Hut 8 Mining Corp

NASDAQ:HUT

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and welcome to HUT 8's Year-End 2023 Financial Results Conference Call. [Operator Instructions] Please note that this event is being recorded and a transcript will be available on HUT 8's website. In addition to the press release issued earlier today when filed, you can find HUT 8's transition report on Form 10-K on the company's website at www.hut8.com under the company's EDGAR profile at www.sec.com, and under the company's SEDAR plus profile at www.sedarplus.ca. Unless noted otherwise, all amounts referred to during the call are denominated in U.S. dollars. Any comments made during this call may include forward-looking statements within the meaning of the applicable securities laws regarding Hut 8 Corp. and its subsidiaries. The statements made reflect current expectations as such, are subject to a variety of risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties include, but are not limited to, factors discussed in Hut 8's Form 10-K for the year ended December 31st, 2023, and the company's other continuous disclosure documents. Except as required by applicable law, Hut 8 undertakes no obligation to publicly update or review any forward-looking statements. During the call, management may also make reference to certain non-GAAP measures that are not separately defined under GAAP, such as adjusted EBITDA. Management believes that non-GAAP measures taken in conjunction with GAAP financial measures, provide useful information for both management and investors. Reconciliations between GAAP and non-GAAP results are presented in the tables accompanying the press release, which can be viewed on Hut 8's website. I would now like to turn the call over to Asher Genoot, CEO of Hut 8.

[Asher Genoot, executive]

The second half of 2023 was an inflection point for Hut 8 Corp. On November 30th, Hut 8 Mining Corp. and U.S. Bitcoin Corp completed a merger. Our thesis was to combine the operating scale and discipline of U.S. Bitcoin Corp with the strong balance sheet, access to capital markets and liquidity of Hut 8 Mining Corp. Our results this period clearly demonstrates the strength and potential of the combined business. First, for some context. From an accounting perspective, U.S. Bitcoin Corp. acquired Hut 8 Mining Corp. We adopted the Hut 8 brand name and ticker, but our historical and year-end financials represent U.S. Bitcoin Corp.'s results through November 2023 and the combined company's results for the month of December 2023. With that, I'll turn to our results for the period. Our revenue grew 32% year-over-year to $60.6 million for the 6-month period ending in December 2023. Today, 68% of our revenue is generated by our digital assets mining or self-mining business. While we remain committed to growing this business, we are equally excited to further diversify our revenue stream across other business lines like managed services, high-performance computing and AI. During this period, we were also net income positive. Our adjusted EBITDA grew 386% year-over-year. Even excluding the impact of revaluing our Bitcoin holdings to fair value, our adjusted EBITDA would have still more than doubled year-over-year. Our results for the fourth quarter of 2023 are yet another indication that this is a new chapter for Hut 8. Our revenue for the 3-month period grew 212% year-over-year to $38.9 million. Our gross margin for the business expanded to 47%, and our net income was $10.6 million for the 3-month period. Most importantly, we did this all without raising any external capital during the period and have set the business on a new trajectory without diluting our shareholders. Going into the merger, U.S. Bitcoin Corp. acknowledged the need for an extensive operational overhaul of the legacy Hut 8 Mining Corp. business. With our post-merger restructuring program now well underway, we are confident that we can continue to drive costs down across the organization and increase cash flows in the coming quarters. The market value of our Bitcoin holdings was approximately $557 million, as of February 29, with a Bitcoin price of approximately $61,000. Based on the 9,110 bitcoin we have held at the time, we had the second largest treasury amongst publicly traded miners and one of the top 6 largest treasuries amongst all public companies alongside MicroStrategy, Tesla, Coinbase, Marathon, and Galaxy. We intend to manage our holdings efficiently to fund growth through direct sales, option strategies and other creative approaches to maximize shareholder value. At the same time, we recognize that our treasury provides proxy exposure to Bitcoin appreciation for our shareholders, and we will deploy our holdings with discipline. The next item I want to discuss is our debt. Thoughtfully structured strategic debt enables us to invest in growth and generate strong returns on invested capital without diluting shareholders. We believe our 3 tranches of debt are healthy and manageable with balanced maturity profile and favorable repayment terms. We are committed to maintaining a strong balance sheet, as we prepare for opportunities to invest post halving. We are equally committed to strengthening our operations. Since I took over as CEO, we have focused tirelessly on driving efficiencies through a comprehensive restructuring program. First and foremost, we have implemented U.S. Bitcoin Corp.'s operating principles and proprietary technology across all our post-merger facilities. This means we now only mine Bitcoin when it is profitable using our proprietary energy management software to curtail operations when the cost of energy exceeds expected revenues. Our software drives significant cost savings by using a set of algorithms to automatically adjust the energy consumption of each individual miner in our managed fleet of approximately 260,000 machines. As an illustrative example, with our software, our realized cost of energy in ERCOT West Load Zone during the period would have been [ $0.026 ] per kilowatt hour instead of [ $0.059 ]. This is a savings of more than 50% with a curtailment rate just under 9%. Our average cost to mine a Bitcoin, excluding hosted facilities, was $16,353 for the 6 months ended December 2023. Our average cost to mine a Bitcoin including hosting facilities was $18,815. Our average self-mining energy rate was less than [ $0.045 ] per kilowatt hour, and our average hosting rate was [ $0.063 ] per kilowatt hour. We continue to focus on driving down our cost to mine at Bitcoin and our realized cost of energy. Earlier this month, we announced the closure of our Drumheller site. Our plan to relocate efficient miners and retire inefficient miners is already underway. This is expected to, one, increase our cash flow; two, reduce our cost to mine a Bitcoin; and three, drive a pro forma increase in our Bitcoin mined per exahash of approximately 11%. The pro forma 44 Bitcoin mined per operational exahash in February, excluding Drumheller, puts us in the top quartile of public miner performance during the month. Reflecting on the last 7 weeks since I took over, I recognize the considerable time and effort we have spent on restructuring the business, while there's still work to do, I'm proud of the progress we have made. We continue to mine when profitable, while focusing on top line revenue growth and cost reduction across the business. Looking ahead, we are focused on 2 key pillars: strengthening and growing our self-mining business and continuing to diversify our broader business. We have already made significant headway on both pillars and remain confident in our ability to execute. First, is strengthening and growing our self-mining business. In an asset-intensive commodity business like mining, being a low-cost operator is a key source of sustainable competitive advantage. As I detailed earlier, we are dedicating significant time and effort to improving our cost structure. We also recognize that many of our peers have announced expansion plans, including forecast to reach 20 exahash this calendar year. What sets us apart is that we have already proven that we can build and operate at scale. As of the end of February, we had approximately 27 exahash under management across our self-mining, hosting and managed services business lines. For us, the question is not if we can scale, but when and how. Unlike in 2021, miners are not in short supply. If purchasing miners today at market prices would generate the highest return on capital, we would do so. But we believe a new generation of miners with a more efficient iteration of the 3-nanometer node is on the near horizon. We expect this generation to be followed shortly by an evolution to a 2-nanometer node with further improvements in efficiency. With the halving quickly approaching, we are being thoughtful about the best time to upgrade our fleet and scale our operation. On the other hand, we believe energy capacity and infrastructure will continue to be a scarce resource across industries. We have worked tirelessly to secure new megawatts with energy partners, and we currently have more than 1,100 megawatts of energy development capacity under exclusivity. This represents nearly 63 exahash of capacity if filled with current generation miners. I look forward to updating you on our progress on these growth plans in the coming quarters, particularly as it relates to self-mining exahash targets. Furthermore, we believe our ability to build sites quickly and cost effectively without sacrificing quality is unmatched. We will continue to execute decisively on accretive opportunities just as we did recently with our acquisition of the 63-megawatt Salt Creek facility. Speaking of which, we are on track to energize Salt Creek with miners hashing in April, less than 3 months after breaking ground at the greenfield site. We are recording some of the fastest build-out times in the industry, thanks to our best-in-class development team. We expect to complete the project for less than $275,000 per megawatt, undercutting recent M&A transactions in the space by more than 40%. We are confident that this site, like the Bravo site, designed and built by U.S. Bitcoin Corp. will be able to achieve hash rate efficiencies amongst the highest in the industry. Now I'll move on to the second pillar, which is continuing to diversify our broader business. This includes managed services, high-performance computing, AI and power generation. I'll discuss each of these in turn. First is managed services. When we created the managed services business, we believe we could take our experience scale in U.S. Bitcoin Corp. and build a suite of turnkey solutions for institutions seeking project level exposure to Bitcoin mining. Our thesis was validated by the market, and we grew the business to more than 680 megawatts under management in less than 5 months. Today, our partnership with Ionic Digital alone generates more than $20 million in cash revenue per year in addition to cost reimbursements and equity incentives. Managed Services is a powerful growth engine. It eliminates the need to deploy large amounts of capital to achieve economies of scale. It subsidizes the cost of our mining business across our operations and our partners' operation, driving improvements in key cost metrics, and it generates a diversified stream of fiat cash flow that is derisked relative to hash price volatility. Managed Services is the only proven offering of its kind. As demand for flexible load increases across institutions, government and renewable energy producers, we are positioned to capture this demand, as the partner of choice for infrastructure development and operations. We continue to focus on refining our offering, driving top line growth and executing on margin expansion opportunities. Turning now to high-performance computing, the second area of diversification. The reality is that our HPC business is currently subscale. However, we believe there is an opportunity to streamline the business and use it as a platform to design, build and operate AI specialized data centers. Today, we are focused on performing a thorough review of the business and developing a plan to achieve growth and profitability. The third area of diversification is AI. Our conviction is that demand for AI compute will continue to rise, leading to substantial growth in demand for underlying GPU hardware. In October 2023, we placed a $40 million purchase order for our initial GPU cluster. Based on current market rates, we believe a deployment of 1,000 NVIDIA H100 GPUs has the potential to generate nearly $30 million in top line revenue per year. We continue to monitor the market, as demand increases and will seize opportunities to scale accordingly. We plan on sharing an update on this growing division in the coming quarter. And the final area is power generation. In February, we completed our acquisition of the Validus asset. We continue to believe in the underlying thesis of vertical integration that drove the transaction, but our strategy for maximizing the value of these assets has shifted. These are some of the few non-contracted merchant power plants available in Ontario, making them more valuable to many players in the energy sector. As a result, we are actively working with Macquarie, our joint venture partner to explore strategic opportunities to maximize our return. Taking a step back, our near-term goal is to continue building a profitable, diversified business during fiscal year 2024. As one of the largest shareholders of Hut 8, I am more determined than ever to set a strong foundation for a lasting generational business. We have a strong balance sheet that enables us to grow, while reducing the need for external capital and limiting shareholder dilution. Our new treasury strategy allows us to use our Bitcoin holdings creatively with the goal of achieving a lower cost of capital for each project we pursue. Our diversified revenue stream and portfolio of CapEx-light and CapEx-heavy businesses gives us the ability to make the right bets at the right time, and our team has a single-minded focus on building a best-in-class operating business. In closing, we are profitable today, and we continue to drive down costs across the organization. We are committed to growing our self-mining business and diversifying our broader business, and we are relentlessly focused on maximizing shareholder value. With that, I'll turn it over to Shenif to review the financial results in detail.

[Shenif Visram, executive]

Thanks, Asher. Before we review the financial results, I want to take a few minutes to explain what you will see in our numbers. Our year-end financials are unique due to a number of factors. Firstly, we completed the merger on November 30th, so we only have 1 month of combined company financials for the month of December. Secondly, while the merger between the 2 companies was a merger of equals, from an accounting perspective, U.S. Bitcoin Corp or USBTC was deemed the acquirer of Hut 8. Lastly, there was a change of year-end for the accounting acquirer, USBTC from June 30th to December 31st. As a result of these changes, we are filing transition period financial statements, as a bridge between USBTC's last year-end, which was June 30th, 2023, and Hut 8's new year-end, which is December 31st, 2023. The outcome of this is a 6-month set of financials. In today's call, we will be discussing the audited financials for the 6 months ended December 31st, 2023, compared to USBTC's 6 months unaudited ended December 31st, 2022. In addition, we will discuss the December 31st, 2023 balance sheet for the company on a combined basis. Turning now to the results. We generated revenue of $60.6 million in the 6 months ended December 31st, 2023, which represents a $14.6 million increase from $46 million in the same period of the prior year. The year-over-year growth of 32% was driven by strong performance in our digital asset mining or self-mining segment; the continued ramp-up of our managed services business and 1 month of the newly acquired high-performance computing business. Digital assets mining revenue totaled $41.5 million in the 6 months ended December 31st, 2023, versus $25.7 million in the same period of the prior year. Total bitcoin mined in the current period was 1,244 versus 1,273 in the prior period. The growth in revenue was due to an increase in the average price of bitcoin mined from approximately $20,200 during the 6 months ended December 31st, 2022, to approximately $33,300 during the 6 months ended December 31st, 2023. Managed Services revenue totaled $12.6 million in the current period versus $2.6 million in the prior period. $12.6 million of revenue in the current period includes $9.6 million in fees and $3 million in cost reimbursement versus $1.5 million in fees and $1.1 million in cost reimbursement in the prior period. The company began providing managed services for third parties in November 2022. As a result, the current period of 6 months ended December 31st, 2023, reflects the full 6 months of activity in revenue, whereas the comparative period of 6 months ended December 31st, 2022, reflects less than 2 months of activity. High Performance Computing, colocation and cloud revenue totaled $1.1 million in the 6 months ended December 31st, 2023. The revenue of this segment relates to the legacy Hut 8 business and was acquired, as part of the merger with Hut 8 Mining Corp. and hence, represents 1 month of activity. The prior year includes no revenue from this segment. Other revenue totaled $5.4 million in the current period versus $17.6 million in the prior period. Current period other revenue consists primarily of hosting services revenue from our Alpha site. Other revenue from the prior period consisted of $14 million in hosting services revenue and $3.6 million in mining equipment sales. One of Hut 8's hosting clients defaulted on its contracts during the 6 months ended December 31st, 2022, which resulted in a termination of the contract without an obligation to refund. Hut 8 recognized the remaining deferred revenue of $13.1 million with respect to this client. I will now review costs and expenses. Cost of revenue for digital asset mining in the 6 months ended December 31st, 2023, was $26.5 million versus $23.2 million in the same period of the prior year. This reflects an increase in electricity utilized due to higher network difficulty and hosting costs from additional miners online, partially offset by lower average cost of power. Our cost to mine a Bitcoin, excluding hosted facilities during the 6 months ended December 31st, 2023, was $16,353. This includes electricity offset by curtailment credit and electricity cost reimbursement. Our cost to mine a Bitcoin, including hosted facilities was $18,815. These cost to mine numbers include our net share of the King Mountain JV. Cost of revenues for managed services for the current period was $3.4 million compared to $1.1 million in the prior period. The cost of revenue primarily consists of reimbursable payroll and other site operating costs. The increase in cost is due to the full 6 months of activity for the current period, 6 months ended December 31st, 2023, compared to less than 2 months of activity in the prior period. Managed Services gross margins were 73% in the current period versus 59% in the prior period. Cost of revenue for high-performance computing, colocation and cloud in the 6 months ended December 31st, 2023, was $0.7 million. This reflects 1 month of activity in line with the revenue reported for this segment. The prior year includes no cost from this segment. Depreciation and amortization expense was $10.6 million in the current period versus $11.8 million in the prior period. The decrease in depreciation and amortization expense was primarily driven by the lower net book value of plant and equipment after the recognition of a non-cash impairment charge during the 6 months ended December 31st, 2022, as part of the annual impairment testing, partially offset by additional depreciation associated with property and equipment acquired, as part of the merger. General and administrative expenses were $37.6 million in the current period versus $10.6 million in the prior period. Stock-based compensation increased by $9 million, primarily due to the acceleration of certain stock options and the issuance and immediate vesting of certain restricted stock awards, as part of the business combination. Current period SG&A was also impacted by a non-recurring state tax provision taken for $9.6 million related to facility build in Texas. In addition, we incurred $2.4 million of transaction costs related primarily to the business combination. The remainder of the year-over-year increase is due to an increase in headcount to support the growth of the company, as well as the inclusion of 1 month of legacy Hut 8 SG&A. The company implemented the new FASB fair value accounting rules, which led to a $32.6 million gain on the reevaluation of our Bitcoin holdings in the current period. For our company, the impact of this implementation was lower relative to the size of our bitcoin stack due to the business combination. Since legacy Hut 8 was acquired by U.S. Bitcoin from an accounting acquirer perspective, the opening balance sheet for legacy Hut 8 was fair valued, as of November 30th. As a result, the implementation of the new policy only created a gain in the appreciation of bitcoin price from November 30th to December 31st. The company expects that our net income in future quarters will be impacted by the fluctuation in bitcoin price, as we fair value our Bitcoin assets. The prior year included $63.6 million impairment of long-lived assets, whereas the current period did not have any such impairments. Other expenses totaled $4.5 million in the current period versus $15.2 million in the prior period. Total interest expense was lower by $3 million, mainly due to the NYDIG debt restructuring in February 2023. In addition, the company booked $6.2 million in equity for our 50% share of the King Mountain JV, which is accounted for under the equity accounting method. The next item is net income. Net income in the 6 months ended December 31st, 2023, was $6.2 million versus a net loss of $81.3 million in the prior period. Prior year net loss included an impairment of long-lived assets of $63.6 million. In the current period, the company opted for the early adoption of the new FASB fair value accounting rules, which resulted in a gain of $32.6 million. I will now turn to adjusted EBITDA. Adjusted EBITDA in the 6 months ended December 31st, 2023, was $62.3 million versus $12.8 million in the prior period, an improvement of $49.5 million. This improvement is mainly due to the gain on the fair valuation of our Bitcoin stack of $32.6 million, higher revenue from our managed services business and the inclusion of our share of the King Mouton JV. And finally, I'll discuss our balance sheet. Our balance sheet remains healthy. We closed the fiscal year with $30.5 million in cash. Our Bitcoin holdings, our market fair value and totaled $388.1 million, as of December 31st, 2023, based on 9,195 Bitcoin held in reserve. Of this total, 6,813 Bitcoin valued at $287.6 million were unencumbered, as of December 31st, 2023. Our total debt was $187.4 million, of which $126.2 million is to be repaid based on a cash sweep and has no minimum monthly repayments. The first tranche held by Coinbase is a $50 million loan collateralized by 2,382 Bitcoin, as of December 31st, 2023. In January 2024, we took a subsequent draw for an additional $15 million, which was also collateralized by Bitcoin, bringing our total encumbered to 2,572 Bitcoin. With the recent appreciation of Bitcoin prices earlier this month, we were able to reduce our encumbered Bitcoin against the $65 million loan to 1,872 freeing up 700 Bitcoin. In tandem, we are exploring the opportunity to write a covered call on the newly unencumbered Bitcoin. We believe the premium generated will be considerable, offsetting our interest expense on the loan and significantly reducing the effective interest rate. In a downside scenario, the call would be struck generating additional sales proceeds. In an upside scenario, we would retain a significant portion of cash and reclaim our Bitcoin. This trade demonstrates how our new treasury strategy enables us to generate value without directly selling our holdings or diluting equity. The second tranche held by Anchorage is $44.4 million with a 5-year term, cash flow sweep structure and end-of-term balloon payment. This debt is collateralized by a portfolio of machines from our self-mining fleet and requires monthly payments only when the machines are profitable. This structure eliminates the risk of a fixed payment structure, which contributed to widespread default in 2022. And the third tranche held by our JV partner, NextEra is $81.9 million with a 5-year term. This tranche features a cash flow sweep on JV distribution, no minimum payments for the next 4 years and ends with a balloon payment. Secured solely by the interest in our JV, it exemplifies why we are so bullish on project level financing. It is highly accretive, non-dilutive and has no recourse to the parent company. Finally, in an effort to increase the transparency of our reporting to the market and our shareholders, our 10-K filing provides additional unaudited information, including a 8-quarter history of unaudited financial spanning the 3 months ended March 31st, 2022, to the 3 months ended September 30th, 2023, of USBTC plus the 3 months ended December 31st, 2023, which includes 2 months of USBTC only and 1 month of combined company and a business combination footnote, which shows pro forma financial information on the consolidated results of operations of USBTC and Hut 8 Mining Corp., as if the transaction occurred, as of July 1st, 2022, with pro forma adjustments. That concludes my commentary. I will turn the call back to our operator.

[Operator]

[Operator Instructions] Our first question comes from Mike Colonnese with H.C. Wainwright.

[Michael Colonnese, analyst]

Thank you for taking my questions and appreciate the new disclosures here. Asher, it sounds like you have a large energy development pipeline and are really focused on growing the self-mining business, but are holding off on making these new rig purchases until these newer generation equipment become available in the market. When do you think we can see these rigs hit the market? What specs are you expecting from them? And generally, what are your views on the risk of losing share, as your peers continue to expand in this market?

[Asher Genoot, executive]

Yes. I appreciate the question, Mike. So for us, we see it as kind of 2 parts of the chapter. First is in the area that we're in right now, pre-any new generation machines coming out, we have been coming up in about a month. And our belief is that pricing will be more depressed post halving them pre-halving. And so being patient until the halving happens to be able to see the impact it had on the markets, we're very close right now to a lot of the resellers, the manufacturers to understand the pulse of where the markets are, the supply available and the pricing available. And so, for us, unless there's accretive opportunities to acquire machines today, just based on current market pricing, we think it's more accretive post-halving or as the new generation chip comes out to be kind of first in line with the newest and best generation. I'll let Mike chime in a little bit more on the evolution of the chips, as we see them.

[Michael Ho, executive]

Hi, everyone. Mike here, Chief Strategy Officer. We believe that there will be a new iteration on the 3-nanometer that will be released later this year. I can't give guidance on exact specs as of yet. That will be from the manufacturer. But based on the time line that TSMC has given guidance on for the 2-nanometer, we expect the 2-nanometer to be commercially available towards the end of this year or into early 2025.

[Michael Colonnese, analyst]

It's very helpful color, guys. And just one more for me. Can you appreciate really optimizing the business here to drive profitability. So can you provide us with an update on your restructuring plans? I know you recently shut down operations at Drumheller, what other sites or miners or candidates to retire from here?

[Asher Genoot, executive]

Yes. So I split the restructuring program into a couple of different parts of the business. The first is our self-mining fleet. So Drumheller was a facility that we announced that we shut down. As a part of that shutdown, we also retired older generation machines. And so you'll see us continuing to be creative in how we maximize the value of every machine, whether that is done at the end of life, finding a better home for them in terms of generating the most amount of profit or under clocking a certain percentage of them to increase efficiency, and we share our efficiency numbers, as well in this upcoming -- in the 10-K that we released. And so that's kind of category 1, which is mining. I'm a big believer that people need to be very comfortable that we have the ability to generate really strong unit economics. And so, as we scale those unit economics will continue to remain strong, only get better. The second part of the restructuring I touched on briefly in my introduction, which was our HPC business. And so, it's subscale today requires time and effort in order to restructure how we run that business today, but we are excited by that business because we see it as a foundation to be able to grow in scale, especially when you look at GPUs, AI and data centers and kind of look at the different parts of the value chain within that ecosystem. And then lastly, is the assets that my predecessor had started, and the transaction closed shortly after I took over and maximizing the value of those assets. And just staying hyper-focused as a team and as an organization on the areas that we have key competitive advantages, and we can really create a moat around and compound over time.

[Operator]

Our next question comes from Joseph Vafi with Canaccord Genuity.

[Joseph Vafi, analyst]

I think one of the key advantages and competitive differences for Hut is your HODL. And I know Shenif talked about that a little bit. Just wondering if you see any other strategic uses for that HODL moving forward, especially in this time of restructuring and the like. And then, I have a follow-up.

[Asher Genoot, executive]

We do. So for us, when we look at kind of use of funds and source of funds, when we look at use of funds, we're constantly looking at opportunities in the markets today, whether it be sites, greenfield, M&A activities, machine purchases and just investments in general and have a pretty high hurdle on what -- on our analysis and kind of our metrics on doing so. But then once we have an investment we want to make, the other side of it is what is the cheapest cost of capital at that moment in time. And the 5 levers that we see we can pull on are: number one, the equity markets and based on how we've traded in recent months, we've traded very close to our Bitcoin actual HODL balance. And so, we think our cost of equity is very expensive. The second is debt, we don't look on taking on any corporate debt going into the halving and maintaining a strong balance sheet. The third is project level financing, whether that be debt or equity or quasi debt and equity. And I think Shenif shared a little bit about one of the tranches that we have on our balance sheet, that's really project level financing that doesn't have a parent recourse. And so, we think that's interesting because it allows us to continue to grow without dilution at the parent company or additional risk exposure. The fourth is selling some of our Bitcoin. We announced that on the Salt Creek project. We will look at our balance sheet in order to fund growth. Luckily, our cash flows have been able to manage a lot of those cash proceeds needed to build out that facility. And the last one is to be able to use the balance sheet we have of over 9,000 Bitcoins to be able to be strategic on how do we pull capital off of that balance sheet. And so, we'll have more announcements around some of those ideas and executing some of those ideas in the coming quarter.

[Joseph Vafi, analyst]

That's great color. And then with the halving coming, obviously, the mining fleet that you have is pretty mixed at this point. Do you expect to see some reduction in your overall hash rate here pre and post halving.

[Asher Genoot, executive]

Appreciate it. And so, your question is around basically where we see kind of difficulty going?

[Joseph Vafi, analyst]

Yes. Well, difficulty price and probably some of the -- probably some are much more efficient than others. And I mean, it all depends on where difficulty and price go, right? But is there maybe a part of the fleet that's still going that you think may not be going post the halving?

[Asher Genoot, executive]

Yes. Definitely. So a big part of us -- of the thesis behind merging, U.S. Bitcoin Corp. and Hut 8 Mining Corp. was to prepare for the halving. Our belief is always plan for the worst and hope for the best. And if the recent price action and Bitcoin price, I think, has bailed a lot of folks out and has been able to keep folks profitable post-halving just because we were at around Bitcoin at 30,000 about a year ago, right? And so, I think that's important. And we want to build the business looking at kind of the worst-case scenario because if you're strong there, then you'll reap rewards, when the markets are better. And so, when we look at our fleet, right now, we're doing a lot of movements of our miners and what facilities can host the different efficiencies of miners to be able to maximize that value. Some of the machines that are older generation will be under clocking to increase those efficiencies. And as I mentioned in kind of the intro paragraph, we have our own proprietary software that we've been developing since we started the business. and that looks at real-time energy markets, any kind of hedges that we have in place or PPAs, and it curtails the machine accordingly, whether it be under clocking the machine or shutting them down relative to those energy rates. And so, continuing to mine a profitability. But the analysis there is less about are you mining profitably or are you not? I think that, like we're very comfortable with and have been doing that historically at U.S. Bitcoin Corp. Really, the question here is, is that the best and highest use of the rack space that you have available? And is that the best return profile. And so, as we continue to [ access ] the market, look at pricing, look at payback on terahash, I think that's the second lever and the second area we think about when we think about which machines generate the best return. And it's not -- the first area is, will you mine at a profit? And the answer is yes. We're not going to operate at a loss when we're mining Bitcoin. We'll always look at real-time energy rates and run our software. But the second question is what's the highest and best use of that rack space and we'll look at kind of the return on that capital invested for any upgrades or any new machines. And I want to circle back on the earlier question you have as well. I said I'll be announcing kind of what we're doing with our treasury management strategy this upcoming quarter. I wanted to tap Mike in here a little bit to share a little bit of what he's seeing on the option market today, as we're looking at our Bitcoin stack.

[Michael Ho, executive]

Yes. Absolutely. We're constantly monitoring opportunities in the derivatives market. Bitcoin being a very volatile asset. Sometimes that volatility is to our favor given the large stack that we have. Lately, we've seen increased volatility on the options, specifically to the upside. We've seen that the implied volatility has spiked up over standard deviation, if not more, compared to the median average. And what that means is, we're able to look at selling calls out of the money above the current spot reference at a favorable premium. The spot right now is around [ 70,000 ]. If you look at more long dated into June and September, the spot premiums -- the premiums trading for -- for example, the [ 85,000 ] call [ for ] June is around [ 7,500, 8,000 ]. And if you look at that going out to September, the premiums are over [ 10,000 ]. That represents almost a 50% premium to the market spot price of Bitcoin at [ 70,000 ]. What that means is over that period if Bitcoin goes above [ 90,000 ] you're getting call, but you're receiving -- you're able to essentially monetize the Bitcoin at [ 100,000 ] which is [ paying ] 50% premium for the market. And if Bitcoin trades relatively flat across this range, we're able to take in that premium and use it as growth non-diluted capital.

[Joseph Vafi, analyst]

Sure. That's great. Thanks for that color and good luck with the option strategy. It's a nice lever to pull.

[Operator]

Our next question comes from Josh Siegler with Cantor Fitzgerald.

[Joshua Siegler, analyst]

Asher, congrats on your first earnings call. Looking forward to much more.

[Asher Genoot, executive]

Thanks. Appreciate you.

[Joshua Siegler, analyst]

So first of all is -- yes. First of all, I just want to talk about is the timing the capital cycle. Obviously, you guys alluded to multiplex kind of waiting on next-generation miners being where they're at, but how are you thinking about timing in terms of the pricing of those markers, especially if you're expecting something [ released ] later this year, historically, we would expect to sort of be in the middle of the Bitcoin bull run, and maybe miners might be more expensive at that time. So how are you reconciling that alongside with timing your capital deployment?

[Asher Genoot, executive]

No, I think that's a great question, and thank you for bringing up that because I did want to clear it at some point. So our perspective is not -- we're not going to buy any machines until new generation machines come up. But we're using that as a variable, as we determine investing in machines and the pricing of machine then where we think machine pricing will go. And so, kind of step one is pre-post-halving, then step 2 is pre-post new machines, right? And so, I think that's important. We are constantly in active dialogues and discussions with the manufacturers. We'll be visiting them on their home turf in short order as well. And so, we're very, very close to the market, not just in terms of pricing, but in terms of allocation, supply chain and what's coming out and [ with their ] ability. I think the big difference here, too, compared to 2021 is the allocation of chips available from the actual foundries, TSMC, Samsung, SMIC. And why that's really important. In fact, if people remember, back in 2021, there was a massive global shortage on chips, you couldn't even buy cars because they couldn't manufacture the cars enough because those chips weren't available. We're not in that era anymore. And so, the availability of the manufacturers to produce these machines is less bottlenecked on chip availability, but more so on them planning their productions. And so, for us, there's a lot of announcements on these massive exahash targets. And for us, we think the real bottleneck here is going to be energy capacity, as you look at energy capacity, a lot of large sites have been utilized in over the course of kind of the last couple of years that different folks went into the market and negotiated these deals. And currently, there are sites that historically could have been for Bitcoin mining, but because of the parameters of where they're located, now they could be interesting for traditional data centers and AI load as well. So you have more competition, and you have new technologies coming as well. And so, we've been hyper-focused on that energy infrastructure piece both from a greenfield perspective and creating new relationships and further deepening the existing relations that we have with energy generators and energy partners. And I mentioned in my script earlier that we have over 1,000 megawatts of exclusivity energy capacity, right? Because we believe building -- getting energy capacity, building that capacity is a lot longer of a lead time than buying machines and having machines delivered and plugging them in. And so, as we look at the market, we are very thoughtful on how we deploy it. But if you look at the history of U.S. Bitcoin Corp., in 2021, we were not behind in how we bought machines, but we were very thoughtful. We didn't buy machines for over $35 a terahash because when we looked at press releases in the market, people were buying for $50, $60, $80 a terahash and creating unique relations with the manufacturers and how you structure those deals, we're able to get access to supply, but also at a low cost to be able to drive our return on investment higher. And so, I think for us, the question is not if we're going to grow and how long we're going to wait, but what is the best entry point to deploy that capital to have a good return. And I think the confidence that I hope people see is in the managed services business and the colocation business and our recent production report, we shared that we're managing 27 exahash today, right? So if we only had our self-mining fleet today, and we said, hey, we're roughly around 7 exahash, we're going to go and add 20 exahash. The questions are, can you do it? Do you have the operational ability, Can you scale? But I think those questions don't really need to be asked or have been answered already, which means -- which is we are already doing it, and we have the capabilities, we have the software, we have the SOPs to do it. And so, the question is, when do we deploy that capital and how do we generate the highest yield and the highest return. But we're very sensitive to your point, Josh and not being caught flat-footed and being in a bull run, where we can get access to machines or pricing is elevated. And so, we're actively monitoring the markets and having discussions on a daily basis to have a strong pulse on that.

[Joshua Siegler, analyst]

Yes. Understood. Honestly, that outlook makes a lot of sense. So I appreciate the answer there. And then tying back to what you were talking about in terms of your diversification and really looking at expanding even more beyond self-mining in the future, I'm curious if you can talk a little bit more about the financing options. I think everyone on this call understands that financing is a very, very difficult task in purely self-mining right now. But as you expand to these other verticals, do you expect that financing to really open up?

[Asher Genoot, executive]

Yes. And that's the key, right? I had this amazing conversation about 1.5 years ago with one of the largest renewable company kind of CEO that just retired and learned about his journey and his path. And I was like, what did you do that allowed you to grow your market cap, like $100 million? Like what was it? Like we didn't see ourselves as an energy company. We saw ourselves as a financing company because we're such a CapEx-intensive business. And that really stuck with me. As we look at our business today, it's no surprise that our business and the business of our peers is a heavy CapEx business. And how do you grow that business with the lowest cost of capital to drive the most amount of shareholder value. If you look at 2021, there was a lot of debt in the market. I think people learned that probably structuring that debt more creatively would have been more beneficial because you had a lot of distressed scenarios in 2022, and we were on the receiving side of that, and we're able to grow a lot through that bear cycle. And then recently, most of the growth capital is coming from the equity market than a lot of the ATMs that are available in the market. And so, when we look at kind of the opportunities today, we see a couple of different buckets of assets and investor opportunities. So if you look at mining, you have the land and the substation, which is pretty kind of cookie cutter, there's a lot of financing there at low cost. Then you have a data center, which is higher risk than a traditional data center financing because of the use cases for Bitcoin mining. You're not going to use that existing data center for the -- the Bitcoin mining data center for traditional data center. To build the Bitcoin mining data center I shared, we're going to be under $275,000 a megawatt to build a traditional data center for AI about $8 million to $10 million a megawatt. So very different infrastructure. And then, you have the ASIC chips themselves, which is high volatility, high risk. Now on the other side of traditional data centers, you have the data center and then you also have the GPUs and the NVIDIA GPUs. And so, we look at all those, as different asset classes that you have different investors that want exposure to that asset and the return and volatility of that asset. And by bifurcating them and looking at more project level financing, we believe we'll be able to expand the pool of people that want exposure and that are willing to invest and also decrease the cost of that capital because there's different risks on each component of that business. So that's how we're thinking about financing, and that's where a lot of our conversations have been.

[Operator]

Our next question comes from John Todaro with Needham & Company.

[John Todaro, analyst]

Thank for taking my questions, and yes, congrats Asher on your...

[Asher Genoot, executive]

Thank you for picking up coverage on us. Appreciate that.

[John Todaro, analyst]

Yes. Yes, of course. So 2 questions for me. First, on the GPU cluster, so I guess, we got a little bit more color here. But as we think about this kind of what are the next steps? So does a site still need to be built? Is there going to be more of a colocation strategy where you use a third-party site. So yes, I guess, just as we think about that, is this something that there's revenue in calendar '24? Or is this more like a '25 story?

[Asher Genoot, executive]

Yes. So we'll be announcing the full plan regarding that first order within the next quarter, and it would be something in this calendar year that we're looking to execute and bring on. We see the data center business and the GPU business as 2 opportunities that will converge down the line. And what I mean by that is today, as I mentioned, the current HPC business, they need to go through some restructuring and investments in order to be equipped to handle AI machines. And so -- but however, we don't want to wait for that in order to get our entry point into the GPU market and get exposure to that market. And we think of that similarly to kind of if I use an analogy to mining, owning and building the data center is different than just buying the chips and kind of hosting and co-locating especially if you have a good customer and kind of partnership in place in order to scale and to have good cash flows. And the market today are long [ chips in ] short supply. And I think the demand for AI chips is only increasing. We're just touching kind of the tip of the iceberg. And so, we're excited to share updates on that in the near term and look to be launching that business unit in the near term as well.

[John Todaro, analyst]

Okay. Great. And then one on the mining side. So I believe you got in self-mining, I think it was mentioned around [ $0.045 ] a kilowatt hour, but either hosting or managed services was a bit higher at $0.06. As you think about the business, where there is the higher power cost, kind of how are those contracts structured? Do you -- I mean, do you expect some of that hash to come offline after the halving? How profitable would that be if say, Bitcoin, we just say it stays at [ 70,000 ]?

[Asher Genoot, executive]

Yes. No, I appreciate that question. So let me give a quick background on why we started hosting machines and go to kind of what the strategy is today. So the only hosted machine that we had in kind of the recent announcements that we discussed was machines hosted at the Charlie and Delta facility, which is the Kearney and Granbury facilities. And the reason we had hosted machines there is during the Compute North bankruptcy, when Generate took over and hired us as a managed services operator to run the facilities. At that moment in time, we believe that our capital was better spent investing in distressed opportunities than just going and building infrastructure. And we looked at the return profiles, we created a good deal, where it was based on the kind of a hash price -- based on hash price that would determine our hosting rate, and it also created an alignment with Generate that we had our own skin in the game and that we care deeply about uptime because we had customers and ourselves there. And it also helped during the transition, where other customers saw, "Hey, you guys have your own machines there, you're putting kind of your money, where your mouth is. And so, we can have comfort as well. I mean, so that was kind of the thesis of why we had hosted at that moment in time. But where we are now in the market, so obviously, those sites have been sold off, and there's a new owner and there's a new operator of those facilities that are looking to operate on their own. And so, for us, even if we had hosted miners controlling the operations and manage them, it's critical to kind of how we think about kind of that growth. And so, from that perspective, -- this month, we already started moving machines from the hosted facilities to vertically integrate them into our self-owned facilities. And so, you'll see some downtime across the end of this month and next month in those machines being offline and being relocated to our facilities. And I mentioned on the Salt Creek facility, we announced kind of the groundbreaking of that last month in February. We expect that site to be fully online in April, which I said is under 3 months or for those of you following kind of build out time line. I think from greenfield to fully online and hashing in less than 3 months is a pretty short time line. And by doing so, we'll be driving all of our machines to self-managed facilities and driving those costs down, especially with the halving coming up in the next couple of weeks.

[Operator]

Our next question comes from Bill Papanastasiou with Stifel.

[Bill Papanastasiou, analyst]

Just a quick one here. Hoping you could provide an update on market opportunities for managed services in a post halving environment. Curious to hear what growth could look like on digital. Obviously, a number of miners have been acquiring a significant amount of equipment and many of which don't have the infrastructure to house these rigs. And according to your earlier comments, we will also see newer generation equipment down the road. Any color you can provide there?

[Asher Genoot, executive]

Yes. So when we look at kind of our 2 non self-mining business units, we have the colocation business, and we have the managed services business. So the managed services business is a third-party hiring us to either build and/or manage all their facilities. And that's not just the operations of the construction, but that's turnkey solutions. That's managing the energy, the curtailment that's doing the financials, putting audited financials and books together, really running a turnkey suite. And the thesis behind that business is when you look at a mature market, usually you can hire an operator to come in and operate. And so, if you want exposure to a wind farm or an oil and gas well, you can hire an operator to come in and operate and you don't have to actually be an operations expert, and the pricing of hiring those third-party operators is fair, and it's not huge. And so, we believe that as we look at the macro direction of renewables coming up, congestion risk happening, governance wanting to get enrolled, not all of those folks, who either want this asset that has kind of curtailable load or who want exposure to Bitcoin mining actually want to be best-in-class operators and learn how to really operate facilities at scale. If they can hire someone to do it for them, especially if it ends up being cheaper than doing it themselves, it's a really interesting product offering. And that's kind of where we see an opportunity. And so, kind of the buckets of opportunities we see, as we see kind of sovereigns and nation states coming and mining and lending our technology and our operational expertise, having kind of over a gigawatt now of assets under management, 27 exahash that we kind of recently announced in our production report. And then also, I think smaller kind of subscale miners or people, who want access to mining for them to hire a whole software team, data science team, operations team, development team, it's a lot of fixed SG&A. And so, by hiring us, they are able to have best-in-class talent, best-in-class software without having to spend those costs in order to build and grow so. And we like that business because when you look at kind of all-in cost to mine a Bitcoin, you have your cost of energy, your site expenses, and you have large corporate SG&A amongst kind of our industry, and I think that's been a big issue historically. And so, for us, kind of those stable cash flows offset a lot of that fixed SG&A for us and our actual kind of cost to mine a Bitcoin from cost of energy and gross profit to kind of drop it down to bottom line become a lot smaller of a step-up because we have a lot of those fixed costs subsidized. The second part is the colocation business. And so, as we build more megawatts, we believe that those megawatts will be valuable. And so, the first part of building megawatts is kind of like having that infrastructure. And then it's what's the highest and best use. So we put our own machines there. What if we get the full kind of tranche of megawatts we spoke about? Now we have more megawatts. Do we want to put all of them with self-mining machines? Or if you look at the colocations, we've implemented 3 different models historically through our sites and kind of the sites that we manage. The first is a very simple structure, which is we have the site, we invest in the site, customer comes and pays a fixed lease payment per month. And so, we pass through the cost of energy. We don't take that exposure. We don't take uptime exposure. We -- the customer basically pays a fee every single month, and it's easy to model what our payback period is and what our IRRs are on that investment. On the other side of the spectrum, we basically take a profit share, right? And we announced that with Celsius last year. And we basically take that exposure of hash price well, volatility without spending the CapEx to actually buy the machines upfront. And at different markets, you have better deals that you strike. And then we had this kind of middle ground scenario, which we implemented when we were managing the sites on behalf of Generate, which was instead of $0.07 hosting, we can give customers a discount to a floor, call it, [ $0.065 or $0.064 ]. But in return, we would basically get more upside if hash prices ran. And so, every single day, we looked at hash price, and we had a hosting rate aligned with hash price. So you bring the floor down to $0.064, you can go up to $0.14 for the customer that makes sense because they have a lower floor, so they get more protected on a downside scenario. And if hash prices run, as a percentage of their revenue, it's still lower than when they first signed that deal. And so, that allows you to get some exposure, but have a protected downside. And so, we think owning infrastructure is extremely interesting because you can own machines, you can have really stable kind of cash flows, or you can have good proxy to the upside of hash prices without the CapEx spend as well. And so, I think having a multifaceted growth model is extremely important and the ability to manage through volatility and to capture as much upside as possible, meanwhile protecting your downside.

[Bill Papanastasiou, analyst]

Thanks for that color, Asher and congrats again on your first earnings call. I really appreciate the analytical approach to your strategic decision-making.

[Operator]

Thank you. There are no further questions at this time. Please proceed with any further remarks.

[Asher Genoot, executive]

Really appreciate everyone for hopping on this morning and for listening to my first earnings call, and the team has been working tirelessly and around the clock since I took over this role, and we will continue to work tirelessly around the clock for our shareholders. So I appreciate everybody's time.

[Operator]

Thank you for your participation. This does conclude the program. You may now disconnect. Everyone, have a great day.