Westwater Resources, Inc. Q1 FY2021 Earnings Call

Thank you for standing by. This is the conference operator. Welcome to the Westwater Resources, Inc. First Quarter 2021 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. Operator Instructions. I would now like to turn the conference over to Christopher Jones, President and CEO. Please go ahead, sir.

Thanks, Ariel. And this is Chris Jones; I'm the President and Chief Executive Officer of Westwater Resources, and welcome to our call. This is our Q1 results call. Joining me here today are Jeff Vigil, our CFO; and Dain McCoig, our VP of Operations. On Slide 2, we encourage everybody to read the cautionary statements. We may be referring to forward-looking information during this call. Slide 3. We continue to ensure the safety of our employees and the communities where we work. In accordance with local and CDC guidelines, we've reopened our office in Centennial. We continue to ensure that our employees can and are encouraged to take time off due to illness, or the illness of those around them, without penalty. On to Slide 4. We continue to work with our business partners to maintain our advanced battery-graphite product development schedule. Our pilot program has now produced over 13 metric tonnes of battery-graphite in multiple sizes across all three of our products. We are working to ensure adequate financial liquidity to support our key operations and business activities. We have a cash balance of $118 million as of March 31. Westwater continues to pursue compensation from the Republic of Turkey. Our hearing is scheduled for September 21, and we are on track with a request for $36.5 million plus fees. And now, Jeff, I'll turn it over to you.

Thank you, Chris. Good morning, everyone. First, let's take a look at our capital position on Slide 5. Our closing share price on Tuesday, March 11, was $3.88. With approximately 32.3 million shares outstanding, our market capitalization stands at approximately $125 million. The share price began 2021 at $4.93 and ended the first quarter at $5.37. Average daily trading volume over the 61 trading days of the quarter was 8.9 million shares. During the first three months of 2021, our stock performance was largely influenced by the ongoing volatility in the capital markets due to the country’s reaction to news about the COVID-19 pandemic, as well as inflation and supply shortages. Share prices for electric vehicle and battery-material equities were boosted in February by President Biden's executive order, which reiterated the prior administration’s declaration of a national emergency for U.S. domestic production of critical minerals, including graphite and vanadium. During the first quarter of 2021, we utilized our ATM facility with Cantor Fitzgerald and our equity line of credit with Lincoln Park Capital to raise approximately $72 million from stock sales. By taking advantage of this opportunity to raise a substantial amount of cash at a low cost of capital, we are now in a fundamentally strong position to execute our budgeted business plan through 2022, including funding for the construction of Phase 1 of the graphite processing facility. On Slide 6, we provide a financial summary for the three months ending March 31, 2021. Net cash used in all operating activities was $4.9 million for the quarter, compared to $3.5 million for the same period in 2020. The $1.4 million increase was primarily due to higher product development expenses related to our battery-grade graphite pilot program, along with a $300,000 increase in general and administrative expenses. The increase in general and administrative expenses stemmed from elevated legal and consulting expenses related to our Coosa Graphite project. The company also spent approximately $1.5 million on legal and expert consulting costs for the ICSID arbitration proceeding. The key hearing in this arbitration process is scheduled for September 2021, as Chris noted. The net loss from continuing operations was $5.4 million for the three months ended March 31, 2021, compared to $3.3 million for the same period in 2020. The $2.1 million increase compared to 2020 was largely due to higher graphite product development costs, general and administrative expenses, and arbitration costs, offset by the elimination of $1.1 million in costs from discontinued operations from 2020. As of March 31, 2021, the company had cash balances of approximately $118 million and a working capital balance of $115 million. As of May 7, our cash balance was approximately $116 million. These cash resources will be used to fund ongoing operations, the development of the graphite business plan, and provide the necessary capital to build Phase 1 of the commercial production plan. Finally, I'd like to welcome Steve Cates to the Westwater executive management team as Chief Accounting Officer. Steve has been designated as WWR's Principal Accounting Officer. He is a proven financial manager whose skills and experience will be instrumental in the upcoming stage of anticipated growth and value creation at Westwater. With that, I'll turn it back to you, Chris.

Thanks, Jeff. On to Slide 7, just a reminder that our core values are simply the safety of each other, our environment, our assets, the communities where we work, and our reputation. Our second core value is cost management, emphasizing the effective and efficient use of our shareholders' assets. We focus on first quartile cost performance and integrity, maintaining the highest level of performance every day while improving our processes and keeping conservative promises. On Slide 8, we are the owner of the leading graphite development property in the United States. Our pilot program has successfully produced over 13 metric tonnes of battery graphite using our proprietary purification process, and our definitive feasibility study is underway with an expected completion in Q3 of 2021. On Slide 9, results from our pilot program include almost 17,000 kilograms of purified material. This is essential graphite material needed for battery-graphite production. Our process sets us apart from all competitors. The production of spherical purified graphite has yielded about 4,600 kilograms so far, which includes fines. On Slide 10, our ULTRA-DEXDG production to date stands at 310 kilograms of material. Purified micronized graphite, or PMG, has produced almost 8,400 kilograms in five different sizes. The pilot program has already provided key inputs for the definitive feasibility study. Slide 12 highlights that we've engaged Samuel Engineering to lead a group of engineering contractors in the United States and Germany to complete our definitive feasibility study for the Coosa project's commercial production plant. We expect this study to be completed in Q3, with a capital cost and operating expense estimate of plus or minus 15%. On Slide 13, our key attributes and differentiators lie in our proprietary technology for purifying graphite, which has a lighter environmental footprint, a simple and robust process, and with projected costs that are competitive in the industry. We are a U.S.-manufactured battery-graphite provider, offering an advantage in shipping costs, and with the vanadium discovery at the Coosa project, we see potential for improved project economics. Importantly, our environmentally sustainable process can save over 200,000 tonnes of CO2 emissions annually when used in all electric vehicles. On Slide 14, regarding the battery segments we participate in: in transportation, notably electric cars and buses, we expect a 23% growth rate over the next 10 years. This primarily involves lithium-ion batteries, which have qualification cycles of three to five years. In energy storage systems, a growth rate of 11% is expected over the next decade, with qualification cycles lasting about five years. These systems enable wind and solar farms to produce electricity when conditions aren't favorable. The consumer electronics market is anticipated to grow at a 3% compound annual growth rate, given its maturity. Specialty markets, further encompassing sectors like defense, aerospace, and medical, remain significant for us as we develop products for all four segments. On Slide 15, graphite is a critical component of all types of batteries, including lead-acid, alkaline power, and non-rechargeable lithium-ion batteries. Our CSPG product is essential for lithium-ion batteries, where approximately 800 pounds of battery composition in electric vehicles include 200 pounds of graphite. The U.S. government officially recognizes graphite as critical to national security and economic prosperity, urging government agencies to take swift action. Slide 16 outlines the Coosa Graphite project as a near-term source of domestic U.S. battery-grade graphite, with samples being sent to potential customers. Our graphite will be produced using environmentally sensitive and sustainable processes, serving all battery markets. The vanadium discovery at Coosa could generate additional revenue, with exploration currently underway. Again, our three products: ULTRA-PMG, used in lead-acid and alkaline batteries for conductivity enhancements; ULTRA-DEXDG, which optimizes conductivity; and ULTRA-CSPG, which functions as anode material for performance-enhanced lithium-ion batteries, has shown that our CSPG can save over 200,000 metric tonnes of CO2 emissions annually when applied in electric vehicles. Slide 18 reminds us that Westwater has developed a new technology for graphite purification, resulting in a provisional patent application with the U.S. Patent and Trademark Office. This technology presents a more sustainable footprint than methods currently used in China, which involve environmentally damaging and costly hydrofluoric acid. Our process achieves over 99.95% purity using a three-step method that includes caustic roasting, acid leaching, and thermal treatment of samples. On Slide 19, just to reiterate what Jeff mentioned, we have secured the funding needed for Phase 1 construction. Looking to slide 20, our project plan is outlined: our feasibility study led by Samuel Engineering is on track to conclude by Q3, exploration drilling for vanadium is in progress along with work on graphite deposit definition, with full-scale production slated to begin in 2022, producing battery-grade graphite. We anticipate starting mining at the Coosa Graphite deposit in Alabama by 2028. Slide 22 provides a visual representation of this timeline for those who prefer graphs. Our team is being continuously expanded, with the addition of Steve Cates as Chief Accounting Officer to enhance our management capabilities. On Page 23, it's important to remember that experience matters. Development and exploration in energy minerals necessitate diligent capital stewardship. We’ve restructured and recapitalized the company, positioning Westwater as a green energy materials firm focused on battery-grade graphite products. Our management team boasts extensive finance and energy development experience, having effectively executed a proactive M&A strategy, including divesting non-core uranium properties to reallocate capital towards expanding our resource base in green energy materials. Finally, on Slide 24, why consider Westwater as an investment? We operate a battery-grade graphite development business with significant upside potential. The U.S. government has classified graphite as a critical mineral. We possess a capable management team with deep experience in energy minerals development and financial management. Expect catalysts for the remainder of the year, including results from Coosa exploration, feasibility study outcomes, and project milestone achievements as we progress. With that, I would like to open the floor for questions.

Thank you. We will now begin the question-and-answer session. Operator Instructions. Our first question comes from Debra Fiakas of Crystal Equity Research. Please go ahead.

Thank you. Good morning, and thank you for taking my questions. I wanted to ask a general follow-up question to Jeff regarding the reported arbitration expenses. There was quite a bit of work that had to be done in the first month of the year to provide a rebuttal to Turkey's response. Do you anticipate that there will be additional work of this nature that has to be done in the current quarter or next quarter? I'm just trying to get an idea of what your cash usage might continue to be in that regard.

That's a very good question, Debra. The process will accelerate in July, with significant activity in July and August as we prepare for the mid-September hearing. However, I want to note that we do have a cap on fees, which should somewhat mitigate the expenses we incur during the upcoming quarters. Yes, we can expect increased activity as we prepare for the hearing.

Excellent. Thank you very much. And congratulations on the new member of your team, Mr. Cates. Do you plan on additional position creation or new hires? If so, could you provide us an idea of what types of positions you will be adding throughout the year?

Debra, if I may, thanks again for your question. Between now and the end of 2022, we plan to onboard 140 people, which includes positions ranging from operators to management roles. We intend to hire as many local people in Alabama as possible and ensure that we build a strong management team to minimize complications as we develop and commission this facility.

Thank you. One more question regarding the feasibility study timeline. You mentioned that it's already underway and is expected to arrive by sometime in Q3. Can you specify whether you believe that will be at the beginning or the end of Q3?

It aligns with our previous messaging. Essentially, our last update was consistent with this timing. Feasibility studies are detailed and intensive, and we want to ensure accuracy, so we expect to provide an update sometime in Q3.

I have one last question. In your press release, you indicated that 13 metric tonnes of battery materials had been processed, and you now have an inventory of materials for testing. Do you believe that the volume will meet the potential customer interest and your testing needs? Or will you need to run the pilot process again before establishing the processing facility next year?

Good question. We believe that the 13 tonnes are sufficient. These are product tonnes, and our potential customers are looking for these in kilogram increments. So yes, we anticipate having enough material available.

Operator Instructions. Our next question comes from David Ball, a Private Investor. Please go ahead.

Hello, Chris, good morning. Could you briefly discuss the Coosa project regarding the mineral rights? I'm assuming these aren't leased, and if so, what is the duration of that arrangement?

Thanks for your question, David. The mineral rights encompass approximately 40,000 acres on the Coosa site itself. These rights are held with a single entity for which we pay annual lease payments.

What is the term or duration of that lease?

The lease is perpetual, including five-year renewals as I recollect.

So you feel this could go on for what, 30, 50, 70 years if necessary?

Currently, we anticipate a mine life of around 30 years based on previous estimates of the ore body and resources. We also have a 10,000-foot drilling program underway, which could integrate additional considerations like vanadium values, potentially enhancing economics. Fortunately, there's no downside to the vanadium; it's all upside.

Operator Instructions. Our next question is a follow-up from Debra Fiakas of Crystal Equity Research. Please go ahead.

Thank you for allowing me to ask another question. There are various estimates regarding the growth of the graphite market and potential demand. I think Benchmark Mineral estimates indicate that demand for graphite may quadruple over the next eight or nine years, while UBS forecasts an increase of seven times by 2030. Could you share your insights on the anticipated pace of growth within your addressable market? Additionally, regardless of whether we see doubling or quadrupling of demand, do you still expect sufficient demand for your products?

We don't typically develop an independent view, but as you know, our estimates are generally conservative. We anticipate a 23% annual growth rate in the lithium-ion battery market alone, essentially meaning it doubles roughly every three years. Even if growth is halved, we are entering a rapidly growing market where supply has not yet been adequately developed. I encourage all listeners to attend my upcoming presentation at the National Academies of Sciences on the 17th, where I will discuss the graphite market in detail without a specific Westwater bias. Our differentiators lie in the limited number of players in the U.S. graphite market, and we expect to be the only fully integrated graphite supplier when we commence operations.

Our next question comes from Michael Porter of Porter, LeVay & Rose. Please go ahead.

I have a redundant question. Have you seen any updates from Washington regarding graphite? Additionally, I've heard about car manufacturers increasingly shifting towards electric vehicles. Have you received any inquiries from them regarding testing your graphite?

Regarding our customers, they typically request confidentiality, which we respect. Every carmaker is now developing some form of electric vehicle and exploring future markets. In the U.S., the annual market comprises about 17 million cars, with electric vehicle adoption rates rising from 2% in 2019 to 4% in 2020. We expect these rates to increase. Even if the market only reaches 10% or 20% adoption, that still amounts to a significant increase in graphite demand not currently being met. Our positioning in the marketplace regarding timing, product, and quality couldn't be better.

This concludes the question-and-answer session. I would like to turn the conference back over to Christopher Jones for any closing remarks.

Thanks, Ariel. Thank you all for spending part of your morning with us and listening to our story. We encourage you to visit our website for further information, and I invite you to my presentation at the National Academy of Sciences on the 17th. Thank you once again, and have a great day.

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