In January 2024, Core Scientific (CORZ), a prominent player in the high-performance blockchain computing and data center industry, exited Chapter 11.  The past six months have been transformative for the company, marked by strategic moves, financial resilience, and a groundbreaking deal with CoreWeave. This article will attempt to summarize Core Scientific’s journey and explore the significance of this new contract to deliver High Performance Computing (HPC) hosting services.

A Chapter 11 Turnaround

With declining Bitcoin prices, rising electricity costs, and payment defaults by customers, Core Scientific made the decision, in December 2022, to voluntarily enter a restructuring support agreement with over 50% of its convertible noteholders and filed for Chapter 11 reorganization.

During this period, the company increased its self-mining hash rate from 15.7 EH/s to 16.9 EH/s and maintained 6.3 EH/s for its hosting business. In 2023, the company produced 13,762 bitcoin from its miners, achieving the highest annual total of Bitcoin mined by a publicly listed North American miner, consistent with its performance, delivering the most Bitcoin in 2021 and 2022. Additionally, the company mined an estimated 5,512 bitcoin on behalf of hosting customers.

Supported by an initial $56 million debtor-in-possession (DIP) financing facility and potential additional funding, their operations continued normally. In fact, from an operational perspective, Core Scientific was still able to mine the most Bitcoin, of all the listed North American miners, in 2023, as it had also done in the previous two years.  The restructuring aimed to reduce debt and interest expenses, converting a portion of noteholder debt into equity while providing recoveries for unsecured claims and shareholders.

The company’s emergence from Chapter 11 was a pivotal moment, having reached a global settlement with key stakeholders, including the Ad Hoc Noteholders Group, the Unsecured Creditors Committee, and B. Riley (the Debtor in Possession lender was repaid before emergence from Chapter 11). This consensus allowed Core Scientific to proceed with a consensual reorganization plan, paving the way for its anticipated emergence from Chapter 11.

Debt and Warrants

Core Scientific completed its Chapter 11 reorganization, emerging with a strengthened balance sheet, listing its common stock, tranche 1 warrants, and tranche 2 warrants on the Nasdaq Global Select Market under the symbols CORZ, CORZW, and CORZZ, respectively, on January 24, 2024.  The Plan of Reorganization reduced the Company's debt by $400 million by converting equipment lender and convertible note holder debt to equity, with further deleveraging pathways available.  

The table above indicates the current debt level at $608 million. If the share price remains above $7.79 for 20 consecutive days, the Convertible Notes will convert into 45 million common shares, reducing the debt by $260 million. Shareholders with Tranche 1 Warrants can convert them into shares at any time, with a cash payment of $6.81 to the Company. The full exercise of tranche 1 warrants would provide $670 million to Core Scientific.  Following this conversion, the remaining $348 million of debt will be paid down, leaving a cash balance of $322 million. Tranche 2 penny warrants can be exercised at or above $8.72.

Upon completion of these processes, the company will have a total of 403 million shares outstanding, which could result in an initial market capitalization of close to $4 billion. Removing some of the current debt will also remove several restrictions, including the sale of mined Bitcoin within 10 days of production, which was imposed as a condition of Chapter 11.

As part of the restructuring deal Core Scientific were also able to deploy approximately 27,000 new Bitmain S19 XP bitcoin miners and a further 12,000 Bitmain S21 miners by April 2024.

"This marks a significant milestone as we re-list and focus on new opportunities," said CEO Adam Sullivan. "With a clear path to deleveraging, sufficient liquidity, and a dedicated team, we are set to execute our growth plan and transform energy into high-value compute for bitcoin mining and other applications."

The CoreWeave Deal: A Game-Changer

On June 3, 2024 the company subsequently agreed and signed a long term deal with CoreWeave that will provide steady cash flows and enhance financial strength. Under a series of 12-year contracts, with 2 renewal periods of 5 years each, Core Scientific will provide approximately 200 megawatts of infrastructure to host CoreWeave’s high-performance computing (HPC) operations. Modifications of existing sites to accommodate CoreWeave’s NVIDIA GPUs will begin in the second half of 2024, with operations expected by mid-2025.

It was later reported that Core Scientific received an unsolicited proposal from CoreWeave to acquire all outstanding shares for $5.75 per share in cash. After careful review, the Board determined the offer undervalued the company and is not in the best interests of the Company and its shareholders.

This is not the first collaboration between Core Scientific and CoreWeave. From 2019 to 2022, Core Scientific hosted CoreWeave's GPUs, and in March 2024, they entered into a contract to deliver 16 MW of HPC hosting in Austin, completing the upgrade of a leased facility more than 30 days ahead of schedule.

The benefits of this agreement are manifold:

• Diversification: Expanding into AI compute hosting balances Core Scientific's portfolio beyond Bitcoin mining, reducing risk while maintaining exposure to Bitcoin’s upside potential. The company has 2% of their current operational power (760 MW) allocated to HPC Services and expect this to grow to 25% as they grow the power capacity to 1,200 MW with further potential to pivot a further 35% of Bitcoin mining into HPC modification.
• Cash Flow Maximization: The deal transforms Core Scientific's hosting business, enhancing earnings power. With high demand for power sites, the existing infrastructure allows for quicker deployment compared to new data center projects.
• Resilience and Sustainability: CoreWeave’s HPC operations align with Core Scientific’s commitment to sustainability. Utilizing existing infrastructure reduces environmental impact while meeting growing compute power demands.
• Revenue Boost: The 12-year contract is expected to generate over $3.5 billion in cumulative revenue, providing margins of 75% to 80% and solidifying Core Scientific’s financial position.
• Predictability of Revenues and Profit Margins:  Unlike Bitcoin mining revenues where there is uncertainty in terms of power costs and Bitcoin price, the HPC contract provides a level of predictability in terms of future revenues and costs.  

Major Wall Street analysts are certainly paying a lot more attention to this diversification into HPC hosting, as was seen by the significant interest at the recent investor day held at the Denton facility on Wednesday 12 June, 2024.  After the company presentation there was an  hour allocated to a Q & A session, which predominantly focused on the CoreWeave contract and only 2-3 questions focusing on the Bitcoin Mining business.

CoreWeave exercises option for additional 70 MW

On June 25, 2024, CoreWeave exercised its first option for additional infrastructure under their current hosting agreement. Core Scientific will modify an additional 100 MW of its infrastructure to deliver 70 MW for hosting NVIDIA GPUs. Modifications will begin in the second half of 2024, with operations expected by late 2025.

This contract is projected to add $1.225 billion in cumulative revenue, enhancing Core Scientific's earnings potential. The expansion strengthens the company's high-power digital infrastructure, balancing bitcoin mining with HPC hosting and diversifying its revenue streams.

Under the financial terms of the two contracts, CoreWeave will fund the $405 million of capex with Core Scientific paying it back through “capex credits, ” in the early years by withholding 50% of the hosting payments. The table below illustrates the expected revenue from these contracts, highlighting their significant financial impact.

Looking Ahead

Core Scientific’s journey in becoming a diversified powerhouse underscores its adaptability and resilience. As it continues to expand its digital infrastructure portfolio, the company remains at the forefront of technological innovation. The emergence of AI data centers alongside Bitcoin mining positions Core Scientific as a leader in both spaces, ready to shape the future of digital computing.

In summary, Core Scientific’s performance over the past six months reflects determination, strategic vision, and a commitment to sustainable growth. As the company navigates the dynamic landscape of blockchain and AI, its impact reverberates across industries, making it a force to be reckoned with.

This latest news has effectively sent a shockwave through the Bitcoin mining industry with many publicly listed miners in North America receiving a large proportion of calls from potential HPC clients looking to source  infrastructure and cheap energy.  

How will this change the Bitcoin mining landscape moving forward and will we see more miners pivot their business to incorporate HPC hosting?  Only time will tell.