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Edited Transcript of OUP.H.V earnings conference call or presentation 6-Apr-20 2:00pm GMT

Q4 2019 Hut 8 Mining Corp Earnings Call

TORONTO Jun 2, 2020 (Thomson StreetEvents) -- Edited Transcript of Hut 8 Mining Corp earnings conference call or presentation Monday, April 6, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Kiguel

Hut 8 Mining Corp. - Former President, CEO & Director

* Demetrios Vaiopoulos

Hut 8 Mining Corp. - Interim CEO

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Conference Call Participants

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* Deepak Kaushal

Stifel Nicolaus Canada Inc., Research Division - Director and Technology & Communications Analyst

* Matt Yamamoto

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Presentation

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Operator [1]

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Welcome to the year-end 2019 financial results earnings call. My name is John, and I'll be your operator for today's call. (Operator Instructions) Please note, the conference is being recorded.

And I will now turn the call over to Andrew Kiguel, the CEO of Hut 8 Mining. Mr. Kiguel, you may begin.

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [2]

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Great. Thank you very much. Thank you, everyone, for joining. I hope everyone is staying healthy here in what is a very strange time, but I'll jump right into the numbers.

For 2019, the highlights are revenue of $82 million from mining 8,618 bitcoin and a mining profit margin of 45%. We had an adjusted EBITDA of $33.5 million with a margin of 41%. Through the year, via acquisitions and expanding our existing capacity, we increased our petahash, which is the amount of mining we're able to do, by 19.6%, almost 20%. Through the year, we were opportunistic in selling bitcoin and repaid $5.3 million of outstanding debt. Of significance, we refinanced a USD 15 million debt facility from paying what was over 12% to paying under 10%, results in significant savings. As well, we spent a lot of time and working through -- working with TSX Sandbox program. We were able to graduate from the TSX venture exchange to the senior Board, which was quite significant in us being the first crypto company to be able to do that. And finally, with respect to 2019, we're able to achieve bottom line profit with net income of $2.1 million.

So with that, I'm going to turn it over to Jimmy Vaiopoulos, our CFO, to walk through the financials in a little more detail. Jimmy?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [3]

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Thank you, Andrew. Before continuing, I'd like to remind everyone that all amounts in the financial statements and discussed on this call are in Canadian dollars, unless otherwise stated.

For 2019, Hut 8 mined approximately 8,600 bitcoin, resulting in revenue of $82 million compared with the prior year of approximately 5,600 bitcoin mined with revenue of $49.4 million. This increase was because Hut 8's flagship site in Medicine Hat came online halfway through 2018 and because of the purchase of 12 additional BlockBoxes at the end of 2018 and also due to the increasing bitcoin price during the year.

Our cost per bitcoin for 2019, which includes all site costs; costs, including electricity, was USD 3,978. This cost per bitcoin remained lower than the average bitcoin price of USD 7,395. This allowed for a mining profit margin for 2019 of 45%.

The bitcoin price and network difficulty rate have been quite volatile during 2019 and especially at the start of 2020. While the price started the year at USD 3,747 and ended the year at USD 7,194, we saw bitcoin hit a low of approximately USD 3,400 and a high of USD 13,800. The network difficulty rate saw a large increase as well of 130% for 2019. When compared to a 92% increase in bitcoin price, the mining margins across the industry compressed in 2019, which we believe was due to more efficient equipment entering the market. Despite this, Hut 8 achieved an adjusted EBITDA margin of 41% for 2019, an increase from the prior year of 39%.

Our team has been focused on becoming one of the lowest cost bitcoin miners in the industry, which has helped us achieve bottom line profitability in 2019 of $2.1 million. Hut 8 had $33.5 million of adjusted EBITDA in 2019, which we used partially towards increasing our petahash capacity by nearly 20% and repaying $5.3 million of debt, which, together with the increase in bitcoin price, has allowed Hut 8 to finish the year with a much stronger balance sheet.

I will now pass the call back over to Andrew.

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [4]

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Thanks, Jimmy. So with that, I think despite there being some volatility, the company has managed to continue to produce well, and we'll continue to try and do that.

So maybe with that, I'll turn it back to the operator and open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division - Director and Technology & Communications Analyst [2]

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Andrew, this is Deepak from Stifel GMP. I've got a handful of questions. Just -- I think it was March 15 that you guys press released a reduction in capacity of 35%. Are you guys back up to full rates now or have we got kind of a semipermanent reduction capacity? Maybe you can walk us through that.

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [3]

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Sure. So I think what we press released is the ability to do that and optimize. And so I think you have to think about it as a car where a car has different fuel efficiency levels if you're running it at different amounts. And so as the price of gas goes up and down, you're going to try and run it in its most efficient levels if the price is too high or costing more. So the concept is similar. So what we do is we look at the price, and we have the ability to scale full throttle and produce as much as we can. However, that results in less efficient use of electricity. And so what we're trying to do is we have that matrix. And we've talked -- we've been actually doing this for a while, and we've been talking about it for a while, but we have a matrix where we look at the price of electricity. We look at the price of bitcoin. And it's an algorithm we have, whether we examine at all different prices of electricity and prices of bitcoin, how much will we be mining? And should we be scaling back to de-mining at more efficient levels and decrease our capacity?

So it's -- Deepak, it's real time. We monitor it 24 hours a day, 7 days a week. I can't tell you exactly where we are now. But given where the price of bitcoin is over the last 24 hours, I would imagine that we probably, again, pushed down on the throttle or closer to our maximum capacity than we would be to deploying back.

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division - Director and Technology & Communications Analyst [4]

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Got it. So you have been talking about it for a while. And I believe like through the power price spikes, you guys were actively running this optimization. So the press release is really nothing different from what you've already been doing. It's just kind of putting it in writing what you've been doing already? Or is it just -- have you increased the ability to do more in a real-time basis? Just trying to understand the difference here.

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [5]

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No. It's the same thing. I think part of it was just to let people know. We were getting some inbound calls. This is when -- in the midst of when the price hit, I think around $4,000. And we're getting some imbalance from people who are concerned, investors and stakeholders, and asking, "Hey, what are you guys doing?" So we thought it was a good time to sort of reiterate that.

One advantage -- there's a couple of advantages that Hut 8 has. Number one is we're not obligated to take 100% of the power that we have as capacity. So other miners are signed up for 50 megawatts. They have to consume 50 megawatts regardless of what's happening in the bitcoin price. We have the ability to scale back without having penalties, not to 0, but we can scale back significantly. So that's one advantage.

And the second advantage in doing that is that we have this -- these optimization modes, which I think other people don't have, which is, again, like a car, at certain levels, you'll utilize the efficiency of your fuel consumption more than others, and it's the same thing for us. So it's nothing new that we were doing. I think it was just a function of letting the market know, hey, there are some things under our control here that will prevent us from losing our shirts here and having to continue to mine when it's not necessarily profitable to do so at certain levels.

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division - Director and Technology & Communications Analyst [6]

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Got it. And then the 50% cost reduction, is that a permanent cost reduction? Or is that part of this flex that you can -- your costs kind of come down as you reduce capacity and you go back up when you increase it?

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [7]

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The latter. So again, we can -- again, it's just an efficiency mode. So again, think about it as like a car. It's like you can go all out and go real fast. You're not going to get your best fuel efficiency when you're going 180 kilometers an hour or a hundred -- however fast your car goes, but you're going to be going real fast. You can pull it back down to 70 or 80 highway driving, you're going to be consuming far less fuel, but you're not going as fast. So it's kind of that trigger that we're trying to play with when we're doing this to say, again, we're looking at the price of electricity. We're looking at the price of bitcoin, and say, "what is the price where we can maximize our profits at these levels?"

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division - Director and Technology & Communications Analyst [8]

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Got it. And then you mentioned this last crash to $4,000. And in light of the covenants that you have with Genesis, I'm just wondering if you can give us some more color on those. Given bitcoin's volatility, you could be kind of in and out of this covenant or on-site or off-site in very short periods of time. How long does the insolvency kind of have to persist before they can call your debt? Is there kind of an understanding or agreement that it's got to be below certain level for a certain number of months or quarters or days? How does that work?

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [9]

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So what happened is that they would have to issue us a -- it's almost like a margin call. So they would issue us a call to say, "Hey, can you guys add some additional bitcoin margin to the account?" We have 24 hours to do that. If, for whatever reason, I'm giving you a worst-case scenario, we say, hey, we can't do that, for whatever reason, we don't have the inventory, they would then have another 24 hours to issue us another request to sort of increase the margin that we have so -- to send them more bitcoin.

If again, we are unable to do that (inaudible) 2 of these notices, then there is a 10-day business day process whereby we can look to remedy the situation with them. And if at the end of that period, another 10 business days, we are still unable to do that and they wish to sort of proceed, they could declare an event of default against the company. So that would be a worst-case scenario.

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division - Director and Technology & Communications Analyst [10]

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Okay. And they're not unfamiliar with the volatility of cryptocurrencies. So I guess can you offer kind of some sense of their thinking around this environment? I mean, clearly, we're in an unprecedented time here. And this is -- everyone's kind of watching bitcoin's response to the first -- its first kind of macroeconomic crisis worldwide, and it sounds not quite strong. So what are they thinking? What are your debt holders telling you guys?

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [11]

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So we haven't received any notices. We are obviously in contact with them. I think -- I don't want to speak on their behalf. But I think is a group and that is a big lender in this space. They're probably keeping a very close eye on it and being very cautious, but I can't speak to what they're saying or doing. We obviously engage in conversations with them and monitor the status of bitcoin or collateral all the time.

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division - Director and Technology & Communications Analyst [12]

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Okay. I get that. So let's maybe ask it a different way or shift the gears a bit. So I mean, clearly, the industry is looking at your halving event in May this year is kind of a major litmus test for bitcoin. Do your debt holders share that view? How do you guys look at that? And then I got a follow-up on halving after that.

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [13]

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Look, I think everybody is keeping an eye on everything. Nobody knows how things are going to play out. But again, I'd be hesitant to speak on their behalf. I think as natural economic players, we're keeping an eye on everything and wanting to make sure from the perspective of the loan. Right now, I think we're over collateralized on it. I don't believe that the halving is going to happen without a big increase in the price of bitcoin. I think that's more personal, but I'm happy to answer questions related to the halving.

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division - Director and Technology & Communications Analyst [14]

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Okay. And so then related to the halving, I guess what are the kind of key indicators you -- or data points you guys are watching as the leading indicators to kind of help you plan what you're going to do? And maybe if you can walk us through, do you have any kind of scenarios that you're planning for if bitcoin does X or bitcoin does Y, we plan to do this or that? Anything you can share there?

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [15]

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Yes. For sure, there's a lot of different scenario planning that we've done, and we have different plans under different scenarios. I think the view is, I think, shared by everyone. The hash rate is probably the thing we monitor most closely, more so even than the bitcoin price. So if there's a couple of assumptions that I think everybody in the industry believes is that the hash rate is going to drop significantly post the halving, which is probably, I don't know, 45 days away or so. So, a, we know that the hash rate's going to drop, and that is a good thing for Hut 8 because that means that the competition decreases and we will have a larger market share.

We also believe that leading into the halving or more significantly post the halving, as we've seen in the past, there will be less selling into the market, less bitcoin being mined. Unless if the demand stays the same or even goes up in light of fiscal policy in North America and Canada and the United States and the rest of the world, you could see a real pop in the price of bitcoin. So it's really going to be the interplay of those 2 factors, which are completely out of our control that will determine how we respond. And we've looked at a whole bunch of different scenarios.

We've been exploring and in conversations with different groups with respect to upgrading some of the facilities to get additional efficiencies. We've done an analysis to see what happens under different amounts of price drops. But the COVID-19 makes things even that much more difficult because supply chains and logistics, travel logistics for delivering things have been broken. And so how is that going to impact what ends up happening here? It's hard to say. There's a lot of changes in the world here in the last 3 weeks that I don't think anybody thought would be this harsh, at least not in North America. And so we're trying to plan around that and see what can be done.

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division - Director and Technology & Communications Analyst [16]

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Okay. And then just on that from an operational perspective. Are you guys able to fully operate remotely? Or are there any kind of on-site things that are restricted that are kind of happening right now?

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [17]

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So we started looking into this early March. And yes, the majority of stuff can be done remotely. We've made sure that key employees and people that need to do that have the proper systems available to them at home. So yes, we completely have been ahead of that -- of the curve on that.

In terms of the operations and equipment, it's not really an issue. So these are not -- you've been to the sites, Deepak. So you know what it's like there. It's not like these are big credit places. So I think if people were working remotely and there was an issue with one of the boxes, we could send an engineer down there. I think there needs to be, by law, 2 people. So if they're wearing face masks, have proper protective gear, you could have one person standing there, 2 people going in to fix or repair anything, and that will be more engineering. The rest of the stuff is mostly software, which is just monitoring the temperature, the heat of what's happening in the boxes, making sure they're producing the right hash rate, temperatures inside the boxes are being consistent. It's that type of operational. And yes, that can be done remotely.

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division - Director and Technology & Communications Analyst [18]

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Okay. And then my last question. There's announcements for succession plan. We're -- obviously, we're in to April now. Any updates on the time line for that or things around that or any changes there?

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [19]

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Yes. I think the Board continues to work around that. Again, I think the COVID stuff has delayed things. I expect that there should be some type of an announcement or something this month. My view is I think this is probably my last month at the company, but the Board is continuing to work towards a solution. And I would expect that there would be some type of announcement in the next couple of weeks.

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Operator [20]

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And we'll go with our next question.

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Matt Yamamoto, [21]

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Can you guys hear me?

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [22]

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Yes.

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Matt Yamamoto, [23]

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Okay. This is Matt Yamamoto for CoinDesk. I just want to ask you about the upgrades -- possible upgrades that you guys had mentioned just moments ago. We're seeing new equipment come out from Bitmain and places like MicroBT. I'm just curious if you guys do plan upgrading the short term, which manufacturer were you hoping to get it from? And also, how would you plan on financing those purchases?

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [24]

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Yes. So what I would say is we're in conversations with several of the manufacturers, specifically the ones that you mentioned, having, I think, the best equipment available at scale. We've been testing out different equipment on our sites. The new offerings from both Bitmain and MicroBT are very strong. So we've been testing those out and getting some good results from the test batches we've received.

With respect to financing, how we would do that. I think we have -- there's several different plans in place. As a public company, there's nothing complete yet, but there's nothing that we can officially disclose. But certainly, these are things that we have been looking at and discussing internally now for months.

I think part of the issue right now that we're trying to explore is delivery schedule. So with the COVID-19, how does this impact manufacturing for companies like Bitmain and MicroBT? How have supply and delivery chains across the world been impacted? So whereas, in February, you thought maybe you'd be able to get things delivered in 4 to 8 weeks, those time lines have certainly changed today. And so that is the type of things we are exploring and trying to figure out in real time because, as I said, 4 -- 3, 4 weeks ago, nobody thought these things would be an issue, and the world is grappling right now with different supply chain issues like getting ventilators and masks around the world as opposed to bitcoin mining machines.

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Matt Yamamoto, [25]

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Got you. And just a follow-up to that, can you talk about kind of -- because I know you guys use BlockBoxes for your equipment. How -- if you guys bought equipment from other manufacturers like MicroBT or Bitmain, how would those machines fit into the BlockBoxes? And would you guys have the expertise for maintenance on those machines?

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [26]

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Yes. So we've been testing out other equipment, and it fits in fine. So the Bitfury equipment that compromise the majority of what's there is essentially similar machine stuff. The offerings from MicroBT and Bitmain, if you take their latest stuff, I think the Bitmain is the T -- or the S19 and then M30 is from MicroBT. We've been testing the stuff. It fits. You just have to rearrange some of the shelving. So we've tested it out on some of the BlockBoxes. There's not an issue. And yes, it does seem like we would have the expertise to do that. And frankly, the companies are very supportive to provide what I would call customer support for large customers if there's any issues.

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Matt Yamamoto, [27]

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Got you. And I guess if I could, switching gears, I want to ask a question on the impairment change that happened in fourth quarter. You guys shifted some of the impairment costs in 2018 from -- I believe it was servers to infrastructure, which caused depreciation and expenses to be much larger in fourth quarter. Could you give some more color on why you guys made that decision?

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [28]

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I'll shift to that question to Jimmy, yes.

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [29]

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I can cover that. Yes. So in 2018, we focused on the servers. But in 2019, at the high level, there -- because in crypto, it's a new industry that the accounting firms are still trying to wrap their heads around. There's new guidance and information that comes out on how they would like things accounted for. And based on the new guidance, we thought it was best to allocate on a pro rata basis instead the impairment from 2018. So that's what we did. So just a reallocation. The impairment amount did not change. There's a reallocation between all of the servers and infrastructure, which, of course, did change the depreciation amount at some level in 2019. But overall, that didn't have an effect actually on impairments.

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Matt Yamamoto, [30]

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Got you. I guess one last question, if I could, a modeling question. Assuming -- with the halving approaching, assuming bitcoin price stays the same, how much would hash rate need to drop for you guys to be positive on the bottom line and then, I guess, from -- also from a cash-basis perspective.

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [31]

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That's a good question. I don't have the specifics of our -- both of our models here right in front of me. But I think based on our modeling, we would like to see the price of bitcoin be a little bit higher here. But we're sort of thinking that the hash rate would be dropping here somewhere between 20% and 30%.

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Operator [32]

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And we'll go to our next question.

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Unidentified Analyst, [33]

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It's [BJ]. Can you guys hear me?

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [34]

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Yes.

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Unidentified Analyst, [35]

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Yes. Hey, Andrew. My question evolves around the recent release around Slushpool. Looking at that particular partnership, it says that you have a minimum requirement of 600 petahash with the requirement within a year to attain 2 exahash. So is it fair to say you guys have planned that out over the next year that you have the cap spend strategy in place to meet a 2 exahash? Based on my numbers, that would mean you're pretty much upgrading most of your network, 80% of your network, to attain that level, if that's the goal. And then I think in the agreement, it also said, once you attain the 1 exahash with Slushpool, you would also start maintaining a mining pool for them. So can you give me more color around that kind of partnership with those hashing commitments and then what your strategy is to get to the 2 exahash goal, if that's the case? And I'll have follow-up questions after that.

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [36]

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Yes. So I'll let Jimmy answer part of this. But what I would say is, obviously, the hope for any minor approaching the halving is that you're going to be able to upgrade your equipment, especially with the Rapid pace of equipment improvements that have come out. So we have been planning for it. Things are -- we will -- once we have things in place, we will press release that, those material items as they come out. But certainly, capital is scarce in this business, and we've been talking to a lot of different providers. And once there's material news here to release, we will do that.

But Jimmy, I don't know if you want to speak specifically to this -- the contract related to Slushpool.

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [37]

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Yes, happy to. On the first point, when we reach 1 exahash, we'll actually get a node set up by Slushpool. This is just going to make our connection stronger, right. So actually having a node on site. And so with an upgrade, that would be very possible. It's not too far to reach.

In terms of 2 exahash, this is, at some level, a placeholder. But if you take our site -- if you take our electrical capacity and look at the latest miners, our site has the ability to go above 2 exahash. But like Andrew said, until we have more details, that will be press released at the time.

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [38]

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Yes. It's the contracts with Slushpool. They haven't built in mechanisms there for you to increase and decrease. And when we were negotiating it, we said, "Hey, if we were to increase to these levels, can we get further reductions?" So part of it is just to build in some future relevancy for that contract.

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Unidentified Analyst, [39]

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Great. And I guess understanding that, and again, it's -- would you guys potentially -- because you have an awesome amount of power capacity, would you even consider -- because me reading that Slushpool agreement, where you would consider colocation? Or would the labor cost of supporting that with technicians and stuff not be worth it and you're just more focused on mining in-house like you've always been? Would that even be something you'd be considering for the next 12 months?

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [40]

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Do you mean that we would host for other people at our location?

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Unidentified Analyst, [41]

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Yes.

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [42]

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Yes. Look, everything is always under consideration. I mean we've been approached with that. Probably, what I would say is the Medicine Hat facility specifically, it's probably -- and this has been verified by lots of people in the industry who have visited the site. It's probably the best site in North America. And what I mean by best site is not just the electricity price component, but just the location, the temperature, the relationship with the government. There's a whole bunch of other factors that people don't take into account when they're looking at this stuff, such as property taxes and lease rates, availability of skilled labor force. When you take all of that into account, it really is a phenomenal site, and that's a huge advantage.

So to your question, yes, we have been approached by people who say we would like -- will you host equipment for us, and all that stuff always gets evaluated and discussed. And if there was a way there for us to create value and profits for shareholders, then that would certainly be something that would be looked at more closely. We haven't seen somebody approach us with something meaningful thus far.

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Unidentified Analyst, [43]

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Okay. Fair. And then, I guess, my next question evolves around revenues for -- I know you reported full year, but -- and the way I do my modeling, I look at quarter-over-quarter. So my modeling is an estimate, but I kind of ballparked for Q4 that you did about 1,694 bitcoin mined. I think, correct me if I'm wrong, you did mine over 1,600 bitcoin. Is that right for the quarter of Q4?

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [44]

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Jimmy, is that information not in the MD&A, how much we mined per quarter?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [45]

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I want to say it should be -- yes. I'm trying to get back actually to that specific number. Yes, it is. I'm just looking at it right here. It's in the MD&A, 1,648.

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Unidentified Analyst, [46]

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1,648.

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [47]

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As opposed to...

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Unidentified Analyst, [48]

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So if you -- okay. So 1,648. Okay. So it's close to my modeling on mined. So with that number, like, was -- and I don't think we have the exchange rate variance. I think you reported just shy of CAD 15 million for the quarter, right?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [49]

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Yes.

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Unidentified Analyst, [50]

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Was there trading challenges or pricing volatility to when you sold? Because there is a variance that I see, at least in the sales number, of a few million bucks based on what I can tell. I mean I could be wrong. But was there just challenges in Q4 selling some of the mined bitcoin where you got lower prices than expected by holding it back a bit? My modeling works that you're basically selling on a daily basis. So that is one reason why I say my modeling might not be accurate. But based on what you mined in bitcoin, I would expect that you would have been closer to like $17 million in revenue, but I don't know if you can speak to that or not. I was just curious.

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [51]

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So one thing I will quickly mention on revenues, and Andrew may have a comment is, yes. So revenue is done based on -- as you receive the bitcoin, we take the price that day. And now my question to you, are you saying -- are you looking at just as revenue and calculating it day by day? Is that...

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Unidentified Analyst, [52]

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Yes. So I take the exchange rate, USD, change it to Canadian and then look at what -- because I estimate your mine production on a daily basis on an average 24-hour window. So that 1,694 that I modeled. And basically looking at if you're selling it into market every day as an average, you would probably be closer to almost $17 million revenue, but you guys reported about $2 million less than that, with 1,638 (sic) [1,648] in mined revenue. So I'm just trying to understand what the potential variances of that fall.

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [53]

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I'd have to look at your model to -- I mean feel free to send it to me, and I'm happy to take that off-line. But yes, Andrew get that.

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [54]

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I mean I think -- part of it has to [understand.] So we don't sell the bitcoin daily. The thesis between the company from day 1 has always been, we think, Hut 8 is an alternative to going and buying the bitcoin, unless we want to hold as much as we can. And our view is also that over the course of time, although the volatility has been insane, that over the longer term, the price of bitcoin will continue to appreciate. So what might have happened there is sometimes we're trying to hold it. We generally always time it pretty well. It could be that there's bitcoin that we didn't sell, but we sold more bitcoin or less bitcoin within a certain quarter. It -- a lot depends on our financing needs and how much we can, but we're always trying to sort of minimize the amount of bitcoin we sell in order to keep it. And so I don't know if the difference in your numbers might be -- if our fiat costs were less, maybe we just sold less bitcoin, and that has to be taken into account with what is our balance of bitcoin at the time.

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Unidentified Analyst, [55]

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Yes, yes. The other thing is true. I think the retained bitcoin in the management discussion was a little bit less, I think, for closing out the year. I think it was like 3,029, and it went down to 29 and change. So I know that went down, too, for the Q4 numbers, but yes. I mean I'm just trying to understand it like if I'm missing something and how you were -- I would just account for that it could be how you hoddle and then potentially sell in bitcoin, and there was some volatility in Q4 that it may have impacted, like, pricing you might have gotten, and that's all relative to what's mined.

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [56]

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Yes. That's totally possible because sometimes you get these situations where we know we have a fiat cost that's due. We always try and plan and have enough working capital available. But could have been a situation where it was a week or 2-week period where the price was lower, and we ended up having to sell more than we thought. It's entirely possible.

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Unidentified Analyst, [57]

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Yes. All in all, like the year for 2019, you guys executed really well. I'm really pleased with what you've been able to do with the equipment. And then going into 2020, same thing with the power capacity you guys have on the site. You have -- I think it's a very valuable asset.

I'll just close out my comments, I guess, with regard to, I guess, earlier comments in the call. I'm assuming you'd use a linear programming model to do optimization, right, for the questions around like how you budget the 50% savings in power to 35% reduction in the hashing rate like you'd use with your own model, but it's probably a linear programming model, I would assume, right, how much (inaudible), how it's done.

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [58]

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Yes. It's essentially -- if you just think about it, it's an x- and y-axes that goes on for a very long time where we program lots of different price points for electricity and bitcoin, and then we just look at it real time. We provide that information to the people operating in the site, and then they just follow that. And we evaluate that program several times a day, just to make sure we're operating as efficiently as we can be and covering -- the number -- one of the most important things we're always trying to do is cover our costs, right? And we want to make sure at the very least that we are -- that the price that we're mining at covers our electricity and our labor costs. That's always the main thing.

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Unidentified Analyst, [59]

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And electricity generally is cheaper in the summer than the winter because it's nat gas predominantly that powers the mines, is that right, is my understanding?

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [60]

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That's correct.

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Unidentified Analyst, [61]

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Is that the sense that -- yes. Okay. Yes. I'm good guys, I appreciate it. Again, Andrew, all the best. You've been a really big, big part of the team there, so I appreciate all the help that you've provided me over time with understanding your business better. Appreciate it.

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [62]

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My pleasure. Thank you.

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Operator [63]

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And we'll go to our next question.

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Unidentified Analyst, [64]

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Have you guys identified who will be taking over as CEO, although I'm very unhappy to hear that you're leaving, Andrew.

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [65]

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Thanks. So that's really more of a Board question. I don't know just because of rules. I think that they need to finalize their determination. They need to negotiate with the people or the candidate. And then once it's ready to be disclosed, it would come out. But I would anticipate that this would be my last month at Hut 8.

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Unidentified Analyst, [66]

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Okay. One other [third] question related to Slushpool. How big of an impact is it going to be having on our margins and revenues in dealing with them as opposed to the current situation?

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [67]

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In the short term, it's hard to say. So what happened was is we switched over to the Bitfury pool. So Slushpool was expensive relative to the deal we got at the Bitfury pool. The thing, though, is that if you're aware of how it works, there's a luck factor that's involved. Essentially, every time you're setting your hash rate, it's like you're trying to guess numbers to solve a combination on the luck. And the larger your pool is, the more consistent that will be on a pro rata basis. And what happened was is that the Bitfury pool got smaller towards the end of last year and the beginning of this year, I think, as people maybe were just taking their miners off-line or moving their hash rate. And what happened is that the pool we were on, while cheaper, became a lot more volatile. So we were seeing some days, we're having exceptionally great luck and we were producing, and then we're seeing some days where it was less luck. So over the long term, you would expect that you would end up producing the exact same amount as you would if you were part of a larger pool. However, we made the choice and we talked to Slushpool, and we're able to, I think, negotiate a deal with them, a contract with them that makes sense. But being part of a larger pool just means that our bitcoin mined becomes more consistent. We don't have to go through the swings of good or bad luck. It's such a large pool that we see much more consistent production of that.

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Unidentified Analyst, [68]

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Okay. And also, are we -- are there any plans to increase production capacity with the new equipment? or you're just getting bigger?

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [69]

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So I think that the opportunity for the company going forward is we have access to about 109 megawatts, which is a lot. And I think the real opportunity for the company here is if you're going to look to expand some of the new equipment that's come out in the last few months -- like, really, it's more like weeks from places like Bitmain and MicroBT, provide a lot of opportunity if we're able to upgrade to that equipment. It just gives you the ability to grow from within. So rather than going out and having -- finding a new site is real complicated. You've got to go through regulatory approvals. You've got to build the site. You've got property taxes, land taxes. You've got to hire labor. The opportunity for Hut 8 is actually within the organic growth here with the new equipment that I think could be a real game changer for the company going forward.

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Operator [70]

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We have no further questions at this time.

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Andrew Kiguel, Hut 8 Mining Corp. - Former President, CEO & Director [71]

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Great. Well, thank you, everybody, for coming on. I was unsure if anybody was actually going to sign on just given all the things happening in the world right now, but thank you, everybody. This is likely my last call, but I want to thank everybody for their support over the last couple of years, and I will be around if there's anybody who wants to reach out. So thank you very much, and everybody, stay healthy and safe.

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [72]

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Thanks, everyone.

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Operator [73]

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Thank you. That concludes today's conference. Thank you for participating, and you may now disconnect.