Stronghold Digital Mining Inc
NASDAQ:SDIG
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Stronghold Digital Mining Inc
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Good morning and welcome to Stronghold Digital Mining's conference call for the fourth quarter and full year ended December 31, 2023. My name is Towanda, and I will be your operator this morning.
Before this call, Stronghold issued its results for the fourth quarter and full year of 2023 in a press release, which is available in the Investors section of the company's website at www.strongholddigitalmining.com. You can find the link in the Investors section at the top of the homepage. Joining us on today's call are Stronghold's Chairman and CEO, Greg Beard; and CFO, Matt Smith. Following their remarks, we will open the call for questions.
Before we begin, Alex Kovtun from Gateway Group will make a brief introductory statement. Mr. Kovtun, please proceed.
Great. Thank you, operator. Good morning, everyone, and welcome. Today's slide presentation, along with our earnings release and financial disclosures were posted to our website earlier today and can be accessed on our website at www.strongholddigitalmining.com.
Some statements we're making today may be considered forward-looking statements under securities law and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors, many of which are beyond our control, which could cause actual results and events to differ materially from those described in forward-looking statements. For more detailed risks, uncertainties and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and public filings made with the Securities and Exchange Commission. We disclaim any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law.
We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and the reconciliation tables to applicable GAAP measures in our earnings release carefully as you consider these metrics. We expect to file our annual report on Form 10-K on or around March 8, 2024 with the Securities and Exchange Commission, which sets forth detailed disclosures and descriptions of our business, as well as uncertainties and other variable circumstances, including, but not limited to, risks and uncertainties identified under the caption Risk Factors. You may access Stronghold's Securities and Exchange Commission filings for free by visiting the SEC website at www.sec.gov or Stronghold's Investor Relations website at ir.strongholddigitalmining.com.
I would like to remind everyone this call is being recorded and will be made available for replay via a link available in the Investor Relations section of Stronghold's website.
Now, I would like to turn the call over to Stronghold's Chairman and CEO, Greg Beard. Greg?
Good morning, everyone, and thank you for joining us on our fourth quarter and full year 2023 earnings call. We will be referencing an associated slide presentation throughout the call that is available through the webcast and on the Investor Relations section of our corporate website.
Let's start on Slide 3. I will say this on every earnings call until it is no longer true. Stronghold is the only environmentally beneficial and vertically integrated public Bitcoin miner. We own and operate 2 mining-waste-to-power facilities in Pennsylvania, Scrubgrass and Panther Creek, with aggregate power capacity of 165 megawatts. Through our process, Scrubgrass and Panther Creek have removed an estimated 30 million tons of toxic mining waste from the environment from nearly 100 different sites. Today, we operate over 40,000 Bitcoin miners with 4.1 exahash of hash rate capacity. While we are thrilled to surpass 4 exahash, we believe that we have significant runway to continue hash rate growth within our existing infrastructure by high-grading our fleet.
As a vertically integrated Bitcoin miner, we have a unique and substantial asset base with significant potential for complementary revenue streams. In November, we announced our carbon capture project, which is simply an extension of our reclamation process. We are excited about the progress we have made on this project over the last few months. We believe that we could capture up to 100,000 tons of CO2 annually at baseload capacity utilization of our plants as discussed in our December presentation.
Moving to Slide 4, over the past 1.5 years, Stronghold executed on its plan to grow hash rate to 4 exahash with high capital efficiency, and we plan to continue adding hash rate and improving our fleet efficiency opportunistically. We have over 40,000 energized slots, and these slots could support more than 7 exahash of mining with a high-graded fleet of latest generation miners. We are exploring various avenues and structures to grow into this capacity.
Looking at our fleet, the average efficiency for our 2,500 least efficient miners exceeds 40 joules per terahash, and our next 10,000 least efficient miners are approximately 37 joules per terahash. That's low-hanging fruit. And just replacing those miners with the latest generation miners could yield hash rate capacity of over 5.3 exahash. So we think that the high-grading opportunity is very attractive.
We also remain focused on improved uptime at our data centers and have been working closely with the Frontier Mining team since October to enhance our data center operations going into the halving in April. This partnership has been a success, as evidenced by our recent achievement of approximately 3.9 exahash of operating hash rate.
Moving to Slide 5, as the halving approaches, we continue to focus on liquidity and debt service obligations. As of February 29, we had over $10 million of liquidity. The current liquidity more than covers the $6.5 million in 2024 mandatory amortization associated with our WhiteHawk notes and the $1 million of remaining committed miner CapEx. And importantly, our operations are generating cash flow with over $5 million of adjusted EBITDA projected for the first quarter, further enhancing our resiliency.
Moving on to Slide 6 to discuss Bitcoin market dynamics. Following the approval of Bitcoin ETF in January, we have seen a significant rise in Bitcoin price and hash price. Bitcoin has set a new all-time high, and hash price is around $0.12 per terahash. There have been $8 billion of inflows into the ETFs, which averages nearly 6,000 Bitcoin per day, [ 6.5x ] more than what is mined daily. So we view the recent run-up in Bitcoin price as a result of the mismatch in supply and demand. Will the price run-up continue? While we won't take a view on inflows representing potential demand, the having will impact the supply side of the equation, which, all else equal, is quite constructive for future Bitcoin price.
Moving on to Slide 7, owning our own power assets gives us a lot of optionality, as electricity is the largest variable cost to mine Bitcoin. It enhances our ability to be responsive to changing market conditions. When power prices are high, we turn off our miners and sell to the grid. When prices are lower than Bitcoin mining economics but higher than variable fuel costs, we use the plants to power our miners. And when power prices are lower than our variable plant costs, we turn off the plants and import electricity to power our miners.
Power prices in our region are currently very low, with the forward curve for the remainder of 2024 averaging around $30 per megawatt hour. While low power pricing is a trend broadly, forward curves in PJM are generally the lowest in the country right now. This is great for us because it gives us the flexibility to opportunistically import electricity from the grid to power our miners, and you can expect to see us do just that.
Moving to Slide 8, on the other side of the equation, the PJM grid is extremely vulnerable over the medium to long term. Renewable energy sources like solar and wind are great because they're clean, but the unfortunate reality is that they generate power intermittently. Replacing stable baseload generation with intermittent generation severely threatens the stability of the grid. This is becoming very clear in PJM by its own account. 40 gigawatts of baseload thermal generation is expected to be retired by 2030. This is over 20% of current PJM generating capacity. On top of this, nearly 95% of the power generation projects in the PJMQ queue are renewable, and it takes multiple megawatts of renewables to replace each megawatt of baseload generation. As a result, at the current rate of development, PJM believes that the new projects will not be sufficient to keep up with demand growth and the expected plant retirements by 2030. The implied outcome here is extreme volatility and market tightness in the medium to long term, making existing baseload assets like Scrubgrass and Panther Creek highly valuable.
Moving to Slide 9, since announcing our carbon capture project in November, our team has made significant progress in proving out, enhancing and validating our process. Recall that our initial third-party testing indicated that our Scrubgrass ash could capture carbon at a capacity of up to 12% by starting weight of the ash. More recent tests from our first Karbolith have demonstrated that up to 14% is achievable. We recently partnered with the Pittsburgh Mineral & Environmental Technology Lab, who is assisting with more enhanced lab analysis, further improving and reinforcing our process. In early February, we announced that we had begun constructing our second Karbolith with our partners, Karbonetiq. This Karbolith is now up and running at Scrubgrass, inclusive of design enhancements that we expect will increase airflow and carbonation and reduce costs and construction time. The second Karbolith cost is about $33,000 in materials, representing significant savings from the first Karbolith. And we expect to continue to reduce costs as we scale.
As we mentioned on our last earnings call, our team has been working closely with Carbonomics since September to list our project on the Puro Registry, the world's first registry for engineered carbon sequestration projects, to monetize our carbon removals in the private markets. We are excited to announce that Puro.earth Registry registered the Scrubgrass facility in late February, and the company will now undertake the audit process, which is the next step towards generating carbon capture-related revenue. We are now embarking on the audit process with Puro, and our goal is to have an accredited carbonated materials project as early as the end of the second quarter. We expect to have further updates on this project, including time line for meaningful monetization and related milestones in the next few months.
With that, I would like to pass it over to our CFO, Matt Smith.
Thank you, Greg. Moving to Slide 10, we continue to believe that Stronghold is significantly undervalued on an absolute basis and acutely so relative to public Bitcoin mining peers. When looking at select valuation metrics, adjusted EV to hash rate capacity and adjusted EV to annualized January Bitcoin production, Stronghold trades at an approximately 70% discount to peers. I have nothing else to add.
Lastly, on Slide 11, revenue for the fourth quarter was $21.7 million, with $20.5 million from cryptocurrency operations on 599 Bitcoin mined and $1.2 million from energy operations. GAAP net loss was $21.2 million for the fourth quarter, and adjusted EBITDA was $2.3 million. A reconciliation for those figures is included in the appendix.
I will now turn the call back over to Greg for closing remarks.
Thanks, Matt. To summarize what we've discussed today, we are executing on the objectives we have communicated to the market. We remain confident in the strength of our business going into the halving, and we believe that we have outstanding growth prospects through high-grading our fleet and developing carbon capture.
With that, we will open up the call for Q&A. Operator?
[Operator Instructions] Our first question comes from the line of Lucas Pipes with B. Riley.
I first wanted to ask a few questions on Slide 4, where you show that column with additional opportunities, and a few questions there. First, what type of machines should we be thinking about? What would a reasonable cost or CapEx range be for that? Or is that included in the guidance? I don't think so, but I would appreciate your perspective. And then, I have a few more follow-up questions from there.
Yes. So I think we're -- so think about it in terms of like the generic latest generation miner that you can still buy. So we're now looking at the next generation, so the current latest generation, so that's something like a Bitmain S21. In terms of -- the market for these machines changes really weekly. And in the past, we've been very opportunistic about how we've managed to fill slots, whether it be just buying machines outright, JV-ing on machines just to improve the capital efficiency and to get a very high ROE. And so, I think if the -- at current prices, market prices, you'd say, hey, to fill up all these slots would be around the $20 million at current rates. We think, obviously, the rates are going to be potentially materially different post halving. And as always, we're trying to do better than the market in terms of what we spend and how we structure.
Greg, when would you make a decision on deploying additional capital there?
You know what? I think we -- won't you give us a quarter to present what we want to do and the pace of that potential repowering of the data center or replacing all of these miners with more miners? So I think we're not ready to be specific with dates and times yet on those. And that's just really a function of making sure that we're opportunistic to achieve the best pricing and rates of return on that equipment.
Got it. Do you have a site in mind?
Yes. I think we've only got the 2 sites, Scrubgrass and Panther Creek. So I think you can expect it at both plants. And just to be clear, at current pricing, it's $20 million per exahash machine, just in case that was missed.
Lucas, I would just add. I think there's -- as we've been carefully observing industry peers announcing growth projects that are significant kind of greenfield builds or that require extraordinary time lines and future delivery schedules, what we're trying to focus you on is the fact that we've looked at third sites. We've looked organically at our own existing 41,000 slots, and we have a number of kind of Tier 1, Tier 2, Tier 3 miners in terms of stratifying by efficiency. And if you were to take the least efficient miners and high-grade those into what's called an S21 type miner, which could utilize existing plugs that are energized, you can get to 7x hash plus. And so, identifying that that's an opportunity is not a commitment to spend the money to do that. But we've demonstrated very -- as Greg said, very creative ways of filling slots in the past. And we think there are a lot of opportunities to do that without stretching for it. So the fact that we have 7x the hash capacity in the existing data centers is the message.
Got it. I appreciate that. And kind of switching topics, obviously, power price environment has been very soft, and you noted your flexibility to toggle between your own generation and purchasing power. Could you speak a little bit to what your costs are when you produce in-house today at Panther and Scrubgrass and kind of what the utilization rate of the plants is expected to be in this price environment?
Yes. So this is just a nice reminder of the strength of the Stronghold business model, which is, hey, if power prices are super high, we can quickly turn the data centers off and divert all of that power to the grid. Conversely, when power prices are low, and by low, we mean, lower than our variable cost to make the power, we can -- and we wouldn't do it on a single day, but if they're expected to be low for weeks or a month, we can turn the power plant off. So, right now, we're saying that we're expecting costs to average between $40 or $45 per megawatt hour to make the power. And if you looked at the forward curve for power -- expected power pricing in PJM, it's one of the lowest powered markets in the U.S.
And so, that's -- that decision to buy power instead of make it, it comes when we see power in the $20s or below, which is where we're seeing it now seasonally. So I think you can expect us to just make the economic decision to buy the power at a cheaper cost than we can make it, which is -- there's a spot in the middle where it makes sense to run the plants and supply all that power to the data centers. But now, we're looking like if the curve ends up playing out as it's priced, we'll run at least Scrubgrass seasonally rather than all the time, and then buy power for a lower price so we can make it, which obviously will improve our margins.
Our next question comes from the line of Joe Flynn with Compass Point Research & Trading.
I wanted to dig a little bit more on your strategy going into the halving. I guess, with $30 a megawatt hour, it's pretty strong prices from a marginal cost standpoint where you keep machines on. But I guess in the event that you don't see a correction of hash price and you kind of see it sub-$0.05 levels in the months, like how are you going to manage the balance sheet and growth ambitions to ultimately put yourself in a better position from both cost and, I guess, cash position?
Yes. So I think we have the benefit of not having to be making debt amortization payments. And we have no or very, very small obligations on CapEx today. So we -- and right now, today, we're generating cash. And so, I think if you looked at the potential for the improvement in efficiency of our mining fleet, I think you're going to have to -- we need to lay to the market what the -- what a realistic time frame is to do that, which we will do. But I think the best response to the halving, in our view, is to drive power costs as low as you can. That's really the most important variable that we can control. And just happily, luckily, we have a power curve that is allowing us to do that.
So we're going to end up with lower power costs than what we would have modeled a quarter ago, just given where the curve moved, just related to natural gas pricing being so cheap. But I think if you were to study our balance sheet and our obligations, they are purposely low through the halving to let us get to the point where we should be able to begin to spend to upgrade the fleet, which will give us a benefit on top of having an extremely low power price. I think also at some point -- we're making a lot of progress on carbon capture. And that project is really designed as well to give us an even lower power price sort of on a net basis for that. So that's a -- that's one of the reasons that we continue to focus on carbon capture as a benefit to the company.
That's helpful. And I also wanted to dig more into your hosting business, which so far demonstrated strong results. But I guess, just what do you think the outlook is there? I was wondering if you're going to pursue additional opportunities on that front? And maybe what's the overall advantages to kind of you guys' model versus traditional hosting miners that have definitely struggled over the past 2 years? There's a lot of industry talk about the hosting model going away. I guess, how are you guys positioned in that respect?
Yes. So I think we're -- we think we have a good relationship with our partners. And I think you're really unlikely to see us enter into what I would describe as like a regular way of hosting, where we run someone else's miners and sell them power. We strongly prefer the model where we share a significant amount of the Bitcoin mining revenue with our partners. So I think we expect them to continue in some way. And if we -- I think I would view that as one of the opportunistic ways to drive the efficiency to a better place from the miners is through expanding our JVs with our existing and new partners. So I think it's a -- I think we don't -- we're not expecting any immediate changes to the to the JV structures.
[Operator Instructions] Our next question comes from the line of Kevin Dede with H.C. Wainwright.
Greg, kind of, I guess, sort of a broad one. I was hoping you would take some time to walk me through and anyone else who's curious on the carbon capture and the balance of -- now that you're seeing 14% recovery, a lower cost to deploy the Karbolith and the balance of running the plants to generate the ash and the expected revenue offset. It's a big question. I know that you're expecting accreditation on Puro next quarter, which means conceivably, you could see revenue in the third quarter. At what point do you think you can just run both plants all out regardless of the power curve?
Yes. So Ken, that's -- what you're describing is absolutely the goal. And I would say, the last 3 months have been, I would say, better than confirmatory because it's -- when you're driving the rate of carbon absorption up, and not only is the upper potential, it moved up, the rate that the ash is carbonating has moved up. So the -- not only is it -- we're going to require fewer Karboliths to get the same job done. The cost of this Karbolith is coming down and labor is coming down. So we're really -- I think we were very conservative in the early days, sort of late last year, describing the potential of the project. But it's still -- while we've made a ton of progress, and on every assumption, it's proven to be conservative so far. But it's still too early to spike the football and say, hey, we're going to have X number of Karboliths fully deployed and generating X amount of revenue related to that sequestration.
I think that should happen. I would expect that we'll be in a position to do that in the next quarter. But I think we've got -- we're still testing just literally dozens of tests a week. Now, we're testing this newly redesigned Karbolith #2 that has an increased airflow. So I think it's, from our vantage point -- I think when we see a plateau in the testing results and we've sort of iterated to the best Karbolith design that maximizes airflow and carbonation, that also minimizes the CapEx build-out cost, that's when we'll say, now we're ready to go ahead and do the build-out. And at that point, we'll describe what the CapEx costs are and what we think we can sequester.
But you're right. The reason to be excited is that this is a revenue stream that when looked at on an offset for power costs, it's going to meaningfully drive the revenue up and sort of the average cost per megawatt down, which is that was the -- which we've always said that's even more important than the efficiency of the machines is a low power cost. So that's what we're driving toward. So I think stand by, give us a quarter or 2 to continue to refine our results and designs. And with those results and designs, we can have accurate CapEx estimates and accurate time frames to share.
I think on the -- we also disclosed, we are now listed on the Puro Registry, and they've now begun their "auditing process". But I think make no mistake about it, this will be a big year for carbon capture, at least at Scrubgrass this year. So that's the -- and hopefully, in the next quarter, have specifics to share as well. So I'm sorry, we can't tell you exactly per unit and everything, but that's a -- I can say, we did all that math in December on a hypothetical basis, and it is materially better than what we had initially thought in terms of CapEx, speed to carbonate and [ a new ] rate of absorption. So, yes, that's super exciting.
Yes, appreciate the color. No need to apologize. I understand it's a very dynamic situation. Appreciate all the effort there.
We just don't want to -- we don't want to go backwards and say, hey, we promise X percent or whatever costs and have it be wrong.
Completely understand. There's been enough of that. Maybe a little more insight on associated revenue timing. If you are registered by the end of the second quarter, as the press release intimated, would that -- is it fair to assume you could see revenue in the third quarter? Maybe give us a little more insight on that. How are you looking at it?
You know what? I would say, if we get on the registry, we could -- what we'd hope to do is sell carbon credits in the private market and on a forward-looking basis. So I'd say, once we have our signs done, we're confident we can share that with potential buyers of carbon credits and we're on the exchange and audited, and I guess then transactable in this way, that then opens up the ability for us to sell -- we could sell out then the -- a certain number of credits and deliver those as we build the project out. So I think it's absolutely right. So I think if there's a benefit to being on a registry, it's that -- and have the process fully vetted out, and we can then sell credits before we generate them with an expected time line to deliver them.
Love the forward market.
In the forward market, correct.
Okay. That sounds good. Another topic, I think, has to do with the mention of Champion. Could you just help me understand how Champion interfaces between you and PGM and how you see them helping to deliver those lower power prices to you before carbon capture is fully up and running at both plants?
Kevin, it's Matt. So we -- I would refer you back to our December press release and when we mentioned that we've been through deep discussions, constructive discussions with PJM around our data center load banks co-located at the plants. And we have been, over the course of the last few months, purchasing retail electricity. And when you're in that market, this is -- when the plant is not on, which we were -- in December, Panther Creek had an outage that we've since come out of and it's been running well. But during that period of time, we were purchasing retail electricity. And at times, the adder or the premium to wholesale can be onerous, which I think you can see in the fourth quarter fuel and imported power cost. Fast forward, we wanted more visibility and more flexibility when you go into the [ shoulder here ].
It was a very warm February. Natural gas prices are at $1.50, $1.75 versus a year ago when they were twice that, and it's the marginal fuel in our market. And so, we expect single-digit to $20 real-time prices in the shoulder potentially, notwithstanding any Ukraine-Russia type of real structural items. And you want to be able to purchase power at as low of a cost in the real-time markets as you can during that period. And so, we have been working on competitive supply agreements for a while to make sure we have ultimate flexibility. And we are very grateful with -- to have Calpine -- or Champion Energy, part of Calpine, step into that role. And we're very excited about the reduced cost of power that will absolutely result from that during periods when we're importing. So it's a pretty big -- it will result in a pretty big savings for us.
Okay. So looking out, we should assume generally, right, generally that you're running both plants sort of peak times ex this past winter, but maybe through the summer and then off on the shoulder months. Is that a fair assumption, at least for the next year or so?
Yes. So we are going to run Scrubgrass, I would say more or less the base case is, as a peaker or more than that, depending on carbon. As we start to monetize carbon potentially and perfect our design, carbon can be a step change in the Scrubgrass cost of power. But right now, as we're looking at it, the peak price for power the rest of the year is, in July, at $50-ish. And so, in that case, if you can buy power well below your marginal fuel cost, you'll do it. Scrubgrass probably runs as a peaker and Panther Creek is likely to run as a baseload -- continue to run as a baseload plant throughout the year, aside from some potential planned outage time that we're not -- is not yet on the calendar.
Okay. Any immediate plans to try the Karbolith at Panther, given that you'll have a continuous supply of ash?
So we're still -- Scrubgrass is nearest term due to the really high limestone and calcium element of the CFB process there. Once we perfect Scrubgrass, where we started the -- where we're starting it, we'll move over to Panther. We don't really see any reasons why Panther can't scale as well, but we need to go over and further test the ash, the byproduct beneficial use ash, and then ultimately can potentially scale at both plants. So I would say Scrubgrass is near-term focus because it's already started and we have 600-plus acres, and there are a lot of benefits, including the very calcium rich nature of the ash. And so, we're going to scale at Scrubgrass first probably and then move over to Panther.
Understand the grand demand on capital. That's the hinge. But have you considered other sites? Any change in your thinking on that? And if so, what type of time line might you consider?
Yes. I think we're always looking at other sites and comparing what we have, does it make sense to high-grade our fleet at our current sites, or should we look at new sites. We are constantly sent opportunities to review new sites. But I think the cost of our power is lower than what most of the things that we see could achieve. So I think we have no pending or announceable new sites at this point, but we are constantly reviewing.
[Operator Instructions] We have a follow-up question from the line of Lucas Pipes with B. Riley.
Greg, there's a lot of talk about shortages of power, given demand not only from Bitcoin mining, but also AI applications. To what extent are you receiving inbound, given your direct access to power and land package?
I would say we do have interest from inbound. But I would say the recent run-up in Bitcoin price and hash price, it's an attractive business to run right now. We'll see what happens post halving to cash price and Bitcoin price. But I think, yes, if Bitcoin were to be outlawed from the earth, there is -- there are multiple purposes for 40,000 fully built-out plugs that have computing capacity available, given what's happening in the world of AI as well. So that the -- we're confident that the -- all of the infrastructure that we're running, that we built with the access to the power, and that redundancy is a valuable infrastructure asset.
Matt, a quick question on the Whiskey Tango slide. You've been in public markets for a long time. How do you explain these discrepancies? Would be keen to get your take on that.
Yes. So I want to avoid speculating. But I think what's interesting is that it's a business where -- it's an industry and a stock market where people could buy or sell us every day, and that can happen in any sort of way. And when you think about the reasons and past potential execution issues or our leverage, which we're -- we've chipped some away at some and are optimistic about -- really about escape velocity with cash flow- related deleveraging against that debt, there are a lot of reasons to be optimistic. And there's hard asset value here that is absolutely, in our view, not recognized by the market in terms of our plants and the carbon opportunity.
And so I can start to step through the different attributes of Stronghold compared to other peers. And there's some scale-related things. There are some kind of daily trading volume and size-related matters. But in the end, it's a commodity industry where there should not be large disparities other than adjusting for operating and financial leverage and some other nuances between businesses. And so, to trade at a 70% or 80% discount to peers, who are in the same business, doesn't make any sense. And so, what -- question is, what's going to close that? And I'll just leave that to you all to ponder, but we're working on it. So I'll just leave it at that.
I'm showing no further questions in the queue. That concludes the question and answer session. I would now like to turn the call back over to Mr. Beard for closing remarks.
Okay. Hey, stockholders, investors, Stronghold employees, thank you for all the effort. Thank you for the faith. We're doing our best, and we are optimistic about our prospects, given the business model. And we will see you next quarter. Thank you. Bye-bye.
Thank you for joining us today for Stronghold's earnings call. You may now disconnect.