Argo Blockchain plc (NASDAQ:ARBK ) Q1 2022 Earnings Conference Call May 18, 2022 8:00 AM ET

Tom Divine - VP, IR

Good afternoon, ladies and gentlemen, and welcome to the Argos Blockchain plc Q1 2022 Results Investor Presentation. Throughout this recorded presentation, investors will be in listen-only mode. [Operator instructions] The company may not be in a position to answer every question receive during today’s meeting. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, we would like to submit the following poll, and as usual, I'm sure the company would appreciate your participation.

I’d now like to hand over to CEO, Peter Wall. Good afternoon.

Thank you, Mark. Thanks everyone for joining us this afternoon or this morning, depending on where you're located. I’m Peter, I'm the CEO of Argo Blockchain. With me today also is Alex Appleton, who is our CFO, and Alex is in the UK, and Tom Divine is with us as well. He has his camera-off. He will come on for the Q&A section at the end. Tom is our Head of Investor Relations.

So we're going to walk through our Q1, Q2 -- sorry, our Q1 2022 earnings presentation. This slide will look familiar to you. It's our normal legal disclaimer. I'm not going to go through it, but it covers the usual language about forward-looking statements.

All right. So our opening side is our classic Argo at-a-glance slide, again familiar to many of you who've tuned in to our presentations over the years. Not much has changed on this slide, since our presentation last, I guess, it was a few weeks ago, our 2021 year-end call. Our contracted hash rate is 3.6 Exahash that includes 1.6 Exahash of our current capacity along with another 2 Exahash from our Bitmain order, as we -- I think as everyone hopefully knows.

We've already started installing this 2 Exahash of machines from Bitmain order at Helios and we are expected to complete that process by the end of October. Installation is going well. Team on the ground is doing a great job. So the 3.6 Exahash translates into about 44,000 mining machines and that's about 24,000 of our current fleet and then another 20,000 from Bitmain order that I was just talking about.

I think, again, as everyone knows at Argo, we're very focused on sustainability on ESG. We were the first bitcoin miner to be 100% carbon-neutral last year and are continuing that this year. Our Bitmain HODL at the end of the year was just under 2,700 Bitcoin and Bitcoin Equivalent and 10% of that is allocated to Argo Labs for non-mining activities that is our innovation arm.

As we discussed on the last earnings call, we are now more comfortable with using a portion of our monthly mining Bitcoin to fund our operating expenses and continued growth. So we'll talk about that a little bit later as well. And lastly, our mining margin for Q1 was 76% amongst the highest of all our peers and a really good number considering market conditions for the first quarter.

All right. Slide number 4, is kind of a snapshot of our 2021 -- I can’t see there, our Q1 2022 results. We generated revenue of $19.5 million, just under GBP15 million, that's a 9% increase over our revenue from the first quarter of 2021. Our adjusted EBITDA, which excludes non-cash items like share-based payments and unrealized change in the value of our HODL was $19.1 million or GBP14.5 million. Our net income came in at $2.1 million, or GBP1.6 million. We mined 470 Bitcoin, which is a 21% increase over the same period last year.

I also mentioned earlier, our money margin for the quarter was 76%, that translates into a direct cost per Bitcoin mined of just under $10,000, $9,779 to be exact, or GBP7448. This money margin is a drop from the 84% mining margin that we saw for the full year of 2021 and that's primarily due to higher global hash rate and the associated increase in difficulty and that's not surprising, we knew that if Bitcoin -- if the price of bitcoin didn't come up and network difficulty continue to rise that money margins would likely come down a little bit for the first quarter of this year.

At the end of the quarter, we HODL 2,700 Bitcoin and Bitcoin Equivalents on the nose -- on the balance sheet. Just a quick note in terms of transparency, I want to acknowledge these results are not the best we've ever had. We always knew that Q1 was going to be a bit of a slog. We knew that we'd see some sluggish performance as our hash rate stayed flat at 1.6 Exahash, while we were building at Helios. The focus for Q1 was to get Helios online. We've done that. I'm very proud of our operations team for doing as well as we've done with the 76% margin for the quarter, amongst the highest of our peers, as I said. And obviously, I'm super proud that we launched Helios two weeks ago.

All right. Onto a few more points for Q1 2022, again, our focus rather than growing our hash rate was executed in clients for us Helios. Along those lines, I've said many times, looking forward, you need three things to be successful minor, you need access to power, you need access to raise, you need access to capital. We're very well set with access to power at Helios, our interconnection agreement there is 800 megawatts capacity.

I know that there has been reports out, people have been talking about ERCOT slowing the pace of grid connections for new Bitcoin mining facilities in Texas. ERCOT, who are the folks who manage the grid in Texas. We have our interconnection agreement in hand for the full 800 megawatts. So we don't anticipate any negative impacts from adjustments that ERCOT is making. Our specific location as well is a particular advantage for us because we are very far from major centers and there is almost no local load where we're based. So we're really confident in our access to that 800 megawatt.

With respect to rigs, again power rigs capital, with respect to rigs, we signed a supply agreement with Intel to purchase their new Blockscale ASIC chips this year. We'll be deploying those into custom-made mining machines at Helios during the second half of this year. On the capital side, we also strengthened our access to capital by establishing a financing relationship with NYDIG and that came in three different forms. One, was in February. We borrowed approximately $27 million for loans secured by electrical infrastructure that's deployed at Helios. These are things like high-voltage, low voltage transformers, et cetera.

And then just a few weeks ago we signed an additional agreement. This happened after our earnings call. We said, we are continuing to explore debt and then we announced, yes, here's a debt deal and that was an additional agreement with NYDIG to borrow $71 million and that is secured by some of the mining machines at Helios. I'll go into a little bit more detail on these loans -- on this loan later on.

We also signed an agreement with Core Scientific, our hosting provider in the first quarter of this year to do a machine swap. We have about 10,000 S19's that were located at some of Core’s facilities and rather than spend the money and the effort and the time to unplug these machines and ship them to Helios, which would have resulted in downtime. Core is sending us brand new machines, brand new S19J PROs and we're swapping out the machines that we have, that we already have at Core.

So as we install these new machines in batches between May, June, July. Core will take ownership of S19s that are located in their facilities. We've already done the first of those swaps along the way. So it's an elegant solution, it avoids major operational risk and it benefits both us in Core’s, it's truly a win-win. So once that machine swap deal is complete at the end of July, we will be operating all of our machines and will no longer have any machines hosted at third party.

We also officially launched Argo Labs this quarter. I'll talk through a slide on Argo Labs a little bit later on, in some of the projects that they're working on. And finally, we strengthened our Board of Directors with the appointment of Raghav Chopra, formerly a portfolio manager at a large asset management firm in U.S. since left that firms started his own Digital Assets fund and this has allowed him to come and join our board. So we're very excited to have him. He’s added a ton of value already.

All right. Moving on to our Helios update. So definitely, the most exciting thing that's happened for the company in 2022 so far is that we've officially opened Helios, we had an event. I guess it was two weeks ago now. We energize the facility on May 5th, and we've actually started -- we actually started mining Bitcoin that day.

So here's a kind of one of our latest photos, you can see the substation that we've built that's connecting to the Cottonwood Substation in the foreground and in the background is the facility, 125,000 square feet with the air coolers coming out on the side. In that picture, if you look carefully, you could see a tent on the left side down the building where there is -- that was where we had our opening event or part of the event, food for the opening event on May 5.

All right. Moving along, little bit more about our grand opening. So we had about 300 folks in attendance, including most of our Argo team, about 150 to 200 people were from the local community came out to show their support. It was great. We also had U.S. Congressman Ronny Jackson, there to say a few words. This is the first mining facility in his district. He was happy to be there. Happy to learn about the space and learn about our business.

We also had Bill Flores, who is the Vice Chairman of the ERCOT Board of Directors, obviously a good ally to have. He came to give some remarks, ERCOT, as I've said he is excited about the opportunity for Bitcoin mining to play a role in stabilizing the grid in West Texas. So we're happy to have Bill come. We had a bunch of other people there. Last week, we put out a video recap of the day. So if you haven't had a chance, it's up on YouTube, check it out.

We're also going to have a few other videos coming out in the next few weeks about some of the back story of Helios and some of the kind of the trials and tribulations of setting up a large facility in the Texas High Plains, but all said, it was a fantastic day and the team has done an incredible job. No one in Dickens County can believe that we built the facility as fast as we can. In fact, no one in this space can believe that we put it up as quickly as we can. So we're getting a lot of congratulations which feels good because we obviously is a big, big moment for us and a big part of our vision for the future.

All right. So a couple more pictures on the left, you can see the crowd that came out, as I said, a ton of locals had a lot of partners there as well. Lot of people have helped Argo along the way. And we wanted to make sure that they were recognized and had a chance to touch and feel what we're building, and it was awesome to happen there. And on the right you can see, our merchant facility Perry Hothi, our CTO has done an incredible job of coming up with the design and the system for immersion.

Roughly speaking, you can see those tanks, those large silver tanks double-decker those hold the fluid, which cool the machines, the machine sit in those tanks. And then the fluid is pumped. You see the large pumps and houses, that hoses that come out and then the larger piping below, the fluid goes into those and that goes out into those air coolers that you see outside, essentially those air coolers like a giant car radiator and a cool the fluid and then once the fluid is cooled they come back in.

The black boxes which you see on the front of those racks are PDUs, power distribution units and those managed the electricity that flows into each mining machine. So those are important part of any mining facility. We had our custom, RS custom built. You can see their branded Argo and so it's really truly a custom facility from top to bottom, and again this is a new space. This is new technology, and we are at the absolute forefront of it and Perry and their team -- and our team are doing an incredible job. And really feel a sense of ownership over this design of this facility, and that's what we want.

We're good at mining. We're good at running facilities and we've done -- every time we've set out to do something on the technological level we've achieved it and it's hard, it's not easy. That's a question I get all the time, how easy is it to do emerging mining. Why aren't more people doing it? A lot of people aren’t doing it, because it's challenging. But our team can do it, because they are really good. So I'm very proud of the work, the team has done.

All right. Moving on to kind of look ahead of Helios Phase 1. Again, we showed this slide during our last earning presentation, a few weeks ago. It shows the basic kind of work streams moving forward. We've already started installing machines at Helios, let’s pass over the construction because we've done that. The key, the key little dot there is energization dot that's happened started May, so we can check that one-off. Then we've got demand response registration and installation of immersion equipment, those are -- the demand response is done registered for that.

The installation of immersion equipment is happening, is still going on to the end of June, building out ahead of what we already have done so far. Then this core swap machines which are also Bitmain machines, and then the Bitmain orders those are being installed as we speak, as we said, to the end of July, and then the end of August. And then lastly, the Intel machines were in that design, testing phase right now for those. And then the deployment those would be in the second half of this year. We're targeting kind of very late Q3, early Q4.

All right. Slide number 10, total hash rate capacity again showed this slide last presentation at the end of Q1 had 1.6 Exahash of mining capacity. We've started installing machines at Helios and are expecting to increase our hash rate to 2.2 Exahash by the end of Q2. We also start -- expect to start deploying the Intel machines, as they just said during Q4. So that will take us to approximately 5.5 Exahash by the end of the year.

All right. Slide 11 is kind of looking forward to 2023 and 2024 and just kind of wanted to talk through the slide, again just to emphasize the incredible runway that we have for growth at Helios. So Phase 1 200 megawatts of power beyond that we have an additional 600 megawatts that we can develop over the next few years.

Our supply agreement with Intel is a key differentiator for us here. So not only are we going to be deploying these chips, which are more cost effective than buying stock machines, but we're able to custom design these machines to run, specifically in our merchant system at Helios. So we won't have to rely on off-the-shelf machines, but able to put our own form factor and our own software et cetera., into the machines and that will really allow us to take advantage of the merchant benefits.

So all of this adds up to essentially a pretty significant amount of growth into 2024 and that's targeting roughly 20 Exahash -- north of 20 Exahash by 2024 and that obviously includes the full development of the 600 megawatts. So even though, we're still at Phase 1, we've already taken some of the key steps to kind of build-out the next phase. Earlier this year, we announced four additional transformers that will take us up to that 800 megawatts of power. These are long-lead items, you can get a massive transformer overnight. So those take nine, 10 months, so we've got those coming in the first half of next year.

All right. Slide number 12 is our financing our growth. So in our presentation, a couple of weeks ago, we showed the slide and said we need roughly $125 million of additional capital to complete Phase 1 also said, as I mentioned that we'd be looking at primarily at raising debt and selling Bitcoin to fund this capital in early May. We announced the first or we announced the next debt deal $71 million financing deal with NYDIG, we will get into the details of that slide -- that deal on the next slide. But additionally, essentially we need $50 million of capital remaining to, and we expect to finance this with a combination of additional debt and by selling a portion of our monthly Bitcoin production. So we were at $125, minus $70.71 need roughly $50 million of additional capital to build -- fully build out Phase 1 and that includes infrastructure, machines everything the whole kit and caboodle,

All right, our machine financing agreement with NYDIG, so feedback from shareholders large and small is they given where we're at right now, non-dilutive growth, non-dilutive capital is our best factor for growth. Our best way for us to grow. So that's what we've done with this latest machine financing agreement with NYDIG. We have built a relationship with them. Going back to earlier this year, obviously, they have been in this space for a while. We signed an agreement with them to borrow $27 million for building out parts of Helios and that was secured by some of the electrical infrastructure at Helios. So then, we've built upon that relationship with NYDIG and now have this $71 million financing agreement.

The borrowings from this deal, I think as people, if they read the R&S and they saw that the deal, there'll be funded in tranches over the next few months as we take delivery of the S19J PROs that are coming into the facility. The interest rate is 12% on this loan to the average consumer obviously that's very high, if you come from a traditional finance background or if your mortgage in your house, you're like wow, that's a big number, but this is actually a very competitive rate for machine financing.

Alex and I started talking about machine financing with people, not that long ago 18 months ago. 24 months ago rates were 24%, 25%, 27%. They've been in the high-teens for most of the last 12 months. So, getting down to 12% is a good number, but obviously we want that number as low as possible moving forward, and we are seeing the trend in the industry in general is to move towards lower, lower interest rates. So as I said, these machines are secured against the S19J PROs.

All right, Argo Labs. So Sebastien and the team at Argo Labs have been doing a great job. We started Argo Labs last year and launched into the market in the first quarter of this year. So, I mean in a way, we've been doing Argo Labs, since we first came together as a company. We've always been talking about other parts of the ecosystem at least in informal way we had made a few deployments of capital over the years, but now we have officially this thing called Argo Labs. And I think as everyone knows, the focus is on mining activities participating in the disruptive sectors of the broader blockchain and web3 ecosystem.

So far, we've allocated about 10% of our total digital assets to Argo Labs. You can see in the pie chart here breakdown some of those holdings. Poke it out, we first invested in back in 2019, has done very well for us. Makes up a large portion of our labs holdings and then we also have exposure to Ethereum, Solana, Atom near and others. And aside from those specific tokens the team is also looking at deploying capital into early stage projects in the areas of gamefi, NFTs, and DeFi, but it truly is a diversified approach. We're also generating revenue through yield generation by running nodes, staking and participated in DeFi liquidity pairs and others.

Overall, generally, as I've said many times before, the goal for Argo Labs is to take a portion of our Bitcoin holdings and generate additional uplift from those holdings that simply outperforms just holding Bitcoin. Obviously, last week, in the web3 space in the non-bitcoin space, well, in the Bitcoin space too, but last week was a particularly intense week with the collapse of the UST Luna, world Terra ecosystem. We are not super heavily invested in the Terra ecosystem. We did have some UST.

We were participating in yield generation on the anchor protocol, none of these amounts were material, we were able to sell our UST positions at $0.93 which looking back was a very good move given where last time I checked and he was trading at $0.12. So overall, on a net basis in the Terra ecosystem, we nearly broke even on our positions after taking into consideration that generate that the yield that we generated through our holdings there. So we did pretty well all things considered, with what happened.

All right. So that's my portion of the presentation. I'm going to hand it over to Alex. He's going to go into some more detail on our financial performance.

Thanks, Peter. Hi, everyone. Just wanted to echo what Pete said about seeing the facility, first time -- it's the first time that I've seen a facility, couple of weeks ago and really hats off to the ops teams and tech team for -- we've invested a great deal of money there and we're now -- we're about see the rewards from that investment. So really exciting time to be part of that build out and part of that facility.

To go into the figures. So as Peter said earlier, the first-three months of this year. Whilst we haven't been investing in new machines on the ground. We knew that this was be a bit of a difficult time. Having said that, our mining margin is still at 76%. Again, we always aim to be in Tier A (ph) and that is well within the Tier A of our fellow minus. Our cost per bitcoin was just below $10,000 per bitcoin or just of the GBP8,000. So, still very, very competitive and still very, very profitable.

In terms of what we are now starting to present to the market, we’ve made a decision to present an adjusted EBITDA as Peter said, this excludes the share-based payment charge and also with the change in fair value of digital currency and what we think that that really gives the shareholders a view of how the company is performing taking some of the elements that we don't necessarily control out of the equation. So we're taking out those charges which go through or seen, or gains, indeed that is seen in our profit and loss account so that people can see how we're actually performing as a business.

And obviously, as we look at adjusted EBITDA, it was very, very pleasing and a great figure. It's in the high-90s there. So the business is well positioned as we stand today. And as we build out Helios, it’s -- that will continue to grow and we will see the impact of the lower power costs that we were able to get Texas site and how that impacts our cost per Bitcoin as we have machines mining in the immersion facility.

So moving down the P&L, we could see that there is a couple of impacts here, particularly from foreign exchange. So the pound weakening against both the U.S. dollar and the Canadian dollars adverse actually helped our income statement. And we've also had a revaluation of the contingent considerations. This was the monies that we paid -- sorry, the shares that we paid for DPN. They changed their value and hence we had a gain in the face of the P&L for those.

We've seen interest expense increase as we move towards away from the equity and we have lent into debt. So we've seen an increase as we would expect in our interest expense well within asset coverage ratios, and our internal coverage ratios and targets that we have still very comfortably covered off there. So that is our P&L. Again given, given the challenges that we've seen in the first quarter and the challenges we knew we would face, really pleasing to see that we have a net income and a very healthy EBITDA mining profits percentages and results.

So moving onto the balance sheet. We can see that the balance sheet, we have increased, particularly our property plants and equipments. And we've also increased some into (ph) trade and other receivables. The items that are flowing into trade and other receivables are significantly the machine prepayments that we put down for Bitmain and we've also -- we made in the first quarter, we made our first payment towards the Intel machines. So we put a $10 million prepayment down for those as well. We are seeing digital assets move, as we've moved away from the pure debt and equity strategy to a debt and selling Bitcoin strategy. We've seen our digital assets reduced as we sold those off to meet our operating costs and expenses.

On the liability side, we've seen the debt increases, as Peter has talked about earlier. In terms of NYDIG again, very much within our internal targets for debt to EBITDA are forward-looking and backward looking, and we're in a very comfortable position with that. Our weighted average cost of capital is still below 10%. So we're very happy with that. And as Peter said, the 12% on the face of it is, looks appears high, but as Peter said only six to seven months ago, I think we're offered it was in the high-teens.

So we're really seeing those rates come down alongside infrastructure rates are much more in line with traditional factor as well. So, and really pleasing to see how the debt market is maturing and how we've got optionality there to continue our build out. And as Peter said, we presented a couple of weeks ago, the requirement for $125. We've already secured $70 million of that leaving us with $50 million to be spread between debt and also selling of Bitcoin, in the near future to get us to the end of that 200 megawatts Phase 1.

Thank you, Peter. I'll pass it back to you.

All right. Thanks, Alex. So again a classic slide that you've seen from us, three key differentiators. One massive runway of power 800 megawatts in Texas. This I can't emphasize right now, how important that access to power is, and how important Helios is for us. We are continually hearing reports, having phone calls with people in the space, and infrastructure is hard to get right now, and infrastructure at scale is hard to get right now.

Everyone thought that machines, we're going to be -- the issue with the supply chain with chip shortage, machines are not the issue right now, access to power at scale is an issue right now for a lot of miners. So the fact that we're doing it and executing on in Texas is a huge advantage for us and the fact that we have an incredible team, both on the construction side and on the operations side is Texas is another huge advantage for us. So we're very excited about that.

Secondly, our relationship with Intel and our supply agreement that we have with them and the fact that we're building out our own custom machines for immersion is a huge advantage or will be a huge advantage for us in the second half of this year. And then lastly, I think it's important that we, as a company continue to emphasize our climate friendliness, and our emphasis on ESG, that's a big part of who we are, it's a big part of what brought a lot of people into the company or turned a lot of people's attention to the company. A couple of years ago, or even last year and it's something we're going to continue to emphasize. And that's why we are setting up in Texas where there's wind and we're going to continue to be leaders in that part of the space.

All right. So we're going to open it up now for questions. I think Tom Divine is going to come on and he will be our Q&A moderator.

No problem at all. [Operator Instructions] Tom, if I may, if I could hand back to you and just if I could ask you to read out the questions and give response obviously where it's appropriate. Thank you.

Great. Thanks, Mark. Peter, our first question today comes from Ramsey El-Assal at Barclays. Can you help us understand your margin expectations for the remainder of the year. To what extent, will the launch of the Helios facility offset network margin pressures?

Yeah. It's a good question. Thanks, Ramsey. So listen, I think our overall margin is obviously determined by a number of factors, price of bitcoin, power costs and mining difficulty. We have expected this year that mining difficulty would continue to rise throughout the year. Bitcoin price is going be Bitcoin price. We are bullish long term, but in the short term, as we saw over the last few weeks. Bitcoin can be volatile. So in terms of margin expectations. It's not just our power costs that are going to determine what our overall margin is.

That being said, our power costs at Texas are expected to be lower than our operations in Quebec, that's why we set up in Texas because we can take advantage of lower power costs, CLR all of the advantages for being in that competitive Texas grid. It's why we're there. So we think we're in a good place there. We have more control over our operations, but ultimately it's not just the price of power that's going to have an impact on our margins.

So I don't want to be overly bullish and say that we're going to have an incredible mining margin at Helios right now. I think the margins will be good. I think there'll be better than, we're better than Quebec. But I don't think you need to use your word, I don't think it's going to offset necessarily because we don't know where the price of Bitcoin is going to be.

We know the difficulty is going to continue to rise because lots of people have invested in new machines and infrastructure and more power is going to come on, more machines are going to come on, but ultimately the goal is to always be in that upper tier of efficiency and being in Texas will get us into that upper tier of efficiencies or is getting us into the upper tier of efficiency especially with having an immersion facility.

Okay. Thanks, Peter. Next question is from Alex and we've received this a few times. We've said that we'll be focusing on raising capital through debt and by selling Bitcoin how much debt are we willing to take on?

It's a good question, particularly given our strategy going forward and we've given a great deal of thought to internally. So we've had discussions of all level in terms of what level of debt, particularly, as I say, against forward looking, EBITDA, but also against backward looking EBITDA. And as a company, many of you have followed us for a while, that we take a very prudent approach and those targets internally. We've not released the market, but again are very prudent. We wouldn't want to be exposed and part of what our strategy is around that is matching the length of the debt against the assets to which we are financing those again. So if you look at our machine debt, machine debt is financed over a period of two years. Our infrastructure debt is over a period of four years. So we're always taking a very prudent view on the length of the debt that we have exposed against the assets that has also been financed against.

So when we think about that for the rest of the build-out what we will do is, we'll continue with that approach and we also have that when we look at the rest of the build out, we'll be able to take on financing, which we'll be able to, as we build out the rest of Helios in a more modular fashion potentially. We will be able to shorten the lifespan of the debt against the assets to which its financing. So if you think about how we've built our Helios to-date, we've used equity. It's been long lead items and we have a lot of investment for a long period of time. Whereas we expect to bring that down and how that over a much shorter period of time going forward.

And again, as I said earlier, in terms of interest cover and looking at those sort of ratios, our weighted average cost of capital is still in the single-digits. We would expect that to also be the case going forward as we see the maturation of the of the debt markets and the ability for us to have debt against those items. So that's how we're thinking about it and it's a very prudent approach within balance of both forward looking and backward looking EBITDA levels.

Great. And a follow-up question to that, this comes from Darren Aftahi at ROTH. Do you feel like you have ample financing options to complete Phase 1 of Helios? And you just talked about debt, but how much of this strategy involves selling of Bitcoin on a monthly basis? Maybe you can go into that in a little more detail.

Yeah. So, absolutely, yes. We do feel that we have a number of different options available to us. We have machines which are unencumbered, which are -- will be delivered in the second half of Q3 and so we have machines there that we would be able to obtain financing against. There is still some infrastructure, which we could obtain, finance against as well, and we have really good relationships. So we have relationships with, first of all, we've got current relationships with NYDIG and Galaxy are some of the biggest lenders in the crypto space at the moment.

And then we also have relationships with all the -- more traditional sector banks, et cetera., which we're also exploring. So at the moment, we have seen a tightening of the market that that is absolutely true. But what that has meant really is that more newer entrants to market finding it much more difficult to find debt, whereas those who got a proven track record as we have are able to provide the due diligence requirements that are necessary et cetera. So we're finding ourselves, we have options and we have optionality in terms of the debt markets.

In terms of selling Bitcoin, again, we have a strategy around selling our Bitcoin and when is -- when there is obviously a good time when it's about time and we look at that and we could pull back and accelerate that as these be, we're in a very healthy position at the moment in terms of our HODL. How much of our HODL is encumbered or is collateralized against loan et cetera. And we're very comfortable with our position today. So in terms of filling that gap, the $50 million that we talked about, to build out the rest of Phase 1. We're well positioned. And of course, every day, we mine more and more Bitcoin. And so that position is -- improves with every day that passes. Okay.

Great. Thanks, Alex. Peter, our next question comes from Joe Vafi at Canaccord. Congrats on energizing Helios, it might be early, but have you begun using immersion there yet? And if yes, have you up the clock speeds and any other comments on what you've learned there since energizing?

Hey, Joe. Thanks for the question. So yeah, Helios is entirely in immersion facility. So if we were, if we're mining that all, at Helios, we are using immersion. So yes, we have started using immersion. Have we upped clock speeds yet, we are ramping up operations, making sure everything is working properly. We've done some over clocking testing, but we are not over clocking at scale yet. We want to make sure that everything's awesome and working properly. So once, we have more kind of data on everything what over clocking systems like, how that's functioning we will update the market.

In terms of other comments on what we've learned since energizing, the one thing I think I've learned is that how you build the team on the ground for operations is really important and we've done an incredible job of building a team on the ground, our facility manager their lane has a culture of collaboration and teamwork and ownership. So we're working with new technology. We're opening this new facility. The team on the ground already feels a sense of ownership of that space and that's incredible, but that has happened in that short of time. So the HR folks have built that team, the tech culture that Perry and his team have built and in kind of brought to them because you obviously have a big moment like we had on May 5, where we energize and everyone has been working really hard.

And then, Perry doesn't live in Dickens County. He goes back to Ottawa, and he's managing everything remotely and Jean it is also not there. And so you're kind of handing it over to your local staff and now they are running the show. Obviously, Perry's managing things remotely and can do a lot from far away, but the sense of ownership that the team has on the ground is amazing. And that's the one thing that I am most thrilled about, especially, when you're working with new technology, because there are bumps, things do happen and you're always troubleshooting.

And I mean you guys all, everyone uses technology these days, there's always things to fix and to optimize. And so the team on the ground is doing an amazing job. And so ultimately that's why we're going to be successful. It could come Joe to our opening event (ph) I mean my message was, yes, we need these three things machines, power and capital, but ultimately we need people and this is a people business and we're only going to be as good as the team that we have. And one of the advantages, I think that we have as a team is we truly have an amazing team. So that's, I guess the one thing that I've learned.

Thanks, Peter. Our next question coming from the live Q&A is from Thanassis S. As Helios is immersion cooled, can you explain the procedure for receiving the mining rigs to converting them to emerge-cooled setups? How long on average does that take from arrival in Helios to instalment?

All right. Thanks, Thanassis.. Hey, how is it going? You always come and ask good questions. So thanks for asking another one. So the process for receiving miners and putting them in immersion is, it's a little more complicated than if you're just getting them normally and putting them on the shelf, but it's not that complicated. We have a shipping and receiving area of machines coming on pallets. We store them and then when they are ready to be installed. We take them. We un-box and prep them. We prep them by taking off the fans and then, we actually have a team called the dunk team, dunk -- the dunk team and they -- part of that culture that we've already have at Helios, they then take them and duck them into the fluid.

And then once an entire system is ready. So the whole facility is broken down into 4 megawatt pods. And so you can do the math, there's 200 megawatts. So once each system is filled with miners that we power on that pod that 4-megawatt system. So it's a fairly, the team has already developed the process in the system. But essentially, that's how it works. And then obviously once we have our own custom miner, we won't need to remove the fans, because we will need fans on a merchant miner. They will come without fans.

Great. Thanks, Peter. Our next question, what is the criteria for Argo Labs involvement in crypto projects?

All right. So this is -- Sebastian and his team are constantly evaluating projects, some of the criteria that they look at are, the token utility. How useful is that particular token? The track record of the team that is building out the project. The tokenomics of the project. The overall quality of the blockchain and the network that is built on. Is it scalable, speed, decentralization et cetera. And then the community around the project? And that's a key piece, how active is the community around the project, how engaged are they, et cetera., et cetera.

But in terms of those early stage projects that they're looking at those are kind of the basic criteria that they're considering. And most of the time they have direct contact, pretty much all the time with the team. So there's a conversation with the team and even going back to Polkadot like, when we originally invested in Polkadot like we had a conversation with a couple of guys from the Polkadot team, multiple times back in 2019, that's still the process now. We don't just deploy into projects that we don't, we don't know the team.

Great. Thanks. Our next question comes from John S, in the chat. Who has previously forecast that hash rate would be at 1.7 Exahash by the end of the first quarter, but the actual hash rate was 1.6 Exahash, which is where we are now? Why -- what's the reason for this reduction and when will the shortfall will be resolved?

Yeah. Thanks, John. Good question. So the difference is back in 2021, we put in two orders for machines. One of those orders was with a company called Minerva. And it was for that difference 100 petahash, 800 machines for Minerva. Other people put in larger orders. We thought we would put a small order and petahash order those machines was were supposed to come last summer July, -- June, July, they got pushed back. They got pushed back and ultimately Minerva was unable to deliver on those machines. And so we've requested and received a full refund from them. And so we've taken those funds and are deploying them into other mining machines, but that's the difference.

And so the shortfall is in terms of Minerva, it will be resolved. It's going to be resolved as we bring the other machines online, the Bitcoin machines that we've ordered et cetera. But it wasn't a huge amount. And we feel like, it was -- when you're looking at new machines from new companies, Minerva is a good example. They had good specs. They had good price. So we thought it was worth putting a small order with them to test, it didn't work out. We got the refund. So no harm, no foul ultimately, but that's ultimately why we wanted to be able to have again more control over our own rig production and that's why this relationship with Intel is so important.

Thanks. Our next question is for Alex, and this comes from the live chat as well. With the continued maturation of debt markets, why has the second NYDIG loan been done at a significantly higher rate 12% per year versus the first NYDIG loan done at only 8.25% per year?

It's a good question. And it shows that people really are reading our analysis, which is nice, nice to see. It is simple. The simple answer is that it's on different items. So when the debt market is looking at assets that they were collateralized loans against they look at how we easily, it was worst scenario how easily unable to then sell on those assets in order to make up the money that they've lent out. Now, the infrastructure is, as Peter said earlier high power transformers, medium power transformers, et cetera, et cetera. So those are assets which are easily transferable to another technology under the sector, et cetera, and therefore the risk around those assets is much less and therefore the interest that we have to pay around those assets is much less.

When you look at Bitcoin mining machines, Bitcoin mining machines have one use, and one purpose. And therefore the risk around them is they would have to be sold to basically another Bitcoin miner or the data would have to take on those machines themselves and therefore the [indiscernible] higher, a higher interest rate. So that's the simple. The simple answer is that pay off between risk and reward and the risk and the interest rate there. So the second loan was against the machines, which have a higher risk attached to them than the infrastructure, which was at lower rate.

Thanks, Alex. Peter, our next question is from Shikha S (ph) from the live Q&A. What is your main focus after the Helios facility?

Thanks, Shikha for the question. So our focus really for 2022 is to complete the build out of Phase 1 of Helios, that's the initial 200 megawatts. Then we've got, as I said, the next 600 megawatts and that's what we're calling Phase 2 and that's we've got the interconnection agreement. We've got some of the long lead items ordered. So the focus for us in 2023 and into 2022 -- the first part of 2024 is that additional 600 megawatt capacity. Above and beyond that, in terms of Phase 3 for the company, we haven't put out publicly. What our thinking is for Phase 3.

We are working behind the scenes to think the next step because we always want to be a few years ahead. So when we're ready to announce that we will, but for now, really the focus is on Helios Phase 1 and then Helios Phase II. Obviously, we are big believers in not just Bitcoin mining and cryptocurrency mining, but in this space in general that's why we have Argo lives as a foothold into the world of Web 3.0, but we're ambitious Shikha, we want to continue to grow as a company, not just as a minor. So we're thinking big picture long term, but haven't announced that vision yet to the market.

Our next question, Peter is from Chris Brendler at D.A. Davidson. Does the Intel rig design requires significant CapEx or R&D expense?

So, thanks Chris for the question. So the design itself does not require significant CapEx or R&D expense in terms of the design and testing et cetera, et cetera,. But as with other rigs, it's the order to themselves that are CapEx intensive, mostly it's the chips that is the biggest expense than the rest of the machines is a fraction of that. Overall, the total cost on a per terra hash basis, we anticipate being significantly less than buying off the shelf miners. But it's not like we're dumping a ton of cash into R&D, which is I think kind of what you're getting at there, Chris.

Thanks, Peter. And to follow up on the -- in terms subjective Intel from Suthan Sukumar at Stifel. Can you give an update on the Intel based rig design and development process? Are you still confident about having those rigs ready to deploy by the end of the year?

Yeah. Sure. The process is going well. When we're ready to announce exactly the update on the specs and all of that and obviously some of it is outside of our control because we're working with Intel and they have their own processes of disclosure. But when we are ready to give the full update on specs and costs, we will be excited to do that and happy to share that. To answer your second question, in terms of having your rigs ready to be deployed by the end of the year, the expectation is, yes, we will have those to be ready to be deployed by the end year and we'll update the market as we go in terms of the steps along the way.

Great. Our next question from the live chat, we've gotten this a few times both from John S and Shikha S. When will the Board get a full-time Chairman?

Yeah. It's a good question. We've been -- or fair question I should say, we've been working on strengthening the Board, as I talked about in the presentation we just had most recently added Raghav. We also added two Board members last summer Maria Perrella and Sarah Gow. I'm really happy with where the Board is at. They're very engaged, very involved adding a ton of value, so, that's great. The Board itself is continuing to work on the Chairman question, the Chairman process and working to strengthen the Board. We do recognize that and we want a Chairman. So when we are again ready to update the market on who that will be, we'll make that announcement but that process is ongoing.

Great. Alex, one other question for you, just came in from the live chat from [indiscernible]. Does your cost of Bitcoin that you talked about so the mining margin include all overhead of operating costs, amortization, depreciation, et cetera.?

No. It simply includes the power costs. So once you put the machine in, the over-hedging, the only real cost line that matters is the power cost or if you're hosting it and then hosting costs, that is what these machines need. I mean in terms of, if you look at our facility for example the Helios facility, in terms of tax and people on the ground this very few people on the ground, you're talking less than 30. So actually the on cost, if you like of booking (ph) in the north of miner is very, very, very, very insignificant. So when we look at the cost of mining and the production cost per Bitcoin, we are simply looking at the power cost that goes into the machine.

Great. Another question, this one comes from Jon Petersen at Jefferies. When the price of Bitcoin recovers to peak levels, would you continue to sell Bitcoin to fund growth or will you go back to a HODL strategy?

Alex, you want to take that one, or you want to me to take it.

Yeah. That's fine. Yes, I think at the moment, our strategy is as we've described, and it is to look at depth and also out selling Bitcoin. Obviously, if Bitcoin recover significantly our share price recover significantly, that would be something that we would look at, but that would not be, that's not the near-term goal, and that's certainly not the short-term strategy. So yes, it is to continue to sell Bitcoin and focus on debt markets not equity at the moment.

And I'll just add a little bit to this, John, I think it's a good question. If you look at the history of the company, we've -- this is a continuum. This is selling Bitcoin. This is never selling Bitcoin. We've been to both extremes. And now we're in the middle, and we're pretty comfortable in the middle. Like, I actually think it's the right place to be. I think HODL is great to have. It's a great piece to have on the balance sheet, it's something you can do a lot with, whether you are deploying some of it into Argo Labs, whether you're using some of it to borrow against, whether it's just appreciating, those are -- that's fine.

But ultimately, at the end of the day, we still live in in a Fiat dominated world and you're going to need Fiat for operations, if you ever do a dividend et cetera., like you want to have a war chest of Fiat, as well as a war chest of Bitcoin. So I'm quite happy with where we are in the middle and it might fluctuate a little bit this way or that way, but I don't think we'll ever go back to either extreme.

Thanks, Peter. Our next question comes from Anthony Power at Compass Mining. With 29 listed company is currently in North America, do you see this number getting bigger, or do you see any M&A activity or consolidation? At what point do you believe the big energy companies ramp up their interest in investment in this space? Are there any opportunities to partner?

Yeah. So I think two questions in there. Anthony, good questions. Yeah. It's hard to believe 29 listed companies, it's happened pretty quickly. I remember when there was like five of us. So do I see M&A activity and particularly with kind of the market we're in right now. I think there's always people out there evaluating deals. I would say as a whole, as a space there will likely probably be some M&A activity in the second half of this year, given where market -- where the market is, and some consolidation. It's a lot of listed company.

In terms of energy companies ramp up their investment and interest, I think that's happening, but I think they move slowly. So, and I think it's still probably a couple years away, but I know that they are looking at, they've got skunk-works happening, there is projects happening, but in terms of really ramping up, I think we're probably into the next bull cycle before we see that happening in a big way. And in terms of opportunities to partner, yeah, look, I think you're seeing people get closer to rigs and people get closer to power.

We're getting closer to rigs with the relationship with Intel, getting closer to chips with the relationship to Intel, I think that's going to start to happen on the power side. We're fortunate that we're in the Texas market where we can really get low cost power using the grid. That's not the case for everywhere in North America. You do have to have relationships with utilities or power generators, but ultimately this space is heading in that direction for sure.

Great. Peter, we're coming up on the top of the hour. We've got two last just quick questions for you. First one, from the live chat from Kevin Dede. With the core machine swap, is it a machine for machines swap or is it based on total terra hash?

Yeah. Thanks, Kevin. It’s total terra hash, pretty much when you're always doing machines, it's based on terra hash.

Great. And then our last question, Peter, also from the live chat. This is from both Paul C and Kevin R. Given the shortage of power, the other companies are facing, is there an opportunity for us to host third-party rigs at Helios?

I think in the short-term would be challenging for us given our commitments to ourselves with our remaining machines coming in and with plans for Intel in the second half of the year, the Intel rig in the second half of this year. Looking into 2023, 2024, it's something that we are always thinking about, is there an opportunity for us to diversify revenue a little bit and have some hosting relationships. So I would say, unlikely for 2022 maybe for 2023.

That's great, Tom. Thank you very much indeed for mentioning that Q&A and obviously just given the considerable attendance you've got on today's call. It's not possible to take everybody's questions, but thank you to everybody that did submit questions and we'll make those available to the company post today's call as well. Peter, I'm sure you're going to redirect investors as usual to give you their thoughts, their expectations and their feedback. But before doing so, I wonder if I may just ask you for a few closing comments and then I'll conclude the meeting.

Great. All right. Thank you, Mark. Well, thanks everyone for attending. It seems like we are doing these more and more frequently, which is part of our commitment to transparency as well as our commitment to, now that we're NASDAQ listed. We’re doing earnings not something we need to do is the UK kind of headquartered, primarily listed company. But we're happy to be doing these earnings calls. And in terms of where we're at, I'm incredibly pleased with the work that the team has done to get Helios up off the ground and excited about the second half of this year. I think it would be nice if the price of Bitcoin could help us along a little bit, but ultimately for us, it's really about head down, executing, under-promising over delivering and I think if we do that, we're going to be successful in the long term.

That's great, Peter, Alex, Tom, thank you very much indeed for updating investors this afternoon. This morning in your case Peter. Could I please ask investors not to close the session as we will now automatically redirect you for the opportunity to provide your feedback in order to the management team can better understand your views and expectations. Just wanted to take a few moments to complete, but I'm sure, it will be greatly valued by the company. On behalf of the management team of Argo Blockchain plc, we'd like to thank you for attending today's presentation.