IREN - H1 2023

Transcript

Operator (participant)

Greetings. Welcome to Iris Energy's second quarter results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Lincoln Tan. You may begin.

Lincoln Tan (Senior Manager of Investor Relations)

Thank you. Good afternoon for those of you in North America, good morning for those of you in Australia. Welcome to the Iris Energy second quarter FY23 results presentation. My name is Lincoln Tan, Senior Manager of Investor Relations. With me on the call today are Daniel Roberts, Co-founder and Co-CEO, and Belinda Nucifora, CFO. Before we begin, please note this call is being webcast live with an accompanying presentation. For those that have dialed in via phone, you can elect to ask a question via the moderator after our presentation. I would like to remind you that certain statements that we make during the conference call may constitute forward-looking statements. Iris Energy cautions listeners that forward-looking information and statements are based on certain assumptions and risk factors that could cause actual results to differ materially from the expectations of the company.

Listeners should not place undue reliance on forward-looking information or statements. Please refer to the disclaimer on slide 2 within the accompanying presentation. Thank you, and I will now turn the call over to Dan Roberts.

Daniel Roberts (Co-Founder and Co-CEO)

Thanks, Lincoln. Welcome everyone. Thanks for dialing in to our results presentation. Very pleased to be speaking with you today. I guess jumping right in to it. We have just got a new technology, so I'm making sure the slides scroll correctly. Straight into the business update. Many of you would have seen our announcement on Monday. We have successfully increased our operating capacity from 2 exahash to 5.5 exahash as a result of a transaction with Bitmain and a third party. This brings to a head and a conclusion, an outcome around the 10 exahash contract we have had on foot with Bitmain over the last 18 months or so. It was fair to say it was a good result. We are very pleased with the relationship and the partnership we have with Bitmain.

That 5.5 exahash will be installed progressively. It will all be shipped, is our expectation in February. Then it's a matter of getting it to site, managing the 44,000 odd machines, which the 40.4 exahash represents and installing them from there. In terms of specific guidance on that ramp up, look, you know, we expect to start installing machines in March and then it will take however long it takes, but rest assured we are all motivated to get them installed in that full capacity in the very short term. In terms of the underlying transaction and how it came to happen, we spoke to you in December. We explained, it had been a difficult year.

We'd had a lot of challenges thrown at us. At that point, we felt like we were in a good position. We had the infrastructure, we had the prepayments with Bitmain, we had cash, we had some operating capacity, we had a clean balance sheet as a result of wiping the debt facility. We urged people to be patient, let us work through the options. We always had hostin there as a backstop. We also had time. I think we've gone through the right process, which is the most important thing. The outcome has been a good one for the business. In terms of what the transaction involved, there was 6.7 exahash of remaining units to acquire under that 10 exahash contract.

Against which the $67 million of prepayments, so cash we had already paid to Bitmain, represented about $10 per terahash as a deposit. So really simply, we sold 2.3 of that 6.7 exahash. Got real cash in the process, directed that cash to Bitmain. That unlocked 4.4 exahash of units for ourselves for a zero cash outlay. It was a tripartite arrangement. It was all locked up in parallel. We didn't take risk on any specific counterparty. It was a three-way agreement. And successfully concluded, pursuant to the announcement on Monday. It's a good result, and we're very pleased to now have a substantial operating base and move forward from here. In terms of what we are looking at now and where we're going, quick update on Childress.

To recap this is our next site in Texas. It's a 600 megawatt total capacity site. Day one on energization, we will have access to 600 megawatts of electrons. That's really important because it provides us with a growth pathway that is essentially locked in. As we have told you previously, the first 20 megawatts has been under construction in terms of the data centers. That's now nearing completion. As part of the site energization, not only have we built the full 600 megawatt substation in addition to the AEP switchyard. We're also commissioning a 100 megawatt substation, of which the first 20 megawatt data center will draw from. What that does is give us an even shorter runway to the next 80 megawatts of data centers, which we have now started working on.

To recap what this means, as we've previously articulated, we have 160 megawatts of data centers already built and commissioned in British Columbia, into which the majority of those Bitmain machines will be plugged in over the next month or two. We have 20 megawatts at Childress almost completed, which will round out the first 5.5 exahash. We are now working on the next 80 megawatts at Childress, utilizing that 100 megawatt substation that has been in the process of being energized, which will support roughly another 2.5 exahash, assuming the same high efficiency miners that we have today in the S19j Pros. This is the culmination of now a couple of years of work on this site. These high voltage, large scale infrastructure energy projects do take time.

They take time to negotiate with the utilities, connection agreements, integration into the energy market, and they also require capital. We've had to put down a substantial amount of capital, get the site to this point. What that has allowed us to do is now scale rapidly, efficiently, and in the relatively short term, just given the investment that we have made in that site. Our focus is absolutely there, as well as plugging in the 5.5 exahash over the next couple of months and, continuing the momentum that we've seen at the start of 2023. That's it from me for now. I will pass you back to Lincoln, Lincoln to give you a further update.

Lincoln Tan (Senior Manager of Investor Relations)

Thanks very much, Dan. This slide just steps through the illustrative economics across a range of different scenarios and Bitcoin prices at the current global hash rate. There are really a couple of key takeaways from our perspective. Firstly, just in terms of the profitability and cash flow generation associated with the infrastructure we have built. You can really see the step up in mining profitability as we step up from 2 exahash to 5.5 exahash of operating capacity. Just to illustrate, at a $25,000 Bitcoin price, this represents an almost 3 times increase in mining profits, with annualized mining profits stepping up from $33 million to $94 million. We expect this to really support some strong operating cash flow going forward.

Secondly, in terms of how we will monetize our available infrastructure, we really believe that the economics here just validate our strategy of adopting a patient approach and fully assessing all of the available options, and ultimately, optimize our decision-making around self-mining versus a blended self-mining and hosting model. As we can see from the economics, and the sort of the boxes shaded green, 5.5 exahash of self-mining delivers a far superior mining profit versus a blended self-mining and hosting model. Again, just to illustrate, at $25,000 Bitcoin price, self-mining the full 5.5 exahash without any additional cash outlay, is expected to generate more than $40 million of additional mining profit on an annualized basis. Turning now to the next slide, and this is the peer comparison slide here.

We thought it'd be helpful just to share some perspectives on the sector and why we view Iris Energy as a differentiated exposure. Firstly, from a scale perspective, 5.5 exahash of self-mining capacity really positions us as a leading Bitcoin miner in the space, and certainly among the top five US-listed Bitcoin miners by exahash. We also really wanted to highlight here the disciplined and risk-focused approach that we have always taken towards capital allocation and also our balance sheet. As we are all aware, 2022 presented the sector with some very significant headwinds. We observed many public miners raising significantly equity capital in the process, obviously diluting shareholders along the way. We wanna reiterate here that we have not sold a single share since our IPO in 2021.

Notwithstanding these challenging market conditions, you know, we have really fought tooth and nail to optimize the operations, optimize our funding position, optimize our liquidity, and ultimately respect our use of shareholder funds, not only just to weather the bear market, but also grow our infrastructure platform significantly and get the most out of our assets. Just to touch on the balance sheet through that risk focus approach to structuring our debt. You know, we are starting this year off with a clean balance sheet, no debt, $38 million cash as of 31 January. The final takeaway here, just in terms of efficiency. You know, one metric we do look at is how many Bitcoin we are mining per exahash of installed capacity.

Over the course of 2022, we are very pleased to have led the sector on this metric, which we believe is a reflection of the quality of the facilities that we've built, the long-term view that we take towards our investments. Importantly, the quality of the team that we have on the ground. Turning to the next slide here. Finally, just wanting to highlight again that our management team remains highly aligned and highly committed to the business. Our founders, our board and management own about a quarter of the register. To reiterate, we have not sold a single share. We are obviously still very early on this journey. We see huge growth opportunities to come. We wanna acknowledge that we very much appreciate the support that we've received along the way.

We were the first Bitcoin mining IPO that was led by large bracket banks. You know, we continue to enjoy broad sell side research coverage. You know, we are looking to build a multi-decade institutional grade infrastructure platform, and we are very much here for the long term. On that note, I'm just gonna hand over now to Belinda, who's gonna take us through a summary of the Q2 financial results.

Belinda Nucifora (CFO)

Thank you, Lincoln. Just moving the slides forward. Whilst I do that, good morning from sunny Sydney. It's a cracking day here. Hopefully it's as lovely in North America. We start off looking at our Bitcoin mining revenue, and it's certainly been definitely an exciting and challenging year for the business in this first six months. During Q1, we energized both our Mackenzie and Prince George sites, and as illustrated per the top chart on this site, we actually achieved a record Bitcoin mining of 780 Bitcoin mined during the period. We realized an average Bitcoin price of around $21K, resulting in Bitcoin mining revenue of $16.2 million.

Whilst our operating average hash rate increased by 0.2 from 2 to 2.2 in the second quarter, the number of Bitcoin mined decreased to 722 as the global hash rate increased and the implied difficulty got more difficult. Being that, the difference is 58 Bitcoin lower in the quarter, and we achieved a Bitcoin price of $19K, resulting in revenue of $13.8 million. During the second quarter, as you're aware, we also decommissioned the miners associated with the Non-Recourse SPVs 2 and 3 on the 5th of November, 2022. Move on now to look at our operating costs. In Q1, we achieved, we spent operating costs of $14.6 million, and Q2, that increased to $16.7 million.

The main increase is primarily due to the electricity costs, as they increased from $6.6 million to $7.4 million as we energized the Mackenzie and PG sites, and we had the growth in our average operating hashrate. When we look at the average electricity cost per Bitcoin mined, this increased from $8.4 in Q1 to $10.2 in Q2, and this was due to the excess demand charges attributable to the average unutilized power capacity, as well as the increase in the average global hashrate during the period. However, looking at the adjusted electricity cost per Bitcoin mined, we achieved a normalized electricity cost of $9.5 per Bitcoin mined, so that's been adjusted for the excess demand charge.

Site and other costs have increased from $8 million in Q1 to $9.3 million in Q2. This is due to a full quarter of operational costs in the Mackenzie and Prince George sites in Q2. We also built out the corporate platforms to support a 5.5 exahash business and beyond. We will now turn our attention to the balance sheet. As at 31st of December, 2022, we had total assets of $412 million and total liabilities of $142 million. As Lincoln previously mentioned, we have a really strong cash at bank balance at the end of January. At the end of December, it was sitting at a similar number of $39 million, which excludes the limited recourse signing SPVs.

As Dan mentioned in our opening slide, we've also utilized the Bitmain mining hardware prepayment, the accounting value of that being $59 million. It's fully utilized post balance date, and this will result in our average operating exahash increasing to 5.5 over the coming months. During Q2, we also recorded a primarily non-cash impairment charge of $105 million, which $67 million relates to the limited recourse financing SPVs. We also looked at the carrying value of our remaining miners, which at that date were approximately 2 exahash, and we have impaired those to the market value of miners. The group's goodwill of $600 thousand has also been impaired, meaning there is no longer a requirement to test for impairment annually, and we're only required to test when there's indicators of impairment.

In terms of the SPVs, a receiver has been appointed on February the third. The last column of the balance sheet on this slide shows an adjusted balance sheet, so it reflects what the derecognition of the SPVs would look like from the group at 31st of December, 2022. As you can see, that would reduce our assets to around approximately $300 million and our liabilities of $29 million as that debt technically comes off from an accounting point of view, off the balance sheet.

Daniel Roberts (Co-Founder and Co-CEO)

All up a very strong balance sheet at the end of December. We're now going to move to the Q&A session of the presentation, and I think the facilitator will handle those questions.

Operator (participant)

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. Confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Once again, that's star one if you have a question or a comment. Next question comes from Mike Colonnese with HCW. Please proceed.

Mike Colonnese (Managing Director, Equity Research)

Hi. Good morning, guys. Thank you for taking my questions. Congratulations as well on working out the Bitmain equipment contract. Great to see that. Really great work there. First, can you speak to your ability to secure power contracts at the Childress site, how those conversations are going and the potential power costs you expect to lock in as you near energization there?

Daniel Roberts (Co-Founder and Co-CEO)

Sure. Thanks, Mike. This is where a lot of our focus is at the moment. We're just refining those arrangements, negotiating final terms. We're not looking to sign a long-term PPA at this point in time. Many of you would have noticed that the market price for power in Texas has plummeted of late. I was just reading a report showing it 60% down month-on-month. The commodity is now sub $0.03 a kWh. It is good timing for us. In due course, we may look at longer-term contractual arrangements. We've got an initial 20 megawatts worth of capacity. It's an opportunity to hedge more on a short-term basis, maybe month-to-month, maybe a couple at a time, and really optimize that operations and importantly, contracting experience.

When you're dealing with volatile, and variable priced power markets, it's risk first, which won't surprise you to hear us say that. We're going to take our time, start with some short-term hedging and really warm into the process as we build confidence in it. Over time, I think getting a longer term security around that power price makes sense. We're gonna take our time and do it properly, particularly recognizing the relatively small operating capacity, as a percentage of our operating portfolio in the short term.

Mike Colonnese (Managing Director, Equity Research)

Got it. Appreciate the color there, Dan. You guys obviously have a lot of runway at Childress with regards to total power capacity. How should we think about the capital requirements to build out the site on a cost per megawatt basis? You know, roughly what the total time it takes to develop these incremental data centers you plan to roll out?

Daniel Roberts (Co-Founder and Co-CEO)

Yeah. Look, the largest component. I guess, first of all, stepping back, we've invested a lot of fixed cost required to get this site, get this capacity, build out the full high voltage substation for 600 megawatts, build out the first 100 megawatt medium voltage substation. We've actually ordered the second 100 megawatt transformer already as well. We have really layered into that programming schedule to ensure that we're cutting down lead times, we're preserving optionality and really giving ourselves the opportunity to optimize the timeframe and the way in which we build out that site. In terms of capital, we haven't stopped talking to capital providers since our IPO. Yep, we haven't sold a share, we haven't taken on corporate level debt, but it doesn't stop us having conversations. We're continuing to have discussions around that.

Fair to say that with 5.5 exahash of operating capacity, the substantial operating cash flow that that will deliver, refer back to Lincoln's slide. That operating cash flow provides not just a source of funds, but equally a way to secure additional less dilutive types of capital as well. As we've said in the past, we're only going to do capital if it makes sense. To date, equity has not made sense. It's not to say it won't in the future. Debt hasn't made sense for us at a corporate level. That's not to say that it won't in the future. We'll go through all the options, take our time and make sure that we work through the best result. The majority of the CapEx from here is the mining hardware itself.

You can see a data point with the transaction we did with Bitmain, where I think we effectively acquired the 4.4 exahash at an average price of $15.20 a terahash. Now, that's not to say that's where the pricing will be when we go to buy new hardware or even if tomorrow if we wanted to go and buy additional hardware, but it is a reference point. If you extrapolated that out, the next 80 megawatts beyond this first 20 at Childress to fill up the first 100 megawatts of medium voltage power that we're building, that's about 2.5 exahash. You know, call it $20 a terahash, you're looking at about $50 million for the hardware plus a small amount for the infrastructure and data center capacity on top of that.

We'll just keep working through it. First things first is get these miners installed over the coming weeks and month or two. Really finish that energization of Childress. We'll get another $18 million back as a refundable deposit in Childress from AEP as part of that process. That's another addition of cash onto our balance sheet, and then we can sit there and really work out how we optimize capital structure, growth, et cetera. Like we've always said, this market is so dynamic, we need to be flexible, we need to be nimble, we need to preserve optionality, minimize exposure to the downside, and the upside will come, and we're just going to maintain that mentality going through the next few months.

Mike Colonnese (Managing Director, Equity Research)

Very helpful. Thank you for taking my questions.

Operator (participant)

Our next question comes from Pallav Saini with Canaccord. Please proceed.

Joseph Vafi (Managing Director, Equity Research)

Hey, guys. It's actually Joseph Vafi here, not Pallav. It's nice to see, you know, the nice progress in the business. Just wondering, guys, in your BC facilities, you know, up, above what you're doing there and your power capacity, is there any incremental potential from here to, you know, increase power at those facilities? It just feels like, you know, with everything up and running there, you know, that would be money well spent if possible, especially given the attractive power prices and that it's all green. Then I'll have a quick follow-up.

Daniel Roberts (Co-Founder and Co-CEO)

Absolutely. Look, that's important. We've been 100% renewable energy since day one, and it's our intent to stay that way. We've got 160 megawatts commissioned in BC, as you know, Joe. We add the 20 megawatts at Childress. We've got another 580 megawatts to go at Childress. That's not to say that we build all of that out before coming back to BC. We have said in the past, and it remains the case, that we've got over 1 gigawatt of additional development sites globally, and the focus obviously hasn't been there over the last few months in terms of communication with the market. We've continued to develop those sites. We believe in the long term, we understand that developing new infrastructure projects is a multi-year timeframe.

We've got development projects in B.C., Canada, the U.S., Asia Pacific. We've continued to keep the ball rolling on those sites, look at paying connection deposits in due course. We have got rights over land, negotiating connection conditions with the utilities. The near term, we've got the 580 megawatts, I think that gives a clear pathway to growth. We're absolutely focused on developing and incubating additional sites outside of North America in addition to within.

Joseph Vafi (Managing Director, Equity Research)

Sure. Thanks, Dan. You know, we're looking at the Bitcoin spot price and it's, you know... You know, I think everyone would agree that we're happy to see it moving up. You know, it does feel like, you know, I would just like to get your view on ASIC spot prices and, you know, if you think there may be a window here, where ASIC, you know, given the kinda supply glut on the market of ASICs, if, you know, we may have, you know, an opportunistic time, between a rising Bitcoin price and ASIC spot prices, not reacting, in sync, and you know, what that may mean for your capital strategy, at some point of time in the future. Thanks, guys.

Daniel Roberts (Co-Founder and Co-CEO)

Thanks, Joe. Look, absolutely. Historically, you tend to get, you know, anywhere between 1 and 3 to 4 months of a window where Bitcoin starts poking its head up and hardware prices don't necessarily respond in kind. There is often opportunities around that. We've been able to capitalize in the past on that when we were unlisted, to the benefit of our shareholders. Equally, sometimes you can try and get too cute with this. The reason I say that is you've got a really natural investment, profile for deploying more capacity in this sector. Historically, if you go back over, you know, the last four, five, six years and look at average hardware prices, they're typically priced to deliver the buyer of that hardware on average a 124% return.

That sounds like a precise number. It is. It's an average of all the data points that we've collated. When you amortize the cost of the data center infrastructure, the electrical, the land, et cetera, you end up with somewhere between 50% and 80% year-over-year. You can get a little bit too cute trying to time ASIC pricing. To a large degree, it is right way risk. If Bitcoin goes up, you pay a bit more for your hardware. It's still priced such that you're still deriving what we view is an acceptable return, and allocation of capital.

It's not to say that you don't try and optimize around the sides to do that, but this is why the sector is really exciting for us because you have got that natural hedge on the way down where we've seen with the last 10 exhash contract. You know, at the time that was signed it was a $40 price cap. I believe the market price at the time was maybe $60 give or take. Great deal. What really worked in our favor was the fact that we had a clause that said we get the lower of market price at the time of delivery and that $40 cap.

Even though Bitcoin has obviously had a drawdown, we've had that natural hedge and been able to deploy capital, hopefully at what turns out to be the bottom of the market to acquire those ASICs. Again, on the way up, it, you know, we're happy to pay, we're happy for other people to make money. We'll maintain our discipline around capital allocation. We feel pretty good about the prospect for investing additional capital in this sector.

Chase White (Senior Research Analyst)

Great. Thanks, Dan.

Operator (participant)

Our next question comes from Josh Siegler with Cantor Fitzgerald. Please proceed.

Josh Siegler (Director and Head of Crypto and FinTech Research)

Yes. Hi guys. Congratulations on, you know, getting the 4.4 secured. That's actually going to be my first question. I was just wondering if you could give a brief update kind of around the timing on when you expect those rigs to be delivered. Are they currently in transit? When do you expect to actually get them plugged in? Thank you.

Daniel Roberts (Co-Founder and Co-CEO)

Absolutely. Nice to see you, Josh. As of this morning, I don't think any have been shipped. I believe the first batch is not far away, and then there might be another batch next week. In any case, the more formal guidance is we expect them all to be shipped this month. By the end of February. We then need to allow some time for them to travel up from Asia to North America. They'll land at the port, make it through the logistics channels and ultimately get to our team on site who will start installing them. How long that process takes, I don't wanna promise anything because we're still working through the logistics. We only made the announcement on Monday. It's a lot of machines. We're talking tens of thousands. We wanna get it right.

We wanna make sure that we look after these assets, do it the right way and optimize the operating environment. Equally, we're clearly highly motivated to getting them in as soon as possible. I think we should start seeing a ramp-up beginning, hopefully early to mid next month. Then as to how long it takes from there to fulfill the ramp up to 5.5 exahash, I'm not sure. It might be another month or so.

Josh Siegler (Director and Head of Crypto and FinTech Research)

Understood. That's helpful. In the meantime, as you are getting these rigs up to speed and plugged in, how are you thinking about your current cash burn and your current cash levels?

Daniel Roberts (Co-Founder and Co-CEO)

Lincoln or Belinda, would you like to handle this? Otherwise, I'm happy to. I've done all the talking.

Lincoln Tan (Senior Manager of Investor Relations)

Yeah, sure. I can address that. I mean, from a cash perspective, we have just disclosed at the end of January, $31 million, a $38 million cash balance. In terms of the sort of the runway, look, I mean, from an OpEx perspective, we have seen the numbers in this result, we're sort of targeting approximately $2 million per month of site and other OpEx. You know, we do the math from there. We think there's significant runway versus the current cash balance and, you know, commercially very much incentivized to plug in these new miners ASAP to start generating more operating cash flow.

Josh Siegler (Director and Head of Crypto and FinTech Research)

Got it. Thank you very much.

Operator (participant)

Okay. Our next question comes from Chase White with Compass Point Trading and Research. Please proceed.

Chase White (Senior Research Analyst)

Thanks. Appreciate you taking the question. A couple of questions, if I might. First of all, I may have missed this, and I saw in the presentation you guys said, Childress is expected to come online in the second calendar quarter of this year. Any color you can give on kind of when exactly you guys are anticipating? I mean, obviously things can happen during construction, but, are we thinking like, early April or is it more like, mid to late quarter? I'm just trying to get another, a good sense of, you know, how that's gonna look.

Daniel Roberts (Co-Founder and Co-CEO)

Look, as you say, we are always cautious around this guide, Chase, because we never wanna underperform, we always want to make sure that we deliver. We are really comfortable with Q2, and that should be looked at through the lens of us often, you know, performing ahead of schedule. I think it's fair to assume that we're targeting more towards the start of Q2 rather than the end. Equally, we're dealing with 600 megawatts of high voltage power. There are safety things. There are technical things. A lot of it's outside our control. If it takes an extra few weeks, if it takes an extra month, for us, that's fine. Let's get it right.

Chase White (Senior Research Analyst)

Got it. That's helpful. In British Columbia, I mean, at what power consumption level do you expect the cost to kind of normalize on a per Bitcoin basis? In other words, like how much do you have to start consuming before you've optimized your power consumption there?

Daniel Roberts (Co-Founder and Co-CEO)

Yeah. The, the short answer is we have got no issue now with the 5.5 exahash. Over the next 4-6 weeks, that issue will disappear entirely. To answer your question more thoroughly, I see Lincoln, you're getting off mute, if you'd like to-

Lincoln Tan (Senior Manager of Investor Relations)

Yeah, sure, Chase. Look, the excess demand charges are expected to normalize at around the 90 megawatt range. That is, you know, roughly 2.8 exahash. As Dan said, you know, laser focused on getting these new miners energized ASAP.

Chase White (Senior Research Analyst)

Got it. That's very helpful. Makes sense. Appreciate it. Thank you again.

Operator (participant)

Once again, if there are any remaining questions or comments, please press star one on your touch tone phone. The next question comes from Reggie Smith with JPMorgan. One moment. Please proceed. Reggie, your line is live.

Reggie Smith (Lead FinTech Analyst)

I'm sorry. Thanks. Great question. I guess my question is more kind of big picture. Thinking about, you know, Bitcoin is obviously off its lows, hashrate still at all-time high. Companies are cleaning up their balance sheets. We have the halving sometime next year, next spring. What's next for the Bitcoin mining space? Like, what's the next story here?

Daniel Roberts (Co-Founder and Co-CEO)

That is a pretty high-level question, Reggie. Whatever we say, it'll be different, if time in this sector has taught us anything. Look, I think clearly margins have improved since Bitcoin's rally from mid-teens. Look, we're prepared for Bitcoin to head back there, right? Like, it just doesn't pay to be optimistic. Plan for the worst, hope for the best. It's just our nature. In saying that, it is looking constructive. The halving's an exciting event, as we know. Typically, within three to six months of that, we see another parabolic run given that supply shock. Does that happen again? Who knows? At the end of the day, there's only 21 million of these things. They are not making more of them, and it feels like adoption's only going one way.

You know, even the increased regulatory scrutiny on the sector, it's hard to see that as anything but a positive, just given the abundance of different projects and these unregulated offshore casino and exchanges. I think it's just gonna bring an air of legitimacy to the space, and Bitcoin is clearly just a digital commodity and should benefit from that. In terms of the mining space specifically, look, you know, having some level of scale, I think is important to be able to cover those overheads, continue to grow, et cetera. We are pleased to now be among those top five listed miners. We think that gives us a step change to have that scale and really continue to look at growing through the cycle, but continuing to do it in a disciplined manner.

In terms of energy prices, I think you have seen a little bit of the heat come out of the market for that and a bit of relief for miners that maybe weren't using 100% renewables or didn't have fixed power prices. That's probably helped them as well. Yeah, it's hard to comment more than that. I think it's steady as you go. As people look at adding incremental capacity, you know, we will only look to do that if it makes sense.

Reggie Smith (Lead FinTech Analyst)

No, that makes sense. You, you mentioned scale, that kind of leads into my next question. How do you guys think about mergers, acquisitions? Like, what are the conditions that it would make sense? Like how should investors think about that? Then, as a result of that, like, would the synergies be primarily at the corporate level? Are there synergies with operations? Like how does that work? We haven't seen too many notable mergers in this space. I'm just curious, like what's the algebra that you guys are doing to evaluate that?

Daniel Roberts (Co-Founder and Co-CEO)

It's a funny question, Reggie, because we've heard it. Like, everyone's jumped up and down for the last 12 months. "Oh, this is the time for sector M&A, mergers, acquisitions." I don't know whether it's just a sexy term or generates banking fees or whatever, like, people just love talking about it. I'm still trying to work out why it would make sense as well. We have had conversations. We've talked to a lot of the other mining companies. I can see in specific circumstances where it does make sense and could lead to a win-win. You know, you might have one team that's got a really strong project development background, infrastructure background, another team that might be, you know, well-capitalized and be able to join forces.

You might have one company who's only doing hosting and recognizes that really to succeed longer term, you need to be vertically integrated and look to use M&A as a way to do that, because it is harder and longer to do that organically. For us, you know, having done everything we've done, we own the land, we own the infrastructure, we own our high efficient proprietary data center design, we limit the counterparties, we have got a clean balance sheet, we've got a very experienced quality management team. I think just signing up to, frankly, other problems by trying to integrate a business when we can grow organically, relatively swiftly and efficiently, yeah, I struggle to see how it would make sense, but I'll never rule anything out.

Reggie Smith (Lead FinTech Analyst)

No, that makes sense. That was kinda how I was thinking about it as well, but I wasn't sure if I was missing, like, some potential synergy. I can appreciate that. Last question for me. So it sounds like you sent 1 final payment to Bitmain, but that payment was actually from someone else. Have you disclosed what that amount was? I'm just trying to back into, like, a price for those 6.7 exahash. Sounds like the math you did was the $67 million divided by the 4.4 that you kept. I'm curious what else was sent, the last payment, just to get a total cost. Thanks.

Daniel Roberts (Co-Founder and Co-CEO)

Yeah. We haven't disclosed that, and I'm just cautious about confidentiality and the commercial terms of that agreement. I would not think it unreasonable to extrapolate out our effective economics across the deal, and you'd be within the ballpark.

Reggie Smith (Lead FinTech Analyst)

Understood. Okay. Thank you.

Operator (participant)

Okay. We have no further questions from the phone lines at the moment.

Speaker 9

Thank you. Now we will just move to Q&A that's coming through on the webcast.

Lincoln Tan (Senior Manager of Investor Relations)

One question being asked from a financial perspective, and perhaps for Linda, this one's for you. It says, "What's included in the other costs on the adjusted EBITDA?

Belinda Nucifora (CFO)

Thank you, Lincoln. In this quarter, there was a salary adjustment made, so that's, pretty much 90% and then some other small one-off costs in relation to transactional deals, for potential debt raisings that didn't go ahead.

Lincoln Tan (Senior Manager of Investor Relations)

Thanks, Linda. I'm just gonna go through the questions sequentially. Another question being asked is, will we consider doing further debt financing at this time? Sort of refer us back to Daniel's comments earlier around, you know, all options being on the table. You know, as we have consistently said, we are always talking to potential funders around capital. You know, as we have also said, we've never sold a share. We are large owners of the business and we wanna be laser-focused on risk management and only take on the right capital at the right time when it makes sense to do so. Another question coming through, just a point of clarity around the cash balance, that it doesn't include the $18 million of Childress refund. That's correct.

So the cash balance that we quoted of $38 million in January and $39 million in December, that is exclusive of the Childress refund that we expect post-energization of the site. Another question, perhaps this one's for Dan. It's around, you know, what is the minimum cash position we wanna see before we commit to further CapEx around building new data centers?

Daniel Roberts (Co-Founder and Co-CEO)

Um, depends. Uh, look, it's not a simple answer. We don't have a target working capital of X or X tens of millions of dollars. Um, it really just depends on a, on a number of factors. Um, do we have debt? Don't we have debt? What's our operational cash flow over that period of time? What's the commitment we are making? What's the drawdown profile and the S-curve of construction for that commitment? Um, look, uh, at risk of making kinda hand-wavy statements, um, we will just continue to be prudent and make sure that we're managing for the downside. We are assuming the market always goes worse, even if we're going vertical because Bitcoin decides to go on a run. We are always gonna model out our scenarios, um, assuming that turns around rapidly and make sure that we've got plenty of headroom.

You know, we've proven an ability to manage the balance sheet, not just manage it. I think we have clearly demonstrated that to Lincoln's earlier comments, we will, you know, scrap and claw our way back and, like, try to optimize every dollar of funds that shareholders allow us to deploy, and we'll continue to do that. You know, we don't hold Bitcoin on balance sheet, we are not looking to take on that additional volatility. We'll keep an appropriate cash balance and make sure that we can ride out various cycles.

Lincoln Tan (Senior Manager of Investor Relations)

Thanks, Dan. Another question coming up around what are our uptime assumptions across our sites, including Texas. Look, I guess, you know, talking to uptime and efficiency, that's something we take very seriously. Obviously, we build and operate all of these data centers ourselves. We have got leading efficiency across the sector. You know, we're always targeting for 100% uptime. If it's not 100%, we're looking at ways to optimize. We are gonna continue doing that going forward, taking lessons from, you know, our operations and obviously looking to leverage them into Texas when that comes online as well.

Daniel Roberts (Co-Founder and Co-CEO)

I think, Lincoln, maybe just jump in. This is another point where now we've got this step up in operating capacity and a resolution to Bitmain, and we've got the debt behind us, is to go back and actually focus on why we are differentiated. We don't do shipping containers. We don't do old abandoned warehouses. You know, you wouldn't expect your local capital city data center to be down 10% of the year. Now, that's not to say that it wouldn't make sense for Bitcoin mining, but our approach is to build proper multi-decade infrastructure that allows these machines to operate through various weather and climatic conditions. Every 1% of downtime goes straight to our bottom line. It's a lot of money, and it's worth the upfront investment, and that's just how we think. I'll give you a couple of examples.

You know, when temperatures go subzero in winter, these chips can get cold, and they can start cracking if you don't look after them. Again, the industry isn't necessarily incentivized to talk about these issues, but it's real. These are chip boards. You put them in negative 5, negative 20 degree temperature, stuff's gonna go wrong. So we've got an automatic recirculation function in our data centers that adjusts the ambient temperature and automatically redirects some of the output heat air back into the intake to give these chips a bit of a blanket when temperatures go subzero. In fact, we've learned that the optimal operating temperature for the chips is actually a bit above zero, so we try to optimize for that. In summer, when you've got the opposite issue, the ambient temperature is heating up.

We've got variable speed exhaust fans that automatically ramp up and down based on the ambient temperature to optimize airflow and importantly, optimize that ancillary power consumption. Little things like that not only translate directly to our bottom line and those Bitcoin mined efficiency stats, but more importantly in our mind, it's asset integrity and lifetime. Like, these chips physically will last a long time. If you look after them. If you let them get dusty, you let them get humidity all over them, overheat, leave them out in 30 degrees Celsius temperatures in shipping containers, they aren't going to last. We have taken a different approach to that, and we'll be patient in time. I think that will be demonstrated even further.

Lincoln Tan (Senior Manager of Investor Relations)

Thanks, Dan. Couple of questions being asked about whether we would be looking at next generation miners, you know, beyond the pros that we have, in particular, hydro-cooled miners, Dan.

Daniel Roberts (Co-Founder and Co-CEO)

Hydro cooling is not really a next generation mining chip per se. It's just a way of cooling the chips themselves just by running fluid rather than air across the chips. It's not like immersion where you're not physically having the engage with the fluid. It's more done through tubes. Look, that's not something that's as much of interest to us. Similarly, immersion today, we are doing a bit of R&D. It's not that of interest. Purely and simply because air cooling is really efficient if you get it right, because you take input air from outside, flow it through the chips, and then you exhaust it back into the atmosphere. It's very hard, and I'm not a technical guy, but the physics and the engineering challenge of having to have a closed loop system and recycle.

Lincoln Tan (Senior Manager of Investor Relations)

Mm.

Daniel Roberts (Co-Founder and Co-CEO)

-your fluid transfer medium, where you are trying to get those hot molecules away from the chips, it doesn't seem intuitive to wanna take them back in and apply them back to the chip services. We will continue to do R&D. That very much sums up how we see all these other technologies, and methodologies unfolding. In terms of the chips themselves, look, we are absolutely ecstatic to have 29.5 joules per terahash efficiency. It's one of the top efficiencies in the market. And this is efficiency. It's not the data center and production efficiency Lincoln referred to earlier. This is the efficiency of turning electrons into hashes. How much energy do you need for each unit of hashing power? We have done that really efficiently as well. Bitmain do have a more efficient model.

We will absolutely look at that going forward and work out whether the cost benefit. They do cost more money on a per terahash basis, but carefully look at all the scenarios, the pricing, and go through our normal capital allocation decision process to work out what model we want at that point in time.

Lincoln Tan (Senior Manager of Investor Relations)

Thanks, Dan. I think that's all of the questions that are coming through on the platform. Perhaps now we just hand over to Dan just for a couple of quick concluding comments, and then we can probably wrap up the call.

Daniel Roberts (Co-Founder and Co-CEO)

Sure. Thanks, Lincoln. Look, thanks everyone for dialing in. It was obviously a challenging 2022 for the industry, for our team. I'd like to give a big special thanks to our team. You know, they have worked so hard over the last 12 months, and the reward in the last week for them is just enormous, and that's really pleasing. At the end of the day, we are here to enjoy ourselves and to see that lift in spirits here is fantastic. We're really excited about now building from this point. We feel like it's another milestone and something to grow from. We are looking at the next 80 megawatts at Childress.

We're looking forward to getting out amongst you, the investors, educating you on why we came to market, why we believe that we're here for the long term. We have got a truly differentiated proposition, 100% renewable energy, proprietary data centers, doing things in an institutional-grade fashion. We'll be patient, as we have demonstrated. We'll go through the right processes. Finally, I'd like to thank you for all your support as investors since the IPO. It's been a bumpy ride, but the amount of support, encouragement, validation that we are doing things the right way is really appreciated. Thanks again for dialing in. Look forward to talking to you again soon.

Operator (participant)

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.