Welcome to the Hut 8 Mining Third Quarter Results Call. My name is Paulette, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question Please note that this conference is being recorded. I will now turn the call over to Andrew Kegel.
Sir, you may begin.
Thank you very much, Paulette. Welcome, everyone, to the Hut 8 Q3 conference call. As per all previous conference calls, this is being recorded and gets posted on our website, w ww.hudditemining.com, and it's under the Investors tab and Reporting. I'm going to start the call, then I'm going to turn it over to Jimmy Vaiopoulos, our CFO, to review the financials. I'll have some concluding remarks, and then we'll turn it back over to the operator for Q and A.
So diving right in. Some of the highlights for the quarter were revenues of $26,700,000 for the quarter, dollars 67,100,000 for the year. In terms of EBITDA, dollars 14,700,000 for the quarter and $30,700,000 for the 9 months ended for the Q3. In terms of other things in the quarter, we mined, well, 19 65 coin in the quarter, 7,187 for the 1st 3 quarters of the year, and our cost per bitcoin in the last quarter was $4,066 I'll note that's inclusive of electricity, mining pool fees and all other production costs. I say that because I just noticed some other companies that report in the space only use the price of electricity divided by the amount of bitcoin they mine.
We think it's a more transparent way to sort of show it is to show all the mining costs associated with mining a Bitcoin. Through the quarter, we strengthened our balance sheet significantly, reduced debt and payables. Increased our petahash capacity at least announced the increase in petahash capacity by 19.6%, increased our balance from the previous quarter, and I think also significantly, we're the 1st company to be approved for listing on the blockchain space on the TSX senior exchange. So with that, I'm going to turn it over to Jimmy Vaiopoulos, our CFO, and he's going to review the financials in more detail. Jimmy?
Thank you, Andrew. This is Jimmy Vialkowis speaking, CFO of Hut 8. Before continuing, I'd like to remind everyone that all amounts in the financial statements and discussed on call are in Canadian dollars unless otherwise stated. This is another strong quarter for us as we mined 1965 bitcoin with revenue of $26,700,000 while maintaining a mining profit margin of 58%. Industry headwind during the quarter as the Bitcoin price dropped 30% and the network difficulty rate increased by 61%.
This level of volatility is expected. However, we are consistently monitoring our ongoing operations to keep electricity prices down while maximizing our Hash rate output. The cost per day for the quarter was US4,364 dollars inclusive of electricity costs, mining pool fees and all other mining production costs. This is favorable when compared to the average Bitcoin price for the quarter of US10,382 dollars Our strategy of mining and holding Bitcoin while trying to sell at peak prices continued to pay off this quarter with a realized gain from the sale of Bitcoin of $514,000 The Bitcoin price dropped nearly 20% in the last 2 weeks of the quarter, causing an unrealized loss from revaluation of Bitcoin of $10,000,000 Despite this, we recognized a gain of $8,200,000 in unrealized revaluation of Bitcoin for the 9 months ended September 30, 2019. With 2 strong back to back quarters, we focused on strengthening our balance sheet by repaying US2 $1,000,000 of debt to Galaxy Digital and US2.3 dollars of debt to Bitfury since the beginning of the year.
We also significantly brought down this accounts our accounts payable since the beginning of the year down by 14,800,000 dollars Together, this puts Hut 8 on stronger footing to move forward. In addition to strengthening our balance sheet, we also invested in new equipment from Bitfury, upgraded with their latest chip technology. This includes 9 block boxes for US7 $1,000,000 for which we already placed a US3.5 million dollars deposit. Combined with the increase by 4.3 megawatts of capacity to our operations, Combined with the increase by 4.3 Megawatts of the City of Medicine Hat facility, this combines to an increase of 19.6% to our overall hash rate output. Although we use cash and Bitcoin to pay down debt, accounts payable and expand operations, we were still able to increase retained Bitcoin by 7.6 percent to 3,496 Bitcoin at September 30, 2019 from the prior quarter of 3,250 bitcoin at June 30, 2019.
Expenses including non cash share based compensation for the quarter was $707,000 a slight increase from Q2 2019 of $637,000 and a decrease from $747,000 for Q1 2019. Adjusted EBITDA for the quarter was $14,700,000 with a 55% adjusted EBITDA margin. The difference between the mining profit margin and the adjusted EBITDA margin of 3% also shows the cost of corporate overhead. We've kept cost consistently lean, and we are focusing on finding new ways of further lowering our operating and overhead costs while maintaining a high standard in our operation. I will now pass the call back over to Andrew.
Thanks, Jenny. So I think if I was to summarize what the quarter looked like was that despite the Bitcoin price dropping, despite difficulty increasing, we still put out, I think, what is a very strong quarter. We managed to actually reduce our debt, strengthen the balance sheet, reduce our leverage. We increased our capacity by close to 20% and despite all that, managed to increase our Bitcoin inventory. So I think overall, despite the headwinds in the industry, it was a good quarter and we accomplished a lot of things.
And again, from the other aspect of being the 1st company to trade on the TSX in the cryptocurrency space is quite significant. We received a lot of great media around that,
and I think it's something that a
lot of people have noticed in. So with that, I'm going to turn it back over to Palat, the operator, and open this up for questions.
Thank
state your name, your company and your question? Please go ahead.
From JMP Securities. My first question is on the update on the capacity expansion. I was wondering if there's any chance those 9 boxes could come online before the slated end of the November time line. From my understanding, those boxes were operational originally with Viparia and just needed to be upgraded to the newest chips?
Yes. The target is still aligned. It's just a function. I believe that the chips have been delivered, and then it's just a manual process of upgrading of replacing the motherboard and sliding the new chips in. We're still on target to do sort of towards the end of November.
I don't see that happening earlier, and it's not really a delay. It's just a function of getting the chips over from Korea where they're manufactured.
AQ just got approval from the ALC to list a publicly traded Bitcoin
fund. So I was wondering if
you could talk about how this impacts Hyatt and what you think the benefits of owning a Bitcoin mine like Hyatt versus a publicly traded Bitcoin funds now that they're available in Canada?
Right. So I mean there's a whole bunch of different things there. I think part of it is, as for us, we own a significant amount of assets. We're an operating business. We're not a passive holder of Bitcoin and in charge of the fee.
I think it's great what the 3iQ guys are doing. We consider them friends. And there might even be some synergies there between us because as guys that mine and have the occasional need to sell and they have the occasional need to buy, there might be some potential synergies there down the road. I think some of the differences are is, A, we own the assets. B, we're mining at significantly below where the market price is.
So our all in price for this quarter was $4,363 So in a sense, when you're buying into Hut 8, you're mining into the ability that we're going to be able to produce at below the market price. When you're buying into a fund, it's just a passive holding. The other piece of it is, is that we're also able to take advantage of, call it, spikes or different things in the market. So during Q3, there was a period of time at the beginning of the quarter where the price spiked over $13,000 Well, we saw that and immediately took advantage of that and we're able to monetize and capitalize on that. Again, versus a passive fund, it's a very different operation that we're able to watch these spikes and actively manage the Bitcoin inventory to our advantage, and then we can reinvest that for higher ROE.
And so if you were to think in the future, the price of Bitcoin was to, again, double, you would see that our margins would go up proportionally more because of that. But if you're just holding the fund, either you're buying it at those higher prices or it's a passive holding, we have the ability to sort of look at what's going on and either sell into the market or continue to produce at a price that's significantly lower than the market. So I'd say that those are the key differences.
Helpful. My last question is related to the network cash rate. So China just announced that they're scrapping their plans to ban Bitcoin mining. What are you hearing on that front? For example, are people actively buying new equipment now that we're 6 to 7 months away from the having?
Any color on the mining industry dynamics would be helpful.
Yes. So my expectation is we always are looking at things in the most conservative way possible. So the expectation from us is that Hash rate will continue to increase. There's been some new Chinese equipment that's come to the market and is in the process, I think, probably being shipped, I think most of it in December. So I think what you'll see is that, that equipment will come in line depending on how fast they can manufacture it and sell it in sort of January, February, March.
We're also hearing things, for example, that a lot of the older equipment is going to come offline. So it's a little bit of a give and take. There's still a ton of older equipment out there that's producing Hashrate and is maybe marginally profitable or on the way to becoming unprofitable that we see coming off market. If you look at the current difficulty, it's projected to go down by close to 7% today in the next few hours. So that tells me that there's equipment that's coming offline.
So it's going to be an interesting mix. I think anybody who is looking to add new equipment in anticipation of the having has to really look at their ROEs, their IRs, the cost of electricity, all of those things very carefully because you just don't know what's going to happen come, call it, May 2020 when the halving occurs. Our perspective is to continue to try and grow our capacity in an accretive fashion, try and mine for the lowest cost we can, optimize our electricity costs and hold the Bitcoin inventory because we're still Bitcoin maximalist here and we think that it's going to go up. Despite that, we will take advantage of spikes that we see in the marketplace, especially if we think they're temporary in light of the price of Bitcoin being volatile, although on an upward, I guess, trajectory. That's my answer.
Operator?
Thank you. And our next question comes from Brett. Please go ahead.
Hi. Brett here, Private Investor. Excellent quarter, hats up guys on the execution. So Andrew, I just want to level set into 2020 with what you've mentioned of maximizing efficiency. So you're approximately 8.8 petahashes per megawatt right now based on your current kind of exiting out of the quarter this year and into the New Year.
So do you foresee being able to get better efficiency through your partnership with Bitfury to get that petahash efficiency up? Or are you just going to, like you say, just focus on electricity and just really, you know, sweat the assets that you have with those block boxes?
I guess, is my question, if that makes sense? It's both. And so obviously, we're very carefully looking at ways to maximize our efficiency and lower costs, which I think we've done a good job at. One of the advantages of the block boxes versus other equipment is that you can just sort of slide new motherboards in and out. So we are in discussions.
I think the one thing that we do have is this large Bitcoin inventory that will help us finance any expansions going forward without the need to do anything potentially dilutive, we're not going to get forced to anything. But absolutely, we are looking at the halving that's coming and our petahash per megawatt and finding ways to improve that either organically to things we can do internally, but also, obviously, on a daily basis, we're evaluating the different technologies that are out there and finding ways to sort of prepare. My perspective is as long as the equipment is making money and is profitable, we want to be ready to sort of upgrade as quickly as possible within a matter of weeks. But we don't want to necessarily upgrade too quickly. We also want to be cognizant of the fact that if the price of Bitcoin goes up, so does the price of equipment and the upgrade.
So we're carefully evaluating it from both sides, but we're certainly cognizant of it and working on it daily.
And just a follow-up to that. And again, I know everything's dynamic in the mining industry, but would
you say your ideal target is
you have like a 2 year window on most of the CapEx that you spend on a black box? Because it looks like at the 73 of the black boxes you initially launched, the company with are coming up to give or take 2 years in Q1 of 2020. Is that kind of what you're focused on like slipping out to 2 years if you can?
The 2 years was really a metric that was put in by the first companies, and it's not a bad metric. And that's where we depreciate the chips inside the block boxes. But the real answer is that the chips the life of the chip is longer than 2 years. The function is what's the useful life of the chip. And to me, the useful life of the chip is as long as it can continue to be profitable, you're going to continue to run it.
And so if the price of Bitcoin was to again, these are
all the variables that have
to be considered. Let's say the price of Bitcoin was to double, but the Hash rate difficulty took 7 or 8 months to catch up. Those existing chips don't need to be upgraded. They're going to be just spinning out Bitcoin and cash and revenue on our behalf. If the difficulty continues to increase faster than the price of Bitcoin, in that case, then we have to look at upgrading them quicker.
So there's a lot of moving parts here that we have to evaluate. And that's why, as I said before, we're sort of getting ready to be in a position to upgrade very quickly in order to get us there. But you don't necessarily want to do it too soon because then that is not really in the best interest of the way we want to use our capital. We just don't know. But again, we're ready to do the upgrades.
But as long as the equipment is making money and there's something sort of uncertain here, we'll continue to use them until they're no longer useful.
Yes, absolutely. Yes. So you kind of answered what I was looking for, so I appreciate that. And just this is more for the CFO question, just so I can model correctly on my side. So when you post out your mining income numbers, are you using the daily number on that?
So the 26 $1,000,000 revenue that you posted, was that based on your total mine coin for the day based on U. S. Exchange rates, just so I know? Thank you.
Yes. So that is all based on, let's just say, we mined a bitcoin yesterday. The bitcoin price that day would be the price we use, and then we use the daily exchange rate. And then that gets mark to marketed through the unrealized gain at the end of the quarter.
And we are showing no further questions at this time.
Great. Well, thank you very much, everyone. Management is always available to answer questions through our website. There's an e mail where questions can be answered. And thank you very much.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.