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Edited Transcript of OUP.H.V earnings conference call or presentation 11-May-20 2:00pm GMT

Q1 2020 Hut 8 Mining Corp Earnings Call

TORONTO Jun 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Hut 8 Mining Corp earnings conference call or presentation Monday, May 11, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Demetrios Vaiopoulos

Hut 8 Mining Corp. - Interim CEO

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Conference Call Participants

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* Deepak Kaushal

Stifel GMP Research - Director and Technology & Communications Analyst

* Matthew Christopher Yamamoto

CoinDesk LLC - Research Analyst

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Presentation

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Operator [1]

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Welcome to the Q1 2020 Earnings Call. My name is Richard, and I'll be your operator for today's call. (Operator Instructions)

Please note that this conference is being recorded.

I will now turn the call over to Jimmy Vaiopoulos. You may begin.

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [2]

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Thank you. This is Jimmy Vaiopoulos, Interim CEO of Hut 8. I hope everyone is staying safe. We'll be discussing our Q1 2020 results today, which also falls on a special day as we'll be witnessing that halving today as well.

Before continuing, I'd like to remind everyone that all amounts in the financial statements and discussed on this call are in Canadian dollars, unless stated otherwise. We've made a lot of progress in Q1 2020. First, we refinanced our debt with Bitfury by increasing our loan facility with Genesis Global Capital, which decreased our interest rate by 2%. Second, we renegotiated our master agreements with Bitfury as well, which lowered our operating costs significantly, and allows Hut 8 autonomy to purchase equipment from any other bitcoin mining supplier. Hut 8 has also been actively testing new equipment on site, and we're excited about their performance and compatibility with our existing infrastructure as we work towards an upgrade.

Regarding the financial performance, we had a successful first 2.5 months of bitcoin mining this quarter. But that changed quickly on March 12 when the bitcoin price collapsed by 37% along with the S&P 500 and Dow also realizing a historic nearly 10% drop as well. Hut 8 was very quick to act at this time, and we limited our production to limit any losses as this was all changing very quickly.

For the quarter, Hut 8 mined 1,116 bitcoin, resulting in revenue generation of $12.7 million, an increase of 5% from the same period of the prior year. Expenses for Q1 2020 were $692,000, excluding share-based compensation compared with Q1 2019 of $747,000. Hut 8 continues to focus on being a low-cost miner by optimizing our operations. Hut 8 recognized a share-based compensation gain this quarter of $708,000 as a result of the forfeiture of restricted share units granted by the outgoing CEO.

For Q1 2020, Hut 8 had a revaluation loss of $1.3 million from adjusting the value of the digital assets held in inventory to the market value on the reporting date. This loss was from the decrease in the bitcoin price from $7,194 on December 31, 2019, to the March 31, 2020 price of $6,439. We've seen the bitcoin price subsequent to Q1 2020 has since recovered significantly.

Hut 8 recognized negative adjusted EBITDA of $558,000 for the quarter compared to the same period of the prior year adjusted EBITDA of $1.3 million. As mentioned, the adjusted EBITDA losses from Q1 2020 mostly came from the last 2 weeks of the quarter when the bitcoin price collapsed as mentioned. Although our revenue margins and adjusted EBITDA were negatively affected by this event, we avoided selling any bitcoin at the bottom level prices. And our lowest price sold was above 50% from the bottom. This was reflected in the $914,000 gain on the revaluation of bitcoin sold. Subsequent to Q1 2020, we were happy to see a quick return of the bitcoin price. And it is during times when there is a run in the bitcoin price when bitcoin miners make the most of their profits. And Hut 8 has been operating at our maximum capacity again to take full advantage of that.

I'll pass the call back over to the operator and open it up for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question online comes from Deepak Kaushal.

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Deepak Kaushal, Stifel GMP Research - Director and Technology & Communications Analyst [2]

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A couple of questions for me. It's halving -- I guess, a big elephant in the room is what your plans are post halving, how long do you sit and watch prices and hash rates before you shut down mining? And what are kind of your thresholds for that timing and what you need to see there to get back on again?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [3]

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Yes. Thanks, Deepak. So there are multiple factors here. And we're obviously going to be watching things very closely and adjusting our operations to maximize profitability here. Actually, we're able to get a bit of a glimpse at what the halving might be like. So March 12, not that long ago, within 2 days, we saw a near 48% just complete drop in the bitcoin price, which mimics behaviors to what the halving would do for the bitcoin mining economics. And so we did see a pretty significant adjustment in the network difficulty rate. So we expect something similar to happen today when the halving does happen. So we have to watch that to really understand.

And of course, we've seen some beneficial movements in natural gas pricing, which has -- which also positively affects us and allows us to operate at a higher rate for longer. But of course, eventually, over time, we will have to find ways to adjust and may have to shut down parts of our operation, if needed, but as I mentioned briefly on the call, we are working towards an upgrade. And that is in site, we've been testing, we've been working very closely with suppliers and are prepared to do this. So this is the real plan, and everything else is kind of the contingency, bridging the gap to that point.

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Deepak Kaushal, Stifel GMP Research - Director and Technology & Communications Analyst [4]

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Okay. So you don't have a threshold on bitcoin price or network hash rate that you're looking at right now for the switch-ons, switch-offs?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [5]

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So we look at that on a minute-to-minute basis. So that's -- so we do have those thresholds. I'd have to check where they are right now with this network. I guess it really depends on how much the network difficulty adjusts, but we're able to operate a significant part of our operation with the expectations that we have from seeing things at March 12. But I didn't mean to interrupt you there.

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Deepak Kaushal, Stifel GMP Research - Director and Technology & Communications Analyst [6]

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Yes, okay. That makes sense. Okay. And then in terms of new equipment, how are you planning -- how are you guys planning to finance that? Has your strategy changed around holding bitcoin on your balance sheet? How much do you think you could dip into there without eroding too much the upside of the bitcoin runs here?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [7]

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Yes. I can't get too deep into this, but we do have options working towards. What I can say is it's likely to be a mix of self-financing debt and equity injection that we do. But we do have capital on hand, willing to go alongside this and are able to partially self-finance an upgrade.

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Deepak Kaushal, Stifel GMP Research - Director and Technology & Communications Analyst [8]

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Okay. And to be clear, I know that you're in a CEO transition here but the initial strategy was to maximize the amount of bitcoin being held on the balance sheet versus some other miners, which sell on a daily basis. Any plans or thoughts of changing that strategy at this point?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [9]

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No. That strategy stands, and we plan to give exposure to investors through our mining operations and both, holding as much bitcoin as we possibly can to have that upside.

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Deepak Kaushal, Stifel GMP Research - Director and Technology & Communications Analyst [10]

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Okay. And just in the event -- I have 2 more questions, if I may. Just in the event that you do shut in your mining, what's kind of your minimum burn rate you have to pay to Bitfury and the power companies to keep the lights on?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [11]

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So some of that would need to be negotiated. It would be very minimal. Our site costs and almost every cost in our business is quite variable. So we do have that option to either negotiate or without operating, not using any electricity, not using any software, anything along those lines, it would be near 0 there. So in terms of the scale of our business, it would be quite negligible.

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Deepak Kaushal, Stifel GMP Research - Director and Technology & Communications Analyst [12]

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Okay. Okay. That's helpful. And then my last question. Can you give us an update? I know you've been appointed Interim CEO, and there's been some other moves on the CFO side on an interim basis. Can you give us an update on the CEO search? Anything that you can share on that front would be helpful.

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [13]

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Sure. So I can't say too much, mostly because I'm not part of that process. And so what I can say is that the Board is nearing the end of their process. And they do plan to put out a press release here in the near term that -- of their plans. But because this is a CEO search, I am a candidate in that. So they're -- so I'm not part of it. But yes, that's really all I can say at this point.

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Operator [14]

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(Operator Instructions) Our next question on the line comes from Matt Yamamoto.

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Matthew Christopher Yamamoto, CoinDesk LLC - Research Analyst [15]

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This is Matt from CoinDesk. A lot of my questions have already been asked. But I guess, more specifically on the CEO succession plan, I know Andrew said last earnings call that this is -- what was it, this month was probably his last month? Or I think it was April?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [16]

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April was.

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Matthew Christopher Yamamoto, CoinDesk LLC - Research Analyst [17]

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Right. And -- but he originally said that he's going to stay on Board until his successor was found. And I believe he said he was going to -- I mean he's going to stay as a CEO until a successor was found, and I believe he was going to stay on the Board. What was the change there?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [18]

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The idea there is that the process is very close to the end that they didn't think an extension for Andrew was needed. So that could give you an idea of how near-term things are with the Board. But yes, there was a discussion that they had, and they said, they're comfortable with me taking on that interim role and while the Board continues that search. And so -- I'm very close with Andrew. I keep in touch with him. But yes, I'm -- everyone was comfortable with me taking on that role, and the business is operating as expected there. It was a mutual discussion.

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Matthew Christopher Yamamoto, CoinDesk LLC - Research Analyst [19]

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Got you. Is Andrew still going to have like a hands-on say in the operations? Or is he not involved anymore?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [20]

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Andrew does not have a formal role at Hut 8 anymore.

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Matthew Christopher Yamamoto, CoinDesk LLC - Research Analyst [21]

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Got you. And I wanted to ask about Gerri Sinclair, the Board member who resigned not that long ago. Is there a reason for her departure?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [22]

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No, there's no -- that was a planned departure. There was no cause or reason for that, that is worth noting. She was just looking to step off the Board. And this was planned. And of course, you can tell by the timing, the fact that we got our audited financials done. And she said at that point, I'm willing to step off or looking to step off.

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Matthew Christopher Yamamoto, CoinDesk LLC - Research Analyst [23]

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Got you. And how is the search for a new Board member on that end?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [24]

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Yes. So that's ongoing as well. So the Board is actively looking to fill that position as well.

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Matthew Christopher Yamamoto, CoinDesk LLC - Research Analyst [25]

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Okay. For sure. And I guess a question on equipment purchases. Last quarter, you guys said you were in discussions with manufacturers like Bitmain and MicroBT. I believe you guys were looking at the newest equipment they had available, but as far as I know, that's largely been sold out. So I'm just curious, what are your current options in terms of equipment purchases?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [26]

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Yes. So there are some equipment that has been sold out, but there are -- I don't know if you saw MicroBT put out a bunch of new models that are still available in the near term. And when I say that, I mean the next -- at the end of this month or in a couple of months. And there are companies who purchase some of this equipment. So it may be sold out in -- from the actual supplier, but other companies or maybe perhaps you can say resellers also still have access to this equipment. So there is access, and we have been able to find ways that we can get that equipment shipped in the next month or 2.

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Matthew Christopher Yamamoto, CoinDesk LLC - Research Analyst [27]

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Got you. And I guess just one more. On the working capital side, your working capital went down to $600,000. And if you look at current assets, a large portion of that is bitcoin locked in collateral. I'm just curious, I mean, this is -- a few months have passed since the end of March, so I'm just curious what your current working capital situation is?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [28]

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Yes. So I can't comment on the financial information afterwards. But what I can say is if you look at our bitcoin and the amount that is not locked up, and so it's about $6,400 that bitcoin is valued at, so if you take that portion and use the current bitcoin price, that's really the biggest variable in calculating it. In terms of just looking at -- yes, short-term assets, my short-term liabilities, that will be the biggest variable there.

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Operator [29]

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And our next question online comes from [Evan Garavedea].

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Unidentified Analyst, [30]

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I'm very curious about the extent to which you're going to upgrade the equipment. Looking at Antminer S19 and even the other equipment manufacturers, essentially, they're highly more efficient in terms of hash rates as well as the energy they consume. So my question is, to what extent are you going to swap out the current equipment for the more efficient equipment? And to what extent are you planning to issue new shares, possibly to finance all of this?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [31]

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So I think it's the last part, I think it was breaking up just a bit. Do you mind just repeating that last part of the...

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Unidentified Analyst, [32]

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Sure. Sure. I'd be happy to. So I'd like to know to what extent you wish to upgrade the equipment you currently have on hand? Is it 50%, 75% of it? And if so, considering the -- to what extent the new equipment is so much more efficient. I'd like to know to what extent you're going to be issuing new equity in order to finance this?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [33]

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Yes. So in terms of the extent, we -- ideally, we would upgrade so that our full capacity is utilized. The -- but what's more likely is that it's going to be in phases up to that level. And so -- yes, so I'll leave that there. And in terms of shares, that's just based on ongoing discussions. We would be -- we, of course, wanted to do a deal that's most accretive to -- for our shareholders. And so everything is on the table in terms of options. Nothing has been set as of yet. But I wouldn't put that off the table or -- again, everything is in discussions right now.

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Operator [34]

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Our next question on the line comes from [Joe Taser]. Okay. It looks like we lost Joe. We do have a follow-up from Deepak.

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Deepak Kaushal, Stifel GMP Research - Director and Technology & Communications Analyst [35]

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I know that last quarter, you guys announced that you were switching over to a different pool. I'm just wondering if that relationship changes the dynamics in the post-halving environment in terms of compensation, like in the event that you do shut down or you're asked to keep running to support the base hash rate of the pool, are there any opportunities for them to compensate even though if you were to mine on your own account, you would be below profitability?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [36]

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Just help me understand that question a little better. So when you say compensate, like so the way the pool fee works is we're just paying a percentage on all the bitcoin that we mined through that pool. So I'm not fully clear on the compensation part of that.

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Deepak Kaushal, Stifel GMP Research - Director and Technology & Communications Analyst [37]

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Well, no, I was just -- I don't know to what extent this is true, but I've read some industry reports that some of the pools were giving some incentives to miners to keep their base hash rate up so they could maintain a relative hash rate. So I don't know if that affects you guys or that's not part of the agreement? Or it's not relevant at all? Or if it's not even real news? So just any thoughts there would be helpful.

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [38]

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Yes. No, there's no -- there is 2 different rates that -- for different levels of hash rate, but those aren't massively different. And so I wouldn't say there's any compensation worth noting related to that. But there are some benefits to getting to a certain level like getting your own node and certain items like that, and of course you get more VIP status and more better customer service the larger you are as opposed to being 2 megawatts, for example.

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Deepak Kaushal, Stifel GMP Research - Director and Technology & Communications Analyst [39]

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Got it. And then any changes in the M&A environment since I know it hasn't been long since our last conference call, but any changes in the M&A environment that's notable or interesting to consider?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [40]

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Yes, nothing I could note on this call. We always have our eyes open on the market. And I would say the mining industry from a competitive stance is -- let's say, everyone talks more than maybe other industries. So we always stay close with the full industry and have our eyes open. But yes, that's all I can really say at this time.

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Operator [41]

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(Operator Instructions) We have a question online from [Michael Wang].

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Unidentified Analyst, [42]

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I have a question about your electricity cost and mining efficiency. Can you share a little bit about that?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [43]

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Yes. So in terms of -- so when you say electricity -- so in terms of our efficiency, that's derived mostly from our equipment and the chips that those are using. Of course -- so we have 3 different generations of mining equipment, and with an upgrade, that efficiency level would, of course, increase. But at a high level, our electricity costs mostly come from natural gas in Alberta, in the Alberta market, and we have 2 sites, one of which we're purchasing directly from our city, which is in Medicine Hat. And the other site, which is in Drumheller, where we're purchasing more from the grid. That's kind of the high level, if that answers your question.

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Unidentified Analyst, [44]

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Right. I have a follow-up question. So in terms of your mining facilities, after this future kind of upgrade, how much do you expect the mining efficiency to go up?

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [45]

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Close in the ballpark of around 3x from our oldest generation.

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Operator [46]

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And it looks like we have no further questions in queue.

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Demetrios Vaiopoulos, Hut 8 Mining Corp. - Interim CEO [47]

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Okay. Well, thank you, everyone, for joining the call. I'm always available for any offline conversations and further discussions. So hope everyone is staying safe and I'm sure everyone will be watching, like me, how things evolve during the halving. So all the best. Take care.

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Operator [48]

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And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.