Q4 2023 Cipher Mining Inc Earnings Call

Participants

Josh Kane; Head of IR; Cipher Mining Inc.

Tyler Page; CEO; Cipher Mining Inc.

Ed Farrell; CFO; Cipher Mining Inc.

John Todaro; Analyst; Needham & Company

John Bridges; Analyst; J.P. Morgan

Joseph Vafi; Analyst; Canaccord

Gregory Lewis; Analyst; BTIG

Josh Siegler; Analyst; Cantor Fitzgerald

Philip Meisel; Analyst; Stifel

Joe Flynn; Analyst; Compass Point Research & Trading, LLC

Mike Colonnese; Analyst; H.C. Wainwright.

Presentation

Operator

Good morning, and thank you for standing by, and welcome to Cipher Mining 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.

Josh Kane

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, Cypress' 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 filed at the end of our earnings release issued earlier this morning. I will now turn the call over to Tyler page. Tyler?

Tyler Page

Thanks, Josh. Hi, this is Tyler page, CEOC. for 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 four 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 Exa hash per second. For those that follow the bitcoin mining space, you already know that 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 having 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 well planning for the having four years, we are built to succeed with approximately 96% of our portfolio energize through fixed-price power at an industry low cost of electricity of roughly $0.027 per kilowatt hour as a reminder, electricity represents the large majority of our operating costs and our low price is a key driver, our best in class unit economics.
Furthermore, as we complete our expansions at bare and Chief and complete the full Black Pearl site. Our overall rig fleet efficiency will improve from 29.9 joules. Proterra has currently 22 joules Proterra house.
Turning to our growth plans. We expect to complete 30 megawatt expansions at each of our bare and chief joint venture data centers in the second quarter of this year. And for those expansions to add 1.25 extra cash per second of self mining capacity to our production.
We also expect to add an incremental 0.6 to 0.5 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 BlackPearl, 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 rates.
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, CYPHER sales, 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 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 FCC'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 product.
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 minor 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 cash rates, which suppresses minor ECONOMICS, perhaps most noteworthy for Cypress shareholders and prospective investors.
On February 26th, our majority shareholder bid theory announced plans to distribute the majority of its Cypress shares and breakup its concentrated position on our cap table, we believe greatly reducing our largest investor's ownership concentration, increases our free float and create a positive liquidity environment for our shares overall as we move forward as we head toward the halving 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 our acquisition opportunities over the past several months and expect the opportunities to improve as we go through the having. 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 the time line for expected expansion in our self mining hash rate in 2023, we paid an average all in electricity costs 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 mean the total cost to deliver electricity to our mining rigs.
So our numbers include all transmission and other charges and our low numbers dramatically demonstrate our competitive advantage on the left side of the slide, you have a snapshot of our four 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 year.
And a half. 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 five 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, and we'll talk more about it in his remarks. We currently generate approximately 6.4 extra cash 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 elbows data center, which we believe is a truly unique site. Outdoors is 100% powered by wind. And as 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 power is roughly 1.3 extra hash per second of rig eyeballs 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 our doors 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 parent chief data centers. Combine the sites operate 20 megawatts, which can generate approximately 0.7 extra cash per second and can generate roughly 1.1 bitcoin per day.
And current market conditions and chief are also structured as joint ventures and future shared economics. Similar to Alberta, 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 CYPHER.
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 FEDERAL.

Ed Farrell

Thank you, Tyler, and hello to everyone on the call as a reminder, for those following the webcast presentation, I'll be referring to our results for the three months and 12 months ending December 31st, 2023. I will discuss some of the key financial metrics for Q4.
Paul provide some additional fourth quarter color as well as walk through our full year results. This quarter marked our first quarter of operation since inception with all four of our data centers being fully deployed.
And it's a testament to the dedication and tenacity 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. And achieving we all take great pride at that 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 base 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 with our within our business model.
Looking ahead, we're 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 having in raising debt or cash rates, which are challenges that all of our competitors face.
However, we firmly believe the cycle 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 our deficit as a result of 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, fast be released new rules mandating companies to adopt the new standard for the fiscal year after December 15, 2024. For Additionally, fast be provided companies the option to early adopt the choice we made for the 2023 fiscal year.
We underwent a rigorous process to transition this to this new standard and assessed our realized and unrealized gains and losses as well as the impact of previously reported bitcoin impairments, 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 was $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 700 beauty bitcoin We held had in Treasury on December 31.
That number is up from 389 bitcoin we had at year end 2022, which was valued at $6.3 million net of impairment. As always, I'd like to dedicate a few minutes to the value of our progressive PPA derivative asset.
We have previously highlighted the significant competitive advantage provided by our power contract at Odessa. As a reminder, we began publishing for third party mark for this agreement for the third quarter of 2022 that Mark is represented as a derivative asset on our balance sheet that gets revalued each reporting period essentially 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 two 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 protests of facility.
This figure includes minus 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 coal sites, and that's related for a CON approval.
The remaining $1.1 million relates to capitalized software at year end, our equity investee interest in Alberta's balance sheet stands at $35.3 million. Our operating lease of 7.1 is primarily related to real estate leases.
Additionally, deposits of $23.9 million includes the previously reported Luminent's security deposit of $12.5 million and a $6.3 million deposit to Encore related to Wipro 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 the $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 quarter results. Considering this marks our first full quarter of operations with all four 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 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. 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 debt facility. 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 invest in building out our team, increasing our headcount 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 miners and equipment and leasehold improvements at Odessa being in service for a full year compared to only two 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 in 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 contributions of miners to our JVs. At the time would Maina 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 warrant liability, stock compensation expense and other nonrecurring gains and losses.
These supplemental financial measures are not measurements of financial performance in accordance with US 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 yielded 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 four 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.

Question and Answer Session

Operator

Thank you, ladies and gentlemen, to ask a question, (Operator Instructions)
John Todaro, Needham & Company. Your line is open.

John Todaro

Great. Thanks for taking my question. And congrats on the quarters quarter guide looks pretty solid despite the year for a dumb without even the accounting rule changes. I guess two questions, maybe one for each of you add when you talked about operational leverage Booz.
So we noticed that as well as the G&A coming in a little bit lower than where we actually estimate for Q4 from if you can grow access to nine plus in G&A flat at '24. It seems like another big boost there. Is that how we should be expecting G&A to basically be flat over '24?

Tyler Page

Yes, good morning, John. Thanks, Rick. Thanks for listening and thanks for the question. But I would look at G&A over the next two quarters and being relatively flat. We don't look, as we've mentioned, we've built out the team.
I think we'll get a lot of leverage from building out the team as we bring on more excess cash and we expand of our end, our data centers, we should expect some additional depreciation, depreciation and amortization. But when you neutralize that for 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. Is that helpful?

John Todaro

Yes, that I think that, um, and then Tyler, on the jewelry side of things and apologies if I missed this, but can you just remind us on how many shares that vary still has right now, the time line for that distribution? And then I believe there is no more lockups. Is that correct?

Ed Farrell

Yes. Hey, John. So let me let me actually add one more piece of color to the answer about SG&A because I think it's important for context and then I'll answer the bid theory question as well. I mean, I know you asked sort of for specific near term, but I think it's important to think about SG&A, especially as we come into the halving.
And 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 happening.
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 kind of two ways to seek out that cheap power, some folks not not safer.
We 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 minor 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 one on doing this is to go to a place like Texas, where you can monetize the curtail ability of these data centers. And as we've talked about often, our data centers can 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 sort of 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 tried to run your rigs 100% of the time.
And 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 sort of 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 RSG. and A. is building a different company with a different skill set of people and it scales very well so whereas I think now, you know, we're going to we're at half of less than half of the output will be from a megawatts perspective.
And like a third less than a third of what will be from a hash rate perspective after we bring Black Pearl online that SG. and A. scales very, very well. It is not a linear scaling and so and your specific question was about the next quarter or two.
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 sort of 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.
Yes, so Fury 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 [Fury]. And so that will be below 20% of our overall shares, we have raised some money via the ATM.
So it will even be a little bit less than that on a percentage basis. And that's in process right now. I don't know exactly where they are in that process because that's sort of outside of my conversations with them. But I know it's sort of very short term.
They're 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 CYPHER business model. We love how you create your own a 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 that. We focus every day on building a great business, but of course, we want to also have Cypress 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 sort of short circuit the time line here. These are shares that are being distributed a bit here you already own. So it's not adding new shares. Is your existing shares going to investors that have been invested in theory 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 and 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 income from our next question.

Operator

John Bridges, JPMorgan. Your line is open

John Bridges

A few housekeeping questions. I guess it was in a second, but I wanted to ask you guys announced a big purchase with big main movers in December and included an option for 2024 for a look at your desk a site. And it has a very impressive power costs, which does a pretty agile.
Proterra has a question is, does it make sense to swap out machines at Odessa for maybe the T20 ones, some kind of how do you think about that? Was the calculus for doing that and I have a few follow-ups. Thank you.

Tyler Page

Sure, it's a great question, Reggie. The current plan is not to put the T. 20 ones from that large order. You mentioned which includes if you fully exercise the option up to 15.8 Exa hash of T. 20 ones, and that's it $14 at Terra hash, which is just an awesome price.
You know, if you look at the profitability of kind of where we are call it in F 19, J. Pro efficiency right now, it's hard to keep up with this but I think it's about at $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 at our current plan is not to use those at Odessa. We recall that we do have an order of 1.2 extra hash of S21 and 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 and 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 excess cash in the second quarter and the 9.3 extra cash in the third quarter. That's largely the balance sheet expansions, but then also that's this swapping out and optimizing of the lowest sort of efficiency rigs at that site.
I mean, one of the thing I'd say is even at our current efficiency I think industry average is more like 34, 35 deals that Terra has were 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 jewels Proterra ash, but that's the current plan.
I also we mentioned I mentioned in my prepared remarks that we are also working on various hardware and software optimizations. Obviously, over time, we learned a lot about operating these rigs in sort of environmental specifics and there are various software and hardware tricks of the trade that we also used to squeeze extra efficiencies out of those.
So even our least efficient machines are becoming more efficient, just through minor upgrades, it don't include like a full swapping out.

John Bridges

And just just to kind of clarify there. So for that bid main announcement in December, there was a piece of it was 20 or 2025 there was an option for 2024. I guess, based on what you kind of announced and disclosed so far today and in the last few weeks, are you 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 that beyond '24? And then my last year soon after a lot of good right.
There is, you know, that are colored lights. It allows us the last one you made last year or yes, in the last month, it was what's your what is your appetite for tuck in acquisitions? Is my first question makes sense.
Like I'm trying to figure out like 100% relative to that option yes, it has it has it been is it accounted for is it spoken for? And if not like, what is the plan for that?

Tyler Page

Yes. So the sizing of that option is tied out with BlackPearl.
So we could build the full 300 megawatts of Black Pearl buying rig T. 20 ones for $14 at a Terra hash. 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 walk out to 25.1 Exa hedges assumes that we plug in all those T. 20 ones at that site. And keep in mind that 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 Tara has 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 sort of great thing about this time line that we've got is also to your answer.
Your second question about tuck-in acquisitions, and we are spending a lot of time looking at opportunities there is a lot for sale and 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 Mid-Maine option right away to fill it, fill whatever we buy with new rigs.
And then we can source other rigs for sort of the back half of Black Pearl. But at a minimum, we can use the full option to build all of Black Barrel. And it truly has optionality if we find a better way to use the investor.Does that make sense and does.

John Bridges

That does that it does make sense. One last point of clarification on that. So I assume that that means the option piece of it can be exercised at any point in '24 and not necessarily at the end of '24, correct?

Tyler Page

That's right.

John Bridges

That's perfect. Thank you so much.

Operator

Joseph Vafi, Canaccord. Your line is open.

Joseph Vafi

Hey, guys, good morning. Great to see the Q4 results and the adoption of new accounting standard, some just Jill, 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 a having an effect on your operating strategy, the build-out strategy and the high-low strategy.
Could you move black Pro forward faster now with some, you know, a higher, you know, average price per bitcoin selling them or does it make sense to hobble? Or do you have a less because the price is high? It's kind of a high-class problem, but just trying to see how it's affecting the business and maybe tweaking the strategy.

Tyler Page

Thanks, Joe. So good question. Because 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 there 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 challenges, there's a 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.
And we sort of 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 and 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 fee bills 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 sort of known binary events, right 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 end market price sort of sell either selling at a better price than was in the market to buy downside insurance. And we continue to do that as well as looking 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 but having 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 that 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 sort of building the full Black Pearl. But look, when we look at acquisition opportunities, it certainly is nice to have that going up.

Joseph Vafi

Sure. That's great color. Thanks, Tyler. And then, Jim, just on I just wondering, transaction fees have been kind of in the news and I know you mentioned that how material was that in the quarter on on relative to overall revenue?
And I'm just trying to think about, you know, post having transaction fees, if you had any thoughts on that. Thanks a lot.

Tyler Page

Sure. So I think it's a really important thing to keep in mind if you evaluate investing in a Bitcoin miner. And again, we sort of 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 in a short timeframe. Investors are 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 the same investors certainly seem to like MicroStrategy quite a bit. And I think that draws a lot of the eyeballs that were 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 they're sort of options to 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 was very important. I mean, 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 and they're not always sustained. Sometimes there's, you know, a hot BRC. 20 token, typically from Asian investors. I think sometimes we're trying to figure out like what's driving the fees today.
And we saw periods we had days where we more than doubled our Coinbase 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 sort of lever operationally leveraged operating business, but your long 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.
So 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 PointBase rewards.

Joseph Vafi

Got it. Thanks. That's good color, much. Appreciate, Tyler.

Tyler Page

Yes, thank you.

Operator

Gregory Lewis , BTIG. Your line is open.

Gregory Lewis

Yes, hi. Thank you and good morning and thanks for taking my question from Tyler. I was hoping for a little bit of an update on our borrowers and where are the statuses of getting grid connected to their and any kind of time lines and thoughts around what else needs to happen in terms of spending to make that happen?

Ed Farrell

Sure. Thanks for the question. So I 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 and 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 just I can't it's hard to 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 Alberta. Should we choose to do that the grid connection you would think would add we're roughly 20% or so of uptime to the machines that are already there. And so it would be no meaningful it's not going to move the entire ship, but it's an excellent way to squeeze more out of what we already have.

Gregory Lewis

Okay, great. And then just as we think about that then obviously the electricity costs there probably best in class. It may be that with the grid connection, maybe it sort of trends up somewhere in more in line realizing that electricity pricing, you mentioned the PPA, but maybe it looks a little bit more like Odessa.
So maybe thinking more on that. I guess what I'm wondering is that the utilization improvement for probably far outstrips the as you know, I guess higher marginal cost of the electricity. Is that kind of interest rate?

Tyler Page

I mean, I think of it this way, right. So power tentative. First of all, our cheapest power in the portfolio as we show in the deck is at Albacora. And so it's great when the wind's blowing that is the strongest you know 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.
Obviously, 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 it all the front of the meter sites, we will manage that sort of curtailment, right?
So we will avoid the most expensive free market hours will increase the utilization. And I think of it as three quarters of the time, it will be that cheap price and outdoors and one-quarter of the time it will be closer to bear and chief.

Gregory Lewis

Super helpful. Thank you for your time.

Tyler Page

Yes. Thank you.

Operator

Josh Siegler, Cantor Fitzgerald. Your line is open.

Josh Siegler

Yes, hi. Thanks for taking my question, guys. First of all, I know it's still early stages by love to understand kind of how you're thinking about the pace of CapEx spending and the rollout of that spending as we head into the Black Pearl Energy Center division? Thank you.

Tyler Page

Sure. 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.
So 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 the average cost. Again, it's early. We like the building 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 20 ones there. We've got that prices fixed and partially paid already. So we've paid. I think in the course of that process of that CapEx, we've paid 20 something million so far from the low $20 million.
And then between the fees, Mark are 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 dynamics. And I'm hoping that we'll push forward the tried to do the full 300 from day one.

Josh Siegler

Yes, understood. Then power, other public color and look, you know, in your presentation you broke down your energy cost by five on an all-in basis. And I think it's very helpful merely pointing out the operating leverage inherent in this business.
I'm curious, no blood flow comes online. How are you thinking about you know its impact on your all in energy cost per bitcoin mines and boards.

Tyler Page

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 up a basic model, Bitcoin miner that just flips on machines and runs them 100% of the time costs in a spot like that in Texas would be something like $0.06 per kilowatt hour, which is not that attractive to us much, much higher than the rest of our portfolio, if you then sort of manually, operate and trade and curtail and to basically mirror what we've treated in curtailment at Odessa.
But where we've got it baked into the contract is a fixed price. And 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 is $0.035, something like that if you then sort of make all the trading decisions around power optimization.
So things like participating and actually 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. And 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 $0.025 and $0.035 on a net basis, depending on how that ends up. That's right on top of our portfolio basically.

Josh Siegler

Understood. Thank you.

Operator

[Philip Meisel], Stifel. Your line is open.

Philip Meisel

Yes, good morning, guys, and congrats on the Pennant Thank you for taking my questions. I just have one here. Tyler 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 big 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?

Tyler Page

Thanks for the question. I'd say we look at everything we're always looking for an opportunity. I think you know, 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 a bull and bear cycle.
The competitors, 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 in a 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 a eye. We've looked at all kinds of AI. proposals and eyeball that that is not currently on our road map, we are much more interested in opportunities to sort of 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. I mean, 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 non completely parabolic bitcoin price increases, I think you're going to see, but 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, and that's just going to make us more sustainable.
So from an M&A perspective, the challenges, you know, I don't we don't love the hosting business really in either direction around having with new chipsets coming out. And I think that business is going to be challenged.
And so we're less interested in general and 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 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.

Philip Meisel

Great. That's a touch. That's amazing color. I think the strategy makes sense just given your superior unit economics, I don't know them the lowest cost producer of commodity or which ones and that's all the questions I have, Sanjay, thank you.

Operator

(Operator Instructions)
Joe Flynn, Compass Point. where your line is open.

Joe Flynn

I guess most of my questions were asked, but I thought I'd maybe just ask about one thing that was brought up earlier at some point that, you know that fix your PPA, like if I think it's a 5-year deal.
But can you walk us through maybe the the process of renegotiating that maybe you guys have clearly demonstrated, yes, best-in-class economics and fueled ultimately seems like risks there.
Just regarding that, like are those kind of deals still out there for you Cognite, newer miners that have demonstrated a track record at fixed.

Tyler Page

So thanks for the question. I think from our perspective, part of the reason that contract was set up is fixed prices. The market was a little bit cheap on a forward basis, and we could lock those prices over five 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 sort of a it's a symbiotic relationship with our power provider there because they're giving us curtailment notices. We're managing curtailment. We provide a lot of data.
We work.
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 a quarter billion dollars 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 five years, but also expansion opportunities, other opportunities potentially at sites with them in other places, et cetera.
So I'm optimistic that over time will extend or alternatively, if if there are amazing sites down the street, we certainly have that capability now with four larger data centers in Texas and hopefully more in the pipeline as they come available and we'll find whatever the best outcome is for shareholders.
But we've got a few years. I think you know, yes, if those opportunities are available to new miners, I would say they won't even offer available to old miners because like that, counterparty, for example, gave anecdotes about how lots of miners had knocked on their door for an opportunity.
And, you know, from a counterparty perspective, we showed very professionally we could post double digit million 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 upfront 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 tried to manage curtailment manually and participate in those demand response programs, whether you're us or anyone else.
I think the differences we've invested years and a lot of money in a team, a tech stack and an operations set of procedures and people that can manually operate and take advantage of produce those economics, I think has very hard to do smaller scale or with a different team.

Operator

Mike Colonnese, H.C. Wainwright.

Mike Colonnese

You lend itself and good morning, guys. Great quarter and thank you for taking my question this morning. I'm 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?

Tyler Page

Thanks. Mike. And I'd say it's dynamic like everything else, right? Meaning Bitcoin prices 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, our COD approved site.
So now it's not built, but but having the sort of approval and capacity to go to 300 megawatts. It's an amazing price and far far less than I've seen anyone achieve. I think it's dynamic and 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 sort of.
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, the hardware, pristine, it at other places, it's not. And so coming up with a secondary market value for things like if there are rigs, their substations, transformers, et cetera, sort of building containerized, et cetera.
So I'd say every situation's 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.
The next thing we look at is the power, how sustainable is the power? What are the risks that the power could change? Are there? What's the regime like, et cetera. And then beyond that, it's kind of a market price evaluation of what equipment might be there. So it's hard to give a stock answer to that.
Other other than basically anything we do with capital at 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 trying to make investments that we think are going to have a fantastic return for shareholders.

Operator

Thinking about the time we have our Q&A session. I will now turn the call back over to Mr. Tyler page for any closing remarks.

Tyler Page

Well, look, thank you very much to everyone that participated on the call. We are really excited. We have been thinking about the having for years and we built this business and even this earnings call getting excited to talk about where we would be positioned going into this really transitional transformational period in this space. So thank you for your time, and we're very excited to give you further updates in the coming months.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.