Westwater Resources, Inc. Q2 FY2021 Earnings Call

Thank you for standing by. This is the conference operator. Welcome to the Westwater Resources, Inc. Q2 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. I would now like to turn the conference over to Chris Jones, President and CEO. Please go ahead, sir.

Thanks, Shariece, and thank you to everyone for taking the time today to join us. Joining me today on the call is Jeff Vigil, our CFO; and I would like to introduce Steve Cates, our Chief Accounting Officer. On Slide 2, note the cautionary statements. We invite you to read them at your leisure. We will be talking about some forward-looking information today. Turning to Slide 3, ensuring the safety of our employees. To ensure the safety and health of our employees and the communities where we work and in accordance with local and CDC guidelines, we've reopened our office in Centennial. We continue to ensure that our employees are permitted and encouraged to take time off due to illness, or the illness of those around them without penalty. Turning to Slide 4, ensuring the health and growth of our business. Our pilot program has produced a total of over 13 metric tons of battery-graphite. We have secured the site for our intended processing plant near Kellyton, Alabama together with the financial incentives from the state, county, and industrial development boards, and we continue to work to ensure adequate financial liquidity to support our key operations and business activities. To that end, we have a cash balance of $119 million as of June 30. Westwater is continuing to proceed in its case for compensation from the Republic of Turkey. Our hearing is scheduled for the middle of September 2021, and we are requesting $36.5 million plus fees. With that, I would like to turn it over to Jeff Vigil, our CFO. Jeff?

Thank you, Chris. Good morning everyone. First, let's take a look at our capital division on Slide 5. Closing share price on Tuesday, August 10, was $4.36, and with approximately 33.5 million shares outstanding at June 30, our market capitalization stands at about $146 million. Share price beginning in the second quarter at $5.37 and ended the second quarter at $4.74. The average daily trading volume over the 63 trading days of the second quarter was 1.8 million shares. We're happy to report that effective June 28, 2021, Westwater common stock was added to the Russell Microcap Index. During the second quarter of 2021, the company utilized its equity line with Lincoln Park Capital to raise approximately $5.7 million from stock sales. With our current cash balance and our availability on our financing facilities, we continue to take advantage of the opportunity to raise cash and put us in a fundamentally strong position to execute our budgeted business plan for 2022, and this also allows us to make a substantial initial investment in the commercial graphite processing facility that we recently announced to be built in Coosa County, Alabama in the latter half of 2021. On Slide 6, we provide a financial summary for the period ended June 30, 2021. The six months ended June 30, net cash used in all operating activities was $9.1 million as compared with $6 million for the same period in 2020. There was a $3.1 million increase in cash used primarily due to increased product development expenses, exploration activities, general administrative costs, and arbitration costs in 2021. Our net loss from continuing operations was $3.5 million for the three months ended June 30, 2021, compared to $2.5 million for the same period in 2020, a $1 million increase compared to 2020, was largely the result of the increased product development expenses, exploration, and general administrative costs, offset partially by the elimination of costs from discontinued uranium operations and an unrealized gain related to the enCore common stock. On June 30, 2021, the company's cash balances were approximately $119 million. The company had working capital balance of $117 million. Again, with these cash resources, we will use them to fund ongoing operations, fund the development of our graphite business plan, and again, allow a substantial investment in our commercial processing facility. So with that, I'll turn it back to you, Chris.

Thanks, Jeff. And on Slide 7, a reminder about Westwater's core values, first of all, safety, and that is safety for each other, our environment, our assets, the communities where we work, and our reputation. Secondly, cost and cost management, effective and efficient use of our shareholders' assets, and a focus on first quartile cost performance. And third, integrity, the highest level of performance every day, improving our processes and then importantly, conservative promises well kept. On Slide 8, it's all about executing our business plan. Our feasibility study inputs primarily from the pilot plant provided all kinds of key inputs for this DFS. Study results are on time for Q3 delivery. We've produced more than 13,000 kilograms of products for testing by Westwater and prospective customers, and samples are in prospective customers' hands as we speak. On Slide 9, we selected a site near Kellyton, Alabama for our processing plant. And on June 22, community leaders from the state of Alabama, including Governor Kay Ivey and Secretary of Commerce, Greg Canfield; Coosa County, Alexander City, and the Lake Martin Industrial Development Board celebrated the unveiling of our project site with the Westwater and Alabama Graphite Projects team. And there's a photo of many of those participants there at the site where we intend to build this facility. On Slide 10, an area of picture of that site includes in the red circled area where we plan on building the majority of the plant as it comes out of its design process. Again, as a result of the Definitive Feasibility Study, within Coosa County, it’s about 30 miles or minutes from our Coosa Graphite Deposit, on the other end of the county. These government agencies, including the county, the municipality, and state offered more than $34 million in incentives for us to site a facility there. We entered into a public-private partnership with the city of Alexander City in order to upgrade and extend their wastewater lines so that we can put our wastewater directly into their waste treatment facility. $400,000 cash was allocated for that public-private partnership, and we added $100,000 worth of prepaid treatment expense in order to facilitate this partnership. Note that we leased the site for up to 10 years with an option to purchase for about $1 a year or thereabouts, and essentially got the land for free. Once again, with all these incentives, it is a terrific business opportunity for Westwater and a great business opportunity for the citizens of Coosa County in Alabama. On Slide 11, our Coosa Graphite Project key attributes include a proprietary technology for purification. It’s a high purity conversion process that results in a 99.95% carbon product. It is simple, robust, and cost-advantaged. Our products do not go on the water. They can be delivered to sites right here in the United States, and if needed, shipped over to Europe and Asia. The vanadium discovery a couple of years ago on our project site in Western Coosa County potentially improves project economics. We utilize a sustainable process, an environmentally sustainable process where we manage the inputs and outputs. Our graphite can save over 200,000 tons a year of CO2 emissions when used in electric vehicles. On Slide 12, a little bit about battery markets. Transportation is clearly the largest growth market for our products, with a 23% growth rate expected over the next 10 years. It’s predominantly lithium-ion batteries. If you think of the battery in two parts, there's anode and cathode. About 25% of the material in a lithium-ion battery is graphite on the anode side. Over the last week, the U.S. government and domestic automakers have announced a goal that over 50% of all autos sold here in the United States will be electric vehicles by 2030. That's a 17-fold increase in the number of cars sold as electric vehicles, with a commensurate 17-fold increase in the demand for graphite. This is a very exciting development for our business. In other areas of battery growth, an 11% growth rate is expected in the energy storage system. Think of these as grid storage systems, and these are the enabling technologies for wind and solar power. Consumer electronics represent a large and mature market for lithium-ion batteries with a 3% annual growth rate, as well as other specialty battery markets from defense and other military and government applications. On Slide 13, graphite is a critical component of all types of batteries, including lead acid, alkaline power cells, and non-rechargeable lithium-ion cells. Purified spherical graphite is a critical component in lithium-ion batteries for the big growth stories for our products. The United States government has defined graphite as critical to national security and prosperity, and presidential executive orders over the last two administrations have directed U.S. government agencies to act with urgency. This week’s announcement of a drive by both the United States government and domestic carmakers to increase sales of these vehicles from 3% of the current automobiles on the market to 50% is great for our business. This puts our CSPG product front and center as a critical material in future source and supply. On Slide 14, the Coosa Graphite Project is a near-term source of domestic U.S. battery-grade graphite. Samples are being sent to potential customers. Westwater’s graphite will be produced using environmentally sustainable processes right here in the United States, where we have a robust regulatory environment to help us manage that process. Westwater’s graphite products serve important battery markets. Our vanadium discovery at Coosa could also contribute revenues, and exploration is currently underway. On Slide 15, we’ve developed a new technology for graphite purification, and we have filed a provisional patent application with the U.S. Patent and Trademark Office for this technology. Our methodology has a more sustainable footprint than those currently used in China, where environmentally damaging and expensive to manage hydrofluoric acid is employed, yielding graphitic carbon grades of more than 99.95%. The process allows for flexible feedstock with consistent overall performance. Our process consists of three basic steps: first, the caustic roasting of the graphite concentrate sample; second, acid leaching of the growth sample; and third, the thermal finish of that sample to remove the remaining impurities. On Slide 16, the Westwater Feasibility Study led by Samuel Engineering is underway for expected completion in Q3. Exploration drilling has begun and continues, not only for vanadium but also to further define the graphite content of the Coosa Graphite Deposit. Full-scale production is expected from purchased feedstock producing battery-grade graphite. Westwater expects to begin mining at the Coosa Graphite Deposit in Alabama, beginning in about 2028. On Slide 17, we have a graphic to support the previous slide’s content: commercial production starting in 2023, U.S.-based feedstock in 2028, and our purchased graphite in order to get this plant up and running quicker in the meantime, purchased from a non-Chinese graphite source. On Slide 18, our team continues to grow with tenured leaders in energy minerals development. Previously, we’ve announced the addition of Chad Potter as our Chief Operating Officer. He is based in Alabama to grow that business. Steve Cates is here on the phone with us today as our Chief Accounting Officer. As the team grows, so does our experience base in project execution and battery materials, with over two centuries of experience currently contained on this executive team. On Slide 19, experience matters. Energy minerals exploration and development requires discipline and diligent capital stewardship. We restructured and recapitalized this company, positioning Westwater as a green energy materials company with a laser focus on battery-grade graphite products. We have an experienced management team with a demonstrated history in finance and green energy development from concept to production. Turning to Slide 20, why Westwater is an investment. We have a battery-grade graphite development business with strong upside potential. Graphite has been designated a critical mineral by the United States Government. Recent tailwinds in terms of announcements from the U.S. Government and carmakers have increased interest in our products. We have a proven management team with experience in energy minerals development and financial management. Looking forward into 2021, you should expect further results on the Coosa exploration project, results from our definitive feasibility study, and milestones in the development of the Coosa Graphite Project as we achieve them, such as those we’ve already accomplished in terms of site selection and state and local support for our project. With that, I’d like to turn it over to questions. Shariece?

Thank you. The first question comes from Debra Fiakas with Crystal Equity Research. Please go ahead.

Thank you very much. Thank you for taking my questions, and congratulations on having achieved a site selection. I imagine that the good folks in Alabama are quite pleased to see that sign go up. No surprise, then that they were prepared to give you a welcoming gift—$36 million is a nice welcome gift. Maybe this is a question for Jeff in regard to how those tax credits and incentives are going to show up. Are any of them cash incentives or was this more or less a matter of reducing future expenses like a future tax bill or something like that? Maybe you could give us a little bit more color on how those will work.

I’d be happy to do that. Debra, that’s a great question. The majority of the incentives we receive are future benefits, a reduction in cost, if you want to say—not a cash payment. They fall into three different buckets: one bucket is a reduction of sales tax during the construction phase; the second bucket is a reduction of property taxes for non-educational purposes for a ten-year period; and the last is the Alabama investment tax credit, which is fairly substantial over the course of the project or the operations of the business. It’s a state credit, so obviously it will come into play at the time that the company generates taxable income at the state level. So, that’s the nature of the incentives.

Excellent. Thank you. And then just another question about the site itself. It was very good to see that picture in the aerial view. Does the site itself, there in that industrial development area, have any particular implications for the environmental permitting that you’re required? Is it positive, a negative? Will you be required to install any kind of special or private access roads? Or can you use the access roads that are there?

Good question, Debra. In reverse order, the roads that are there we can feel free to use. And also remember that there is land across the creek towards the top of the page in that red circle, which requires a bridge to be built that is being constructed by the industrial board with some state support. So the short version is the existing roads and the roads to be are free for our use. The site itself is developed as an industrial park and as such has no special permitting requirements. However, we will still be required by the state and other agencies to ensure that our air and water are properly managed, so that we can provide a sustainable footprint for the development of that site. Permitting an industrial facility in an industrial park is different, and frankly, far easier than permitting a mine. We are in the process of becoming acquainted with and getting involved with the Alabama Department of Environmental Management to begin that process as soon as we know precisely what those outputs and inputs will be.

Excellent. Thank you. Now, of course, we've heard quite a bit from you already about the pilot project and the various products that you were able to produce. You had mentioned in the past, and I think it is again repeated in your quarter report that they've been sent for testing the final product to see how they perform. You can tell how they performed, and also that the precursor for the especially fancy materials, the CSPG, has been sent for coating. I wondered if you could maybe give us a little bit of an update on how that testing has proceeded, and is there anything new that you can tell us today? Also, whether or not we'll read about that testing when you get your final feasibility study published here in the next two or three months?

You bet. You'll read about it. We're pretty excited about it. Coating is underway right now; I can't remember the rate at which we are coating right now, but it's certainly beyond bench level and pilot scale level, and we’re in process. So, results are yet to come on that particular bit. With regard to samples out for tests at our independent lab and several potential customers right now, they are examining and looking at this material. It's a very exciting time that way. All of that testing with regard to potential customers takes place under non-disclosure agreements, which really benefits our customers and us in many different ways. So, I wish we could provide specifics, but we can't really discuss them. However, we're very excited about the product and the progress we've made over these three months, over these six months, in developing these products. Does that answer your question?

Yes, it does. Now, are any of the tests that you're contemplating of the sort that you've commissioned yourselves and could disclose the results?

Good question, and yes, that sort of testing. Once it comes back from our independent lab, that'll be part of our package that we develop for introducing our product to new customers. Generally, there’s no reason to keep that information secret.

Okay. And then I'll make one last question. This is in regard to uranium. I know you're not in the uranium business anymore. We have one final piece of business regarding the dispute with the government of the Republic of Turkey. You mentioned in your opening remarks that you have a mid-September date to move forward with your arbitration against Turkey. Do you have a definite date, or is that mid-September just a goal set by the arbitration panel?

We have a specific date for testimony. We will be in Washington giving our testimony and receiving theirs during the week of the 13th.

Excellent. Thank you.

The way the calendar works is that testimony is completed on the Friday of that week. From there, the arbitration panel deliberates for upwards of a year; there’s potential for some back and forth on clarification, but that year is really pretty standard in their deliberative process for rendering a decision.

Alright. Very good. Thank you.

Thank you, Debra.

The next question comes from Dan Murchison with Lake Mitchell Homeowners Association. Please go ahead.

Yes. Hello. And thank you for the invite. My question is regarding the local planning for the Lake Mitchell Area: your water withdrawal for washing; can you tell us exactly where that comes from? If I understand correctly, your discharge goes through the Alexander plant there before it returns to the lake. Does the water go back into Lake Martin or does it come into Lake Mitchell where your discharge is? And what about tree removal? Can you kind of go through that and tell us if any of your tree removal is in the forever wild land area there?

You bet, and thank you for your question and interest. In reverse order, none of the tree removal we intend on any level will occur in the forever wild area as it applies to our site development for the processing facility near Chilton. Regarding our intake and discharge water, your questions are good; the City of Alexander City is providing both our fresh water and our discharge. My understanding of the water treatment plant in Alexander City is that it discharges into Lake Martin. If that answers all three of your questions, or do you have any others?

Okay. And do you have a timeframe to estimate when your factory operation will be operational?

Our schedule indicates that construction starts before the end of this year and the operations will start in 2023. Those are important pieces of the definitive feasibility study that we are currently conducting, expected to be completed here in Q3. So, I’d have to answer that with a more detailed update to come.

Okay. The tree removal for the mining operation—what is your reforestation program just roughly consistent with?

We haven’t yet designed the mine, and we'll be doing so over the next six years. There will be points in the process along the way where public comment will be invited and documents will be produced. So, I’d ask you to give us that time to properly prepare the design for the mineral operations yet to proceed. For now, we are firmly and laser-focused on building this processing facility.

Okay. Thank you very much for your questions, and good luck with your operation.

Certainly. Thank you for asking them. We appreciate it.

Your next question comes from Gerard NATO with NATO Investments. Please go ahead. The next question comes from Barbara Cole with Hargrove Engineering. Please go ahead.

Yes, thank you. What an exciting project for Alabama right there on beautiful Lake Martin. My question is more geared toward the project execution phase. Hargrove Engineers and Constructors is a large EPCM company headquartered in Mobile, Alabama, with offices throughout the state. My question is, what is your plan proceeding forward in execution with the receipt of the conceptual engineering due here this quarter?

As it applies to any EPCM, what we expect to have during this quarter is all of the parameters—inputs, outputs, and information we need to evaluate the economics of the project. More to come there, followed by detailed engineering as we go along. We would expect to have a request for proposals going out here in the next couple of months, so your overly quick and inaccurate evaluations as we go forward. This is a pretty exciting time for us.

Okay. Another quick question. Do you have a strategy for involvement of Alabama companies in the sizes going forward?

The answer is absolutely and positively, we are excited about doing business in Alabama. We are enthusiastic about the capabilities that exist across the state, as well as the municipal agencies. To that end, wherever we can and should, we will be partnering with local Alabama and other companies.

Very good. Thank you very much.

Thank you.

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

Thank you, Shariece, and thank you all for your questions today. We really appreciate your interest in our project and our business. Thanks to everyone for taking the time and attention to be with us today. We wish you all a safe and great day. Thanks again.

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