Stronghold Digital Mining, Inc. (NASDAQ:SDIG) Q4 2023 Earnings Call Transcript

Stronghold Digital Mining, Inc. (NASDAQ:SDIG) Q4 2023 Earnings Call Transcript March 6, 2024

Stronghold Digital Mining, Inc. misses on earnings expectations. Reported EPS is $-1.46 EPS, expectations were $-1.22. SDIG isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to Stronghold Digital Mining’s Conference Call for the Fourth Quarter and Full Year Ended December 31, 2023. My name is Towanda, and I’ll be your operator this morning. Before this call, Stronghold issued its results for the fourth quarter and full year of 2023 in a press release, which is available in the Investors section of the company’s website at www.strongholddigitalmining.com. You can find a link in the Investors section at the top of the home page. Joining us on today’s call are Stronghold’s Chairman and CEO, Greg Beard; and CFO, Matt Smith. Following their remarks, we will open the call for questions. Before we begin, Alex Kovtun from Gateway Group will make a brief introductory statement. Mr. Kovtun, please proceed.

Alex Kovtun: Great. Thank you, operator. Good morning, everyone, and welcome. Today’s slide presentation, along with our earnings release and financial disclosures were posted to our website earlier today and can be accessed on our website at www.strongholddigitalmining.com. Some statements we’re making today may be considered forward-looking statements under securities law and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors, many of which are beyond our control, which could cause actual results and events to differ materially from those described in the forward-looking statements. For more detailed risks, uncertainties and the assumptions related to our forward-looking statements, please see the disclosures in our earnings release and public filings made with the Securities and Exchange Commission.

We disclaim any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and the reconciliation tables to applicable GAAP measures in our earnings release carefully as you consider these metrics. We expect to file our annual report on Form 10-K on or around March 8, 2024, with the Securities and Exchange Commission, which sets forth detailed disclosures and descriptions of our business, as well as uncertainties and other variable circumstances, including, but not limited to risks and uncertainties identified under the caption, Risk Factors.

You may access Stronghold’s Securities and Exchange Commission filings for free by visiting the SEC website at www.sec.gov or Stronghold’s Investor Relations website at ir.strongholddigitalmining.com. I would like to remind everyone this call is being recorded and will be made available for replay via a link available in the Investor Relations section of Stronghold’s website. Now, I would like to turn the call over to Stronghold’s, Chairman and CEO, Greg Beard. Greg?

Greg Beard: Good morning, everyone and thank you for joining us on our fourth quarter and full year 2023 earnings call. We will be referencing an associated slide presentation throughout the call that is available through the webcast and on the Investor Relations section of our corporate website. Let’s start on Slide 3. I will say this on every earnings call until it’s no longer true. Stronghold is the only environmentally beneficial and vertically integrated public Bitcoin miner. We own and operate two mining waste-to-power facilities in Pennsylvania, Scrubgrass and Panther Creek, with aggregate power capacity of 165 megawatts Through our process, Scrubgrass and Panther Creek have removed an estimated 30 million tonnes of toxic mining waste from the environment from nearly 100 different sites.

Today, we operate over 40,000 Bitcoin miners with 4.1 exahash of hash rate capacity, while we are thrilled to surpass 4 exahash. We believe that we have significant runway to continue hash rate growth within our existing infrastructure by high-grading our fleet. As a vertically integrated Bitcoin miner, we have a unique and substantial asset base with significant potential for complementary revenue streams. In November, we announced our Carbon Capture project, which is simply an extension of our reclamation process. We are excited about our progress we have made on this project over the last few months. We believe that we could capture up to 100,000 tonnes of CO2 annually at baseload capacity utilization of our plants, as discussed in our December presentation.

Moving to Slide 4. Over the past year and a half, Stronghold executed on its plan to grow hash rate to 4 exahash, with high capital efficiency. And we plan to continue adding hash rate in improving our fleet efficiency opportunistically. We have over 40,000 energized slots and these slots could support more than seven exahash of mining, with a high-graded fleet of latest generation miners. We are exploring various avenues and structures to grow into this capacity. Looking at our fleet, the average efficiency for our 2,500 these efficient miners exceeds 40 joules per terahash and our next 10,000 feet efficient miners are approximately, 37 joules per terahash. That’s low hanging fruit. And just replacing those miners, with latest generation miners could yield hash rate capacity of over 5.3 exahash.

So, we think that the Highgrade opportunity is very attractive. We also remain focused on improved uptime at our Data Centers. Matt’s been working closely with the Frontier mining team since, October to enhance our Data Center operations going into halving in April. This partnership has been a success, as evidenced by our recent achievement of approximately 3.9 exahash of operating hash rate. Moving to Slide 5. As the halving approaches, we continue to focus on liquidity and debt service obligations. As of February 29, we had over $10 million of liquidity. So current liquidity more than covers the $6.5 million in 2024, mandatory amortization associated, with our WhiteHawk notes from the $1 million of remaining committed minor CapEx. And importantly, our operations are generating cash flow with over $5 million of adjusted EBITDA projected for the first quarter, further enhancing our resiliency.

Moving on to Slide 6, to discuss Bitcoin market dynamics. Following the approval of Bitcoin ETFs from January, we have seen a significant rise in Bitcoin price and hash-price. Bitcoin has set a new all-time high and hash price is around $0.12 per terahash. There have been $8 billion of inflows into the ETFs, which averages nearly 6,000 Bitcoin per day, 6.5 more than what is mined daily. So we view the recent run-up in Bitcoin price as a result of the mismatch in supply in demand. Will the price run off continue?. While we won’t take a view on inflows representing potential demand, the halving will impact the supply side of the equation which all else equal, is quite constructive for future Bitcoin price. Moving on to Slide 7. Owning our own power assets gives us a lot of optionality, as electricity is the largest variable cost to mining Bitcoin.

A close-up of a person’s hands holding cryptocurrency coins.

It enhances our ability to be responsive to changing market conditions. When power prices are high, we turn off some miners and sell to the grid. When prices are lower than Bitcoin mining economics, but higher than variable fuel costs, we use the plants to power our miners and when power prices are lower than our variable plant costs, we turn off the plants and import electricity to power our miners. Power prices in our region are currently very low, with the forward curve for the remainder of 2024, averaging around $30 per megawatt hour. While low power pricing is a trend broadly, forward curves in PJM are generally the lowest in the country right now. This is great for us, because it gives us the flexibility to opportunistically import electricity from the grid to power our miners and you can expect to see us do just that.

Moving to Slide 8, on the other side of the equation, the PJM grid is extremely vulnerable over the medium to long term. Renewable energy sources like solar and wind are great, because they’re clean. But the unfortunate reality, is that they generate power intermittently, replacing stable baseload generation, with intermittent generation, severely threatens the stability of the grid. This is becoming very clear in PJM, by its own accounts. 40 gigawatts of baseload thermal generation is expected to be retired by 2030. This is over 20% of current PJM generating capacity. On top of this, nearly 95% of power generation projects in the PJM queue or renewable and it takes multiple megawatts of renewables to replace each megawatt of baseload generation.

As a result, at the current rate of development, PJM believes that the new projects will not be sufficient to keep up with demand growth, and the expected plant retirements by 2030. The implied outcome here is extreme volatility and market tightness in the medium to long-term making existing baseload assets like Scrubgrass and Panther Creek highly valued. Moving to Slide 9. Since announcing our carbon capture project in November our team has made significant progress improving our enhancing and validating our process. Recall that our initial third-party testing indicated that our Scrubgrass ash could capture carbon at a capacity of up to 12% by starting weight of the ash. Our recent tests from our first Karbolith have demonstrated that up to 14% is achievable.

We recently partnered with the Pittsburgh Mineral & Environmental Technology Lab, who is assisting with more enhanced lab analysis, further improving and reinforcing our process. In early February, we announced that we have begun constructing our second Karbolith with our partners Karbonetiq. This Karbolith is now up and running at Scrubgrass, inclusive of design enhancements that we expect will increase airflow and carbonation and reduce cost and construction time. The second Karbolith cost is about $33,000 in materials representing significant savings from the first Karbolith. And we expect to continue to reduce costs as we scale. As we mentioned on our last earnings call, our team has been working closely with Carbonomics since September to list our project on the Puro Registry, the world’s first registry for engineered carbon sequestration projects to monetize our carbon removals in the private market.

We are excited to announce that Puro Earth Registry registered the Scrubgrass facility in late February and the company will now undertake the audit process, which is the next step towards generating carbon capture related revenue. We are now embarking on the audit process for Puro and our goal is to have an accredited carbonated materials project as early as the end of the second quarter. We expect to have further updates on this project, including timelines for meaningful monetization and related milestones in the next few months. With that, I would like to pass it over to our CFO, Matt Smith.

Matt Smith : Thank you, Greg. Moving to Slide 10, we continue to believe that Stronghold is significantly undervalued on an absolute basis and acutely so relative to public Bitcoin mining peers. When looking at select valuation metrics, adjusted EBITDA hashrate capacity and adjusted EV to annualized January bitcoin production, Stronghold trades at an approximately 70% discount to peers. I have nothing else to add. Lastly on Slide 11, revenue for the fourth quarter was $21.7 million with $20.5 million from cryptocurrency operations, on 599 bitcoin mined and $1.2 million from energy operations. GAAP net loss was $21.2 million for the fourth quarter and adjusted EBITDA was $2.3 million. A reconciliation for those figures is included in the appendix. I will now turn the call back over to Greg for closing remarks.

Greg Beard : Thanks Matt. To summarize what we’ve discussed today, we are executing on the objectives we have communicated to the market. We remain confident in the strength of our business going into the halving and we believe that we have outstanding growth prospects through high-grading our fleet and developing carbon capture. With that, we’ll open up the call for Q&A. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Lucas Pipes with B. Riley. Your line is open.

Lucas Pipes : Thank you very much, operator. Good morning everyone.

Greg Beard : Hi, Lucas.

Lucas Pipes : I first wanted to do two ask a few questions on Slide 4. We show that column with additional opportunities and a few a few questions there. First, what type of machines should we be thinking about? What would a reasonable cost or CapEx range be for that? Or is that included in the guidance? I don’t think so. But I would appreciate your perspective. And then I have a few more follow-up questions from there. Thank you.

Greg Beard: Yes. So, I think we’re thinking about it in terms like the generic latest-generation miner that you can still buy. So, we’re not looking at the next generation to the current latest generation. So, something like a Bitmain S21. In terms of the market for these machines changes really weekly. And in the past, we’ve been very opportunistic about how we’ve managed to fill slots whether it’d be just buying machines out right JV-ing on machines, just to improve the capital efficiency and to get a very high ROE. And so, I think at current prices, market prices, you’d say, hey, to fill up all the slots would be around $20 million at current rates. We think obviously, the rates are going to be potentially materially different post having and as always, we’re trying to do better than the market in terms of what we spend and how we structure.

Lucas Pipes: Thank you, Greg. When would you make a decision on deploying additional capital there?

Greg Beard: What I think, we — once you give us say a quarter to present what we — what I want to do in the pace of that potential repowering of the data center or replacing all of these miners with more and more miners. So, I think we’re not ready to be specific with dates and times yet on those, not just really a function of making sure that we’re opportunistic to achieve the best pricing and rates of return on that equipment.

Lucas Pipes: Got it. Do you have a site in mind?

Greg Beard: Yes. I think we have — we’ve only got two sites Scrubgrass and Panther Creek. So I think you can expect it at all plants. And just to be clear at current pricing, it’s $20 million per exahash of machine just in case that was missed.

Lucas Pipes: Noted. Thank you. Thank you for that. So…

Matt Smith: Hey Lucas, I think…

Lucas Pipes: Yes.

Matt Smith: Lucas, I would just add. I think there is, as we’ve been carefully observing industry peers, announcing growth projects that are significant kind of greenfield builds for that require extraordinary time lines and future delivery schedules. What we’re trying to focus you on is the fact that we’ve looked at third sites and we’ve looked organically at our own existing 41,000 slots. And we have a number of at our Tier 1, Tier 2, Tier 3 miners in terms of stratifying by efficiency. And if you were to take the least efficient miners and high-grade does into what’s called an S21 type miner, which could utilize existing plugs that are energized, you can get to seven exahash plus. And so, identifying that that’s an opportunity is not a commitment to, I spend money to do that.

But we’ve demonstrated various actually very creative ways of filling slots in the past and we think there are a lot of opportunities to do that without stretching forward. So, the fact we have seven exahash capacity in the existing data centers is the message.

Lucas Pipes: Got it. I appreciate that. In kind of switching topics, obviously power price environment has been very soft and you noted your flexibility to toggle between your own generation and purchasing power. Could you speak a little bit to what your costs are when you produce in-house today at Panther and Scrubgrass, and kind of what the utilization rate of the plants is expected to be in this price environment? Thank you.

Greg Beard: Yes. So this is just a nice like reminder of the strength of the stronghold business model, which is, hey, if power prices are super high, we can quickly turn the data centers off and divert all of that power to the grid. Conversely, when power prices are low, and by low mean we have lowered our variable cost to make power, we can and we wouldn’t do it on a single day. But it’s expected to be low four weeks or a month. We can turn the power plant off. So, right now what we’re saying that we’re expecting costs to average between $40 or $45 per megawatt hour to make the power. And you looked at the forward curve for power expected power pricing in PJM, it’s one of the lowest power markets in the U.S. And so that’s that decision to come to buy power instead of make it becomes when we see power in the 20s or below, which is where we’re seeing it now seasonally.

So, I think you can expect us to just make the economic decision to buy the power at a cheaper cost than we can make it, which is there’s a — if there’s a spot in the middle where it makes sense to run the plants and supply all that power of the data centers, but now we’re looking like if the curve ends up playing out as its priced will run at least scrub brass seasonally rather than off time and then buy power for a lower price. You can make it which obviously will improve our margins.

Lucas Pipes: Thank you very much Greg. Really appreciate the color and best of luck. I’ll turn it over for now.

Greg Beard: Yes. Okay.

Operator: Thank you. Our next question comes from the line of Joe Flynn with Compass Point Research & Trading. Your line is open.

Joe Flynn: Hi guys. I wanted to dig a little bit more on your strategy going into halving. I guess with $30 megawatt hour, it’s produced strong prices from a marginal cost standpoint where you keep machines on. But I guess in the event that we don’t see correction of hedge prices and you kind of see it sub $0.05 level in the months, like how do you — how you’re going to manage the balance sheet and growth your ambitions to ultimately place yourself at a better position from a both cost and I guess cash position?