Cipher Mining Inc. (NASDAQ:CIFR) Q4 2022 Earnings Call Transcript

Cipher Mining Inc. (NASDAQ:CIFR) Q4 2022 Earnings Call Transcript March 14, 2023

Operator: Good morning and welcome to Cipher Mining Inc.’s Fourth Quarter and Full Year 2022 Business Update. All participants are in a listen-only mode. After the speakers’ presentation, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Josh Kane with Investor Relations. Thank you. Please, go ahead.

Josh Kane: Good morning. Thank you for joining us on this conference call to discuss Cipher Mining’s fourth quarter and full year 2022 business update. Joining me on the call today are Tyler Page, Chief Executive Officer; and Ed Farrell, Chief Financial Officer. Please note that you may also review our press release and presentation, which can be found on the Investor Relations section of the company’s website. Please note that this call will also be simultaneously webcast on the Investor Relations section of the company’s website. This conference call is the property of Cipher Mining and any taping or other reproduction is expressly prohibited without prior consent. Before we start, I’d like to remind you that the following discussion, as well as our press release and presentation, contain forward-looking statements, including but not limited to Cipher’s financial outlook, business plans and objectives and other future events and developments, including statements about market potential of our business operations, potential competition and our goals and strategies.

The forward-looking statements and risks in this conference call, including responses to your questions, are based on current expectations as of today and Cipher assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. Additionally, the following discussion may contain non-GAAP financial measures. We may use non-GAAP measures to describe the way in which we manage and operate our business. We reconcile non-GAAP measures to the most directly comparable GAAP measure and you are encouraged to examine those reconciliations, which are found at the end of our earnings release issued earlier this morning. I will now turn the call over to Tyler. Tyler?

Tyler Page: Hi. This is Tyler Page, CEO of Cipher Mining. Thank you very much for joining our fourth quarter and full year 2022 business update call. Let me start with some key developments since our last call. As we moved towards completion of our four initial data centers, we began publishing monthly production reports. Page three gives a snapshot of our business, as of our most recent production report. At the end of February 2023, we reported 5.2 exahash per second of self mining operations across all of our sites. This is well on the way to our initial build-out of 6 exahash per second of self-mining capacity across the portfolio. And later in this presentation I will detail how we have the potential to expand to up to 8.2 exahash per second at our existing sites by year-end 2023, if we choose to pursue expansion.

We have over 48,000 rigs operating and anticipate an additional 11,000 miners to be energized in the near future. In total, Cipher has now purchased and paid for over 59,000 machines, including 7,700 rigs that we announced in December 2022. As we mentioned at the time of that announcement, we were able to purchase these new rigs with minimal cash outlay, an important example of our focus on cost discipline and our ability to manage the cyclicality of prices in the Bitcoin Mining marketplace. The philosophy of managing through the cycle is one you’ll hear me talk about a lot, because it is a fundamental part of the way we run every aspect of our business. In terms of production, you can see that we ended the month of February with the ability to mine over 15.5 bitcoin per day and that we held 465 bitcoin in reserve.

Later on in the presentation, we will talk more about our philosophy around our Bitcoin reserve and treasury management. Turning to page 4. We think it’s important to step back and take stock of the past year and the developments that have led to these very strong production numbers that we are now reporting. In 2022, we completed development on three of our four initial sites and began production at our fourth site Odessa, the largest data center in our current portfolio. It’s a testament to the tremendous capability of our team that in roughly 15 months we were able to go from a group of greenfield projects on paper to operating four best-in-class data centers. Our Alborz, Bear and Chief Data centers were fully operational coming into the New Year.

And here we have provided some cost estimates from our recent electricity bills that illustrate the low cost that Cipher pays on a per bitcoin basis at the sites. As a reminder, the large majority of operational costs paid by a Bitcoin miner are its electricity bills. As you can see in January at Alborz, we paid about $5,143 in electricity per Bitcoin produced. While at Bear and Chief, we paid roughly $6,293 in electricity per Bitcoin produced. These costs are among the lowest we have seen for a Bitcoin miner in the current market and we believe demonstrate one of Cipher’s greatest competitive strengths. In November, we announced that our Odessa data center began Bitcoin mining operations just 10 months after we broke ground at the site. As of the end of February, we have roughly 4.2 exahash per second of our self mining operations at this site alone and we’ll talk later in the presentation about our expansion plans.

We also plan to report electricity cost for Bitcoin for Odessa in the future when it is operating at full scale. As you can see we have now reached that critical inflection point in our business where we have gone from a development story to a story of large-scale bitcoin production combined with strong and resilient unit economics. You can see that reflected in our monthly reports. And in the coming quarters, we expect to demonstrate that best-in-class execution at full scale across all of our sites. Before diving deeper into a market update let me take a moment to remind everyone how our business model works. On slide 5, you will see a simple overview of a Bitcoin mining business. We operate the box in the middle of the drawing that says mining equipment, which represents our data centers and mining rigs.

As I discussed earlier, we spent the majority of our operating expenses on electricity, which our data centers convert into computing output. Unlike traditional data centers which operate a similar model and sell their computing output to enterprise clients for dollars, Cipher sells its computing output called Hash Rate to the Bitcoin network for Bitcoins. To make this model operate profitably, a Bitcoin mining company needs to control both its electricity costs and the capital it spends to build its data centers, including what it spends to purchase mining equipment. Controlling these costs enables a minor to be a lower-cost producer. And our focus at Cipher has always been on controlling these specific costs to produce the best possible unit economics.

Now let’s turn to page 6 and take a look at recent market events in the Bitcoin mining space and talk about Cipher’s approach to these challenging markets. Our philosophy continues to be that as a low-cost producer, these markets present opportunities for us over the long term. Since our last business update, Bitcoin prices initially dropped significantly in the fourth quarter to the mid-teens thousands of dollars, before rallying to the mid-20,000s of dollars in early 2023. However, accompanying this price increase has been a steady climb to an all-time high in Bitcoin network cash rate, which continues to suppress overall mining economics. This market backdrop has led to several noteworthy news events for competitors in our industry, including the repossessions of competitors’ mining rigs by equipment lenders, the sale of assets and the M&A activity.

While energy prices have softened recently, there continue to be many more mining rigs looking for a home than available sites with good mining cost economics. With our strong portfolio of data centers, Cipher is very well positioned. And with the strength of our balance sheet and the successful growth of our business, we’ve been approached with many different opportunities. But it’s important to remember that cheap assets are only part of the equation and that many of the businesses that are now in distress have fundamental issues around their cost structure, that make them unattractive acquisition targets. So while we continue to look at a variety of distressed opportunities, our current view is that the best potential growth opportunities are already within our portfolio, beginning with finishing the initial build at Odessa and subsequently expanding to full capacity later this year at this site.

Photo by nick chong on Unsplash

We will continue to look for low-risk cyclical opportunities, where we can take advantage of our relative strengths and continue building a company that can withstand the storm. We believe, we can ultimately emerge as the industry winner when brighter days return. As a final note on the market, big disruptions seem to coincide with our business updates. So it is challenging to keep up to the minute on this slide. Unfortunately, this quarter is no different with recent bank failures. I am happy to report that Cipher had no exposure to Silvergate or Silicon Valley Bank and we had less than $20000 at Signature, which we are in the process of moving. Proactive counter party risk management is a major focus for us. We currently have accounts with three of the largest 10 banks by assets in the United States, as well as other more niche-focused accounts.

We see positives for Bitcoin in the long-run future coming from the recent turmoil and Cipher will help ensure that positive future. Moving to more specific highlights on our data centers. Slide seven shows some operational highlights from our Alborz data center. Alborz is 100% powered by wind and is a joint venture that we share with our energy provider. It has a total operating capacity when the wind blows of 40 megawatts. That 40 megawatts powers roughly 1.3 exahash per second of rigs. Alborz can mine almost four Bitcoin per day and year-to-date the site has mined approximately 186 Bitcoin. Roughly half of that total capacity in production belongs to Cipher. Most importantly, our recent all-in electricity cost per Bitcoin at Alborz was approximately $5143, demonstrating our resilient low-cost structure.

Slide eight shows operational highlights from our Bear and Chief data centers. Bear and Chief were completed and made fully operational last October. Combined, the sites operate 20 megawatts, which powers approximately 0.65 exahash per second at the data centers and can generate roughly 2 bitcoins per day in current market conditions. Bear and Chief are also structured as joint ventures with similar shared economics to Alborz. Unlike our other sites, which have behind-the-meter power arrangements, Bear and Chief, are set up in front of the meter in a location within Texas that typically features attractive market prices. Our recent all-in electricity cost per Bitcoin at the sites, was approximately $6,293. Turning to our Odessa data center.

Slide 9 includes our most recent production numbers as well as a timeline for the completion of our site build-out. At the end of February, we reported a exahash rate of approximately 4.2 exahash per second at the site, generated using approximately 143 megawatts. We have mined roughly 770 bitcoins at the site to-date, and had a recent daily mining capacity of approximately 12.9 bitcoins per day. We continue to expand at the site every day and we expect it to reach approximately 4.7 exahash per second of capacity by the end of March and 5 exahash per second of capacity shortly thereafter. Beyond this initial machine deployment, we will also have completed the necessary infrastructure at the site to accommodate further machines capable of taking the site to a total of 6.2 exahash per second by year-end.

In previous quarters, we have talked in detail about the Odessa power contract, but it’s important to reiterate that because of our long-term low-cost fixed price power contract at Odessa, we have an advantage that few other bitcoin miners have. We have the flexibility to resell our power capacity at market rates and this flexibility can provide a hedge against potential future declines in bitcoin mining profitability. As a further hedge against deteriorating market conditions, our power purchase capabilities exceed our power purchase obligations under the contract. While we have the right to purchase 207 megawatts per hour under the contract, we are only required to purchase two-thirds of these hours per annum. So in possible situations where both bitcoin mining and reselling power to the market were not profitable, we will have limited our exposure.

This feature of our power contract also sets Cipher up for growth potential while minimizing risky commitments, as I will explain on the next slide. Slide 10 provides further detail on the organic growth capacity at our current data centers. Though the potential for hash rate growth has not been as much of a focus for investors in our sector recently given choppy market conditions, we always keep an eye on the potential for growth into the future. Our goal is to identify opportunities for growth that feature favorable mining economics but minimal financial commitments so that we can remain flexible. Our existing portfolio of sites features the best expansion opportunities we have found and are detailed here. As I mentioned, our most immediate expansion opportunity will be to purchase mining rigs to utilize the full 207 megawatts available to us at Odessa.

In advance of acquiring those machines, we can resell the megawatt hours we are not currently using to the market or elect not to take them at all. That is we already have mining operations at the site that exceed our take-or-pay obligations under the contract. So if we need to, we can simply mine with our existing build-out and to weight better market conditions for expansion. In the coming months, it is our current intent to purchase rigs with the revenues we are generating from operations to fully utilize our 207 megawatts at Odessa. If we purchase current generation machines, we could add approximately 1.2 exahash per second of mining capacity to the site this year. However, given volatile market conditions, we want to be mindful of not overextending ourselves.

So we will continue to evaluate expansion in light of market conditions. This near-term opportunity for growth with strong built-in unit economics but without operational spending commitments is one that few if any of our competitors have and demonstrate Cipher’s continued approach to look for low-risk opportunities. Continuing with this same theme, our joint ventures at Bear and Chief have expansion potential in 2023 as well and have mapped out 30 megawatts of expansion at each site. Again Cipher has the right, but not the obligation to participate in this expansion. Should we choose to opportunistically participate these expansions could add another one exahash of self mining capacity to Cipher in 2023. Beyond 2023, Bear and Chief have further expansion potential and our joint venture at Alborz is exploring adding a grid connection to supplement the existing wind farm in the coming years, which would expand its capacity meaningfully.

As you can see, we have the potential to expand to 8.2 exahash per second in 2023 and significant potential for further expansion beyond that in the years to come at the data centers we are already operating. We will manage this growth potential prudently as we navigate challenging markets and financing conditions. I will close my portion of the call by reiterating some key statistics of Cipher Mining that show how we are built to succeed through bear markets and bull markets. Our fleet of roughly 59,000 rigs operate at a very efficient 31.4 jewels per terahash average and we power them with electricity purchased at a price of roughly $0.027 per kilowatt hour. Using newer and efficient machines with a low cost of power makes us a low-cost producer of Bitcoin, giving us resilience in the bear market and also operational leverage in a bull market.

In this current tough market for Bitcoin miners, I’d like again to emphasize Cipher’s strong liquidity profile. At the end of February, we had approximately $16.4 million of cash in Bitcoin. We do not have the debt service with as some of our competitors are experiencing and we have no further obligations to make any additional payments to mining rig manufacturers. As part of our prudent liquidity and balance sheet management, we also have access to a $250 million at the market equity shelf. We have yet to sell a single share from the shelf. In the last quarter, we passed on multiple offers for debt financing that we found to be unattractive and have continued to fund our remaining capital expenses at Odessa from our operations. We will prudently manage our Bitcoin treasury over time.

While we plan to grow the Bitcoin treasury over time, we also liquidate Bitcoin to pay operational expenses and capital expenses and overhead when necessary. We currently anticipate funding all of the remaining infrastructure expenses at Odessa from our treasury and ongoing operations. And we expect to complete our initial build-out of infrastructure in the second quarter. When you combine our current liquidity profile, with our expanding Bitcoin production and strong unit economics, we believe Cipher is positioned to emerge from this challenging market, as the true leader in the Bitcoin mining space. Now, I’d like to turn it over to our Chief Financial Officer, Ed Farrell.

Ed Farrell: Thank you, Tyler, and hello to everyone on the call. Our flagship data center, Odessa was energized in November. For the period from November 22, 2022 through December 31, we mined 180 Bitcoin at an average price of approximately $17,000 resulting in Cipher reporting $3 million in revenue for the year. With the ramp-up of Odessa in 2023, we look forward to providing the market with greater detail on our operations, which we believe will eliminate our best-in-class unit economics. Again, we have no burden from debt, and we are funding our operations with our current Bitcoin production. If you recall, we have recorded a derivative asset on our balance sheet in the third quarter driven by our Luminant Power agreement.

The change in fair value of this derivative asset was $73.5 million for the year ended December 31, 2022. The $73.5 million includes $83.6 million of income recognized for the initial derivative asset fair value on July 1, 2022 offset by $11.8 million of expense recorded related to a decrease in fair value of the power agreement as of December 31, 2022. The change in fair value of the derivative asset in 2022 also included $1.7 million for our sales of electricity facilitated by Luminant. For this year, and future periods the change in fair value of this contract will flow through our GAAP earnings, and will exclude the impact for non-GAAP reporting. Other significant assets, include liquidity of $18.2 million. This includes cash of $11.9 million, and Bitcoin of $6.3 million.

Property and equipment of $191.8 million, primarily related to our Odessa site, which includes miners of $80 million; lease hold improvements of $95 million, and construction process of $20 million, offset by $4.2 million of depreciation. Deposits on equipment of $73 million is primarily related to miners, of which sizable portion have been delivered in 2023. As Tyler stated, we do not have any amounts due associated with purchase commitments for miners. Security deposits of $17.7 million, primarily related to our collateral for our Luminant PPA. And our equity investment in our JVs Alborz Bear and Chief are $37.5 million. As Tyler stated earlier, our liquidity position at the end of February was approximately $16.4 million in cash and Bitcoin.

Also to-date, we have not utilized our $250 million ATM shelf. But when market conditions improve, it will be additive to our liquidity profile. Now, let’s look at our GAAP operating results for the year ended December 31. We had a net loss of $39.1 million, resulting in a net loss of $0.16 per share. Revenue for the year ended December 31, 2022 was $3 million and was generated entirely from Bitcoin mining operations. The change in fair value of our Odessa power agreement, which I mentioned earlier, resulted in a gain of $73.5 million. This was offset by equity and losses of equity investees totaling $37 million for the year ended December 31st and primarily consisted of losses totaling $33.4 million, resulting from a contribution of miners to our JVs Alborz Bear and Chief between June and October 2022.

This is due to the miners having fair values at the time of the contributions that were less than the cost paid to acquire the miners. We had general and administrative expenses of $70.8 million during the year ended December 31st. This includes stock-based compensation of $41.5 million; payroll and benefits of $4.3 million; corporate insurance of $9.5 million; professional fees of $5.2 million that includes legal, accounting, audit, and tax services; and other G&A of $8.5 million that include IT, occupancy, consulting, and other public company expenses. We had $4.4 million of depreciation, primarily related to the assets put into service at Odessa. Our non-GAAP financial measures. We are providing supplemental financial measures for non-GAAP loss from operation that excludes the impact of depreciation of fixed assets, stock compensation expense, and the non-cash change in fair value of our derivative assets.

These supplemental financial measures are not measurements of financial performance in accordance with US GAAP and as a result, these supplemental financial measures may not be comparable to similarly titled measures of other companies. We believe that these non-GAAP measures are also useful to investors in comparing our performance across reporting periods on a consistent basis. Management uses these non-GAAP financial measures internally to help understand, manage, and evaluate business performance and help make operating decisions. So, for the year ended December 31st, 2022, we had non-GAAP loss of $64 million, resulting in a non-GAAP net loss of $0.26 per share. We have provided a reconciliation of GAAP versus non-GAAP results for your review.

Finally, our team takes great pride on continuing to deliver the plan we set out back in 2021 and we look forward to reporting our progress in future periods. I will stop there and Tyler and I are happy to take your questions.

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Q&A Session

Operator: Thank you. Our first question comes from Josh Siegler from Cantor Fitzgerald. Please go ahead, your line is open.

Josh Siegler: Good morning. Thanks for taking my question today. First off, how are you thinking about the CapEx spend needed to expand at Bear and Chief? And do you plan on funding this expansion through your operations? Thank you.

Tyler Page: Thanks Josh. I think it remains to be seen. I think the reason why we highlight the sort of opportunistic flexibility that we have in our model is that these are choppy markets, right? And so at any given point in time, if you think about the levers we could easily tap for financing, we could look for debt financing, which I mentioned we’ve seen offers on some of our data centers, we could theoretically sell equity to fund it, or we could sell our Bitcoin effectively via operations. It kind of depends on market conditions and point in time. And so I can’t give you a specific answer for this is the lever we’re going to pull for those particular expansions. But that will be a question that will come more to the forefront in the coming months.

Josh Siegler: Understood. And it seems like you do have many levers and optionality around that. For my second question, I was wondering if you could discuss what prices you’re currently seeing for rigs right now. And as you consider purchasing rigs earlier than the infrastructure is actually available to take advantage of the current low-prices?

Tyler Page: Yeah. So it’s a constantly shifting target. So it moves day-by-day. I think the thing to keep in mind is and candidly I haven’t seen a price run since this Bitcoin rally began with the news this week, but hash price is still depressed, right? We’ve seen a huge growth in network cash rates. So the most recent prices I’ve seen — I’ve seen quotes in the low double-digit dollars per terahash so kind of 12, 13 but that can move day-by day-and it depends on how many you order at a clip. I think it’s fair to say that, it’s certainly not a bad time to buy rigs. We don’t believe, if you’ve got the capital. And we will be prioritizing that as we finish the build-out at Odessa, right? I think we have probably the greatest opportunity of any of the miners given that we’ve got this free option on available infrastructure at a very low-fixed price there.

So rest assured, certainly philosophically, we are ready and excited to purchase rigs at prices that are seemingly potentially below cost of manufacturing for the rigs. But it’s all about just being cautious as we finish the build — finish the capital spend on Odessa to get the infrastructure in place and then, pivoting to purchase rigs. But I’m hoping we do that in the near future.

Josh Siegler: Thank you very much. Appreciate that.

Tyler Page: Thanks Josh.

Operator: Our next question comes from Reggie Smith from JPMorgan. Please go ahead. Your line is open.

Reggie Smith: Hey. Good morning guys and congrats on the build-out. I had two quick questions. I guess one this is probably difficult to answer and such to the extent that you could kind of walk me through your thinking, I think it will be super helpful. But thinking about that $250 million shelf offering, how do you — like what’s the calculus or the math behind tapping that versus the dilutive impact of it? Like is there a rule of thumb that investors or you kind of look to in deciding this is a good time to use that. When does it make sense? And what do those conditions look like?

Tyler Page: So tough to answer that question with specifics Reggie, it’s a good one. We think about it a lot. I think as a framework for it, we would want to use it to do something accretive. Well, let me actually say in two ways. I view it as it’s a nice thing to have in place just in choppy markets, right? It’s just yet another lever, we could tap if we had to Bitcoin — something terrible happens and Bitcoin drops to $8,000 and the market is stressed like it’s just another lever we can pull. But I think we’re more likely to think about using it opportunistically and the framework for that would be something accretive. So for example, if we could find an incredible price on rigs to immediately plug in at Odessa, we would view that as instantly accretive to shareholders.

And so that’s the kind of thing where we would think about it. Now, as I’m sure, you know there’s, many dimensions to thinking about using it. Our liquidity is steadily building in the market. But of course, we want to be mindful of not impacting the stock in an adverse way while we do something accretive.

Reggie Smith: Understood. Would — yeah, I guess I appreciate that you could be thought about it in a number of different ways. I think one way I was kind of thinking about it and tell me if this makes sense. If you were to think about exahash per share outstanding and kind of do the math that way. And as you did a shelf offering that would increase your shares outstanding, but it would also bring in exahash. Is that the right way to think about accretion?

Tyler Page: Yeah, it’s an interesting angle, I think

Reggie Smith: Or is it too complicated? I don’t know.

Tyler Page: It starts to get a little challenging. I think we probably fall back on a dollars-based profitability to drive value to shareholders. So exahash per share is I guess as a proxy, but it sort of ignores the hash price element of things, right? Because if we the problem with that is what if network cash rate goes to 1,000 exahash or something like that like you have to sort of think of both of those things at the same time if it makes sense?

Reggie Smith: No, it does. It’s a fascinating problem to solve. So we’ll be watching there. I guess if I could sneak one more question in. Very impressive price — energy price per Bitcoin numbers you guys posted just like the lowest I’ve seen among any of the Bitcoin miners so that’s great and hats off to you for that. My question how do you think about kind of the unit economics below the energy line? And what are you driving the business to there? And I don’t know if it’s overhead for you what’s the right way for investors to think about that too? Thank you.

Tyler Page: Yeah. So that’s a great question and I’m optimistic that in the future when we are operating at full scale throughout a quarter, we’ll be able to drill down with more specificity on that. So with electricity, it’s pretty straightforward, right? We can take a monthly bill and we can look at how many Bitcoin we produced and it’s division. On operations, I’ll tell you how we think about it overall at the company level. We try to leverage technology to drive efficiency. And this is one of the great benefits we had of — rather than sort of incrementally scaling up as a minor, we sort of came public with a big plan to build scale. And so starting from a blank sheet of paper, we’ve architected a firm that generally has fewer people and fewer better people and leverages technology.

And so I think what you’ll see is in the future parallel with our low energy costs, you’ll see low overall OpEx costs to match with that. But keep in mind electricity is sort of in my mind the big variable. Even if we are the most efficient at the other OpEx the thing that really drives the overall cost economics is the electricity price.

Reggie Smith: Understood. That’s good color. Thank you.

Tyler Page: Thanks, Regi.

Operator: Our next question comes from John Todaro from Needham. Please go ahead. Your line is open.

John Todaro: Great. Thanks for taking my question. Congrats on the quarter. First question, so with Odessa getting a little bit further built out here, is the G&A spend is that kind of already in place? Should we be taking that Q4 number and thinking it holds at least for the first half of 2023?

Ed Farrell : I can take that. Hi, John. How are you? Yes, we — as Tyler said, we — from a personnel perspective, I think, at this point in time, we don’t see a tremendous increase in headcount for 2023. And some of our early company expenses, I think have been put behind us and just starting to level out more. So I think if you look at the last two quarters, you could use that as a reasonable run rate into 2023.

John Todaro : Got it. Okay. Great. And then

Ed Farrell : Is that helpful?

John Todaro : Yes, that is. I appreciate that. And then the second question. So, on the potential Alborz expansion, I believe that’s the lowest power cost in the portfolio. Any expansion there? Could you just give us some more color on what those power contracts would look like today?

Tyler Page : So, it’s a little bit early. I think we wanted to put it on there to include it, because it is within the portfolio, but you will note that we don’t have any of that marked for 2023. What we are exploring there is adding a grid connection. And so recall that Alborz operates as an off-the-grid wind farm only. And so when the wind blows, we mine and you can see why it’s so attractive, because the electricity price is so low there. But of course, when the wind doesn’t blow, our machines are not hashing. And also it is a 40-megawatt facility from a data center perspective, but it is co-located with 165-megawatt wind farm. And so theoretically, we can go get a grid connection. There are some structuring hurdles and some things we need to go through.

We need to map out the approvals process, et cetera. But what we would be doing then is adding the potential for 100% uptime there and also expansion. Now from a cost perspective, we would be buying that power front of the meter, right? We’d be buying it from the grid. So that would be the market price unless we opportunistically put in place a financial hedge. So, hard to forecast, but the point is it would be a floating price at least in as much as we’re buying from the grid directly.

John Todaro : Got it. Okay. So just to make partially would be still wind and then part of it would be from the grid there. Okay. Correct. Still bring your average cost down. Quite a bit I would imagine?

Tyler Page : It’s hard to forecast right, because we have the exact same price, when the wind is blowing. But when the wind stops we would be tapping the power prices that we could get. So it probably would look something like a mix of the Bear and Chief power price plus the Alborz’s power price, if that makes sense. So think about one-third the Alborz cost and about two-third of the Bear and Chief costs. But keep in mind, the Bear and Chief cost we put in the deck but that can vary right because it’s front of the meter. So if market prices go way up that could change, or conversely if they go down same thing.

John Todaro : Okay. Got it. Understood. Thank you guys. Appreciate it.

Operator: Our next question comes from Mike Colonnese from H.C. Wainwright. Please go ahead. Your line is open.

Mike Colonnese: Good morning guys. Thank you for taking my question this morning. First one for me. So in your slide presentation that you have 2.2 exahash and self-owned expandable capacity at three of your four sites so does Bear and Chief that you call out specific for 2023. How long would it take you guys to build out the additional capacity when you decide to do so? Really just trying to get a better sense on the timeline to scale organically during this calendar year?

Tyler Page: Thanks, Mike. So the 2.2 we mentioned across Odessa, Bear and Chief are all theoretically possible within the calendar year. So that would be — there is the early work going on at Bear and Chief. We need to go acquire rigs. They need to get delivered. We need to build the infrastructure et cetera, but we estimate that we would be able to bring that up by year end. And certainly at Odessa that’s just a matter of acquiring the rigs after we finish the build-out and the build-out will be finished in the next quarter.

Mike Colonnese: Got it. Got it. That’s helpful. Thank you, Tyler. And then the next one for me. You mentioned, you’re seeing a lot of acquisition opportunities right now. What type of deals would get you more excited to engage in M&A versus expanding organically?

Tyler Page: We try to stay very disciplined on modeling costs and profitability and ROI. And so the truth is we would evaluate an M&A opportunity or an asset purchase just like we would expansion. Now obviously there’s some extra risks that you mix in with M&A that we also have to somehow put a call it a risk price on. So — but we really just have to compare what the opportunity is. I think it’s fair to say, I can’t imagine there is possibly an M&A opportunity as good as the expansion at Odessa right? We have a fixed lowest cost that I’m aware of in the industry just waiting for rigs there. So I don’t think anything from an ROI perspective can possibly beat that unless someone I guess was in real distress. But beyond that what I’d say is there are questions as we get closer to the having and now we’re only about a year or 13 months out a lot of miners with sort of different approaches to costs are going to get under more and more stress and we think we’re going to be — the belle of the ball.

I think that people are going to be very interested in partnering with us. So we will look for whatever the best opportunity is to grow thoughtfully and produce the best shareholder returns.

Mike Colonnese: Make sense. Thank you for taking my question.

Tyler Page: Thanks, Mike.

Operator: Our next question comes from Joseph Vafi from Canaccord. Please go ahead. Your line is open.

Joseph Vafi: Hi, guys. Good morning and nice update. Nice progress. I thought we’d — I know you mentioned the Bear and Chief locations and expanding there and I know it’s front of the meter. How do you think about, kind of, price volatility of power in those sites and how that is incorporated, I guess, into your thoughts on expansion there? And then I have a quick follow-up.

Tyler Page: Sure. Thanks, Joe. So Bear and Chief are located in very favorable front-of-the-meter locations. So if you look at the prices in that geographical location of the ERCOT grid, you can find a very low front-of-the-meter prices because there’s an abundance of supply. Historically, although it does bounce around of course with the weather and other conditions. The other thing is they’re favorably located to minimize the various associated transmission and distribution charges. So, what I’d say is, you saw the prices we’ve paid with the floating prices which are in the deck. And so that gives an indication of how favorable those locations are. What I would also say is, we always evaluate what we could find as a hedge.

So, it is possible to get a financial hedge that we would put in place, but both Bear and Chief are in load zone west and that has a particularly low transmission and distribution tariff. So we always look for a hedge and think about locking a price, but the floating price is pretty favorable right now. So it could go either way. It’s sort of market dependent.

Joseph Vafi: Sure. Fair enough. And then, as you expand out Odessa and it sounds like, you’re using your funds from operations really to expand that, could you just get a — give us a feel for kind of the rate at which you can expand versus your intention to perhaps keep some Bitcoin as hovel while you’re expanding just kind of I guess the mix of operational funds that goes back to the balance sheet as hovel and then what’s being deployed to continue to grow exahash? Thanks a lot guys.

Tyler Page: Sure. So that’s — it’s also a tough one to answer, because it’s a little bit of a dynamic — there’s a dynamic element to managing it. So, what I mean by that is, March will be a decent chunk of CapEx we will spend to complete the infrastructure at Odessa and then that will tail off into April and there may be some cleanup final payments subsequent to that, but it’s tailing off. And then at the same time, we will be thinking about opportunistically buying machines, right? So, if we were to purely fund the machines out of operations, very rough back of the envelope, we will have — when we stop using funds to pay for CapEx expansion, we would have a couple of million dollars a month that we could think about spending on machines.

Now, when you think about the overall Bitcoin inventory that we want to build over time, I think of that on more of a long-term time frame. So, if we saw again an amazing opportunity to do something accretive, we could theoretically go sell the Bitcoin inventory, because it would be in the pursuit of rapidly increasing our rate of Bitcoin production. So, there’s no hard and fast rules other than the philosophy around the Bitcoin inventory is to build it slow and steady over long time frame and think about tapping it. Obviously, we use it to spend — we liquidate our Bitcoin to pay for OpEx as we go. And then, what gets held and what goes to CapEx and investment is somewhat dynamic and market dependent.

Joseph Vafi: Sure. Fair enough. Yes, lots of options always watching the opportunistic opportunities. I get it. Thanks a lot guys.

Tyler Page: Thanks, Joe.

Operator: Our next question comes from Bill Papanastasiou from Stifel. Please go ahead. Your line is open.

Bill Papanastasiou: Hi, good morning, everyone. Thank you for taking my questions. Just looking at the big point right here, it looks like mining economics are improving, so that’s a great start to the day as well. My first question is in regards to fleet efficiency. We continue to see a premium for the latest generation of mining equipment, which seems to be largely as a result of mining operators that have exposure to higher electricity prices than companies like Cipher, looking for equipment that provide the highest implied breakeven cost of electricity. Given that Cipher is operating at 31 joules per terahash, curious to hear whether your team has any targeted fleet efficiency profiles, as we look at the having coming up later this year or later in 2024 rather and how that might look as you guys potentially pursue growth to 8.2 exahash? Thank you.

Tyler Page: That’s a great question. We usually wouldn’t look at that in a vacuum like having a goal specifically for fleet efficiency. It’s really part of a mosaic when we look at the return on investment for a site meaning and you highlighted this, more efficient machines are going to be really a requirement for miners that have higher electricity costs. We are spoiled for choice. And so what we end up doing is, when we look at the potential to buy rigs, we will look at whether the premium you have to pay for the latest and greatest and most efficient machines is sort of worth it from an overall ROI perspective. I think a lot of miners are handcuffed and certainly will be more so when the having comes with having no choice that basically they will have to pay the premium, because they have to pay their higher cost of operations.

For us, it is a little bit opportunistic and dynamic. I could see a situation where perhaps, the let’s call it, the S-19 generation prices or the M30S++ generations drop enough that we make a better overall forecasted return than paying the premium that has generally been a little bit too high for us in the past. That’s why we have not purchased the kind of XP generation of machines. But I do think that’s something that is going to squeeze the higher-cost producers. And it sort of highlights — while I don’t — we don’t have a target, certainly we recognize that over time your fleet efficiency needs to keep up. We are set up to have a lot of optionality with our power costs.

: Great. I really appreciate that color. Yes, I mean we all know that bitcoin mining is a relative game, so we have to see kind of how the other players continue to expand or contract our operations. So at least, Cipher has the flexibility there to potentially look at cheaper models that provide a better ROI profile. My next question is in regards to the US Treasury Department’s proposal recently for a 30% excise tax on the total cost of electricity used for digital mining. Wondering what the company’s thoughts are there? And it seems a little bit ridiculous in some sense that there would be the — also the inclusion to apply the excise tax to firms that are producing the acquired power off grid. What are your thoughts to that?

Tyler Page: So, it’s a really interesting development. I’m not sure that our thoughts are fully baked at this point. I’d say, first of all, it’s a proposal that our advisers have told me is unlikely to pass and people can get deep on thinking about taxing certain uses of energy. There’s certainly a part as an element seemingly to that that I hope we avoid as it makes its way through the legislative process. What I’d say overall though is that, it always comes back to the same answer that it’s good to pay the lowest electricity prices. So if that were to happen, we’re still at the lower end of the cost spectrum. And given the competitive dynamics of the way network hash rate works, we would be better equipped to handle it than anyone else. But everything, I have heard and read is that, it’s probably unlikely to materialize. We’ll see.

Bill Papanastasiou: Thank you. Really appreciate the color.

Tyler Page: Thank you.

Operator: We have no further questions in queue. I would like to turn the call back over to Tyler Page for closing remarks.

Tyler Page: Thank you everyone for your time today. It’s always exciting to update you guys on our progress, and we look forward to the next one. Thank you for your support, and we’ll talk to you soon.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.