, Kevin, we try to be thoughtful about addressing this. You know, we have done extensive diligence and have had numerous discussions with third-party sites owners and potential partners. And if we wanted to pull the trigger on one of those today, we could. But the reality is we are data-driven allocators of capital and very much process-oriented. And while we are excited about the prospects of a third site with this inventory of $10 or $15 million of data center equipment that we've already paid for, You know, we're weighing that constantly against, you know, minor efficiency upgrades at our current sites where you could add an Exahash or two in place at existing clubs with our low and we believe going much lower cost of power. And so those are to be compared against a secular growth story with no halving event in the carbon capture opportunity that we just discussed. And so what I think Matt used and Greg shared is over the next six to nine months, there's no halving in carbon tax return. We can test and start to deploy capital potentially if it's data-driven and makes sense in early 24 and start to potentially sell these private carbon credits in the private markets for values well in excess of what you can put money to work in a Bitcoin miner right now. And so what I would just point out, we're going to do the right thing with capital. We're going to be transparent about it. And so we look forward to, you know, the data we'll have hopefully at the analyst day to help make that decision process clearer. But it's about creating value and, you know, not putting a dogmatic, you know, vision of what a Bitcoin miner should be ahead of creating value and exploiting these assets to their fullest.

Thanks, Matt. Can you just rationalize that commentary with your 4x-to-hash target and the 3,000 high-spec miners mentioned in the press this morning?

Yeah, so those miners were actually the tail end of the deliveries of previously announced July purchases and the expanded Canaan hosting agreement. So, we've made no incremental minor purchases since July. All those deliveries happen in, you know, August as planned or at the latest early September, but it's mostly by the end of August. And so, the press release needed to include the third quarter deliveries. That's all we were citing were previously announced minor deliveries. As for the forex hash, yeah. Look, as for the forex hash, you know, you can impute from the monthly coins that we have a significant, you know, organic opportunity to increase and grow our actual effective hash rate by improving operations. And so, you know, we can pick up four or five, 600 petahash here over the next three months, you know, in pretty short term with Frontier. And, you know, we look forward to doing that. and then we will systematically deploy capital like I described. You know, it'll be carbon capture, returns, and payback unaffected by the halving. It'll be, you know, replacing and upgrading miners in place at Scrub Brass or Panther, or it will be, you know, the third site. We're going to do whatever makes sense to create value.

The CapEx guidelines that you've outlined here, Would that include, I guess, vehicles for transportation of ash, or do you feel like you're well set there?

Yeah, so we, thankfully, we are, I believe we're experts at moving materials, including ash, onsite at our plants. We do it every day. We have those costs embedded in our fixed and variable OPEX assumptions in our slides, embedded in the EBITDA, you know, kind of the run rate EBITDA illustration we provided. The capital expenditures are for two things primarily that we're expecting for carbon, the $50 to $125 per ton. It's primarily for the equipment for the carboliths in the final form they take, assuming they're effective. And then it would be the kind of the flex labor in addition to the baseline fixed and variable operating expenses we've forecasted embedded in that illustration. You know, I think we feel like we've been conservative in what we've put out. We don't want to miss, but it's based on what we know now, it's still early, and so they're our best forecast.

Well, congrats again, Jens. Very, very interesting. Thanks for entertaining my questions. Thanks. Thanks, Kevin.

As a reminder, that is star 1-1 to ask a question. Our next question will come from the line of Josh Siegler with Cantor Fitzgerald.

Yeah. Hi, guys. Thanks for taking my question today. Congrats on the launch of this new initiative. Sounds super interesting and unique among the Bitcoin mining space. Most of my questions have already been addressed, but I want to touch on a couple of things. First, is there a political risk associated with changing administration that could impact the IRA and how you're thinking about tax credits in the future?

Hey, in this sort of political climate, there's always that risk, but the IRA, that's the law of the land, and it has a long tail to it. It would take a really meaningful sort of landslide-type political change in order to have that impact us. So that's certainly not out of the question, but not expected at this point. Okay, understood. The intent of the IRA is to, which is, you know, bipartisan at this point, is to incentivize companies like us to come up with projects like this to capture carbon and do other environmentally protective things. But I think our estimate is it's, you know, what, more than $400 billion of IRA tax credits are earmarked for carbon capture. And, you know, this project certainly fits with the intent of what they're trying to do. So I would say I would, you know, I wouldn't spend a lot of time worrying about, hey, are we going to see a new administration that just says, hey, take this whole thing away? But it's possible, not probable.

Okay, that's really helpful, Culler. I appreciate that. And then for investors on the line, can you help us better understand the fees and royalties aspect here, kind of what's going into that bucket, and how do you expect it to fluctuate depending on the total tax credits and removal credits?

So we've studied specifically the five registries. We'll talk about the private markets initially. Each registry, if you were to sell a credit once listed on the registry, you know, there's a specific, you know, fee or commission, whatever you want to call it, that's sort of a gross deduct. We've accounted for that in our illustration in our slide deck. And then, you know, you can always transact off of the registry, but by all accounts, having your process validated and put on a registry is a meaningful value uplift for, you know, for receiving value for the work you're doing to sequester carbon. And so, we have tried to appropriately model the fees and commissions as a gross deduct from the income stream. And then, you know, thereafter, we have, you know, some agreements in place and appropriately, you know, deducted, you know, 10 percent from the private market receipts and 5 percent from the, you know, any 45Q qualifications based on agreements in place today.

Great. That's very helpful. Well, congrats again on the launch here. Really looking forward to seeing how this plays out. Thanks for taking my question, guys. Thanks, Josh.

Appreciate the interest.

As a reminder, that is star 1-1 to ask a question. Our next question comes from the line of Lucas Pipes with B. Reilly Securities.

Hey, thank you, Operator. It's Nick again here. Apologies if I missed it. Matt, you referenced paybacks and returns. I'm not seeing anything better elsewhere. Is there a project IRR you would cite for the capture initiative, maybe inclusive and exclusive of the 45Q piece?

Yeah, I think what I would do is I'd like to not front run the data from Scrub RAS. I think The payback in IRR, if you just think about the single carbolith and you were to scale that at scrub brass, for instance, we know how much ash we make at scrub brass. If the lab results were to extend to that ash, you can calculate how much carbon you could capture. And then based on the time to capture, whether it's a week like in the lab or potentially up to two weeks, That would determine how many of these carbon structures are placed, for instance, at scrub brass in order to capture optimally the carbon available to be captured with the scrub brass ash. That range of capex is the basis on which we're running the payback, assuming first private market, which we expect and hope to be available to us in earnest in 2024. and then reach a run rate in 2025. You know, that payback, if you think about the scrub brass ash as sequestering sort of, we'll call it 40 to 50,000 tons of carbon potentially annually, multiplied by that private carbon range that we provide in the slides, you know, relative to the, you know, the capex, which would be, you know, half of the approximate total capex for the project that we've estimated I think you can start to get to a place where, you know, the payback, again, doesn't suffer from a halving in four or five months. And it's a secular growth opportunity. And if you put the money to work, it's because you're getting traction with Puro in the first quarter of 24. It's because the data is demonstrating compelling carbon capture in the, you know, in the testing. It's progress. You can... coordinate allocating capital with selling of credits, and that makes for a faster payback, potentially, because you're actually getting cash in as you're deploying capital and scaling up. And so I would just point there, there are timing. There's still some uncertainty around the, around how many card bullets are needed, as Greg described, but we're, we think that payback, you know, relative to, you know, other places we could put our money today is really compelling.

Fair enough. No, I appreciate that.

And maybe I would point out today that I would just add one more thing, which is that, you know, we've maybe call ourselves the orphan of the Bitcoin mining space because we traded a fraction of the multiple on every metric that every other Bitcoin miner does publicly. I think what we point you to is the private market and and kind of energy transition and other types of businesses that that don't suffer from the Bitcoin mining having concerns that have prevailed in the market. We're really excited about a totally differentiated income stream potential that could potentially double our cash flow over the next 12 to 18 months. That's pretty exciting, and it's totally idiosyncratic to Stronghold, which we're quite excited about.

Thanks for that, Matt. Maybe just One follow-up there. Can you just remind us how you're thinking about debt pay down based on current structures or sweeps in place and how this could impact that?

Sure. So we've placed – we have a single creditor. The credit agreement is available publicly. For cash above that $7.5 million level, there's a sweep that works to kind of mechanically pay that down over time. We do not have mandatory amortization starting until well after the halving in July of 24 and beyond. We've got a really good relationship with that creditor. And I would point out maybe the interest rate is, you know, SOFR plus 1100 basis points. We think we'll have opportunities or we hope to have opportunities over the next 12 months with success and value creation from what we're announcing today. to meaningfully improve our cost of capital relative to that.

Well, it's good to hear you and the team continue. Best of luck. Thanks again.

Yeah, and just to correct myself, it's SOFR plus 10%, not SOFR plus 11%. Forgive me.

At this time, this concludes our question and answer session. I'd now like to turn the call back over to Mr. Beard for his closing remarks.

All right. Hey, Anna, thank you very much for your insightful questions. Hopefully any investors or interest parties that are listening out there have processed what we've said in terms of the presentation and helped clarify with the Q&A here. We're going to do our best to communicate really well over the next few months just to quickly and fully disclose information as we get it. But thanks for listening, and we're excited about our prospects here. Bye-bye.

Thank you for joining us today for Strongholds Earnings Call. You may now disconnect.