Bitfarms Ltd. (NASDAQ:BITF) Q2 2023 Earnings Call Transcript

Bitfarms Ltd. (NASDAQ:BITF) Q2 2023 Earnings Call Transcript August 8, 2023

Bitfarms Ltd. misses on earnings expectations. Reported EPS is $-0.06 EPS, expectations were $0.05.

Operator: Good morning, everyone. My name is Alan, and I will be your conference operator today. At this time, I’d like to welcome to the Bitfarms’ Second Quarter 2023 Financial Results Conference Call. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] As a reminder, this conference is being recorded today, August 8, 2023. I’d like to turn the call over to David Barnard of LHA Investor Relations. David, you may begin you conference.

David Barnard: Thank you, Alan. Good morning, everyone, and welcome to Bitfarms conference call for the second quarter of 2023. With me on the call today is Geoff Morphy, President and CEO; and Jeff Lucas, Chief Financial Officer. Before we begin, please note, this call is being webcast live with an accompanying presentation. To watch along with the slides, you can log on our website at www.bitfarms.com under the Investor Relations section under Presentation. 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, Bitfarms issued press release announcing its second quarter 2023 financial results. Turning to Slide 2, I’ll remind everyone that certain forward-looking statements will be made during the call and that future results could differ materially 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 Bitfarms’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 on our website www.bitfarms.com under the Investor Relations section. The Company will also refer to certain measures not recognized under IFRS, and they do not have a 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 earnings release and the Company’s second quarter 2023 MD&A for definitions of the aforementioned non-IFRS measures and the reconciliations to IFRS measures.

Please note that all financial references are denominated in US dollars unless otherwise noted. During today’s call, CEO, Geoff Morphy will review our operations for the quarter. CFO, Jeff Lucas will follow with a detailed financial review and Jeff Morph will return for some closing remarks after the Q&A. We have also requested investors to send questions in advance, which I will read to management after we open the call to analysts interested in the live Q&A. And now, it’s my pleasure to turn the call over to Jeff Morphy.

Geoff Morphy: Thank you for joining us today. I’ll begin by emphasizing that we have built a quality portfolio of assets and the resources to manage them very effectively. Together with ongoing investments, they provide investors with excellent exposure to rising Bitcoin prices, particularly as we approach the next Bitcoin having. To capitalize on this further, we are executing an aggressive and disciplined growth strategy to optimize overall risk returns while managing risks. Pillars of our growth strategy are responsible capital deployment, reinvestment in our fleet with the latest and minor technology, continued geographic diversification, adherence to strong financial and operating controls, audited by a big four accounting firm since incorporation over five years ago, and we have the most highly experienced and accomplished team supporting our global growth.

In the past 24 months, we have expanded from 69 megawatts, powering five production facilities in Quebec to 212 megawatts, energizing 11 operating farms in four countries. During this time, we increased our hash rate over 275% to 5.3 exahash per second. We have built an incredibly sound infrastructure to support scalable and sustainable growth, and we are now leveraging our infrastructure as we pursue current and future opportunities. I’ll now review our foundation. Our farms are well established and efficient, maximizing output while minimizing costs leading to higher and more consistent profitability with each location contributing positively. We excel in operations and continuously work to improve facilities and processes, including the adoption of cutting edge technologies to enhance efficiency and productivity, driving effective deployment of miners in fleet enhancements.

We carefully manage our capital structure. In this quarter, we further deleveraged our balance sheet by utilizing our surplus free cash flow after debt service, while still investing in growth. We ended June with only 16 million in debt, enhancing our financial flexibility to expeditiously seize upon growth opportunities and deploy capital quickly and effectively. A perfect example is our accretive expansion in Paraguay, where we acquired 150 megawatts of hydropower contracts in July and recently initiated deployment plans for the first 50 megawatts, which I’ll detail in a moment. We are truly a global player with a well diversified portfolio of production assets and management personnel. These attributes mitigates risks associated with concentrated operations in a small number of facilities in a single region.

Our stellar corporate development team is actively seeking new opportunities including expanding into new geographies, adding complementary businesses, and improving overall operations. With just eight months until the next Bitcoin having, the pipeline is growing and with our global footprint, sound balance sheet and respected integrity, Bitfarms is well positioned to take advantage of situations, meeting our criteria of stable low cost power contracts, quick paybacks, and high return on invested capital. Simply put, our portfolio of high quality assets offers exposure to rising Bitcoin prices and Bitfarms leverages this inherent value with efficient operations, strong execution, financial discipline, global diversification and a proactive approach to identify and act on opportunities and risk management practices incorporated to safeguard against potential adverse developments.

On Slide 5, I’ll review some of our accomplishments for Q2, 2023. We ended June 2023 with 5.3 exahash per second, up 10% from March 31, 2023, and up 47% from June 30, 2022. Current installations in Rio Cuarto and Baie-Comeau continue and our target for completion in September increasing our hash rate 19% to 6.3 exahash per second. During Q2, 2023, we mined 1,223 Bitcoin with higher average Bitcoin prices, Q2, 2023 revenue increased 18% from Q1, 2023. We delivered adjusted EBITDA of $8 million and increased our huddle to 594 Bitcoin at June 30th, 2023. Slide 6 shows a summary of operating capacity and installed miners for our farms, 11 operating in four countries and we now consider our two new locations in Paraguay as farms under development.

In July, we reached 212 megawatts in operating capacity, up 28% from a year ago. Notably, 86% is powered by sustainable hydroelectricity. I will now review our operations and development plans. Turning to Slide 7, in Paraguay, we acquired two power purchase agreements totaling 150 megawatts of low cost hydropower in July that will energize two new farms. These were very strategic acquisitions because Paraguay is highly attractive for development. Based on our experience, this country has amongst the lowest build out costs, quickest project timelines to completion, and a straightforward importation regime. Yesterday, we announced our initial deployment at our new Paso Pe farm. The Paso Pe farm will be only about 1 kilometer away from our existing Villarrica farm.

In addition to plans for 30 megawatts of air-cooled facilities, we purchased MicroBT hydro-cooled miners and related containers entirely with vendor credits for 20 megawatts of deployment of this latest mining technology. We expect the new farm to be fully commissioned at 50 megawatts in Q1 2024. Turning to Slide 8. In Rio Cuarto, Argentina, we increased production to 29 megawatts as we imported and installed approximately 5,100 new M30s watts minors. This added approximately 510 petahash per second to the facility and brought its total hash rate to approximately 700 petahash per second. We also qualified and strategically became a self-importer of miners. Doing so streamlines and lowers the cost of importing miners into the country. And as of today, 4,680 additional miners have arrived and are being processed by Argentine customs, and additional 2,797 miners are in transit, and all miners are expected to be installed and running in Q3 2023, which will bring us up to 50 megawatts at this farm.

We can provide more details on this equipment if so desired. In Canada, we close the purchase of the Baie-Comeau acquisition, and initiated production in early July. The acquisition not only brought new production capacity, but also provided us with the opportunity to optimize our fleet by redeploying miners from Magog. This was undertaken to free up suitable Rackspace in Magog for higher performance miners. The Baie-Comeau farm is presently operating with 1,300 miners at 5 megawatts. And with the remaining miners from Magog, we should reach 11 megawatts in Q3 2023 as planned. This in conjunction with the Rio Cuarto build out that I just mentioned gives us confidence we can achieve our 6.3 exahash per second in Q3 2023 target. Regarding Magog, in July, we leveraged our assets to respond quickly to a lightning strike that took out our primary transformer.

Our proactive risk mitigation strategy handles unforeseen incidents and minimizes their impact on production and operations. By combining redundancy, geographic diversification, in-house capabilities and spare equipment, we were able to respond swiftly and effectively to the outage, ensuring minimal disruption to our overall business. Favorably, the facility is hashing at full capacity and no miners were damaged as part of this lightning strike. In Washington state, we upgraded intake and exhaust systems greatly improving efficiencies, the intake is now equipped with a two stage filter, which includes an evaporative cooling component, which saves energy and reduces service requirements. The exhaust system now includes automated bands reducing power consumption by as much as 90%, results have been impressive.

For example, deterioration of hash rate on a 100 plus degree day has been limited to only 2% to 3% versus approximately 30% previously. Considering this, we are now evaluating these enhancements for use on our other farms. We continue to enhance our MGMT proprietary software. This software remains one of the longest running and robust systems in the industry. New capabilities include the precise tracking of power consumption and operating performance per minor per location. This enables greater detail on minor performance, the optimization and reconciliation of electricity consumption, and adds the predictive capability to power forecasting for all MicroBT miners, which comprise about 90% of our fleet. In summary, as we execute against our fleet expansion and upgrade plans, we are projecting 20% sequential growth in our hash rate in Q3 2023, and with Paso Pe expected to come online in Q1 2024, we are expecting to achieve 7 exahash in Q1 2024.

Those are our near term goals. As we continue to evaluate other diverse capital efficient development opportunities, please turn to Slide 9. With that, I will now hand over the call over to Jeff Lucas with a financial review.

Jeff Lucas: Thank you, Jeff. I’ll begin by highlighting some key elements of our financial strategy and position. We have efficient operations and stable and predictable energy rates that with over 85% hydro are not subject to the energy cost variability associated with fossil fuels. We have a laser focus on rapid payback of capital. We enjoy low capital requirements necessary to meet our near term growth plan, including using our existing equipment credits to reduce the capital expenditure funding needs, and we enjoy the strongest balance sheet in the history of our company that gives us the flexibility and enables us to utilize our operational expertise, take advantage of attractive growth opportunities and positions us well for the unpredictable economics of the having.

I’ll now review our mining economics, our performance, and our balance sheet. Turning to Slide 10. In the second quarter of 2023, we mined 1,223 Bitcoin compared to 1,297 in the first quarter of ’23, and 1,257 in the second quarter of ’22. The differences reflect increases in average total network difficulty about 24% sequentially in 67% year over year, offset by our hash rate, which was 10% higher sequentially and 52% higher year over year. Our second quarter revenue was $35 million comprised of $34 million from our mining activities. This compares to $29 million from mining in the first quarter of ’23 and reflects a 24% increase in the average Bitcoin price quarter over quarter, partially offset by 6% and fewer Bitcoin mine during the quarter.

Focusing on mining economics, we turn to Slide 11 here. In the second quarter of ’23, pit farm’s direct cost to production per Bitcoin was under $15,700. That’s up to $12,500 per Bitcoin in the first quarter of ’23. The change reflects the four mentioned increase in network difficulty and approximately 7% higher energy costs quarter over quarter. While we benefit from a low cost stable hydropower across our productive capacity in Quebec, for the first time in several years, we had a rate increase that resulted in 6% higher energy costs. With Quebec representing about three quarters of our total Q2 ’23 production, the impact was significant. That said our increasing geographic diversification paid off as the impact of rate adjustments in one jurisdiction is moderated.

I’ll add one more caveat for those building financial models. Our direct cost of production since February 2022 includes a 15% accrual for value added taxes on Canadian energy costs reflecting proposed legislation for which has not yet been determined or legislated. Excluding that accrual in the second quarter of ’23, our direct cost to production would’ve been about $14,000 to Bitcoin $1,700 less than our reported direct cost to production. Second quarter gross mining profit was $14 million or 42% of revenue compared to $12 million or 42% of revenue in the first quarter. The total cash cost of production per BTC was just under $21,800 in the second quarter of ’23, up from $17,600 in Q1,’23.The largest contributor to the increase was higher network difficulty, which resulted in higher energy costs per Bitcoin.

General and administrative, our G&A expenses were also higher over the prior quarter as a result of costs associated with moving miners among our farms to optimize efficiency, higher professional service fees related to corporate development and prospective due diligence work and business taxes in Argentina that were incurred and paid during the quarter. The quarter over quarter comparison also reflected benefits in the prior quarter from one-time insurance refund and the reversal of an accrual associated with the dismissal of noise penalties at the former Villa Point facility in Sherbrooke. Going forward, with the having in mind, we will continue to focus on reducing our G&A cost structure and have already identified savings and insurance in other discretionary areas.

Please now turn to Slide 12. For the second quarter, our operating loss was $25 million, including non-cash depreciation expense of $21 million and an impairment on short-term prepaid deposits and PPE of $10 million. This compared to an operating loss of $15 million in the first quarter of ’23, including a $3 million reversal revaluation loss on digital assets, a $2 million loss in disposition of PP&E and a $1 million realized gain on disposition of digital assets. Our net loss for the second quarter was $25 million or $0.10 per basic and fully diluted share compared to a net loss for the first quarter of ’23 of $2 million or $0.01 per basic and fully diluted share. Higher Bitcoin prices contributed to improved profitability with adjusted EBITDA increasing from $7 million in the first quarter of ’23 to $8 million in the second quarter of ’23.

Profitability in the quarter was $6,200 per Bitcoin versus $4,900 per Bitcoin in the first quarter of ’23. Turning to Slide 13, at June 30, we had cash of $31 million and 549 BTC valued at $17 million for total liquidity of 48 million. This compares to $42 million of liquidity at March 31 of ’23. In summary of the 1,223 Bitcoin, we mined during the second quarter, we sold 1,109 to generate $31 million of proceeds to fund our operating and debt service requirements and deposited 114 BTC in treasury with a June month end value of about $4 million. In July, we deposited another 45 Bitcoin treasury, increasing our Bitcoin in custody as of July 31st, ’23 to 594 Bitcoin. This represents a total value of approximately $17 million based on the Bitcoin price that day of just over $29,200.

In the second quarter of ’23, we also raised $22 million in net proceeds from our ATM program. For the third quarter of ’23 through August 7th, we have raised additional net proceeds of $26 million. These moneys that we raised under our ATM are specifically earmarked for the growth initiatives, which Jeff spoke about earlier. We continue to use cash generic from operations to deleverage our balance sheet, total indebtedness was reduced to $16 million at June 30th and to under $14 million at July 31st. As we’ve noted in previous earnings calls, our debt is scheduled to be fully repaid by the end of February 2024 well in advance of the having. With that, I’ll now turn the call back over to Geoff.

Geoff Morphy: Thank you, Jeff. Before I open the call for questions, I would like to mention some upcoming events, especially our Analyst Day on September the 14th, which will begin at 8:00 AM at the Convene in New York City. In addition, we will be at the Canaccord 43rd Annual Growth Conference in Boston on August 9th and 10th. The Third Annual Needham Virtual Crypto Conference on September 7th, the H.C. Wainwright Conference in New York, September 11th, 12th, and 13th. And we will also be presenting at several industry events in Europe this fall. In summary, Bitfarms remains focused on accretive and diversified growth, while further optimizing our facilities, fleet investments, and infrastructure, including the adoption of innovative technologies and practices to enhance efficiency.

Our core strengths include a competitive low-cost structure, stable and surplus sources of energy with attractive pricing, proprietary mining and facility management software, a vertically integrated electrical subsidiary, and an exceptional management team. Our growth in 2023 and advance of the having will come with minimal capital outlay given our full use of our MicroBT hardware credits. We expect to meet our near term 6.3 exahash per second target before the end of September, and 7 exahash per second in Q1 2024. The first mega — the first 50 megawatts of our 150 megawatt expansion in Paraguay is underway and opportunities that meet our criteria for growth, both before and after the having are abundant. Operator, we can now open the call for questions.

Please go ahead. And just before you do it, I just got a note from David. I understand that we have a few questions from online investors. Let’s handle those questions first if you would, and then we’ll go to the analysts.

A – David Barnard: Sure. Thanks, Geoff. I’ll read them. There’s two questions. I’ll read them both at the same time, and then you can answer. One of the questions is. How greatly do you think the Bitcoin having will impact financial results in the coming fiscal year 2024? And then another question, totally different, does Bitfarms run any third party firmware? Go ahead.

Geoff Morphy: Interesting. Okay, let’s start with a having, the having, we’ve seen it before. They happen in every four years. It’s going to be a big event. And nobody’s fooling anybody here is that, we have to get — miners that want to survive the having need to be well prepared. We have a cost structure that is as good as anybody in the business. And as we’ve said in the past, we are planning to get our debts completely repaid so that we don’t have P&I payments. We plan to get all our construction finished so that we don’t have construction commitments. We plan to get all our miners bought and installed so that we don’t have — when you go into that having, and frankly, right now with Bitcoin prices just below 30,000. Our cost to mine a Bitcoinon a cash basis is 15,700.

If we get the accrual back from the Canadian government, then it’ll be 14,000. But it just goes to show that that margin will quickly disappear. I can — we all see the analysts talking about margins and how other people’s costs are higher. Some are lower, but some are much higher. They are going to be extremely stressed. And typically, as we’ve seen in the past, the adjustment to the having takes five or six months. I think my gut’s telling me this time that it might be a little quicker because there’s more adoption and more knowledge in the industry. And you know that four or five, six months later, Bitcoin prices go up and then things get really exciting, but in the meantime you have to be batten down and ready for a storm, frankly. And we think, for example, it’s because of that discipline in our orientation that when Bitcoin prices fell below $16,000 in the fourth quarter of last year, we were one of very few miners with a positive adjusted EBITDA.

And that goes to show what happens. I think if you really want to test what mines were, go back to the fourth quarter last year and see their results, we’re well positioned. And I think, sort of as we go into the next summer when the havings going to take place without debt, we’re going to even be better positioned. And with the Paraguay expansion, those are going to be low cost. We are going to have more cash flow. And the other thing you have to remember, when things get adverse, like they do, miners with inefficient operations go offline. So that’s when the network hash rate goes down, our market share goes up, our block rewards go up, and there’s a compensating factor there. We think we’re well positioned. So that’s, the first question.

Okay, firmware? Yes. Because we are so operationally focused, we have people within our operations that look at these type of things and test them all the time. So, it’s getting better control of your miners and squeezing more output from them. Of course, we all want to do that. Sometimes it’s firmware and now there’s some hardware fixes with cards as well. We test a number of them and because there’s advantages to that. Sometimes the OEM firmware is fine. And the other thing that we need to keep in track, which is a little bit different from some of the others, about 90% of our fleet is MicroBT versus Bitfarms. So some of these Firmwares are firmware changes are, are more tailored for Bitfarms. Some work with MicroBT. But yes, we’re always looking at these, trying, trying to get an advantage.

So, it’s not necessarily uniformly applied across the fleet. We do not want to fall into a bug or something like that. So, we test them on a very limited basis and roll them at a little more when appropriate. So hopefully that addresses those two questions. So operator, let’s go to the analyst please.

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Josh Siegler from Cantor Fitzgerald. Please go ahead.

Josh Siegler: I guess to start good — it would be helpful to get an understanding of how you’re thinking about future growth, specifically, which geography is really going to drive that growth. With the new Paraguay contracts in place, but still opportunity in Argentina, how are you going to balance between the two geographies when thinking about scaling in the future?

Geoff Morphy: Josh, we’ve got management and personnel in every single geography. It makes sense to have critical mass in every geography that we operate in so that we can do that. And we, over the last two, two and a half years have done an active technology and knowledge transfer amongst employees so that we have Argentine employees and Washington employees coming up to Quebec, Quebec employees going to the other geographies and teaching. So, those best practices that we developed in Quebec years ago, they’re now embedded in our other geographies. And we now feel we’ve got critical mass in Argentina. We’ve got a good team, solid team in Washington and of course in Quebec. So, now the opportunity came about to really take our 10 megawatt operation in Paraguay and build it up.

And frankly, we’re excited about Paraguay. It was the site where — it was a bit of a test bed back in late ’21 when we built it. It became active in January ’22. 10 megawatts we shipped down used miners from Quebec. The experiment was a very good success. We put that facility together. It’s a warehouse style building in about three and a half months it was our lowest cost infrastructure to build and we subsequently put brand new miners in there and brought the production up. But our plan is to hire more personnel in Paraguay for this build and establish critical mass. The Paso Pe facility is 1 kilometer from our Villarrica site. So we can already take advantage of some of the talent there, but this is a much bigger build out, it’s 50 megawatts, it involves the build of a substation.

So we’re going to high voltage and knocking it down. 50 megawatts is what’s been announced. We’ve announced 20 megawatts using the MicroBT hydro containers, and those orders have been placed, like, as I said in my script, we’re feeling very confident about the 6.3 grow for September, because that’s going to be from the miners coming into Argentina right now. And from taking Baie-Comeau farm 4.85 megawatts right now up to 11, which is the maximum capacity of the electrical current available. It’ll be upgraded next year. And then with the 20 megawatts of contracts that we’ve done, that’ll take us up to seven. Civil work is going to start probably in early September there. Miners are going to start arriving later in the year and into January. The longest contract there is the transformer, the big main transformer there.

We are actually overbuilding it with hope that, we can get more expansion in the area. So instead of 50 we’re building, we’re buying an 80 megawatt transformer there. And it’s got the longest lead time, about six and a half, seven months. We plan to put that order in the next number of days, get that started. It’s actually going to be the last thing to arrive. So, we expect to go from basically zero megawatts to 50 megawatts, literally with the flip of the switch. Hopefully that’s in the latter part of February. Maybe it’s early March, but certainly before the having. And that’s for 20 megawatts. And then there’s 30 megawatts that we have not talked about yet, and that 30 megawatts we hope to provide more news in the coming days and weeks. But, this isn’t guidance, but that could very much take us up to 7.8 exahash if things come together as we expect.

Our guidance is right now for 7 exahash in the first quarter of next year. I added a little bit extra there, but feel free to have a follow up.

Josh Siegler: No, that’s all really helpful color. Thank you. Appreciate that. And then, I also wanted to touch on, as we’re heading into the having and mining rigs and secondary markets, at least still remain at fairly depressed price levels. Are you thinking about potentially replacing some older machines and improving the efficiency across the fleet?

Geoff Morphy: Josh, all the time, that’s the nature of the business we’re in. If you do not upgrade your fleet, frankly you’re going to die. And the having is going to expedite that process. So I think we have some M30s right now. Some of them will be redeploying, but other ones we’re selling. But most of those are coming out. They’re the least efficient of our miners, and we continue to upgrade. Case in point, these hydro miners are amongst the most efficient in the world with the highest output. They are going to very much enhance our efficiency across the fleet. And just like what I mentioned about Washington in terms of changes to the intake and exhaust systems there and bringing the temperature down and getting more out of our existing miners.

But our fleet, if you were to look from top to bottom is already modern. And we are continuing to modernize it and go with the latest models. We are not going for immersion cooling, but we’re going to air cooled, which we do very, very well, particularly with our geographies and the hydro miners. We’re very excited about them.

Operator: Our next question comes from Kevin Dede of HCW. Please go ahead.

Kevin Dede: I guess the first thing is maybe you peel the onion back a little bit on the PPA — the PPAs plural, I guess in Paraguay. Are they both with it — with [indiscernible] [Andre]? Are there — can you talk at all to, I guess the costs associated with them and whether or not they’re curtailment opportunities for you there?

Geoff Morphy: Okay, so the first answer to the question is yes. There’s — we bought companies that owned, two separate companies that owned power purchase agreements. They are both with [Andre], so the Villarrica site is with [Indiscernible]. So, we moved from the regional distributor to the national distributor. The cost of the power for that is $3.90. And as I’ve talked about before, there’s some optimism and hope that with the new party in the election and the promises that were given, that that power might actually be reduced, like the cost of it. So fingers crossed there, and it could be a tangible reduction so that we haven’t banked on that, but that’s what we’re hoping for. In terms of the deployment like we haven’t put out any big, any of the numbers on that yet, except for the fact that the 20 megawatts of MicroBT hydro containers, we used our credits.

So, from a cash — there’s still a cost there, but from a cash perspective, we’re not out of pocket. So really, it’s the substation that has a cost to it. The air cooled warehouses have a cost to them, but we do that very efficiently, and in Paraguay it’s frankly the lowest cost in our whole fleet. Jeff Lucas, do you want to come in with a little, sort of a little more sort of finality with some of the costs there, with the 30 megawatts not announced yet. We’re kind of stuck on being able to sort of give total project costs at this point. So, I give that as a caveat.

Jeff Lucas: Yes, sure. I’m more than glad to speak to that here. So, for Paraguay pay, what we’re looking at here, we’re contemplating roughly $24 million. And that encompasses not only the infrastructure build out here, including the substation in 80 megawatt substation versus the initial opportunity of 50 megawatts here. And secondly, certain guarantees, another payment that we made about $4 million to the power provider here. But overall, we’re looking roughly, again, around $20 million of what’s happening in Paraguay, which we’re contemplating $14 million being paid remainder this calendar year. And the other $6 million or so will be done in early 2024.

Kevin Dede: I know, Mr. Morphy, you mentioned that importing things into Paraguay was a little bit easier than Argentina, and I’m wondering if the hydro machines already manufactured, or do you — would you expect any delay getting those onto site? Or is it really exclusively just a matter of getting that? I mean, from what I understand, you’re starting with a greenfield open plot of land and that needs to be treated and the substation and the grid connection and all of that has to come in. And I’m just wondering if you’d expect or would it be prudent on from our perspective to assume that MicroBT might hit hurdles in getting their new machines to your site?

Geoff Morphy: We really don’t anticipate any problems bringing the equipment into Paraguay. It’s always been pretty straightforward. Compared to Argentina, it’s always been quicker and easier to get equipment, in fact, even use equipment into Paraguay and the ability to source other equipment that goes into the infrastructure. It’s always been really easier in Paraguay, as long as you have the right documents you can bring it in, you pay that, and you get it on site. Argentina, as we’ve learned over the last 2.5 years has been more difficult. First we didn’t have the self importation rights because we hadn’t done business there for a couple years and didn’t have the track record to apply for that self importation. We had to rely on brokers that were expensive.

They only had small allocations. And then last summer, when the government was really under strain for its US dollar reserves. They stopped direct importation for people like us and in many other industries dead in its tracks. And we were stymied for a lot of months. And our 50 megawatt warehouse there was fully constructed in October, but we weren’t in it able to put it into, sort of bring it up to full operation until earlier this year. And that was a real setback. And the government didn’t provide any alternative mechanisms until, we could qualify for to be a self importer, which unfortunately we are, and things are a lot better now, but they also have a government change coming in November. There is uncertainty there and it’s one of the reasons why we decided to take advantage of these opportunities in Paraguay and really make that one of our, our geographic of actually the whole Lat-Am areas is a geographic hub, but putting more emphasis and more growth into, to Paraguay at this time.

It’s also all hydro too, which we think long run is going to be a win for the industry and our company.

Kevin Dede: Just switching gears to Quebec for the moment, you spoke to a rate increase. I’m wondering if that was like universally, and I apologize in not having researched this, I was wondering if that was universally applied by Hydro Quebec or if it was more for a township regulated and whether or not you would expect that to be rolled back or something that continues forever going forward.

Geoff Morphy: Well, fortunately, rate increases in Quebec don’t happen very often and, but this was applied right across the board and it applied to our tariff with a few nuances. It happens to other industrial tariffs. This was pretty much right across the board. And this is Hydro Quebec reassessing where they are, realizing their electricity grid will become more strained as electric vehicles and greenhouses and other industries using electricity in the future surge. And they contemplate building new hydro projects down the road. There’s a lot of discussion with the new provincial government and Hydro Quebec about that. We’ve been intervening in some of the hearings and some of the things happening. It was actually a great opportunity for us to once again talk about some of the benefits that we can bring to Hydro Quebec of Bitcoin mining, taking our miners and putting them in areas where the hydro is rather than wheeling power long distances, using some of the thermal benefits that are available.

And I think they’re finally seeing that, like our ability to curtail on a moment’s notice can actually be a huge benefit to them, and we’re unique in that feature. So there’s more development’s going to happen in Quebec, but I do not contemplate another increase at least for the foreseeable future in Quebec. But yes, this was a universal one and it was too bad. It impacted our results and will continue to impact our results. But compared to the level of inflation I think we’ve had, one increase, 6%. That was basically the rate of less than the rate of inflation last year, and this has been several years since our last rate increase. So really we’re still below the increases in inflation, which by and large is good.

Kevin Dede: Last question from me, gentlemen. In the past there was some discussion of future opportunity in Washington. Congrats on improving your efficiency there, but I’m curious to how you might see potential expansion in Washington State?

Geoff Morphy: Washington still is a very attractive place and it’s nice that we have talent there. It’s one of the hotbeds of crypto mining. So, there’s opportunities to expand both greenfield and through acquisitions. But the one thing that happened, at least in the, the county we’re in and with the utility we’re dealing with is they put up, the price of power earlier this year as well. So we’ve gone from being one of the low cost power facilities that we have to once again, sort of being in sort of more in the upper quarter or so, and so that’s taken some of the attractiveness out of Washington for the time being. But similarly we’re having discussions with that utility, talking about the benefits and looking around that whole area, that Columbia River and what was built for effectively the smelters from days gone by, makes it a very interesting area. So we’re not giving up on that area.

Operator: Our next question comes from Bill Papanastasiou of Stifel. Please go ahead.

Bill Papanastasiou: So for my first question, just hoping to gain some insight on the average cost of power that was realized in the Argentina in the quarter just for the purposes of measuring the impact to margins and the road ahead, obviously, the Company shifted from drawing on power from the grid in Rio Cuarto, to the very attractive $0.03 power contract. How should we look at that?

Geoff Morphy: Let me speak to that, and then Jeff can add a little further color to that. So we are starting to get the benefits and we did see the benefits beginning to accrue in the second quarter from that ship that you spoke to. But we didn’t get all the benefit here. So we’ve talked about Argentina, cost being in the $0.03 range here, and we didn’t experience that in the quarter again, because part of that quarter was actually from the grid itself. So while, we didn’t get that much of a savings, to give you some concrete numbers here. In the first quarter, the cost of power in Argentina for us was about $0.046. In the second quarter, the average amount in Argentina again was about $0.044. That includes this period of time where we had in $0.03 range, getting it right from the power provider, and then also a period of time where we were getting it from the grid as well.

So that kind of gives you a bit of a context. So the expectation here is that we’re actually going to continue to achieve, rate improvements in Argentina that’s actually going to lower our rates overall. Now, bear in mind another comment to keep in mind here that Argentina wasn’t that large a contributor in the second quarter as we’re ramping up to 29 megawatts and then going to 50 megawatts perhaps even beyond here. We’re going to have a much larger proportion of the total Bitcoin that’s actually will be mined in Argentina. So that certainly includes our benefit.

Jeff Lucas: Let me add to that too. Like, as Geoff mentioned, we’re moving from the 29 megawatts up to the 50 megawatts very soon. That will optimize our facility there. We’re still ramping up. So, there’s cost to do that in terms of the natural gas and the power costs. Once we’re at 50 megawatts, we can optimize better, but almost more importantly is start to get a little cooler in this part of the world, in the northern hemisphere, in the southern time, part of the hemisphere, air warning into the summer season, and starting in October, which is where the summer starts, warmer temperatures that you consume less natural gas, the price of natural gas goes down. And that’s where for the 6, 7, 8 months we are — we should see much lower natural gas prices, which will lead to lower electricity prices.

And that’s where I think when you — when we do our next quarter results, or certainly in March, when we do our full year results, you’ll be able to ask the same question. And hopefully, we are talking more of the — we’ve had less than $0.03. We really are averaging the $0.03 type of area, and we start seeing the real margins come out of that facility. And there’s one other thing. They are putting an extra pipeline up, providing more natural gas to the area in which our power — the power plant next door to us is, which is — which was a supply constraint in the past that was being activated in July. So, it should be in pretty good state right now. So with more natural gas coming up and not being constrained, that should help the price too.

Operator: Our next question comes from Chase White of Compass Point Research and Trading. Please go ahead.

Chase White: So, I’m clear that, the second 7 exahash target includes only the 20 megawatts of the 150 you just acquired in PPAs in Paraguay, right? So there’s nothing incremental from Argentina past 50 megawatts just the additional 20 megawatts of Paraguay.

Geoff Morphy: Correct.

Chase White: Okay just making sure.

Geoff Morphy: So, yes. If we infill the 30 megawatts on that 50 megawatts as we expect, I think you’ll see us bump our guidance up to sort of that 7.8-ish area. But we’re not ready to do that yet. We want — we generally only do guidance when we have clear and firmer sight lines to how to get there.

Chase White: And then in terms of, obviously that would still just be 50 of 150 plus everything else in Argentina. I mean, what would you need to see in the market for to want to green light all of your potential expansion projects and would you generally finance it with is the Bitcoin sales and selling ATM shares and how do you think about that?

Jeff Lucas: Let me start and I can’t go ahead. No, go ahead Jeff.

Geoff Morphy: Please, Jeff Lucas, go ahead.

Jeff Lucas: Okay, sure. So, the one thing we need to see Chase more than anything else, a little more stability and certainty in terms of what the Argentinean outlook is. And I say that ’cause bear in mind right now they’re in the process of going through an election. They actually have their presidential primaries this Sunday and they have the presidential election itself on October 22. There are four different candidates, and not to develop too much in the politics here, but there are four different candidates who are remarkably close in the polls. Some are advocating financial policies that certainly be very constructive for us. Others require a little more thinking involved here. And part of, by the way, what’s driving the fact that their US dollar reserves are actually negative to two, about $8 billion.

So they know they have — the country has to address this that can introduce uncertainties similar to what we saw and the pain that we experienced obviously last year. So we want to make sure that we’re looking at great opportunities here. We’re also very cognizant of the potential impact and the benefits that the having is going to bring to make sure that we’re moving very carefully and very thoughtfully from that angle. In terms of how we’re going to financing it, first of all, this is Argentina. You don’t finance his debt. Clearly, those opportunities just really aren’t available at anything worthy of a reasonable rate or a price, but the goal here, primarily as overall strategy speaks to is to use our excess cash flow from operations to fund the ACT capital finishes down there.

And then secondly, of course to use the ATM, but we’re always, always tapping the ATM with a very careful eye to how we apply those funds to make sure that they’re a creative and that we get an attractive ROI and a short payback on them. Go head Geoff.

Geoff Morphy: That’s right. Paraguay, as I mentioned, the longest lead time is the primary transformer. It’s seven months. That gets us really close to the having and with our own internal guidelines is that we do not want to be in construction. We do not want to have debt, all of this during, during those first few months of the having. We want to be lean, we want to survive. We got long-term goals. So when we saw this opportunity to buy these two contracts, we didn’t see it for necessarily immediate build out, although we were hoping it, we might be able to, we saw it as long-term. And so that a hundred megawatts is an opportunity to expand. We are looking at developing it right now. Maybe we’ll do the substation sort of over the next seven months.

Maybe we can add some production or maybe we just do the substation and maybe we get ready so that we have warehouses and the site ready to go, sort of that four, five, six months after the having when Bitcoin prices start to rip again, when the network hash rate is lower and we have more market share. And it makes pure sense because of our capital structure and what we built over the last number of years to then just jump right in with both feet and fully build it out. But, we’ve practiced a very disciplined decision process here and so far the pieces are not coming together to build it out over the next seven, eight months. But we are examining that very closely and we’re looking at a number of other things too. So capital allocation is important and we continue to want to be a diversified company and make sure that we put our precious capital where it’ll do the most good.

Chase White: Got it. Helpful. Thank you.

Geoff Morphy: Now, I think Bill got disconnected there from a note that I got. So maybe he’s back and maybe operator, you can put him back in. I think he has another question.

Operator: We will take another question from Bill Papanastasiou. Please go ahead.

Bill Papanastasiou: Hi. Thanks guys. Sorry about that. I’m not sure why I disconnected, but I just wanted to talk about the recent purchase of the M53S+ machines. These are the first hydro cooled mining units in the fleet. I believe you alluded to the fact that we could see a high proportion of hydro cooled miners in the overall fleet in the long run, you continue to improve fleet efficiencies. I just wanted to gain kind of a high level understanding of how the Company is looking at hydro cooled mining units compared to other types of ASIC uses such as, air cooling or immersion cooling. You know, could we see more peers also move towards hydro cooled mining in the future?

Jeff Lucas: Well, I can’t really speak for our peers, but I can speak for us. And hydro cooled is a new technology. It’s not that we are on the bleeding edge here. They are deployments and it’s can be more efficient in that you do not have to plunge your miners into a bath of dielectric fluid, sticky, oily, dielectric fluid. It’s more efficient. But then we’re going into more plumbing related type of things where, you have cool water that’s going through, you’re cooling the circuits, and we think it’s more efficient. We think it’s supersedes immersion, I guess time will tell, but that’s our position on it. Immersion has turned out to be expensive and I think this offers more opportunities for expansion. Like these things push out production that two and a half, two, two and a half times more than sort of pretty much the S19 and M30 in our fleet.

The efficiencies are tremendous. So we know enough and we think this is exciting enough that this is where we’re going to go next. It will not replace air cooled. Air cooled is still something we do very, very well. But as you look at supercomputers and other things, you know, they use these type of technologies and as we continue to push for higher levels of efficiency, you have to look at what some of the other industries have done. So we’re doing that.

Geoff Morphy: By the way and I can tell you as well, Bill.

Bill Papanastasiou: Go ahead.

Jeff Lucas: I was going to say, and by the way, I, I didn’t want to interrupt Geoff here, but what gets us excited not only in the performance business machine, but the economics behind it from our benefit as well, for those of you who just aren’t familiar, particularly with the M53S+ and plus, plus, these things have 24 watts terahash, they’re about280terahashper unit. And the economics of these things is well below a third less than, for example, an XP others which may be a little better performance here, but are dramatically more expensive.

Geoff Morphy: Sorry, go ahead. And then where I was going to go next is because you have this hot fluid, you can also take this industry to what we think is also sort of the next frontier, and that’s getting some — capturing the residual heat and putting it to give use. When you have air cooled, it’s very tough to transport hot air in any distances at all. We do it now in Quebec by heating some of the warehouse spaces in adjacent industries. We’ve looked for aqua farming and various other things, but in fluid form and not dielectric fluid. You can push this into other things and I know MicroBT is looking at future generations where they can put a concentrate more heat into, it’s going. And I think the ability to provide heat to buildings and other things much more effectively and efficiently is there.

So, well — we don’t know that for sure. By buying these machines and getting more familiar with them now, we are very hopeful that there’s — that we can squeeze more efficiency out by possibly selling some of the heat in the fluid form down the road. And that would be particularly attractive in possibly Washington, but more so in Quebec as we get more adjacent to industries and things like that.

Chase White: Very, thank you for that color. And Geoff, you were talking about the having that’s coming up. And I was just hoping to get your expert knowledge and your team’s expert knowledge on kind of the evolution of mining. As we proceed to another event of Bitcoin rewards getting halved, we’ve seen a lot of bitcoin mining operators, transition their business from being completely self-mining to diversifying into high performance and cloud computing. And many of these players cite that they’ve gained a significant amount of experience at operating data centers. But Bitfarms is arguably, has the most longstanding experience. You guys are scaling to 12 farms by early next year. How do you see kind of the industry evolving from where it is today given a potential trend of margin deterioration?

Geoff Morphy: Bitcoin is an amazing thing. That protocol with its self-adjustment mechanisms and with adoption and everything else. We absolutely feel confident that over time the adoption of Bitcoin with the inflation in the world, with government’s printing money, that Bitcoin has a real place. And over the next few years to 5, 10, the adoption is going to be tremendous. That will take care of a lot of things because the price is going to go up and that will allow the industry through the having to sort of reinvent itself. The weakest players will get — will go bankrupt. There’ll be some upstarts, but then there’s going to be a handful of us that are public and others. There’s a lot of private companies in the world that will do very well.

And they will expand. They will continue to push the barriers in terms of efficiency, as I said, using their thermal properties, the residual heat, and other applications being closer to sources to the electricity sources, to be able to work on solar and wind and these type of things and energy management, all that’s going to continue to evolve. But in terms of other opportunities and data center management, like we operate data centers basically on steroids, high performance, but not like tier three data centers where there’s redundancy and everything else. They use a lot less electricity. They need to have 99.9% uptime. And then we see AI and a high power computing. That sort of, some comes somewhere between, there’s going to be a huge demand for that.

High power computing we can sort of do, but it has, but — we are not set up to have redundancy in terms of diesel generators to come on when we have to curtail. So there has to be a fine place for us to play. And AI is exciting. Some of the high powered computing is exciting. They’re talking about phenomenal growth over the next six years. We do have experience, but I’m not sure if it’s the right experience. And frankly, we’re doing that research to understand whether there might be a role for us there, but we’re not going to jump willy-nilly into to something where we don’t know much about. And it changes the fundamental aspect to your commercial operations too. Right now, effectively we have no clients. We, we mine Bitcoin and we sell Bitcoin to the pool and then we get them and we sell them to make the business work.

If you could start getting into commercial contracts, sometimes you’re hosting, sometimes you’re not. These contracts tend to have two or three years. You have to be much more customer focused. None of us really have those customers facing people right now, so we’d have to build that to our part of the business and get ready for churn. It’s not as simple overnight decision just to jump into that type of business. And if we’re going to do it, it needs to have the margins and longevity to make sense and we’re, we’re evaluating that very closely.

Jeff Lucas: One other comment to make here actually a shout out goes to our IT team because the economics naturally tightened with the having. Coming up here, managing and getting information from your miners to run them more precisely and more efficiently is going to be key. And I think our MGMT-2 programming and the developments we’re making to that right now really give us an edge in that area and we think that’s going to work to our advantage, certainly when they’re having code.

Operator: That concludes our question-and-answer session. I’ll now turn the call back over to Geoff Morphy, CEO of Bitfarms. Please go ahead, sir.

Geoff Morphy: Thank you, Alan. I would like to reiterate three points about Bitfarms. One, we’ve maintained profitable mining operations each quarter as a result of our determination to maintain stable low energy and operating costs. Two, with little capital outlay, we expect to reach 6.3 exahash per second by the end of Q3 from our existing portfolio and reach 7 exahash per second in Q1 2024. Three, a major expansion in its underway in Paraguay and we are well positioned to move quickly on other major as well as minor expansion opportunities that meet our investment criteria. Thank you all for attending today’s conference call. We look forward to updating you with our monthly production reports as well as our other developments at our upcoming Analyst Day in September 14th and when we announce our Q3 results in the fall. Thank you very much.

Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.