Cipher Mining Inc
NASDAQ:CIFR
Earnings Call Analysis
Q4-2023 Analysis
Cipher Mining Inc
Cipher Mining's 2023 was an impressive year, marked by strong operational performance and the beginning of a growth journey. Throughout the year, Cipher achieved significant revenue of $126.8 million, all generated from their Odessa facility, which stands as the most significant part of their portfolio, accounting for about 90% of Bitcoin production. Lauding their achievement, management emphasized Cipher's focus on best-in-class unit economics, which they believe has solidified their ability to lead in the mining space. The company finished the year with an adjusted earnings gain of $46.2 million, a remarkable pivot from the adjusted earnings loss of $64.9 million in the previous year.
Despite a substantial increase in revenue, Cipher managed to keep general & administrative expenses relatively flat, coming in at $85.2 million, and expects this trend to continue over the next two quarters. This control over operating expenses, coupled with no debt on the books and the ability to generate free cash flow, positions Cipher to take advantage of the next phase of growth.
Cipher increased its workforce from 22 to 36 employees, ramping up investment in compensation and benefits by $14.4 million, to build a team that can achieve more with less. The company is poised to capture operational leverage as it scales, particularly with plans to keep general & administrative costs flat even with a projected increase in exahash rate and data center expansion.
Cipher Mining's 2023 marked a financial turnaround, recording an adjusted net income of $27.8 million for Q4, compared to $2.3 million in the previous quarter, showcasing their efficiency gains and ability to convert revenue growth into bottom-line earnings.
Cipher benefitted from several positive market developments including the approval of Bitcoin ETFs, increased transaction fees, and changes in accounting standards enhancing transparency. Strategically, Cipher highlighted their low-cost power purchase agreement at Odessa and ongoing efforts to supplement wind production with grid connection at their Alborz JV site.
The year saw Cipher Mining's derivative asset—the Odessa Power Purchase Agreement—increasing in value by $26.8 million due to strategic power arrangements. Moreover, a key shareholder, Bitfury, has been distributing its holdings, decreasing its ownership concentration and potentially improving liquidity for Cipher's shares.
Cipher Mining is not resting on its laurels. CEO Tyler Page detailed ambitious expansion plans, including a 30-megawatt expansion at Bear and Chief joint venture data centers and building out the 300-megawatt Black Pearl site in West Texas. The company is preparing to navigate through expected industry headwinds like the Bitcoin halving and is actively exploring acquisition opportunities to foster growth at opportune moments, underscoring their disciplined approach to expansion.
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Good morning, and thank you for standing by. Welcome to Cipher Mining, Inc. Fourth Quarter and Full Year 2023 Business Update Conference Call. [Operator Instructions]. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Josh Kane, Head of Investor Relations. Josh, please go ahead.
Good morning, and thank you for joining us on this conference call to discuss Cipher Mining's Fourth Quarter and Full Year-End 2023 business update. Joining me on the call today are Tyler Page, Chief Executive Officer; and Ed Farrell, Chief Financial Officer. Please note that you may also review our press release and presentation, which can be found on the Investor Relations section of the company's website. Please note that this call will also be simultaneously webcast on the Investor Relations section of the company's website. This conference call is the property of Cipher Mining and any taping or other reproduction is expressly prohibited without prior consent. Before we start, I'd like to remind you that the following discussion as well as our press release and presentation contain forward-looking statements, including, but not limited to, Cipher's financial outlook, business plans and objectives and other future events and developments, including statements about the market potential of our business operations, potential competition and our goals and strategies. The forward-looking statements and risks in this conference call, including responses to your questions, are based on current expectations as of today, and Cipher assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. Additionally, the following discussion may contain non-GAAP financial measures. We may use non-GAAP measures to describe the way in which we manage and operate our business. We reconcile non-GAAP measures to the most directly comparable GAAP measures, and you are encouraged to examine those reconciliations, which are found at the end of our earnings release issued earlier this morning. I will now turn the call over to Tyler Page. Tyler?
Thanks, Josh. This is Tyler Page, CEO of Cipher Mining. Thank you very much for joining our fourth quarter 2023 business update call. Let me begin the call with a few summary financial statistics from our outstanding fourth quarter of 2023. Ed will give a full breakdown of our numbers during his portion of the call, but I wanted to highlight our performance during the fourth quarter of 2023 upfront because it was the first quarter we have had since going public that featured completed operations at our original 4 data centers for the full quarter. In this sense, it provides the most accurate view of the progress we have made toward our vision of Cipher's full capabilities as a low-cost producer of Bitcoin. Our progress has been immense. By mining 1,327 Bitcoin in the quarter, a production increase of 252% year-over-year, we produced revenues of $43 million and GAAP net earnings of $11 million. We early adopted the new accounting standard in 2023, and these numbers include mark-to-market gains on our Bitcoin inventory. But I think it is important to highlight that even under the previous accounting treatment for Bitcoin, Cipher also would have produced positive GAAP net earnings for the quarter. This is not something most of our competitors can say. Our adjusted earnings were even stronger. We produced adjusted earnings of $28 million for the quarter, which represents massive progress and an improvement of over $50 million year-over-year. We are very proud of these milestones as they demonstrate our relative strength and outperformance versus competitors. And with the upcoming having on the horizon, we believe that the relative advantages of being a low-cost producer of Bitcoin will only increase going forward. As of the end of February, Cipher held 1,433 Bitcoin in inventory and $69 million of cash, while our total self-mining hash rate has grown to 7.4 exahash per second. For those that follow the Bitcoin mining space, you already know that the having is nearly upon us. We have spoken repeatedly about how Cipher is built to thrive throughout market cycles. While the cut in new Bitcoin supply from the halving is painful for the industry, it can reward thoughtful miners while exposing those miners who have not been disciplined in their strategic decision-making. Cipher has been very disciplined while planning for the halving for years. We are built to succeed with approximately 96% of our portfolio energized through fixed price power at an industry low cost of electricity of roughly $0.07 per kilowatt hour. As a reminder, electricity represents the large majority of our operating costs and our low price is a key driver of our best-in-class unit economics. Furthermore, as we complete our expansions at Bear and Chief and complete the full Black Pearl site, our overall rig fleet efficiency will improve from 29.9 joules per terahash currently to 22 joules per terahash. Turning to our growth plans. We expect to complete 30 megawatt expansions at each of our Bear and Chief joint venture data centers in the second quarter of this year and for those expansions to add 1.25 exahash per second of self-mining capacity to our production. We also expect to add an incremental 0.62 exahash per second of self-mining capacity via hardware and software optimization of our existing fleet that we expect to be fully online by the end of the third quarter. Lastly, we are most excited about the enormous potential of Black Pearl, our 300-megawatt site in West Texas. We recently commenced construction activity and aim to energize the site in the second quarter of 2025. Slide 5 is a high-level overview of a Bitcoin mining business that we like to include each quarter to remind everyone how our business model works. We operate the box in the middle of the drawing that says mining equipment, which represents our data centers and mining rigs. As I discussed earlier, the majority of our operating expenses is electricity, which our data centers convert into computing output. Unlike traditional data centers, which operate a similar model and sell their computing output to enterprise clients for dollars, Cipher sells its computing output called hash rate to the Bitcoin network for Bitcoins. To make this model operate profitably, a Bitcoin mining company needs to control both its electricity costs and the capital it spends to build new data centers, including mining equipment. Controlling these costs enables a miner to be a lower-cost producer, and our focus at Cipher has always been on controlling these specific costs to produce the best possible unit economics. That illustration hopefully gives you a good sense of a straightforward Bitcoin mining business. Cipher, however, does have an additional element to our business that is incredibly valuable. We have the ability to sell power back to the grid at our Odessa facility. Our power purchase agreement gives us a combination of downside risk protection as well as upside optionality to our revenue streams that doesn't exist for most Bitcoin miners. Let's now turn to Page 6 and look at some recent Bitcoin market events. Since our last business update, we've seen many positive headlines impacting Bitcoin miners. The SEC's approval of the Bitcoin ETFs in January has dominated the headlines and the price of Bitcoin has positively reacted to the better-than-expected early inflows into the products. We believe this is a massively positive development for the space as it will pull additional investment dollars into the ecosystem. In addition to the new U.S. ETFs, in the past few months, we have also seen elevated periods of transaction fees paid to miners as well as a new accounting standard that provides investors transparency into the mark-to-market value of Bitcoin held on balance sheet. While both of these good developments have provided additional tailwinds to the sector, we have also seen a counterbalancing steady climb to an all-time high in overall Bitcoin network hash rate, which suppresses miner economics. Perhaps most noteworthy for Cipher's shareholders and prospective investors. On February 26, our majority shareholder, Bitfury, announced plans to distribute the majority of its Cipher shares and break up its concentrated position on our cap table. We believe greatly reducing our largest investors ownership concentration, increases our free float and creates a positive liquidity environment for our shares overall as we move forward. As we head toward the having next month, Cipher is focused on executing the expansion and build-out of data centers, optimizing the production from our current fleet and selectively looking for new growth opportunities. We have reviewed many acquisition opportunities over the past several months and expect the opportunities to improve as we go through the halving. We will evaluate these opportunities with the same disciplined approach as always and hopefully find expansion options at cyclically low prices. On Slide 7, we give a portfolio overview of our existing data centers and a time line for expected expansion in our self-mining hash rate. In 2023, we paid an average all-in electricity cost of $8,626 per Bitcoin produced at our data centers. We are very proud of this number, and it drives our best-in-class unit economics. Please note that when some of our competitors talk about these costs, they only include electricity and not transmission and other charges. In contrast, when we talk about all-in electricity costs, we made the total cost to deliver electricity to our mining rigs. So our numbers include all transmission and other charges and our loan numbers dramatically demonstrate our competitive advantage. On the left side of the slide, you have a snapshot of our 4 current data centers, along with our all-in electricity cost per Bitcoin at the respective sites for the year 2023. The chart on the right of the slide gives you a graphic illustration of the current Cipher hash rate as well as the additional growth opportunities in the coming 1.5 years. At this point, we will turn to production by site. On Slide 8, you can see a picture of our fully operational Odessa facility. Odessa is the most significant part of our portfolio as it represents approximately 90% of our Bitcoin production. Odessa is a wholly owned facility with a 5-year fixed price power purchase agreement and some of the lowest cost power in the industry. In the third quarter of 2022, we began reporting a third-party independent valuation to give investors a sense of how much value is represented in the power contract alone. As always, Ed will talk more about it in his remarks. We currently generate approximately 6.4 exahash per second at the site, utilizing approximately 207 megawatts. We have mined roughly 635 Bitcoin at the site through February 29 and had a recent maximum daily mining capacity of approximately 10.8 Bitcoin per day. On Slide 9, we show a picture and highlights from our Alborz data center, which we believe is a truly unique site. Alborz is 100% powered by wind and is a joint venture that we share with our energy provider. It currently has a total operating capacity of 40 megawatts when the wind blows. That 40 megawatts powers roughly 1.3 exahash per second of rigs. Alborz can mine a maximum of roughly 2.2 Bitcoin per day, and year-to-date, the site has mined approximately 88 Bitcoin through February 29. Roughly half of that total capacity and site production belong to Cipher. We are working to supplement the wind production at Alborz with a grid connection, which would allow us to increase our uptime and generate more Bitcoin with the existing equipment at the site, and we remain confident that we will have that arrangement in place later this year. Slide 10 shows operational highlights from our Bear and Chief data centers. Combined, the sites operate 20 megawatts, which can generate approximately 0.7 exahash per second and can generate roughly 1.1 Bitcoin per day in current market conditions. Bear and Chief are also structured as joint ventures and feature shared economics similar to Alborz. Unlike our other sites, which have behind-the-meter power arrangements, Bear and Chief are set up in front of the meter at a location in Texas that typically features attractive market prices. Finally, I will close with a few pictures of the expansion work underway at Cipher. We are very busy every day working to expand our mining capacity in the coming months, and we look forward to providing future updates on our progress. Now I'll turn it over to our Chief Financial Officer, Ed Farrell.
Thank you, Tyler, and hello to everyone on the call. As a reminder, for those following our webcast presentation, I'll be referring to our results for the 3 months and 12 months ending December 31, 2023. I will discuss some of the key financial metrics for Q4. I'll provide some additional fourth quarter color as well as walk through our full year results. This quarter marked our first quarter of operations since inception with all 4 of our data centers being fully deployed and is a testament to the dedication of our entire team and the strength of our company that we were able to deliver positive GAAP earnings for the quarter even before adopting the new accounting standard related to the fair value of Bitcoin. As observed across the industry, top line growth doesn't always translate into bottom line earnings. However, at Cipher this quarter showcased strong top line growth that also positively impact our bottom line. In the quarter, we mined 1,195 Bitcoin, which resulted in revenues of $43.4 million, an achievement we all take great pride in. Yet upon closer examination, these numbers become even more impressive. While our revenues were up 43% sequentially, the cost of power to generate those revenues was only up 2%, underscoring the value we get from our fixed price PPA at Odessa. We will talk about it later, but the value of that PPA also increased by over $13 million in the quarter, again, a testament to the capabilities of our power and origination team. Despite substantial top line growth in Q4 at $22.5 million, G&A expenses were down 6% from the prior period. This emphasizes the significant potential for operational leverage within our business model. Looking ahead, we are excited about our prospects as we scale up operations significantly over the course of this year in 2025. We anticipate encountering industry headwinds such as the upcoming haLving and rising network cash rates, which are challenges that all of our competitors face. However, we firmly believe that Cipher is well positioned to navigate these obstacles and emerge as a leader through this next cycle. In our third quarter business update, we talked about the challenging operating environment. Transitioning to the fourth quarter, we experienced much more favorable conditions marked by a rally in Bitcoin price and a significant increase in our production as we fully energized Odessa. As a result, our fourth quarter was characterized by strong top line free cash flow. These conditions, combined with our ability to draw on our ATM led to a substantial improvement in our liquidity position. I would also like to take a moment to talk about the new accounting standard, which requires entities that hold crypto assets to measure them at fair value. We believe this is an important step forward for the industry and positive development for institutions looking to invest in the space. In December, FASB released new rules mandating companies to adopt the new standard for the fiscal year after December 15, 2024. Additionally, FASB provided companies the option to really adopt a choice we made for the 2023 fiscal year. We underwent a rigorous process to transition this to this new standard and assess our realized and unrealized gains and losses as well as the impact of previously reported Bitcoin impairments. The fair value adjustment for the fourth quarter compared to the prior accounting guidance resulted in net earnings impact of $3 million. Now let's turn our attention to the full year consolidated balance sheet and statement of operations. As of December 31, our total current assets stood at $155 million, up from $48 million at year-end 2022. Our accounts receivable were $622,000 versus 98,000 the previous year, and our prepaid expenses were $3.7 million versus $7.3 million in the prior year. I should note that those prepaid expenses are primarily due to corporate insurance, which is worth highlighting because we were able to reduce our D&O premium significantly this year. We recorded a Bitcoin balance of $33 million, representing the 780 Bitcoin we had in treasury on December 31. That number is up from 399 Bitcoin we had at year-end 2022, which was then valued at $6.3 million net of impairment. As always, I'd like to dedicate a few minutes to the value of our Odessa PPA derivative asset. We have previously highlighted the significant competitive advantage provided by our power contract at Odessa. As a reminder, we began publishing a third-party mark for this agreement in the third quarter of 2022. That mark is represented as a derivative asset on our balance sheet that gets revalued each reporting period. Essentially, it reflects the in-the-money value of the contract relative to the current forward prices at our Odessa facility. As of December 31, this asset was valued at $93.6 million, which represents an increase of $26.9 million year-over-year. This change is recorded as a gain on our income statement. It is important to note that this asset is in 2 components on the balance sheet, $31.5 million as a current asset and $61.7 million as a noncurrent asset. The change in fair value of this contract will affect our GAAP earnings, but we excluded from our non-GAAP reporting. Our other significant assets include property and equipment of $243.8 million, primarily attributed to our Odessa facility. This figure includes miners and related equipment of $163.5 million as well as leasehold improvements valued at $139 million. These items are offset by $59.1 million of accumulated depreciation. In addition, we hold intangible assets of $8.1 million, which includes $7 million designated for the payment of Black Pearl site and its related ERCOT approval. The remaining $1.1 million relates to capitalized software. At year-end, our equity investee interest in Alborz Bear and Chief stands at $35.3 million. Our operating lease of $7.1 million is primarily related to real estate leases. Additionally, deposits of $23.9 million includes the previously reported limited security deposit of $12.5 million and a $6.3 million deposit to Encore related to Black Pearl data center. I would like to report that our current liquidity position on February 29 is $158 million, comprised of $69 million in cash and $89 million worth of Bitcoin assuming a $62,000 price per Bitcoin. Now let's look at our GAAP operating results. Before delving into our full year numbers, I'd like to provide more detail on the fourth quarter results. Considering this marks our first full quarter of operations with all 4 of our data centers at full capacity. In the fourth quarter, we mined 1,195 Bitcoin, resulting in $43.4 million in mining revenues versus the prior quarter when we mined 1,078 Bitcoin, producing $30.3 million in revenue. We are particularly proud that despite significantly higher operating revenue, our operating expenses, including G&A and depreciation and amortization remained relatively flat quarter-over-quarter. As I mentioned earlier, G&A totaled $22.5 million, a decrease of 6% from the previous quarter. Depreciation and amortization came in at $16.8 million, a slight increase from the $16.2 million in the previous quarter. The cost of revenue was $13.3 million, which includes our power and direct expenses related to Odessa, a 2% increase over last quarter. Now let me turn to our full year results, which we can see on Slide 15. For the full year 2023, we mined 4,350 Bitcoin, resulting in $126.8 million of revenues generated entirely from our Odessa facility. The cost of revenue for the year was $50.3 million versus $748,000 in the prior year. G&A expenses came in at $85.2 million in '23 versus $70.8 million in '22. The increase of $14.4 million was primarily driven by compensation and benefits as we invested in building out our team, increasing our head count from 22 employees to 36 employees. Depreciation and amortization for the year was $59.1 million versus $4.4 million in the prior year. This increase was primarily due to miner and equipment and leasehold improvements at Odessa being in service for a full year compared to only 2 months in the previous year. As we mentioned earlier, we recorded a positive change in the fair value of our derivative asset of $26.8 million year-over-year. Power sales amounted to $9.9 million in 2023 versus $500,000 in the previous year, reflecting the ramp-up at Odessa over the course of 2023. For our JV sites, the line item titled Equity and losses of equity investees was $2.5 million in 2023 compared to $37 million in 2022. It is worth noting that the losses in 2022 were primarily from the fair value contribution of miners to our JVs at the time when miners prices were much higher. Let's now turn to our slide on our non-GAAP measures used to reconcile our adjusted earnings. Allow me to remind everyone that adjusted earnings exclude the impact of depreciation of fixed assets, the change in the fair value of our derivative assets, deferred income tax expense, the change in fair value of market liability, stock compensation expense and other nonrecurring gains and losses. These supplemental financial measures are not measurements of financial performance in accordance with U.S. GAAP, and as such, they may not be comparable to similarly titled measures of other companies. We believe that these non-GAAP measures may be useful to investors in comparing our performance across reporting periods on a consistent basis. Management uses these non-GAAP financial measures internally to help understand, manage and evaluate our business performance and to help make operating decisions. When we adjust our fourth quarter GAAP results to the GAAP net income of $10.6 million, we had $17.2 million for those items I just listed. That brings us to adjusted net income of $27.8 million for the quarter compared to $2.3 million in the previous quarter. For the full year, our adjusted GAAP results yield an adjusted earnings gain of $46.2 million versus an adjusted earnings loss of $64.9 million in the previous year. I will conclude my remarks by saying we are extremely pleased with our financial performance in Q4 and throughout the entirety of 2023. Our philosophy continues to be, that to be a leader in the mining space, we need to focus relentlessly on having best-in-class unit economics. We firmly believe 2023 validated our ability to deliver on our stated objective by successfully bringing online our initial 4 data centers. We are excited about the next stage of growth that Tyler outlined. And with our current financial position, free cash flow generation, lack of debt and best-in-class unit economics, we believe we should be well positioned to be a leader through the next cycle. We look forward to updating you in greater detail on our expansion plans when we report for the first quarter. I will pause now and Tyler and I are happy to answer your questions.
[Operator Instructions]. Our first question coming from the line of John Todaro with Needham & Company.
Congrats on the quarter, guys, looks pretty solid without even the accounting rule changes. 2 questions, maybe one for each of you. Ed, when you talked about operational leverage boost, so we noticed that as well as the G&A coming in a little bit lower than what we actually estimated for Q4. If you can grow exahash to 9-plus in G&A flat in '24, it seems like another big boost there. Is that how we should be expecting G&A to basically be flat over '24?
I would look at G&A over the next 2 quarters as being relatively flat. As we mentioned, we built out the team. I think we'll get a lot of leverage from building out the team. As we bring on more exahash and we expand our data centers, we should expect some additional depreciation and amortization. But when you neutralize that or the non-GAAP numbers, I would expect that not to be too much greater than we've been reporting in the fourth quarter of '23.
And then, Tyler, on the Bitfury side of things can you just remind us, so how many shares Bitfury still has right now, the time line for that distribution? And then I believe there's no more lockups, is that correct?
John, so let me actually add one more piece of color to Ed's answer about SG&A because I think it's important for context, and then I'll answer the Bitfury question as well. I know you asked for specific near term, but I think it's important to think about SG&A, especially as we come into the halving. The way we look at SG&A, I do think is pretty differentiated from most other Bitcoin miners. And I think about that, that needs to be kept in mind as all the research analysts and investors in the space look at what happens to these companies post halving. And so we often talk about the relentless search for cheap power because that drives the unit economics. And look, in a post halving world as the world evolves and these sites get bigger, there's really 2 ways to seek out that cheap power. Some folks not Cipher have gone to jurisdictions, where there may be regulatory risk or other challenges that we find hard to underwrite and you get cheap power so long as they don't raise the miner tax or the government comes after mining or something like that. And maybe there are people that can underwrite that risk better than us. The other way in the way that we've really focused since day 1 on doing this is to go to a place like Texas, where you can monetize the curtailability of these data centers. And as we've talked about often, our data centers can power up and they shut down within a minute, they can do it very quickly. They can respond to price signals and we talk a lot about the opportunities to be involved in providing power back to the grid, making extra cash to do it, and that being a real hidden ability of what we can do. And the thing is, if you take what I'll call a more basic operating model for a miner where you just find a power cost and try to run your rigs 100% of the time. That model is going to be more and more challenged. And if you did that in Texas -- the average price in Texas is something like $0.06 a kilowatt hour. And so to manufacture your own lower electricity price, you have to be able to curtail your data centers, potentially participate in demand response programs, et cetera. The only way to do that is to build a stack of talented people across ops, technology, trading. It's not easy, and we're one of the only companies that really does that at scale, and that will be an even bigger part of our story as we build Black Pearl. So that's all by way of saying that when our SG&A is building a different company with a different skill set of people and it scales very well. So whereas I think now, less than half of the output will be from a megawatts perspective and like less than 1/3 of what will be from a hash rate perspective after we bring Black Pearl online, that SG&A scales very, very well. It is not a linear scaling. And so Ed, your specific question was about the next quarter or 2. I think it's important to keep in mind that this will become one of our greatest relative strengths in the long term because we will bring on very large data centers with very little linear growth in SG&A. So we're just getting started in some ways on the chassis that we're building to continue to source and produce our own cheap power and control our own destiny. So I think that's important context for SG&A. Just on a longer term, not exactly your question. And then to get to your specific question, and thank you for indulging me on that. So Bitfury is in the process of distributing those shares. They put out a press release, and they talked about this that they plan to end up with 50 million shares at Bitfury and so that will be below 20% of our overall shares. We have raised some money via the ATM, we'll even be a little bit less than that on a percentage basis. That's in process right now. I don't know exactly where they are in that process because that's outside of my conversations with them. But I know it's very short term. They are in the process. I expect it to be days for them to complete those distributions. And so we will go from where we were not that long ago when they were north of 80% of our cap table to decently below 20%. And there are no more lockups on that. So those will be freely tradable shares as they're distributed. I think it's good to give some context on this as well. I've heard a lot from investors over the last year or so, Hey, Tyler, we love the Cipher business model. We love how you create your own cheap cost of power. This is very sustainable. You have a clean balance sheet. We like everything about it, but we're an institutional investor, and we don't buy the stock of companies with an 82% shareholder. And so this has been a central challenge for us to solve. We focus every day on building a great business. But of course, we want to also have Cipher stock be a great investment. I think the very wonderful thing about this outcome is that if you think about what I would like to see on our cap table over time in a perfect world, we'd have a bunch of long-term investors that understand Bitcoin mining. And so we short circuit the time line here. These are shares that are being distributed that Bitfury already owns. So it's not adding new shares, this your existing shares going to investors that have been invested in Bitfury and Bitcoin mining typically for a long time, sometimes longer than a decade. So I think from our perspective at Cipher, we're really excited about this. I think just based on my conversations with investors, I have heard we trade at a discount to where our business model should be trading if we didn't have such a concentrated cap table. And I believe that, that discount will be removed and that, frankly, I think we should trade at a premium based on just the results we've put out. So no lockups, that distribution is in process, and I expect it to be completed within days.
Our next question is coming from the line of Regee with JPMorgan.
A few housekeeping questions, I'll get to those in a second, but I wanted to -- I think you guys announced a big purchase with Bitmain, I believe it was in December. It included an option for 2024. I look at your Odessa site and it has very impressive power costs, but still has a pretty high joules per terahash. My question is, does it make sense to swap out machines at Odessa for maybe the T21? And how do you think about that? What's the calculus for doing that? And I have a few follow-ups.
The current plan is not to put the T21 from that large order you mentioned, which includes if you fully exercised the option up to 15.8 exahash of T21s, and that's at $14 a terahash, which is just an awesome price. If you look at the profitability of where we are, call it, an S19j Pro efficiency right now. It's hard to keep up with this, but I think it's about a $165 or so per megawatt hour right now. So getting more and more profitable. And as everyone knows, that generally drives the cost of rigs. So having locked in $14 is just an awesome price on that purchase. Our current plan is not to use those at Odessa. We recall that we do have an order of 1.2 exahash of the S21 that we are using at Odessa both to swap out for machines getting repaired and generally upgrade from the least efficient machines we have. That replacement exercise gets us to a big part of the growth in hash rate that we projected for this year. So we've got a projection of 8.7 exahash in the second quarter and then 9.3 exahash in the third quarter. That's largely the Bear and Chief expansions, but then also that's this swapping out and optimizing of the lowest efficiency rigs at that site. The one other thing I'd say is even at our current efficiency, I think industry average is more like 34 or 35 joules per terahash. So we're already decently more efficient than the industry average. And as we mentioned, by the time we get all these things plugged in, will be at 22 joules per terahash, but that's the current plan. I mentioned in my prepared remarks that we are also working on various hardware and software optimizations. Obviously, over time, we learn a lot about operating these rigs and environmental specifics, and there are various software and hardware tricks of the trade that we also use to squeeze extra efficiencies out of those. So even our least efficient machines are becoming more efficient just through miner upgrades that don't include like a full swapping out.
And just to clarify there. So for that Bitmain announcement in December, there was a piece that was for 2025. There was an option for 2024. Based on what you announced and disclosed so far today in the last few weeks, does that assume that any of that option is used for 2024? And if not, how are you thinking about that option? And can you extend it beyond '24? And the last one is what is your appetite for tuck-in acquisitions? Does my first question makes sense? I'm trying to figure out like 100 that option, is it accounted for? Or is it spoken for? And if not, what is the plan for that?
So the sizing of that option is tied out with Black Pearl. So we could build the full 300 megawatts of Black Pearl buying rig T21 for $14 a terahash. And so at Black Pearl, which will be energized in the first half of 2025, we have the ability to basically build that full site. If you look at Slide 7 of our deck, the walkout to 25.1 exahash assumes that we plug in all those T21 at that site. And keep in mind, the option is exercisable in calendar year 2024. But when we exercise it, it takes a few months to deliver. So here's how we're thinking about it. At a baseline, when we do CapEx planning for Black Pearl, we've locked in the most important variable cost in CapEx. That cost per terahash can go up 600%. We've locked it with that option. And if we find nothing else to do with rigs beyond the expansions we've already laid out, we can exercise that full option and build the full Black Pearl.The great thing about this time line that we've got is also an answer to your second question about tuck-in acquisitions, we are spending a lot of time looking at opportunities. There is a lot for sale. There are companies for sale. There are ones that are well known. There's private ones that are less well known. There's domestic ones. There's international ones. There are sites. There are folks that want to get out of the hosting business. There's folks that want to sell infrastructure. So we are looking at a lot. I think a hallmark of our history has been an extremely disciplined focus on return on investment. And so we're just not going to overpay for stuff because that's ultimately what produces things like positive GAAP earnings is the discipline not to overpay for things. So my hope is that we will find amazing opportunities at very low prices that are available right away. We could exercise that Bitmain option right away to fill whatever we buy with new rigs. And then we can source other rigs for the back half of Black Pearl. But at a minimum, we can use the full option to build all of Black Pearl, and then it truly has optionality if we find a better way to use them faster.
One last point of clarification on that. I assume that means the option piece of it can be exercised at any point in '24 and not necessarily at the end of '24?
Correct.
And our next question is coming from the line Joseph Vafi with Canaccord.
I was just thinking here, we've had this really nice run up here in Bitcoin that's been pretty rapid and precipitous. Just wondering how the higher Bitcoin price is perhaps having effect on your operating strategy, the build-out strategy and the hedge strategy. Could you move Black Pearl forward faster now with a higher average price per Bitcoin selling them? Or does it make sense to hedge or do you have less because the price is high? It's a high-class problem, but just trying to see how it's affecting the business and maybe tweaking the strategy.
First of all, Black Pearl has an energization schedule, which is set for the second quarter of next year. So unfortunately, we cannot move that up. In addition to their just being a lot of logistics, we're clearing large 50-acre fields now. We have to install and build everything. But really, the time line there, even if we wanted to, the challenge is, there's an energization time line that we don't have optionality on. Now what we do have optionality on is how much we build. We publicly committed to building the first half of it. We have an option to build the second half of it. And the way I think of the increasing economics of the business, frankly, which is tied to the higher Bitcoin price, it makes it more likely that we could greenlight the full 300 megawatts as opposed to just the first half of it, which we've committed to, that we do have optionality on. So I think of it in those terms. And then speaking more broadly about treasury management, let me remind everyone that in general, it's our goal to build a Bitcoin treasury over time. We need to do that thoughtfully about different ways we can tap capital. It's been very favorable to build that treasury recently. But in addition to selling some Bitcoin with regularity to pay our fails and holding an increasing number of Bitcoin. We also hedge. We did see a noticeable pickup in hedging over the last few months, and that's because we've had these big known binary events. Things like the ETF approval date, when everyone was coming into that week, for example, we put several costless collars around Bitcoin we held in inventory, where we protected the downside in case we got a piece of bad news on that inventory. And also we didn't pay anything for it other than giving up upside that was well above the then market price. So we're either selling at a better price than was in the market to buy downside insurance. We continue to do that as well as look at other ways to think about hedging. We're following the hash rate derivatives market very closely to look at ideas. We've got other known events coming up like the halving, but also things like there's time lines on the ETF approval, which may have an impact on the space. It wouldn't surprise me if we continue to do things like costless collars. Of course, that also comes down to an analysis of the relative economics. We want to do that when the option map is very favorable, and we can keep a lot of upside to protect downside. So it's not just we put this much in this bucket and this much in that bucket, it's dynamic. But listen, the rising Bitcoin price is certainly very helpful for our optionality, not only on building the full Black Pearl. But look, when we look at acquisition opportunities, it certainly is nice to have that going up.
And then I was just wondering, transaction fees have been in the news, and I know you mentioned it. How material was that in the quarter on relative to overall revenue? And I'm just trying to think about post halving transaction fees, if you got any thoughts on that.
So I think it's a really important thing to keep in mind if you evaluate investing in a Bitcoin miner. And again, we have this extraordinary moment in the history of the space where you have the halving upon us, which we think is going to expose the less disciplined models in the space, you're going to have to have a better nuanced understanding of power going forward and a clean balance sheet. But also with ETFs available, I think a lot of the investors in the space historically have been short time frame investors looking to trade Bitcoin moves and these were the companies that had balances of Bitcoin. And obviously, there was GBTC out there historically. But now flash forward, you've got ETFs as an option, and those same investors certainly seem to like microstrategy quite a bit. And I think that draws a lot of the eyeballs that we're trading these Bitcoin mining companies really for their Bitcoin balance. So I think you need to break out the balance from the mining business because investors have other options. And that's why it's so important that in this last quarter, we were profitable without marking the Bitcoin held in treasury to market that from a GAAP basis, it's very important. That means not only are we a treasury balance, we're an operating business that is solid. And now to get to your question about transaction fees, what's so important and attractive about that non-treasury piece of the business, the operating mining business is that in the fourth quarter, we did see these spikes in transaction fees, they're not always sustained, sometimes, there's a hot BRC-20 token, typically from Asian investors. I think sometimes we're trying to figure out what's driving the fees today. And we saw periods we had days where we more than doubled our coin-based rewards from the transaction fees. So it is a massive potential upside. We continue to see developments in the use of block space as being valuable. And so I think the thing that's important to remember, like, why would you buy a Bitcoin mining company if there's an ETF out there? Not only are you buying this leveraged operating business, but your long a call option on transaction fees. And so if we see those fees spike or they're more sustainable, that's extra basically that you get from this business. And that has the potential to spike rapidly. We'll see what happens with the spike in demand is generally we continue to see more investors come to the space and demand spike. Traditionally, that makes transaction fees go up. Also, we've got these other uses for block space that we saw really last quarter. And on the magnitude, I don't know off the top of my head, the magnitude for the whole quarter, what it was in the aggregate, but we definitely had sustained days where it was 50% to 100% of the rewards we were getting from the coin-based reward.
And our next question coming from the line of Greg Lewis with BTIG.
Tyler, I was hoping for a little bit of an update on Alborz and where the status is of getting grid connected to there and any time lines and thoughts around what else needs to happen in terms of spending to make that happen.
We still think that it is in the near term. I think we could see it as soon as the next quarter. The only reason I haven't given a specific date is that it's basically negotiating contracts, those contracts are all in motion. Some of the contracts, the types of entities involved to do things like set up a grid connection don't necessarily move as quick as other contractual negotiations. And so that's the only reason we haven't been as specific because I can't underwrite that exact time line. That said, it's in process. So my optimistic goal would be in the second quarter, and I think that's achievable. And then I'll remind everyone that we also have technically a 50-megawatt PPA there. So we would have potential for another 10 megawatts of expansion at Alborz, should we choose to do that. The grid connection, you would think would add roughly 20% or so of uptime to the machines that are already there. So it would be meaningful. It's not going to move the entire shift, but it's an excellent way to squeeze more out of what we already have.
And then just as we think about that, then obviously, the electricity costs there probably best in places, that with the grid connection, maybe it trends up somewhere more in line, realizing that electricity pricing, you mentioned the PPA, but maybe it looks a little bit more like Odessa maybe thinking more -- What I'm wondering is the utilization improvement probably far outstrips the higher marginal cost of the electricity. Is that [Indiscernible]?
That's right. I think of it this way, so power tends to -- first of all, our cheapest power in the portfolio as we show in the deck is at Alborz, so it's great. When the wind is blowing, that is the strongest economics we have. Obviously, when the wind blows, that's great. When it doesn't blow, we're not currently drawing power. In Texas, when the wind blows, typically, the grid market price is also lower. So I do think it will be higher than we pay when we're drawing from the grid. But what we will do as we do at all the front of the meter sites, we will manage that curtailment. So we will avoid the most expensive free market hours, we will increase the utilization. And I think of it as 3 quarters of the time, it will be that cheap price at Alborz and 1quarter of the time, it will be closer to Bear and Chief.
And our next question is coming from the line of Joshua Siegler with Cantor Fitzgerald.
First of all, I know it's still early stages, but I'd love to understand how you're thinking about the pace of CapEx spending and the rollout of that spending as we head into the Black Pearl energization.
So it's early days, and we're still at the point where we're testing different design decisions at Black Pearl. So we're looking at air cooling. We're looking at hydro. I would say maybe we haven't completely ruled out immersion, but we're not favoring it. It's more likely to be hydro or air cooled. As we look at cost projections at that site, it's running in line roughly with Odessa. So Odessa, we came in just above $500,000 per megawatt for the non-rig infrastructure. We're tracking towards the same thing at Black Pearl. I'll say one difference though, at Black Pearl. Technically, we're building and owning the substation there for a 300-megawatt site. So if you include that as well, that would take -- at the average cost, again, it's early. We like to build in contingencies, et cetera. But we're forecasting $650,000 to $700,000 per megawatt for the non-rig infrastructure. And then, of course, should we choose to put all the T21 there, we've got that price is fixed and partially paid already. So I think in the course of that process, that CapEx, we've paid 20-something million so far, below $20 million. And if you mark our to market our Bitcoin today, we've got about $165 million or so or I should say, at the end of February, if you look at the numbers that we reported between cash and Bitcoin. Thus far, March has been a strong month, obviously, with Bitcoin value. So between the cash on hand and what we expect to be ongoing operating cash flows, we're very comfortable certainly with the first half of Black Pearl. And as we continue to watch the market dynamic, I'm hoping that we'll push forward to try to do the full $300 million from day 1.
And look, in your presentation, you broke down your energy cost buy side on an all-in basis. And I think it's very helpful, really points to the operating leverage inherent in this business. I'm curious, as Black Pearl comes online, how are you thinking about its impact on your all-in energy cost per Bitcoin mine moving forward?
So let me give some color on how we're thinking about it. It's hard to project exactly. So Black Pearl is a front of the meter site, but it is -- so what we will do is manage curtailment, and we plan to participate in demand response programs in Texas, so things like ancillary services. So to give some color, I mentioned, if you were, what I'll call a basic model, Bitcoin miner that just flips on machines and runs them 100% of the time. The cost in a spot like that in Texas would be something like $0.06 per kilowatt hour, which is not that attractive to us, much higher than the rest of our portfolio. If you then manually operate and trade and curtail to basically mirror what we've traded in curtailment at Odessa, but there, we've got it baked into the contract as a fixed price. So in other words, think about we shut off the 5% most expensive times for floating prices in the market, which is basically what we have to do at Odessa. That would take that $0.06 price somewhere down to like the mid-$0.03, $0.035, something like that. If you then make all the trading decisions around power optimization, so things like participating in the ancillary services market, looking at real-time versus day-ahead markets, thinking about other things like congestion trading and other things we can optimize, if you did it perfectly, which we will not, but we will aim for, we think you could get the price actually on a net basis below $0.02 per kilowatt hour. So in reality, the way we will operate the fully scaled up site, I would currently forecast to be somewhere between, let's call it $0.02 and $0.05 on a net basis. And so depending on how that ends up, that's right on top of our portfolio basically.
Our next question coming from the line of Bill Papanastasiou with Stifel.
Congrats on the [indiscernible]. I just have one here. Tyler, I was just hoping you could share your thoughts on how you see the industry evolving over time with respect to consolidation. If we look at the universe of public Bitcoin miners, it's evident that operators who focus purely on Bitcoin mining have achieved arguably superior financial performance and scale. And a number of these players are building massive data centers. And so what's your take on the appetite to acquire subscale peers. Has that diminished at all?
I'd say we look at everything. We're always looking for an opportunity. I think often sites are for sale or sellers are distressed for a reason. Sometimes I'd say most typically, we screen things out because we're just not interested in power prices that we don't think are sustainable through Alborz and Bear cycle. The competitive landscape is getting larger and larger scale. It does make sense that the large-scale players are going to do better on a going-forward basis. I think being a registered company in the U.S. gives people great access to capital markets to fund expansion and also gives you scale to negotiate lower CapEx, et cetera. I think there are folks out there that are basically to your point, maybe Bitcoin mining is not working that well and the shiny new toy is something like AI. We've looked at all kinds of AI proposals and eyeballed it. That is not currently on our road map. We are much more interested in opportunities to integrate upward into the power industry. And so we'll continue to look at that. But I think going forward to your question, it's dynamic. Bitcoin prices are going up so fast right now. Who knows what the price is going to be at the halving? Maybe Bitcoin price bills some of the less efficient guys out. But if you assume we go forward with very large network cash rate growth and noncompletely parabolic Bitcoin price increases. I think you're going to see dispersion among the miners. I think people are going to stop looking at these companies as the same thing and seeing them trading all in line. And as I mentioned earlier, in our case, we think the ability to have a team, a company operations technology that can effectively produce its own cheap power from the free market in the way we interact with the grid, particularly in places like Texas, that's just going to make us more sustainable. So from an M&A perspective, the challenge is we don't love the hosting business really in either direction around having with new chipsets coming out. I think that business is going to be challenged. And so we're less interested in general in sites that are for sale that have hosted clients with contracts or maybe have obligations on the power side that they can't necessarily pass through to clients. There are challenges like that that sometimes make things for sale. Overall, I think the differentiator for us is are there companies that look at Cipher and say, "Wow, those are the best-in-class unit economics and they have large scale and expansion and a clean balance sheet. So we'd love to effectively aggregate with them to become a very large player." I think that could be something that becomes interesting to us. There is an interesting valuation gap in our opinion, between us and some of the biggest miners where we think we're running a better company, frankly. And so if there are opportunities that we think are very good price and very accretive to shareholders, we're certainly looking.
[Operator Instructions]. Our next question coming from the line of Joe Flynn with Compass Point.
Most of my questions were asked, but I thought maybe just ask about one thing that was brought up earlier was at some point the fixed year PPA, I think it's a 5-year deal. But can you walk us through maybe the process of renegotiating that? You guys have clearly demonstrated that best-in-class economics. And do you ultimately see risk there? And just regarding that, are those deals still out there for call it, newer miners that haven't demonstrated that track record yet?
I think from our perspective, part of the reason that contract was set up as fixed prices, the market was a little bit cheap on a forward basis, and we could lock those prices over 5 years. And so we chose to do that. As you mentioned, we've got 3.5-ish years left on that contract. We're in constant negotiations and it's a symbiotic relationship with our power provider there because they're giving us curtailment notice is we're managing curtailment. We provide a lot of data. We're in constant contact with them. So listen, even with that amazingly cheap price, over the life of that contract, we're going to pay something like $0.25 billion to our power provider. So I think there's every commercial incentive for us to keep working. We are co-located with their data center and we're in constant negotiations about things that happen beyond that 5 years, but also expansion opportunities, other opportunities potentially at sites with them and other places, et cetera. So I'm optimistic that over time, will extend or alternatively, if there are amazing sites down the street, we certainly have that capability now with 4 larger data centers in Texas and hopefully more in the pipeline as they come available. We'll find whatever the best outcome is for shareholders, but we've got a few years. I think you asked if those opportunities are available to new miners, I would say they weren't even available to old miners because that counterparty, for example, gave anecdotes about how lots of miners had knocked on their door for an opportunity. And from a counterparty perspective, we showed very professionally, we could post double-digit million dollars of collateral to support the contract, et cetera. So I think it's hard to go through the counterparty analysis, even if you have built space. Right now, as far as doing new deals like that, I mentioned the economics that we can effectively replicate from how we curtail at Odessa to take a front-of-the-meter floating price site. And more or less through the tech ops and trading stack we've built manufacture our own results from the floating price. I think that means that right now, floating price is more attractive than what we've seen for market hedges, which is why right now, we haven't been doing as many fixed price deals. That will change over the course of years, cycles happen. So right now, I think the best way to do it is to try to manage curtailment manually and participate in those demand response programs, whether you're us or anyone else. I think the difference is we've invested years and a lot of money in a team, a tech stack in an operations set of procedures and people that can manually operate and take advantage of produce those economics. I think it's very hard to do at smaller scale or with a different team.
Our last question in question is coming from the line Mike Colonnese with H.C. Wainwright.
Curious to what price range you'd consider on a cost per megawatt basis to acquire infrastructure as you evaluate some of these M&A opportunities out there?
I'd say it's dynamic like everything else, the Bitcoin price is going up, enthusiasm is going up. I don't think anyone's ever going to get the price we got for Black Pearl. We paid $7 million for a 300-megawatt ERCOT approved site. So now it's not built, but having the approval and capacity to go to 300 megawatts is an amazing price and far, far less than I've seen anyone achieve. I think it's dynamic. It's really site by site. It depends on what you're buying, what the power contract is, what are the opportunities to do things like manage your curtailment and be paid for that so that you can again, manufacture your own cheaper prices. And then if there's hardware there, what's the state of the hardware? And we're doing diligence on some sites. Some sites to hardware is pristine at other places, it's not. And so coming up with a secondary market value for things like if there are rigs there, substations, transformers, et cetera, is a building, containerized, et cetera. So I'd say every situation is a little bit different. But where we always start is we typically look for a minimum of scale. We screen out things most often below 50 megawatts unless there's a compelling reason to look at them. Next thing we look at is the power, how sustainable is the power? What are the risks that the power could change? What's the regime like? Et cetera. And then beyond that, it's a market price evaluation of what equipment might be there. So it's hard to give a stock answer to that other than basically anything we do with capital that the company starts with a return on investment calculation. And that's whether we're buying rigs, buying power or buying a site. And so all I can say is we will remain very disciplined and try to make investments that we think are going to have a fantastic return for shareholders.
And that's all the time we have for our Q&A session.I will now turn the call back over to Mr. Tyler Page for any closing remarks.
Look, thank you very much to everyone that participated on the call. We are really excited. We have been thinking about the halving for years when we built this business and even this earnings call, getting excited to talk about where we would be positioned going into this really transformational period in the space. So thank you for your time, and we're very excited to give you further updates in the coming months.
Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.