Hut 8 Mining Corp. (NASDAQ:HUT) Q3 2023 Earnings Call Transcript

Hut 8 Mining Corp. (NASDAQ:HUT) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: Welcome to Hut 8’s Third Quarter 2023 Financial Results Analyst and Investor Call. In addition to the media release issued earlier today, you can find Hut 8’s financial statement and MD&A on the company’s website at www.hut8.io under the company’s SEDAR+ profile at www.sedarplus.ca and under the company’s EDGAR profile at www.sec.gov. Unless noted otherwise, all amounts referred to during this call are denominated in Canadian dollars. Any comments made during this call may include forward-looking statements within the meaning of applicable securities legislation regarding the future performance of Hut 8 Mining Corp. and its subsidiaries. The statements made reflect current expectations and, as such, are subject to a variety of risks and uncertainties that could cause actual results to differ materially from current expectations.

These risks and uncertainties include, but are not limited to, the factors discussed in Hut 8’s Annual Information Form for the year ended December 31, 2022, and the company’s other continuous disclosure documents. Except as required by applicable law, Hut 8 undertakes no obligation to publicly update or review any forward-looking statement. During the call, management may also make reference to certain non-IFRS measures that are not separately defined under IFRS such as adjusted EBITDA, mining profit, digital asset revenue per Bitcoin mined and mining cost per Bitcoin. Management believes that non-IFRS in financial information taken in conjunction with IFRS in financial measures provide useful information for both management and investors.

A close-up aerial shot of a sprawling gold-mining operation in a desert landscape.

Reconciliations between IFRS and non-IFRS results are presented in the tables accompanying our press release, which can be viewed in our website. I would now like to turn the call over to Hut 8’s CEO, Jaime Leverton.

Jaime Leverton: Thank you, Carmen. Good morning, everyone. Welcome today -- to today’s call where we will discuss Hut 8’s results for the third quarter of 2023. Throughout the third quarter, we continued to mine despite headwinds from seasonal energy spikes, which drove some curtailments and increased network difficulties. We continued to work to mitigate the issues we are seeing in Drumheller, and the team made good progress in repairs but continued to see challenges upon re-energization. Still, we made some progress finishing the quarter with a 7% improvement in operating capacity over the end of the second quarter. At Medicine Hat, the team utilized mutually beneficial terms in the electricity supply agreement covering the site, which provides the opportunity for both parties to continue benefiting from high prices in the Alberta power market.

In our HPC business, we created some momentum in Q3 with new customer additions and growth among existing customers. Last week, we launched our on-demand cloud service for customers seeking HPC services from our GPUs with Kubernetes-based applications that can support artificial intelligence, machine learning, visual effects and rendering workloads. This service puts control in our client’s hands while reducing provisioning time from days to minutes, which is particularly compelling for those seeking shorter term HPC projects. This offering is currently available for our Mississauga data center and we look forward to expanding this service to new regions and adding more services in the weeks and months to come. We also have data center capacity in both Central and Western Canada that we can quickly allocate with minimal investment to accommodate clients that have up to an equivalent of 85 HGX class server chassis with GPU cards.

We continue to see constrained infrastructure supply, especially for high performance computing capacity required for intensive workloads like AI and are unique in our ability to support clients that may have their own GPUs on hand, but need access to build out infrastructure on a very tight turnaround. We will continue to focus on capitalizing on these opportunities in HPC and cater to these growth areas in the coming quarters. Moving on to our treasury strategy. You are all very well acquainted with our commitment to HODLing our Bitcoin mined, and this year, while we worked to close the transaction with USBTC, we continued to have maintained our stack above 9,000 Bitcoins, only selling production at opportune points throughout 2023 when we felt prices were particularly strong, such as in the last month.

We have not dipped into anything mined or HODLed prior to 2023, which has been very intentional. We remain bullish on Bitcoin, are committed to our treasury strategy and know that it remains a powerful differentiator for us. With up to 10 spot Bitcoin ETFs awaiting SEC approval, we believe it’s a matter of time before we see an ETF approved. BlackRock is one of the institutions on that list and has a near perfect ETF approval track record of 99.8%. We see institutions like BlackRock with approximately $9 trillion in assets under management as a meaningful bridge between traditional wealth and Bitcoin once ETFs are approved. For example, last month, we saw the price of Bitcoin rally 27% on optimism around ETFs and with these shares backed one-to-one with Bitcoin, we believe that we should not only see increased demand, but also see value heading up and to the right with these approvals.

Tying this back to our stack, a lift in the value of our stack compared to the capital, time and effort it would take to mine the same amount from this point going forward, especially 160 days or so out from the having is a very compelling scenario and reinforces our current treasury strategy. As we have said in the past, moving forward we hope to see positive momentum and will actively seek opportunities to responsibly work our track -- our stack to drive additional value. At the beginning of the month, we were very pleased to share that we have received court approval for our stalking horse bid for four natural gas power plants in Ontario, a 40-megawatt facility in Kapuskasing, a 110-megawatt facility in Kingston, 120-megawatt facility in Iroquois Falls and a Bitcoin mine and power facility in North Bay, which has 40-megawatt of capacity.

While the sale and investment solicitation process is underway, if our bid is ultimately declared successful, a new subsidiary of the company will become the owner of the assets of the four sites. Our partner, Macquarie, will receive a minority equity interest in the subsidiary of approximately 20% and a subsidiary of Hut 8 will be the majority owner with the remaining approximately 80%. We believe that the strategic addition of these assets would position Hut 8 as a vertically integrated mining operation, allow us to utilize idle infrastructure and machinery, provide access to energy pricing certainty and give us flexible energy capacity and properties for alternative uses such as traditional data center and/or AI hosting. Significantly, the facilities are expected to give us the optionality to pursue revenue generating activity, including selling energy to the grid, mining Bitcoin and powering high demand HPC applications like artificial intelligence.

This move is not only in keeping with our infrastructure-first strategy, but also affords us very compelling flexibility ahead of the halving. In addition, we made considerable progress as we work toward closing our transaction with USBTC, which has been our North Star since we first announced the merger. On September 13th, we announced that our shareholders overwhelmingly approved the transaction through a special vote, which is incredibly encouraging, because it reflects how engaged and supportive they are of our merger of equals. Five days later, we announced that we obtained a final order approving the plan of arrangement with USBTC from the Supreme Court of British Columbia. We also continued to file updated amendment to our S-4 with the SEC, and on November 9th, the SEC declared Hut 8 Corp.’s registration statement effective, which is a significant milestone that we have been collectively working towards.

Now that we have the effectiveness declaration between the SEC, we are very pleased to share that we expect to close our transaction by November 30th, subject to USBTC obtaining its required stockholder approval and the satisfaction of other customary closing conditions. Before I turn it over to our CFO, Shenif Visram, I would like to thank our investors for their continued commitment to Hut 8 and their excitement for our merger, our team for their ongoing hard work and dedication across the business and our Board for their continued support and guidance. Thank you. And over to you, Shenif.

Shenif Visram: Thanks, Jaime, and good morning, everyone. During Q3, we continued to remedy the operational challenges at our Drumheller site and pursue the stalking horse bid to address our suspension of mining activities at North Bay. As both matters remain ongoing, they affected our Q3 results. We achieved revenue of $17 million for Q3 2023, a $14.7 million decrease relative to the same quarter prior year of $31.7 million. This year-over-year decrease was driven by a lower quantity of Bitcoin mined, partially offset by an increase in the price of Bitcoin. Revenue from digital asset mining activities was $12.5 million as we mined 330 new Bitcoin in the quarter. This compares with $27.3 million of digital asset mining revenue in Q3 2022 when we mined 982 Bitcoin.

The year-over-year reduction in new Bitcoin mined was driven by a combination of an increase in network difficulty, impacts of electrical issues at the Drumheller site resulting in less mining activities, the halt of GPU Ethereum mining, which we were doing in Q3 2022 until the Ethereum networks merged and the suspension of mining activities at North Bay. The impact of revenue of less Bitcoin mined was partially offset by the higher price of Bitcoin reflected by the digital asset revenue per Bitcoin mined of $37,800 in the current quarter, compared to approximately $27,800 in the prior year quarter. Our high performance computing business contributed an additional $4.5 million of revenue in Q3 2023, compared to $4.4 million in Q3 2022. Q3 2023 results included revenue from new sales, which were partially impacted by client churn.

Revenue from the Interior Health contract is expected to start in Q4 2023. Cost of revenue for Q3 2023 was $21.4 million lower than prior year by $24.2 million and consists of depreciation and site operating costs. Depreciation expense decreased to $10.2 million during the third quarter of 2023, compared to $25.3 million in the same quarter in 2022. The decrease was due to the lower net book value of digital asset mining assets after the recognition of the non-tax impairment charge in Q4 2022. Site operating costs of $11.2 million was lower than the same quarter prior year by $9.1 million. Within the digital assets mining operation, site operating costs reduced by $9.3 million, mainly due to lower power costs. The average mining cost per Bitcoin for the third quarter of 2023 was approximately C$26,300 compared to approximately C$18,300 per Bitcoin in the prior year for the same quarter.

The increase was due to higher power consumption per Bitcoin mined and the ongoing electrical issues at the Drumheller facility, which were partly offset by the company’s decision to curtail and lower average energy cost prices compared to prior year same quarter. We incurred $2.5 million in operating costs related to the high performance computing operation, compared to $2.3 million in Q3 2022 due to increased repairs and maintenance, partially offset by lower software costs. In terms of margins, our digital asset mining operations generated mining profit of $3.8 million in Q3 2023 versus $9.3 million in the prior year same quarter. The decrease in mining profit is due to the lower quantity of Bitcoin mined during -- due to increased network difficulty, suspension of mining activity in North Bay and the ongoing electrical issues in Drumheller, partially offset by a lower average price of power and the higher price of Bitcoin compared to Q3 2022.

General and administrative costs were $11.9 million for the quarter, compared to $11.2 million for the same quarter prior year. The key driver in the increase was the inclusion of $2.4 million of one-time transaction costs in third quarter of 2023 related to the merger with USBTC and the stalking horse bid. Excluding these one-time transaction costs, our general and administrative costs were down $1.7 million compared to Q3 2022, due to lower sales tax expenses and other expenses. We recorded a net loss of $53.6 million for Q3 2023, compared to a net loss of $23.8 million in Q3 2022. In Q3 2023, we recorded a $20 million impairment loss on our deposit related to the purchase -- the power purchase agreement for the North Bay facility as a result of our power providers’ receivership.

We also booked a $10.1 million non-cash loss in the third quarter on the revaluation of our digital assets to income or loss, compared to a $7.3 million non-cash gain in the comparative quarter, both as a result of changes in the average price of Bitcoin during the respective quarters. Q3 2023 saw an increase of net finance income expense of $0.6 million, partly due to the increased interest expense from our loan with coin-based credit that was first drawn in the second quarter of 2023. Also, Q3 2022 included a non-cash loss on the revaluation of warrant liability of $2.9 million. Reflecting the operating results discussed previously, Hut 8 achieved adjusted EBITDA of negative $11.6 million in Q3 2023, compared to a positive adjusted EBITDA of $9.4 million in Q3 2022, primarily driven by a lower digital asset mining profit and a non-cash revaluation loss on our digital assets.

Our balance sheet remains healthy with manageable levels of debt and a cash balance of $21.1 million as of September 30, 2023. As previously announced, the company entered into a US$50 million credit facility with coin-based credit on June 26, 2023, which has drawdowns available in three tranches. At the end of Q3 2023, the company had 20 -- had C$47 million of loans outstanding, net of deferred financing costs related to the facility. Our Bitcoin holding are marked at fair value and totaled $341.4 million as at September 30, 2023, based on 9,366 Bitcoin held in reserve. Of this total, 7,259 Bitcoin valued at $265 million remain unencumbered. As previously announced, the company has continued to sell Bitcoin production to help fund operations while we work on closing the merger with USBTC.

In the current quarter, we mined 330 Bitcoin and sold 100, resulting in our Bitcoin held in reserves increasing by 230. Thank you. With that, I will turn the call back to our Operator.

See also 20 U.S. Cities With Highest Murders Per Capita in 2023 and Two Sigma Advisors Top Stock Picks and their Performance against S&P 500 ETF (SPY).

To continue reading the Q&A session, please click here.