Hut 8 Mining Corp

TSX:HUT

Earnings Call Transcript 2019-Q3

[Operator]

Welcome to the Hut 8 Mining third quarter results call. My name is Paulette, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Andrew Kiguel. Sir, you may begin.

[Andrew Kiguel, President, CEO & Director]

Thank you very much, Paulette. Welcome, everyone, to the Hut 8 Q3 conference call. As per all previous conference calls, this is being recorded and gets posted on our website at www.hut8mining.com, and it's under the Investors tab in Reporting. I'm going to start the call, then I'm going to turn it over to Jimmy Vaiopoulos, our CFO, to review the financials. I'll have some concluding remarks, and then we'll turn it back over to the operator for Q&A. So diving right in. Some of the highlights for the quarter were revenues of $26.7 million for the quarter, $67.1 million for the year. In terms of EBITDA, $14.7 million for the quarter and $30.7 million for the 9 months ended for the third quarter. In terms of other things in the quarter, we mined 1,965 coin in the quarter. 7,187 for the first 3 quarters of the year, and our cost per bitcoin in the last quarter was $4,363. I'll note that's inclusive of electricity, mining pool fees and all other production costs. I say that because I just noticed some other companies that report in the space only use the price of electricity divided by the amount of bitcoin they mine. We think it's a more transparent way to sort of show it is to show all the mining costs associated with mining a bitcoin. Through the quarter, we've strengthened our balance sheet, significantly reduced debt and payables. We've increased our petahash capacity, at least announced the increase in petahash capacity by 19.6%, increased our balance from the previous quarter, and I think, also significantly, we're the first company to be approved for listing on the blockchain space on the TSX senior exchange. So with that, I'm going to turn it over to Jimmy Vaiopoulos, our CFO, and he's going to review the financials in more detail. Jimmy?

[Demetrios Vaiopoulos, Chief Financial Officer]

Thank you, Andrew. This is Jimmy Vaiopoulos speaking, CFO of Hut 8. Before continuing, I'd like to remind everyone that all amounts in the financial statements and discussed on this call are in Canadian dollars, unless otherwise stated. This is another strong quarter for us as we mined 1,965 bitcoin with revenue of $26.7 million, while maintaining a mining profit margin of 58%. This is despite industry headwind during the quarter as the bitcoin price dropped 30%, and the network difficulty rate increased by 61%. This level of volatility is expected. However, we are consistently monitoring our ongoing operations to keep electricity prices down while maximizing our hash rate output. The cost per bitcoin for the quarter was USD 4,364 (sic) [ USD 4,363 ], inclusive of electricity costs, mining pool fees and all other mining production costs. This is favorable when compared to the average bitcoin price for the quarter of USD 10,382. Our strategy of mining and holding bitcoin while trying to sell at peak prices continues to pay off this quarter with a realized gain from the sale of bitcoin of 514,000. The bitcoin price dropped nearly 20% in the last 2 weeks of the quarter, causing an unrealized loss from revaluation of bitcoin of $10 million. Despite this, we recognized a gain of $8.2 million in unrealized revaluation of bitcoin for the 9 months ended September 30, 2019. With 2 strong back-to-back quarters, we focused on strengthening our balance sheet by repaying USD 2 million of debt to Galaxy Digital and USD 2.3 million of debt to Bitfury since the beginning of the year. We also significantly brought down its accounts -- our accounts payable since the beginning of the year, down by $14.8 million. Together, this puts Hut 8 on stronger footing to move forward. In addition to strengthening our balance sheet, we also invested in new equipment from Bitfury upgraded with their latest chip technology. This includes 9 BlockBoxes for USD 7 million, for which we already placed a USD 3.5 million deposit. This will add 113 petahash per second and 9.9 megawatts of capacity to our operations. Combined with the increase by -- of 4.3 megawatts at the City of Medicine Hat facility. This combines to an increase of 19.6% to our overall hash rate output. Although we used cash and bitcoin to pay down debt, accounts payable and expand operations, we were still able to increase retained bitcoin by 7.6% to 3,496 bitcoin at September 30, 2019, from the prior quarter of 3,250 bitcoin at June 30, 2019. Expenses, including noncash share-based compensation, for the quarter was $707,000, a slight increase from Q2 2019 of $637,000 and a decrease from $747,000 for Q1 2019. Adjusted EBITDA for the quarter was $14.7 million, with a 55% adjusted EBITDA margin. The difference between the mining profit margin and the EBITDA margin of 3% also showed the cost of corporate overhead. We've kept costs consistently lean, and we are focusing on finding new ways to further lowering our operating and overhead costs, while maintaining a high standard in our operation. I will now pass the call back over to Andrew.

[Andrew Kiguel, President, CEO & Director]

Thanks, Jimmy. So I think if I was to summarize what the quarter looked like was that despite the bitcoin price dropping, despite difficulty increasing, we still put out, I think, what is a very strong quarter. We managed to actually reduce our debt, strengthen the balance sheet, reduce our leverage. We increased our capacity by close to 20%. And despite all that, managed to increase our bitcoin inventory. So I think, overall, despite the headwinds in the industry, it was a good quarter, and we accomplished a lot of things. And again from the other aspect of being the first company to trade on the TSX in the cryptocurrency space is quite significant. We received a lot of great media around that. And I think it's something that a lot of people took notice of. So with that, I'm going to turn it back over to Paulette, the operator, and open this up for questions.

[Operator]

[Operator Instructions] And we do have a question online. [Operator Instructions]

[Unknown Analyst]

[indiscernible] from GMP Securities. My first question is on the update on the capacity expansion. I was wondering if you -- there's any chance those 9 boxes could come online before the slated end of the November time line. From my understanding, those boxes were operational originally with Bitfury and just needed to be upgraded to the newest chips.

[Andrew Kiguel, President, CEO & Director]

Yes, the target's still [ aligned ]. It's just a function that -- I believe that the chips have been delivered. And then it's just a manual process of upgrading, replacing the motherboards and sliding the new chips in. We're still on target to do sort of towards the end of November. I don't see that happening earlier. And does it -- it's not really a delay, it's just a function of getting the chips over from Korea where they're manufactured.

[Unknown Analyst]

[Audio Gap][ 3iQ ] just got approval from the OSC to list a publicly traded bitcoin fund. So I was wondering if you could talk about how this impacts [ Hut ] and what you think the benefits of owning a bitcoin by a [ litecoin person, ] a publicly traded bitcoin fund, now that they're available in Canada.

[Andrew Kiguel, President, CEO & Director]

Right. So I mean there's a whole bunch of different things there. I think part of it is for us, we own a significant amount of assets. We're an operating business. We're not a passive holder of bitcoin and charging a fee. I think it's great what the 3iQ guys are doing. We consider them friends. And there might even be some synergies there between us because -- so as guys that mine and have the occasional need to sell, and they have the occasional need to buy, there might be some potential synergies there down the road. I think some of the differences are -- is: a, we own the assets; b, we're mining at significantly below where the market price is. So our all-in price for this quarter was $4,363. So in a sense, when you're buying into Hut 8, you're [ mining ] into the ability that we're going to be able to produce at below the market price. When you're buying into a fund, it's just a passive holding. The other piece of it is, is that we're also able to take advantage of, call it, spikes or different things in the market. So during Q3, there was a period of time at the beginning of the quarter where the price spiked over $13,000. Well, we saw that and immediately took advantage of that, and we were able to monetize and capitalize on that. Again, versus a passive fund, it's a very different operation that we're able to watch these spikes and actively manage the bitcoin inventory to our advantage, and then we can reinvest that for higher ROE. And so if you were to think in the future, the price of bitcoin was to, again, double, you would see that our margins would go up proportionally more because of that. But if you're just holding the fund, either you're buying in at those higher prices or it's a passive holding. We have the ability to sort of look at what's going on and either sell into the market or continue to produce at a price that's significantly lower than the market. So I'd say that those are the key differences.

[Unknown Analyst]

Helpful. My last question is related to the network hash rate. So China just announced that they're scrapping their plans to ban bitcoin mining. What are you hearing on that front? For example, are people actively buying new equipment now that we're 6 to 7 months away from the halving? Any color on the mining industry dynamics would be helpful.

[Andrew Kiguel, President, CEO & Director]

Yes. So I -- my expectation is we always are looking at things in the most conservative way possible. So the expectation from us is that hash rate will continue to increase. There's been some new Chinese equipment that's come to the market, and is in the process, I think, probably being shipped, I think, most of it in December. So I think what you'll see is that, that equipment will come online, depending on how fast they manufacture and sell it in sort of January, February, March. We're also hearing things, for example, that a lot of the older equipment is going to come offline.So it's a little bit of a give and take. There's still a ton of older equipment out there that's producing hash rate. And is maybe marginally profitable or on the way to becoming unprofitable that we see coming off market. If you look at the current difficulty, it's projected to go down by close to 7% today in the next few hours. So that tells me that there's equipment that's coming off-line. So it's going to be an interesting mix. I think anybody who is looking to add new equipment in anticipation of the halving, has to really look at their ROEs, their IRRs, the cost of electricity and all of those things very carefully, because you just don't know what's going to happen come, call it, May 2020 when the halving occurs. Our perspective is to continue to try and grow our capacity in an accretive fashion. Try and mine for the lowest cost we can, optimize our electricity costs and hold the bitcoin inventory because we're still bitcoin maximalists here, and we think that it's going to go up. Despite that, we will take advantage of spikes that we see in the marketplace, especially if we think they're temporary in light of the price of bitcoin being volatile although on an upward, I guess, trajectory. That's my answer.

[Operator]

[Operator Instructions] And our next question comes from Brett.

[Unknown Attendee]

Brett here, private investor. Excellent quarter, hats off, guys, on the execution. So Andrew, I just want to level set into 2020 with what you've mentioned of maximizing efficiency. So you're approximately 8.8 petahash -- petahashes per megawatt right now based on your current, kind of, exiting out of the quarter this year and into the new year. So do you foresee being able to get better efficiency through your partnership with Bitfury to get that petahash efficiency up? Or are you just going to, like you say, just focus on electricity and just really [ sweat ] the assets that you have with those BlockBoxes, I guess, is my question, if that makes sense.

[Andrew Kiguel, President, CEO & Director]

It's both. And so obviously, we're very carefully looking at ways to maximize our efficiency and lower cost, which I think we've done a good job at. One of the advantages of the BlockBoxes versus other equipment is that you can just sort of slide new motherboards in and out. So we are in discussions. I think the one thing that we do have is this large bitcoin inventory that will help us finance any expansions going forward without the need to do anything potentially dilutive. We're not going to get -- force anything. But absolutely, we are looking at the halving that's coming and our petahash per megawatt and finding ways to improve that, either organically through things we can do internally, but also, obviously, on a daily basis, we're evaluating the different technologies that are out there and finding ways to sort of prepare. My perspective is as long as the equipment is making money and is profitable, we want to be ready to sort of upgrade as quickly as possible within a matter of weeks. But we don't want to necessarily upgrade too quickly. We also want to be cognizant of the fact that if the price of bitcoin goes up, so does the price of equipment and the upgrade. So we're carefully evaluating it from both sides. But we're certainly cognizant of it and working on it daily.

[Unknown Attendee]

And just a follow-up to that. And again, I know everything is dynamic in the mining industry. But would you say your ideal target is you have like a 2-year window on most of the CapEx that you spend on a BlockBox? Because it looks like about 73 of the BlockBoxes that you initially launched the company with, are coming up to, give or take, 2 years in Q1 of 2020. Is that kind of what you're focused on? Like [ indiscernible ] those to 2 years if you can?

[Andrew Kiguel, President, CEO & Director]

Well, I mean, the 2 years was really a metric that was put in by the first companies, and it's not a bad metric, and that's where we depreciate the chips inside the BlockBoxes. But the real answer is that the chips -- the life of the chip is longer than 2 years. The function is, is what's the useful life of the chip? And to me, the useful life of the chip is as long as it can continue to be profitable, you're going to continue to run it. And so if the price of bitcoin was to -- again, these are all the variables that have [ indiscernible ]. Let's say, the price of bitcoin was to double, but the hash rate difficulty took 7 or 8 months to catch up, those existing chips don't need to be upgraded. They're going to be just spinning out bitcoin and cash and revenue on our behalf. If the difficulty continues to increase faster than the price of bitcoin, in that case, then we have to look at upgrading them quicker. So there's a lot of moving parts here that we have to evaluate. And that's why, as I said before, we're sort of getting ready to be in a position to upgrade very quickly in order to get us there, but you don't necessarily want to do it too soon because that is not really in the best interest of the way we want to use our capital. The -- we just don't know. But again, we're ready to do the upgrades. But as long as the equipment is making money, and there's something sort of uncertain here, we'll continue to use them until they're no longer useful.

[Unknown Attendee]

Yes, absolutely. Yes. So you kind of answered what I was looking for. So I appreciate that. And just -- this is more for the CFO question. Just so I can model correctly on my side. So when you post out your mining income numbers, are you using the daily number on that? So the 27 -- or sorry, $26 million revenue that you posted, was that based on your total mined coin for the day based on U.S. exchange rates? Just so I know.

[Demetrios Vaiopoulos, Chief Financial Officer]

Yes, yes. So that is all based on -- let's just say, we mined a bitcoin yesterday, the bitcoin price that day would be the price we use. And then we use the daily exchange rate. And then that gets mark-to-marketed through the unrealized gain at the end of the quarter.

[Operator]

[Operator Instructions] And we are showing no further questions at this time.

[Andrew Kiguel, President, CEO & Director]

Great. Well, thank you very much, everyone. Management is always available to answer questions through our website. There's an e-mail where questions can be answered. And thank you very much.

[Operator]

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