💥New Chapter 11 Bankruptcy - Rhodium Encore LLC💥

Bitcoin mining operator grapples with competitor in chapter 11.

On August 30, 2024, Texas-based Rhodium Encore LLC and 18 affiliates (collectively, the “debtors”) filed chapter 11 petitions in the Southern District of Texas (Judge Perez). The debtors are crypto miners, or in a more impressive thirty-four syllables, an “…industrial scale digital asset technology company utilizing proprietary technologies to mine Bitcoin.”*  Oh how the world has evolved over the decades — from worked-to-death men covered in soot (and eventually cancer) to nerds in glasses tinkering over GPUs.

Source: Pinterest

The debtors’ assets include some of the largest liquid-cooled mining sites in the world. Those are located in Texas, where power — distributed by ERCOT, the state grid of Winter Storm Uri infamy — runs cheaper than the other 49 states, thanks to a competitive and lightly regulated market. “Strategically chosen Texas sites allowed the Company to obtain competitive energy pricing through long-term energy contracts,” co-CRO David Dunn from company-side advisory powerhouse Province LLC writes (😉). Long-term, in this instance, means 10 years. The debtors chose Rockdale, Texas, an unassuming little burg in Milam County between College Station (home of Texas A&M) and Austin. There’s a Dollar General, a rodeo arena and on North Main, three excellent beer joints. 

Once upon a time, Rockdale was called “The Town Where it Rains Money.” That was when Alcoa Corp. ($AA) operated an aluminum smelter, the world’s largest, and offered good wages and, by extension, an excellent tax base. The United States having “evolved” to a different economic structure, Alcoa decided to close the facility in ‘08 and production ceased for good in ‘14. Chad Harris, a Louisiana entrepreneur and partner at The Whinstone Group, a crypto miner, spotted an opportunity. The Whinstone Group,  which eventually became Whinstone US Inc. (“Whinstone”) leased 100 acres from Alcoa (which sold the entire site in ‘21) and set to work building what they hoped to be one of the “...world’s largest purpose-built data centers dedicated to blockchain, video rendering, and artificial intelligence technology.”** Whinstone promised an initial spend of $150mm and the creation of 200 jobs. Milam County Judge Steve Young called it an “…exciting time for Milam County.” A ground-breaking ceremony was set for November 7, 2019 with the full 1-Gig of capacity promised for Q4’20. 

2019 was when the debtors and Whinstone hooked up. Per Mr Dunn: “When Rhodium’s principals first met Whinstone’s then-CEO in 2019, Whinstone’s ‘facility’ was nothing more than a large plot of empty land.”  Whinstone offered the debtors a 10-year fixed-price electricity deal, in exchange for which “Rhodium would pay to build out the Rockdale site.” And so they did: spending over $150mm over two years on “…complex and proprietary infrastructure that cannot readily be used anywhere else.” The relationship was governed by a joint venture — the Rhodium JV LLC (“Rhodium JV”), an entity that served as a holdco for the opcos doing the mining. Separate hosting agreements — twenty of them, in total — governed the opcos:

Source: Docket 35

Whinstone owned 12.5% of the JV. It “redeemed” this stake in December ‘20 by swapping its ownership stake for 12.5% of the JV’s profits — effectively a “synthetic dividend” — governed by a profit sharing agreement (“PSA”). Whinstone had a separate PSA with debtor Air HPC LLC, also a holdco with opco miners, from which Whinstone collected 50% of profits. A number of the debtors also entered a very very important water supply agreement with Whinstone — critical for “liquid-cooling,” after all. 

The debtors’ assets at the Rockdale site consist of 227.5 MW of available power and 53,712 deployed miners. It’s quite the operation: “Through the use of proprietary software and infrastructure, the Debtors have the flexibility to curtail operations and release energy capacity during emergencies and high-demand periods, allowing their power supplier to sell unused capacity back to the Texas power market,” Dunn writes (emphasis added). The debtors built a “significant” asset base, and gained “market trust” as a low-cost and reliable operator. That bright and shiny digital future drew closer every day, lol. 

Then Riot Platforms Inc. ($RIOT), a rival Bitcoin miner, appeared on the scene with the totally boss move of acquiring Whinstone.