Welcome to the Hut 8 Mining first quarter filing conference call. My name is Fabiana, I'll be your operator for today's call. At this time, all participants are in listen only mode. Later, we'll conduct a question and answer session. During the question and answer session, if you have a question, please press star then one on your touch tone phone. Please note that this conference is being recorded. I will now turn the call over to Andrew Kiguel, CEO. Mr. Kiguel, you may begin.
Thank you very much. Welcome everybody. Good morning to the Hut 8 Mining Q1 call. Let me just start off with the sort of an overview here, and then I'll turn it over to Jimmy to walk through the financials, and then we'll take questions. We had revenue of CAD 12.1 million for Q1. We mined 2,405 Bitcoin. While mining economics improved in April, basically the uptick started April 1, the first quarter was still tough. Some of that was primarily for most of Q1, price of Bitcoin was trading below CAD 4,000. Network difficulty increased by 14%. We had the polar vortex and other cold weather in Alberta, which resulted in somewhat higher electricity pricing.
Although we had initiated a whole bunch of cost reductions that were successful, they were somewhat offset by some higher power prices. These were record temperatures. There's some more details on that in our MD&A. Despite that, with the higher cost, we still managed to decrease our price per Bitcoin to CAD 3,950 in Q1. You see that the benefits of our cost reductions and our electricity optimizations have been successful. In addition, we also reduced our overhead, by a couple hundred thousand CAD in Q1 to CAD 747,000 for the quarter, which is we continue to drive to keep the company lean and bring that down. Just to put things in some perspective, we think that our electricity optimization in Q1 ended up saving us, we estimate, about CAD 5 million.
While we maybe lost a little bit of revenue there with some coin, I think we're pretty effective there in keeping costs fairly low by not mining at periods of time when the energy price was peaking, when we had this very weird cold weather that flowed through the western part of Canada. As part of the other thing, we remain committed to solely mining Bitcoin. It's a question we get as often as possible and retaining as much as we can. Despite what were harsh conditions, at the end of March 31st, we had 2,715 Bitcoin. Our operations, as I say in the press release, our operations today are stronger than ever, and we feel very confident and we're poised for strong financial improvement.
Just to put it in perspective, I think for, in terms of the industry, Q1 seems to have marked the bottom of the Bitcoin cycle. It was really right at the end of the quarter when we started seeing the uptick in the Bitcoin price that we've been seeing today. To put things in further perspective, we mined 2,405 Bitcoin at the end of the quarter, or sorry, for the Q1 quarter. That resulted in CAD 12.1 million in revenue. At today's Bitcoin price, that would be close to CAD 30 million in revenues.
Since our cost per Bitcoin decreased from Q1, people can do the math, but I think what you can see there, even if we use the cost price of CAD 3,950 per coin on CAD 30 million of revenue, you can see that we have significant impact on our margins based on what's happening today. Again, these are the reasons that we're sort of saying that the company is stronger than ever. I can tell you since then, electricity prices have really stabilized, and we've actually seen our costs come down a lot more than that. Q1, we also mined more Bitcoin than ever before. That's because we had all of our operations farms up and going. That was an integration of the 12 new BlockBox boxes that we bought at the end of Q4 last year.
We feel very confident there's a lot of positive things happening in the Bitcoin ecosystem, we're excited for what's happening there right now. With that, I'd like to say Q1 was a tough quarter, but it certainly doesn't feel reflective of where the company is today. I'll turn it over to Jimmy to talk about Q1.
Thank you, Andrew. This is Jimmy Vaiopoulos speaking, CFO of Hut 8. 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 stated otherwise. For the first quarter of 2019, the company mined 2,405 Bitcoin, resulting in revenue of CAD 12.1 million, compared with the same period of the prior year of 817 Bitcoin mined with revenue of CAD 11 million. Revenue between the two periods increased by 10%, while the amount of Bitcoin mined increased by 194%.
The reason for the difference in Bitcoin mined to revenue was primarily due to the decrease in average Bitcoin price in Q1 2019 of $3,800 from the same period of the prior year of $10,600, while average difficulty rates increased by over 120% between Q1 2019 and the same period of the prior year. The site operating costs for the year were CAD 12.6 million, and the cost to mine each Bitcoin was $3,950. This quarter was an anomaly as Alberta had extreme weather conditions, including a polar vortex and record cold temperatures, which negatively affected our operations.
This caused higher than normal natural gas prices in all North America and resulted in increased electricity costs at our Drumheller site and a smaller portion of our Medicine Hat site, which is exposed to market natural gas prices. We've seen the natural gas market return to normal in March 2019. The Hut 8 team has worked hard to keep a lean cost structure, which has shown that the expenses for the first quarter of 2019, excluding non-cash share-based compensation, were CAD 774,000 compared with Q4 2018 of CAD 994,000. This has helped minimize losses at the worst of the crypto winter, but will also provide a good basis to become more profitable in the next Bitcoin pricing cycle, which we believe we're seeing the beginning of in Q2 2019. Hut 8 recognized negative CAD 1.3 million in adjusted EBITDA, the first quarter of negative operations, and a net loss of CAD 6.1 million.
Both losses were largely as a result of Bitcoin prices remaining at around 52-week lows during Q1 2019, hash rates increasing, and a volatile natural gas market, which all negatively impacted operations for the first quarter of 2019. For Q1 2019, fair value on remeasurement of digital assets was CAD 790,000, which represents a gain on adjusting the value of digital assets held to the market value on the reporting date. This is the first gain on remeasurement of digital assets for Hut 8 and marks a potential bottoming of the Bitcoin price. Subsequent to March 31st, 2019 to today's date, we have seen crypto winter turn closer to a crypto spring as the Bitcoin price has increased by 112%, while difficulty rates have only increased by 5%. This has improved Bitcoin mining economics thus far in Q2 2019, and our team is optimistic about the future of Bitcoin.
I'll now pass the call back over to Andrew.
Yeah, I think we'll, operator, we can turn it over for questions.
Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch-tone phone. The first question comes from Deepak from GMP Securities.
Hey, guys. Good morning. I know we just spoke a couple weeks ago when you did Q4, I do have some questions because there's been a lot of development since then. Andrew, first on the costing, you said CAD 5 million. I assume that was CAD 5 million in the quarter, right, not annualized?
Correct. That's not a savings number. What that number is, it's electricity optimization. As I've said before, the price of electricity is way more volatile than the price of Bitcoin, believe it or not. It'll go from CAD 0.02 a kilowatt hour to CAD 2.00 a kilowatt hour in the span of an hour. Rather than us looking to mine 100% of the time, what we do is we sort of see these spikes and we curtail our mining. By curtailing our mining during sort of peak periods, which generally happen in the morning when people are getting up and ready for that, and then in the evenings when they come home, we might curtail our production for an hour and a half a day.
It's that savings of not mining for an hour and a half a day that ended up saving us an incremental potential cost of about CAD 5 million.
Okay. Could you say what your percentage uptime was during the quarter in terms of mining? Are we thinking you're up 98% of the time still, or does that optimization.
Yeah.
go down to.
It's still very high. Even on super cold days, we're still going to be up 90% of the time, right? We're talking about an hour and a half a day during extreme periods of time when the price-
Okay
might spike up to CAD 3 or CAD 4 a kilowatt hour. It's minimal downtime, and I think you can see that in terms of the number of Bitcoin that we mined is more than we've ever mined before.
Okay. It's fairly predictable, so if you wanted to schedule any downtime maintenance, you could do it in the same periods, too, right?
Well, no. Well, the weather's not predictable. We do try when stuff's down. Like I said, it's short periods of time. It might be 45 minutes in the morning and 45 minutes in the evening. We do try and do some maintenance and things we need to do that time, although, if the weather's -40 degrees outside, sometimes it's hard to do that also.
Got it. Okay. Just another question. When we think about capacity expansion, before we get to the capital, from a technology perspective, are you guys tied to only using Bitfury BlockBoxes? I know that's been your preference. That's what you've been using for now. Are you able in your agreement to go elsewhere if you need to, and is there anything else on the market that is kind of appealing versus what you're seeing from Bitfury these days?
We do have an exclusivity that goes both ways. There are ways around it, but frankly, we've been very satisfied with the Bitfury equipment that we're seeing. Even with the older equipment that we had been depreciating at two years, we did the math. We do the math every week, those boxes are still hugely profitable, and even though they're coming up on two years, we see no reason we even need to update them now, even though we have that option. It's tricky. Keep in mind, Bitfury owns a good chunk of the company, and they've been excellent partners to us, so I don't know that necessarily that we would want to go outside that. We have looked at a bunch of stuff. There is a new Bitmain machine, I think it's called the S18, which is supposed to be quite powerful.
The issue with that is that it's pretty hard to get your hands on them. Again, this is somewhat hearsay, my understanding is that Bitmain was unable to secure production at Taiwan Semiconductor, the actual amount of those new machines that are available is pretty low. I think that the other thing that come with that as well is that one of the benefits of using the BlockBoxes is that we can locate them in pretty remote areas, like some of the regions and some of the new sites and things that we're looking at, it's somewhat stranded energy in remote places. If you're using other equipment, generally speaking, you've got to build up an entire facility. You've got to build a site or retrofit a site, and that's time-consuming, it's expensive, and it could take 12 months.
Frankly, you don't know what the market's going to be in 12 months. The cheapest Bitcoin you're going to mine is the Bitcoin mined today. We're still feeling pretty good about the equipment that we have, and we're in talks with the guys at Bitfury. The equipment there keeps improving in terms of their chips and the hash rate. We're always looking at other products. We haven't seen a real need in there to go back to them and try and get out of the exclusivity. Like I said, it goes both ways.
Got it. You also need capital if you want to expand. I think you mentioned in the last conference call, you're looking at creative ways of finding financing. What are your options? What have you thought of in the last couple of weeks, what else can you share in terms of any potential ways to expand capacity?
Well, one of the things we're looking at is getting some additional megawatts out of the city of Medicine Hat without any additional capital spend. We've been creative there in dealing with them, we think that we'll be able to get another 3 megawatts out of the city without any incremental capital, then just pushing some of our machines a little bit harder. That's one way. We're always looking at sites, there's nothing I have here to disclose, obviously, we think that this is the best time to potentially expand when the price of the equipment is low and the competition for new sites is low. I would say we're exploring different things. There's nothing here that I would reveal to anybody that's material.
Okay. One of the other options is you have a big Bitcoin balance. I know you have a covenant on the debt. Bitcoin's been ripping here. At what price do you start looking at converting some of that coin to fiat to redeploy? How do you make that kind of decision?
Yeah, I think part of it, we're well in excess of the covenant here. The covenant is not an issue. It's things that we've thought about, there's nothing out there right now. I think at the end of the day, the reason people invest in Hut 8, or at least the message we try and provide, is that we provide a proxy via the public markets for exposure to Bitcoin. I think if our digital assets got to be so large where we could still provide that exposure to investors and then reinvest them into new projects, that would make sense. I wouldn't say we're quite there yet.
We've seen some other Canadian miners diversify into hosting services or mining as a service or staking. Others are selling the coins as they mine and just being a fiat cash flow machine. What are your thoughts on those strategies? I know that that's not what you're thinking of at this time, is the message, but what do you think of those strategies from a value perspective?
Well, hindsight's always 20/20. You never know. When we started Hut 8, it was with the purpose of being solely a Bitcoin miner, mining on behalf of investors. At certain points of last year, that strategy looked bad. Currently today, the strategy looks quite good. Things change. The thing with hosting, we want to keep the company lean, and I'm sure people are aware, but there's only four employees at Hut 8. We keep things very lean here. If you start getting into things like hosting, then you start partially becoming a marketing company, because then you have to go out there and you have to find people, and you're competing against a lot of people. That would mean additional investments in marketing, hiring people, doing things.
At the end of the day, what we really want to do is continue to provide that proxy for being a Bitcoin miner. Some of the things we have been approached about, people have approached us to see if we would sell them a portion of our hash rate. Those are kind of things we've looked at. When we talk about creative ways of potentially financing, could we sell some hash rate? The price for hash rate right now has gone up. We look at that stuff. Again, in terms of other miners, everybody has a different strategy. If you had a strategy last year where you mined and sold everything that you did, it's probably still a tough year, but you probably did better than we did on a pound-for-pound basis.
This year, I think our strategy of holding has benefited us a lot when we've seen the price of Bitcoin go from $3,200 or so at the beginning of the year to, I think it hit $8,900 at the beginning of the week, and it's currently trading at about $8,700. That strategy benefits us, where all of a sudden, the digital assets that we hold start becoming a real big war chest over time. At that point, we start contemplating, if the balance becomes big enough, you start evaluating, do you become the first crypto company to provide a dividend? Do we sell some of that, convert it into fiat as a hedge? Do we convert to fiat and build out new sites? I would say, Deepak, we're not quite there yet.
The company's in a very strong position right now, but I wouldn't say we're in a position where I would want to diverge from the strategy of mining and holding.
Thanks. That makes sense to me. It's a helpful answer, and I don't necessarily disagree with that strategy. I think I agree with that. Just one last question, if I may. I'm usually the only guy on the call. You guys have 85 BlockBoxes. Can you give us a sense of the broader universe of BlockBoxes out there? How prevalent are these things, and what's your share in North America of BlockBoxes? Do you have a sense of the in-situ resource that's Bitfury based, to the extent that you can share that?
Yeah. Totally. To our knowledge, there are 85 BlockBoxes, and then prior to Hut 8 being established, there was about another 24 BlockBoxes, the majority of which are in Drumheller, and those are owned by Bitfury. That's it. There's nobody outside of Hut 8 that we're aware of, and we talk to the Bitfury. We have a very good relationship with them. I don't think there's any other BlockBoxes in North America other than the ones that we own, and then the older models that they own. The ones that Bitfury owns are primarily in Drumheller, right next to our facility. It's actually all just one big facility, and we own a certain amount of boxes, and they own the other ones.
We get some economies of scale there as they're the guys who do the operations in terms of staffing, maintenance, and all those sorts of things.
Okay. I don't want to get ahead of ourselves here, but could you ever see yourself looking at Bitfury BlockBoxes in other parts of the world in terms of consolidating a more of an international operation?
Yeah, we have to see. Look, this is all a good news story, but you got to remember, five, six weeks ago, we were all in a very different situation. It's been a very positive upside surprise. One of the things that we have talked about with Bitfury is seeing if there's an ability to bend in some of the existing boxes, and those are things we do diligence on. It's all older technology stuff, so it's coming up on about two years life. As I said before, we're looking at our current older version, which is the first 17 BlockBoxes that we took on in December 2017.
In the current market, even though those are our least efficient boxes, so I always divide up the first 17 are the least efficient, that's our most expensive Bitcoin that we mine, but it's still in this market making a ton of money. It could be a possibility that we look to bend in there, and that could be another 25 MW there. We're exploring all types of different things right now, but like I said, there's nothing that's material here that I'd be looking to disclose to the market.
Okay. That makes sense. Okay. Thanks again for taking my questions. Hopefully we have continued current mining economics for a while so you guys can start accumulating some value.
Like I said, the one thing that I would say is, I can say that in Q2, our price per Bitcoin has come down from Q1, and the price of Bitcoin has more than doubled here. From a mining economic standpoint, this is a very healthy time.
Makes sense. Okay. Thanks so much, Andrew. Appreciate your thoughts.
Our following question comes from Dan from Terroso.
Hey, Dan.
If your line is on mute, please unmute yourself.
There we go. Now I'm off mute. Thanks, Andrew, for hosting the call. You said something pretty powerful, and I'm not sure I can get my arms around it, but maybe you could speculate, if you would. You said that the price of Bitcoin went up 112, hash went up five. How do we get our arms around that hash rate? Is there something that we should be looking at specifically from the vantage point of outsiders looking in to assess where that hash rate is going?
Yeah, I think there's a few things. What you got to remember, Dan, is there's always a lag. What you saw happen in 2017 was that the price of Bitcoin runs, but the hash rate is not like guys can just turn on a light and the hash rate comes on. You got to go out, buy equipment, build a facility, get it going. What you saw happen at the end of 2017 and what unfortunately happened in the winter of 2018 is everybody ordered all their equipment to get their hash rate going at the end of 2017 at prices of CAD 20,000. Everybody overpaid for equipment then. The mining economics for six or seven months there were phenomenal, 2018 comes, the price plummets, and you're stuck with all this equipment.
I think we're seeing that again here, where the hash rate is unable to keep up with the price of Bitcoin, I think is one of the things. You've got guys trying to manufacture, as I said earlier, my understanding, and again, this is somewhat just hearsay and things I'm hearing, is that Bitmain, which is the biggest manufacturer of equipment, was unable to secure space at Taiwan Semiconductor. That means that the availability of getting the equipment, there's going to be a lag. I think the second thing is, in China, they put the Bitcoin mining, China still remains probably one of the largest, I wouldn't be surprised if they control 50%-60% of Bitcoin mining in the world. The government there has just put, amongst other things, Bitcoin mining on their gray list of things that they want to get rid of.
Generally what happens is, if you put it on the list, it's going to happen. That's extremely positive for Hut 8 for a couple of reasons, because if the hash rate goes down by 60% or 50%, that just means we'll be mining twice as many coin on a daily basis if China follows through with this. Number two, if you're in China and you're looking to get into mining and the government has just put out this decree, you're going to think twice about buying equipment that might get shut down in six to 12 months. I think the China trade war as well, if I'm not mistaken, I think there's a new tariff on technology, which mining equipment falls under, of 23%, 24% on any equipment coming in from China to the U.S.
If you look at the U.S. as being potentially the bigger buyers here of equipment in terms of new hash rate growing, again, that's going to dissuade people as the price goes up of buying Chinese equipment from importing it into the U.S. I think a combination of those things and some of the hurt and pain that happened in 2018 is, I think, leading people to not go crazy and start ordering a whole bunch of mining equipment and increase the hash rate. It will go up. There's still a bunch of used stuff out there, but I think what happened in 2017 is going to happen again. You're going to see the price of Bitcoin go parabolic here. The mining margins are going to be insane.
People will order things, the hash rate's going to lag behind by six to seven months, it's going to spike up huge as everybody goes online, that'll bring margins back to normal. It's just a cyclical process, and I think we'll see it again.
What's the issue with Taiwan Semi?
Sorry, can you repeat the question?
What's the issue with Taiwan Semi as far as why they're not producing?
Taiwan Semiconductor is producing a lot of stuff.
Okay.
What I understand is that they just didn't secure space. Taiwan Semi, that's where Apple manufactures their chips for the iPhones.
Yeah.
Everybody's fighting to get in there. Because crypto winter last year was so bad and everybody was unsure what was going to happen to the crypto price, I don't think a lot of the large ASIC chip manufacturers went in and put down the money to secure the facilities. Other people moved in, so AMDs and all these other guys. There's a lot of things that can be built there, and they only have a certain amount of capacity. If that capacity at Taiwan Semiconductor wasn't booked, then you can't just go in in the last four weeks because the price of Bitcoin doubled and say, "We changed our mind, drop the iPhone and start building our chips.
I got you. Okay. It wasn't something I didn't know. I was interpreting you were saying something different. Okay. Thank you very much, Andrew.
You're welcome.
We have no further questions.
Okay. Well, thanks everyone. As always, you can reach us, our contact information is on the website, and we're always available for questions. Look forward to talking in three months.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.