Argo Blockchain plc (NASDAQ:ARBK) Q3 2023 Earnings Call Transcript

Argo Blockchain plc (NASDAQ:ARBK) Q3 2023 Earnings Call Transcript November 16, 2023

Operator: Good afternoon, and welcome to the Argo Blockchain plc Q3 Update Investor Presentation. Throughout this recorded presentation investors will be in listen-only mode. Questions are encouraged, can be submitted at any time by the Q&A tab situated on the right-hand corner of your screen, click Q&A scroll to the bottom type your question and press send. Given the large attendance on today’s call, the Company will not be in a position to answer every question received during the meeting itself. However, the Company will review all questions submitted today, will publish responses where it’s appropriate to do so. Before we begin, I would like to submit the following poll. I’d now like to hand you over to Tom Divine, Vice President of Investor Relations. Good afternoon.

Tom Divine: Thank you, Paul. Before we begin, I’d like to remind everyone that today’s presentation and remarks may contain forward-looking statements. For our full risk factors, please see our Form 20-F filed with the Securities and Exchange Commission for the year 2022. With us today for our discussion of Q3 2023 results are Seif El-Bakly, Argo’s Interim Chief Executive Officer; and Jim MacCallum, Argo’s Chief Financial Officer. And now I’ll turn it over to Seif.

A shot of someone securely accepting crypto assets as payment, showcasing the company’s payment solutions.

Seif El-Bakly: Thanks, Tom. Hi, everyone. Thanks for joining us today to discuss our Q3 results. It was a strong quarter for us, and I’m excited to dive into the numbers. Just a quick reminder for everyone of our three key priorities that helped guide us on a daily basis, we continue to focus on financial discipline and deleveraging, operational excellence, growth and strategic partnerships for the sustainable future of this company. I hope you’re seeing how these priorities have been manifested in the performance of the business over the last couple of quarters. Before we dive into the Q3 results, I want to take a few minutes to discuss the current macro environment and some recent trends that we’re seeing. The network hashrate continues to increase at a fairly rapid pace.

The global network started the year at roughly 270 exahash per second, and it has grown approximately 70% over the course of the year. Over the last two years, we’ve seen some seasonality emerge in hashrate and network difficulty partly due to the large amount of hashrate going online in Texas. During the summer months, we saw instances where hashrate decreased as Texas miners curtailed operations in response to high power prices. This is something we experienced at Helios, which generated significant proceeds in form of power credits. I’ll go into more detail on that a little bit later. But that seasonality does have an impact on network difficulty in hash price, so it’s something that we monitor closely, especially as we head into winter months where cold weather can also impact grid conditions and power prices.

Overall, the third quarter saw hash price trend down, bottoming out at around $60 per petahash per day during August and September, but it’s rebounded strongly in late October and so far into November, rising to over $90 per petahash per day. We’ve historically seen those temporary spikes from ordinal mint before, which drive up transaction fees. We do expect hash price to stabilize as the backlog of transactions is processed. Hash price takes into account the price of Bitcoin, the network difficulty and transaction fees at any given time. It’s a metric that we pay close attention to. Every $10 increase in the dollar per petahash per day has the potential to generate approximately an incremental $840,000 of revenue per month or $2.5 million per quarter based on Argo’s total hashrate capacity.

See also 12 Best-Performing Growth Stocks in 2023 and 30 Countries with Best Work-Life Balance in the World.

Q&A Session

We’re also paying close attention to some upcoming events that we believe will impact our business. For one, if approved by the SEC, we believe that at spot, Bitcoin ETF, will bring large institutional cash inflow into the space and will ultimately increase demand for Bitcoin. And of course, we have the 2024 halving approaching in late April of next year. As everyone knows, the halving is a feature of the Bitcoin protocol, whereby the block reward is reduced by 50%. As we approach the halving, our key focus is on three things: fleet efficiency, cost structure and the strength of our balance sheet. Argo has a strong fleet efficiency of right around 30 joules per terahash, and we’ve had attractive power and hosting costs at an average of $0.045 per kilowatt hour so far this year.

This combination of fleet efficiency, low power costs and hosting costs makes us well positioned for the halving. On the balance sheet front, we said this time and again that one of our main priorities is reducing our debt and interest payments in order to strengthen the balance sheet to be well positioned for that halving. Turning to our third quarter results. We mined 370 Bitcoin and generated revenue of $10.4 million, which is a decrease of 17% compared to our revenue from Q2. This decrease was primarily driven by economic curtailment we experienced at Helios during August and September. However, through this curtailment, we accrued $4.4 million of power credits through power trading activities at Helios, which more than offset our decrease in revenue versus Q2.

On the next slide, I’ll go into some more details about economic curtailment and how that benefits us since we’ve gotten a lot of questions from investors pertaining to this source of net revenue. But put simply, the power credits we accrued helped us achieve an overall power and hosting cost of less than $0.04 per kilowatt hour. For the quarter, our mining margin was 58%, translating into an average direct cost per Bitcoin of $11,736. We also continued to focus on cost reduction, and we reduced our non-mining operating expenses by 11%. Our adjusted EBITDA for the quarter was $3.1 million, which is an improvement from the $1.1 million of adjusted EBITDA that we generated in Q2. In July, we strengthened our balance sheet by raising $7.5 million in gross proceeds through an equity raise with primarily institutional investors in the U.K. and also reduced our Galaxy debt by $5 million.

And at the end of September, our cash balance was $8 million. Given our strategic decision to mine in Texas, I’d like to give a little more color on economic curtailment there. So on the screen is a slide that came out of an ERCOT presentation during the September meeting of its Large Flexible Load Task Force. That’s the group within ERCOT that is tasked with integrating large power demands such as Bitcoin mining into the Texas grid. The slide shows the impact of elevated power prices and the use of power by Bitcoin miners on September 6. If you follow the screen, Bitcoin mining usage is in blue, and the gray line shows the power price throughout the day. So you can see a very strong negative correlation between the price to power and the consumption of power from Bitcoin miners.

As power prices increased, it became less profitable to mine, incentivizing miners to curtail their operations. From this chart, it demonstrates how the majority of miners were shut off during peak hours of power price. As power prices came down in the evening, you can see miners ramp up their operations and their consumption increasing again. So this data is important as it demonstrates how flexible Bitcoin miners are and how quickly they can reduce power consumption when demand is high. As soon as prices spike above their breakeven point, miners are turning off. This is what is meant by flexible load. When the market price of power spikes to a maximum amount of $5,000 per megawatt hour, as it did on September 6, miners who are not hedged will simply shut down and stop mining.

The miners who have locked in their power prices can make a decision. They can either use that power for their operations and continue to mine or they can sell that power on the open market and make a profit from the difference in the prevailing market price and the price which they’ve locked in their power. In other words, when the price is high enough, it makes economic sense to sell that power in the open market rather than to use it and mine Bitcoin. In essence, that’s what happens at Helios, and through our hosting agreement, we share in those proceeds. And for this quarter, those power credits amounted to $4.4 million. That being said, let me turn it over to Jim to provide some additional comments on our financial results for the quarter.

Jim?