IREN - H2 2022

Transcript

Lincoln Tan (Senior Manager of Corporate Finance)

Good afternoon to those of you in North America, and good morning to those of you in Australia, and welcome to the Iris Energy Earnings Conference Call for the fiscal year ended June 30, 2022. My name is Lincoln Tan, Senior Manager of Corporate Finance, and with me on the call today is Daniel Roberts, Co-Founder and Co-CEO, Lindsay Ward, President, and Belinda Nucifora, Chief Financial Officer. Before we begin, please note this call is being webcast live with an accompanying presentation. There will also be an opportunity for some Q&A following the main presentation. I would like to remind you that certain statements that we make during this conference call may constitute forward-looking statements, and 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 two within the accompanying presentation. Thank you, and I will now turn the call over to Dan Roberts. Dan?

Daniel Roberts (Co-Founder and Co-CEO)

Thanks, Lincoln. Good morning. Good afternoon, everyone. Thanks for joining us for our inaugural annual earnings call. We've done a couple of quarterlies already, but this is the first annual, and appreciate everyone's support and time to dial in today. Very excited to go through a quick update on the business, where we're at, where we're going, and go through some of the details. Without further ado, thought it's worth recapping at the top of the presentation, who are we? Why are we here? And really it comes down to three fundamental beliefs. One is, we believe as a team that Bitcoin is here to stay. If it's here to stay, there's only $21 million. You can't stop it. You can't change it.

It feels like it's likely to go up in value over time and be proven as a store of value asset. The second thing is we believe Bitcoin mining can be done better. Bitcoin mining has evolved rapidly over the 11 years Bitcoin's been around. It's evolved from hobbyists on their computers and laptops through to graphics cards, through to the start of the ASIC era, to where we are today, which is hitting a level of maturity where we've caught traditional computing in terms of efficiency levels. Really, as we all know, the game is now more about that large scale energy data center infrastructure, where everyone's got access to the same technology. It's really about the energy component now and how you access energy markets and how you do that in a socially responsible way. Finally, we believe Bitcoin mining can be done better.

As I said, it's evolved from hobbyist enthusiasts at home on their laptops and computers to early mining farms with shipping containers, old warehouses, and now we're really starting to see the emergence of an institutional asset class. Last year alone, 2021, $15 billion of revenue line. The sector is growing. It's growing really rapidly, and it's maturing and evolving accordingly. We've really set this business up over the last four years, focused on doing it the right way. Really not taking shortcuts, building an institutional-grade platform where we're really building an asset base for the long term. We haven't held any coins. That's not because we're not bullish on Bitcoin. We're very bullish on Bitcoin. We just don't believe it's in the best interest of our shareholders, for us as a business to be holding Bitcoin.

We believe you double down on risk, i.e., when Bitcoin's going up, happy days. When Bitcoin goes down, you're getting hit on your P&L, as we're seeing at the moment, and you're getting hit on your balance sheet as well. If you then geared up against those balance sheet coins, then we can see the issues that quickly arise. For us, the optimal strategy is to liquidate daily, lock in those profits. As you can see there, we're mining Bitcoin at $8,000 a coin. Lock in that profitability and then make a capital allocation decision with that profitability left over. Today, even in the current market, Bitcoin mining is profitable. Incremental returns on CapEx are profitable.

Why would you hold a Bitcoin on balance sheet if you have the ability to reinvest that Bitcoin in additional infrastructure and computing capacity to generate an additional Bitcoin every 12-15 months? I understand that not every business can do that, but when we set up our business as a growth platform with a substantial number of development sites, it does continue to appear to be the optimal strategy from our perspective. The second point, we've delivered. We really pride ourselves on doing what we say we're going to do, and we have. Without preempting an announcement a little bit later on, we're pleased to report that we continue to hit our milestones. We said 3.7 exahash by the end of September. We will hit 3.7 exahash by the end of September.

Every milestone along the way, we've at least met, if not exceeded, in terms of timeframe. Not only that, but the facilities that we're building are highly efficient, and we've been saying this for a year. We don't do shipping containers. We don't take shortcuts with temporary facilities. We don't retrofit old warehouses. We build, own, and operate our own proprietary data center infrastructure, where we have now invested four years in optimizing ventilation, airflow, networking, design, infrastructure to really house these chips in the optimal operating environment. That's now proving results. We're in a very good balance sheet position. As of June 30, $110 million of cash on the balance sheet. No corporate debt. Again, we've got some hardware financing, but that is limited to asset level. Again, essentially a key differentiator with other listed firms. We have not given parent company guarantees.

We do not have cross defaults. We do not have cross collateralization. Those financing are limited recourse specifically to the individual computers and the SPVs they're held in. Further to our recent announcement, as a result of negotiations with Bitmain, we're pleased to have 6 exahash locked and loaded. We've got the hardware. It's all in the process of being on the ground, operating or being delivered, and we're excited about installing that over the coming year. Low operating costs. Again, this comes down to the benefit of what our energy strategy has been since day one. Target low cost excess renewables. Almost by definition, the cheapest power out there is marginal cost renewables. There is no feedstock cost. There's no commodity input.

If there is overbuilt renewables, the marginal cost of that power fundamentally is lowest cost power, and we're really now starting to see the benefits of that play out given what's happening in the macro environment. I mentioned the efficiency gains, and here's a chart that seeks to really highlight that. What this chart shows is how many Bitcoin we are mining per exahash of installed capacity over the course of this year. It's a very simple metric. One exahash worth of computers. How many Bitcoin did you produce from that one exahash? Again, there's a lot of good miners. There's a lot of different people doing different strategies, different approaches. But we're very pleased and pride ourselves on being number one in that list. For us, this has two benefits.

One is the obvious Operating Cash Flow benefit along with the CapEx efficiency benefit, i.e., we're obviously generating a better return on investment as a result of generating that additional Bitcoin. For us, asset life, asset integrity, we are looking after our assets, the electrical infrastructure, the computing infrastructure. We're not letting it overheat. We're not letting dust get in there. We're not letting humidity. These chips, they're extremely profitable. We are looking after them for the long term and managing those assets for the long term. I did say that I didn't want to preempt some news that Lindsay was going to address, but this chart basically does. Sorry, Lindsay, we energized 50 MW at Prince George literally in the last hour.

It's a fantastic milestone for the business and really rounds out that 3.7 exahash objective or state of guidance to the market that we've had for a long time now. It'll take another week or two for the individual sections to be lit up. The miners are installed, but that takes us to 3.7 exahash and one of the largest listed Bitcoin miners already, which is very pleasing and in a relatively short period of time from only reaching 0.7 about a year ago now. We look forward to obviously continuing to grow that not only into the 6 exahash that we've got secured, that we're building out, but obviously beyond as well.

Again, this just shows the track record of delivery and the growth pathway that we've been on and also the near term growth pathway that we're guiding the market towards. As you can see, it was only 12 or so months ago that we're at 0.4, 0.7 exahash. We've continued to deliver these projects and Lindsay will go into more detail around our operational and executional excellence. Fundamentally, it comes down to a team with substantial experience in building very similar data center energy, renewable energy assets. Just to recap where we're at in terms of balance sheet and profitability, this is on the right-hand side. If I start, right to left is a matrix or a table that many of you will be familiar with, and it contains a link to an online website where you can validate this firsthand.

The beauty of Bitcoin mining is that it's very objective, it's very mathematical in terms of how the profitability and the revenues work. As you can see, we're obviously leveraged to the Bitcoin price. We understand that. But where we're at in terms of six exahash of capacity and over $100 million of annualized mining profit based on that six exahash, we feel like we're in a very good position from a P&L perspective. Balance sheet, absolutely critical to manage, particularly when you are exposed to a volatile exponential asset such as Bitcoin. $110 million of cash, as I mentioned at the outset. Importantly, from that $110 million, our expected spend post-June 30 to deliver the six exahash of operating capacity is around $76 million.

Around 76 of that 110 is expected to be utilized to deliver the full six exahash of capacity, which leads to the profitability matrix on the right. In terms of net assets, $462 million of net assets on balance sheet and our market cap is slightly below that today. As I've mentioned a couple of times, we are building multi-decade institutional grade infrastructure. We are here for the long term. We believe in Bitcoin. We believe it's here to stay. We believe in the value of our underlying asset base, locking up that low-cost excess renewable energy, building out the electrical infrastructure, building out industry-leading data centers, and monetizing that into the digital exponential age. In terms of our sites, recapping where we're at today, that 160 MW across British Columbia, as of one hour ago, is now all energized.

The computing capacity will be coming online progressively. The 30 MW at Mackenzie is obviously a Q4 exercise. The 50 MW at Prince George, as of this morning, now has energy. That will take us up to around 4.7 exahash by the end of Q4 this year, up from the 3.7 expected at the end of this quarter, being the quarter end of September, with an additional 1.3 exahash to be installed at Childress early next year. I've mentioned management team a few times. Again, just to recap, you know, we do this as a very large team. We've got about 100 people globally, all with substantial experience in associated sectors around data centers, electrical engineering, construction, energy, et cetera.

Many of them are construction contractors, but we've got a fantastic core group with substantial experience, many of those who are on this slide. We'll hear from Lindsay in a moment, who will really drive through a lot of what we've done around the operations and the execution, and why we've been able to deliver what we've been able to deliver. We'll also hear from Belinda around the financials at the last third of the presentation. Finally, alignment, incentives. Around a quarter of the business is owned by us. We're all laser-focused. We're really committed to the business. We treat every dollar as our own. We believe in where we're going into the business. We're extremely proud of the infrastructure we've built, the team we work with. It's a fantastic environment.

We very much appreciate all that third-party investment and support of our business, and internally feel like we're very well aligned to the future of this business. On that note, I'll pass over to Lindsay, who will now go through a bit of an operational update on the business. Thank you, Lindsay.

Lindsay Ward (President)

Okay. Thanks, Dan. I just wanted to start today to talk about operational excellence. It is a key factor to our success. As a company, we're consciously building out our operational culture that has extremely high standards. It's the only way to be successful, is to set yourself high goals and make sure you achieve them. Recruiting is a key part of that. Getting the right team in place allows us to achieve excellence in everything we do, from safety flowing into the environment, community, governance, operations, maintenance, asset management, construction, and financial control. It's all about people once you get to the point of getting these buildings underway. We recently welcomed Heather Miller as our Vice President of People, Culture and Community. Javier Garcia is our Engineering Manager. Leonard Wojcik is our Construction Manager down in Childress, and Martin Salovsky is our IT Manager.

All of them recently joined the Iris team. Having a motivated, flexible, and focused team is the key to success. Our air-cooled data centers continue to outperform our competitors as Dan went through on that slide, and that's not a fluke. It's the outcome of very focused R&D, trial and error, and really learning from our mistakes, and a constant focus to build out excellent infrastructure. We are confident that our operating performance will continue. We're continuing to build out. We've got a further 30 MW at Mackenzie to come online by the end of the year, and that's progressing well. As Dan said, we'll have 4.7 exahash online by the end of the year. Supply chain management certainly remains a challenge.

I think we've found the right formula to minimize the risk, particularly to Mackenzie. We ordered the long lead items for Mackenzie well in advance of construction and really well in advance of final design. That really is a key strength of ours, that we understand our data centers. We've done all the engineering. We understand what we need, and we can order ahead of final design, and that makes sure we get ahead of the queue. We've got a construction team, an in-house construction team. We've got key subcontractors who we're moving progressively now. They were at Mackenzie, went down to Prince George, heading back to Mackenzie, and they'll also supplement our Childress team. That's really important for us.

Not only does it help us with our procurement because we know what we need, when we need it, and where to go and get it, but it also gives us a high level of certainty of building out our infrastructure on schedule. I think it's just worth talking about a recent example of how focused we are on procurement. We had an issue, and it's around looking at the small items within a larger package. Often a subcontract will come to you or you'll place an order and the supplier will say, "Oh, that long lead item is X weeks." But it's not every component within that package that is a long lead item.

What you've gotta do is get behind the package, look at each individual item, and track each individual item, not the longest item, because it gets a bit lost in the overall challenge of meeting deadlines. We were told by a supplier that there was a part that we needed, and it was only a small part. It's amazing, quite low cost. Couldn't be found, and we managed to talk to an electrical contractor in Childress who went to a small supplier in Utah. We then flew down there, put it in a suitcase, and brought it back up to Prince George, handed it to the service provider, and kept ourselves on track. It's just that focus and dedication to winning that really is inherent in the way in which we go about building out our facilities.

I think just touching, again, we lead this construction effort ourselves. We don't have an EPC or an EPCM sitting between us and the subcontractor. We've got one fully integrated team. We're all focused on outputs, making things happen safely, low cost. It's really exciting when you see the subcontractors come on board. It's not a contractual relationship at all. It's a relationship to succeed in building out our data centers on time and ahead of budget. I think from that perspective, that's been one of the things that I've really enjoyed watching, is teams with, you know, different motivations, different outcomes, coming together for the better good of getting us on track and getting our supply chain management enabled. In terms of technology, we're very focused on improving our systems and processes through technology.

There's a lot of work going on in the background, looking at how we can do things quicker, smarter, more efficiently, cheaper. How we really enable technology to improve our business. We've got our own in-house IT team led by Denis Skrinnikoff, our Chief Technology Officer, and they monitor every aspect of our operations. It's amazing the amount of data points that we're gathering data from. From air temperatures to airflow to dust ingress, chip temperatures, energy usage, efficiency of each mine and much more. What's exciting is the guys on the ground who really make the difference to how efficient we are are hungry for this data. You see it on their large screens in their offices. We see it out in the field on their iPads.

They're really looking for that 0.1 exahash every day. How can we just add a little bit more? What can we change to make it more efficient? That's all data-led. To have your site team that's interested in the data and absorbing that data is really exciting and just a testament to the culture that we're building across our organization. Community. Community is at the heart of everything we do. We generally operate in small communities where our presence makes a real difference through the local employment that we create and through the expenditure that we do within those local communities. You employ locals. It allows you to quickly get in touch with the community.

They know what the community needs, they know where the community gaps are, and quite quickly, we can get involved and help contribute to great community outcomes. I recently was in Mackenzie, attended a community luncheon for the successful grant applicants. We handed out about $70,000, and it really makes a difference in a small community. The feedback's been positive. We're not a check-writing organization. We get involved with the community. We had a kickoff lunch. We'll regularly touch base with each of the community groups, see how they're going, see where our money's being spent, see how else we can offer further support, and look at longer-term relationships with some of these community organizations so that they can really plan for the future. It's at, really at the heart of what we do. Excitingly, we're also starting a scholarship program.

We've got our first successful applicant. It's a female apprentice who's going off to finish her studies. Financially, it wasn't possible for her to do that. With our assistance, she can now finish the third and fourth year studies and then will come back and work for that post, that scholarship opportunity. I think that's another thing we wanna do more of and look at how do we get more females into the electrical space and into engineering. Community grants in Childress are going quite well. They're now closed. I'll be there in a couple of weeks' time in Childress, and again, we'll have a luncheon with the successful participants. It's a great opportunity for me to better understand the community, what things we can do differently, how we can be better a community citizen.

That's a really important part of my travels when I'm in North America. Equally around Canal Flats, our other operating center, we sponsor a number of local charities, sporting events, and we'll kick off a community grants program in Prince George in 2023. Just like to touch on our operating centers. Our first one was Canal Flats. It's ramped up, you know, quite impressively. It's operating consistently above nameplate, and that's a testament to the guys on site who are very focused on improving the performance. Canal Flats is our center of excellence. We've got a majority of our engineering team based there. We've also got a fabrication shop.

It's an in-house fabrication shop, which makes it really easy to trial new ideas and concepts 'cause our engineers are there. We can engineer on the run. We can manufacture on the run. We're not relying on third parties who aren't incentivized to try things and make mistakes. The work we do there rolls out to our other data centers as we progressively build them out. Small operational tweaks are then rolled out progressively to the other sites. What's key is that core group of people where we started this business. Great culture, great ownership of Iris Energy. We utilize them to go out and initiate the production teams at each of the sites, so we keep embedding that great culture as we progressively build out our business.

The Childress team also get involved in the construction down in Mackenzie, Prince George, and they'll also be involved in the construction down at Childress as well. We're just getting that consistently, consistency of approach, certainty of approach by sharing our workforce, excuse me, more broadly across the business. In terms of Mackenzie, pretty exciting. You know, when I went there, we were just had a bit of a patch of dirt, and yes, about eight months later, all of a sudden, we've got 50 MW up and running and another 30 MW under construction at the moment. We switched that facility on in August. Since then, it's sat at 50 MW consistently from day one. A great effort by the IT and the site team to get all that commissioned and tested ahead of ramping up.

We really have not had any issues at all. To be able to just run consistently from day one has been fantastic. We'll have 2.5 exahash built out at Mackenzie by the end of this calendar year. The ops team's in place. All locals that have worked in other industries in the local area, we've been able to attract them to our business. We're really happy and excited that we've brought a brand new industry to Mackenzie that's contributing to the community, contributing to their economy. We're there certainly for the next 20 or 30 years. At 80 MW by the end of the year, it's gonna be a really significant facility. Prince George is our third operating site, again, up in British Columbia.

It is now the home of an additional 50 MW and 1.44 exahash housed across three data center buildings. The construction is all complete. As Dan mentioned, the energization happened at about 4 minutes to 7 Australian time. Just in time for this call, which was great. Everyone's there just excited. I was watching all the WhatsApps come through and photos. It's another big milestone for the business. Again, we hadn't done anything on that site till about February of this year. In 7 months, we've gone from a paddock through an operating data center. We've done that very safely. We've had no material safety incidents. We're a really motivated team. That group of individuals came down from Mackenzie, and they're now heading back to Mackenzie.

Again, that consistency approach is really important to building great data centers. Finally, just onto Childress. You can see a photo there of the earthworks are well advanced. It's in the Panhandle region of Texas. There's a lot of excess renewables there that we'll be able to take advantage of. We're planning to build out an initial 40-MW development in 2023. That will host the remaining 1.3 exahash of miners that we received recently from Bitmain. In 2023 will be a 6 exahash business, which again is a fantastic achievement. All the construction permits are in place. Earthworks are underway. First data center building earthworks of 20 MW is nearing completion.

We placed all the required long lead time items, so we're ticking along there at Childress. Certainly, be great to have a fourth operating site up and running in 2023. I think in closing, I'd just like to thank our team. They're amazing group of individuals to bring on 50 MW in August and another 50 MW in September. Parallel builds has been a great achievement and a great milestone for the business. Thank you for listening to me today. Certainly happy to take any questions after this around the operational side of the business. I'll now hand over to Belinda, our CFO, to talk about our financial results. Thank you.

Belinda Nucifora (CFO)

Hi, all. Thank you, Lindsay. I'm pleased to be presenting our first full year results following our successful listing in November 2021. As the graphs show, we have seen strong revenue and earnings growth over the year as our sites have become operational. For the year ended June 30, 2022, we mined 1,398 Bitcoins, being a 422 increase year-on-year due to our average operating hash rate increasing by 611%. This generated $95 million revenue and $26.2 million Adjusted EBITDA, with an Adjusted EBITDA margin of 44%. Management uses Adjusted EBITDA as the year was marked with significant adjustments as a result of the IPO and non-cash expenses, which I'll explain on the next slide. Adjusted EBITDA provides management a better picture of our underlying operations and allows comparison with our peers. Adjusted EBITDA.

This is a reconciliation back to our loss after income tax expense. While our net loss after tax for the year was $422 million, it is important to call out that the impact of non-recurring and significant non-cash items. The hybrid financial instruments converted to equity just prior to the IPO and resulted in non-cash $419 million expense in the P&L. All the instruments have now converted and will have no further P&L impact. The share-based payments expense, which also is non-cash, is split between the co-founders and other executives. The co-founders shares, which accounts for 11.4 mil of the expense, is predominantly made up of options that have a strike price of $75 and vesting conditions of between 370 and 1,850 per share.

Amortization takes place over the life of the options, and as such, they will continue to be an expense taken to the P&L. $4 million of one-off expenses predominantly relates to the IPO were incurred during the period. After these one-off expenses and non-cash items, the year produced an Adjusted EBITDA of $26.2 million, being a margin of 44% on revenue of $59 million compared to Adjusted EBITDA in 2021 of $1.4 million being a margin of 18% on revenue of $7.9 million. Looking at our consolidated statement of profit and loss, this is our year ended June 30, 2022 financial statement. As mentioned, the results were significantly impacted by non-cash items, including the amortization of employee share plans and the conversion of the convertible notes at the IPO.

As highlighted on the previous slide, the non-cash movements relating to the options as well as the convertible notes. Finally, we move on to the statement of financial position, which is a quick update on our balance sheet. We ended the year with $110 million of cash and cash equivalents of total assets of $570 million. Our property, plant, and equipment increased by $232 million and mining hardware prepayments by $83 million. The increase in our assets were funded from our IPO cash reserves, as well as an additional $71 million for asset financing deal with NYDIG. As at June 30, 2022, our current and non-current borrowings includes the $71 million, which was $108 million in total.

That's a brief summary of our financial statements, and I'll now hand over to the operator, Melanie, to commence the Q and A.

Operator (participant)

Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Please limit your questions to two per person. If you wish to ask further questions, please rejoin the queue. Your first question comes from Chase White with Compass Point Research & Trading. Please go ahead.

Chase White (Senior Research Analyst)

Thank you. You guys are continuing to develop the Childress site. You know, how should we think about the timing, just roughly, to getting to the 40 MW? And then after that, how much work is there to get to the original 100 MW phase l target? Like, is there a time by which you need to make a decision on that, or do you have flexibility? That's my first question.

Lindsay Ward (President)

Dan, do you wanna answer the first bit, and I'll answer the second half?

Daniel Roberts (Co-Founder and Co-CEO)

Yeah, absolutely. No problems. Thanks, Chase. Appreciate you dialing in. Good to see you. In terms of the first 40 MW, we're currently working through our procurement processes. We've previously advised that our original target for energization of Childress was in early 2023. Having now secured the hardware to fill out a reasonable portion of that site, or at least initial capacity of 40 MW, we're now working through what that timetable looks like to build the data centers, the infrastructure, and actually install and commission those computers. We haven't got any more specific guidance other than to say that it won't be prior to the end of December this year, so it will be a 2023 project. We'll announce more specifics as we gain additional confidence in our project timetable.

Lindsay Ward (President)

I'll just add to that or answer the second part of the question. The connection being built by AEP and ERCOT is for 600 MW, and so that will be completed in 2023 as well. That allows us to build out at a rate of our choosing. There's no limitation or time constraint against how we build out the remaining MW at Childress.

Daniel Roberts (Co-Founder and Co-CEO)

I think that's a really important point, Lindsay, and one should really highlight is we've now got, as a result of energizing that first 40 MW at Childress, access to 600 MW of power. We don't need to go and do anything more to access that 600 MW in the network. What that allows us to do is we essentially get to amortize all the upfront time, investment, the work over that 2-year period to get that site up and running, to build out relatively swiftly and at low marginal cost above the 40 MW as we grow into that full 600 MW over time.

Chase White (Senior Research Analyst)

Got it. That's helpful. Could you remind us, you know, when the power price in British Columbia is reset, and any indications on where the rate could go in the next rate setting?

Daniel Roberts (Co-Founder and Co-CEO)

It's set annually, and then it's the same price for every electron, 24/7, 365 days of the year. The way British Columbia power market works, it's a regulated market where that price is set by the regulator, and it's done with reference to a regulated pricing model. This goes to the heart of what our energy strategy has been, which is about chasing low-cost excess renewable energy around the world. British Columbia, as we've outlined previously, has an enormous oversupply of hydropower. They're still building large-scale facilities in the north, but they've seen the removal of a closure down of a lot of their manufacturing and industrial base. The issue in a regulated market is they need additional users of that power, otherwise power prices need to go up.

Somewhat counterintuitively, the introduction of our load into the market, us paying a market price to BC Hydro for that power, which now happens to be a very low market price relative to many of the markets globally. The additional revenue to BC Hydro actually puts a downward pressure on that power price, in the sense that they're now receiving a greater amount of revenues on their asset base, and they can afford to potentially lower prices for all the other users of power in the province. We haven't had any guidance around where that power price is likely to go. Historical changes indicate that it's a relatively immaterial adjustment year-on-year.

Chase White (Senior Research Analyst)

Got it. Very helpful. Thanks, guys.

Operator (participant)

Thank you. Your next question comes from Jim Suva with Citi Research. Please go ahead.

Jim Suva (Senior Technology Analyst)

Thank you very much, and good morning to you there in Australia from Silicon Valley. I just wanted to ask a question about your CapEx plans, given both, you know, say, labor costs, material costs have been changing, things like that. Can you maybe walk us through some of your CapEx plans as we think about them?

Daniel Roberts (Co-Founder and Co-CEO)

I'll let Lindsay talk to labor costs, material costs, and how we've been managing that. In terms of CapEx planning, our advice is really clear. Six exahash capacity, that's what we're committed to, that's what we're building out. Post-June 30, that requires $76 million of incremental investment. In reference to that, we've got $110 million of cash. As at June thirty, we feel that that's the right amount of CapEx to be committing to in the current environment. As mentioned, to Chase just now by doing that and energizing the first 40 MW at Childress, that opens up an incredibly attractive scaling opportunity at Childress. Unlocking that 600 MW, the opportunity to scale with relatively low marginal cost and time to continue building out capacity is a really attractive growth prospect for us.

In terms of committing to additional capacity above that 40 MW, that is just purely market dependent. Access to capital markets, debt, equity, everything in between, just working through when the right time is to take additional capital and to pursue those, that additional growth.

Paul Golding (Senior Equity Research Analyst)

In terms of

Jim Suva (Senior Technology Analyst)

Follow-up question now. Go ahead.

Daniel Roberts (Co-Founder and Co-CEO)

Sorry, a 30-second explanation on labor and capital costs. We placed our high expense long lead items, you know, some of them 12 months ago. So we were. They were at fixed pricing, so we've been pretty isolated from some of the more recent increases in costs. Where we are seeing cost increases in the overall scheme of the build, they're manageable. You know, we always run with a little bit of contingency, and we're certainly within that contingency. We're not seeing difficulties in attracting labor. You know, we had 85 people on site at Prince George over the August period and July period. Again, we're not seeing major blowouts in labor costs.

I think from our perspective, you know, we've been fortunate in the way in which we've managed to build. We're not having an EPCM contractor sitting between us and the direct subcontractors, I think gives us much better price discovery. I think we've been, you know, quite fortunate in not facing a lot of the blowouts that other projects have seen.

Jim Suva (Senior Technology Analyst)

Thank you for the details and clarifications. Thank you. That was great. We appreciate it.

Operator (participant)

Thank you. Your next question comes from Paul Golding with Macquarie Capital. Please go ahead.

Paul Golding (Senior Equity Research Analyst)

Thanks so much. Congrats on a great first year. I wanted to ask about Childress with the 600 MW of capacity there. Any consideration to opening up some of that excess to hosting other miners and generating cash through that kind of a relationship? Then secondly, on Childress, I was curious, given the smaller initial footprint now, how that impacts the power relationship in terms of rate setting going forward. Are we gonna be facing a sort of a floating spot rate environment? How should we think about how that capacity is going to sort of see a gross profit picture unfold? Thanks so much.

Lindsay Ward (President)

Dan, you're on mute, Dan.

Daniel Roberts (Co-Founder and Co-CEO)

Oh, thanks, Lindsay. Thank you. Great question. So in terms of utilizing that excess 560 MW of capacity, gee, that's a big number when you say it out loud. Look, all options are on the table. We've really prided ourselves on being a proprietary miner and owning a fully vertically integrated stack. Would we rule out completely ever doing hosting? I don't think we'd rule it out. We don't rule anything out, to be honest. It's probably a lower probability. But given the current market, if we kinda step back, we've always positioned this business through the lens of the four Ms, the key ingredient, management, miners, MW, and money. You've got to bring all those together to continue growing this business. Management, I think we've well and truly demonstrated that we've got an industry-leading team and platform now.

MW, we've got 560 MW of potential spare capacity next year, and then we still have over 1 GW of additional growth projects globally. We are not short MW. Miners, we understand the market softer. We have the relationships with the manufacturers. We understand what models that we like, what models we're a little bit more cautious on. We can procure the machines as we require it in the current market, which really only leaves the fourth M, money. You know, it's a hard market. It's a hard market from a macro perspective. You know, the broader digital asset space has come off. Yes, we're still mining Bitcoin at $8,000 a coin. It's still very good gross profit margins, even at $20,000 Bitcoin.

In a market where money is our sole constraint on growth, then yes, we're naturally going to consider alternative options and pathways to continue building and monetizing all the work that we've done to date. Now, in terms of power procurement, we've just concluded an RFP process to secure our energy partners for Childress. That isn't concluded in terms of the negotiation, so I won't comment on specifics. As part of that, we will naturally be looking at the market structure and optimizing our power price, the demand response programs, the ability to operate in a flexible manner. I again highlight the location of where our site is specifically in Texas. We are not down in the southeast. We're not close to the big load centers. In fact, we're the opposite.

We're up in the Panhandle region, where there's around 32 GW of renewable energy, wind and solar, and only around 12 GW of transmission line capacity to actually move that power down to the load centers. Our strategy has been around finding that low cost excess renewables and monetizing it in a way that supports these energy markets. A reason for choosing that northern part of West Texas was because of the congestion that we're now seeing in West Texas. There's a lot more complexity around the interconnections, the market structure when you go west, West Texas, as compared to the north, where our Childress site is located. Yes, power prices in that market are currently elevated, but there's still substantial opportunity to optimize power pricing and have a very profitable project there over the long term.

Paul Golding (Senior Equity Research Analyst)

Thanks, Daniel. Just a quick follow-up on vertically integrated mining with this excess capacity. If the Bitcoin price or capital markets were to unlock, do you see yourself—I guess any color on lead time would also be valuable. Do you see yourself going back to Bitmain to order machines depending on lead time? Or, how do you see the market unfolding in terms of ASICs that are maybe available stateside already? Thanks so much.

Daniel Roberts (Co-Founder and Co-CEO)

That's another good question. So clearly, we're not here for six exahash. We're a growth business. We've invested four years building a growth platform to really take on this industry. We believe we're doing it the right way. We are beholden to market conditions, as you should suggest. Should those capital markets open up, in terms of hardware procurement, we are manufacturer agnostic. We are independent. We have no exclusivity. We have no restrictions. We talk to all the manufacturers. We have our views. Every manufacturer's had their ups and downs over the journey, but we'll continue to keep optionality on that. We've never touched secondhand hardware. I find that difficult to think that we would. Why take the risk? Again, this business all comes down to managing risk.

The most likely outcome is to deal with Bitmain by virtue of that $83 million we still have as payments against that 10 exahash contract. Again, for everyone's benefit, to recap, we unlocked 1.7 of that 10 exahash by making that circa $6 million payment to Bitmain a couple of months ago. We monetized around $47 million of the previous $130 million of prepayments we had made to them. I know there's a lot of numbers in there, but hopefully you're following. Which now means that we've got $83 million of deposits paid against the residual amount of capacity being 8.3 exahash. That's around $10 a terahash. Now, clearly we aren't making payments under that 10 exahash contract. As we've continued to tell the market, we speak to Bitmain regularly.

Our hope would be that we raise additional capital and we can seek to deal with Bitmain and come to an appropriate resolution around that existing contract that remains on foot.

Paul Golding (Senior Equity Research Analyst)

Great. Thanks so much for the color.

Operator (participant)

Thank you. Your next question comes from Stephen Glagola with Cowen. Please go ahead.

Stephen Glagola (VP and Equity Research Analyst)

Hi. Thanks for the question. Dan, I just wanna drill in more on your overhead cost structure ending the calendar quarter here. It appears the corporate overhead expense increased pretty significantly quarter over quarter. I just wanna ask, what was the driver of that? One. Then, two, on site overheads, are you at sufficient headcount here at Mackenzie and Prince George? How should we expect, you know, site overhead cost on Childress over the second half of the year in that ramp? Thanks.

Daniel Roberts (Co-Founder and Co-CEO)

Thanks, Steven. So the word corporate overheads is probably a bit misleading, to be frank, in the sense that everything gets bundled into that bucket, and we've got a lot of construction, development and other activities which are being captured in that line item. The question often pops up in the context of, if you only stayed at a six exahash business, what would your overhead line look like? Because to look back and look at 12 months where we've grown, you know, 5x-6x in capacity, we've listed on the Nasdaq, we've embarked on all these growth activities in many respects, I wouldn't suggest that corporate overhead line as it's classified would be indicative of what a business corporate overhead line would look like from this point.

There are challenges around accounting and, audits and whatnot around reclassifying corporate overheads into construction and development, costs. There's also some large costs are associated with insurance, et cetera, that we're working on. In terms of that status quo business, really you need the site overheads, which Lindsay can talk to in terms of where we're at there with people resourcing, et cetera. You need a small centralized corporate function, to pay invoices, monetize the Bitcoin, et cetera. Really, a large part of that corporate overheads line is both related to construction activities as well as the fact that we are a growth business and still committed, to growth in this industry, subject to those market conditions, obviously.

Stephen Glagola (VP and Equity Research Analyst)

Thank you.

Daniel Roberts (Co-Founder and Co-CEO)

Lindsay

Lindsay Ward (President)

Yeah, sorry. In terms of our site teams, we've got a well-established operational and engineering team at Canal Flats. I talked about Canal Flats being our center of excellence and certainly well supported by our own fabrication shop. At Mackenzie, we've got our operational team in place. We've got, you know, maximum of 12 people we require for operations. We think that probably in time get that down to 10 and that won't change whether we've got 80 MW or 50 MW. We're very focused on our operational efficiency and the number of people that we need. Equally, Prince George will be a sort of a 10-12-person operation. Down in Canal Flats, sorry, in Childress again, around that number, will be both operations and construction.

We try and intermix the construction and the operational team. We don't double up. We think people can manage both, as we progressively bring miners on. Certainly we don't expect having large workforces. Even when we get to 600 MW at Childress, you know, we think probably around 56 people is all that we'll need at that site.

Stephen Glagola (VP and Equity Research Analyst)

I appreciate the call, Lindsay, and thanks, Daniel.

Operator (participant)

Thank you. Your next question comes from Reggie Smith with JPMorgan. Please go ahead.

Reggie Smith (Senior Equity Research Analyst)

Hey, good morning, gentlemen. Thanks for taking the question. I had two quick ones. I appreciate the disclosure on Childress. My question is, I guess you guys have called out, you know, 40 MW initial build out. Is 40 MW kind of like your minimum effective dose? Is that as small as you'll go for a build out at Childress for incremental expansion? And what, I'm not sure if you guys have shared this in the past, but how should we think about the incremental CapEx needed at Childress as you expand beyond 40 MW? Like, is there some rule of thumb that we can kind of look to? And I have a follow-up. Thank you.

Daniel Roberts (Co-Founder and Co-CEO)

Lindsay, do you wanna do this one?

Lindsay Ward (President)

Yeah.

Daniel Roberts (Co-Founder and Co-CEO)

Would you like me to?

Lindsay Ward (President)

Look, I think we're comfortable building out 20 MW and we're equally comfortable building out 40 MW. I think the key is to get that site connected, have the switchyard built that gives us the flexibility to scale to that 600 MW over time.

Daniel Roberts (Co-Founder and Co-CEO)

We're building 20 MW, we're then moving to 40 MW, and then we'll just see how we go from there as to what we do to further out to 100 MW over time. I think incrementally, capital-wise, I'm not sure we've disclosed down to that level of detail before, but certainly the majority of the capital is going into the connection facilities. The incremental build-out of each of the data centers, the capital required is quite modest, particularly when we've already secured the 1.3 exahash from Bitmain at really competitive pricing to fill up that first 40 MW at Childress.

Reggie Smith (Senior Equity Research Analyst)

Got it. If I'm hearing you right, you can do as little as 20 MW and that the incremental cost once you've, you know, set the initial switch up, it's pretty low. Is that what I heard?

Daniel Roberts (Co-Founder and Co-CEO)

Yeah. I think without wanting to disclose absolute numbers, that the incremental build out of each 20 MW facility is, you know, I would say modest in the overall scheme of things. 20 MW makes sense. That's one building. It just makes sense to build out a full building. They're about 500 ft, 300 m long. We build them incrementally side by side. We progressively do the earthworks. Each building is effectively a self-contained addition. Doing it in 20 MW increments makes sense. That's at 40 MW, matches the additional miners that we're able to achieve through negotiation with Bitmain. Allows us to then deploy all our miners that we have.

Reggie Smith (Senior Equity Research Analyst)

Sure. I guess going to that, the negotiation with Bitmain, and I'm not asking for any details on how that works, but curious, the $1.7 that you guys negotiated, were you guys a limiting factor in that? Like, could you have secured more had you had more capacity? You follow my question?

Daniel Roberts (Co-Founder and Co-CEO)

Yes, we are. Capital was the limiting factor given the current market and our ability to continue making all the milestone payments under that contract was challenging given those market conditions. The conversations with Bitmain have obviously been very constructive. We've already had one result on that contract. Really, as capital markets continue to improve and access to capital improves, that'll certainly help the conversations with Bitmain from here as well.

Reggie Smith (Senior Equity Research Analyst)

Got it. I guess am I right in doing the math it works out to like a low $30 price per terahash? Is that...

Daniel Roberts (Co-Founder and Co-CEO)

That's exactly right.

Reggie Smith (Senior Equity Research Analyst)

price right now.

Daniel Roberts (Co-Founder and Co-CEO)

Yeah. That's where the pricing was.

Reggie Smith (Senior Equity Research Analyst)

Perfect.

Daniel Roberts (Co-Founder and Co-CEO)

We negotiated with Bitmain. That's one of the unique things about this industry where your CapEx is partially hedged. You know, when Bitcoin rips, you're paying more for the computers, but you're still earning a fantastic return on investment. Equally, when Bitcoin has a drawdown like we're seeing at the moment, you see hardware prices dropping from a peak of $70 a terahash down to that data point you just referenced in the low thirties. It does raise interesting questions around the ability to grow through the cycle in terms of the theory and the return on investment. It actually looks reasonable, but it's more about access to absolute dollars and the capital to build that out and turn that theory into reality.

Reggie Smith (Senior Equity Research Analyst)

Perfect. Thank you.

Operator (participant)

Thank you. Your next question comes from Joseph Vafi with Canaccord. Please go ahead.

Joseph Vafi (Managing Director and Senior Equity Research Analyst)

Hey, guys. Good morning. Nice to see the exahash ramp continuing. Just one. You know, a lot of questions have been asked already. Maybe, you know, if you look at, you know, energy prices globally and some of the cheap power that you have coming online at Childress, that, you know, at what point does optionality around, you know, using that power for other uses come into play versus just mining Bitcoin? Thanks a lot, guys.

Daniel Roberts (Co-Founder and Co-CEO)

Thanks, Joe. Look, we're always thinking of it. You know, we've done work internally on mapping out what green hydrogen looks like. We signed an MoU with Dell Technologies a couple of years ago about bringing their customers and hardware out to our first site in Canal Flats at the time. Things like data analytics, machine learning, rendering for augmented reality, et cetera. The reality is, up until now it's been, you know, sole focus Bitcoin. You know, scarce resources, time, hours in the day, we've just had to focus, and that focus has obviously delivered us today in a really, really good position. In terms of going forward, as I continue to iterate, we're not a status quo business. We're not here for the 6 exahash. We are here to continue growing.

Not only do we believe Bitcoin's here to stay, and if Bitcoin has a drawdown for a period of time, then we're big believers in this digital transition and technology transition that the world is going through. We're all going online. The demand for renewable energy and electricity and monetizing that into the new world, we don't believe is going away. If we step back and look at our business through a macro lens, what we're really good at is identifying where this low cost excess renewable energy is, how to get access to quality sites, navigate the grid connection, the connection request, the negotiations with the utilities, build out high quality institutional grade infrastructure, and then operate that infrastructure. Whether we're monetizing Bitcoin or whether we're tapping into one of these other exponential demand drivers to monetize that asset base, in some respects, we're agnostic.

Sitting here today, we still believe there's a lot of interest in Bitcoin on our side. The profitability is still good. When you're mining at $8K a coin and the current market price is still over $20K, those gross profit margins are really attractive. It's not really fast tracking per se, a drive into those adjacent revenue streams, but equally, it's something in our minds that we're monitoring closely and may accelerate at some point in time.

Operator (participant)

Thank you. Your next question comes from Josh Siegler with Cantor Fitzgerald. Please go ahead.

Josh Siegler (Head of Crypto and FinTech Equity Research)

Yes, hi. Thanks for taking my question. With over $100 million in cash on the balance sheet as of June 30th, how are you feeling about your cash position given your current expansion plans? Are there any near-term plans for shifting capital allocation strategy?

Daniel Roberts (Co-Founder and Co-CEO)

Feeling pretty good. $110 million of cash, as we outlined in the presentation. $76 million of expected expenditure since that date to deliver the 6 exahash. That feels like a really good allocation of capital that gets the balance right between both growth and ensuring that we're managing for the rainy day. That excludes Operating Cash Flow as well from the analysis. It also excludes debt service on some of the machines for the hardware financing, but hopefully gives you a high level feel for what our balance sheet looks like. Again, we're continuing to have conversations with various market participants around leveraging that strong balance sheet, but doing it in a prudent way where we're looking at risk first, return second.

If we are able to secure an attractive instrument of some sort, attractive source of capital, then the growth opportunities are still there. You know, per the conversation with Reggie a couple of minutes ago, when you've got a natural hedge in your industry economic model, where hardware prices fall broadly in line with the Bitcoin price, it allows you to continue reinvesting through the cycle at relatively attractive returns. If you don't have the capital, you don't have the dollars, you can have all the good Excel spreadsheets and theoretical return on investment that you like, but you can't catalyze it. Look, that's still a focus for the business.

We'll continue working through that, but we're certainly not going to do anything brash or take on any form of financing that we think detracts from the business, proposition and risk profile long term.

Josh Siegler (Head of Crypto and FinTech Equity Research)

Understood. Thank you. I'd also appreciate some more color on the ongoing optimization of your supply chain. Specifically, do you expect the supply chain improvements to help accelerate some of your infrastructure targets? Thank you.

Daniel Roberts (Co-Founder and Co-CEO)

Look, we're very comfortable with BC. You know, obviously, Prince George energized today, so nil supply chain risk there. In terms of the extra 30 MW at Mackenzie, we remain very confident that we'll have that online by the end of the year. We've de-risked that supply chain exposure there. There are some challenges at Childress, and we're working through those that, you know, I touched on before. It's often the little thing within a bigger package that you've got to focus on. What we've been doing is identifying those smaller items and putting small focus groups together to source those. Again, interestingly, they're often low cost, and so we'll actually run parallel sourcing streams such that we'll be, you know, we'll end up buying two of them, but we'll always need them in the future.

The cost of them is relatively modest. You know, I think there are some challenges for Childress that we're working through. Each day we seem to have a win and then another issue comes up and we just get on and deal with that one. We've got some great sort of partners around Childress as well, a couple of smaller, more local Texan firms that are working with us, and we're just finding it's great that they're just so energized to get the supply chain problem solved. I think we're not seeing any massive blowouts in schedule, but you know, we've set some internal goals, and I think they're probably gonna be challenging, but we keep looking at alternate ways to narrow those timelines.

Josh Siegler (Head of Crypto and FinTech Equity Research)

Great. Thank you very much for the color.

Operator (participant)

Thank you. There are no further phone questions at this time. I'll now hand the call back to Lincoln.

Lincoln Tan (Senior Manager of Corporate Finance)

Thanks. Just conscious we're running a bit over time. I think with the remaining time left, we might just go through a couple of questions that have come through the pre-submissions and through listeners on this call. First question to Dan. When can we expect new investments in Australia?

Daniel Roberts (Co-Founder and Co-CEO)

So what we've—I'm gonna answer this without answering it, apologize upfront for that. We've previously announced that we've got over a GW of development sites spanning North America and Asia Pacific. That remains the case. That's unchanged. In fact, we continue to move the ball along. Infrastructure and energy infrastructure development is actually a game or a process that takes a long time. To go from site acquisition, negotiating option agreements with farmers, grid connection requests, connection negotiations can take many years in many jurisdictions. The best thing about it is it's just time. The expenditure's relatively low. It's just people and consultant costs and moving that ball along.

In some ways, this quieter period in the market just allows us to push on in the background and continually developing all those sites, and retaining enormous optionality to monetize those sites at a future point in time. To answer the question more specifically, we've eyed Asia Pacific, we're all Australian, at some point in time, you would expect us to be looking closely at Australia.

Lincoln Tan (Senior Manager of Corporate Finance)

Thanks, Dan. Next question. All of the public miners are priced like Bitcoin is gonna zero. What do you think the biggest thing Wall Street is missing or doesn't understand about Bitcoin or this business?

Daniel Roberts (Co-Founder and Co-CEO)

You know, the market's the market, right? It's been a bit of a perfect storm. Fortunately or unfortunately, we IPO'd at the top of the market last November. The vast majority, in fact, most of our book was institutional investment, so we've never really had a retail presence in that. If you look at the macro, and I think that's obviously changed over time. We've seen fantastic engagement across our socials. I think if you step back, you've seen risk off, the Fed do its work. Crypto has its own unique challenges where the broader digital asset space, you know, there's some pretty questionable goings on. You've seen businesses go under over leverage, et cetera. The Nasdaq's come off.

I think we, as Bitcoin miners, get thrown in the basket, where, you know, it's high risk. It's still crypto, even though Bitcoin's, you know, in my view, fundamentally a different asset class to all this other crypto stuff going on. You look at what we're building, it's a real asset business. We're building proprietary data centers, building out energy infrastructure, locking up low cost renewable energies. Yes, we're monetizing that into Bitcoin, but it's a real asset base generating real cash flows. Yeah, I'm sure the market will sort itself out over time. I think the other thing is there's probably 20 different listed Bitcoin miners today, you know, and everyone's got their own strategy, their own take, doing things different way.

It just takes time for the market to work out what their preference is over time.

Lincoln Tan (Senior Manager of Corporate Finance)

Thanks, Dan. The next question is just about the ASIC purchase contracts. How much money is outstanding regarding the purchase order contracts for our ASICs? And what credits, if any, has Bitmain provided against the remaining payments?

Daniel Roberts (Co-Founder and Co-CEO)

If we step back, there's that 10 exahash contract with Bitmain that had a headline cost or price cap of $40 a terahash, i.e., $400 million. We paid $130 million out of that $400 million before the market turned south and we stopped making additional payments. We've converted $46-$47 million of that $130 million into additional miners, which was part of that 1.7 that's been shipped. There's still $83 million of payments we have made against that contract, which is sitting with Bitmain. In terms of what that looks like longer term, there's uncertainty, right? The contract's on foot. We continue to talk to Bitmain extremely regularly. At the end of the day, we wanna buy chips. They wanna make chips.

The relationship is good, but equally, there's a high degree of uncertainty as to how that plays out over time. I can't really say more than that. It is what it is. If we secure additional capital, and we're working on that, but doing it the right way, then over the next three, six, 12 months, we anticipate speaking very closely with Bitmain on even more detail around accessing more machines.

Lincoln Tan (Senior Manager of Corporate Finance)

Thanks, Dan. I think just conscious we're running over time. This is probably all we have time for. Dan, did you just wanna make a couple of closing remarks before we end the call?

Daniel Roberts (Co-Founder and Co-CEO)

Sure. Very happy to. Thanks, Lincoln. So I think thanks everyone for dialing in. Obviously, another fantastic attendance. You know, look, less than 12 months ago, David Bartholomew, our Chairman, and I sat in front of many of you at the IPO. We outlined our vision and plan for the business, and we've delivered. As you've heard today, Lindsay's been an enormous part of that. Lindsay and I have spent most of the past decade working together and have together built, managed, and operated what's now billions of dollars in energy infrastructure assets. To take that relationship, to take the systems, processes, learnings, many of the same people, and then do it in this emerging sector, it's been really exciting. Our standards are incredibly high. We solve problems, and we challenge. We challenge ourselves. We continually challenge our partners.

There's always a better way. There's always a way to improve. We're a high-performance culture, and we're one where we take enormous pride in what we do. Having already grown to be one of the largest listed miners globally with additional growth and capacity, on our doorstep, you know, it's an incredible journey that we're on, and we're really grateful. We're grateful for the dedication of all our people, the communities and the support from them in which we operate, and for all of your ongoing support. Again, to have so many quality analysts on this call asking such detailed questions, is another testament to that. Thank you, everyone. Appreciate your support. Enjoy your evening if you're in North America and your day in Australia. Thank you.