Argo Blockchain plc (OTCPK:ARBKF) Q1 2024 Earnings Conference Call May 23, 2024 10:00 AM ET
Company Participants
Thomas Chippas – Chief Executive Officer
Jim MacCallum – Chief Financial Officer
Thomas Chippas
Thank you, [Marcella], and thank you to everyone for joining us today. We recently shared our 2023 full year results, and I’m excited to update you on our progress, since then for this quarter.
As everyone is aware, the fourth Bitcoin halving occurred just over a month ago, and Argo exited having with a stronger balance sheet and leaner operations. As seen here, financial discipline, including deleveraging, operational excellence and certainly growth and strategic partnerships are our R3 priorities, and they guide us on a daily basis for the sustainable future of Argo.
By concentrating on these goals, we’re optimistic about the ongoing growth and development opportunities for Argo, and we have a clear objective of delivering shareholder value. I’m certainly excited to continue with the great work the team is doing and tell you more about what we’ve been up to.
A few comments first on the macro front. With the 2024 having complete, the block subsidy that miners collect now stands at 3.8 Bitcoin down from 6.25. The launch of spot ETFs for Bitcoin were certainly big drivers of price from $40,000 to $75,000, but after the halving ETF holders began selling and it actually resulted in about seven days of net outflows, a reversal of day-after-day of net inflows for those ETFs. Although initially there was a spike in transaction fees post halving, it was short lived and fees declined in the subsequent weeks. Rooms, one of the drivers of fees the initial period post halving are now generating far lower fees than regular transactions compared to the weeks succeeding the halving. As a result, fees today have dropped below the first quarter’s average of 64 spot 39 Bitcoin, and hash price is coming down from post halving runes driven high.
Concurrently, the network hash rate hit an all-time high of 654 exahash before the halving, but dropped to 580 over the following three weeks. This reduction can be attributed to miners, adjusting efficiency settings in their machines and some shutting down temporarily. This might appear significant, but such a decline, it’s not out of the ordinary and this happened on two occasions previously this year.
Going forward, the hash rate is likely to oscillate as hash price changes. However, for the near-term, due to highly compressed mining margins and the upcoming summer months here in the U.S. hash rate growth will likely be restrained. And then just looking beyond Bitcoin for a moment, for the long-term, the Head of the U.S. Federal Reserve has suggested that, the central bank might have hit its peak rate cycle height, which is promising for Bitcoin mining because it suggests more favorable environment with, potential for increasing Bitcoin prices.
With that, we can talk a little bit about our 2024 results. We generated approximately $17 million of revenue in Q1, which was an increase of 4% from the last quarter of 2023, really due to elevated hash price. At the end of the first quarter, our cash in hand stood at $12.4 million, which is an increase from the $7.4 million at the end of 2023. As mentioned previously, we had some significant balance sheet events occur in Q1 2024, including an equity raise of nearly $10 million in January and the sale of our Mirabel facility in Quebec in March. The proceeds were used to repay the facility’s existing mortgage and pay down some of the debt owed to Galaxy.
So let’s move on to the next slide. We can talk a little bit more about debt reduction in further detail. As discussed on the previous call, debt reduction has been a focus for us since we sold Helios and restructured our debt at the end of 2022. As noted, we executed two significant transactions in the first quarter of ‘24, bolstering our cash position in addition to reducing our debt. That being the equity raise and the Mirabel sale.
The Mirabel sale was a great transaction for a number of reasons. First, we realized an attractive exit on the asset with a $6.1 million sale price. And secondly, consolidating our Quebec fleet to Bake Homo allowed us to streamline operations with minimal impact to revenue. We were able to execute the move quickly and we realized an annualized reduction in OpEx of about $700,000 per annum.
Now let me turn it over to Jim for a deeper dive into Q1 financial results. Over to you, Jim.
Jim MacCallum
Thank you, Tom. During the first quarter, we mined 319 Bitcoin and our mining margin percentage for the quarter was 38%, which is an increase from the 34% achieved in Q4 2023. We generated revenue of $16.8 million and $0.6 million in power credits from economic curtailment in Texas. As mentioned, this curtailment helped us to achieve a mining margin of 38% this quarter, with an average direct cost per Bitcoin mined of approximately $32,000. We raised $9.9 million of gross proceeds through an equity raise in January, of which we used a portion to pay down our Galaxy debt.
As Tom mentioned previously, we also sold our Mirabel facility in March for $6.1 million. The accounting gain net of tax for this transaction was $3 million. Our adjusted EBITDA has increased almost two-fold over the last year and was $3.8 million during Q1 2024.
This slide shows our cash flow from December 31, 2023 to March 31, 2024. We continue to have a strong focus on cash flow generation and strengthening the balance sheet. In Q1, our cash flow from operations, including working capital changes was $3.7 million. We used that for debt reduction and we paid $1.7 million of interest during the period. During the first quarter of 2024, we improved our cash position by $5 million to over $12 million, while simultaneously paying down our debt by over $12 million.
With that, I’ll turn it back over to Tom.
Thomas Chippas
Thanks Jim. So in the period since our last — since our full year results, we have maintained our streamlined operations in Quebec through the consolidation of the fleet of Bake Homo post Maribel. As I mentioned, as part of that fleet consolidation, we did not take the opportunity to decommission — I’m sorry, we did take the opportunity to decommission and sell some older generation machines, which reduced our total hash rate from 2.8 to 2.7 exahash. We still have the majority of our fleet roughly 2.4 exahash of total hash rate capacity located at Helios in Texas.
Now, as we think about growth in the sector is focused on, of course, transitioning to clean energy, which has always been a focus for Argo, and it requires investment in the power grid and certainly in demand response technology. As we’ve stated, as of others in the industry, we believe, Bitcoin miners can play a very important role in that transition. Bitcoin miners are exceptionally agile and well-suited for low balancing programs. By acting as a flexible load, Bitcoin miners can help balance the grid by spinning up and spinning down quickly when required.
Argo is having discussions focused on ways to integrate our operational capabilities with those of energy companies, and we certainly look forward to updating everyone on those discussions in due course. As we continue, in our mission of powering an innovative and sustainable blockchain infrastructure, these three pillars will continue to be our focus.
With that, back to [Marcella] for any questions.
Question-And-Answer Session
A – Unidentified Company Representative
First question is from Kevin David from H.C. Wainwright. It’s directed to Thomas. Can you elaborate on the Galaxy relationship, their plans for the Kenya site, and how you expect mining to progress through the hot summer months, including the potential for curtailing? Additionally, are they given the opportunity to overclock? And if so, have you taken advantage of it?
Thomas Chippas
Thanks for your question, Kevin. A compelling aspect of our operations at Helios is, of course, the facility’s ability to curtail, during periods of high power prices. For most of 2023, we procured electricity through fixed price power purchase agreements, which ensured a stable cost of power. However, when market prices are high, of course, we can curtail or shut down operations and sell electricity back on the open market, a process known as, economic curtailment. And as we discussed in the previous call, it generated about $7.2 million in power credits, directly reducing our cost of mining. The curtailment helped us achieve a mining margin of about 38% this quarter, with an average direct cost per Bitcoin mined of about $31,000.
During the hot summer months, we expect to continue practicing economic curtailment when necessary. Additionally, we do have the opportunity to overclock our rigs to optimize performance, and we’ll do so when conditions are favorable. Thank you for that, Kevin.
Unidentified Company Representative
Thank you, Thomas. Next question, it was pre-submitted in the chat and it’s directed to Jim. Will Argo invest into infrastructure again or only focus on machines?
Jim MacCallum
Yes. Thanks for the question. Currently, we have both hosted machines at Helios, in Texas and owned machines that are based in Homo site in Quebec, where we can also expand our capacity. As market evolves, we think there will be opportunities in both the hosted space and doing our own investing in infrastructure and we’ll evaluate these decisions on a case-by-case basis. Thank you.
Unidentified Company Representative
Thank you, Jim. Next question was again pre-submitted, and it’s directed to Thomas. What can you say about the growth opportunities you are seeking out for Argo? Any details on the size, type, timing?
Thomas Chippas
Thank you for that. We cannot get into details right now, but given Argo’s size and market position, we believe that smaller sites with unique power cost and availability characteristics could fit well into our portfolio. Look, there are certainly many groups on the hunt for power resources right now, not just Bitcoin miners. But we think our size may be an advantage here, as we flesh out opportunities and certainly we’ll have more to say when we can about those.
Unidentified Company Representative
Thank you, Thomas. The next question is from Kevin Dede at H.C. Wainwright once more, and it’s directed to Jim. How do you plan to return to growth while balancing debt obligations?
Jim MacCallum
Thanks Kevin. We’ve had a strong focus on costs over the past year and feel the heavy lifting has been successfully completed here. Our run rate, as we said for non-mining operating expenses has trended to approximately $1 million per month, and we believe that’s a reasonable outlook for the balance of the year.
Our new vision centers on optimizing operational efficiency, strengthening the balance sheet and reducing debt. We aim to leverage strategic partnerships and explore sustainable growth projects while maintaining our commitment to renewable energy sources. Given that we exited the Bitcoin having with cash of just over $12 million and reduced our debt by over $12 million during the first quarter. Our goal is in a strong position and the company is in a growth mindset now and will continue to focus on fiscal responsibility.
Unidentified Company Representative
Next question is [Chris Bennett] and it’s directed to Jim. Can you speak to power prices for the second quarter?
Jim MacCallum
Yes. I mean, we can’t go into too much detail here, but power prices during the second quarter, which include obviously the early part of the summer are subject to significant volatility, which we certainly saw last year. This period often sees heightened uncertainty due to the potential for heat waves, which can drive up demand and consequently prices. To navigate these fluctuations, we have to remain agile and capitalize on any economic curtailment programs that may arise. We can’t give some color.
April was clearly a strong month for Bitcoin economics. For May, despite the Bitcoin having through lower power prices and optimization of our fleet’s efficiency settings, we have seen mining margins in the 30% range, albeit on the lower revenue resulting from the having. We will closely monitor market trends and price movements and this proactive approach will enable us to adjust our strategies in real time and optimize our mining profitability, while mitigating the risks of hash price and energy cost volatility.
Unidentified Company Representative
Next question submitted in the chat directed to Thomas. Does Argo have any plans to branch into AI data centers?
Thomas Chippas
Thank for that. With respect to AI and HPC, this is certainly a very topical area amongst miners. We understand the demand for HPC processing in the market but I think it’s a different business than operating a Bitcoin mining facility. We have explored the possibility and we’re certainly not ruling it out for the future. However, our current strategy remains centered on Bitcoin mining operations.
Unidentified Company Representative
Thank you, Thomas. Next question was submitted by Bill Papanastasiou at Stifle and it’s directed to Thomas. We have seen mining economics weak in following the having event. How is management approaching the capital allocation strategy of balancing expense management with growing, upgrading the fleet? Is there any near term path of a shift towards the growth in the future?
Thomas Chippas
Thanks for that Bill. Argo’s fleet operates flexibly, which allows us to adjust power consumption through, over under clocking, like a dimmer switch allows you to control the brightness of a light. And I think Jim referenced that in his comments about Q2 power. In the current market and recognizing the weaker mining economics this adaptability is essential. We fully appreciate the capabilities of newer generation machines and the efficiency they bring.
Our growth strategy when it comes to fleet, we’ll always consider hash price, rig availability and energy cost amongst other factors. As I’ve said, we are shifting back to a growth mindset. We want to leverage our size to target sites that may be less appealing to larger miners and explore what opportunities we can there, and we’ll find the right fleet for those opportunities when they present themselves. Our capital allocation strategy is going to balance expense management, with fleet upgrades and ensure that we can remain competitive and ready for future opportunities, as they arise in the industry. Thanks, Bill.
Unidentified Company Representative
Thank you, Thomas. Next question was also pre-submitted and directed to Jim. How does Argo plan to manage its debt and what are the prospects for refinancing?
Jim MacCallum
Yes. Thanks for that question. We’re pleased with how we’ve managed our Galaxy debt. Over the past year, we’ve paid it down, it started at $35 million. We paid it down $23 million or approximately 2/3 of the total balance over the last 12 months. At March 31, we reported cash of over $12 million and our Galaxy debt has been substantially reduced to $12.8 million. We exited the having in a strong fiscal position and continue to focus on paying down this debt and strengthening the balance sheet. Thank you.
Unidentified Company Representative
Thank you, Jim. And another pre-submitted question for Thomas this time. What are your plans for increasing efficiency and reducing the recent downtime at several Bitcoin mining facilities?
Thomas Chippas
Thank you for that question. With the relocation to big Homo as I noted, we consolidated our infrastructure. And as discussed on the previous, downtime was minimal and had minimal impact to revenue. In response to downtime that we saw in February, as we also noted on the previous call, there was some maintenance upstream by power providers that was beyond our control. I think when you look at our operations team, they’re doing a very good job of maintaining uptime across the fleet and they continually work to improve operational efficiency. You can observe that, when looking at the 5% increase in daily Bitcoin production in March of ’24 compared to February ’24. We’ll continue to look for ways to enhance efficiency and reduce our susceptibility to downtime events on an ongoing basis. Thank you.
Unidentified Company Representative
Thank you, Thomas. Another pre-submitted question directed to Thomas once more. Can you give an update on where hash rate currently stands across all facilities? Additionally, assuming past prices normalized post halving, what strategies can you implement to lower your direct and all in cost for B2B mine to mitigate losses?
Thomas Chippas
Thank you for that. Our hash rate capacity at big Homo was about 300 petahash and that’s the Bitcoin miners and the efficiency on the nameplate for those machines is anywhere from 30 to 35 joule per terahash. At Helios, where we have about 2.4 exahash, we’re running the S19J Pros, and the nameplate efficiency is about the same in the 30 to 35 range.
To lower our direct and all in cost per Bitcoin mined, we’re going to continue to optimize the fleet for operational efficiency and leverage economic curtailment during high power prices. I think going forward, we’re open-minded about strategic opportunities for equipment acquisition and site acquisition and what have you and we’ll continue to focus in the interim on maintaining cost-effective operations to ensure that we’re getting the best out of the fleet that we can. Thank you.
Unidentified Company Representative
Thomas, I think we have time for one last question. With this one, let’s wrap that up. Last question pre-submitted directed to Jim. What was the thought process around selling the Mirabel facility?
Jim MacCallum
Yes. There were clearly a number of factors that went into this sales decision. Firstly, we were very happy with the price. We think the sale price of $6.1 million, which equates to approximately $1.2 million per megawatt for that site, was significantly more than what it would cost to develop a facility in North America. So we were pleased with the price, first of all.
Secondly, the sale provided an opportunity, as Tom mentioned to consolidate our operations into the Baie Comeau facility. So going from two facilities in Quebec to one, allowing us to reduce our overhead and operational expenses contributing to greater overall efficiency for Argo.
And then lastly, the consolidation as we’ve mentioned has had minimal impact on our overall hash rate and revenue generation from relocating the machines, we’re able to maintain our hash rate capacity while at the same time streamlining our Quebec operations, which allows us to focus the resources and management efforts more effectively. And additionally, the net proceeds from the sales strengthen our financial position, support our growth initiatives and reduces our interest expense going forward, which is important. So these were the primary factors in deciding to sell the Mirabel facility.
Thomas Chippas
Thank you everyone for joining us today. It goes without saying, it’s certainly an exciting time in the mining space and we think an exciting time for Argo. We look forward to speaking with everyone again in a few weeks at our annual journal meeting on June 6. Thank you very much for your time.
Operator
Fantastic. Thank you very much indeed. For updating investors today, I could please ask investors not to close this session, as you’ll now be automatically redirected to provide your feedback in order the management team can better understand your views and expectations. This will only take a few minutes complete, but maybe greatly valued by the company.
On behalf of the management team of Argo Blockchain, we’d like to thank you for attending today’s presentation. That concludes today’s session and good afternoon to you all.
