Cipher Mining - Q1 2024

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Cipher Mining Q1 2024 business update call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Josh Cain, Head of Investor Relations. Please go ahead.

Josh Kane (Head of Investor Relations)

Good morning, and thank you for joining us on this conference call to discuss Cipher Mining's Q1 2024 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 the 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 measures, and you are encouraged to examine those reconciliations, which are filed at the end of our earnings release issued earlier this morning. I will now turn the call over to Tyler Page. Tyler?

Tyler Page (CEO)

Thanks, Josh. Hello, this is Tyler Page, CEO of Cipher Mining. Thank you very much for joining our Q1 2024 business update call. Let me begin the call with a few summary financial statistics from our outstanding Q1 of 2024. Our CFO, Ed Farrell, will give a full breakdown of our numbers during his portion of the call, but I wanted to highlight our continued strong performance during the Q1 up front, because it represents our second quarter of operating our full initial data center portfolio, and it is our second sequential quarter of growth in positive revenues, GAAP net earnings, and adjusted earnings. We continue to believe that the best way to evaluate the success of a public Bitcoin mining company is to look at the financials the company files with the SEC.

There are important growth narratives and key performance indicators that are not always encapsulated in backward-looking numbers, but ultimately, it's the numbers that validate the story. Cipher's progress continues at full pace. Quarter-over-quarter, we improved revenues from $43 million to $48 million, GAAP net earnings from $11 million to $40 million, and adjusted earnings from $28 million to $63 million. We are very proud of our continued record-breaking numbers, and with the fourth Bitcoin halving now behind us, we believe that the relative advantages of being a low-cost producer of Bitcoin will only increase going forward. As of the end of April, Cipher held 2,033 Bitcoin in inventory and $96 million of cash, while our total self-mining hash rate has grown to 7.7 exahash per second. For the literary-minded among you, you will recall that T.S.

Eliot shared that April is the cruelest month, and he may as well have been speaking about Bitcoin miners in 2024, as the halving reduced the block rewards of new Bitcoin to 3.125 Bitcoin per block. In order to address this known impact to Bitcoin revenues, Cipher is built to succeed with approximately 96% of our portfolio energized through fixed-price power at an industry-low cost of electricity of roughly $0.027 per kWh. As a reminder, electricity represents the large majority of our operating costs, and our low price is a key driver of our best-in-class unit economics.

As we bring online our planned site expansions at our Bear and Chief data centers and complete the full Black Pearl site in 2025, we expect our overall rig fleet efficiency will improve from 29 joules per terahash currently to 22 joules per terahash. With a combination of cheap, hedged power costs and an efficient fleet of rigs, Cipher has a sustainable business model that is positioned to survive downturns while benefiting from operational leverage in rising profitability environments. We have been very busy expanding our production capacity over the last few months. Slide 5 shows construction progress at our Bear and Chief data centers.... Bear's infrastructure is now complete, and the first new rigs will be delivered on site this week, with full completion of the expansion expected to be completed this month.

Chief's infrastructure is expected to be completed in June, and we expect full energization and operations at the site by the end of June. These two on-time expansions will add a total of roughly 1.25 exahash per second of self-mining to our portfolio. Once we are finished with the Bear and Chief expansions, our full attention will be on Black Pearl. But before we begin a progress update at Black Pearl, I want to take a detour into our past with some pictures from the progress we made while constructing our Odessa data center. Odessa began life as 50 acres of dirt and mesquite in late 2021, and a year later, our team of construction experts transformed it into our flagship data center. Take a look at just how different a site can look and operate in a year's time.

With that in mind, let's turn to Black Pearl. The next two slides show the beginning of work at Black Pearl and a rendering of what we expect the completed data center to look like. Remember that we are scheduled to energize the site in the second quarter of 2025. The time difference between now and our scheduled energization at Black Pearl is about the same as the time difference between the pictures on the previous slide of the Odessa data center construction. We have done this exercise before with the same team. Long lead time items are secured, and we fully intend and expect to continue our habit of on-time execution. Within the Bitcoin mining industry, Cipher has proven uniquely capable of identifying and negotiating the acquisition of greenfield sites, structuring optimal power arrangements, and then building best-in-class data centers all the way to completion.

This process takes longer than simply signing a hosting agreement or buying a completed facility, but we believe it delivers the best return on investment in the long run. With an eye toward delivering the best returns to our shareholders, I am pleased to share that we have accelerated our building plans at the site and plan to energize in 2025, not only the first half of our total capacity at Black Pearl, but the full 300 MW available. Slide 8 shows a 3D rendering of the data center we expect to see at Black Pearl in 2025. Slide 9 is a high-level overview of a Bitcoin mining business that we like to include each quarter to remind everyone how our business model works. 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, the majority of our operating expenses is 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 mining equipment. Controlling these costs enables a miner 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. That illustration hopefully gives you a good sense of a straightforward Bitcoin mining business. Cipher, however, does have an additional element to our business that is incredibly valuable.

We have the ability to sell power back to the grid at our Odessa facility. Our power purchase agreement gives us a combination of downside risk protection as well as upside optionality to our revenue streams that doesn't exist for most Bitcoin miners. Let's now turn to page 10 and look at some recent Bitcoin market events. A lot has happened since our last business update. We have seen all-time highs in both Bitcoin price and network hash rate, as well as the halving and a brief period of skyrocketing transaction fees related to the launch of the Runes protocol thereafter. Now that the halving has passed, we are seeing the anticipated squeeze on miner economics, and we at Cipher are witnessing firsthand the benefits of being a large, low-cost producer in real time.

We believe that the supply and demand dynamics of Bitcoin, given the halving of new supply coming to market, will likely eventually produce Bitcoin price appreciation as seen in previous halvings. We have also been encouraged by the enthusiasm for the U.S. Bitcoin ETFs thus far as a driver of potential new demand. With the squeeze on miner economics, we have seen a pickup in acquisition discussions over the last several weeks, and we are engaged in several ongoing reviews of opportunities. We continue to have a disciplined focus on potential return on investment in our evaluations, and we are looking for opportunities where Cipher's unique strengths can unlock extra value. As we move forward, Cipher is focused on finishing the expansions at Bear and Chief while ramping up the build-out of Black Pearl and selectively looking for new growth opportunities via acquisition.

On slide 11, we give a portfolio overview of our existing data centers and the timeline for expected scaling of our data centers and expansion in our self-mining hash rate. In the Q1, we paid an average all-in electricity cost of $11,912 per Bitcoin produced at our data centers. We are very proud of this number, and it drives our best-in-class unit economics.... Please note that when some of our competitors talk about these costs, they only include electricity and not transmission and other charges. In contrast, when we talk about all-in electricity costs, we mean the total cost to deliver electricity to our mining rigs. So our numbers include all transmission and other charges, and our low numbers dramatically demonstrate our competitive advantage.

On the left side of this slide, you have an overview of our 4 current data centers, along with our all-in electricity cost per Bitcoin at the respective sites for the Q1. The charts on the right side of the slide give you a graphic illustration of the amount of megawatts we manage related to our self-mining operations and the hash rate produced by those operations, as well as the additional growth opportunities in the coming year and a half. As discussed, in 2025, we anticipate bringing on the full capacity of the Black Pearl site. At this point, we will turn to production by site. On slide 12, you can see a picture of our Odessa facility. Odessa is the most significant part of our portfolio, as it represents approximately 90% of our Bitcoin production.

Odessa is a wholly owned facility with a 5-year fixed price power purchase agreement and some of the lowest cost power in the industry. We report a third-party independent valuation to give investors a sense of how much value is represented in the fixed-price power contract alone, and that contract continues to be valuable and differentiating for us. As always, Ed will talk more about it in his remarks. We currently generate approximately 6.7 exahash per second at the site, utilizing approximately 207 MW. We have mined roughly 1,183 bitcoins at the site year-to-date through April 30. On slide 13, we show a picture and highlights from our Alborz data center, which we believe is a truly unique site. Alborz is 100% powered by wind and is a joint venture that we share with our energy provider.

It currently has a total operating capacity of 40 MW when the wind blows. That 40 MW powers roughly 1.3 exahash per second of rigs. Alborz has mined approximately 168 Bitcoin year-to-date through April 30. Roughly half of that total capacity and site production belong to Cipher. We expect to supplement the wind production at Alborz with a grid connection by the end of the second quarter. This grid connection will allow us to bring our uptime at Alborz in line with Bear and Chief, and most importantly, generate more Bitcoin with the existing equipment at the site. We currently target roughly 75% uptime at the site, and with the supplemental grid connection, we anticipate our uptime will be closer to roughly 95%. Slide 14 shows operational highlights from our Bear and Chief data centers.

Combined, the sites operate 20 MW, which can generate approximately 0.7 EH/s. Bear and Chief are also structured as joint ventures and feature shared economics similar to Alborz. Unlike our other sites, which have behind-the-meter power arrangements, Bear and Chief are set up in front-of-the-meter at a location in Texas that typically features attractive market prices, and we are excited to report on their production next quarter when they will each be 4 times their current size. As you can see, we are extremely busy at Cipher as always. We have been a company focused on long-term success since day one, and our disciplined approach to strategic decision-making continues to differentiate us. In the post-halving environment, the value of our low-cost producer model is clear.

We believe our ability to identify attractive electrical interconnection opportunities at greenfield locations and manage their evolution all the way to the state-of-the-art data centers we operate makes us unique. We are thrilled to have two consecutive quarters of GAAP profits, and the way we are going to celebrate is to keep investing in the expansion of the business. At this point, I'll turn it over to our Chief Financial Officer, Ed Farrell.

Ed Farrell (CFO)

Thank you, Tyler, and hello to everyone on the call. Tyler has already discussed some of the key financial metrics for the Q1. Before we proceed with the walkthrough of the balance sheet and statement of operations, I'd like to add some further insights and context. Last quarter, we emphasized the importance of having all four of our data centers fully deployed, and we saw the beneficial effects of this reflected in our earnings. In the Q1, we observed the continuation of many of these favorable trends, amplified by a tailwind from higher Bitcoin prices. Slide 16 and 17 are some financial metrics on both a sequential and year-over-year basis, highlighting our performance and strength of our underlying business. As you can see, for both comparisons, the trends are favorable. Let's move on to slide 18 and drill down on the numbers in more detail.

In the Q1, we experienced top-line growth, which translated into significant bottom-line results. For the second consecutive quarter, we had GAAP net income reporting $39.9 million this quarter, a sequential increase of 277% and a 976% increase from the prior year quarter, where we reported a net loss of $4.6 million. In the current quarter, we mined 924 Bitcoin, resulting in $48.1 million in revenues, a sequential increase of 11%.... year-over-year, our revenues increased from $21.9 million to $48.1 million, a 120% increase. A critical contributor to this revenue to profit conversion is our previously discussed power costs, which in the current quarter increased in step with the growth in revenues.

In the current quarter, it's worth noting that cost of revenues included $1.1 million of non-recurring costs to purchase upgrade parts to increase the efficiency of our miners. When comparing revenues in the current quarter versus the same quarter in the prior year, you can see that the cost of power on a percentage basis was well below the increase in revenues. This is primarily attributable to our fixed price power contract at Odessa. The value of that contract rose by over $7.3 million this quarter alone, underscoring the inherent value of the power arrangement we secured at Odessa. As you recall, we adopted the new crypto fair value accounting standard in 2023, and in the Q1 of 2024, we had a fair value gain on our Bitcoin inventory of $40.6 million.

I'd like to talk a bit about our G&A expenses and our philosophy for managing these costs. To provide greater transparency into our financials, starting this quarter, we've further broken down our G&A expenses into compensation and benefits and general administrative on the face of the statement of operations. In the Q1 of 2024, compensation and benefit costs were $13 million, representing a decrease of $2.7 million compared to the last quarter of 2023. Comparing the Q1 of 2024 against the Q1 of 2023, compensation and benefits increased $1.1 million, primarily due to the rise in headcount as we grew the company in 2023. Now on to general administrative expenses, which include IT, corporate insurance, professional fees, occupancy, and other public company expenses.

We reduced these costs by $700,000, or 11%, compared to the prior quarter, and they increased $600,000, or 11%, from the Q1 of 2023, again, due to the growth in our business. Depreciation and amortization expense of $17.2 million was up $400,000, or 3%, from the prior quarter and up 48% comparing the Q1 of 2024 to the Q1 of 2023. That was driven by both a full year of service for some mining rigs, infrastructure, and some new rigs that were placed into service in 2024. As Tyler mentioned, we view our ability to find greenfield sites and quickly turn them into best-in-class data centers as differentiating and our best return on investment in the long run.

Right from Cipher's earliest days, we have invested in both personnel and technology because we think our model scales as well as we expand the aggregate amount of megawatts we manage. We believe those early investments will drive top-line growth for the future and in turn, flow through to our bottom line. Now, let's turn to our slide on non-GAAP measurements we use to reconcile our adjusted earnings. Allow me to remind everyone that our adjusted earnings exclude the impact of depreciation of fixed assets, the change in fair value of our derivative asset, deferred income tax expense, the change in fair value of the warrant liability, stock compensation expense, and other non-recurring gains and losses. These supplemental financial measures are not measurements of financial performance in accordance with U.S. GAAP, and as such, they may not be comparable to similarly titled measures of other companies.

We believe that these non-GAAP measures may be 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 our business performance and to help make operating decisions. When we adjust our Q1 GAAP net income, we add $23.1 million for those items I just listed. That brings us to adjusted net income of $63 million for the quarter, versus an adjusted net income of $27.8 million in the prior quarter and $8.4 million in last year's Q1. Thanks to our top-line growth, our discipline on costs, and our industry-leading power arrangements, the Q1 showcased strong free cash flow.

These conditions, along with our access to capital through our strategic use of our ATM shelf to funding accretive expansion opportunities, contributed to a significant improvement in our liquidity position and further bolstered our balance sheet and liquidity outlook. We closed the quarter with over $200 million in cash and Bitcoin holdings. Now, let's turn our attention to the consolidated balance sheet. As of March 31st, our total assets amounted to $250 million, an increase of $95 million from $156 million at the end of 2023. Our cash position remained relatively flat at $88.7 million, up a little bit from the $86.1 million at the close of 2023. I'll quickly touch on some of our balance sheet line items.

Accounts receivable totaled $680,000, compared to $622,000 at year-end, while prepaid expenses amounted to $2.9 million, down from $3.7 million at the end of 2023. It's worth mentioning that most of these prepaid expenses are related to corporate insurance, and as discussed last quarter, we were able to significantly reduce our D&O insurance premiums. We reported a Bitcoin balance of $123.3 million, reflecting the 1,730 Bitcoin held in Treasury as of March 31. This figure marks an increase from the 780 Bitcoin held at year-end 2023, valued at $33 million. We did not sell any Bitcoin during the quarter. Our treasury management philosophy remains a frequent topic of inquiry, and our stance remains consistent.

We maintain an opportunistic approach, continually assessing various funding avenues for our growth initiatives. While we generally aim to increase the size of our Bitcoin inventory over time, our decisions are guided by the markets and our overarching capital allocation strategy. We constantly assess the markets, looking for the most attractive forms of capital available, and we weigh the pros and cons of all the various ways to fund our business and expansion plans efficiently. This may be through our cash reserves, our Bitcoin holdings, or issuing equity. Through this constant evaluation process, we determine our estimated cost of capital and manage our treasury dynamically. We try not to be dogmatic. Though we sold Bitcoin this quarter, there may be times when we sell more of our Bitcoin holdings to fund accretive growth plans.

Now I'd like to shift focus to the value of our Odessa power contract, which we record as a derivative asset. We consistently emphasize the substantial competitive advantage afforded by our power contract at Odessa. As a refresher, we began publishing a third-party mark for this agreement in the Q3 of 2022. This mark is depicted as a derivative asset on our balance sheet, subject to revaluation each reporting period. Essentially, it reflects the in-the-money value of the contract in relation to the time value of the contract and prevailing forward power prices at our Odessa facility. As of March 31st, this asset was valued at $101 million, reflecting a $7.4 million increase since the end of 2023. This change is recorded as a gain on the statement of operations.

It is important to highlight that this asset is categorized into two components on the balance sheet: $34.2 million as a current asset and $66.7 million as a non-current asset. As always, fluctuations in the fair value of this contract will impact our GAAP earnings, but we exclude it from our adjusted earnings. Our other significant assets comprise of property and equipment totaling $238.5 million, primarily attributable to our Odessa facility. Within this figure, mining rigs and related equipment account for $168.7 million, while leasehold improvements are valued at $137.5 million. These amounts are net of $75.9 million of accumulated depreciation.

We also hold intangible assets amounting to $8.2 million, with $7 million attributable to the Black Pearl site and associated ERCOT approval, and the remaining $1.4 million relating to capitalized software. These amounts are net of $270,000 of amortization. At the end of the Q1, our equity investee interest in the Alborz, Bear, and Chief JVs stand at $52.6 million, and we had an operating lease obligations of $6.8 million. We had security deposits totaling $23.9 million, which include the $12.5 million of collateral posted to our Odessa power provider and a $6.3 million dollar deposit to Oncor related to the construction of our new Black Pearl data center.

There were no significant changes to the liability side of the balance sheet from year-end, and we have no debt that hinders our capital structure. Our current liquidity position as of April 30th is $213 million, comprised of $96 million in cash and $117 million worth of Bitcoin. I will close my remarks by saying we're extremely pleased with our financial performance in Q1 and excited about our position as we enter this new halving epoch. From day one, we have been disciplined and relentlessly focused on our unit economics while also delivering a prudent growth strategy. These financial results reflect the value of all the careful decisions we have made. Now that the halving is behind us, I hope we'll see the markets recognize that we have deliberately built Cipher to be different from other miners.

As Tyler stated, Cipher is built to survive market downturns and to benefit from operational leverage in rising profitability environments. As always, we look forward to updating you in greater detail on our growth plans over the coming quarters. I will pause now, and Tyler and I are happy to answer your questions.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. And our first question comes from Josh Siegler of Cantor. Your line is open.

Josh Siegler (Analyst)

Yeah. Hi, guys. Good morning. Great results here. Great continued execution. Always good to see. For my first question, I was wondering if you could comment on some post-Halving dynamics. Have you seen any change in regards to the types of deals that are being presented to you or how your competitors are currently executing? Any color on that would be helpful.

Ed Farrell (CFO)

Thanks, Josh, and good morning. I should say good evening. I'm actually doing the call from Hong Kong. I'm over here with Will, our co-president, meeting with rig manufacturers and investors. So, if there's a slight delay on my line, my apologies, I'll try to be deliberate in my answers.

Tyler Page (CEO)

... Yeah, great question. It's been interesting to watch post-halving dynamics. So if we put aside the day or two where there was a huge explosion in transaction fees and, like, an all-time high daily USD revenue for miners immediately after the halving, we've seen the economics settle in to exactly basically as expected. We actually, if we look at hash price, so the metric that measures what a miner is paid per unit of compute that it contributes to the network, it made an all-time daily low about a week after the halving, and has kind of hung around there. It's bounced. So it touched about $0.045 per terahash and it's bounced back. I think it's above, you know, the Bitcoin's at $64,000.

It's above $0.05 per terahash per day. But what that means is that is going to squeeze folks. That's an all-time low in terms of revenue paid in dollars for compute. And so you really have to be a miner that has a growth plan, has the ability to update fleets, tap capital markets, and raise capital, expand, et cetera, or, you could be getting squeezed. So it seems like based on, you know, what we have seen, if you look at the dynamic between hash price and the cost to produce that hash or the hash cost, is pretty tight or even negative for a lot of miners.

Cipher has stayed positive since the Halving, but it's definitely getting into the zone where if we are the low-cost producer or among the lowest cost producers, there are others that are getting squeezed harder. So I can't say specifically how each company is dealing with this, but it's fair to say that as expected and as historically happens, immediately post-Halving, the economics are squeezed for miners. I have seen or we have seen, I think a pickup in other miners needing to come up with a strategic plan. You know, so much of that is obviously driven by your power costs, and if you don't have cheaper power costs, those, you know, you could be cash flow negative and you need to figure things out.

So I do think, and I alluded to this in my earlier remarks, we probably will see a pickup in acquisition activity, I would expect, because otherwise, I think, you know, it just becomes a question of how long can miners with worse economics withstand the pain? So we'll have to see. I mean, I think you could also maybe batten down the hatches, and as we normally see post-halving, Bitcoin historically makes all-time highs a few months later, and if that happens, maybe the Bitcoin price appreciation will come help miners with tougher economics. But I think, you know, a lot of them are thinking about what the plan's gonna be going forward.

Josh Siegler (Analyst)

Yeah, understood, and I appreciate the color there, Tyler. I guess as a follow-up, I was wondering if you could talk a little bit more about how much, you know, how you're thinking about raising capital for the full 25 exahash of Black Pearl, and, you know, now that you've delivered on kind of building up this Bitcoin balance, if you'd be looking to essentially sell Bitcoin to help fund that expansion?

Tyler Page (CEO)

So let me talk about Black Pearl, and projections are pretty much in line with what we've said in the past. If you look at the total 300 MW site, it's about. We forecast it to cost about $420 million to build, and that's roughly $200 million in non-rig infrastructure and $220 million in for rigs. And I'm using the $220 million figure, that's pretty cheap. That's the figure that we have contracted for with Bitmain. Recall that we have a purchase option, or we have a purchase contract and a purchase option to buy 300 MW of rigs in total for about $220 million.

So of that, you know, we've put down deposits on the rigs, we've paid for work at the site. We've already paid for some of the payments for substations, et cetera. So I think about, you know, give or take, $30 million or so has been paid of that. If you look at our Bitcoin balance and today's Bitcoin price and cash on hand, as we just reported, we're sitting on about $226 million of liquidity there as of this morning. And so that would leave a gap over the next, you know, five quarters or so to pay about $164 million.

So we feel very comfortable between our positive cash flow operations, the Bitcoin balance we have, and if we need to, tapping either equity or debt markets to fill in any of the remainder between here and there. As a reminder, I mean, we have an equity shelf that has plenty of capacity on it if we chose to tap it. So that's how we're thinking about, that's the overall spend for Black Pearl and why we feel so comfortable that we can build the full data center. As far as spending the Bitcoin versus other means of capital, yeah, I think it's... We stay very consistent, as Ed described in our philosophy, that it's always been our goal to build a Bitcoin treasury that increases over time....

We do not expect that to be linear. There will be times we sell Bitcoin, and no one should think that's a bad thing if we do. It doesn't indicate, you know, a change in heart about the long-term track of where we think Bitcoin will go or ways we'll manage the business, so much as just, at any given time, we're trying to come up with the optimal way to source capital. And so we spend a lot of time looking at the relative price of Bitcoin to our options and debt and equity markets, and we also sometimes hedge that Bitcoin, as we've described in the past. So, we very actively manage the treasury, and certainly some of that cost at Black Pearl, I would expect to come from Bitcoin over time.

But, you know, currently, you know, where we're positioned and where we've been putting on hedges, we're comfortable with what we've got in the treasury, which was, again, 2,033 Bitcoin, at the end of last month.

Josh Siegler (Analyst)

Yeah. Understood. That's very helpful, Tyler. Thanks again for taking my questions, and congrats on the strong execution this quarter.

Operator (participant)

Thank you. One moment for our next question. And our next question comes from Mike Colonnese of H.C. Wainwright. Your line is open.

Mike Colonnese (Analyst)

Hi, good morning, guys. Nice quarter here. Great to see. First question for me, you know, Tyler, if you could just walk us through your thought process in deciding to do the full 300 MW build-out at Odessa by the end of next year, and how the full infrastructure build influences your decision to exercise all or part of your purchase options for the T21s under your purchase order with Bitmain.

Tyler Page (CEO)

Thanks, Mike. So as always, we look to preserve flexibility to try to find the best opportunities for our shareholders. So it's easy to kind of pencil in that we have a contract to purchase enough rigs to fill all of the 300 MW. And, you know, a week from now, after I do these meetings in Hong Kong with all the rig manufacturers, I'll have a better sense for, you know, what we think about the dynamics of that market going forward. But if you just look at our purchase contract, it's for T21s, and it's $14 a terahash, and last I checked, the going rate for that is about 15% higher, so that contract is in the money. We have a locked-in cheaper price. And so that's one factor.

We know we have access to rigs at a very good price. The second thing is thinking about timing and opportunity. Our greatest relative strength compared to other miners, I believe, is our ability to source greenfield sites, structure favorable power arrangements, and go all the way through a very long construction process to then fully operate these data centers that require active power management. And there's not—I don't believe any of our competitors, most of them don't do that entire chain of value, and I think the ones that do, we do it better. And so, you know, when we think about the opportunities that are out there, the opportunity to build Black Pearl really leverages those strengths. And so looking at the timing, it's scheduled to energize in the second quarter of next year.

I mentioned the various costs for infrastructure and rigs. The decision to build everything really begins with infrastructure because that's the longer lead time items, that is. Again, the rigs are sitting there waiting to be exercised, you know, when we want to buy them. And so the decision begins with thinking about the value of that infrastructure. It's been a popular theme for the past few weeks. I know there's been some research pieces written in the industry about the value of having interconnection for large loads of electricity, and having those assets ready to go with approvals is very valuable. And so, moving forward on the infrastructure side seems like a no-brainer to us, that is, produces the most value.

On the rig side, that will be sort of the final decision, will be exercising that purchase option, and that gives us another, you know, eight months or so to see what happens to the market, market dynamics, and think about, are there opportunities to better exercise that option and use those rigs earlier? Say we acquire another site that needs upgrading or something like that. We may choose to move those rigs earlier, or alternatively, we have this fallback to Black Pearl, which gives us lots of optionality and plays to our greatest strengths. So that's kind of the framing on the decision-making there, but it is dynamic. I think it's an exciting time.

We've talked about this, I feel like, on all of our earnings calls, that this squeeze in cash flow economics is coming, and we've tried to build our business to be ready for it, and we'll have to see how everyone reacts. I think if we see amazing opportunities to scoop up sites that we could upgrade cheaper than others by using that purchase option, we'll do it. And then we'll figure out if we want to buy more rigs for Black Pearl. You know, alternatively, as we are building over this long process towards next year to get all of Black Pearl built, we have time value in that purchase option to see how things are going and see what the Bitcoin price and the network hash rate is in four or five, six months and make our decisions strategically then.

So, we've got optionality, but that's the framework for sort of how we think about it, that we can unlock the most... focusing on what we do best.

Mike Colonnese (Analyst)

That makes a lot of sense. I appreciate that, Tyler. And just a follow-up for me, and I appreciate the $420 million CapEx number to fully build out Black Pearl. But how should we think about the cadence of the CapEx-related spend as you continue to build out, Black Pearl, over the coming quarters? You know, be it between the remaining rig payments and Bitmain, but, obviously, again, on the infrastructure side as well.

Tyler Page (CEO)

So let me give some color, and then if Ed, if you have any other color, feel free to jump in or pass. But we're now in the steady drumbeat of construction. You saw the pictures there. Also, now that we are just about done with Bear and Chief, we'll be bringing the full brunt of our capabilities to build Black Pearl. And so the cost is month by month, right? Because you're paying for labor at different stages of construction. The biggest payments, the chunkiest payments, are related to rigs, and so there is a payment schedule there, where within the Bitmain contracts, large payments are made six months out from delivery and one month out from delivery.

So there will be payments made towards the end of the year, because again, in general, when we build a site from a greenfield, we try to make the various stages work with a just-in-time sequencing, and the pretty much the last step is having the rigs show up on site to then be installed. And so, you know, we would anticipate those being delivered in the second quarter of next year, which means those chunkier payments are later in the year. Specifically, on the Bitmain contracts, we put 10% down on each contract, and then the two remaining payments are 45% and 45%.

Mike Colonnese (Analyst)

Great. Thank you for taking my questions, and again, congrats on the quarter.

Operator (participant)

Thank you. One moment for our next question.

Mike Colonnese (Analyst)

Thank you.

Operator (participant)

And our next question comes from John Todaro of Needham and Company. Your line is open.

John Todaro (Analyst)

Great. Hey, everyone. Good morning or good evening, Tyler. Thanks for taking my questions. Two here, one a little bit more specific, and then one kind of broader. So I guess first on the more specific one, and Ed, appreciate the color on this, but just wondering on that G&A, you know, kind of came down versus the second half of 2023. Understood some of the dynamics driving that, but just wondering, so is this kind of the new quarterly rate we should be going with or any dynamics for the remainder of the year that would change that? And then my second question is just on hash rates. It's come down a bit here.

Tyler, it seems like you're almost saying it could be kind of early innings in that flushing out, or do you think this was kind of a flush out that maybe call it 6% drawdown from top network hash rate?

Ed Farrell (CFO)

Yeah. Hi, John, it's Ed here. With regard to your question on G&A, you can see that we, this quarter and what we'll continue to do is break out compensation and benefits and G&A. I think that gives everybody a little bit more insight to the true costs, the true expense and items that we have within G&A. Yes, it is down this quarter, and it's up from a year ago. It's up a year ago because some additional staffing that we had to help, you know, build out our team, which we fully expect to leverage as, you know, we build out Black Pearl. I would expect that number to remain relatively constant. Maybe we'll have one or two, a few more strategic hires in 2024 as Black Pearl, we continue to build out Black Pearl.

But with some of our other expenses, we're bringing more things in. Keep in mind, we were a greenfield company. We relied on a lot of third-party service providers, which they have been great, and we're now looking at maybe bringing some of that stuff in-house. So I wouldn't expect to see G&A. Make a long story short, I wouldn't really expect to see G&A move significantly over the next two or three quarters.

Tyler Page (CEO)

And then I can jump in on hash rate. Although before I do, I think it's worthwhile mentioning, because I've had this discussion with a lot of investors over the last few months, thinking about SG&A, and it actually gets at the broader way about thinking about these Bitcoin mining companies, going through the halving, the M&A landscape, and the hash rate question you asked. And that's... You know, there's different kinds of companies. So our belief is that this is still a growth industry. We still believe, I can't tell you when, but we believe that Bitcoin prices will go up over time as network adoption increases. We see a lot of signs for supply and demand imbalance, and we feel very bullish on that.

And so as a company, we are trying to find more opportunities where we can acquire a cheap site with lots of potential power interconnection that we can build and operate, right? And so we are a development company building more sites in a growth industry, and that's our outlook. And this is pretty important for contextualizing SG&A, I think, overall, that you know, that's very different than if you have a company that has one or two sites and is not expanding and is kind of just running those two sites. You know, in those cases, SG&A becomes a really important metric with the hash rate where it is and the squeeze on miner economics. And there's a big difference in our minds between a development company that is pursuing growth and one that is sort of hanging on.

And that's important because as we think about SG&A spend overall, that the KPI that I like to look at internally is SG&A per megawatt, and really both per megawatt being operated and under construction, because we have to keep paying the wonderful people that source these opportunities, structure these power contracts, build these sites, et cetera. And so, you know, from an SG&A perspective, the way I look at the efficiency, but it's related to these bigger questions about hash rate and what happens, as appropriately being analyzed on a per megawatt basis, and obviously, we're going to 566 MW of self-mining. And so, you know, that's an important, let's call it longer term contextualizing for SG&A, and where I think a lot of our tech investments will scale very well.

On hash rate specifically, you know, John, I think it's got a time dynamic for how long hash price stays where it does, so and the magnitude of how low it gets. So again, today, it's above $0.05. Last I checked, it had dipped to about $0.045. That is definitely in the zone where it starts to squeeze the cash flow dynamics of most Bitcoin miners, and I would say the majority of them are negative when you get down to those levels. Lots of companies that are large can withstand that for a week. If it stays in the zone or goes further down and lasts months, that could happen, right? You could still get a big Bitcoin price explosion later this year, but it may take a few months of really grinding the miner economics.

That will produce a very different result where more hash rate would come offline. So, you know, look, I think what was funny about the timing of the difficulty adjustments here is that the day after the halving, we had the highest revenue day ever. And even the day after that, there were still lingering effects where the revenue was decent. And then we had a difficulty adjustment, I think, maybe two days after that. And so, you know, looking at more than the immediate day before the difficulty adjustment, miner economics looked great. People felt like they were making a lot, so not a lot of people turned off in advance of that difficulty adjustment.

We now have another one in another day and a half or so, and that's where we're seeing this first downward adjustment that, you know, last I looked, was trending towards about 4.5% of an easier difficulty, so reflecting a lower hash rate on the network. I think to directly answer your question, the one that we will really be looking at is the next difficulty adjustment, so about 15 days from now, because I think then you'll start to get a truer reflection of these sustained hash price dynamics, and you'll start to see miners' real-time reactions.

I think the other thing that's gonna be hard to measure is, so I think on our last call, we said we didn't think much hash rate was gonna come off, and frankly, I may have even said 5%, and that's about where we are now. But we'll see. You know, this hash price squeeze is tough, I think, on a lot of miners, and you've also got the summer coming up, and we now have a lot of hash rate in Texas, and so we could see, you know, hash rate moderate further over the next couple months. But I think the next difficulty adjustment in two weeks will be very telling towards that direction.

Ed Farrell (CFO)

Great. Thanks, guys.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Greg Lewis of BTIG. Your line is open.

Greg Lewis (Analyst)

Yes, thank you, and good morning and good evening, everybody. You know, Tyler, you know, I had a quick question on rig pricing. You mentioned, you know, for your purchases that are gonna be delivered, that rig pricing is up on a terahash basis around 15%. I'm curious, not necessarily for these newer generation rigs, but you know, just post the halving, I mean, and maybe it's too early since the halving was, you know, less than a month ago. What has kind of been the pricing response reaction from the market for, you know, kind of older generation rigs that you know are more in the, you know, maybe that 30 joules per terahash?

Is there a bid for those, and how has that been developing?

Tyler Page (CEO)

Thanks, Greg. I think the real question there is, how deep would the secondary market be for rigs at that efficiency or at worse efficiencies? Because, you know, there are various secondary markets that get made by some different players where you see prices. They're obviously down because if, again, if hash price is $0.05 or $0.055 or even especially if it's $0.045, you know, you start looking at an efficiency curve where, you know, you have to have really low power prices to make less efficient rigs operate profitably in that environment. So, I would say that, you know, the question that's hard to say is it's still too early because... I don't know anyone moving large quantities of those rigs.

And so could you sell a rig, you know, with a 30 J/TH? Absolutely. The price would be probably lower than it had been, but, you know, I'm sure you could get, probably mid- to high single digits dollars per TH, if I had to guess. You know, but the question would be, how much could you sell? I mean, could you sell 100 of them? Probably. If you tried to sell, you know, 25,000 of them, I think the price would probably go lower, but that could also change really quickly, depending on this next, like, difficulty. Part of it is, everyone's trying to predict this question about, well, what's gonna happen to hash rate? Is it gonna go... More are gonna come off? It's just hard to say.

There's a lot of questions to that. So I'd say, it's easy to say it's less than it was. It's probably high single-digit dollars or mid single-digit dollars per terahash, and that could change a lot in a month, depending on the next difficulty adjustment or two.

Greg Lewis (Analyst)

Okay, great. And then just because it has become topical for some, you know, for any kind of data—any kind of company that has access to power, you know, obviously, AI data centers are kind of, you know, everyone wants to talk about them on earnings calls all across the energy and industrial space. You know, I guess what I'm wondering is, you know, and it's interesting, right? I mean, like, some of these major tech companies have been working on AI for years. Really, my question is around, you know, hey, you know, we're moving forward with Black Pearl. You know, everyone's aware that it takes a couple years from start to finish to actually get a data center up and running.

At least in the U.S., are we starting to run into price inflation on potential data center sites that maybe somebody like Cipher or others in the industry are looking at, simply because there's a competitive bid coming from somewhere else?

Tyler Page (CEO)

That's a great question. I think... Listen, we've had many discussions around AI-related data centers, particularly in the last month or two. We have been approached by people asking for capacity for AI at Black Pearl. We have no plans to do that. I think we are still where we have always been with operating AI data centers, which is, seems like a no-brainer that it's a huge growth market. I think it, in some ways, it depends on which part of that market you're trying to play in, but, you know, GPUs are very expensive. Speculating on the progress that those chips will make over time seems highly speculative when you're spending so much CapEx on the rigs.

And on the data center side, it's also more expensive, in general, to build a data center that is ready for AI. There are some questions about stratification within that market, where there may be opportunities as that market matures, to take advantage of things like managing curtailment, like we do. That's where it starts to get more interesting to us. But the challenge for us, at least, to be an AI at this point, is really a cost of funding question, and we have been approached by some people saying that they're—we could set up access to cheap debt capital to, to do AI-related data centers, you know, and set it up in some sort of special purpose vehicle or something. Nothing, you know, we're, we're sort of keeping our finger on the pulse.

It is an interesting question to ask about, and I think there was a prominent research analyst on Wall Street that put out a piece about a week ago that said, you know, basically, there's such a crunch and a time lag to get interconnection set up, just the approvals and sites ready, that having these interconnections themselves could be extremely valuable, and we could be attractive to someone just to buy for our portfolio of sites. That would be great, and that's an extra call option for us if that develops, and we'll just have to see over time. It certainly does take a long time to get approvals for interconnection. So if that becomes the choke point, there is a lot of value in having that.

Greg Lewis (Analyst)

Okay, great. Hey, super helpful. Thanks for the thoughts. Have a great day.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Joseph Vafi of Canaccord Genuity. Your line is open.

Joseph Vafi (Analyst)

Hey, guys, good morning, and good afternoon or good evening to you, Tyler, over in Hong Kong. Nice results. Just Tyler, I know you have mentioned M&A here a few times on the call, which I think is a lot more than you've mentioned it in the past. You know, I think you've kind of hinted at what you're looking at here with the halving and potentially squeezed other operators that may need to merge. Maybe some extra thoughts here on how that would work. Would you, you know, do you see sites with attractive power costs, or is it just really a time to market, where you could incrementally increase hash rate profitably, given some of your mining, you know, your rig contracts, et cetera?

Maybe just a little more on how M&A might work for you. I'll follow up.

Tyler Page (CEO)

... Sure. So I'd say we are casting a broad net, because we've, again, I feel like we've been planning for this time period for a while, and so excited to see things develop. So we look at everything, but in general, I'd say the, the two buckets of opportunities we see are, if there are greenfield sites where a developer is basically running out of time, they've got the interconnection and the approvals and so forth, and they're set up, maybe their financing didn't come through, or they don't have access to capital, that really plays to our greatest strengths. Now, that's what we'll call the longer term story. Again, over time, I think we probably produce the most value and the highest return on investment in those situations. So from the starting point, those tend to be our, our favorites.

That said, there's a second bucket, which is more what you alluded to and, and a little bit more related to the shorter term crunch, on existing mining operators, where maybe they have a site, and again, maybe the power setup is decent, but they don't have as much access to capital. They're private, or, you know, for whatever reason, they're, they're having challenges. Maybe they have debt, whatever, and their rigs might be getting older. And so there could be situations where we find a site, we do have access to new generation rigs, we have access to capital, and maybe it's win-win because we can get a site that we can upgrade and make, you know, very profitable in the current environment, and they cannot. And so I'd say that's the second bucket of opportunities.

But I'd say those opportunities have been a little bit more reluctant to move over the past few months, and we'll have to see. Maybe they, maybe they become more interesting in the coming weeks and months.

Joseph Vafi (Analyst)

Great. And then follow-ups kind of related to that. Could M&A kind of potentially affect Black Pearl timeline if you know, if the right opportunities came up and you wanted to move on M&A, could that affect the Black Pearl timeline? Just thinking about you know, overall, you know, capital commitments you know, both in organic and inorganic. Thanks a lot, guys.

Tyler Page (CEO)

So I think, I guess anything's possible. We're very excited about Black Pearl and proceeding at full pace on that. I think maybe the one way that that could be impacted from a strategic planning perspective would be if we did find one of those opportunities where we could add a lot of value by exercising the current Bitmain purchase option we have to upgrade a site, that would then create an opportunity to buy more rigs or think about how we set up the back half of Black Pearl.

You know, I think it will be interesting to see what happens again with the cost of rigs and what happens with this whole hash price squeeze, because that has historically been how the rig manufacturers price their machines, is based on the profitability of mining. So, you know, we may have a window that stays open to get attractive rig prices, and so perhaps there's a reshuffling of our planning of which rigs go where. And I guess anything's possible, depending on if we do something or not, and what that deal might look like if and when we do it. But, you know, certainly the base case and the plan now is to build all of Black Pearl with the rigs we have on order.

Joseph Vafi (Analyst)

Got it. Great. Thanks a lot, guys. Nice results.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Reggie Smith of J.P. Morgan. Your line is open.

Reggie Smith (Analyst)

Hey, good morning, guys. This is a long call, so I'll keep it, keep it brief. Thanks for taking the questions. I wanted to ask a follow-up about AI, and I'm curious how you think, I guess, the AI investment wave could impact the Bitcoin mining industry from the perspective of, will you still be able to build 300 MW sites? Do you think you'll need to scale down to get things done? Like, how, how, how does this impact... You talked about it a little bit, but how does this impact the just access to power and being able to to get approvals? Thanks.

Tyler Page (CEO)

It's a great question, and I think it might be too early to say. On the one hand, we're looking at a bunch of interesting opportunities, and so I know they exist, at least for people that can source them and build from a greenfield site. I do think there's an end of the spectrum within Bitcoin mining that might find it harder to operate if you are being hosted somewhere. It feels like everyone that's in the hosting business now wants to talk about AI, and so you might find a harder place. You might be squeezed if you're just a business that plans to buy Bitcoin mining rigs and plug them into someone else's site.

I think if you combine that with, you know, I know AWS set a gigantic purchase of the site at Susquehanna last quarter, and I know Microsoft just announced a big deal. I think it was with Brookfield to build a lot of data centers, you know, $10 billion. I mean, the one thing is, for these larger sites, they were for AI, it requires a much larger amount of CapEx. Certainly, if it's hyperscalers, they've got the CapEx to spend and the access to favorable funding rates to also.

So I do think, like, it could squeeze that end of the spectrum, but if anything, again, I—when I look at our capabilities as a company to source opportunities and kind of manage the process from beginning to end, I think if anything, it puts a lot more value on what we do as a business. So you know, we'll have to see how much we get squeezed out at other large sites, but I don't see anything today that suggests we will be.

Reggie Smith (Analyst)

And just real quick, just to put a finer point on it, in terms of, like, the size of future sites, like, what's kind of your minimum effective dose? Is it 100 MW? Is it 200 MW? Like, would you be... Like, do you see the industry moving to a place where maybe those are how the next-

Tyler Page (CEO)

I think generally-

Reggie Smith (Analyst)

Go ahead.

Tyler Page (CEO)

I think generally, we would look at a minimum of 50, typically. Then there's questions around operational synergies. You know, is it in places where we can trade power, and monetize the flexibility of our load? Also operationally, does it work with, you know, where our people are? Is it easy to get to, et cetera? So it's a little bit of a dynamic matrix, but, in general, I'd say 50 MW is where we start to get interested.

Reggie Smith (Analyst)

Sounds good. Okay, perfect. I'll follow up with Josh after the quarter. Thanks, thanks for taking the question.

Operator (participant)

Thank you. One moment. Our last question today comes from Bill Papanastasiou of Stifel. Your line is open.

Bill Papanastasiou (Analyst)

Thank you. Congrats, guys, on the quarter and the attractive unit economics once again. Tyler, for my first question, you know, you spoke on M&A opportunities and how there's been an uptick in the need for some subscale peers to re-strategize their plans. I'm curious to hear whether or where the most appealing opportunities are today. Is it operations that are connected to ERCOT? And would there be any appetite to target other geographies, or is Texas still, you know, your main priority?

Tyler Page (CEO)

So Texas obviously has a lot of upside for us in that we believe we have a lot of strength in monetizing that very unique characteristic of Bitcoin mining, which is that, you know, it is instantly curtailable. And so in a place like Texas, with volatile market set power prices, there's a lot of value in being able to use a lot of power and then turn it off very quickly. And it's, it's a, it's a wonderful benefit for us from a return perspective. It's also for strengthening the grid in general. That said, we're very concentrated in Texas, so we would love to expand to other geographies, and we have looked at opportunities in other places in the United States and in other countries.

You know, I think we do want to be mindful of what the risks are in any jurisdiction. We typically start with what the power dynamics are. Are there demand response opportunities and ways for us to monetize our flexibility? And then we do a risk assessment of what the jurisdiction is like, both from a, you know, if it's overseas, a rule of law and respective contract, et cetera, property rights perspective, a physical environment, you know, is it a good place to operate, computers, et cetera? But in general, I, I think we, we would love to, diversify, but we also still think Texas is great, and it's a big place. You can be diversified within Texas as well.

Bill Papanastasiou (Analyst)

Awesome. Thanks for that. And just as a follow-up, may you remind us again of the power strategy planned at Black Pearl? Just curious to hear whether it's gonna be as attractive as Odessa and kind of what you're expecting as the average fleet-wide per megawatt cost of power.

Tyler Page (CEO)

Sure. So the forward curve for power in general in Texas has been going up. You can see that, in that even though we keep losing time value on our contract at Odessa, it keeps going up every quarter, seemingly, in value. But again, what's interesting about Texas is the wide dispersion of those prices and the high volatility of those prices. And so, we would expect Black Pearl to look a lot like Bear and Chief, in that it's a front-of-the-meter site, so it's gonna be paying market prices. But if you effectively recreate what we do at Odessa, which is, you know, recall that in the Odessa contract, our power counterparty has a 5% curtailment option.

So 5% of the time, they can curtail our use to keep the power, and that's because 5% of the time, prices are very elevated in Texas. We create effectively the same thing when we manage a front-of-the-meter site, which is, if we avoid those most expensive times, which is what we do at Bear and Chief, you'll get prices that, you know, we would forecast to be in the mid, you know, call it $0.03-$0.04 per kWh range. $0.035, something like that, would be what we would expect.

Then beyond that, being such a large site, it will have opportunities to participate in ancillary services down in Texas, which is, you know, making your capacity available for curtailment to the grid operator, and you can potentially get paid, you know, quite a bit for doing that, and there's a fair amount of nuance to that, doing it, you know, in day-ahead markets or real time. And so let's call it the active management and trading of that capacity; we think will produce value above and beyond just avoiding those high prices. And when you net out the payments we hope to make there, we would hope to drive the overall power price at Black Pearl down to close to what our portfolio average is today. You know, so sub-$0.03.

But that will require active management and trading and, you know, we won't always get there, but we're confident we will be able to get there.

Bill Papanastasiou (Analyst)

Appreciate the color, and, again, congrats on the quarter.

Operator (participant)

Thank you. This concludes our question and answer session. I'd now like to turn it back to Tyler Page for closing remarks.

Tyler Page (CEO)

Thank you, everyone, for your time and continued interest in Cipher Mining. This is the moment we've been waiting for, so we're very excited about all the opportunities we've got in front of us, and I look forward to speaking to you again soon.

Operator (participant)

This concludes today's conference call. Thank you for participating, and you may now disconnect.