Good morning. Thank you for standing by, and welcome to Cipher Mining's Third Quarter 2022 Business Update Conference Call. Please be advised, today's conference is being recorded and a replay will be available on Cipher Mining's Investor Relations website. I would now like to hand the conference over to Lori Barker, Investor Relations..

Good morning, ladies and gentlemen, thank you for joining us on this conference call to discuss Cipher Mining's third quarter 2022 business update. Joining me on the call today are Tyler Page, Chief Executive Officer; and Ed Farrel, Chief Financial Officer.

Please note that you may also review our press release and presentation, which can be found on the Investor Relations section of the website at investors @ciphermining.com. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website.

This conference call is the property of Cipher Mining and any taping or other reproduction is expressly prohibited without prior written consent.

Before we start, I'd like to remind you that the following discussion as well as our press release and presentation contains forward-looking statements, including but not limited to Cipher's financial outlook, business plans and objectives.

And other future events and developments, including statements about the market potential of our business operations, potential competition and our goals and strategies.

The forward-looking statements and risks in this conference call including responses to your questions are based on current expectations as of today and Cipher assumes no obligation to update or revise them whether as a result of new developments or otherwise, except as required by law.

Additionally, the following discussion may contain non-GAAP financial measures. We may use non-GAAP measures to describe the way in which we manage and operate our business.

We reconcile non-GAAP measures to the most directly comparable GAAP measures and you are encouraged to examine these reconciliations which are found at the end of our earnings release issued earlier this morning. I will now turn the call over to Tyler.

Tyler?.

Hi. This is Tyler Page, CEO of Cipher Mining. Thank you very much for joining our third quarter business update call. Let me start with some key developments since our last call. Today, we are announcing quarterly earnings of $0.24 per share, which validate Cipher's resilient position as a low cost producer in Bitcoin mining.

We have always said that our low cost fixed price power contracts are some of our strongest assets and we can now quantify the value of our Odessa power contract as being valued at roughly $78.9 million at the end of the third quarter.

Our contractual arrangement at Odessa allows us the flexibility to mine bitcoin or resell power to the market, which potentially provides benefits when bitcoin mining margins are low. As power prices have moved higher since we executed the contract, it is substantially in the money.

Since our last business update, when we announced the completion of our Alborz data center. I am happy to report that we have now completed construction and are operating two new data centers we call Bear and Chief. The Alborz data center is 100% powered by wind and produced a total of 196 bitcoin during the quarter.

Bear and Chief are now up and running and between the two of them can produce roughly two bitcoin per day at their current sites. Our team has also made tremendous progress at our largest data center at Odessa since our last update.

The infrastructure in rig installation is complete for the first phase of miners, which are capable of generating about 2.3 exahash per second. We are currently executing the final necessary steps to begin mining and we expect that hash rate will be coming online this month.

We have additional mining rigs capable of producing roughly 2.6 exahash per second shipped or scheduled to ship to Odessa by year end. In addition to our execution progress and in light of all the turmoil going on in the crypto industry, I would like to remind everyone of our strong liquidity position.

As of Wednesday, November 9, the day after last week's tumultuous news about FTX and Binance. We have approximately $25 billion of cash and 161 bitcoin on our balance sheet.

Unlike some of our competitors now struggling to meet their debt obligations, our only debt obligations are relatively small secured equipment finance loans at our sites that have payments expected to be covered by ongoing operations. We have no further payments to make to any mining rig manufacturers.

Before diving deeper into a market and business update, let me take a moment to remind everyone how our business model works. On Slide 4, you will see a simple overview of the Bitcoin Mining business. We operate the box in the middle of the drawing that says mining equipment, which represents our data centers and mining rigs.

We spend the majority of our operating expenses on electricity which our data centers convert into computing power. Unlike traditional data centers, which operate a similar model, and sell their computing power output to enterprise clients for dollars, Cipher sells its computing power called hash rate to the bitcoin network for bitcoins.

To make this model operate profitably, a bitcoin mining company needs to control both its electricity costs and the capital it spends to build its data centers, including what it spends to purchase mining equipment. Controlling these costs enables a miner to be a lower cost producer.

And our focus at Cipher always been on controlling these specific costs to produce the best possible unit economics. On Slide 5, we highlight some of Cipher's specific cost advantages. Specifically, our fleet of mining rigs cost us an average of $31.52 per terahash per second and that fleet has an average efficiency of $31.5 joules per terahash.

This is a fleet of rigs that has both a lower acquisition cost and better efficiency than most of our competitors. We have already paid for and expect to install rigs capable of generating about 5.8 exahash per second by early 2023.

We expect to have a total infrastructure capacity capable of handling rigs that could generate up to 7 exahash per second in early 2023. And given current distressed market conditions for hardware, (ph) we continue to look for low priced opportunities to expand our total hash rate.

We have some of the lowest power costs in the industry with an average power price of approximately $2.07 per kilowatt hour, arranged via long term power purchase agreements. We use a variety of structures to achieve such a low power cost.

Furthermore, we have developed a proprietary real time power pricing model to optimize our decision making and the profitability at our data centers. We expect to complete the infrastructure at our fourth data center at Odessa in early 2023 and when it is done, we expect to have a total operating capacity of approximately 267 megawatts.

Now let's talk about Cipher's approach to navigating the recent choppy markets. On Slide 6, we show the last several months of bitcoin prices along with several noteworthy news events for the industry. Generally, it has been a very rough few months for the bitcoin mining industry.

Until last week, bitcoin prices had remained relatively flat, while power prices and overall network cash rate increased. These market conditions have produced a great amount of distress among companies focused on bitcoin mining.

We have also seen the price of mining rigs continue to drop and there are public quotes for new machines offered at less than $20 per terahash per second. Last week saw incredibly fast moving and volatile crypto prices related to the liquidity crunch at FTX.

Problems in adjacent crypto markets bled into bitcoin prices and that price action has only made mining conditions more difficult. We remain big believers in a brighter eventual future for bitcoin for those who can survive the choppy markets and we don't mind other cryptocurrencies.

Given this market backdrop, the current strategic focus at Cipher is to find low risk, cyclical opportunities where we can take advantage of our relative strength and continue building a company that can withstand the storm and ultimately emerge as the industry winner when brighter days return.

From a day to day perspective, we remain laser focused on the completion of our data centers. Let me close my observations on the recent market turmoil by saying that we don't yet have clarity on the specific causes of the FTX fiasco, but some are calling it the worst day in the history of crypto.

For some perspective, I'm now working professionally at my second firm in the industry that I have helped grow from day one. I have watched the ups and downs of the industry through multiple boom and bust cycles over many years at this point.

Over time, my focus has evolved from what started as a more generalized interest in crypto and all of its use cases, to one that focuses on the potential of bitcoin. We built Cipher Mining to support the infrastructure of bitcoin as it scales. We think our business has tremendous potential to grow from bitcoin network adoption over time.

And that bitcoin is a separate and distinguishable thing from the rest of the crypto universe. We believe this market turmoil will ultimately cause investors, regulators and others in the ecosystem to come to the same realization and see bitcoin as something unique and different.

My hope is that investors ultimately come to the same realization I did a few years ago that bitcoin is the future. Now let's talk about how Cipher is helping ensure that future. Moving to more specific highlights on our data center build out, Slide 7 shows some operational highlights from our Alborz data center.

Alborz is a joint venture that we share with our energy provider and has a total operating capacity when the wind blows of 40 megawatts, that 40 megawatts powers roughly 1.3 exahash per second of rigs. In the third quarter, as we ramped up the data center in somewhat less windy than typical conditions, the site mined roughly 196 bitcoin.

Note that our all in-electricity cost for bitcoin at Alborz was approximately $4,571. Slide 8 shows operational highlights from our Bear and Chief data centers. Bear and Chief were completed and made fully operational in October.

Note that one of our new transformers at Bear had a problem that being fixed, which means Bear is currently only mining at 8 of its expected 10 megawatts. Combined, the two sites are capable of generating roughly two bitcoin per day in current market conditions. Turning to our Odessa data center.

Slide 9 has some beautiful pictures of the significant progress we have made at our largest site. As I previously mentioned, we currently have installed rigs capable of generating roughly 2.3 exahash per second at Odessa. We are in the final stages of preparing the data center and we expect those rigs will be fully operational by the end of the month.

You can also see the anticipated monthly ramp up scheduled by megawatts and we expect the full 207 megawatts to be available in February of 2023. You can also see our current forecast for expanding operational hash rate at the site each quarter.

Note that we currently forecast having an excess of 44 megawatts of power and infrastructure capacity beyond the mining rigs for which we've already paid and arranged shipping.

This additional capacity provides us tremendous flexibility to expand by purchasing mining rigs at bargain prices in the coming months or alternatively to sell power capacity to the market at times when doing so is attractive.

Because of our long term low cost fixed price power contract at Odessa, we have an advantage that few other bitcoin miners have.

We have the flexibility to resell our power capacity at market rates and given the currently forecasted market prices for power, this flexibility provides an excellent hedge against potential future declines in bitcoin mining margins.

I will close my portion of the call by reiterating some key statistics of Cipher Mining that show our position of relative strength against other bitcoin miners.

For our very efficient fleet of roughly 57,000 rigs installed in on order, we paid an average price of approximately $31.52 per terahash per second, and our average weighted power price is about $2.07 per kilowatt hour. In this tough market for bitcoin miners, I'd like again to emphasize Cipher's strong liquidity profile.

As of November 9, we had approximately $25 million of cash and 161 bitcoin on our balance sheet. We do not have the debt service owes (ph) that some of our competitors are experiencing and we have no further obligations to make any additional payments to mining rig manufacturers.

As part of our prudent liquidity and balance sheet management, in the third quarter, we also put in place a $250 million at the market equity shelf. We have yet to sell a single share from the shelf. And as of now, we don't anticipate tapping at current share price levels.

When you combine our liquidity profile with our expanding operations and strong unit economics, we believe Cipher is positioned to emerge from this challenging market as the true leader in the bitcoin mining space. Now I'd like to turn it over to our Chief Financial Officer, Ed Farrel..

the change in fair value of our [indiscernible] power agreement resulted in a gain of $85.7 million and this was offset by our equity investment in Alborz, which had a loss of $8.3 million. This includes a fair value adjustment of $7.2 million related to the miners we contributed to the JV.

In addition, our share of the operating loss at Alborz was $1.9 million. These two items are offset by accretion of $800,000 relating to the basis differences from miners that were previously contributed to the JV. On to expenses, we incurred G&A of $17.8 million.

This includes stock-based compensation of $10.5 million and the remaining $7.3 incurred include business insurance, payroll and benefits, professional fees, technology, occupancy and other public company expenses.

We believe non-GAAP financial measures is also helpful to investors in comparing our performance across reporting periods on a consistent basis.

Our non-GAAP P&L and non-GAAP diluted earnings per share exclude the impact of certain non-cash recurring items which includes stock compensation expense, change in fair value of our derivative assets, depreciation of fixed assets, and the change in fair value of warrant liabilities.

These measures are not a substitute for our GAAP results, but management will use these non-GAAP financial measures internally to help understand, manage and evaluate our business performance and help us make operating decisions.

So for the three months ended December 30, our non-GAAP loss of $14.1 million resulted in a non-GAAP net loss of $0.06 per share. We have provided a reconciliation of our GAAP versus non-GAAP results.

Finally, as you can see, we have made significant progress in becoming industrial scale bitcoin mining company and we look forward to reporting our progress in future periods. I'll stop there and Tyler and I are happy to take your questions..

The floor is now open for your questions. [Operator Instructions] Your first question comes from the line of Mike Colonnese from H. C. Wainwright. Your line is open..

Great. Thank you. Hi. Good morning, guys, and thank you for taking my questions this morning. And congratulations on all the progress you're making at each of your sites. It's really exciting to see that.

To start, I guess, how should we think about your strategy for purchasing additional mining rigs to fill out the remaining 44 megs of infrastructure at Odessa once that site is fully built out.

And would you guys consider hosting equipment at all at the facility?.

Hey, Mike. It's Tyler. Thanks for the question. Yeah. I think of it this way, given the market conditions, we're trying to maximize for opportunistic flexibility. So rig prices continue to drop. They've certainly gotten extremely cheap compared to historical prices.

We actually executed a purchase this past quarter of 500 new S19j Pro that we're going to purchase entirely with sort of accumulated coupons and deposits with Bitmain. We will continue to opportunistically look to fill those slots at Odessa.

I think the thing for us is that if you look at the powering up schedule, we've already acquired the miners for about the first 163 megawatts or so. So it's really that last leg that will be towards the end of the first quarter in the New Year, where we'll have slots available.

So when I think about flexibility, our options there are go shopping in a distressed market for really cheap machines, potentially think about strategically working with someone that may be repossessing machines or looking for hosting opportunities.

I don't think that's our primary goal, but lots of interesting things are happening in the space and there are machines being repoed by lenders that are going to look for a home. So if we find something that we think is the most favorable for shareholders, we'd be willing to do that.

I think also we'll be weighing the opportunity set versus selling power in the market. So what I'd say is solving for flexibility, but we're pretty confident we're going to find either historically cheap prices for the rigs that we would just go purchase or potentially interesting business opportunities..

That's great. So definitely some optionality there.

And as a follow-up to the Odessa facility, can you just confirm the remaining infrastructure CapEx you have to complete the build out there?.

Yeah. Let me give a picture, so we pay via monthly invoices that will stretch out four or five months into the New Year. It's roughly about $20 million I think of expected remaining infrastructure CapEx there, but they come due month by month as progress is made..

Got it. And last one for me, can appreciate the electricity cost for bitcoin on Alborz at under 5,000 per bitcoin, which is really strong.

How should we think about your all indirect cost to mine a bitcoin when all of your sites are fully up in hashing, as we look out over the next quarter or two?.

Yeah. I think that it would likely be -- the blended electricity price is likely to be slightly higher than that, but ballpark, Alborz is -- our cheapest power in the portfolio generally, unless we get really cheap front of the meter prices at Bear and Chief. But I think that's ballpark.

So probably slightly more expensive electricity prices as we scale up..

Got it. Thank you for taking my questions, Tyler. Appreciate it..

Thanks, Mike..

Again, the floor is open for your questions. [Operator Instructions] That does conclude today's questions. I would now like to turn the call over to Tyler Page, CEO for closing remarks..

Thank you. Thank you to all of our investors for participating in the call. We look forward to continuing to update you on our progress as we move forward. Have a great day..

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect..