Argo Blockchain plc Q3 FY2023 earnings call

• Macro Environment: Network hashrate increased ~70% year-to-date, with seasonality in hashrate and network difficulty due to factors like Texas miners curtailing operations in high power prices. Hash price trended down in Q3 but rebounded strongly in late October/November. Upcoming events like potential spot Bitcoin ETF approval and 2024 halving are key considerations.
• Q3 Results: Mined 370 Bitcoin, revenue $10.4M, mining margin 58%, adjusted EBITDA $3.1M. Power credits from Helios curtailment were $4.4M, reducing net power costs. Non-mining operating expenses reduced by 11% in Q3.
• Fleet and Balance Sheet: Argo has a fleet efficiency of ~30 joules per terahash and average power/hosting costs of $0.045 per kWh. Strengthened balance sheet by raising $7.5M in equity and reducing Galaxy debt by $5M in Q3. Focus on deleveraging and cost reduction for the 2024 halving.

In the third quarter, Argo Blockchain mined 370 Bitcoin and generated revenue of $10.4 million, a 17% decrease from Q2 due to economic curtailment at Helios. However, power credits from curtailment amounted to $4.4 million, offsetting the revenue decrease. The mining margin was 58%, translating to an average direct cost per Bitcoin of $11,736. Adjusted EBITDA for the quarter was $3.1 million, an improvement from Q2. Argo's total hashrate capacity reached 2.8 exahash per second, with the deployment of around 2,700 ePIC BlockMiners in Quebec contributing approximately 300 petahash of additional capacity. Revenue contribution is primarily from Bitcoin mining operations.

• Hash price rebound: Every $10 increase in hash price per petahash per day could generate ~$2.5M incremental revenue per quarter. Anticipate hash price stabilization as transaction backlog is processed.
• Upcoming Events: Potential spot Bitcoin ETF approval could bring institutional cash inflow. Focus on fleet efficiency, cost structure, and balance sheet strength ahead of 2024 halving.
• Growth Opportunities: Continues discussions with strategic partners and remains opportunistic post-halving as unprofitable miners may go offline.

• Seasonality Impact: Seasonality in hashrate due to factors like Texas miners curtailing operations in high power prices and cold weather affecting grid conditions and power prices can impact network difficulty and hash price.
• Regulatory Uncertainty: Uncertainty around SEC approval of spot Bitcoin ETF could affect institutional inflow and demand for Bitcoin.
• Halving Risks: Failure to manage fleet efficiency, cost structure, or balance sheet effectively could impact profitability post-2024 halving.

Q: Hash price has been rebounding lately with the recent appreciation in the Bitcoin spot price. Can you speak to the improvements in Q4 '23 and elaborate on how it is impacting cash flow?

A: Yes, the hash price is paying close attention to. It's still significantly higher than Q3 average. For every $10 increase in hash price, based on total hash rate capacity of 2.8 exahash, we're generating an additional $2.5 million per quarter. There was a difficulty increase of around 3.5% which tempers a bit with hashrate but is smaller than expected.

Q: Can you remind me how you reduced the debt by $5 million? Did that come from operating cash flow?

A: In July, we raised around $7 million of net proceeds, 25% of that went to reduce the debt. Plus, we had another three amortization payments of roughly $1.1 million each, and that came out of our operating cash flow and cash on hand.

Q: Now that all your machines are installed and operations are going well, do you have any visibility into future growth options? Is there a time frame for making any decisions?

A: Yes, we're continuing our discussions with some key strategic partners and hope to share some updates on our next call. Right now, we're focused on reducing our debt and cost structure, so we'll be opportunistic post-halving.

Q: How were the non-mining expenses reduced by 11%? And is that reduction stable going forward?

A: We were able to reduce our recurring non-mining OpEx by around 11% from the prior quarter. This was primarily driven by lower insurance costs, lower professional fees and lower salaries as a result of reduced head count. And we believe this is going to be an ongoing reduction going forward.

Q: Can you speak a little bit about how the ePIC BlockMiner machines are performing in Quebec?

A: Performance is better than expected. Averaging about 114 terahash through the fleet, representing about 11% of overall hashrate capacity. Efficiencies on par with S19J Pros, down clocking brings them to about 27 joules per terahash. Uptime is outstanding due to Quebec's reliable power, firmware is stable.

Q: Can you comment on Argo's capital structure and how you plan to continue addressing debt?

A: We continue to focus on paying down our debt. We've made significant progress in paying down our Galaxy debt especially, and we are continuing to look for other ways to strengthen the balance sheet. Some avenues include noncore asset sales and potential refinancing of existing debt.

Q: How do you plan on expanding the mining capabilities in Canada? And do we plan on renewing our contract with Galaxy and continue to mine at Helios once the two-year contract expires?

A: We're geographically agnostic. We're looking at various opportunities including hydropower in Quebec, Texas, or Oman. We're open to discussions and remain opportunistic. Regarding Galaxy contract, details will be determined as the two-year contract nears expiration.

Q: When should we expect to hear more about the discussions mentioned on the asset sales?

A: We're still in advanced discussions with partners. We anticipate sharing something hopefully by the end of the year.

Q: What are your network hashrate forecasts post halving and how will ARBK remain competitive?

A: Expect a lot of hashrate come offline as unprofitable miners go offline. Our focus is on efficiency and costs. We have an efficient fleet, competitive power and hosting costs (~$0.045 per kWh year-to-date). We're also looking at potential hedging opportunities using derivatives to remain competitive post-halving.

Q: When you reached 2.8 exahash, did that come from the BlockMiner machines?

A: In our September monthly operational update, we announced completion of deployment of ePIC blockchain machines, which represent around 300 petahash of hashrate capacity, enabling growth from 2.5 to 2.8 exahash. The BlockMiners have been online and hashing since the end of September.