Argo Blockchain plc
Q3 2023 Earnings Call Transcript

Published: 16 Nov 2023

[Operator:]

Good afternoon, and welcome to the Argo Blockchain plc Q3 Update Investor Presentation. Throughout this recorded presentation investors will be in listen-only mode. Questions are encouraged, can be submitted at any time by the Q&A tab situated on the right-hand corner of your screen, click Q&A scroll to the bottom type your question and press send. Given the large attendance on today's call, the Company will not be in a position to answer every question received during the meeting itself. However, the Company will review all questions submitted today, will publish responses where it's appropriate to do so. Before we begin, I would like to submit the following poll. I'd now like to hand you over to Tom Divine, Vice President of Investor Relations. Good afternoon.

[Tom Divine:]

Thank you, Paul. Before we begin, I'd like to remind everyone that today's presentation and remarks may contain forward-looking statements. For our full risk factors, please see our Form 20-F filed with the Securities and Exchange Commission for the year 2022. With us today for our discussion of Q3 2023 results are Seif El-Bakly, Argo's Interim Chief Executive Officer; and Jim MacCallum, Argo's Chief Financial Officer. And now I'll turn it over to Seif.

[Seif El-Bakly:]

Thanks, Tom. Hi, everyone. Thanks for joining us today to discuss our Q3 results. It was a strong quarter for us, and I'm excited to dive into the numbers. Just a quick reminder for everyone of our three key priorities that helped guide us on a daily basis, we continue to focus on financial discipline and deleveraging, operational excellence, growth and strategic partnerships for the sustainable future of this company. I hope you're seeing how these priorities have been manifested in the performance of the business over the last couple of quarters. Before we dive into the Q3 results, I want to take a few minutes to discuss the current macro environment and some recent trends that we're seeing. The network hashrate continues to increase at a fairly rapid pace. The global network started the year at roughly 270 exahash per second, and it has grown approximately 70% over the course of the year. Over the last two years, we've seen some seasonality emerge in hashrate and network difficulty partly due to the large amount of hashrate going online in Texas. During the summer months, we saw instances where hashrate decreased as Texas miners curtailed operations in response to high power prices. This is something we experienced at Helios, which generated significant proceeds in form of power credits. I'll go into more detail on that a little bit later. But that seasonality does have an impact on network difficulty in hash price, so it's something that we monitor closely, especially as we head into winter months where cold weather can also impact grid conditions and power prices. Overall, the third quarter saw hash price trend down, bottoming out at around $60 per petahash per day during August and September, but it's rebounded strongly in late October and so far into November, rising to over $90 per petahash per day. We've historically seen those temporary spikes from ordinal mint before, which drive up transaction fees. We do expect hash price to stabilize as the backlog of transactions is processed. Hash price takes into account the price of Bitcoin, the network difficulty and transaction fees at any given time. It's a metric that we pay close attention to. Every $10 increase in the dollar per petahash per day has the potential to generate approximately an incremental $840,000 of revenue per month or $2.5 million per quarter based on Argo's total hashrate capacity. We're also paying close attention to some upcoming events that we believe will impact our business. For one, if approved by the SEC, we believe that at spot, Bitcoin ETF, will bring large institutional cash inflow into the space and will ultimately increase demand for Bitcoin. And of course, we have the 2024 halving approaching in late April of next year. As everyone knows, the halving is a feature of the Bitcoin protocol, whereby the block reward is reduced by 50%. As we approach the halving, our key focus is on three things

[Jim MacCallum:]

Thank you, Seif. As you mentioned, we generated $10.4 million of revenue for the quarter, a decrease of 17% from Q2 resulting from economic curtailment. However, the power credits that we generated from the curtailment reduced our net power costs significantly and increased our mining profit to $6.1 million. Our mining margin percentage was 58% for Q3, an increase over the 36% mining margin we achieved in Q2. During the quarter, we recorded a onetime noncash provision of $1.2 million related to prior year sales tax expected to be received from the Canadian tax authorities. This is the majority of the $1.5 million of nonrecurring expenses that we added back to adjusted EBITDA. We generated adjusted EBITDA of $3.1 million, which is a strong improvement from the second quarter. For the nine-month period ended September 30, we generated $5.3 million of adjusted EBITDA. At the end of the quarter, we had $8 million of cash on hand. As Seif mentioned, we've seen a significant increase in hash price in October and so far into November. With our total hashrate capacity, every $10 increase in hash price results in approximately $2.5 million of incremental revenue per quarter, which dramatically improves our profitability and cash flow. This slide shows our cash flow from the end of June to the end of September. Our cash flow from operations, excluding working capital changes, was $1.5 million. As Seif mentioned, we raised $7.5 million in gross proceeds from the sale of equity, and we paid down $7.8 million in principal and interest on our debt. At the end of the quarter, we had a net power receivable of $2.8 million. Adding that to the $8 million closing cash balance would have given us $10.8 million at September 30 compared to $9.1 million at June 30. We are pleased that we continue to improve our operating cash flow with our focus on operations and cost reduction. As we've shown in prior quarters, we continue to scrutinize all of our non-mining operating expenses and find ways to reduce costs. In Q3, we reduced our recurring non-mining operating expenses by 11% as compared to Q2. Since the second half of 2022, we've cut our non-mining operating expenses by more than 70%. This cost reduction is important because it improves our overall margin and cash flow generation. Again, one of our key priorities is to reduce debt, which is critically important as we approach the halving. In Q3, we reduced our debt owed to Galaxy by $5 million to $27 million, and we ended the quarter with $70 million in debt. We are also in advanced discussions to sell certain noncore assets, which is an important part of our deleveraging strategy. We anticipate announcing further details by the end of the year. With that, I'll pass it back to Seif.

[Seif El-Bakly:]

Thanks, Jim. In Quebec, we've now completed the deployment of our ePIC BlockMiners numbering around 2,700. This represents around 300 petahash of additional capacity, bringing our total hashrate capacity to 2.8 exahash as per second. We're seeing really good performance from these machines, and we're excited to have added them to our fleet just in time to take advantage of the recent run-up in hash price. So all in all and in summary, it was a great quarter for Argo. We increased our mining margin, our adjusted EBITDA and our total hashrate capacity, all the while continuing to cut costs and reduce debt. I'm also really optimistic about the trends that we've been seeing in the market with the increases in both Bitcoin and hash price. Argo is well positioned to capitalize on these trends as we move forward into 2024. With that, back to you, Paul and Tom, for any questions. Thanks, everybody.

[Operator:]

[Operator Instructions] I'd like to remind you, a recording of the presentation along with the copy of the slides and the published Q&A can be accessed via your Investor dashboard. As you can see, we've had a number of questions submitted both throughout today's presentation and pre-submitted. Tom, if I may just hand back to you just to read out those questions where appropriate to do so, and I'll pick up from you at the end.

[Tom Divine:]

Great. Thanks, Paul. Our first question comes from Bill Papanastasiou at Stifel. Hash price has been rebounding lately with the recent appreciation in the Bitcoin spot price. Can you speak to the improvements in Q4 '23 and elaborate on how it is impacting cash flow?

[Seif El-Bakly:]

Yes, sure. I'll take. Thanks, Tom. Thanks, Bill. Yes, the hash price is something that obviously we're paying very close attention to. It's come down a bit from its most recent peak at $90, but it's still significantly higher than the Q3 average of $67. So I mentioned this during our remarks, but really, for every $10 increase in hash price, based on our total hash rate capacity of 2.8 exahash, we're generating an additional $2.5 million per quarter. So we did just have a difficulty increase of around 3.5%. So that tempers a little bit with the hashrate, but it's actually smaller than the difficulty adjustment we were actually expecting a year ago -- a week ago, sorry, not a year ago.

[Tom Divine:]

Our next question comes from Kevin Dede at H.C. Wainwright, and this is for Jim. Can you remind me how you reduced the debt by $5 million? Did that come from operating cash flow?

[Jim MacCallum:]

Yes. Thanks, Kevin. In July, you'll recall, we raised around $7 million of net proceeds, and immediately, 25% of that went to reduce the debt. Plus, we had another three amortization payments of roughly $1.1 million each, and that came out of our operating cash flow and cash on hand. So that's the three plus the $1.7 billion is $4.8 million or approximately $5 million there.

[Tom Divine:]

Thanks, Jim. Our next question comes from Chase White at Compass Point. Seif, now that all your machines are installed and operations are going well, do you have any visibility into future growth options? Is there a time frame for making any decisions?

[Seif El-Bakly:]

Yes, absolutely. Thanks, Chase. Look, we're continuing our discussions with some key strategic partners and hope to share some updates with you on our next call. Right now, we're -- in parallel to that, we're focused on reducing our debt and cost structure. So it's really going to allow us to be opportunistic when we're thinking about the halving. So I think we're going to see a lot of opportunities in the market as a lot of unprofitable miners come offline, and we're basically just going to be ready to take advantage of that be it from an operational perspective, financial perspective or a strategic partnership perspective.

[Tom Divine:]

Our next question was submitted in the chat. How were the non-mining expenses reduced by 11%? And is that reduction stable going forward?

[Jim MacCallum:]

Yes, I can take that. As I mentioned earlier, we were able to reduce our recurring non-mining OpEx by around 11% from the prior quarter. This was primarily driven by lower insurance costs, lower professional fees and lower salaries as a result of reduced head count. And so yes, we believe this is going to be an ongoing reduction going forward.

[Tom Divine:]

Thanks. Our next question for Seif from Kevin Dede again from H.C. Wainwright. Can you speak a little bit about how the ePIC BlockMiner machines are performing in Quebec?

[Seif El-Bakly:]

Yes. Thanks, Kevin. Performance is just better than expected. We're seeing really good results, especially when we overclock them to about 130 terahash per unit. Currently, they're averaging about 114 terahash through the fleet. So they're representing about 11% of our overall hashrate capacity right now. Efficiencies on par with the S19J Pros. They're capable of achieving good efficiency when we down clock them. So down clocking them brings them to about 27 joules per terahash. Uptime is outstanding, thanks to Quebec's reliable power. We're entering our curtailment season in Quebec, so minimal downtime still despite that is to be expected. Firmware-wise, it's stable. It's performing as expected. ePIC has been providing us with all the right updates and then the installation process was amazing thanks to our tech. I got to -- kudos to our operations team here. I think the rigs were deployed within 48 hours once they got to the data centers. So all in all, Kevin, I would say that they're performing better than expected.

[Tom Divine:]

Thanks, Seif. Our next question is for Jim. This comes from [Jason F.] in the chat. Can you comment on Argo's capital structure and how you plan to continue addressing debt?

[Jim MacCallum:]

Yes. Thanks, [Jason]. Yes, we continue to focus on paying down our debt. We've made significant progress in paying down our Galaxy debt especially, and we are continuing to look for other ways to strengthen the balance sheet. Some of the avenues we're exploring include noncore asset sales and potential refinancing of our existing debt. We have seen, with the improvement in Bitcoin mining economics over the past month, more appetite for debt and equity financing from the capital markets. So we're having lots of conversations on that front as well.

[Tom Divine:]

Another question that we've received several times in the chat, how do you plan on -- or do you plan on expanding the mining capabilities in Canada? And do we plan on renewing our contract with Galaxy and continue to mine at Helios once the two-year contract expires?

[Seif El-Bakly:]

Yes, I'll take that. So good question. I think having our history or Argo's history beginning in Canada, I mean we know it. We understand it. We love the reliability of the power here. But we're also nimble. We're flexible, and most importantly, we're mobile. So which really makes those geographically agnostic. When we're thinking about growth and opportunity, we're really looking at anywhere from hydropower in Quebec or Texas or the deserts of Oman. So we're really open and having these discussions accordingly and remain opportunistic and again, geographically agnostic.

[Tom Divine:]

Thanks, Seif. Another question that we've received several times, including from [Sabir B.], [Sagar S] and [Satish P], when should we expect to hear more about the discussions mentioned on the asset sales?

[Seif El-Bakly:]

Yes. Thanks, [Savir, Sagar] and everybody else. I mean I appreciate everybody's patience on this. As Jim mentioned, we're still in advanced discussions with partners. We're genuinely making good progress here, and we anticipate sharing something hopefully by the end of the year.

[Tom Divine:]

Our next question comes from Bill Papanastasiou. What are your network hashrate forecasts post halving and how will ARBK remain competitive?

[Seif El-Bakly:]

Yes. Good question, Bill. Thanks. I mean we're expecting to see a lot of hashrate come offline as miners with older-generation machines and an older fleet, mining -- as mining gets more expensive and power contracts or good power contracts, it's just more difficult to find and to mine profitably. So as we've seen in past halving cycles, I think the difficulty adjustment will fluctuate back and forth as the network flushes out the miners that are just right on margin or below. And I'm going to say this again. I mean, really, our focus is what we can control, and it's why, in my initial comments, I say that we're so focused on efficiency and costs. So relative to the entire network, we have an efficient fleet. We're competitive from a power and hosting cost perspective. Year-to-date, our power hosting has been all in at around $0.045 per kilowatt hour. So we're looking at, again, efficiency in operations, and we're also looking at potential hedging opportunities using derivatives, which I think everyone in this space should be looking into. And so I think those factors, the ones at least that are in our control, should enable us to remain competitive and continue to mine profitably after the halving. So thanks for the question, Bill. It's a good one, and we're conscious of all of that.

[Tom Divine:]

And then this will be our last question from Kevin Dede at H.C. Wainwright. Seif, can you clarify, when you reached 2.8 exahash, did that come from the BlockMiner machines?

[Seif El-Bakly:]

Yes. So thanks, Kev. In our September monthly operational update, we announced that we had completed the deployment of our ePIC blockchain machines. So -- and they represent around 300 petahash of hashrate capacity. So that essentially enabled us to grow from 2.5 to 2.8 exahash. So the BlockMiners have been online and hashing since the end of September.

[Tom Divine:]

Great. Thank you, Seif. Paul?

[Operator:]

Fantastic. Thank you very much indeed for addressing those questions. And of course, the Company will review all questions submitted today and will publish responses on the Investor Meet Company platform. Before redirecting investors to provide you with their feedback, which is particularly important to the Company, Seif, if I could just ask you just for a few closing comments, please.

[Seif El-Bakly:]

Yes. Thank you, Paul. I just want to thank everyone around the world for tuning into our earnings call today. Again, it was a great quarter for Argo with improvements in mining margin, adjusted EBITDA and hashrates. So we really continue to focus on deleveraging and reducing costs and looking forward to our next call to give everybody some more updates. So thank you, everybody. Be well. Thank you, Paul. Thank you, Tom. Thank you, Jim. Thanks, team.

[Operator:]

Thank you all for updating investors today. Could I please ask investors not to close the session as you'll be automatically redirected to provide your feedback in order the team can better understand your views and expectations? This will only take a few moments to complete and is greatly valued by the Company. On behalf of the management team of our Argo Blockchain plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.