Hut 8 Mining Corp

TSX:HUT

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Fourth Quarter Hut 8 2021 Earnings Call. My name is Brandon, and I'll be your operator for today. [Operator Instructions] Please note, this conference is being recorded.

I will now turn it over to Shane Downey. And Shane, you may begin.

[Shane Downey, executive]

Thank you. And good morning, ladies and gentlemen, and welcome to the 2021 annual earnings call for Hut 8 Mining Corp. I'm joined this morning by Jaime Leverton, CEO of Hut 8.

It was a transformative year for the business, becoming the first Canadian miner to list its common shares on the NASDAQ, surpassing 2 exahash in hashrate and well in excess of 5,000 Bitcoin held in reserve at the end of 2021.

I will run through some short disclaimer language and then jump into a summary of our annual results. I'll then turn things over to Jaime, and we'll open it up to Q&A. In addition to the press release issued earlier today, you can find our financial statements MD&A and annual information form on SEDAR, and shortly, on both EDGAR and our website at hut8mining.com. Unless noted otherwise, all amounts referred to are denominated in Canadian dollars.

I'd like to remind you that comments made during this call may include forward looking statements within the meaning of applicable securities legislation regarding the future performance of Hut 8 Mining Corp. and its subsidiaries. These statements are current expectations, and as such, are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from current expectations. These risks and uncertainties include, but are not limited to, the factors discussed in the company's annual information form for the year ended December 31, 2021.

Overall, we are pleased with the strong operating results for 2021. With the improvements in Bitcoin mining economics and our strategic capital investments, including the acquisition of the data center business from TeraGo, Hut 8 remains well positioned for continued growth. Along with record breaking financial performance, we had a tremendous year in the capital markets, being the first Canadian digital asset miner to list on the NASDAQ and also the first blockchain company to be added to the S&P/TSX Index here in Canada.

We also strengthened our relationship with MicroBT with the purchase of nearly 32,000 watts miners, substantially increasing our hashrate to an excess of 2 exahash. We also demonstrated flexibility in our approach to capital structuring, entering into a USD 30 million equipment financing with Trinity Capital. This non-dilutive capital with limited collateral support has provided valuable flexibility as we continue to pursue our growth strategy.

We achieved record revenue of $173.8 million for the year, with sequential revenue increases in each quarter over the prior year quarter. This performance was driven by strong mining activity, increased hashrate throughout the year and Bitcoin price. Our 2021 revenue was more than triple 2020's revenue of $40.7 million.

We achieved revenue of $165.4 million from mining activities as we mined 2,786 new Bitcoin at an average of approximately $59,400 per Bitcoin. This compares with $2,798 Bitcoin at an average of approximately $13,900 in the prior year.

Our hosting line of business generated $8.4 million of revenue compared to $1.7 million in the prior year. Hosting benefited from onboarding a second customer in late May of this year, whereas the prior year reflected the initial launch of our first hosting customer.

Cost of revenue for the year was $85 million compared to $59.2 million in the prior year. This resulted in -- this increase is a result of higher site operating costs, mostly electricity and an increase in depreciation expense. The increased depreciation expense was driven by the addition of over $85 million of new mining equipment over the past 12 months, partially offset by the revised estimated useful life of the company's infrastructure assets from 4 to 10 years, which was made in Q2 of this year.

Site operating costs increased due to Hut 8's continued expansion, specifically the addition of miners to our fleet. I note that in absolute terms, site operating costs were depressed in the prior year was due to poor Bitcoin mining economics, the company ran much of our mining fleet in eco-mode so as to reduce power consumption.

General and administrative costs were $40.3 million compared to $5.1 million in the prior year. After excluding noncash share-based compensation expense of $9.9 million, onetime transaction costs of $3 million and nonoperational sales tax expense of $10.7 million, G&A expense was $16.7 million compared to $2.9 million in the prior year period. This increase stems from the strategic investment of building of a larger and deeper pool of executives and managers, professional fees associated with various capital markets initiatives and the new management team's commitment to best corporate practices as well as higher insurance and investor relations costs.

The sales tax expense relates to amounts we expect ultimately to be refunded by Canadian tax authorities, have not been -- have been fully provided against due to collection uncertainty. The $10.7 million quantum is larger in 2021 due to sales tax import duties associated with our mining equipment purchases.

We currently have Bitcoin lending arrangements with Genesis and Galaxy. We earned $2.9 million of income in 2021 from our Bitcoin lending arrangements, which are reported in finance income. These lending arrangements currently earn an annual return ranging from 2% to 2.25% and allow the company to generate additional fee and cash flow while supporting our HODL strategy.

We recorded a net loss of $72.7 million for 2021 compared to a net income of $19 million in 2020. This net loss was driven by nonoperational IFRS-driven accounting treatment as opposed to the company's operating performance, which achieved record gross profit of $88.8 million compared to a gross loss of $18.5 million in 2020.

The prior year net income was driven by the combination of a $13.7 million revaluation of digital assets to the P&L, a $13.2 million impairment reversal and a $15 million deferred income tax recovery. 2021 earnings, meanwhile, are impacted by a $114.2 million unrealized loss of revaluation of warrant liability as well as a $5.6 million deferred tax expense.

With respect to the warrant liability, which, to be clear, is a new classification as of 2021 year-end, we assessed the classification of our issued warrants and determined that certain warrants which were issued in our January 2021 and June 2021 capital raise transactions met the definition of financial liabilities under IAS 32. As a financial liability, we first present these instruments in the liability section rather than the equity section of our balance sheet; and second, measure these warrants at fair value at each reporting period, while flowing the unrealized mark-to-market gain or loss through the P&L.

As at December 31, 2021, the fair value of the warrant liability was $99 million. We also recorded a cumulative unrealized revaluation loss in respective of warrant liability of $114.2 million in 2021, which was driven ultimately by the increase in the company's share price. The deferred tax expense of $5.6 million was due to a higher taxable net income, which excludes the impact of the loss on revaluation of warrant liability.

Finally, given the movements in the price of Bitcoin over the year, we recorded a $57.9 million unrealized gain on digital assets, all of which went through OCI on an after-tax basis. Taken together, this results in other comprehensive loss of $14.9 million for 2021.

Driven by the strong operating performance, Hut 8 achieved adjusted EBITDA of $96.6 million for 2021 compared to negative adjusted EBITDA of $0.2 million in 2020.

I'll now turn to Q4 results and provide some additional commentary. Fourth quarter results for 2021 also reflect many of the themes and achievements I just touched on for our annual performance. We achieved record quarterly revenue of $57.9 million compared to $13 million in the prior year's quarter. Our increased hashrate and BTC price resulted in $55 million of digital asset mining revenue, while our hosting business contributed $2.4 million.

Cost of revenue was $27.3 million versus $14 million in the prior year's quarter, with the increase driven by power consumption consistent with our increased number of ASICs deployed, average power rates as well as higher depreciation expense as a result of the expansion of our mining fleet. The cost of mining each Bitcoin for Q4 2021, excluding depreciation expense, was approximately $22,800 compared with approximately $20,200 in the prior year quarter, with the slight increase primarily due to increased Bitcoin network difficulty as well as average power prices in Alberta.

And I want to bring emphasis to the fact that our cost of mine figures are fully loaded costs, inclusive of electricity, T&D and associated fees as well as personnel and network monitoring and equipment repair and maintenance cost.

General and administrative expenses were $14.1 million for the fourth quarter versus $1.6 million in the prior year period. After excluding noncash share-based compensation expense of $2.5 million, onetime transaction costs of $2 million and nonoperational sales tax expense of $4.9 million, G&A expense was $4.6 million versus $1 million in the prior year.

The higher general and administrative costs for the quarter reflect the same factors previously discussed in our annual results, namely the investment in building out our management team, Investor Relations function and professional fees associated with corporate best practices.

We reported a net loss for the fourth quarter of $111.2 million compared to net income of $27.3 million in the prior year's quarter. The net loss was again a result of our strong operating performance, being more than offset by the previously discussed $114.2 million unrealized loss on revaluation of warrant liability, which was recorded entirely in Q4.

Our strong operating performance is reflected in our fourth quarter adjusted EBITDA of $35.3 million versus $1.6 million in the prior year's quarter.

Our balance sheet remains healthy. We raised approximately $413 million across 3 equity issuances in 2021. The proceeds from these issuances were and will continue to be invested in the growth of the company through the acquisition of mining equipments, development of our third mining site in North Bay, Ontario, as well as the acquisition of TeraGo's data center business.

We also continued to evaluate non-dilutive measures to enhance liquidity, including securing a USD 30 million equipment financing arrangement with Trinity Capital at the end of 2021.

Our Bitcoin holdings are marked at fair value and totaled $323.9 million as of December 31, 2021. This balance consisted of 3,518 Bitcoin held in custody and 2,000 Bitcoin held subject to lending arrangements with Genesis and Galaxy. We continue to emphasize our long-term HODL strategy and did not sell any Bitcoin during the quarter.

With that, I will turn the call over to Jaime, who will speak in more detail to our recent acquisition of TeraGo's data center and cloud business. And from there, we'll move across to Q&A. Jaime?

[Jaime Leverton, executive]

Thank you so much, Shane, and Good morning, everybody. 2021 was a tremendous year for Hut 8, and I'm incredibly proud to see our vision of transforming from a $100 million market cap company into a $1 billion global leader in digital asset mining and infrastructure innovation. I'd like to recognize the entire Hut 8 team and our Board of Directors for their hard work and leadership to get Hut 8 to where we are today.

In 2021, we embarked on our diversification strategy and began to do things differently, from diversifying our fleet and beginning to mine Ethereum to being the first Canadian digital asset mining company listed on the NASDAQ and being the first digital asset miner to be named to the TSX/S&P Index, from upgrading our infrastructure by ordering nearly 32,000 top-of-the-line miners and becoming a certified repair center for MicroBT, to leveraging our team's experience as data infrastructure specialists to, and most importantly, seize upon a crucial acquisition opportunity that will bring Hut 8 to the forefront of infrastructure innovation at the intersection between blockchain and Web 3.0.

It's been a year of growth, shaped by our relentless dedication to innovate and our vision of building a company capable of providing the infrastructure to support the ecosystem, working and rapidly growing blockchain environments and the nascent Web 3.0 space.

Now that we've laid the crucial building blocks, we are laser-focused on realizing continued execution, scale and growth. With over 6,000 Bitcoin on our balance sheet, we will continue to strengthen our position as market leaders, HODLers and digital asset miners. But as we've said, we're not just miners. We are business building technologists. Through innovation, imagination and dedication, we are helping to shape the digital asset revolution to create value, a platform for the future of applications built on the Internet and helping to power the fourth industrial revolution.

With our acquisition of TeraGo's data centers and cloud business, we welcomed more than 400 enterprise customers to the Hut 8 family. We also gained 36,000 square feet of geo-diverse data center space and cloud capacity, powered by emission-free energy sources. This acquisition is giving us the white space to revolutionize these conventional assets and create the industry's first hybrid data center model that provides both traditional high-performance computing and creates the infrastructure to capitalize on the nascent digital asset computing, blockchain gaming and Web 3.0 industries.

Our fleet of data centers now provides Tier 0 facilities traditionally used for our digital asset mining, all the way to 2 geo-diverse Tier 3 data centers located in Mississauga and Kelowna as part of our new TeraGo acquisition and the Hut 8 high performance computing division.

Location is key, and we're so excited to now have 8 locations across the map in Canada, with our mining sites in Drumheller and Medicine Hat, our third site, rapidly completing construction in North Bay and our new data centers in Kelowna, 2 in Vancouver, Vaughan and Mississauga, Ontario. We are thrilled to be one of Canada's fastest-growing technology company.

And with that, I will turn it back to the operator and we'll open it up for Q&A.

[Operator]

[Operator Instructions] From Canaccord Genuity we have Joseph Vafi.

[Pallav Saini, analyst]

Pallav Saini on for Joe. Congratulations on a strong finish to the year. So first, can you remind us what your mining production plan is for the rest of the year? And any additional color you can offer on the operational side of the business?

[Jaime Leverton, executive]

Yes. So I'm happy to take that. As we've communicated, we have our third site rapidly completing construction in North Bay. We actually have racking being installed at that location this week and expect to power it up within the next 4 to 8 weeks, which will bring the first 35 megawatts online, which will be approximately -- just over 1 exahash of incremental compute will come on when we power up that North Bay facility.

And then we are continuing to work towards a 6 exahash goal over the balance of the year as we look at the opportunities available in the supply chain for new mining equipment over the next few months as well.

[Pallav Saini, analyst]

Great. And following up on the TeraGo acquisition, you are now operating a truly diversified business here. What's your vision for that piece of the business as we look out 1 to 2 years? And can we expect to see more M&A along those lines?

[Jaime Leverton, executive]

Look, we've been transparent that we'll continue to drive growth through organic and inorganic means. We have proven ourselves to be patient with our balance sheet and opportunistic when it comes to deploying capital, and that's something that you'll continue to see from us. So I can't speak to anything specific because we do evaluate on a case-by-case basis. And again, we're really looking to make sure that when we deploy capital, it's into the right assets at the right point in time.

[Operator]

And from Craig Hallum, we have George Sutton.

[Unknown Analyst]

It's actually [ Adam ] on for George. Could you give us an update about your thinking about capital allocation now that you've acquired the data center assets, specifically between mining, hosting and the DC business?

[Jaime Leverton, executive]

The capital requirements of the different businesses are fundamentally different. I'm not sure of a better way to say it. Mining compute is obviously very capital intensive. There's a lot more power dedicated to the mining side of our business. Whereas, the data centers that have come in through the TeraGo acquisition are more traditional enterprise style data centers. The capital required is fundamentally different and the power is obviously quite a bit less. But it's a different motion as far as the white space, the infrastructure involved in those facilities.

So we will continue to look at how we deploy capital based on where we see the market opportunity, the demand coming in from customers and from the ecosystem as we continue to build out some new -- some of our new product thinking.

[Unknown Analyst]

Great. And to make that a little more simpler. Any updated thinking on how you look at hosting versus proprietary mining?

[Jaime Leverton, executive]

We are -- don't quote me on the numbers. We're probably 94% prop mining today at our mining sites. And really, the focus is shifting to hosting colocation and cloud-managed services really in the TeraGo data center. So the focus will be using the TeraGo data centers for that nondigital asset mining revenue and focusing our traditional -- our traditional mining sites will be predominantly prop mining.

[Unknown Analyst]

Great. And then one final question for me. There's a modest pickup in cost per coin quarter-over-quarter. Curious to know if you have any insight on with the third site coming online with lower power costs, do you expect material changes in cost per coin over the next year?

[Jaime Leverton, executive]

Well, that requires taking a view on the overall global network hashrate and difficulty. And that's the challenging part. Difficulty and hashrate have moved up quite quickly over the last few months. And that's really the primary impact that's difficult to predict. And everybody kind of needs to run their own models on where they think hashrate and difficulty are going in the short and medium term.

[Operator]

And from D.A. Davidson we have Chris Brendler.

[Christopher Brendler, analyst]

It's actually, Chris. I just want to follow-up with that last question. Understand that obviously hashrate and the network has a big impact on your cost for coin. But I do think that the North Bay facility -- our understanding, at least previously, with -- we could potentially see a pretty significant improvement in cost. So absent like a big change in the network, could we get sub-20,000 here potentially once North Bay is fully operational?

[Jaime Leverton, executive]

We potentially could. But again, it really depends how everything moves across the different variables that go into those -- to the costs and the Bitcoin mining economics globally.

[Christopher Brendler, analyst]

That's a very good answer You definitely. can't say for sure. Okay. Let's go to the other side of the coin. How about the miner deliveries to get to 6? I think we have 10,000 still coming. So you still need to close that gap? But I've heard that pricing has gotten a little better for new deliveries. Can you just talk about your strategy there as you get to -- ramp to 6 exahash?

[Jaime Leverton, executive]

Yes. So we're very consistent as far as how we look to deploy capital into hardware. And you're absolutely right. The pricing that we had been seeing in the last few months was, we thought, out of sync with where the economics were. From an IRR perspective, we expected the price per terahash to come down, particularly as we see new entrants moving into the ASIC manufacturing space. And we are starting to see some of that softening now and actually better delivery lead times as well. So a softening in price and better delivery time.

So we're constantly evaluating what's going on in the marketplace, and we'll continue to do so and be opportunistic accordingly.

[Christopher Brendler, analyst]

Okay. Maybe Jaime, [indiscernible] for Shane was well. The strategy of lending out Bitcoin rather than borrowing against it, just given the pretty dramatic change we've had in the capital markets' appetite for Bitcoin miners, and if things don't improve, the stock price doesn't go higher, is lending it out better than borrowing against it?

[Jaime Leverton, executive]

Well, I can start and then have Shane chime in. We have borrowed against it in the past when capital markets were constrained and mining economics weren't as good in order to preserve our Bitcoin balance, but access capital. We have used our Bitcoin to do that in the past.

We currently don't have Bitcoin encumbered. We are using the yield relationships instead. But again, it's a decision that we make based on what's available in the market. And we're certainly not against it. It's a tool we've used in the past.

Shane, I don't know if you have anything to add there.

[Shane Downey, executive]

Yes, not a lot to add. I would say it's certainly something, even like to today, with sort of more or less a moment's notice almost or a day's notice. We could go ahead and execute on that, borrowing against Bitcoin. So yes, it's definitely something in the toolkit. And we've, to date, like Jaime said, sort of very intentionally -- in the last year, anyway, very intentionally not pursued that path.

[Christopher Brendler, analyst]

Okay. I'll ask one last one because I can't resist. Ethereum mining, how much does that contribute in the most recent, like -- I guess it's still doing a very good job, like 15%, 20% of your Bitcoin mine is actually Ethereum. But that could change. Any update on what happens if that does change when we go to Eeb 2.0?

[Jaime Leverton, executive]

So our answer remains the same. We really don't have a time line for that move to -- for Ethereum to go proof-of-stake. It's obviously been talked about for many years. If and when that happens, we would move our compute to the next most profitable blockchain to mine using our GPUs. And I think currently that is Ethereum Classic, but I haven't checked it in a while.

[Operator]

No further questions at the moment. We'll just pause for a moment in case. [Operator Instructions] And we have [ David Shapiro ] online.

[Unknown Analyst]

Yes, Jaime. I was just curious to what extent you've looked at immersion cooling to drive down your electricity costs?

[Jaime Leverton, executive]

Yes. We've looked at immersion. There is some interesting new tech happening in the space as the space matures. And it's something our Head of Technology, Jason Zaluski, pays very close attention to.

We have the benefit of being in cold climates in our mining sites. Drumheller, Medicine Hat and North Bay, all take advantage of significant free air cooling, which means we're not requiring CapEx or incremental OpEx to cool the equipment. We let Mother Nature up here in Canada do that for us.

So for us, it's a bit of a different conversation and the ROI calculations that we run are different. That said, the space is maturing and we're paying close attention. And when it makes sense for us, we'll look at it. But again, we let Mother Nature do the work, and she doesn't charge us for it.

[Operator]

All right. And it looks like no further questions at the moment.

[Jaime Leverton, executive]

Okay. Then we wish everybody a very happy St. Patrick's Day. Thank you all for joining and your continued support.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining, and you may now disconnect.