Keel Infrastructure Corp. (BITF) Earnings Call Transcript & Summary

Excellent. Already. Well, first of all, welcome, this is Martin Jacobs, and welcome to the TechLeaderBoard facilitated by JNK. As you know, the TechLeaderBoard is a hosted conversation outside of the usual earnings and guidance-related calls. It really provides a unique and exclusive opportunity to share and learn about future semiconductor and technology trends within the supply chain. The TLB is really where leaders meet. Now before we get started, and I introduce our current guests, a couple of housekeeping items. First of all, a recording of this event is available on techleaderboard.com. You can also listen to the event wherever you get your podcast fixed from and just enter TechLeaderBoard, and it will come up. And if you're looking for my insight, register for the techleaderboard.com, you can get access to webcast, replace, research, daily trader, everything for free at techleaderboard.com. With that being said, on the TechLeaderBoard today, we have our guests and part of our digital asset mining series, Geoff Morphy, President and CEO of Bitfarms; and Jeffrey Lucas, CFO. And what we will address today is a critical topic that has everybody up at night for some, and wondering others, which is how do minors actually profit in the bull market? And more critically, how do they survive in a bear market. Geoffrey, welcome to the TechLeaderBoard. If you want to do a brief introduction of Bitfarms. That would be fantastic, and then we'll go into Q&A.

Thank you, Martin, and we very much appreciate you inviting us to J&K's TechLeaderBoard. It's an honor to be here. Before getting into just talking about Bitfarms and giving you an overview, I just wanted -- because this is a public forum and got investors and viewers from all over the place, I just wanted to make a quick reference to our safe harbor statement. I won't go into it at any length, but I just wanted to say it's on our website as part of our public filings. And today's presentation and any comments that Jeff and I might make are subject to our safe harbor statement and you and I should be governed accordingly. So with that out of the way, we can move on. Bitfarms started operations as a Bitcoin self-mining company over 5 years ago. In fact, we had our fifth anniversary just back in October. This makes Bitfarms one of the oldest publicly-traded mining companies in terms of production. And one of the largest, biggest and most established. We now have 10 production facilities in 4 countries. We're a well-established professional and well diversified. I just -- some of your investors and guess probably know the difference between the miners. But we're one of the largest. We have 4.4 exa hash of production right now. We mine approximately 15.1 bitcoin per day on a consistent basis. We have 1,664 Bitcoin as at the end of November on our balance sheet, representing just under about $30 million based on the prevailing price. We have mined as of the end of November, so 11 months year-to-date, 4,672 Bitcoin. So we should have -- we mine over -- we should be mining over 5,000 for the year. We have approximately 45,000 mining machines in our 10 locations operating. And we have 182 megawatts of power that we draw to make all those miners work day in and day out. Just to give you a little bit of overview of our diversification. We have 7 farms in the province of Quebec, all drying hydro power, so very green. We have 1 facility in Washington, also drawing main hydro power. One in Paraguay, which is also part of the grid and driving green hydropower. And then in September, we started up our new Argentina facility, which is behind the fence at a power production facility and that's powered by natural gas. I think we can go on, I think you're going to get into the differences, so I won't add any more color there, but I'll let Jeff Lucas introduce himself and add a little more.

Thank you. Good afternoon. I'm Jeff Lucas, I'm the CFO for Bitfarms. I've been with the company now for about 1.5 years. We enjoy some unique advantages, which I know Martin will be addressing in greater detail very shortly. But we do enjoy some of the lowest cost energy in the industry here. And actually overall economics, some of the most attractive overall when taking place the overall cost structure here. Again, we had the benefits of geographic diversification. We also enjoy the stability and consistency of hydro power being over 95% of our source of energy here. So overall, we're very well positioned. And lastly, I want to point out part of our strong advantage in the marketplace is that we are really operationally focused. We enjoy the reputation as probably one of the best operators out there within our sector. So with that, I'll turn it over to you, Martin.

Right. Very good. Let's get right into [indiscernible] FTX, made a significant impact on investors and company within the digital asset world. There's a lot of commentary about potential companies or companies potentially going out of business or filing for bankruptcy protection. Miners are part of that. I'd love to understand, a, what is the aftermath and the impact on the mining industry in general; and then b, what is it, and how do you differentiate yourself to protect yourself from these kinds of events? And what is your view of how you're going to exit once this event is past us?

Sure. Let me start, and then Jeff can add what I forget or some additional comments, but first of all, I think you need to take a look at where FTX sits on the whole bitcoin and crypto value chain. As a mining company and as one of 15 or so other publicly-traded mining companies. We're really the utility layer. We're the ones that take the power and convert that into Bitcoin. We're also the ones that are verifying transactions and making sure the integrity of the Bitcoin network is at the highest level. And as people have gotten to know over the last few years, there is bitcoin and then there's everything else. And we are in Bitcoin and owns the biggest market share of the cryptocurrencies and is the most stable and it's also decentralized and not prone to really corruption by people that can take control of it, which other cryptocurrencies are susceptible to. And then you've got the FTX and BlockFi and others [indiscernible] sit in the next layer up, where they facilitate transactions. There's a lot of trading. There is a lot of lending. There's a lot of investments. And that -- it's an important layer. We're not in that layer. Ours is much more stable. But that layer is necessary and what happened to FTX and what they did to the marketplace has probably knocked 2 years off the progress of adoption, both institutionally and retail for everybody. And it's a shame because in 2020, we were getting our legs. In '21, we made a lot of advancements and now this has really set things back. And it's -- I think I don't want to get ahead of myself, but it certainly alleged that there's significant fraud and wrongdoing there. And because of that, it blew -- there's a lot of uncertainty in the marketplace now that it's going to take a while to recover from. And it was a domino effect because of all the trading activities and counterparties, everybody relies on each other for these type of things. And when you have a dominant player like that going down, it's going to kill a lot of others as it is. And there's going to be other victims to this, and people are going to lose a lot of money. So it's -- it really is unfortunate. What it's meant to us, people are leaving the industry right now because of that uncertainty, and it's hurting us just like it's hurting everybody else. Bitcoin is already going through a cyclical downturn, which is related to a lot of different things, the S&P Index and other factors play into that. But this just is like being kicked several times when you're down and investors are scratching their head. They don't understand some of the things that are going on here and need to understand. We are reliable. We're solid. But that uncertainty is pervasive. And they need to get more education and knowledge of what we do versus what they do, and why it's important that this industry recovers. I think it's probably going to be an opportunity for banks and others to come into this marketplace and bring more confidence. But I think you talk about the positives. It's going to accelerate regulation. And regulation is absolutely something we've been advocating for, for years. And in fact, if there was more regulation in place, the likelihood of demise of FTX and others probably would not have been to the same degree or size. And it's just really bringing everybody's attention that regulation needs to come in sooner rather than later. We hope it does.

That's an excellent point. Now if we're looking at the recent news, for example, from Goldman Sachs that plans to invest in crypto firms. It sounds like there's a differentiation that can be made between the retail investor and the institutional investment world. Are you seeing the same thing?

There is a difference. And this is something that Jeff and I work on a lot in trying to bring about adoption within our -- the investment base in our company as well as everywhere else. Right now, our investor base is predominantly retail, and we want to get more institutional types investing in our company because of the type of margins and opportunity that we can bring and that's been hammered. But this is an area that Jeff spends a lot of time on. So maybe I'll pass it over to Jeff.

So when you look at our sector overall, currently, probably about 70 to 75 in the investor base is retail at this point in time. We actually one of our goals and objectives that we have going forward here is actually to become more tracking to appeal to institutional investors, allow the stability elements that you sort of alluded to, Martin. But it's very important to achieve that, you got to step back and think about what is necessary here. First of all, very important is you need high-level professionalism, you need visibility, you need transparency in senior financial results. We've taken this very serious. It's been a key objective of ours for the past 1.5 years. And just by a way to give an example, one of the reporting elements that we introduced and play a role in bringing out about it almost a year ago was having monthly production reports. And we are the only public mining company that issues the day after each month our production update for the previous month here. A lot of others may take a fair amount of time, but we're very, very consistent because you recognize that's very important in the eyes of investors. The second point to bear in mind here that investors look for visibility and stability in the earnings stream. Now clearly, we don't have control of bitcoin pricing and impact that has on our revenues on the hash price. But where we do bring a lot of stability here is primarily on our cost of our energy, which can comprise 85% to 87% of the cost of money bitcoin. Given the fact that we have more than 95% hydro, the energy cost for us of mining Bitcoin for each PTC has been in the range of only $7,000 to $9,000 in the past 2 years. So while a lot of our peer companies have been experiencing generations and the cost of energy due to the fossil fuel volatility, we've actually been insulated largely from that and have not suffered that. So those are some of the elements in our mind that are very important in terms of attracting institutional investors. The beauty truly of institutional investors is obviously they have a longer-term horizon, and they can push at some of the more compelling sustainable advantages, particularly those that we bring with our operational emphasis.

Very good. Let's talk a little bit about a different topic, which is another thing that appears to be particularly here in the U.S., something that could potentially with the last legislation being released here in your preventing minors to acquire new licenses. If you look at the regulatory aspect, what is your view on that? What do you think is a progress? Is that driving your diversification into different countries? And then I want to talk about your operations that you have and the different areas. What benefits it actually brings you.

Well Mark, our founders started mining Ethereum in a garage and [indiscernible] 6-plus years ago and realized they had a business here and molded that into what is now the present day Bitfarms, and we've been operating for over 5 years. But what they discovered was -- I think working in Argentina that currently has 100% inflation, political upheaval that you needed to be diversified to avoid some of these risks. So right from our start, we wanted to make sure that we were established properly with an excellent foundation that could withstand the type of things that inevitably happen in any industry, in any new industry. It happened in the Internet and it's going to happen in a lot of technology industries. So we set up in Quebec to start with. We got a good base of operation. We have low-cost power. We had hydro green. And then when we expanded, we make sure we diversified into areas that also had low-cost power, so we could always be competitive and use our operational advantage to our advantage -- to our benefit. So we bought a hosting facility in Washington over a year ago and completely rebuilt it. So we have a base in Washington, and now we have a geography that is hydro and is one that we'd like to expand into. We then started our efforts in Argentina, which had very low cost energy that once again really being the lowest quartile in terms of energy costs so that we could be long-term potential down in Argentina. It's landlocked. It's geographically really a neat place, and well, it has government other issues related to getting equipment in there and operations. When you have local talent there, you can overcome these things and understand them. And then Paraguay, that opportunity came up when we were starting to develop Argentina, and it's green and it's low cost, and it's stable and it's been one of our lowest cost, best producers there is. But I know it's a long-winded story, but I think what we've decided to do is make sure that we're in a lot of different locations with a good core of operations that are profitable. And if something happens in 1 location, it's going to be a setback, but it's not going to be terminal. And I think everybody operating have to realize that given the risks in the development, regulation and things that are happening, things can happen, and you can't have all your eggs in 1 basket, and that's where we've diversified. We've got management team spread across North and South America. Like everything we do is diversified, and we rely on a lot of technology, including our proprietary software to be able to operate that as well as anybody else in the industry. So those are really something the core type of things that we have at our heart that really makes us different and why we think we've got a company and a platform that can sustain a lot of adversity and thrive on.

Fantastic. You mentioned the different locations are being either natural gas or hydro power. Your green -- if you look at your green road map, and ESG is going to come into -- play into that as well. If you look forward, can you see yourself being 100% on green energy or renewable energy?

We -- eventually, yes. In fact, we were 100% green until September when we started taking our first natural gas produced power in Argentina. It was -- once again, that was a bit of a hedging strategy because natural gas is historically quite cheap because it's so abundant in Argentina, that getting power -- right now, our average cost of power is high $0.03, $0.04 or sort of area, which is better than most and hydro is nice and stable. It hasn't been up to the inflationary things of other fossil-based fuels that have gone up because of the Ukraine-Russian war, as well as other issues. So while their cost of power is $0.04 or $0.05, $0.06, $0.07, $0.08 and sometimes more cents per kilowatt hour. Ours is pretty stable at sort of around $0.04. Argentina right now, given the summer is somewhere in the 2s, I think if we were to really crank that up. But right now, 5% of our production output is Argentina. And 95% is green as Paraguay, Washington and Quebec. So we're already largely there. But we think there's better opportunities in the long run with energy management as wind and solar come in to help develop some of those things, low-cost, sustainable and then having sort of grid-based power fill in when it's dark, when the wind is not blowing. And eventually, there will be battery technology that will help load balancing.

Very good. excellent. Talking about the different sites. Now you look at miners and you would say, well, every miner does, in essence, the same thing. I'm going to make this sound easy when it's really not. But it appears that you have an operational edge with what you do. So maybe you can talk about the operational side that puts you and your business model ahead of any headwinds that might be coming your way.

I'm going to start this, but I'm going to hand it over to Jeff because we have really achieved some pretty substantial metrics that we follow and efficiencies. But we use 2 manufacturers, Bitmain and MicroBT for our miners. They are the 2 largest manufacturers. They have the highest operating efficiency machines. And if you're going to thrive in this industry or any other industry, you need low cost. You need to be able to generate the biggest margins and the biggest cash flow from operations to be successful. That's what investors are looking for. That's what we're looking for in order to achieve the best metrics against our competitors. So as Jeff had mentioned, we are vertically integrated. We will -- we have a business development team that goes out and finds sites, it negotiates contracts, we design, we build our own facilities. We have our own subsidiary called Volta that is an electrical services provider with 30-plus electricians. So we take a lot of the elements out of the mix that otherwise represent risk, and we control them ourselves, and that's so important. So as we go into all of our locations, we have this operational edge. I think we know everything about the facility. We -- it's our contracts. It's our people that we installed all the miners. It's all our work [indiscernible] iteration of facilities in terms of how to set them up with a lot of advanced knowledge. It's not just the electrical, but it's air flow, it's cooling. It's heating. It's how you do these things. And that's where we've got an edge from the last 5 years of experience. And we put this in every one of our sites so that we are completely running our assets as best they possibly can. And a few people can touch us in terms of our efficiencies. And we continue to upgrade our fleet. We don't have -- I don't think we have any miners that are more than 3 years old operating at this point. They're all the latest generation. And we continue to improve our efficiencies from our fleet. So I'll pass it to Jeff to really get it -- to dive deeper into those areas.

I think Geoff characterized it well, but if you look at it almost in 2 different categories. One is the cost of our inputs here. And then secondly, as Geoff spoke to how efficiently we utilize our assets to get a high ROI. So first and foremost, as you've already mentioned here, the cost of energy for us is about $9,400 per bitcoin. We keep a very sharp eye in all the other costs, including G&A and overhead. And as a matter of fact, the all-in cash cost for us is $14,300 to mine in bitcoin. That's clearly well below the current pricing and even now with downside, it shows us how to operate profitably. Secondly, though importantly, is that we have a number of measures to see how efficiently and effectively, we're realizing our assets. Obviously, uptime is one of the key ones. A measure of that is how many Bitcoin to generate exa hash per month. And we generally are leading the pack here. We've got 115. In October, 105 due to higher difficulty in the month that just ended. That's among the best among the miners. Secondly, we also look at what our energy efficiency is, and that is how many watt per terahash. We were on 49 watts per terahash last year. We're now down a little below 40 watts per terahash, and that's further declining. We also look at a measure called power usage efficiency or PUE. How much of our energy is actually going towards the miners themselves versus the ancillary services such as fans, cooling, lights, things of that sort. And we're about 103%. So that's actually also some of the best that's in the industry overall. That positions us to a high level profitability, not on a per Bitcoin basis, but if you look at our results, particularly in the third quarter, we actually had $10.3 million of adjusted EBITDA. And by adjusted EBITDA, we mean our true operating performance, not factoring any changes in balance sheet assets or those accounts. But just how do we generate cash from our ongoing operations. $10.3 million in adjusted EBITDA where 31% margin there. So in other words, one out of every $3 of our revenue that we earn, even at these low price levels is profitability for us. So those are some of the key measures that we really focused on going here, the cost of the inputs and how efficiently we utilize our assets.

Very good. I appreciate it. All right. Very good. I have a customer question here concerning the current cost structure. It was noted that your costs actually decreased by 5% in the third quarter over the second quarter. If you could elaborate on how you achieved decreases and what the main drivers are for that?

Sure. So when you look at the actual cost of mining decline directly, there are really a couple of elements come into play. One of the elements was the fact that the difficulty decreased by a little under 1% from the second quarter to the third quarter. Secondly, is that we had about a 2.5% to 3% improvement in our efficiency, that is how many watts per terahash. That worked in our favor. And then also, we had a bit of an improvement in the mix of our electricity costs, whereas Canada is around $0.04 to $0.041. We enjoy around $0.036 in Washington about $0.026 in Paraguay and around a very low range as well in Argentina for that small portion we're getting from there as well. So that's like change in mix and the beneficial impact of FX rates here led to overall lower cost there. But also very importantly, recognizing that tougher times we're ahead, we did take a very conscious effort on our part to lower our overhead costs. We brought those down by about $1.1 million or 15% in the second and third quarter. So those are a lot of the elements that led us to achieve that lower overall cost structure in the third quarter versus the second and the prior year.

I have a follow-up question on that, which is kind of be anticipated that as difficulty increases, but that goes together with an increase of cost. And is there a ratio that can be thought about?