Hello, everyone. Thank you for joining Riot Business Update Call this afternoon. My name is Jason Les. I'm the CEO of Riot Blockchain. I'm joined by Jason Chung, Riot's Head of Corporate Development and Strategy, as well as Phil McPherson, Riot's Vice President, Capital Markets. We're going to get into the presentation here in a moment. When we've concluded, we'll use our limited time remaining for some Q&A. Before we get started, I encourage everyone to review the forward-looking statements on this slide. A copy of this presentation will be made available on our website and on file with the SEC on Form 8-K. Let's talk about Riot. Riot has built its business on three key pillars vital to our competitive advantage. This includes significant scale, low power costs, and financial strength.
First, large scale allows us the opportunity to continue growing our business faster than the global network hash rate. It gives us greater negotiating power with ASIC manufacturers to ensure supply and at competitive prices. It allows us to operate more efficiently, lowering our overall cost of production. Current hash rate capacity of approximately 7.7 EH/s is top three amongst publicly traded miners, and we will continue to increase this in the first quarter of 2023 to 12.5 EH/s. Second, power costs represent the single largest cost of production for a Bitcoin miner. The large scale of our operations and base in Texas ERCOT grid has allowed us to maintain a very low cost of power. A significant portion of our energy consumption is contracted under long-term power purchase agreements or PPAs, which gives us strong visibility into our expected power cost.
Our long-term PPAs underpin our ability to sell power back to the grid when spot power prices are high, allowing us to economically benefit from high power prices and further lower our power costs. As a result of our low power costs, our average cost to mine Bitcoin has been just under $11,000 per Bitcoin through the third quarter of 2022, one of the lowest cost of productions in the industry. We have the strongest financial position amongst our publicly traded peers, with no long-term debt and approximately $255 million in cash as of September 30th, 2022, plus an additional fully unencumbered approximately $100 million in Bitcoin on our balance sheet. Meaning that we are well-positioned to continue funding our growth plans, notwithstanding the currently challenging macro environment.
Riot's best-in-class management team is driving value creation based on seven key factors. Vertical integration, which drives key operating benefits for Riot. Our unique power strategy. Our leading hash rate growth. Our strong financial position. Being a technological leader in Bitcoin mining. Our long track record of experience across numerous Bitcoin cycles, and our concentrated operations in Texas. Now let's walk through these advantages one by one. Riot is the only publicly traded miner to embrace a full vertical integration strategy to its business. They own and operate our own 700 MW Bitcoin mining data center and facility in Rockdale, Texas, which allows the company to better directly control our costs and timing of our miner deployments.
Our 2023 growth plans remain on track with the recent groundbreaking of our second facility in Corsicana, Texas, which when completed, will have a total capacity of 1 GW, which would significantly outscale even our Rockdale facility. In December of 2021, we acquired ESS Metron. ESS Metron is an independent OEM which manufactures critical components for Bitcoin mining data centers, traditional data centers, remote oil and gas power needs, and US military needs. Owning our own electrical manufacturing business helps de-risk our supply chain as ESS Metron is a critical supplier that ensures Riot has access to key infrastructure required for our expansion development. Ownership of our various business platforms through our vertical integration strategy gives Riot strong visibility and control over our organic growth opportunities in the near term.
Our vertically integrated strategy gives us better control over our operations and helps us drive lower costs through our enhanced operational efficiencies, thereby increasing our profitability. Operational control is a key differentiator for Riot from its competitors. Bitcoin miners are price takers based on the market price of Bitcoin. As such, our goal is to be the lowest cost producer. Controlling all aspects of our business allows us to directly control our costs and oversee all aspects of our operations. For example, owning and operating our Rockdale facility allows us to better match miner deliveries with data center infrastructure development so that we can minimize any idle inventory. By hosting our own miners, we do not need to pay third-party hosting fees or profit share, further lowering our cost to mine Bitcoin.
As far as Riot is aware, our Rockdale facility is the largest dedicated Bitcoin mining data center globally, as measured by developed capacity, and we continue to work to expand it further. This expansion initiative to 700 megawatts of total capacity is nearly complete, and consists of seven separate buildings utilizing both air cooling and immersion cooling technology. Those are the seven buildings you see summarized on the slide here. As the owner and operator of the largest Bitcoin mining data center, we have gained unique institutional knowledge in developing large-scale facilities to optimize efficiency, which is evident in the design improvements noticeable in each new building's development. We have a unique power strategy to drive low power costs.
By owning our own infrastructure, we are able to enter into long-term power purchase agreements, PPAs, locking in power prices, and therefore our cost to mine Bitcoin without undue exposure to volatility in ERCOT's spot power market. Additionally, given the unique nature of the Texas power grid, ERCOT, having such PPAs in place allows Riot to curtail mining operations at times of elevated power prices and sell power back to the grid, which ultimately lowers our overall cost to mine Bitcoin in addition to helping stabilize the grid. We demonstrated the benefits of this unique power strategy just this past summer as spot power prices in ERCOT reached all-time highs. Through curtailment activities at Riot, we were able to significantly reduce our overall power cost.
For example, during the month of July 2022, we earned approximately $9.5 million in credits towards our power bill as a result of our curtailment activities. We are an industry leader in hash rate deployment and growth. By the first quarter of 2023, Riot is expected to significantly increase our current hash rate capacity from approximately 7.7 exahash to 12.5 exahash, continuing our strong record of aggressively expanding hash rate. This is expected to increase Riot's share of the global network hash rate from approximately 2% to approximately 4%, depending of course on the growth in the global network hash rate. All of this growth has already been funded. The ASICs and infrastructure underpinning this growth has already been paid for.
Upon achieving this growth in the first quarter of 2023, the consensus estimate of investment banking analysts covering the sector is that Riot will mine approximately 11,000 Bitcoin in 2023, depending on the global hash rate. We have industry-leading financial strength and positioning. Riot's strong balance sheet and growing Bitcoin production positions us to be able to complete our 2023 growth plans independent of any additional capital raise. We believe that the best time to build is when the rest of the industry is contracting and equipment prices are depressed, that growing our Bitcoin mining capacity at a time of stress for others in the industry will position us to enjoy outsized gains as the cycle rebounds.
Bitcoin's unique structure allows the strongest miners to not only survive, but to further benefit from lower cost of production and gain market share if the global network hash rate contracts further in response to current market conditions. Riot continues to lead the industry in the application of cutting-edge technology, including immersion cooling technology. Immersion cooling has three primary benefits which have the opportunity to lead to enhanced performance and strengthen financial results. First, high uptime. By utilizing cooler operating temperatures, there's less wear on certain components of the machine, and therefore, there's reduced machine maintenance. Longer lifespan of equipment. Since the machines are running at more stable and cooler operating temperatures, there is reduced strain on their components, which improve their operational lifespan. Finally, increased hash rate.
Immersion cooling technology gives a miner the opportunity to overclock machines and increase the hash rate of those machines, and therefore support a higher return on investment. In 2021, Riot announced the development of the world's largest known immersion cool facility. We have continued to aggressively grow our industrial scale immersion operations, including committing to building immersion cooling at our new development in Corsicana, Texas. Pictured here is the inside at Building G at our Rockdale facility, one of two buildings at our Rockdale facility which is fully dedicated to immersion cooling operations. Riot has been mining Bitcoin since 2017. Now enjoys one of the longest track records in the industry. As such, our management team has a depth of operating experience across numerous Bitcoin cycles.
Having a long-term bullish view on Bitcoin has fortified our team's decisions to aggressively invest over the past three years. We have led the industry in acquiring best-in-class S19 machines with over 115,000 machines ordered and expected to be deployed by the first quarter of 2023. We have strategically acquired Whinstone US and ESS Metron, which provide the foundation for our vertically integrated growth strategy and serve as platforms for further growth. We have raised capital in a timely and cost-effective manner, allowing us to operate from a position of financial strength to continue building as others contract their operations. Riot anticipates it will exit this most recent crypto winter stronger with a best-in-class balance sheet and its largest-ever hash rate, positioning us to significantly benefit when the Bitcoin cycle turns back in our favor.
Riot has intentionally concentrated its mining operations in Texas, which is believed to be the most attractive location to mine Bitcoin. This is for two reasons. First, Texas' unique electrical grid, ERCOT, is deregulated. As such, Riot can enter into long-term power purchase agreements with power providers and lock in fixed costs to mine Bitcoin, which is important as power costs can constitute up to 80% of direct costs to mine Bitcoin. Deregulated markets such as ERCOT allow miners to curtail power consumption during periods of elevated power prices and instead sell contracted power back to the grid on economically attractive terms, further lowering our cost of production. Riot is also able to reduce power costs by participating in ERCOT's various demand response programs. Riot's Rockdale facility is the largest known controllable power load in the world.
This dynamic power solution allows Riot to benefit from a direct cost to mine Bitcoin of approximately $8,200 per Bitcoin in the third quarter of 2022, an industry-low cost of production. The second reason is, as a state, Texas provides a business-friendly environment and has proven to be the most popular state for Bitcoin miners to set up operations, allowing numerous communities in the state to benefit from the economic opportunities generated by the Bitcoin mining industry. ERCOT is also the largest source of renewable power generation in the United States, and in fact, over one-third of Texas' power generation comes from wind and solar sources. Wind tends to blow the heaviest at night, leading to a surplus of power at night, when demand is typically the lowest as consumer demand is reduced.
Bitcoin miners are uniquely positioned to generate demand and utilize this excess, often wasted power at substantially lower prices than during the day during high demand. Usage which incentivizes further renewable power development. Bitcoin mining demand helps improve the financial profile of these renewable projects by being a consistent offtaker to help capture surplus and stranded power with the flexibility to curtail when demand is high. Riot and the Bitcoin mining industry can play a key role in helping to balance grid demand at times of both low and high demand. Riot's unique, vertically integrated business model is built upon a number of strategically linked synergistic platforms, the value of which we anticipate the market will eventually recognize.
This means that we believe there is significant potential upside for our shareholders, assuming the market eventually retrades our valuation upwards to reflect our actual business mix to be more in line with relevant peers. Through the direct control of our operations afforded by our vertically integrated strategy, low power costs, and strong financial position, Riot is ideally positioned in the industry to continue building the foundation for further growth, increase market share, and enhance profitability, even during periods of contraction in the Bitcoin cycle, and as we work towards our vision to be the world's leading Bitcoin-driven infrastructure platform.
Okay. Thank you, Jason, for that overview. This is Phil McPherson, Vice President of Capital Markets. We'd now like to open up the floor to our covering analysts to ask management questions. Our first question comes from Darren Aftahi with Roth Capital Partners.
Can you hear me?
Yes, I can.
Great. Jason, if I could maybe ask you a big picture question, kinda with everything that's kind of gone on in the last six months. Could you kind of speak to the overall strategy of just balancing kind of aggressive growth and taking share versus capital preservation and kind of being mindful of your balance sheet? I guess, said another way, another is an underlying asset that dictates a lot of decisions. Like, over the next kind of 12 months into 23, like, how are you thinking about growth relative to, you know, making sure that you don't get yourself in a precarious situation?
Yeah. Darren, thank you for the question. You know, what comes to mind here is the slides that we overviewed of the decisions our management team has made over the numerous Bitcoin cycles. One of the key drivers of Riot's success over so many years is positioning ourselves to continue to expand during different market cycles. If you are really only working to expand during the bull markets, you're effectively only going to be buying equipment at the highest prices. I believe Riot is in the position it is today because of the moves we've made during previous downturns in the Bitcoin market cycle. With that in mind, I think we prepared and positioned ourselves to do that today.
When Riot sits here today with no long-term debt, with a lot of liquidity on its balance sheet and good production results and a low cost of production, I think what we've demonstrated is that we have the liquidity here to continue working on our expansion plans, understating that additional financing will probably be required in the future. We position ourselves here to continue to expand. I think that's very critical. We focus on not putting the business at risk, and we've set up a cycle of continued growth through different market cycles.
Great. If I could just squeeze one more in.
Sure.
Can you just talk a little bit on your last November update, your commentary about the unfavorable mining pool? I guess, have you looked into or secured a new mining pool? Is changing mining pool, like how instantaneous is that? With integration and costs, like are there any sort of delays in terms of time or additional costs that are involved with that? Thanks.
Sure. We had poor luck in our mining pool in November. Because of that, we've decided to switch to a pool with more consistent payout results, a different reward mechanism. We don't anticipate any change of cost here. We're evaluating the options right now. That change is pretty quick and seamless once we're ready to pull the trigger there.
Great. Thank you, Darren. Let's take our next question from Greg Lewis at BTIG. Greg?
Yeah. Hi. Thank you and good afternoon, everybody. You know, Jason, you know, I'd be curious on some comments around the state of the market. Clearly you alluded to the fact that you've maintained a, you know, a best in class balance sheet. You know, as a lot of us look around the market, there's clearly a lot of distress in the market, a lot of rig lenders, let's say, are receiving those rigs back from the previous operator. Is Riot interested in engaging in any of those discussions? Is that an opportunity for Riot? I guess I'll start with that.
Sure. Let me actually turn that question over to Jason Chung, our Head of Corporate Development.
Thanks, Jason. Thanks, Greg, for the question. It's definitely an interesting and timely one, and one that's top of our mind. I think when we look at the landscape today, you know, as you mentioned, there's obviously a number of our PRs in distressed or challenged financial situations. As one of the stronger and better capitalized players in this space, you know, we're positioned as sort of a natural potential buyer for a lot of these situations. I'd say we're very often approached by opportunities, and we evaluate all these opportunities, you know, looking at the sort of financial returns. I think big picture wise, the challenge or the consideration on our side is it's not just financial.
I mean, there's a financial element to any investment or acquisition, but also the strategic and operational elements. When we see opportunities, we have to make sure and feel comfortable that strategically these opportunities fit our overall strategy of large scale operations. Then operationally, we have to feel comfortable that, you know, we can accommodate the new assets or the new businesses. Today, we've focused so far on, at least in the near term, on organic growth. As opportunities come up and as opportunities check off all three of those boxes, then of course we'll look into that. That's a big part of the analysis we're doing today as we continue to be approached.
Okay. Great. That kind of leads into my next question. And correct me if I'm wrong. As I look at rigs on order at Riot, you know, kind of doing the math, it looks like the build out at Whinstone is for those rigs. But as we look farther ahead to Corsicana, it looks like, or correct me if I'm wrong, have we started to see rig purchases for that facility? And as we look at the landscape, how should we be thinking about the timing of those?
Thank you for the question, Greg. I think the simple answer is. Well, first, you haven't missed anything. We have not purchased any equipment for the site yet. I think in our position as a Bitcoin miner, time is the valuable information here. Since we are almost a year away from operations, energizing at scale at that site, we don't believe it's necessary to rush in securing equipment right now. We have the opportunity to see how the market develops over the coming months, what happens with rig prices, if there is different types of new supply that's introduced of whether it's XPs or another type of model.
We're simply taking our time and gathering as much information as possible so we can make the best decision when it comes time to make a decision there.
Okay. Super helpful. Thank you very much.
Thanks, Greg. Our next question comes from Lucas Pipes at B. Riley.
Thank you very much, Phil. Good afternoon, everyone. Thank you very much for the opportunity to ask questions and also just hosting this call. My first question is, looking, you know, a little bit around the corner with the halving event in 2024, and I wondered if you could share your thoughts on what you think the global network hash rate is likely going to be in today's price environment, if this halving event were to occur today. What would be the makeup of this global network hash rate between different machine models? Thank you very much for your perspective on that.
Yeah. Thank you, Lucas. That's an interesting question. I mean, if we look at the market right now and at how challenged it is, both with the price of Bitcoin and with the cost of energy for many participants, a halving event today, I think would lower the network hash rate considerably. I think this is, you know, one of the more challenging environments the industry has seen in a while. We're already below most expectations for 2022 year-end hash rate. I think if we look forward to mid-2024, assuming the price remained the same, I think we would see a pretty significant drop in network hash rate.
Even then, and this is once again assuming the price remains the same right now, even with the price remaining the same, at a halving event, probably inefficient operators of a lot of S19 miners would have to go offline. It'd only be the lowest cost producers that would be remaining and profitable after a halving, which is why we put so much emphasis and focus on maintaining the lowest cost of power that we can.
That's helpful. Can you remind me what will be the percentage of XPs within your fleet based on the current build-out schedule? I leaked a little bit on the prior question, but maybe if you could just share some perspective on that. Thank you.
Yeah, sure. We have about 30,000 XPs, either deployed or on order, or waiting to be deployed. With a total of about 115,000 machines. Approximately 25% of our fleet is S19 XPs at this time.
Very helpful. Thank you. My last question for now is on the hosting business. You know, it's been a difficult market for hosting broadly. I wondered if you have a view on that segment potentially turning the corner and making a positive gross margin contribution. Thank you very much for your color.
Sure. You know, from Riot's perspective, our hosting business has historically been impacted by some of the legacy hosting agreements that we have. As a result of our power strategy, on a non-GAAP basis of the direct cost of revenue net of power curtailment credits, we've been able to achieve a positive direct margin for 2022 through the third quarter. That's Riot specifically. Giving commentary on the industry as a whole, I think what we're seeing across the landscape is the way a lot of hosting agreements have been approached historically, have left a lot of problems. We are seeing conflict all over the place.
I think that is simply virtue of an industry still being in its nascent, which is why I think that there's opportunity here. I think the industry, just like with equipment financing, is figuring out the structure that works. It truly is a structure that requires both parties to succeed. The customer needs to be able to succeed and have a pathway to be profitable, and the host needs to have a positive margin as well. I think the industry will figure that structure out over time. As we think about filling up our capacity in the future at Corsicana, I can tell you that's something we are spending quite a lot of time thinking about and developing internally.
That's very helpful. Thank you very much for the color and, best of luck.
Thank you, Lucas.
Thanks, Lucas. Our next question comes from, Jeff Cantwell at Wells Fargo. Jeff?
Hey, thanks for doing this, and thanks for allowing me to join these calls. I wanted to ask you what your thoughts are on the potential, you know, evolution of the regulatory environment, with respect to crypto. I think, you know, it's clearly still early days, but we would love to get a sense of how you feel, things may develop from a regulatory perspective. What are some of the early learnings, you know, from the conversations that you're having, you know, whether for crypto broadly or for Bitcoin as well? Just wanna get a feel for how you're contemplating that going forward.
Sure. Thanks for the question, Jeff. Well, first off, on a state level in Texas, we find ourselves in a very friendly regulatory environment. Every level of government that we are engaging with, has been overall supportive of what we're doing, understand the value that Bitcoin mining brings to both energy grids and the communities that we operate in. In Texas, things are going very well. We're very comfortable with the environment there, which is why we focus so much of our resources in that jurisdiction. On the federal level, you know, there's more division in viewpoints on Bitcoin mining there. That being said, I think Bitcoin and Bitcoin mining has an incredible amount of allies on the Hill as well. It's an evolving issue. I think there are.
there's a lot of education efforts to be made. The onus is on us in the industry and Riot as an industry leader to be a part of those education efforts, going out and engaging with regulators to help them understand what our business is and how it operates, and dispelling some misnomers about Bitcoin and Bitcoin mining, and emphasizing the positive benefits that may not be immediately apparent. I'll tell you, Jeff, we put quite a lot of effort and resources into this because we understand it's important, and I'm optimistic on the long-term regulatory outcome.
Okay, great. Just thanks for that. Just to follow up on the M&A temperature. You know, you've spoken in the past about potentially being a consolidator, and just curious whether you feel now is the time for offense or whether it might be time to think a little more defensively on that front. What I'm trying to do is get a sense of, you know, clearly we're all seeing what else is going on in your space with others, competitors. Just trying to get a better feel for what your, you know, current mindset is. Thank you.
Sure. Thanks, Jeff. I'll turn that question back over to Jason Chung.
Sure. Thanks, Jeff. I would say we are defensively on the offense. And what I mean by that is, you know, we're looking at opportunities. As Jason mentioned, you know, we think bear markets are a great time to grow, and we've seen that play out in a number of other sort of cyclical type sectors, where players have been able to take advantage of lower valuations and weaker financed competition to make big gains in market share at attractive valuations. So we're looking at the same. That being said, and relating to one of the earlier questions, you know, we always have to be mindful of the capital that we have.
The, you know, number one focus for us is always financial strength and capital preservation. What I'll say is, if we find an opportunity that we feel is sufficiently attractive, checks all the boxes I mentioned before from a financial, strategic, and operational perspective, and we feel it has the right balance on sort of the risk/reward metric, then we would, you know, we'd be ready to act. Beyond that, obviously, we have a lot of organic growth opportunities which will consume a lot of our capital as well. That's the other balancing act on our side.
Yeah, that makes perfect sense. Okay, great. Thanks so much.
At this point, I don't think we have any follow-up questions from any of the covering analysts. I'd like to thank everyone for joining us on our December business update. Riot has consistently demonstrated, you know, leadership and transparency, and doing these type of calls with analysts is something we're gonna continue doing as we go forward with earnings into 2023. As you can tell, we're quite excited where Riot is currently positioned, and we're looking forward to an incredible 2023, and we appreciate everybody's support and all of our investors' support along the way. Thank you very much.
Well said, Phil. Thank you everyone for joining today.
Thanks, everyone.