Welcome to Hut 8’s Fourth Quarter and Full Year 2022 Financial Results Analysts and Investor Call. In addition to the press release issued earlier today, you can find Hut 8’s financial statements and MD&A on the Company’s website at www.hut8.io under the Company’s SEDAR profile at www.sedar.com, and under the Company’s EDGAR profile at www.sec.gov. Unless noted otherwise, all amounts referred to during this call are denominated in Canadian dollars. Any comments made during this call may include forward-looking statements within the meaning of applicable securities legislation regarding the future performance of Hut 8 Mining Corp. and its subsidiaries. The statements may reflect current expectations and as such, are subject to a variety of risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties include, but are not limited to, the factors discussed in the Hut 8’s Annual MD&A and Annual Information Form for the year ended December 31, 2022, except as required by applicable law, Hut 8 undertakes no obligation to publicly update or review any forward-looking statements. During the call, management may also make reference to certain non-IFRS measures that are not separately defined under IFRS, such as adjusted EBITDA and mine profit. Management believes that non-IFRS financial information taken in conjunction with IFRS financial measures provide useful information for both management and investors. Reconciliations between IFRS and non-IFRS results are presented in the tables accompanying our press release, which can be viewed on our website. I would now like to turn the call over to Hut 8’s CEO, Jaime Leverton. Please go ahead.

Thank you, Joel. Good morning, everyone, and thank you for joining us to discuss Hut 8’s results for the 2022 fiscal year. I will start by restating the obvious. 2022 was a challenging year for our entire industry. For us, this meant that pivoting and changing was essential. This is where our balance sheet first approach, which has been in place since the early days of the previous bull market, enabled us to continue pursuing opportunistic moments throughout the year. Closing our acquisition of five high performance computing data centers and integrating them into our business operations, managing through the ETH merge last fall, expanding our leadership team and growing our team members to over 100 across British Columbia, Alberta and Ontario, continuing to advance our ESG goals by finding innovative ways to e-recycle our miners and computing infrastructure and self-mining Bitcoin throughout 2022 at less costs, despite fluctuating power prices resulting in a 28.1% year-over-year increase in Bitcoin mined and a 25% year-over-year increase in hash rate, thanks to steadily plugging in new miners throughout the year. We continue to believe in our expansion into the high performance computing business, as we renovated our flagship data center in Kelowna and refresh our data centers in the Greater Toronto Area and Vancouver. We welcomed new customers, including Enthusiast Gaming, Zenlayer and Luxor. We’re replacing our networks with new Cisco carrier grade routing and switching hardware. We’re re-architecting our network carrier uplinks to provide increased resiliency, diversity and capacity. We recertified the organization under our SOC2 compliance program, ensuring security best practices across 158 unique operational controls. As we look ahead, we are confident that 2023 will be a year of extraordinary growth. As announced last month, we look forward to the future where Hut 8 Mining Corp. and US Bitcoin…

Thanks, Jaime, and good morning, everyone. Let’s begin with the full year results for 2022. We achieved revenue of $150.7 million for the year, a $23.1 million decrease relative to the prior year of $173.8 million. This year-over-year decrease was driven by the reduction in price of Bitcoin, which more than offset the expansion of our Bitcoin mining fleet and incremental contributions from the high performance computing business we acquired in Q1 of 2022. Revenue from digital asset mining activities was $133 million, as we mined 3,568 new Bitcoin. This compares to $165.4 million of digital asset mining revenue in 2021 when we mined 2,786 Bitcoin. We increased our mining production by 28% compared to 2021 and our average cost to mine each Bitcoin reduced by 7% relative to the prior year, reflecting more efficient miners deployed partially offset by higher energy prices in the year. Our high performance computing business contributed an additional $16.9 million of revenue in 2022, the majority of which is monthly recurring revenue. Cost of revenue for the year was $175.6 million compared to $85 million in the prior year, and consists of depreciation and site operating costs. The increased depreciation expense from $23.3 million in 2021 to $93.9 million was driven by the increased number and overall cost of miners deployed during the year and $5.1 million of additional depreciation from the newly acquired HPC business. Site operating costs increased by $20.1 million to $81.8 million from 2021. Within the digital asset mining operation, site operating costs increased by $11.7 million consistent with our expansion of mining fleet and increased power costs. We incurred $8.4 million in operating costs related to the high performance computing operation, all of which are incremental year-over-year. In terms of margin, our digital asset mining operation generated profit of…

Thank you. [Operator Instructions] Your first question comes from Mike Colonnese with H.C. Wainwright. Please go ahead.

Hi. Good morning. Thank you for taking my questions. First one for me, saw that you relocated 7,000 miners from North Bay to Medicine Hat. How long do you guys think it’ll take to redeploy those miners there? And do you have the sufficient infrastructure and power availability to support the additional capacity?

Yes, so I’ll take that one. We’ve moved miners really into temporary storage for now, while we assessed various options of where we could redeploy them. We don’t currently have that much available capacity in Medicine Hat today.

Got it, got it. And I appreciate the clarity there. And then the next one for me, if we look at post-merge environment here, you’ll be operating several different business lines. How should we think about strategic priorities for the balance of 2023 after the transaction closes and how you intend to allocate capital?

Yes. We’re entirely focused on getting this transaction closed. As you can imagine, and working with the combined teams to plan out the integration, so too soon for me to say where we’re going to be prioritizing capital allocation.

Got it. Thank you for taking the questions.

Anytime.

Your next question comes from Joseph Vafi with Canaccord. Please go ahead.

Good morning, Joe.

Sorry, I was on mute. Good morning, Jaime. Good morning, team. Thanks for taking my questions. I know you probably can’t talk too much about Validus, but is there at least a timeframe that perhaps we should be looking at where we may get a resolution on that? And I have a quick follow up.

So yes, we – to be transparent, we’ve had some setbacks at our North Bay site, which affected our results in the latter part of the year, an issue that we continue to be addressing. In November 2022, we delivered a notice of event of default to Validus, and as we announced in January 2023, we filed a statement of claim against Validus. In February of 2023, we received a statement of defense and counterclaim from Validus, which denies the majority of the allegations in the statement of claim and brings counterclaims. We believe the counterclaim is meritless and intend to vigorously defend all the claims in the counterclaim, while pursuing the claim set out in our statement of claim. Having said that, these matters are in the early stages of litigation and we can’t make any assessment regarding the likely outcomes with the high degree of certainty. Unfortunately, the current litigation means that the North Bay site is not currently operational, as we’ve discussed, and miners and electrical equipment has been removed from the site. As I just mentioned to the prior question, we’re assessing opportunities to energize the approximately 7,000 miners from North Bay, which represents approximately 680 petahash of capacity. But given this is a legal matter, we cannot comment further at this time, although I appreciate the question, Joe.

Sure, absolutely. Jaime, that was a very clear answer and I’m glad that you had it ready to be – to say. So that’s fair enough. Just if you kind of look out at the landscape now, I mean, it does feel like mining today is in better shape than it was a few months ago with spot prices being higher and mining equipment pricing still haven’t not – hasn’t responded that much at this point. How do you feel about the supply side of the business looking into 2023? I know you got a lot of moving parts. You got to finalize your merger here. But it does seem like mining rigs are attractively priced right now. I’m not sure how long they will be and any thoughts on exploiting this pricing environment right now? Thanks a lot.

No problem. Yes, we still see a lot of available supply in the market from a mining – a miner capacity perspective. The long pole in the tent, as I think we’ve discussed before is on the access to power side, but also the power distribution infrastructure. So I think we’re just going to continue to assess the market and again, really, really focus on getting our merger closed. We’re incredibly excited about the increased diversification of New Hut’s in the combined entity and the optionality that’ll it’ll give us to strategically pivot as this supply environment continues to adjust.

Great. Thanks a lot, Jaime.

Of course, anytime, Joe.

Your next question comes from Chris Brendler with D.A. Davidson. Please go ahead.

Hi. Thanks and good morning. Thanks for my questions. I wasn’t able to tease out the exact number, but it looks like the gross margins or profit margins in the Bitcoin mining side of the business were came in a lot better than I was expecting. And I saw there was a – I guess, a full year number around CAD$20,000 costs per month. Can you talk about the fourth quarter and if you can provide some insight into average power costs? Are they increasing, are they decreasing and the outlook for 2023? Thanks.

I’m happy to turn it over to Shenif to answer your question.

Yes. Thank you, Jaime. Thank you for the question. So the cost of mining in the fourth quarter of this fiscal year was $20,100 that compares to $22,800 in the prior year. In the fourth quarter this year, we did see an increase in the power costs that we were seeing, particularly in our Drumheller location as we saw some stark increases in the power rates there. So that impacted our numbers. The offset to that is we did have a lot of month and a half of mining in North Bay. As you know, we’ve got favorable power rates at the time – with Validus at that time we were mining still. So those two factors kind of led to the $20,100 average cost of mining in the quarter.

Okay. And so going forward, you won’t have North Bay, but how much does the precipitous drop in national gas prices help out the outlook for 2023?

I really can’t get too much guidance specifically about what the impact would be in 2023. Certainly, we have seen some drop in our power rates in Alberta since the end of the year. So we’ll hope to see that trend continue as we move forward.

Okay. Jaime, I’d just like to sort of ask an industry question that you may or may not be able to comment on. I’m just thinking about Silvergate and what’s happening to the traditional banking system in the United States, where a lot of crypto related companies have been using Silvergate as their banking partner. Where does Hut 8 stand there and what do you think it means for the industry?

Yes, I’m happy to take that one. Obviously, we know Silvergate and the team, although we’ve never had a direct working relationship with them. So we don’t – there is no direct impact to Hut in that regard from a broader ecosystem perspective. Certainly, it’s not something that any of us wanted to see. It’s going to have ripple effects, I think we’ve already seen overnight. But from a Hut perspective, there is no direct implication.

Okay. I’m going to squeeze in one more, if you don’t mind. HPC revenue came in almost exactly where I noted, so solid progress there. But with all the hype around AI in the fourth quarter, and I’ve heard other companies indicate that HPC demand is still rising rapidly. Can you give us any color on what you expect in terms of how that business is going to look this year?

I can’t give you any forward looking guidance. But what I can say is, we are very pleased that we did that acquisition. It’s been just over a year since we diversified into that area and then ultimately we’re able to not just integrate the business, but spent a significant amount of time focusing on upgrading that business. So I think we’ve timed the market incredibly well and we continue to be bullish on the space and really thrilled that we’re a bit ahead of the curve on that diversification strategy.

Awesome. Thanks so much.

No problem. Thank you.

Your next question comes from George Sutton with Craig Hallum. Please go ahead.

Good morning, George.

Good morning, Jaime. So also on HPC, just asking the question a different way, can you talk about the key use cases that you currently have relative to the HPC segment?

So, as I think, when we purchased that business, we purchased it with an existing fleet of enterprise customers. So we’ve got just under 400 enterprise customers across the five data centers, and they’re consuming a mix of products from us, which includes co-location, cloud and managed services. And those customers are from very diverse industries. I think really all major industries are represented in our current customer base. And when we kind of look forward and think about the demand profile that we’re seeing really increased from, we’re definitely seeing more inbound demand from artificial intelligence. Gaming continues to be strong. Machine learning is another area that’s got traction. But I would say the leading use case right now from a demand perspective that we’re seeing in an inbound capacity is coming from AI projects.

So Shenif, I wonder if you could address the Drumheller question this way. Your overall cost was $20,100, I’ll use $15,000 as an equivalent U.S. dollar amount per Bitcoin. Natural gas prices are down 50% year-to-date. So my assumption would be that you should be seeing those fall and I’m getting to the curtailment question in terms of trying to understand when you ostensibly would curtail, is it simply at the production cost number or there additional considerations relative to that?

Yes. So, first of all, I’m just going to highlight in Drumheller specifically. We are investigating some electrical issues at our Drumheller site, which have reduced our overall production there. We’re in the early stages of exploring supplementary options to mitigate the challenges and hope we have more definitive plan ready in due course. So it’s a bit more complicated in Drumheller and that you’re right, that we’re seeing energy prices drop, but we are seeing an impact on production right now due these electrical issues. So a bit more going into play into the first quarter as we look into these issues that we’re having in that site specifically, it’s a bit more complicated than just energy price reduction.

I assume that was the case. And then finally, is there any update you can give us on the closing process in terms of things that you are awaiting in terms of stipulations or anything that we need to be aware of and any sense of the timing of the close?

Great question. So I’ll take that. The closing of the proposed merger of equals with USBTC continues to be a top priority as we’ve discussed, and we’re happy to share that we have received a no action letter from the Competition Bureau of Canada in respect of the proposed merger. The letter confirms that the Competition Bureau does not at this time intend to challenge the proposed transaction under the merger provisions in the Competition Act. This is a very positive development as we continue to work to obtain all necessary regulatory, shareholder, exchange and other approvals required to close the transaction. So that’s as much of an update as I’ve got for you today.

It was impressive off the top of your head. Thank you very much.

You know me, I’m always prepared.

Your next question comes from Bill Papanastasiou from Stifel. Please go ahead.

Hi, good morning, Jaime. Thank you for taking my questions. I just want to first touch on the high performance computing business. We’ve continued to see upward movements in margin performance for the business unit that now sit over 50%. Just wanting to hopefully get some more color on how we should be thinking about margins in the long-term and how the team is strategizing on what I believe is still excess capacity at some of the TeraGo sites.

Yes, I’m struggling how to answer that question. We’ve got a – we’ve done a lot of work as I’ve talked about updating the facilities, and I went into some of the specifics already on the call this morning. We’ve got an incredible sales team in place that’s actively driving expansion of the pipeline. But I don’t know how to get into more specific details with you. We do have some expansion capabilities remaining in a few of the sites, not all five are expandable. But we’ll continue to look to expand as required when the capacity that we have built out already is filled up. So it’s really a data center by data center question as opposed to a fleet demand question.

Right. Great. Thank you. Yes, I appreciate the color and I understand that the data centers will be specifically focused to particular regions, so that makes sense.

Yes. Thank you.

So shifting gears to the mining space. The company was able to see fairly strong gross mining margins just given where breakeven electricity costs were and assumed power costs may be for these sites. And it appears that things are trending in a positive direction in 2023, just based on that same analysis. Given the relationships that you guys have and just your take on the space with manufacturers, how do you see further consolidation in the space as we approach the having? Are you planning – do you see an improvement in overall mining economics? What’s your take on 2023?

Yes. I mean, I wish I had a crystal ball. I think we’ve all been surprised by the continued growth of the hash rate and difficulty levels, despite relatively a sideways trading of the Bitcoin price in general. Obviously a nice development that we’ve seen natural gas prices come down and as Shenif mentioned, hopeful that that will continue. But it’s really, really difficult for us to make a prediction on ultimately where hash rate and difficulty are going to go as well as Bitcoin price. So what we’ve always tried to do as a business and a leadership team is make sure that that we have optionality built into the system, which for us only increases when we get the merger closed with us USBTC. And we really believe in the diversified business model that we’ve kicked off and ultimately again, expands with this merger because we really cannot predict where Bitcoin price is going to go or hash rate in the short-term for sure. And keeping in mind, we’re right about a year away from the having, which has its own unique implications as I think everyone’s aware.

Right. I guess it helps to have that huge Bitcoin treasury too, as we approach the having and hopefully get the upside there. Thank you for taking my questions.

My pleasure, anytime.

There are no further questions at this time, please proceed.

Okay. Thank you again everybody for joining today and for your continued support. We truly appreciate it and we look forward to an exciting 2023 ahead. Have a great day, everybody.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.