Good day, ladies and gentlemen. Welcome to the Marathon Digital Holdings Business Update Webcast and Conference Call. I'd now like to turn the call over to your host, Chris Brendler, Vice President, Investor Relations. Please go ahead, Chris.
Thank you, Kevin. Good morning, and welcome to Marathon Digital Holdings Business Update Call. With me on today's call are our Chairman and Chief Executive Officer, Fred Thiel, and our Chief Financial Officer, Salman Khan. Before we get started, I'd like to remind everyone that our prepared remarks contain forward-looking statements which are subject to the risks and uncertainties, and that may make additional forward-looking statements during the question and answer session. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially. When used in this call, the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project, and similar expressions as they relate to Marathon Digital Holdings are, as such, a forward-looking statement. Please refer to our earnings release for a full recitation of our forward-looking statements.
Investors are cautioned that all forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially from those anticipated by Marathon at this time. In addition, other risks are more fully described in Marathon's public filings with the U.S. Securities and Exchange Commission, which can be viewed at www.sec.gov and ir.mara.com. Finally, please note that on today's call, we will refer to certain non-GAAP financial measures in which Marathon excludes certain items from its GAAP financial results. Please refer to our company's periodic reports on Form 10-K and 10-Q, and to our website for a full reconciliation of these non-GAAP performance measures to the most comparable GAAP financial measures. We will begin today's call with prepared remarks from Fred and Salman. After their comments, we'll be transferring to a live Q&A from our covering analysts.
With that out of the way, I'm going to turn the call over to Fred to get us started. Fred?
Thank you, Chris. Today, we are very excited to announce that Marathon has closed on its first major acquisition. We have purchased two former Compute North data centers in Granbury, Texas, and Kearney, Nebraska, from Generate Capital for a total of $179 million, which we will be paying for entirely with cash from our balance sheet. This acquisition is a milestone for Marathon. These will be our first fully owned and operated sites, and taking control of them marks the official transition from Marathon as an asset-light company to one that manages a diversified and resilient portfolio of Bitcoin mining operations.
With these transactions, we are increasing the size of our Bitcoin mining portfolio 56%, from 584 megawatts of capacity to 910 megawatts of capacity, and we are increasing the total amount of megawatts that we directly own in our Bitcoin mining portfolio from only 3% to 45%. Additionally, the expansion opportunities at these sites, coupled with the rest of the opportunities in our pipeline, give us the potential to nearly double our current hash rate and grow our operations to approximately 50 exahashes of total operating capacity over the next 18-24 months. We've had miners running at Kearney and Granbury for several years, which means our team is intimately familiar with the sites and their potential to both expand and optimize our operations. These two data centers have a total of 390 megawatts of power capacity.
Of the 390 MW, 82 MW, or 21%, are currently vacant and available for immediate expansion. 244 MW, or 63%, are occupied by other Bitcoin mining tenants with hosting contracts from which we can benefit, and 64 MW, or 16%, are already occupied by Marathon and ripe for optimization. In the near term, we believe we can quickly fill the 82 MW that are earmarked for expansion. We have already ordered 7 exahashes of miners, of which 35% have already been paid for. The first tranche of these miners is expected to arrive in just a few weeks, which means that we can start preparing to install and energize new miners as early as January. We can also reduce our cost in the 2.2 exahashes that we already have energized at these sites.
Based on our models, we believe we can reduce our cost per coin at these sites by approximately 30%. These improvements will mainly come from operational efficiencies we expect to realize as the new owner, as well as from the benefits we believe we can generate from energy hedging and other tactics. With 63% of the site already tied up with hosting contracts, we do expect to see an initial bump in our revenues from these contracts. However, I should make it clear that Marathon has no intention of being in the hosting business long term. As these contracts expire over time and hosting clients depart the sites, it's our intention to convert the 244 MW that are currently used for hosting into self-mining.
Over the long run, it's our intention to transition this site to one that is fully self-mined, and by doing so, we will be able to grow our hash rate and realize the full potential of the synergies that come from owning these assets. One of the unique aspects of this acquisition is the power purchase agreements, or PPAs. Most PPAs require you to consume a meaningful amount of energy, regardless of whether your miners are online or offline. At these sites, that isn't the case. In Kearney, the minimum amount of energy we are required to consume is negligible. In Granbury, it's non-existent. There is no minimum. We can completely turn off our operations in Granbury without having to pay for energy. This gives us a huge amount of flexibility, especially when it's combined with our vertical technology stack.
Regardless of Bitcoin's price, we will be able to operate how we want at these sites. We can run state-of-the-art hardware and adjust our operations to either ramp up hash rates or reduce costs in response to market conditions. Alternatively, as we upgrade our fleet to more efficient hardware, we could also deprecate older generation machines to this facility and only turn them on opportunistically. By owning these sites, we will be improving our mining economics and gaining much more influence over our operations. Improving efficiency and optimizing operations are among the key reasons we have been focusing our attention this year on evolving our strategy. Joint ventures have been a way for us to test the waters, but taking full ownership of our first sites officially marks the transition from the asset-light strategy to the portfolio model.
However, before discussing these transitions further and why Marathon is uniquely positioned at this time in the company's history to own, develop, and operate its own infrastructure, I'm going to turn the call over to Salman to discuss the accretive nature of this transaction. Salman?
Thank you, Fred. As Fred mentioned, we are very excited about our company. At a high level, we will pay approximately $179 million for the data centers in Granbury, Texas, and Kearney, Nebraska. All of the proceeds will be paid in cash on our balance sheet. On closing, we will have paid on average of $458,000 per megawatt hour for two fully functional and well-designed data centers that collectively add 326 megawatts of new capacity to our Bitcoin mining op portfolio. Based on our financial modeling and market research, this is less than it would cost us to build the sites from the ground up in today's market. And because the sites are already fully operational, we expect to see an immediate positive impact on our business.
Assuming a conservative hash price of $50 per petahash per day, we believe that we may be able to add approximately $200 million to our top line in 2024 from mining and hosting, as well as from our own additional hash rate at these sites. While there may be near-term benefits from the hosting contracts, we do eventually plan to transition the 244 MW that are currently under active hosting contracts to our own miners, as Fred mentioned earlier. As we progress through this transition, we expect to realize further cost savings and synergies over time. As Fred mentioned, we already have 7 exahashes of new miners on order. Almost 35% of these orders have been paid for, which places us in a prime position to quickly expand into these sites.
Given that we started the month with approximately $802 million in cash and Bitcoin on our balance sheet, we believe we have a clear path forward to grow into 50 exahashes of operational capacity within 18-24 months, should the opportunities in our pipeline materialize. Marathon's ability to act quickly and opportunistically acquire these sites was made possible by the work of our team has done to improve our financial position over the past year. This is a dynamic industry, and it moves quickly. We knew that opportunities would come up, and when they did, we needed to have the financial strength, flexibility, and liquidity to move quickly. It is for these reasons that we intently focused on bolstering the balance sheet all throughout 2023.
We started the year with $750 million of long-term debt and $306 million in unrestricted cash in Bitcoin. In Q3, we reduced our long-term debt by 56% at a 21% discount to par, reducing our leverage and capturing approximately $101 million in cash savings for our shareholders. At the same time, we continued to add to our war chest and improved our liquidity position. As a result, we entered December with $331 million of long-term debt and $802 million in cash and Bitcoin on the balance sheet. Few of our competitors would be in a position to make acquisitions on this scale, regardless of how attractive they may look in today's market. It takes forethought and careful planning to prepare for opportunities like this. The balance sheet is critical.
It is because of the actions we have taken throughout the year to improve our financial position that these acquisitions came to fruition. But it's worth noting that successful companies are more than spreadsheets. It also takes a great team to execute. During my career, I have had the privilege to work on billions of dollars worth of acquisitions, and I'm quite familiar with how challenging they can be, even for veterans with abundant resources. What the team at Marathon has accomplished with such a nimble organization and in such a short amount of time, is extraordinary. This is a remarkable group of intelligent, driven, and highly collaborative individuals.
I have no doubt, given what I have seen during my tenure so far, that the team will be able to achieve similar success as we now focus on integrating these assets into our Bitcoin mining portfolio and pursue additional organic and inorganic growth opportunities. We do not intend to stop here. There's more to come in Marathon's success story as we turn the page to this new chapter of organic and inorganic growth. We have a diversified portfolio of assets that weather proofs Marathon from Bitcoin price cycles and positions us well to continue growing globally. And with that, I'll turn it back to Fred. Fred?
... Thank you, Salman. For the first few years of our history as a Bitcoin miner, Marathon employed an asset-light model in which we focused on purchasing machines and outsourcing our operations. This strategy was instrumental to Marathon scaling faster than its competitors and establishing ourselves as the leading Bitcoin miner in North America. But another benefit of this strategy is that it allowed our team to gain a breadth and depth of experience unmatched by any other in the industry. Over the past few years, we have worked with a number of different hosting providers, energy companies, and mining operators all over the globe. We have deployed machines everywhere from Montana to Abu Dhabi to Paraguay, and we have learned from every deployment. We have gotten our hands dirty and personally learned what it takes to successfully build and operate Bitcoin mining data centers.
We know what works, and we know what doesn't. We have both the success stories and the scar tissue to prove it. The Marathon team has operated in some of the most challenging climates and designed and managed some of the most innovative and well-run Bitcoin mining sites in the world. Our vertical tech stack has been a key component of this success. In Abu Dhabi, we designed and managed what many in the industry consider to be the best immersion site in the world. Thanks to the advanced technologies we have been developing and vertically integrating, our miners ran for over 100 days in the harsh desert climate without needing any maintenance.
We have proven our ability to optimize existing operations with our technologies, and at the site at King Mountain, Texas, we improved the average uptime of our operations from 51% in August to 90% in November, and we are constantly pushing the boundaries of what Bitcoin mining can do, as evidenced by our pilot project in Utah that is using renewable off-grid energy from a landfill to power our Bitcoin miners. The real-world experience our team has gathered over the years, the mission-oriented drive that permeates our corporate culture, and our vertical tech stack will all prove immensely valuable as we transition to focus on integrating these new assets into our evolving Bitcoin mining portfolio. Today marks the official transition to the diversified portfolio approach that we first outlined in our Q1 earnings call in May of this year.
As Marathon has transitioned from a lean startup into a more sophisticated and mature organization, we have evolved our strategy from outsourcing to vertically integrating, first technology and now more infrastructure. Asset-light allows you to scale quickly. It allows you to grow faster than others, which is critical in the zero-sum world of Bitcoin mining. Owning sites, however, provides you with more influence over your operations. It gives you more control over the technology you want to deploy, and it gives you more levers to pull when it comes to optimizing costs. The reality is that there is no single strategy that works in this industry. Every site is different. Every deployment requires a curated approach. There is a time and place for asset-light, and there is a time and place for owning and operating. By integrating both into our portfolio, we can get the best of both worlds.
We can scale quickly, and we can reduce costs and optimize performance. Marathon has never been as resilient as we are today. In the coming weeks, our operations and finance teams will begin integrating these assets into our portfolio, and our growth and strategy team will continue to hunt for new and innovative ways to energize, optimize, and diversify our organization. Our pipeline is full of opportunities that range from expanding at current sites to enhancing the viability of renewable energy projects and reducing emissions to recycling heat from our operations for various applications. With a more diversified and resilient base from which to build, hash rate expanding, our vertically integrated tech stack growing, and cost per coin improving, we are confident that Marathon of today is better positioned than ever before to develop and deploy innovative technologies that expand our position as the leader in our industry.
With that, I believe we're ready to start taking questions. Operator?
Thank you. I'll now be conducting your question-and-answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment, please, while we poll for questions. Our first question today is coming from Chase White from Compass Point Research. Your line is now live.
Thanks. Good morning, guys. So, given, you know, that the sites have kind of been through a lot recently, these two in particular, you know, changing hands a couple of times over the past year, I mean, do you expect to need any to spend any capital to kind of get the sites up to your standards? And if so, how much should we be thinking about? I have a follow-up.
Well, the sites are operating fine as they are today. As we spend more time during this integration process, we'll identify ways to optimize and maximize performance. What we were able to do at the King Mountain site in McCamey, Texas, didn't involve a lot of capital spending. It involved a lot of tweaking, tuning, reconfiguring, and working to optimize. And we believe that these sites are great, as they are, but obviously, there will be some, you know, some updates that we'll do. We're not looking to rip out infrastructure, replace everything with immersion or anything major like that. So I don't foresee any large CapEx other than the miners we'll be deploying at the site as we take over more and more of the capacity.
Gotcha, that makes sense. And then, you know, for the current unoccupied capacity, do you guys need to purchase any rigs at all? It seems like you have enough with the 7 exahash you've ordered. And on top of that, you know, any color on that 7 exahash, what type of miners or the cost for those?
... Sure. The rigs we'll be putting in the site immediately are from the 7 exahash that we've ordered. We've ordered machines from a variety of vendors, you know, more than just the usual cadre, if you would, that we've ordered from previously in the past. And we'll, you know, disclose that in more detail in the future as we talk about our hardware strategy and future updates.
Gotcha. Thanks.
Thank you. Next question is coming from John Todaro from Needham & Company. Your line is now live.
Oh, great, thanks. Maybe I missed this, but can you talk about the hosting agreements that you have now, you guys are the landlord or hosting provider? Is there a revenue sharing there? Is it just a fixed fee? How should we think about how those are structured?
Most of them are fixed fee, but I'll let Salman give any more details on the specifics of the agreements.
Yeah, it's a varied multiple different contracts with multiple customers and they're typically mostly on a fixed rate basis and attractive rates that make good profit for us. We expect that the profitability is going to be north of 30% on these kind of contracts.
Gotcha. Okay. And then, I think we've all noticed, like, the transaction fees are, I think at kind of record highs right now. So should we read through this, that, you know, just the profitability and revenue you're getting from mining right now allowed you guys to buy out these Compute North sites? Because I think these were part of the bankruptcy, you know, months ago, and you didn't decide to buy them out then. So just curious how your position is different now to be able to buy the data centers now, and maybe just talk about the transaction fees you're seeing.
So strategically today, as I mentioned in my remarks, we have now got the right team to take over sites like this and operate them efficiently and optimize them. You know, what we have spent the last number of months this year doing to optimize sites has taught us a lot. What we have learned in building the facility in Abu Dhabi, which is, you know, one of the today most probably best in class immersion sites globally, taught us a lot, and we now want to take those lessons and roll them back into this site and other sites that we operate. We believe that had we gone into these sites before, we as an organization wouldn't have been prepared. But today we are, and today we will aggressively be pursuing, you know, our growth strategy, both organically and inorganically.
Gotcha. Okay. And then... Okay, I mean, is there any time frame on... It seems like it. I don't want to put words in your mouth, but it seems like there's now a long-term goal of doing all mining in-house with your own data centers. Is there a time frame we can think about you guys moving towards moving towards 100% that structure?
Well, the portfolio approach that we outlined in Q1 really is a diversified approach. It's both hosted, joint ventures, and fully owned and operated. You know, the site in Abu Dhabi is an 80/20 joint venture where we only own 20% of it. But it's structured in a way that benefits us better than just a pure kind of 80/20 split. Other joint ventures that we've done and will continue to do help us experiment and learn, figure out how to deal with new energy sources, new geographies, and other potential complexities, new technologies as well. And when we feel very comfortable and feel that there are great opportunities for optimization, then we'll go in, take over a site fully or build a site from the ground up, using, you know, the lessons we've learned, if you would.
So you're going to continue to see a portfolio approach. We may very well, in some locations, decide to use third party hosting as a way to get comfortable with a particular climatology, and then grow and expand in a proprietary way, in that location or do a joint venture. It's really all about optionality and being agile. You know, unlike other miners in our space, we don't have a geographic restriction. We're open and able to go anywhere in the world we think is appropriate. We don't have a restriction on the technologies we use, and we don't need to, be very fixated on a particular model. We're open to discussing all sorts of different models. So you'll continue to see Marathon be very agile, but at the same time be very resilient.
All right. That's very helpful, Fred. All right, thank you.
Thank you. Next question is coming from Brian Dobson, from Chardan Capital Markets. Your line is now live.
Hey, good morning. Congratulations on the acquisition.
Thank you.
So just to follow up, you know, how long will it take those hosting contracts to roll off? And are you potentially interested in buying any of the miners that are currently hosted in your new facilities? And as we're thinking about that, you know, call it $200 million of hosting revenue that you referenced, how will that be replaced with what I assume is more profitable self-mining revenue?
So the contracts have varied lengths and terms, so I'm not going to go into the details of what contract falls off when or what's going to happen with what contract. And then I think the revenue growth is a combination of additional self-mining at the sites as well as hosting. So it won't be fully $200 million of hosting revenue only. There'll be a blend. So I think that's the right way to look at that.
Okay. So as you're thinking about those contracts falling off, I would think that if you're looking to double your exahash over the next 18 months, then likely those would have expired over the next 18 months, or do you have some long duration contracts in there as well?
Yeah, I'm not going to go into the specifics of the agreements, but they have varying terms. There is also, as I mentioned in my comments, maybe it was a little difficult to tease out with all the numbers, but there are further expansion capacities at the Granbury site, that we could build out additional capacity at, which would also increase our self-mining at the site over and above the capacity that's there today.
All right. And then, you know, given your outlook to more than double exahash over the next 18 months, how do you expect the fleet's efficiency metrics to improve as a result of the new miners?
We expect next year, by mid-next year, to see a variety of different miner vendors offering, you know, miners at sub-20 joules per terahash. You know, Auradine has announced a miner that's, you know, in the teens, for example, as have WhatsMiner and Bitmain. We believe that the machines we start deploying in the kind of middle of next year and beyond will be these leading edge, kind of, most efficient miners out there. But there'll also be a mix. Depending on the site where we're deploying miners, we may use immersion, we may use some other form of liquid cooling, or we may use our dual phase technology that is, you know, almost ready to see the light of day.
So I think what you'll see is we'll deploy a mix of machines focusing on two metrics: most efficient machine in the industry, coupled with the lowest total cost of ownership of machine, meaning the ability to overclock, under clock, control machines for profitability and operate for the maximum optionality.
Yeah, great. That's very positive. And can you just remind us, as one final thing, where your current joules per terahash stands for the fleet?
We're at about 24-25 joules per terahash, and you'll see it continue to tweak, you know, downwards more and more as we start replacing some of the older machines we have and deprecating those to other sites and bringing in these new sort of, you know, sub-20 joules per terahash machines.
Thanks very much.
Thank you. Next question is coming from Tyler DiMatteo from BTIG. Your line is now live.
Yeah, good morning, everyone. Thanks for taking the questions. Really appreciate the time. You know, Fred, or maybe Salman, I was wondering if you could just provide more color on the 30% reduction there. You know, it seems as if we're pushing for these operational efficiencies. Just wanted to get a little more granular on the kind of the where and how that's underpinning that. And then I guess my follow-up there is, Fred, I guess more broadly here, I mean, how do you think about the energy hedging dynamic, given where the portfolio is going to sit? Just any color there on those two, please.
Salman, I'll let you answer the first one.
Absolutely. So great question. It's, as you know, we are already operating in those sites. We, we're being hosted, and that, that portion is about 64 MW, approximately. And that 64 MW we have, we are in under the contract, we have been paying north of $0.06/kWh. And with this transaction, it reduces our cost significantly, as we expect the cost to hover around $0.04/kWh after considering all the hedging and demand responses. So roughly between the range of $0.04-$0.045/kWh or so. So that price, all cost, in combined together, we expect the cost to reduce by approximately 30% per, on a per coin basis.
And then as regards to the hedges, the current owner Generate has, you know, earned substantial benefits, financial benefits from hedges and curtailment, and we intend to do more of the same with that. Again, it's different when you're the operator and the owner of the site, and they're running your miners. Your priorities are different than if you're a service provider for others. So we're going to be very focused-
Yeah
... on taking advantage of these things.
Yeah.
Okay, great. And then just to follow up there, Fred, you know, I wanted to get a little bit bigger picture. I, I mean, at this point, we have the 910 MW we're working towards. I mean, seems as if optionality, flexibility is a key theme here. But, but I guess broader, I mean, how comfortable are you with the current portfolio? It seems as, you know, we have our ducks in a row here, and it just comes down to execute. Just kind of wanted to see how you're thinking about that broader out.
You know, maybe help clarify the question a little bit. You know, we think the... If we look at our portfolio today, you know, we're obviously shifting it more, much more towards owned and operated, because, you know, this industry goes through cycles. You know, right now we're in the beginning of what may be a bull run or may not.... But regardless, we're at a point in time where with our balance sheet today, we had the ability, and continue to have the ability to take advantage of some pricing dynamics in the marketplace. It is not as easy for miners to raise capital as it was in the last run, and so the competition for sites has decreased, which makes the pricing more attractive.
Additionally, rig pricing is very low today and will remain low for the foreseeable future, in our opinion. So we believe that now is the right time to go out and do these types of deals, because, you know, as Bitcoin begins its run-up, sites will become more expensive potentially, and there'll be more people vying for them. So we believe it was a question of being a first mover and moving quickly to do this, and potentially other deals. So as we look across the rest of our fleet, we may continue to vertically integrate some of it that we don't own today, or we may just decide to let those contracts roll off and through inorganic and organic growth, transition to other locations. You know, it'll be on a site-by-site basis, because we're very focused continually on kind of three things.
One is energizing more capacity and continuing to grow and continuing to be the biggest in the industry. The other is optimizing our cost structure and our infrastructure, our operations, so that we are in that lowest quartile of cost per coin mined. And lastly, diversify our revenue streams. And this is really important because in both times of plenty and tough times, if you have diversified revenue streams, you have more optionality. And by diversified revenue streams, I'm not talking about doing more hosting. You know, hosting will be a transitional business for us. We have no intention of being a third-party hoster long term at all.
But there are other forms of diversification we're doing through our energy harvesting initiatives, some of the early pilots we've announced earlier this year, as well as in our technology business, all of which will go to contribute to lowering our overall cost to operate. And we think that's the most important thing that we'll be focused on, you know, through this cycle.
Okay, great. Very helpful. I really appreciate the time, guys. Thank you.
Thank you. Next question today is coming from Kevin Dede from H.C. Wainwright. Your line is now live.
Thanks. Good morning, Fred, Salman. Appreciate you having me on the call. Congrats on this deal. Obviously transformational. Can you talk a little about the headcount change, Fred? I mean, you've spoken a number of times this morning to this in-house ability now to manage a site. You've also talked about how you might be able to optimize it. Clearly, you were able to run Abu Dhabi unattended for 100 days. How do you see transitioning air-cooled sites to operate as efficiently as an immersion site?
You know, Kevin, I don't think we have enough time in the call for me to go through all the details of it. The Abu Dhabi site is unique because it was a greenfield. We could design it using all the lessons that our team had kind of learned over the years of their experience in the industry, and we have some very experienced people on our team that we're very proud of. In the case of this site, similar to what we did in McCamey, Texas, at King Mountain, where we took the efficiency up considerably, the initial low-hanging fruit is to go in and do just optimization, and most of that is operational in nature. Then you start looking at infrastructure optimization and identifying what you want to do.
We have been able to, through what we've learned in Abu Dhabi and our continued work on our technology side, significantly lower the cost to deploy immersion. And don't take me wrong, I'm not saying we're going to deploy immersion here, but we could potentially transition some of the capacity at these sites to immersion if it was feasible. We can also look at potentially changing the machine infrastructure that we use at the sites, moving towards more efficient next gen machines and deprecating machines to other sites. So there's this constant tweaking of what machine you have running, how you operate those machines. Do you underclock them? Do you overclock them? How do you deal with uptime? How are you going to deal with curtailment, right?
Are you more focused on earning money from energy hedging and energy arbitrage, or are you more focused on maximizing uptime? So we're constantly looking at the models that underpin those decisions. And at the end of the day, our goal is to maximize the amount of value we extract from these assets.
And on the headcount question, Fred, do you, obviously, you're comfortable with the folks that you have. How does owning these sites change the, you know, sort of the G&A complexion of Marathon with the additional folks that you'll have here?
Sure. So, I mean, a way to look at it is... I'll give you a different approach to look at it. So in a third-party hosting model, anywhere from $0.02-$0.025 per kWh of the cost is the, essentially the revenues you're providing to your third-party hosting provider that cover their operational overhead. And then power is separate, right? So, if you're the owner of the site, that number is somewhere between $0.005 per kWh and $0.01 per kWh, depending on the nature of the site, air-cooled, liquid-cooled, etc. Air-cooled being slightly more expensive. So that's where you right away get a cost savings... And then you start looking at, you know, how many people do you need on the ground?
You know, there'll be a transition period here, as we take over more and more control of the site, and it'll be a decision-making process. But I think the better way of looking at it is on a cost per kilowatt-hour basis, as opposed to a number of people.
Fair enough. I appreciate that. I apologize for the ignorance here, Fred, but could you just hold my hand and walk through your decision-making process? And understanding that diversity of revenue mix is, offers more optionality, but to be so adamantly against wanting to host and offering Marathon shareholders that pass-through power revenue. Just, just kind of walk me through your decision-making there.
Not sure I understand the question perfectly, Kevin, so-
Well, yeah, no, I apologize for not being more articulate, Fred. Forgive me.
Sure.
I'm just curious how you're looking at hosting and why you've decided not to continue to do that.
So, you know, at the end of the day, we make the best return for our shareholders by operating our own miners. That's how we maximize profits. You know, as a hosting provider, you're having to deal with customers who may or may not pay you. They're running machines that aren't the most efficient, and you're just getting, think of it as a fee on, on power, on top of your power, all right, profits. So we can make a lot more money mining, we believe, than just being a hosting provider. And we think that the challenge with hosting in this industry is in the down cycles.
You know, this industry is two years up, two years down, which means basically you've got to do a really good job in the up years, and you've got to hold onto your pants in the down years. And so we believe that if we are the owner-operator of the miners, hey, especially with these sites, if it's not profitable to mine, we just don't mine. Right? If we've got third parties in there and we're having to potentially go to legal means to get them to pay their bills because they can't afford to pay, because they have a take or pay contract with us, we don't want to be in that business. I mean, look at most of the large third-party hosting providers out there. They're all turning to becoming self miners, right? What has Core said? What is Riot doing? They're all becoming self-miners.
There's a reason for that.
Yeah, that's a good point, Fred. Thank you. Granbury must be on the 4CP, right? Part of ERCOT's 4CP, but how do you see energy arbitrage at the Kearney, Nebraska site?
You know, with Kearney, it's less an energy arbitrage play. In Texas, different story, right? You know, Texas, you have all sorts of opportunities to do things. What's great about the Kearney site is it's got a great consistency, very limited curtailment, and it just runs beautifully. So, you know, kudos to the, you know, Compute North team that initially built it and how Generate's kept the site up. But it's just a great site, and, you know, I think we've been hosting at that site since most probably, gosh-
Twenty twenty-
Eighteen, right?
Yeah.
We know the site really, really well. Yep.
Yeah.
So.
Okay. I think this might be the last one for me. Obviously, the hedging is an opportunity in Texas. And you've talked a lot about just working through efficiencies and improved operations, the potential to turn on immersion. Is there anything else that you could add on how you see improving overall operating efficiency at those two sites? Is there anything that's immediately low-hanging for you?
Well, super low-hanging for us is continuing to roll out our firmware on our miners at the sites, which gives us better operational control of what the miners are doing and how they're doing it, and tweaking efficiencies there. That's the ultra low-hanging fruit. Then it's going in and looking at, you know, how has the site been curtailed historically? You know, how much of that was an energy arbitrage decision versus an operational decision? And I think we're going to find that, there may be times where we will continue to operate where, you know, previous owners may have curtailed because they were making more money on the energy arbitrage than on the hosting fee. And this gets back to your question about why we don't want to be in the third-party hosting business. Right? Your incentives aren't aligned.
Our incentives and our mission is to secure the Bitcoin network. Our goal is to mine as much Bitcoin as we can and operate the most efficient miners in the industry, and that's what we're going to be focused on. Our goal is not to be a third-party hosting provider.
Understood. Very clear. I appreciate the extra color, Fred. Thanks very much for taking... Oh, yeah, before I go, could you-
Yep
... just sort of round out the specifics of the PPA, where you think the—I think Salman alluded to four cents. Is that sort of the standing or is that sort of post-hedging?
... But let's go mine.
Yeah, Kevin, it's not a PPA, it's a supply agreement, and the comments made were that this, there's no commitment to buy as it would be in a power purchase agreement. In this case, we can curtail when we want, and we can increase the capacity when we need to, with the expected 300+ MW on top of what we have as of now.
In terms of the contracts, it's the way to see this is that we have a hedge in place, and that hedge combined with the curtailment and demand response, and the ancillary services, as they're called, all of those things combined together brings us closer to the $0.04-$0.045, including all-in costs as it relates to operating that site.
Okay. I apologize, Salman, I think I may get tripped up, right? You got... Is there an opportunity to expand Granbury or Kearney?
Yes. Yes. Granbury could potentially. Sorry. Go ahead, Salman. Continue to talk.
Yeah, Granbury has obviously we have the existing capacity that can be accessed immediately. That... And then we've got the third-party miners, as Fred talked about earlier. And on top of that, there's so this is the 390 MW in total capacity, including both the sites. And on top of that, there is, there's an expansion opportunity of 310 MW that can be expanded within the Granbury area.
Okay.
So in total, this is closer to 600, 600 MW, 700 MW, I'm sorry.
Would you be able to leverage the existing substation at Granbury? Would you have to, you know, build a whole other set of step-down transformers?
Yeah, this is going to be part of our diligence as we move forward from here. We don't expect to have any material investments in order to access that, because the infrastructure already exists.
Thank you. Next question is coming from Reggie Smith from JP Morgan. Your line is now live.
Hey, guys. Congrats on the announcement. Most of my questions have been covered, but I had two. Thinking about the 50 exahash that you guys kind of quoted as a longer-term, I guess, 24-month potential. Was curious what assumptions were kind of embedded in that in terms of, you know, whether it assumes expansion at the Texas site or if it's based primarily on converting some of the hosting contracts, or rather, those rolling off. So any color you guys can provide to kind of support that figure will be helpful.
Sure. So we'll exit this year somewhere north of 25 exahash of operating capacity. Over the next 18-24 months, as agreements roll off, more and more of that capacity, you know, will come under our purview, if you would. And then there are other things in our pipeline that we mentioned. You know, this is one of many steps we're taking in the strategy of, you know, continuing to drive our growth both organically and inorganically. You know, as we continue to do pilots, some of the pilots we've announced, some of those projects will expand. There's already planned expansion in those. There will be other expansion opportunities.
And then, we are not, kind of to answer your question in another way, in the 50 exahash, we're not saying that the expanding the site is included in those numbers. That's additional if we want to do that.
Okay. Perfect. Perfect. And then my last question, and this kind of came up on the last comment, recognizing that, you know, some of these hosting contracts can be a little tenuous. Are the, to the extent you know, are the miners that are currently working, in these two sites, are they, are they paying on time, are the contracts in good standing? And, you know, kind of what, what gives you confidence or have you thought about, you know, how those contracts may perform, post-halving? Is there any, any risk, in your mind there and how you guys are, are managing that? Thanks.
Yeah. So the advantage with being the owner of a site like this is that if somebody doesn't pay your bill, you point the hash rate from their miners at your pool, and you collect all the coins, and guess what? You're mining on somebody else's miners that you didn't have to pay for until they pay the bill. So everybody has an incentive to pay on time, and if they don't, we have an incentive to just run their miners. So, you know, that's one of the benefits of being the owner. On the flip side, you know, the ability for clients to operate at the site is all going to be driven by the price of Bitcoin. But, you know, believe me, we will have machines inbound on a regular basis, ready to take up capacity.
This is a very different situation than where Marathon was earlier this year or in 2022, where our model of asset-light required us to acquire machines and then go find homes. In this case, it's kind of the flip side. We have homes for machines, and as it happens to be right now in the market dynamics, the pricing for machines is quite low. So it's the perfect situation where we have access to ample capacity for growth, and it's just a question of when do we want to deploy machines based on contracts rolling off, or if somebody doesn't pay for their agreement, and we think it's more profitable to mine with a new miner, then we would do that. I think, you know, the way we look at this is it's kind of the perfect situation.
If they don't pay, we just point the hash rate and take a hash rate. Excuse me. If they're not profitable, we replace them with, you know... They're gonna cancel their agreement or try to get out of the agreement, and then we'll put in our new miners, that will run more efficiently. So, you know, it's kind of a, a very good situation for us to be in, no matter whether a Bitcoin price runs to $100,000 and even old machines are still profitable to run post-halving, or whether Bitcoin price comes down to levels where these older machines are not profitable.
Perfect. Again, I think it's a great deal. This is one of the, I guess, points that you were concerned about with the business, and so it's nice to see you guys taking a more active role, a more vertically integrated approach.
Right. Thank you. Thank you. Again, Reggie, I think, you know, for us, it's, as I said, earlier, you know, our focus is really to be in that lowest quartile by cost, to mine Bitcoin. And no matter how you're structured, if you're in the bottom quartile, you will be mining regardless of what's happening with the price of Bitcoin.
Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further closing comments.
Thanks all for your time this morning. If you have any questions that were not answered during today's call, please feel free to contact our investor relations team at the email address ir@mara.com. Thank you, and enjoy the rest of your day.
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