Keel Infrastructure Corp. (KEEL) Earnings Call Transcript

Greetings. Welcome to the Bitfarms' acquisition of Stronghold Digital Mining Conference Call. [Operator Instructions] Please note, this call is being recorded. I will now turn the conference over to your host, Tracy Krumme, Senior Vice President, Head of IR and Corporate Communications. You may begin.

Thank you, and good morning, everyone. We appreciate you joining us on short notice to review today's announcement that Bitfarms has entered into a definitive agreement to acquire Stronghold Digital Mining. Before we begin, please note that this call is being webcast with an accompanying presentation. Today's press release and our presentation can be accessed at our website, bitfarms.com, under the Investors section. Turning to Slide 2. During the call, we may make forward-looking statements about expected future results. This forward-looking information is based on certain assumptions and is subject to risks and uncertainties, and as such, could differ from actual results. I invite you to refer to today's press release commentary on forward-looking statements or to consult Bitfarms regulatory filings for a complete list of risks and uncertainties. Please note that all financial references are denominated in U.S. dollars, unless otherwise noted. Moving to Slide 3. On the call today, we have Bitfarms' CEO, Ben Gagnon; CFO, Jeff Lucas; and Stronghold's Chairman and CEO, Greg Beard. Ben and Greg will start by providing a high-level overview of the strategic rationale, describing how the addition of Stronghold positions Bitfarms for sustainable growth, while delivering significant environmentally beneficial carbon capture potential. Then Jeff will cover the transaction details. After concluding remarks from Ben, we will then open the call to questions. Turning to Slide 4. It is now my pleasure to turn the call over to Ben. Ben, please go ahead.

Thank you, Tracy, and good morning, everyone. I'm very pleased to be here today discussing this transformative combination with Stronghold. We've known Greg and his team since 2021, and today's announcement is the culmination of 3 years of ongoing discussions. I'm incredibly proud to announce this acquisition, which builds upon the successful momentum of our transformative fleet upgrade and ensures a multiyear strategic growth path for the company that both companies are incredibly excited about. Turning to Slide 5. As I've said, since my appointment as CEO, I'm committed to diversifying the company beyond Bitcoin mining, in order to make us better Bitcoin miners and create long-term value for shareholders. I would like to start this call with a summary of how we are executing on that strategy with this transaction. First, we are vertically integrating into energy generation with the acquisition of two strategically located U.S. power plants. Second, we are dramatically expanding and rebalancing our energy portfolio towards the U.S. with potentially over 300 megawatts of cost-effective power capacity. This could increase our energy portfolio to 950 megawatts by year-end 2025 with significant expansion potential in 2026 and beyond. Third, the two sites boast significant energy trading, demand response and other opportunities to give us significantly greater control over our most important cost variable, our price of energy. Fourth, the sites have tremendous flexibility and a unique potential to scale our Bitcoin mining operations and cost effectively integrate HPC and AI into our portfolio. Fifth, we are extending our long-standing environmental leadership with the acquisition and integration of equipment and processes that go beyond just using sustainable energy and proactively detoxify and clean up century's old pollution, cleaning the earth, the water and the air. Sixth, this all-stock transaction is highly accretive and preserves our balance sheet for future growth. Turning to Slide 6. I would like to turn the call over to Greg Beard, to give a quick overview of the Stronghold assets and their potential. Greg, the call is yours.

Thanks, Ben. I'm grateful to be here alongside the Bitfarms team, and we have gotten to know very well, after 3 years of merger discussions, it was about time we found a way to make it work, and we are very excited to be joining forces. Scale and balance sheet strength are critical differentiators in most industries, including our own. When these characteristics are combined with low cost of power and a culture built on technological and operational expertise, we believe it is a winning recipe, and this represents what Bitfarms offers. There is not a stock I would rather take. I believe that Stronghold is getting good fair value for our assets. And I'm highly confident that with Bitfarms' financial fortitude, demonstrated the ability to execute and vision, they will be able to expand Stronghold sites and unlock their value in a way that we would not have been able to do in the near term as a stand-alone company. And for me, personally, as a Stronghold shareholder, the accretion, growth profile and balance sheet of the combined company are highly compelling and differentiated from industry peers. Turning to Slide 7. I want to provide a quick overview of the Stronghold assets and their potential. Our complementary vertically integrated operations include Bitcoin mining, power generation and environmental reclamation across two sites in Pennsylvania. Stronghold owns two merchant power generation and reclamation facilities, Scrubgrass and Panther Creek, which are pictured on this slide. And over 750 acres of land with another 1,100 acres under option. Scrubgrass and Panther Creek are waste to energy facilities that both nameplate net power output capacities of 85 and 80 megawatts, respectively. They were among about a dozen reclamation facilities purpose-built in Pennsylvania to deal with mining waste that dates as far back as the 1800s. For over 200 years, this toxic waste has been damaging the Earth, poisoning the water supply and often spontaneously combusting and burning uncontrolled. The waste emits CO2, NOx, SOx and other harmful toxins and our plants process the waste in a controlled manner, significantly reducing emissions, cleaning the land and mitigating acid mine drainage while producing both cost-effective electricity and beneficial use ash, which can be used in environmental remediation as agriculture fertilizer and to capture CO2. In addition to producing electricity, our sites have the ability to draw power from the grid at attractive prices. This is expected to effectively double the potential electricity available at these locations to over 300 megawatts in the short term. Furthermore, Stronghold has numerous studies in process at different stages with local utilities to potentially nearly triple the total capacity available at the two sites to over 950 megawatts over the next few years. This expands Bitfarms' robust portfolio of power assets with strategic access to existing power and provide significant potential for further expansion and development. Turning to Slide 8. I will return the call to Ben.

Thanks, Greg, for your great overview of the strength and potential of the Stronghold assets. Turning to Slide 9. I would like to discuss how this expands and rebalances our portfolio of energy assets. Upon closing, the expected 307 megawatts available at these two locations will drive a 47% increase in our 2025 year-end megawatts from 648 megawatts to 955 megawatts. Building off the success of our recently announced Sharon, Pennsylvania announcement, the combination of these three sites creates a PJM portfolio of approximately 427 megawatts in 2025, which is nearly the same size as our energy portfolio at the end of 2024. Importantly, these sites rebalance our portfolio back to the U.S. and North America, representing 47% and is 65% of our 2025 year-end portfolio, respectively. While our LatAm exposure will scale down to just 35%, significantly improving the size, quality and distribution of our energy portfolio. Turning to Slide 10. We can see here how our energy portfolio can grow over the next few years. With the additional potential expansion capacity of the Stronghold assets beyond 307 megawatts, we now expect to expand beyond 950 megawatts to up to 1.6 gigawatts of power, of which 66% would be located in the U.S. and in the highly desired PJM region. This creates the potential to grow our energy portfolio an additional 62% beyond 2025. Turning to Slide 11. I would like to reiterate why we believe PJM and Pennsylvania, specifically are top-tier jurisdictions for Bitcoin mining. First, the PJM grid is the largest wholesale electricity market in the U.S. As a deregulated market, PJM offers significant curtailment and energy trading opportunities, giving us the ability to effectively hedge our energy costs and bring down the total cost of power, ideal for mining Bitcoin. These sites also have the ability to participate in demand response programs in order to earn additional revenue by providing reliability services to the grid. As the grid is rapidly adding renewable capacity and significantly contributing to the decarbonization of the grid, these demand response programs are becoming increasingly more valuable and make these sites both economically and environmentally sustainable. Pennsylvania is a great business jurisdiction with a notably pro Bitcoin and Pro energy Governor, that just a few months ago, recognized the importance of these remediation plans by doubling the tax credits available through 2035. Finally, the proximity of these sites to major metropolitan areas and fiber lines make them ideal for both Bitcoin mining and HPC and AI data centers. Turning to Slide 12. There exists a tremendous potential for improvement and expansion of the Bitcoin mining operations at these two locations that can increase the total attach rate capacity by up to 5x in 2025, which would effectively double our 2024 year-end target of 21 exahash. This potential upgrade in addition to the changes in our energy portfolio is what we have underwritten this acquisition on. The potential upgrade can be broken down in two phases. First, the megawatts available at both sites can be doubled by simply isolating the power plants from the grid, otherwise known as islanding, to provide power to a Bitcoin data center. Doing so, frees up the substation, enables these sites to double down, drawing additional power from the grid and a similar capacity as the sites can generate. This grid connected load can then participate in demand response and other economic programs. Doing so, we can dramatically increase scale by nearly 100%, bring down our expected average price of power through energy trading and other economic programs and spread our fixed operating expenses over a significantly greater amount of megawatts, further bringing down our all-in cost per megawatt hour on site. Second, while the miners on site are still productive, at 32 watts per terahash, the fleet is significantly below the efficiency and productivity of the industry and new miner models, refreshing this fleet with new Bitmain S21 XPs would increase the total hash rate of the current footprint to over 10 exahash. Additionally, if the full 307 megawatts were allocated to new S21 Pros or S21 XPs, the total exahash on site could increase over five-fold in 2025 to over 20 exahash, more or less equivalent to our year-end target of 21 exahash. Improving the energy efficiency of this largely outdated fleet would also dramatically reduce site hash cost by over 50% from over $0.03 a day to an estimated $0.13 to $0.14 per terahash per day. This is well below where the market is currently operating at. And well below the levels of hash rate that the market currently responds to, as well as where we expect hash price to go during the widely anticipated Bitcoin BOW market. Turning to Slide 13. These sites have a unique potential to disrupt the HPC business model with a combined AI and Bitcoin mining data center. It is important to emphasize here at the outset, that this is highly innovative and disruptive. As far as we can tell, no one has ever contemplated this kind of strategy and data center configuration. It is actually so novel that there is nothing in the PJM and FERC regulations that can be applied towards this structure. In order for this to be successfully implemented, we will need to get approval from both PJM and FERC. Accordingly, this potential was not underwritten as part of the transaction. However, the potential is so great that we think it's important to outline the vision here and state that we will be seeking the necessary approvals, but these approvals will take time, and it's possible that they may never materialize. A traditional data center utilizes a grid connection and diesel generators to provide a redundant source of power. With this strategy, we will be flipping this model on its head and instead utilize the cost-effective and reliable power from the Tier 2 alternative energy plants for its primary and baseload connection. We would then utilize the grid connection to provide redundancy for the HPC and AI data center. This configuration has numerous potential benefits. First, diesel redundancy has a very high OpEx. And other than providing the reliability for the data center required, it has no value or function. By utilizing the grid connection and Bitcoin miners as a load bank, we would be able to monetize this redundancy when the cost of energy is low and significantly enhance site profitability. And in the process, provide a more sustainable and environmentally friendly redundancy over traditional diesel or battery storage. Even more importantly, we could avoid entirely the CapEx associated with building out diesel or battery redundancy, which can easily add up to $3 million a megawatt. Assuming one 80-megawatt HPC, AI and Bitcoin data center, that would translate to CapEx savings of up to $240 million, significantly more than the entire cost of the transaction, and we can do this twice, once at each location. Potentially saving up to $480 million of CapEx on 160 megawatts of HPC infrastructure, nearly 3x the value of this transaction. If we are successful in securing the necessary regulatory approvals, this could potentially result in a significant competitive advantage over traditional data centers by materially reducing CapEx, increasing revenues and improving our return on invested capital. Turning to Slide 14. For years, Bitfarms has led the industry an environmentally responsible Bitcoin mining operations. Since our founding in 2017, approximately 96% of all our Bitcoin's mined have been mined with sustainable energy, producing over 25,000 Bitcoins with minimal environmental impact. But as we look towards the future, we believe it is not enough to utilize clean energy. We need to be proactive in solving problems and not only minimizing our impact but going above and beyond to drive positive change. Turning to Slide 15. In addition to the tremendous economic value of this transaction, as part of this transaction, we are acquiring technologies, infrastructure and a team to drive the positive change and extend our environmental leadership beyond just minimizing our impact to making the world better. Starting in the Industrial Revolution in the 1800s, industrial race began being dumped into large piles all across the state. Over time, they effectively became toxic norms. There are literally hundreds of these abandoned waste piles across the state of Pennsylvania that make the land unusable. As these waste piles sit untreated, they lead toxic chemicals into the water supply. First contaminating smaller streams that feed into the Allegheny River and then into the Ohio River, which feeds into the Missouri River and eventually ends up in the Gulf of Mexico; including a significant amount of the U.S. water supply and negatively impacting tens or hundreds of millions of people. Additionally, these piles will inevitably combust whether that happens from a lightning strike, dry weather or some other factors. And when they do, they burn uncontrollably, emitting a massive amount of pollutants into the atmosphere. There are currently over 40 of these piles actively burning throughout the state today. The remediation plans we are acquiring utilize specialized technology that remediates toxic waste into two valuable commodities, electricity and beneficial use ash, which is both a valuable fertilizer and carbon capture agent. This equipment and remediation effort is so important to Pennsylvania that is classified as a Tier 2 alternative energy source in the state, and it is in the same category as large-scale hydro power. This is a well-recognized environmental issue, and these remediation plans enjoy what may seem rare these days, bipartisan support due to their proven environmental benefits over multiple decades. The tax credits available to those that remediate these legacy way sites are proof of this positive impact these plants are having on the local communities and stakeholders. On the screen are photos that highlight the century's old environmental problem and the positive externalities that these plants have driven over many years as they clean the Earth, the water and the atmosphere. We look forward to continuing to drive these environmental benefits in a way that creates value for shareholders and the local communities. I'll now move to Slide 16 and turn the call over to Jeff to discuss the financials. Jeff?

Thank you, Ben. This is indeed an exciting day for us. Turning to Slide 17. I'll now provide a brief overview of the deal economics. Bitfarms is acquiring 100% of Stronghold in an all-stock transaction for a total equity value of USD 125 million, plus the assumption of debt valued at about USD 50 million. As Ben discussed, Stronghold is bringing significant value to the table, immediately adding 4 exahash and 165 megawatts to our operating capacity upon closing. We believe that this exahash number will grow significantly as we initiate a similar fleet upgrade program to the one that we have been successfully conducting across all of our sites in 2024. In addition, Stronghold currently has capacity to import 142 megawatts of PJM power. And has identified a path to potentially import as much as 790 megawatts of PJM power, which will bring our total megawatts under management to over 1.6 gigawatts. On the operational side, we anticipate annual run rate cost synergies of approximately USD 10 million based on our current estimates. The Stronghold team complements Bitfarms' existing bench with operational expertise in power generation and a number of other activities that will be additive to our current capabilities. Lastly, we expect this transaction to close in the first quarter of 2025 subject to approval by Stronghold shareholders and other customary closing conditions. With that, I'll turn to Slide 18 and hand the call back over to Ben to close.

Thanks, Jeff. Turning to Slide 19. To summarize, this transaction is highly accretive, expanding our Bitcoin mining operations at an attractive value and securing robust expansion and growth opportunities for years to come. With this one transaction, we are able to, one, significantly scale up our exposure to the highly coveted PJM region; two, expand and rebalance our energy portfolio towards the U.S. delivering short-term value and significant long-term potential expansion; three, leverage our operating expertise to perform transformative data center upgrade; four, pursue our vision of disrupting the HPC and AI industry with a combination HPC, AI and Bitcoin data center; five, acquire new technologies that drive positive environmental change. And we are able to do all of this at an attractive price with compelling transaction economics and an all-stock structure and potential synergies that preserve our balance sheet strength for future growth. I know I speak on behalf of the entire Bitfarms and Stronghold team when I say we are so incredibly excited about this transaction, which would not be possible if it wasn't for the tremendous teams at both Bitfarms and Stronghold that made this possible. And we are both looking forward to building the bid farms of the future. With that, we'd be happy to take your questions. Operator?

[Operator Instructions] Your first question for today is from Mike Colonnese with H.C. Wainwright.

Congrats to both the Bitfarms team and the Stronghold teams on the transaction. Really, really great to see here. First for me, if you could provide more color on the near-term opportunity to expand Stronghold's existing facilities to the north of 300 megawatts next year, really what needs to be done specifically, the CapEx requirements and the expected time lines for the expansions really just on the infrastructure side.

Thanks, Mike. Happy to take that question. first, when you look at what's there, they already have about 145 megawatts of data center infrastructure and all of the electrical equipment necessary in terms of the high-voltage transformers and the medium voltage transformers in order to build out the additional power capacity there. What we need to do is really what Bitfarms already does best is we need to build out additional data center infrastructure for the Bitcoin mining operations. That's something that is our bread and butter. We don't have a specific CapEx figure for that involved. But it will be quite cost effective, we think, because we already have a lot of those longer lead time items and kind of the expensive items with regards to the transformers and high-voltage equipment.

Got it. And Jeff, maybe this one is for you. If you could just unpack that $10 million in annualized run rate cost synergies that you found with the transaction, where they're coming from and really how we should think about the pro forma cost structure here of the company as it relates to hash costs?

Glad to do that, Mike. First of all, the $10 million of synergy, this is a pretty conservative estimate at this point in time, and we look forward to working further with the folks at the Stronghold as we identify further cost savings. But up that $10 million at this point and not surprise me the largest area of the savings will be the fact that the public company expends here, we expect to save a fair amount here from the legal, registration and certainly to the degree the accounting on it to come into place. So we estimate around $3.5 million to $4 million of those savings will actually be in the -- really in the public company/investor relations side here. The other big opportunity for savings here is actually there's going to be savings on the insurance side as well that could be -- we'd be estimate anywhere from about $1 million to $1.5 million. And then thirdly, of course, will be some administrative statements as well, that we'll be putting in place over time, regarding savings both in personnel and the general infrastructure costs associated with normal processing activities associated with paying bills and things of that sort, as well as some, again, personnel costs and savings that will be achieved as we begin to develop a more effective and consolidated administrative function going forward.

Your next question is from Mike Grondahl with Northland Securities.

Ben, pretty interesting what you talked about with the data center strategy, when would you think you could seek those approvals from PJM and FERC. And how long would you think it takes to get those approvals? And then you can kind of get started on it.

Thanks, Mike. Well, we can get started on seeking the approvals immediately, but regulatory agencies do take some time in order to move forward with this from, a, an engineering perspective or a technical perspective, there really is not much of a difference between the structure that we've outlined with the Bitcoin mining data center and the HPC, AI Bitcoin mining combined data center, the only aspect of that, that's different is the ability to provide that redundancy. And while it would still be the same amount of electrons and for the grid's perspective, it would still look the same in terms of how much energy is being consumed, whether it's going to the Bitcoin mining portion or the HPC portion of the data center, really, this is something that, like I said, is so novel and new. It's never been tried before. And so we're going to need to pursue approval and classification on this new type of data center structure. I think probably looking at a year, maybe more in order to get that approval in place. And again, it may not materialize, Mike. I need to -- we need to be clear about that because it is we can't promise that because it is such a new and novel concept. But technically and engineering-wise, there is really not much of a difference.

Got it. And just to be clear, you can begin to seek that approval prior to the close. Is that correct?

That's correct.

Okay. Great. And then -- is most of the Stronghold team staying in place kind of post-transaction? Or any initial thoughts there?

Yes. We value the Stronghold team a lot. We are expanding massively in the Pennsylvania area, not just with the Stronghold acquisition, but our recently announced Sharon acquisition. So having an experienced team in the area is going to be crucial for part of this. And we're going to be keeping all of the operational staff and there's going to be a transition period for at least 6 months for all of the staff to stay on board.

Your next question is from Joe Flynn with Compass Point Research.

So hoping you could provide more color on the first quarter '25 expected close date. And if you could just walk us through that process, what needs to get done, does Bitfarms need shareholder approval, et cetera, that would be helpful.

Sure. So there -- let me speak to that a little bit here. It does not require Bitfarms' shareholder approval. It doesn't meet the threshold for that or even come close to that matter. It will require a Stronghold approval -- shareholder approval and that will take a little bit of time just to process the normal process there. I think the second point to keep in mind here is that, given that we are reaching shares in this transaction here, we will be filing as we refer to S-4 statements with the SEC. While we envision that process going smoothly, we wanted to sort of build an especial buffer in terms of expectations as to how long that will take. And that's why we are comfortably stating between really January 1 or March 31 to 1st quarter of next year to give us a good range to make sure that we can address those elements that are not in our immediate control, including the extent of the SEC's comments and responses through our application process.

Great. And then Ben or Greg, could you maybe talk to the strategy and in regard to generating RECs, waste coal credits that was recently increased and then ultimately, if you guys are still going to be pursuing a longer-term carbon capture opportunity.

Greg, do you want to speak to the RECs and then I'll speak to the carbon capture?

Yes, sure. I think, obviously, a big part of the strategy is to run both of the plants, which is going to allow the combined company to take advantage of the increased pricing for RECs and for the increase in the waste coal tax credits. So it's -- I think it's even more valuable. Those credits is even more valuable when the plants are running, and it will dramatically lower the overall cost of power. So it's a -- the plan from our perspective, at Stronghold is around the plants as much as we can to get the cost of power as low as possible.

Thanks Greg. And on the carbon capture, Joe, there's already pilot programs going on there with the carbon capture projects. These sites have shown -- sorry, these pilots have shown very, very strong potential in the studies that have already been done, and they're incredibly cost effective. So when we look at what we can do here from the environmental perspective, there is a big opportunity here to continue those and to scale those up further to the point where these can become one of the largest carbon capture projects on the planet. And they can provide an additional revenue stream that would bring in effectively the all-in cost of power at those sites.

Again, just one more. So from what it sounds like you're also -- we're going to be running the plant as much as possible using the existing data centers, but you're also going to have the opportunity to put up new infrastructure to use the grid connection? Is that the right way to think about it, I guess, in the -- over the next 2 years or so?

Yes, that's the big opportunity here beyond the ability to scale up the grid connection. The big immediate opportunity is to double down on the infrastructure. So given the roughly 80-megawatt footprint at both sites, we can turn that into 160 megawatts in very, very short order and with minimal CapEx. And that provides significant opportunities for cost savings and great synergies when we're building out these plants.

Your next question for today is from Brett Knoblauch with Cantor Fitzgerald.

On -- I guess, as we look at the potential capacity beyond the '25, I guess, where did you come up with, call it, the 955 number? Is that what you think you can pull from the grid? Or could you just help kind of break that down of where that number came from.

Yes, happy to, Brett. So the Stronghold team has been working with PJM to do a lot of grid connection and interconnection studies at these two sites. And so that number comes from the studies that are already in the queue. And it's based on the conversations and the work that they've already been doing on with PJM for many, many months here in order to understand what the total capacity is out of the transmission lines in the areas and the local high-voltage electric -- high-voltage electrical infrastructure in the area. And that number is backed up with those applications. And the other thing to put there is that these studies were mostly put in before the massive deluge of applications for HPC and AI and PJM. And so they do have priority in the queue over anything that is going in right now, whether it be from a hyperscaler or somebody else?

Perfect. That's helpful. And then on a timing standpoint, I believe you're going to be breaking ground at your share in site in the first quarter of next year as well. I guess what would your priority be in terms of getting that site to the 120 mgs of capacity versus doubling capacity at the existing Stronghold sites?