Good morning, and welcome to Stronghold Digital Mining's conference call for the third quarter ended September 30, 2023. My name is Liz, and I'll be your operator this morning.

Before this call, Stronghold issued its results for the third 2023 and announced the new business initiative in a press release which will be available in the Investors section of the company's website at www.strongholddigitalmining.com. You can find a link in the Investors section at the top of the home page.

Joining us on today's call are Stronghold's Chairman and Chief Executive Officer, Greg Beard; and CFO, Matt Smith. Following their remarks, we will open the call for questions. Before we begin, Alex Kovtun from Gateway Group will make a brief introductory statement. Mr. Kovtun, please proceed..

Great. Thank you, operator. Good morning, everyone, and welcome. Today's slide presentation, along with our earnings release and financial disclosures were posted to our website earlier today and can be accessed on our website at www.strongholddigitalmining.com.

Some statements we're making today may be considered forward-looking statements under securities law and involve a number of risks and uncertainties.

As a result, we caution you that there are a number of factors, many of which are beyond our control, which could cause actual results and events to differ materially from those described in the forward-looking statements.

For more detailed risks, uncertainties and the assumptions related to our forward-looking statements, please see the disclosures in our earnings release and public filings made with the Securities and Exchange Commission.

We disclaim any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law.

We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and the reconciliation tables to applicable GAAP measures in our earnings release carefully as you consider these metrics.

We expect to file our quarterly report on Form 10-Q on or prior to November 14, 2023, with the Securities and Exchange Commission, which sets forth detailed disclosures and descriptions of our business, as well as uncertainties and other variable circumstances, including, but not limited to risks and uncertainties identified under the caption, Risk Factors in our previously filed annual report on Form 10-K filed on April 3, 2023, and our subsequently filed quarterly report on Form 10-Q.

You may access Stronghold's Securities and Exchange Commission filings for free by visiting the SEC website at www.sec.gov or Stronghold's Investor Relations website at ir.strongholddigitalmining.com.

I would like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of Stronghold's website. Now, I would like to turn the call over to Stronghold's Chairman and CEO, Greg Beard.

Greg?.

Good morning, everyone, and thank you for joining us in our announcement of our carbon capture initiative and our third quarter 2023 results. We will be referencing an associated slide presentation throughout the call that is available through the webcast and on the Investor Relations section of our corporate website.

We're also live today, so forgive any fumbles as we get through it, but we are really excited about what we're presenting today, so hopefully they'll come out in the slides and in the Q&A. So, let's start on slide three.

As a reminder to everyone joining us today, Stronghold is the only environmentally beneficial and vertically integrated public Bitcoin miner. We own and operate two mining waste-to-power facilities in Pennsylvania, Scrubgrass and Panther Creek, with aggregate power capacity of 165 megawatts.

Through our process, we've removed nearly 1.7 million tons of toxic mining waste from the environment since the beginning of 2022. Today, we have over 40,000 Bitcoin miners and continue to seek opportunities to expand our capacity by deploying 25 megawatts of owned end-to-end data center equipment. Moving to slide four.

We are a Bitcoin miner and remain committed to Bitcoin mining. However, as a vertically integrated Bitcoin miner, we have a unique substantial asset base with significant potential for complementary revenue streams. We've talked a lot about our Ash Byproduct in the past year and have spent significant time testing it.

I'm excited to tell you that this has created a potentially transformational opportunity. Our Ash can capture carbon dioxide directly out of the atmosphere and we are forming a highly complementary business, Stronghold carbon capture, around this discovery. Slide five.

We're going to use the majority of this call to explain how our reclamation process results in potential to capture a significant amount of carbon directly from ambient air, the scale of this opportunity and also how we might be able to monetize it in the new carbon market. Slide six. Over the last few years, carbon markets have grown and developed.

Both private markets and the federal government have established significant initiatives for those who capture carbon and/or reduce carbon emissions. The private market consists of registries that validate certain projects and upon validation, credits from those projects can be sold to buyers looking to offset their emissions.

Additionally, the Inflation Reduction Act expanded IRS Section 45Q tax credits which can pay up to $180 per ton of carbon captured by qualifying direct air capture projects also known as DAC.

While it is not entirely clear if our project qualifies today where we are evaluating opportunities for qualification and believe our project is consistent with the intent of the IRA. Moving to slide seven. We have studied our ash extensively and over the past several months we learned to capture carbon.

While we are in the early stages of the project and developing a better understanding of variables such as weather, construction, ash placement, we believe that we ultimately have the potential to capture about 100,000 tons of carbon from ambient air annually using the ash produced by our facilities.

Assuming that we qualify for 45Q tax credits and we are able to sell voluntary carbon credits, this could drive up to $30 million of incremental annual EBITDA and reduce our net cost of power to as low as $16 per megawatt hour.

And importantly, while carbon capture is perceived to have significant technology risk, we believe that our project has relatively low technology risk because our process is just a combination of accepted chemistry and airflow. Moving to slide eight.

I'd like to review our mining through waste to power process as this process is responsible for the production of our ash byproduct that can capture carbon. We own two reclamation facilities that utilize circulating fluidized beds to convert mining waste into electricity.

So what does that mean? It means our primary source of fuel for these facilities is mining waste, which is sourced from the reclamation of some of the 840 mining waste piles littered across Pennsylvania. These large mountains of waste pollute the land, water and air and sometimes spontaneously combust.

Our unique purpose-built CFB power generation process takes this toxic waste from the environment, combines it with limestone to neutralize sulfur dioxide and creates electricity. The primary purpose is reclamation and the primary product is electricity. A calcium rich ash is the byproduct.

Most of this ash is returned to mining waste piles to facilitate the reclamation and re-vegetation to the previously unusable land. Moving to slide nine. For those who think they are burning waste coal and pumping CO2 into the atmosphere, I want to highlight findings of recent third-party studies.

Earlier this year both Lehigh University and TRC Environmental published studies examining the environmental impact of mining waste piles and the mining-waste-to-power industry.

Both studies concluded that our process is carbon negative, meaning, we reduce net greenhouse gas emissions by over 50% compared to expected emissions from mining waste had it not been removed from the environment.

I'm not going to cover the mining waste crisis in Pennsylvania on the call today, but I encourage you to take a look at the appendix for a comprehensive overview. It includes a description of over 5,000 miles of contaminated waterways that extend to the Chesapeake Bay, the Ohio River, and more.

Dozens of burning waste piles and hundreds of millions of tons of waste that are impacting some of the most economically disadvantaged counties in Pennsylvania. These studies underscore that not only do our plants reduce the harm associated with waterways, burning piles, and land pollution, but they're also carbon negative. Moving to slide 10.

After extensive third-party testing of our Scrubgrass ash by our partners Karbonetiq over the last four months, which we conducted under conditions intended to replicate Scrubgrass weather conditions, we have determined that our ash can capture carbon at a capacity of up to 12% by starting weight of the ash.

Our ash can capture carbon because it contains reactive calcium oxide, which bonds with carbon dioxide to form calcium carbonate. In other words, the ash pulls the carbon dioxide out of the air, creating a permanent geologically stable solid. We have worked with construction design and engineering partners to develop direct air capture technology.

The technology uses the stack effect to drive air through the ash to facilitate and expedite this carbonation process.

We are excited to announce that our first direct air capture unit has been deployed at Scrubgrass, and while we anticipate iterating around design and process to maximize carbon capture and minimize costs, testing is currently underway. We expect field results within the next month in advance of our Investor Day that's coming up this December.

Moving to slide 11. Scrubgrass and Panther Creek facilities can produce 800,000 to 900,000 metric tons of ash per year when operating at baseload capacity, which equates to approximately 100,000 tons of carbon captured at 12% capture capacity.

For reference, this is the same as eliminating the emissions from almost 22,000 cars, and it would take over 4.5 million mature trees to capture this much carbon. Last Friday, we deployed our first carbon capture unit at Scrubgrass. Our partner Karbonetiq has branded these proprietary patent pending units as Karbolith.

Very importantly, we have exclusivity with Karbonetiq. We're the only group allowed to use this patent pending technology and intellectual property in connection with mining to waste power CFB facilities. The equipment cost for our first Karbolith was less than $100,000.

Compared to other DAC projects in the U.S, we believe that ours has best-in-class capital efficiency currently estimated at $50 to $125 per ton of annual carbon capture capacity. Recall that Stronghold owns two specialized CFB plants with an estimated replacement cost in excess of $400 million.

Historical investments in these facilities provide the foundation for this modest incremental investment that we believe is required to capture carbon.

In September, we engaged an environmental consulting firm called Carbonomics to advice on carbon capture verification, documentation, and listing our project on a registry to monetize carbon removals in the private markets.

We are pursuing a listing on the Puro Registry, which is owned by NASDAQ, and we're pleased to discover multiple existing methodologies that could be applicable to our project. Using a previously approved methodology can reduce lead time for generating high-value carbon credits from years to months.

We've already submitted a concept paper to Puro, received supportive feedback, and plan to submit formal project design documentation with the goal of having the project listed in Q1 2024. We anticipate monetization efforts to follow shortly thereafter. Moving to slide 12.

Here we lay out our status quo ash removal operations and the new process incorporated in carbon capture. We typically remove ash from our facilities and transport it back to the mining waste piles where it is packed in the ground to neutralize the acidity of the site and revegetate the land.

The current process allows for little carbonation given the ashes limited exposure to air. Our carbon capture project will simply be a new step added into the existing process. After the ash is produced by the plant, we will methodically distribute it among the Karbolith to drive air flow through the ash facilitating the absorption of carbon.

Post-carbonation, the ash will follow our current process and be transported back to the mining waste sites. We are also evaluating opportunities to sell our newly carbonated ash into new markets, such as green cement, to generate additional value from the process. Moving to slide 13.

If our carbon capture process becomes fully operational as planned, it would be one of the largest announced direct air capture projects in the world, and it could be the largest operational U.S. direct air capture project in 2024.

This slide also illustrates the two potential income streams resulting from this carbon capture opportunity, with the first being the sale of carbon credits into the private markets, and the second being receipt of 45Q tax credits. Both represent tremendous value potential for Stronghold.

Initially, as we worked to qualify for 45Q tax credits under the IRS, we planned to sell into the private carbon credit markets, where the average index price for Puro Carbon removal credits in 2023 has ranged from approximately $130 to $190 per ton of carbon.

This range implies $13 million to $19 million in annual proceeds, assuming 100,000 tons of carbon captured annually. Qualification for $180 per ton 45Q tax credits would imply $18 million and additional annual proceeds at 100,000 tons of carbon removed annually.

While it is not entirely clear that we will be able to qualify for 45Q tax credits, it is important to note that 45Q has a three-year look back. So even if we don't qualify for a number of years, carbon capture before qualification could be eligible.

I'll now turn the call over to Matt Smith to discuss the financial impact of Stronghold carbon capture..

Thank you, Greg. We would remind you, as we discussed financial estimates, we would refer you to the presentation for various assumptions, qualifications, and risk factors.

As you can see on slide 14, our carbon capture opportunity represents a compelling value proposition for Stronghold, as we have the potential to capture up to 100,000 tons of carbon dioxide annually.

This could drive up to $30 million of incremental EBITDA, assuming receipt of 45Q tax credits, or up to $14 million of incremental EBITDA without tax credits. In terms of timing, we think that we will be positioned to start monetizing private carbon credits in 2024 at some level and in earnest in 2025.

The earliest we would hope to receive 45Q tax credits is in 2025 with a higher likelihood in 2026. Simply put, carbon capture has the potential to transform the cash flow profile of the business in an exponential way, further expanding optionality beyond the power in Bitcoin markets.

Moving to slide 15, this slide details the financial benefit of carbon capture to our cost of power. Currently, we have guided to a net cost of power of $40 to $45 per megawatt hour. This carbon capture opportunity provides a significant potential reduction approaching $20 per megawatt hour, assuming receipt of 45Q tax credits.

This would result in a pro forma cost of power of under $25 per megawatt hour. Lastly, on slide 16, as some may be aware, electricity is the largest cost to mine Bitcoin.

Looking at the carbon capture opportunity through the Bitcoin mining lens, this initiative has the potential to reduce our cost of power to the lowest among public Bitcoin mining peers. To close, I'd like to note that there are not many ways to express concentrated exposure to carbon capture in the public markets today.

As we seek to create value with this initiative, we hope to become that opportunity for our investors. With that, I'll turn the call back over to Greg for closing remarks and Q&A..

Thanks Matt. Hopefully, as you can tell, we are extremely excited about this new opportunity. We started in the environmental reclamation and power generation business and cleaning up toxic mining waste has always been and will continue to be a cornerstone of our business.

A few years ago, in response to depressed power markets, we were innovative in entering the Bitcoin mining space, creating an alternative market for our power.

We formed Stronghold around this strategy, producing our own power and having the option to either sell that power to the PGM grid or use it to mine Bitcoin, whichever is more beneficial to the company and its stakeholders. This opportunity was enabled by our plants.

Now, ownership of these valuable assets has created yet another, a new opportunity that will help from carbon markets and the IRA and has the potential to transform our business once again. What makes stronghold unique is that we can pursue reclamation, power generation, Bitcoin mining and carbon capture and all are completely complementary.

From a Bitcoin mining perspective, producing power allows us to control costs and benefits from opportunistically selling power to the grid and carbon capture has the potential to reduce our net cost of power to best in class levels.

From a power generation perspective, Bitcoin mining and carbon capture serve as additional revenue lines that boost the value of our power assets.

From a carbon capture perspective, we have the potential to have one of the largest direct air capture projects in the world with relatively less technology risk and a shorter timeline than the other announced projects.

So, I think before we open this up to questions, obviously, we just want to recognize it's a lot of work has gone into this over the past six months. Matt, who's sitting at the table here with me, has shepherded a lot of the technology through testing, understanding the markets.

We've got partners in California, Karbonetiq, Mike and Mark, with a shout out to them. Of course, we've got Bill Spence, our co-founder at Stronghold. He's always thinking creatively about new opportunities to get the most out of our assets.

And of course, the guys that are doing the tough reclamation work and keeping these plants running, that is really what gives us the optionality and the new business lines between making power, making Bitcoin and now capturing carbon. So, hey, we're excited about the future. And with that, I'll open up to questions.

Operator?.

[Operator Instructions] Our first question comes from a line of Lucas Pipes with B. Riley Securities..

Yes. Thank you, operator. And good morning, everyone. This is Nick Giles on for Lucas and apologies he couldn't join today with a hosted event on the metal side. But guys, congrats on the progress here. I know this is really affirmative of what's long been your mission. So congratulations..

Thank you. Thank you..

My first question was just, you noted the capital cost, I believe it was $50 to $125 per ton of CO2 capture.

And just given it's a pretty wide range, can you talk about what could get you to the low end or the high end?.

Yes, I can take a stab at that and then that someone on the team can correct me when I get it wrong. But the biggest factor in the total CapEx cost will be the pace at which the ash is carbonated.

And so, for example, if it takes only one week for the ash to reach the full carbonation at 12%, expect the number of Installed first Karbolith that to process that quantity of ash to be half of what it would be if it took two or three or four weeks to carbonate that same quantity of ash.

So it's really - the biggest factor is probably time to carbonate. And I can tell you having seen lab results in person where we were carbonating ash and using a solution that ash was carbonated in less than 10 minutes. And so obviously air capture is a much different process than a solution in a lab.

But hey, we are hopeful that the answer on CapEx will be lower because we'll find ways to pump more air through the ash to then require less CapEx. But that's really, and I can tell you we're now running our first machine. I think there are pictures of it on our website and on Karbonetiq website in a month. I think on December 12th is our Investor Day.

We're going to know a lot more then about what the CapEx needed to capture all the carbon is. And we'll iterate until we get it right..

Okay, Greg, thanks for that. That's really helpful. Maybe just a follow-up, when would you expect to receive the notice of qualification for the carbonated materials methodology, just that piece of it? And then secondly, Matt, you noted that as it relates to 45Q, that would likely be a 2025 or maybe a 2026 event.

When would you expect to receive an update on whether you qualify for that?.

Hey, this is Matt. So taking the private registry piece first, the next step in that process is submitting a PDD, a project design document for approval and then subsequently listing on the registry. That typically involves a bit of back and forth.

It describes our project and how it attaches to the existing methodologies we've identified that may be applicable for our project. We respect a couple of rounds of comments, but we think at this point in time, we have a line of sight to being registered and listed on Poru in the first quarter of next year.

Hopefully towards the earlier side of that, but it'll take a couple of months, but we're hopeful no longer than that. After that is done is when we can really attempt to start monetizing the credits on the private side. So that would be the first real opportunity to recognize some revenue around this. On the 45Q side, that'll be a little bit later.

It requires an audit of a year's worth of capture data. I think conservatively, I wouldn't model this until 2026, but as we know, there's a three-year look back that would allow us to utilize our capture from 2024, 2025 and into 2026 as well, even 2023 if we're able to start getting something going in the next month or two this year.

There's the potential for IRA qualification in 2025, if things check out, but I think we refer you to our risk factors in the deck and otherwise that highlight some of the aspects of what would be involved in qualification there..

Okay, great. That's really helpful. I appreciate all the detail. I know there are a lot of questions, so I'll jump back into queue, but congratulations again and best of luck..

You bet. Thank you..

Our next question will come from a line of Chase White with Compass Point Research..

Good morning. Thanks for taking my question guys.

So in terms of, and obviously, I think it's pretty clear this is somewhat up in the air, but we're just trying to understand the timeline to full deployment at both plants and what the cadence of spin would look like leading up to that and ultimately what could impact those type frames in terms of actual deployment?.

Yes. So, Chase, I would link what Greg responded to the prior question with as a starting point. So, we're going to use the data that comes out of this initial phase Karbolith test at Scrubgrass and the amount of time it takes to reach what we would view as similar outcome as what we saw in the laboratory simulating Scrubgrass's environment.

And we may iterate second time or third time or fourth time to try to perfect that process. As the data becomes supportive of the thesis, we would expect capital to follow, and the more constructive the data is if it matches a week to carbonation at 12%, then we would probably think about accelerating capital and deploying sooner.

If we don't see what we like, it may take more iterations, but importantly, there are a couple of things. I would not expect the cost of the Karbolith to rise from what we shared. In fact, the first Karbolith we shared in the slide, it's less than $100,000.

The first Karbolith was around $70,000, and we've already made modifications in the field where we think it could approach a number that's less than that, $50,000 to $60,000.

And so, cost savings with the subsequent iterations, trying to maximize the exposure to the ash and the carbonation in as fast a period of time as possible are some of the things we will look to drive the answer to your question.

Scrubgrass likely sees an entire rollout over the course of 2024, assuming the data supports what we think it will, which is deploying capital. The payback and returns on that are better than just about anything else we could put our money into right now.

And so, we're quite excited about ramping at Scrubgrass and then testing and the opportunity to ramp at Santa Creek. But I would think about a 12-month to 15-month sort of process where we hope to be at a full run rate entering 2025..

Got it. That's helpful..

It's important that we don't expect like equipment delays. This stuff is mostly off the shelf. We can assemble them pretty rapidly. And so, I don't know, this is not something where you order something, you get it six months or a year later. So, it's just going to be data driven..

Got it. That's helpful. And then kind of changing gears a little bit.

I mean, how should we think about the benefits associated with and also the OpEx associated with the Frontier agreement?.

Yes, I can start. So, I think we have not had the mining uptime that we aspire to, which is at the same time we've known the Frontier team for a couple of years and have really respected their work. And so, I think we have entered into an agreement that essentially outsources the management at uptime of the data centers of Frontier.

And in the first month of operations, they have shown a market improvement over the status quo prior to them working on our behalf. And I think it essentially is going to allow us to hopefully enter the top quartile for uptime versus our industry peers. And I think I can say that should, I would expect that to happen over the next three months.

I'm sure all lenders would agree with that and is incentivized to do so. Like, yes, the Frontier deal has rewards for hitting uptime metrics that include both cash and stock..

Chase, I would just add that we spent a significant capital this year, all of which is funded with no sort of incremental CapEx required down the road. And we did that to upgrade the efficiency of the fleet. And as we got through the summer, we just - we weren't hitting with the stride we expected in terms of uptime on the miners.

And so our land, when you spreadsheet it, [indiscernible] and the frontier team represented a - we'll call it a $5 million to $10 million revenue pie over the next 12 months at a consistent hash price with today versus hiring a team of people to do the same thing, technology stack experts with firmware and other expertise.

And so for us it was a - in our view, a no brainer mathematically to bring in the frontier team, and we've already seen the fruits of that start to play out. And so we're quite excited about that kind of meaningfully improving our revenue generation..

Got it. Thanks, guys..

Yes..

Our next question will come from the line of Kevin Dede with H.C. Wainwright..

Good morning, guys. Kevin Dede. Yes, congrats for thinking outside of the Bitcoin mining box on the carbon capture plan. I guess I'm kind of curious about your go sort of no go decision tree. I mean, as it is now, you're rolling out your first big real life test. And I understand you'd like to go, I understand Matt's comments.

You can't see a better option in using your CapEx.

But I just like to hear your take on the variable - the inputs that you get from this test and how you rationalize those inputs in making your deployment decision?.

Yes. Hey, Kevin, thanks for your interest in the comments. Let me just start with just a bit of like a history lesson on the plants.

Like part of why this opportunity is here is that we have these legacy plants that are worth hundreds of millions of dollars, and so that's very much part of the process, so I appreciate the compliment, but like what makes us different as Bitcoin miner is we did - we also have 40,000 rapidly appreciating Bitcoin mining machines, but we have options around power and now around carbon capture.

And so, we have this first Karbolith, this first device that we have constructed. This isn't - while it's our first big field test, from my perspective, we've shown a lot of discipline before coming out to the market and explaining what we're doing.

And now we're only doing it after a really extensive testing, lab testing with I can just tell you bucket after bucket, after bucket after bucket of our ash. We're shipping this stuff out to a lab in California and they have simulated conditions that will emulate what we have in Pennsylvania. And it's not great weather in Pennsylvania.

So this is - we are past the point where we say, well, hey, we'll see what amount of carbon the ash can capture. We know it's going to - we know the amount it's going to capture. The only question is the pace that it captures it.

Because this is the chemistry, when we describe the process to guys that are geologists or chemists, they're like, well, of course your ash captures carbon. You use limestone as a part of the process and it's not a giant mystery.

It's a chemical certainty that carbon is going to bind with this process and be permanently and geologically removed from the air. The only question we have is how long does it take? And then how long does it take under certain temperature conditions, under certain wind conditions? We need to study the airflow that the carbon that creates.

And by the way, even as I'm thinking and sitting here who knows if we end up sticking 50 Bitcoin mining machines inside of a Karbolith that help that airflow along. It's where we are going to make this airflow through this ash and it's going to capture the carbon. It's just a matter of iterating around it.

And I don't know, hey, we're motivated and we have a bunch of creatively minded people. And I think we have all the ingredients for a great project. But hey, then sitting next to a lawyer is like, hey, but it's not done. We got to do the work. We have to test it. But I can tell you how the story ends. It ends with this ash capturing all this carbon.

The timeline is the only question that we're going to know a lot by the end of today, we're going to know more tomorrow. And we'll have a - we've announced sort of an Analyst and Investor Day, December 12th. My bet is we'll put out some news before then.

But I think just given the data that we have from the test, I won't understand it if we don't have a fairly rapid carbon capture just with our current setup.

And then I think the - we'll still say, well, how do we make it faster? How to make it better? How do we make the process cheaper? How to make the design of these things cheaper? But I think we're already really capital efficient because the big project cost was spent $400 million was spent decades ago to build the plants. That was the big expense.

And that's the tough to get part of the process. The Karbolith and this part is the relatively easy part. And we'll just iterate around it. So I know I didn't - you're looking for a day that's in - I mentioned that some days and we can't give you that yet..

But I wasn't really looking for that. I appreciated the way you responded to the question, Greg. I just wanted to hear about your thinking. And I appreciate that..

That was like, I think my - you'll know it's over when we've won. That's when it's over..

Well, winning is only temporary, Greg. It's a fight every day. I'll tell you, I don't think you want to put your miners in one of these Karboliths. I mean, I could see piping maybe some immersion heat over to it. That would make sense, but I think dust and machines just don't mix well..

Come and check it out in person. And then we'd love to get your engineering advice..

Yes. Well, I think you have far sharper minds than mine on it.

Can you give us an update on that potential third facility, the 25 megawatt one you guys have alluded to in the past?.

Yes. So Kevin we tried to be thoughtful about addressing this. We have done extensive diligence and have had numerous discussions with third-party site owners and potential partners. And if we wanted to pull the trigger on one of those today, we could. But the reality is we are data driven allocators of capital and very much process oriented.

And while we do, we are excited about the prospects of a third site with this inventory of $10 million or $15 million of data center equipment we have that we've already paid for.

And we're weighing that constantly against minor efficiency upgrades at our current sites where you could add the next hash or two in place at existing clubs [ph] with our low and we believe going much lower cost of power.

And so, those are to be compared against a secular growth story with no having event in the carbon capture opportunity that we just discussed. And so what I think [indiscernible] and Greg, if here it is over the next 69 months, there's no having in carbon capture.

We can test and start to deploy capital potentially if it's data driven and makes sense in early 2024 and start to potentially sell these private carbon credits in the private markets for values, well in excess of what you can put money to work in a Bitcoin miner right now.

And so what I would just point out that we're going to do the right thing with capital. We're going to be transparent about it.

And so we look forward to the data we'll have hopefully at the Analyst Day to help make that, that decision process clearer, but it's about creating value and not putting a dogmatic vision of what a Bitcoin miner should be ahead of creating value and exploiting these assets to the fullest..

Thanks, Matt.

Can you just rationalize that commentary with your four exahash target and the 3000 high spec miners mentioned in the press this morning?.

Yes. So those miners were actually the tail end of the deliveries of already - of previously announced July purchases and the expanded CAN [ph] and Hosting agreement. So we've made no incremental minor purchases since July. All those deliveries happened in August as planned or at the latest - early September, but mostly by the end of August.

And so, the press release needed to include the third quarter deliveries. That's all we were citing were previously announced minor deliveries..

That's for the hash. Yes. But as for the four exahash you can impute from the monthly coins that we have significant organic opportunity to increase and grow our hash - our actual effective hash rate by improving operations. And so we can pick up four or five, 600 petahash here over the next three months is in pretty short term with Frontier.

And we look forward to doing that. And we then, we will systematically deploy capital like I described it'll be carbon capture returns and payback unaffected by the halving. It'll be replacing and upgrading minors in place that Scrubgrass or Panther, or it will be the third site. We're going to do whatever makes sense to create value..

The CapEx guidelines that you've outlined, would that include I guess vehicles for transportation of ash, or do you feel like you're well set there?.

Yes. So we, thankfully we are, I believe we're experts at moving materials, including ash on site at our plants. We do it every day. We have those costs embedded in our fixed and variable OpEx assumptions in our slides embedded in the EBITDA kind of the run rate EBITDA, illustration we provided.

The capital expenditures are for two things primarily that we're expecting for carbon, the $50 to $120 a ton. It's primarily for the equipment, for the Karboliths. The final form they take, assuming they're effective.

And then it would be the kind of a flex labor in addition to the baseline fixed and variable operating expenses we've forecasted embedded in that illustration. I think we feel like we've been conservative in what we put out. We don't want to miss. But it's based on what we know now, it's still early and so they're our best forecast..

Well, congrats again, Gent [ph]. Very, very interesting. Thanks for entertaining my questions..

Thanks..

Thanks, Kevin..

[Operator Instructions] Our next question will come from the line of Josh Siegler with Cantor Fitzgerald..

Yes. Hi guys. Thanks for thinking my questions today. Congratulations on this new initiative, sounds super interesting and unique among the Bitcoin mining space. Most of my questions have already been addressed, but I want to touch on a couple of things.

First, is there a political risk associated with changing administration that could impact the IRA and how you're thinking about tax credits in the future?.

Hey, in this sort of political climate, there's always that risk, but the IRA is, that's the law of the land and it has a long tail to it. And it would take a really meaningful sort of landslide type political change in order to have that impact us. So that's certainly not out of the question, but not expected at this point..

Okay. Understood..

I think our view is like - the intent of the IRA is to, which is bipartisan at this point, is to incentivize companies like us to come up with projects like this to capture carbon and do other environmentally protective things. But I think our estimate is it's what more than $400 billion of IRA tax credits are earmarked for carbon capture.

And that's, this project certainly fits with the intent of what they're trying to do. So I would say, I wouldn't spend a lot of time worrying about, hey, is, are we going to see a new administration that just says, hey, take off this whole thing away? But it's possible, not probable..

Okay. That's really helpful color. Appreciate that.

And then for investors on the line, can you help us better understand the fees and royalties aspect here, kind of what's going into that bucket? And how do you expect it to fluctuate depending on the total tax credits and removal credits?.

So we've studied the specifically the five registries for the, we'll talk about the private markets initially. Each registry, if you were to sell a credit once we're done the registry there's a specific fee or commission, whatever you want to call it, that's sort of a gross deduct. We've accounted for that in our illustration in our slide deck.

And then you can always transact off of the registry, but, by all accounts, having your process validated and put on a registry is a meaningful value uplift for receiving value for the work you're doing to sequester carbon. And so we have tried to appropriately model the fees and commissions as a gross deduct from the income stream.

And then thereafter we have some agreements in place and appropriately deducted 10% from the private market receipts and 5% from the any 45Q qualifications based on agreements in place today. .

Great. That's very helpful. Well, congrats again on the launch year. Really looking forward to seeing how this plays out. Thanks for taking my question, guys..

Thanks, Josh. Appreciate the interest. .

[Operator Instructions] Our next question comes from a line of Lucas Pipes with B. Riley Securities..

Yes. Hey, thank you, operator. Nick again here. Apologies if I missed it Matt. Matt, you referenced paybacks and returns. I'm not seeing anything better elsewhere.

Is there a project IRR you would cite for the capture initiative, maybe inclusive and exclusive of the 45Q piece?.

Yes, I think what we, what I would do is I'd like to not front run the data from Scrubgrass. I think the, the payback in IRR, if you just think about the single Karbolith, and you were to scale that at Scrubgrass, for instance, we know how much ash we make at Scrubgrass.

if the lab results were to extend to that ash, you can calculate how much carbon you could capture and then based on the time to capture, whether it's a week, like in the lab or up potentially it's two weeks, that would determine how many of these carbon with structures are placed, for instance, at Scrubgrass in order to capture optimally the, the carbon available to be captured with the Scrubgrass ash.

That CapEx is kind of that range of CapEx is the basis on which we're running the, the payback assuming first private market, which we expect and hope to be available to us in earnest in 2024, and then reach a run rate in 2025.

You know that payback, if you think about the Scrubgrass ash as sequestering sort of, we'll call it 40,000 to 50,000 tons of carbon potentially annually, multiplied by that private carbon range that we provide in the slides relative to the CapEx which would be half of the approximate total CapEx for the project that we've estimated.

I think you can start to get to a place where the payback, again, doesn't suffer from a having in four or five months. And, it's a secular growth opportunity. And if you put the money to work it's because you're getting traction with Puro in the first quarter of 2024.

It's because the data is demonstrating compelling carbon capture in the, in the testing, it's Scrubgrass. You can coordinate allocating capital with selling of credits. And that makes for a faster payback potentially because you're actually getting cash in as you're deploying capital and scaling up. And so I would just point their timing.

There is still some uncertainty around the, around how many carbolists are needed as Greg described, but we think that payback relative to other places we could put our money today is really compelling..

Fair enough. I appreciate that..

Maybe I would point out today that I would just add one more thing, which is that we've maybe call ourselves the orphan of the Bitcoin mining space because we traded a fraction of the multiple on every metric that every other Bitcoin miner does publicly.

I think what we'd point you to is the private market and kind of energy transition and other types of businesses that don't suffer from the kind of the Bitcoin mining, having concerns that have prevailed in the market.

I think we're really excited about a totally differentiated income stream potential that could potentially double our cash flow over the next 12 to 18 months. That's pretty exciting. And it's totally decent credit to Stronghold, which we're quite excited about..

Thanks to that, Matt. Maybe just one follow up there.

Can you just remind us how you're thinking about debt pay down based on current structures or sweeps in place and how this could impact that?.

Sure. So we've placed we have one, we have a single creditor, the credit agreements available publicly for cash above that $7.5 million level, there is a sweep that works to kind of mechanically pay that down over time. We do not have mandatory immunization starting until well after the halving in July of 24 and beyond.

We've got a really good relationship with that creditor. And I would point out maybe the interest rate is wide plus, SPFR plus 1100 basis points.

We think we'll have opportunities or we hope to have opportunities over the next 12 months with success and value creation from what we're announcing today to meaningfully improve our cost of capital relative to that..

That's good to hear. Tune the team to continue best work. Thanks again..

Yes, correct myself. It's SOFR plus 10% not SOFR plus 11. Forgive me..

At this time, this concludes our question and answer session. I'd now like to turn the call back over to Mr. Beard for his closing remarks..

All right. Hey thank you very much for your insightful questions. Hopefully any investors or interested parties that are listening out there have processed what we've said in terms of the presentation and help clarify with the Q&A here.

We're going to do our best to communicate really well over the next few months just to quickly and slowly disclose information as we get it. But thanks for listening and we're excited about our prospects here. Bye-bye..

Thank you for joining us today for Strongholds earnings call. You may now disconnect..