Westwater Resources, Inc. Q2 FY2020 Earnings Call

Thank you for standing by. This is the conference operator. Welcome to the Westwater Resources Inc. Second Quarter 2020 Results and Business Update Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

Thanks, Gaylene, and welcome to the Q2 results meeting for Westwater Resources. Again, this is Chris Jones, I'm the Chief Executive Officer and with me here on the line are Jeff Vigil, our Chief Financial Officer; and Dain McCoig, our Vice President of Operations. On Page 2 of our presentation we have our cautionary statement. So I’d like to encourage listeners to read them at their leisure. We will be talking about some and discussing some forward-looking information as we go through the presentation today. On to Page 3, Westwater is a green energy materials developer. We are developing a battery-ready graphite business in Alabama, which is scheduled for production in 2022. And now with a vanadium discovery and we'll be talking about that later in our presentation today. We're exploring for lithium in Nevada and Utah on two highly prospective properties. And we retain leverage to a rising uranium price with two licensed processing plants in Texas and almost 200,000 acres of mineral rights and development properties in Texas and New Mexico. On to Page 4, ensuring the safety of our employees is our prime directive here, and to ensure the health and safety of these employees in the communities where we work. We've eliminated unnecessary travel. We've instituted health protocols working together and instituted remote working arrangements for our employees based on CDC and State guidelines for COVID-19 compliance. We’ve ensured that our employees are permitted and encouraged to take time off due to illness, or the illness of those around them without penalty. And reclamation activities are in South Texas are continuing using protocols designed to ensure the safety of our employees there. On Page 5, we continue to work with our business partners to maintain our advanced battery graphite product development schedule. Dorfner Anzaplan, our technical consultant continues to provide results that will shape our pilot plant operations that are scheduled for Q4 of 2020. We continue to work to ensure adequate financial liquidity to support our key operations and business activities by using a stock purchase agreement with Lincoln Park Capital, a controlled equity offering sales agreement with Cantor Fitzgerald. And we were able to secure a Federal PPP loan for our URI subsidiary in Texas. And Westwater has prevailed in a key decision in its case for compensation from the Republic of Turkey. The ICSID tribunal turned down Turkey’s request to bifurcate the case. And really that was a turn down of a delaying tactic. Westwater is requesting $36.5 million plus fees for the taking of its licenses in Turkey. And with that, I'd like to turn it over to Jeff. Jeff?

Good morning, everyone. Thank you, Chris. First, let's look at our capital position on Slide 6. Our closing share price yesterday was $2.39 and was approximately 7.6 million shares outstanding, our market capitalization stands at $18.2 million. At the start of the second quarter of 2020, our share price was $0.98, while at the end of the quarter our share price had increased to $2.65. We welcomed a more positive outlook in the capital markets, evidenced by a recovery in the Dow Jones Industrial Average of nearly 4,000 points during the second quarter. Certainly, the enactment of the CARES Act at the end of March appears to have added some stability to the capital markets. In particular, as the Payroll Protection Program appears to have been beneficial to many small companies, including Westwater Resources. After evaluating and determining that WWR's subsidiary URI Inc. was eligible and qualified for a PPP loan, we applied for and received the PPP loan in the amount of $331,000 on May 4. This allowed URI to put back to work employees who had been furloughed in March due to the uncertain economic conditions that existed at the time. Over the course of the following eight weeks, URI used 100% of the loan proceeds for qualified labor and benefits expenses. We believe we have met the criteria for a 100% forgiveness of the loan and we'll prepare and file the forgiveness application during the third quarter. Given our forgiveness application to be approved by the Small Business Administration, as we expect, we will treat the forgiveness as a gain from extinguishment of debt. Despite the uncertain economic conditions and tumultuous capital markets we faced in Q1, in Q2 we were able to maintain adequate liquidity to keep our graphite business moving forward and to resume reclamation activities at our South Texas operations. Moving to Slide 7. We provide a financial summary for the second quarter of 2020. Net cash used in operating activities was $2.6 million for the quarter ended June 30, 2020, compared with $1.6 million for the same period in 2019. The increase in cash used during the current quarter was primarily due to a reduction of trade payables and accrued liabilities. For the quarter ended June 30, 2020 mineral property expenses decreased by approximately $230,000, as compared with the corresponding period in 2019. This decrease was primarily due to the timing of a mineral lease payment for one of our uranium properties in New Mexico. For the current year, the leaseholder agreed to monthly payments, while in 2019, the lease rental was paid in one payment in the second quarter of the year. At June 30, 2020, we had five monthly payments remaining. General and administrative expenses for the three months ended June 30, 2020 were comparable to the corresponding period in 2019. Our consolidated net loss for the 3 months ended June 30, 2020 was $2.5 million or $0.43 per share as compared with the consolidated net loss of $2.8 million or $1.81 per share for the same period in 2019. The $300,000 decrease in our consolidated net loss from the respective prior period was due to a decrease in mineral property expenses and arbitration expenses, which have been offset by a decrease in interest income as a result of the sale of assets in the third quarter of 2019. At June 30, 2020, the company's cash balances were approximately $2.3 million. The company had a working capital deficit balance of $1 million. The cash balance at July 31 stands at $2.9 million. We are grateful to our shareholders for approving our proposal to enter into a new financing facility with Lincoln Park Capital at the Annual Shareholders Meeting, which we held on April 28. Approval of the Lincoln Park re-gain along with our other financing facility with Cantor Fitzgerald has allowed us to maintain funding levels to support our current business plan, including the graphite processing pilot plant for operation late in the fourth quarter. However, should the pandemic surge in the coming months and negatively impact capital markets once again, we will carefully review our resource allocation priorities and take the necessary actions to sustain our company for the long term. And with that, I'll turn it back to you, Chris.

Thanks, Jeff. On to Slide 8. We're going to talk about our Coosa Graphite Project really the crown jewel in the Westwater universe. On Slide 9, batteries and their role in clean energy is really what the topic of this slide is. Batteries are really driven at this point, battery growth is driven at this point by the transportation market. Global electric vehicles are expected to grow at about a 23% growth rate over the next several years. Think of, however, electric vehicles or cars, as they're coming down the road, you might see a Tesla weighing 800 pounds with 200 pounds of graphite models. The transportation sector accounts for 23% of greenhouse gas emissions accelerating demand for these low-emission alternatives. But that's not the only place where we see growth in the battery business. In the energy storage business, grid batteries, peak shaving batteries, and peak demand management batteries are expected to grow at 11% growth in graphite; our graphite products go into those batteries as well. And of course, consumer electronics like the laptop you may have on your desk today or the phone that you've been using this morning represents a big, solid, and still growing market at about a 3% growth rate. Graphite is a component of all these batteries. That includes lead-acid batteries, the largest battery market in the world; alkaline power cells; and of course, non-rechargeable and rechargeable lithium-ion batteries. We make products for all three of these battery types. The United States government has defined graphite as critical to the nation's security and prosperity. On Slide 11, the Coosa Graphite Project is the only near-term source of domestic U.S. natural graphite. Pilot plant design work is underway right now. Customer qualification is underway right now as well, and we had a recent one-time order from an alkaline power cell here in the United States. Westwater’s graphite will be produced using environmentally sustainable processes right here in the U.S., presently targeted for Alabama. Westwater’s graphite products serve all battery markets. And our vanadium discovery at Coosa can be an enhancement to the project's already great economics. On Slide 12. The three products we are making right now, and we'll be making at the pilot scale level by the end of this year. Our ULTRA-PMG, this is Purified Micronized Graphite, and this is a conductivity enhancer for all types of batteries. The largest market again is lead-acid. ULTRA-DEXDG is our Delaminated Expanded Graphite. This is a development product right now, and we will be making and we have been making that in the lab, and we will be making larger samples of that throughout this year. The target markets are lithium-ion, lithium lead-acid, and alkaline power cells once again. And ULTRA-CSPG, the Coated Spherical Purified Graphite. This is the material that makes the lithium-ion battery work, and once again, it is 25% of the mineral constituents inside of a lithium-ion battery. On to Slide 13. It’s about the flowchart of how we intend to make that at the manufacturing level. We take 95% graphite concentrate, we clarify it, and we make it into these three products using some proprietary and some public domain processes, all of which minimize our environmental footprint and are compliant with all U.S. regulations by design, something that the Chinese and other manufacturers may not be able to claim. Slide 14. The project plan. Once again, the pilot plant is being designed as we speak right now for production at the end of this year. We expect to make 12.5 tons of material in various sizes and qualities for further work in customer development. It also informs our feasibility study, which is expected to be complete by the middle of 2021, enabling us to construct the plant during the period mid-2021 to the end of 2022. Full production is expected in 2023. In a little bit counterintuitive fashion, we're going to start mining our own graphite in 2028. The reason for this is mining permitting timelines can be longer than manufacturing facility timelines. We can build the manufacturing facility and start up on purchased feedstock for which we already have a long-term relationship and contract. On Slide 15. Project CapEx is presently estimated at $54.5 million, that includes $2.5 million this year for the pilot plant and $32.9 million and $19.5 million in 2021 and 2022 respectively. For the first full year, once again, our positive cash flow is 2023, and the pre-tax NPV on our property discounted at 8% is estimated at $481 million. The internal rate of return on that is 41%. And vanadium development can enhance these economics, there's no downside whatsoever. We are considering equity, project-level debt, and joint venture structures for financing this operation. Turning now to Page 17. We have two projects, Columbus Basin and Nevada, which has around 14,000 acres of brine prospect. Phase 1 drilling has been completed, and we own the water rights at that property. It is about 45 minutes west, a little south of Tonopah, Nevada. Sal Rica, which is on the state line between Nevada and Utah, Wendover is about 13,000 acres. We have sample results ranging up to about 100 parts per million lithium from shallow aquifers. And again, we own the water rights for these properties. On Page 18, let's talk a little bit about our uranium portfolio. On Page 19, the U.S. Nuclear Fuel Working Group report has recommended that we build a national stockpile of uranium. The President's budget proposal has $150 million per year for 10 years to do just that. That is a budget request, subject to action, of course, by the House and the Senate. But it acts to level the playing field and secure nuclear power for the United States, remembering that the United States is dependent upon 20% of its electrical supply from nuclear facilities around the country. We are the largest nuclear power producer in the world. On Slide 20, we're going to talk a little bit about vanadium now. A year or so ago, we were on the site and we discovered vanadium occurring with our graphite deposit in Alabama. We sent some 2,000 samples to the lab and confirmed widespread presence of vanadium in grades that apparently look interesting to us, about 1.15%. These could represent an economic enhancement to our facility once we start mining, and we'll need to do a little exploration and evaluation to see how widespread and in what direction and quality of that vanadium is, and what the metallurgy is so that we know how to produce it from the processing of graphite concentrate. If profitable, we can enter the steel markets with that material as a commodity. And again, vanadium can enhance Coosa's economics. On Slide 22, we have a list of tenure leaders in energy minerals development. This is something that you have seen before, with the exception of the addition of Jay Wago to our staff on July 1. Jay comes to us with a BSBA in marketing from Georgia State and he has more than 20 years of experience marketing to the lithium-ion and electric vehicle markets in the U.S. and Asia. This valuable addition to our staff puts sales front and center, so that we can begin actively marketing our materials with the knowledge base that Jay already brings to us. And of course, you know, leadership like Jeff Vigil with more than 40 years of experience in the mining and manufacturing spaces. Dain, who is also on the phone, a graduate of the Colorado School of Mines, and he came to us in 2004, and he is heading up our Graphite business. Cevat Er, our VP Tech has relocated to the United States and is in the Denver office with us, and he is running all of the technical aspects of our graphite business. And of course, John Lawrence, with more than 30 years of experience in law and licensing across the nuclear fuel cycle and securities. On Slide 23, experience matters. Energy minerals exploration and development is a process that requires discipline and diligent capital stewardship. We've restructured and recapitalized this company over the past several years, repositioning Westwater as a diversified energy materials company. We have in place an experienced management team with a demonstrated history of developing businesses from concept to production. We have executed a proactive M&A program by selling non-core uranium properties to redeploy capital and cost-effectively expand our resource base into green energy materials. Slide 24. We benefit from strong, fundamental market drivers in all of our portfolio materials, leverage to the battery sector with the Coosa Graphite project in Alabama, leverage to rising uranium price with one of the largest uranium mineralization bases in the United States and two licensed uranium processing facilities in Texas. Pending U.S. Government recommendations on uranium purchases provide upside for U.S. producers and developers. And the new vanadium discovery at Coosa has the potential to provide entry into steel markets and enhance the economics of our Coosa project. On Slide 25, we have a strong asset portfolio with upside potential. We are a proven management team with experience in energy minerals development and financial management. And you should expect catalysts in the remainder of 2020 and 2021, as we develop this graphite business through the pilot plant onto the feasibility study and on into development and production. And with that, I'd like to thank you for your attention today and open up the lines for questions.

Thank you. Our first question is from Debra Fiakas with Crystal Equity Research. Debra, your line is open.

Thank you. Thank you for taking my question. I actually have a couple, and I wanted to direct one question initially to Jeff Vigil in regard to the cash usage during the quarter. It seemed like it ticked up just a little bit in this quarter, understandable. I wondered if you could perhaps give us a little bit of insight into how much of that spending in the quarter related to the coronavirus pandemic and whether or not there's any cash usage there that might not be repeated in subsequent quarters? And then maybe if you could just give us a little bit of guidance on the coming quarters, do you expect cash usage to increase or decrease?

That’s a very good question, Deborah. And during the second quarter, I can say that we were not really impacted from a spending standpoint by the COVID-19 pandemic, and the primary reason for that is the higher uses of cash, as I mentioned in my presentation, was due to the pay-down of trade accounts payable and accrued liabilities that have built up since most of the year. So, when you look at it year-over-year and on a quarterly basis, there was quite a reduction. But again, the answer to your direct question about did the coronavirus impact our spending? No, it did not. We kept it pretty much at the same level. Otherwise, as indicated by the G&A spending, as well as the mineral property spending, and looking forward, for the quarters, we will see some ramp up in costs related to product development as we discussed. But as far as our general and administrative spending and our other mineral property expense levels, we expect them to be fairly consistent with this quarter that we just completed.

Okay, thank you. And then I wanted to move on and touch on something that was mentioned in your opening remarks, Chris, in regard to the test of the CSPG product. And I think in the announcement, you mentioned previously that there's been some testing done on that CSPG product and comparing it to some other graphite materials. And I wondered if you perhaps could give us a little bit more detail on who might have conducted those tests. Did you commission them yourselves? And then, if you maybe could give us some hints as to how they went about selecting the other graphite materials to use as a comparison. I’d just kind of like to get a little bit more granularity on, no pun intended, on the graphite test?

You bet and if it's okay, I'll take them in reverse order. The way we selected our competition is frankly we had data sheets available. Some are proprietary, some are public domain, and publicly available, and that's how we select our comparators. With regard to who did the testing? We've been working with Polaris Labs for most of the year now on our testing regime for all of our products. They're located in Seattle. And they represent our in-house, out-of-house lab, if you will, we pay the bills, and they do the testing and report results; we do not influence results, of course. So, it gives us a first-class third party to evaluate our performance. And with regard to the testing of CSPG itself, we do two kinds of testing if you will. First of all, you send it to the lab and get it coded, so that it can act like a battery material in the same way that a lithium-ion battery actually uses it. And then you do initial charge acceptance and decline curves to ensure that the thing is electrically active and electrically receptive. And then over the course of about four months, you do upwards of several hundred charge and discharge cycles to evaluate what its performance can be over the long run. So, now what you saw in our releases is initial results, and what you'll see later, are going to be longer-term results, so that we can understand the electrical properties of this particular product and how they apply to lithium-ion batteries. Does that answer your three-part question adequately, Debra?

Yes, it does. Thank you very much for explaining what was involved in that test. You mentioned that some elements of your graphite materials processing are standard while others are proprietary. Could you remind us if there is potential for patenting those proprietary aspects of your production process? Is protecting your processes and know-how from competition important for your business?

So let me answer the question this way. For any process that is clearly better than what we see out there in the neighborhood and is something that we developed, there's some value to our company to patent that or to protect it in some way. So we're in the process of continuously evaluating whether or not that's appropriate for what we want to do right now. And I think that once we would register IP, that would be something we want to talk about at some point in the overall process of development.

Thank you for your response. My last question pertains to the pilot plant, and I appreciate the work that has been done over the past few months despite the significant business disruptions. I'm eager to get started on this project and would like to know what the initial steps are to begin the pilot plant. Specifically, what actions need to be taken first, and which steps are likely to have longer lead times? Could you please outline what needs to be done to get the pilot plant operational?

The longest single step in developing the pilot plant is the design, and we have been and are working on that right now. And then, the unique nature and the multiple processes for using for these different products then becomes something we have to schedule between different locations. So, the pilot plant would potentially purify at one location, make SPG at another location, and make PMG at some combination of the locations, for instance. So, we're working with several different vendors to coordinate these activities so that we can have one coherent and easy to manage process for running this pilot plant. And then it all runs basically over the course of a month and a half or so towards the end of this year.

If I could just ask a follow-up, you're saying you're working with different vendors. Are you suggesting that you would have processing work done by different entities or are you just talking about the design and construction elements of the pilot plant?

The design and construction and coordination is not necessarily with multiple vendors, say, but the individual processes, we're basically high-grading processes from different vendors, people that are really good at this particular aspect, if you will, of the pilot plant. So, this work is being done brilliantly by and large by our team working with Dorfner Anzaplan in Hamburg, Germany.

Okay. If you had to provide a percentage, what would you say is the amount of design work that has been completed?

I don't think I get pushed into that corner, Debra. But, I appreciate the question nonetheless.

Thank you. Chris, I want to congratulate you and your team. I've been a follower of this company for years. This is the best quarter you've had in years and the best balance sheet you've had in years. So, just tons of congratulations. That's all I have.

Well, thank you for that, Howard. And I'll pass that along to the team, faced with the challenges of working remotely and then not remotely and the financial markets being a little nuts, certainly the first part of the year, I agree this has been a great quarter, but it's really been due to the hard work on part of this team. And those folks we represent. So, thanks.

There appear to be no further questions. So, this concludes today's question-and-answer session. I'd like to turn the conference back over to Christopher Jones for any closing remarks.

Thanks, again, Gaylene. And thanks all of you for listening to the call and participating in the Q&A. We're really proud of the team. We're really proud of the results that we have been able to produce this quarter, and we wish you all a safe, healthy and happy day. Thank you very much.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.