Westwater Resources, Inc. Q3 FY2021 Earnings Call

Thank you for standing by. This is the conference operator. Welcome to the Westwater Resources, Inc., Q3 2021 Results and Business Update Conference Call. As a reminder, all participants are in a 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.

Thank you, Charisse. And thank you, everyone for taking time this morning to listen to our Q3 results presentation and offer up your questions. We really appreciate it. Before we get started, a quick safety message and turning to slide 3. To ensure the health and safety of our employees and the communities where we work, 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. Under slide 4, we continue to maintain our advanced battery graphite product development schedule. We've completed the definitive feasibility study for our Graphite Processing Facility and approved construction of Phase 1. We've secured the site for our intended processing plant near Kellyton, Alabama, together with financial incentives in the state, county, and industrial development boards. We have purchased 2 buildings adjacent to our Kellyton site totaling 90,000 square feet to accelerate our construction schedule. We continue to work to ensure adequate financial liquidity to support our key operations and business activities. We have a cash balance of $119 million as of September 30th. And with that, I'd like to turn it to Jeff.

Thank you, Chris. Good morning, everyone. First, let’s take a look at our capital position on Slide 5. The closing price on Monday, November 9, was $3.74. With approximately 34.6 million shares outstanding as of September 30, our market capitalization stands at approximately $129 million. The share price began the third quarter at $4.74 and ended the second quarter at $3.58. Average daily trading volume over the past 3 months is approximately 767,000 shares per day. During the third quarter of 2021, we used our equity line with Lincoln Park Capital to raise approximately $4.1 million from stock sales. We continue to take advantage of this opportunity to raise cash at a low cost of capital. We are currently in a fundamentally strong position to execute our budget business plans through 2022 and to fund a substantial initial investment in the commercial Graphite processing facility in Coosa County, Alabama during the remainder of 2021 and through 2022. Turning to Slide 6, we provided a financial summary for the period ending September 30, 2021. For the 9 months ended September 30, 2021, net cash used in all operating activities was $13 million as compared to $10.1 million for the same period in 2020. The $2.9 million increase in cash used was primarily due to the increased product development expenses, exploration, general administrative costs, and arbitration costs in 2021. Net loss from continuing operations was $4.6 million and $3.4 million for the 3 months ended September 30, 2021 and 2020, respectively. The $1.2 million increase compared to 2020 was largely the result of an increase in product development, exploration, and general administrative costs from 2021, offset partially by an unrealized gain related to the Encore common stock. On September 30, 2021, as Chris mentioned, the cash balances were approximately $119 million and the company had a working capital balance of approximately $117 million. In October, the company liquidated its holdings of Encore Energy common stock for net proceeds of approximately $3.6 million, realizing a gain of nearly 100% from the value of the stock when received in December 2020 at the time the company sold its uranium business. Again, these cash resources will be used to fund ongoing operations, fund the development of our graphite business plan, and allow for a substantial initial investment in the commercial Graphite Processing Facility. With that, I'll turn it back to you, Chris.

Thanks, Jeff. And onto Slide 7. Our core values are based on continuous improvement in safety, and that's the safety of each other, our environment, our assets, the communities where we work, and our reputation. Cost, meaning effective and efficient use of our shareholders' assets. And our focus on first quartile cost performance. Integrity means the highest level of performance every day, improving our processes and keeping conservative promises. On to slide 8. We are executing our business plan; the feasibility study is complete, and construction of Phase 1 is approved by the board. Shown here on our slide are photographs from our pilot plant where we produce more than 13,000 kilograms of products for testing by us and prospective customers. Samples are now in prospective customers' hands as we speak. On Slide 9, we selected Kellyton, Alabama for our Graphite Processing Facility site. This was important, and on June 22, community leaders from the State of Alabama, Coosa County, Alexander City, and the Lake Martin industrial development board celebrated the unveiling of our project with us and a group of local officials. On Slide 10, a quick photograph and a brief description of how our site lays out. The original Kellyton site footprint is supported by the state and the local industrial board that awarded us the site at no cost. Building A, shown on the left, is one of the 2 facilities we've acquired, and we intend it to be our administration building once refitted. Building B, a 60,000 square foot warehouse, will be for product storage and spares warehousing, etc. We're presently utilizing offices in Building B as we begin to refit Building A. We're pretty excited about our now 100-acre footprint near Kellyton, Alabama. On slide 11, key attributes of our project include proprietary technology for high purity conversion of graphite concentrate at about 95% to 99.95% or greater purity. Ample and robust process cost advantage as this is U.S.-manufactured battery graphite. Vanadium in our deposit potentially improves our project economics, and the drilling program we are executing right now is expected to further our knowledge of not only the graphite resource but the vanadium resource as well if safe for exploration. We have an environmentally sustainable process. On Slide 12, a little bit about our battery markets. We expect the transportation segment of our market, specifically electric vehicles, will grow at a compounded annual growth rate of around 23% per year. We see that in the adoption rate for electric cars everywhere you work, live, and drive. The U.S. government and automakers have jointly announced a goal of 50% of all autos sold in the U.S. will be electric by 2050. A second segment, energy storage systems, which we mean by grid energy storage systems, is expected to grow at an 11% rate over the next 10 years. Qualification cycles tend to be a little shorter than the EV market, and these are the enabling technologies for wind and solar power, allowing electricity to be provided when the wind does not blow and the sun does not shine. Large markets like consumer electronics continue to grow at 3% a year, and it's a well-established value chain. Consumer electronics—like phones or laptops—are still expanding. We also see growth in specialized areas such as defense, aerospace, and medical with major players here in the U.S., where there is government and major contract-based business for us to bid on as we develop our products. On Slide 13, know that graphite is a major component of all batteries. This includes lead-acid batteries in most vehicles, alkaline power cells like those in smoke alarms and flashlights at home, and non-rechargeable lithium cells like those used in remotes. Coated purified spherical graphite, or CSPG, is a critical component in lithium-ion batteries, which power electric cars. The U.S. government has defined graphite as 'critical to the nation's security and prosperity,' and presidential executive orders have asked U.S. government agencies to act promptly. On to Slide 14. Because the graphite project represents a near-term source of domestic U.S. battery-grade graphite, samples are currently under evaluation by potential customers. Westwater's graphite will be produced using environmentally sustainable processes here in the U.S. Westwater's graphite products serve important battery markets, and Westwater's vanadium discovery could contribute revenues. Exploration is already underway. Slide 15 details our new technology for graphite purification, which does not use hydrochloric acid or elevated levels of energy to produce graphite. This is a chemical process with lower temperature bakes that yields graphite of more than 99.95% purity. Our process also allows for flexible feedstock sourcing while maintaining consistent performance. This purification technology has a more sustainable footprint than current methods used in China, which rely on environmentally damaging and expensive-to-manage hydrochloric acid. On Slide 16, our project plan is straightforward. Westwater's feasibility study, led by Samuel Engineers, is complete, and Phase 1 construction has been approved, with expected completion in the latter part of Q1 of 2023. We have increased the amount of CSPG that goes into lithium-ion batteries to accommodate market demand. In doing so, we delayed our definitive feasibility study by just a couple of months, which deferred our production timeline by one quarter. However, we expect this will lead to greater production. Exploration drilling has begun to better define the Coosa project. We expect to complete our drilling activities this quarter, with geological models expected in 2022. Following that, we will begin the permitting process for our mine located in Western Coosa County, expecting to operate that mine by 2028. Slide 17 presents a graphic of our project plan, noting that the feasibility study is indeed complete as of the end of Q3 2021, with commercial production starting in Q1 of 2023, and Phase II of our plant anticipated to be built and operational by 2025, subject to another feasibility study based on increased production. Until then, we will use an alternative source for graphite not sourced from China, though our supplier has requested confidentiality regarding their name. We will transition to U.S.-based feedstock expected in 2028. On Slide 18, our team is growing. These are tenured leaders in energy minerals development. Certainly, you've heard from Chris and from Jeff over the years, with each of us having over 40 years of experience in the energy space. Recently, we added Chad Potter to our organization, who has 25 years of operational and executive experience in the metals business. We added Steve Capes, who joined us in May of 2021 with nearly 20 years of financial experience in mining, oil, and gas. Dain McCoig, our longest-serving employee, joined us in 2004. He is well-experienced in all phases of ISR uranium development and has been one of the leaders of our developmental efforts with our feasibility study for Phase 1. Cevat Er, our VP of Tech Services, has more than 30 years of experience and is the technical leader of our team, developing this process and business. John Lawrence, who has been with us since 2012, is our General Counsel, with 35 years in law and licensing across the nuclear fuel cycle and mine operations. Lastly, Jay Wago joined us in 2020 as our VP of Sales. In total, this team has the leadership capabilities this company needs to fulfill its promises. On Slide 19, energy minerals exploration and development requires discipline and diligent capital stewardship. We have restructured and capitalized the company, positioning Westwater as a green energy materials company with a laser focus on battery-grade graphite materials. We have an experienced management team that can demonstrate its history in finance and green energy development from concept to production. Why invest in Westwater? Turn to Slide 20. We have a battery-grade graphite development business with strong upside potential. We possess the largest graphite property in the contiguous U.S. Graphite has been designated a critical mineral by the U.S. government. Our sales and marketing team has engaged with a number of potential battery supply chain customers. We have a proven team with experience in energy minerals development and financial management. You can also anticipate catalysts for the remainder of 2021 and 2022, including Coosa exploration and geological model results as well as construction milestone achievements. With that, I'd like to open it up for questions. Therese?

Thank you. We will now begin the question-and-answer session. We will pause for a moment as callers join the queue. The first question comes from Debra Fiakas with Crystal Equity Research. Please go ahead.

Thank you. And thank you for taking my questions, particularly on this very auspicious day, where we honor our veterans. I have a couple of housekeeping questions and several others afterwards. So whenever you get tired of answering my questions, you can just cut me off. First, I wanted to ask one of those housekeeping questions regarding the arbitration action with Turkey. Your filing suggests that you've spent $2 million in legal expenses in 2021. I wondered if those expenses can still be included in what you're asking Turkey to compensate you for. Could you also provide guidance on any additional expenses you think you might incur in this final quarter of 2021 and into 2022 as you await the panel's decision?

First, Debra, thank you for calling in, and we never tire of answering your questions. The arbitration itself—the final hearing for witnesses occurred in the latter part of September, and we expect that the panel will deliberate over the next 12 months. There will be some paperwork in between now and then, at the end of this quarter and possibly in January. Overall, we expect expenditures for the arbitration to slow down to a very low level until the decision is rendered some 11 months from now.

Okay. Thank you. Is there any communication allowed between Westwater Resources as the complainant and Turkey as the respondent? Can you pass notes back and forth or are you prohibited from engaging in any discussions?

We are certainly permitted to communicate with the counterparty and would do so if we found a reason to do that, and likewise, Turkey has that opportunity as well. For now, communications have been limited to the arbitration proceedings, and we're satisfied with that for now.

Great. Shifting to something else in your quarterly filing regarding capital spending. You've provided an aggregate budget for the construction of the Graphite Processing Facility, but there was a suggestion that there will be significant capital spending in the fourth quarter. I was hoping you could give us some guidance on what your capital spending might be and whether Jeff could provide insight on when we might see the assets reflected on the balance sheet as construction in progress.

Jeff, why don't you go ahead?

Thank you, Debra. Our expectations for expenditures in the near term revolve mostly around long-lead items. Those would be deposits that, if they occur, will go on the balance sheet at the time we start actual construction activities. Investors can expect to see a construction in progress asset as we accumulate the capital costs in that account. These assets will be transferred into the respective fixed asset categories once they're operational.

Excellent, thank you. Now, could either of you discuss the 4Q activities currently underway? Are there modifications to the existing buildings or are there site preparations like land clearance or utilities work happening now at the site?

Debra, we anticipate a construction start before the end of the year. That includes building out the office. We have hired the employees we need to bring on for the project. From a cost perspective and with respect to capital equipment, to build on Jeff's answer, we'll begin laying down deposits for long lead items necessary for delivery at the end of next year to maintain our schedule. We were in Germany last week with 4 of our vendors, and we received assurances from each of those vendors that they can meet our schedules if we order with efficiency. Project expenditures typically follow an S-curve; they tend to be heavier at the front and attenuate as the project is commissioned.

Great. I also wanted to draw your attention back to slide 8 in your presentation. You provided images of the equipment used to create the 13 kilograms of products. Could you identify what we are seeing and where we would see this equipment at your site once everything is constructed?

Sure. The photograph at the lower left is the result of a filter press. When our product comes out of the leaching process, where we leach with caustic and then clean with acid, it's wet. We need to dry that cake through our filter press, which is basically a porous belt conveying materials from one end of the device to the other and presses it much like you would press a biscuit. This process dewaters the material before it goes to the baking cycle. The light on the upper right is part of making our coated spherical graphite product. We shape, size, and coat it with hard carbon; that requires a baking step to calcine the carbon onto the graphite. What you are looking at there is the equipment we use in the pilot plant for that process.

Thank you. Where would we see these pieces—or corresponding items—at your site in Kellyton once everything is constructed?

There will be 2 or 3 new buildings in the red circled area for the original acquisition. The first building in the process is the purification building. You would see the filter press and some thermal dryers resembling that kiln in that building as we bake the material. The next building will be used almost entirely for material coating, where hard carbon is applied to small spheres of graphite. Other buildings will focus on water purification, ensuring our effluents can be released as high-quality water into our domestic sources.

Excellent, thank you. Slide 8 images look expensive, so I want to discuss capital availability. You currently have 2 agreements: one equity agreement with Lincoln Park and another ATM with Cantor Fitzgerald. I believe, if I'm not mistaken, you have approximately $80 million in value available through those 2 agreements. Are they subject to any expiration or deadline?

Both facilities are still available to us through 2022 and beyond. In fact, there's more like about $120 million availability on those lines. To clarify, it's about $70 million from Lincoln Park and approximately $50 million from Cantor Fitzgerald.

Thank you for that clarification; I appreciate it. Lastly, could you provide an update on the continued internal testing you’re doing regarding sampling and new product development activities? In your prepared remarks, you mentioned you expect the exploration of the graphite deposit to be completed soon. Will there be more vanadium sampling conducted, as well as ongoing product testing to ensure your final graphite product is perfected?

To answer in reverse order: Yes, the vanadium testing continues as part of our graphite exploration efforts. We are actively running tests. We have an ongoing product testing matrix; we are internally testing the products we have made through various vendors that give us a good housekeeping seal of approval on our work. Additionally, prospective customers are testing our material, and we have a process to provide samples with enhanced characteristics for individual customers. Finally, no company in our position can succeed without a robust R&D effort for new product development, and we're proud of our labs' reorganization and the technical staff directing our R&D efforts.

Excellent, thank you for answering all my questions. I'll stand down now.

Debra, my pleasure. Thank you.

The next question comes from Dan Hubert with Aces Group. Please go ahead.

Thank you for allowing me to speak. Just a couple of observations. I'm involved in energy storage and work directly with several large grid power utility companies. I would say your estimates on the 11% aggregated growth rate for energy storage and 23% for EVs need adjustment. All power utility companies are struggling to meet the peak demands for recharging electric vehicles, and they are pressing hard on their integrated resource planning initiatives to include significant amounts of energy storage across the U.S. They say the greatest threat to the adoption of electric vehicles is the grid's ability to recharge them, and that brings me to your operations set up here in the Coosa belt, where the commercial-grade graphite belt lies. There are some new energy storage technologies that are almost 100% based on graphene, which has seen issues due to lithium, leading to environmental concerns. My question is, are you preparing for demand greater than you anticipate?

To answer your question, I would direct you to one of our basic principles here at Westwater Resources: we keep conservative promises. While we may appear conservative in our estimates, we are confident that our business will thrive at these growth rates, even if they may be lower than expected. Regarding lithium, we aren't aligned with some of your opinions, but that's still a valid point of discussion for further conversation.

Certainly, I understand.

As for graphene, our product from CSPG manufacturing is also 99.95% or better purity, and we are in discussions with some graphene manufacturers for potential utilization of our product in their processes. While our focus is on battery technologies, we are excited about the graphene business. Our R&D efforts are strong, and we're exploring the best market opportunities for our products.

The next question comes from Michael Porter with Porter La Veen Rose. Please go ahead.

Good morning, Chris. Two quick questions: First, are you experiencing any supply chain issues affecting the equipment needed for your Alabama site? Secondly, could you briefly discuss the differences between graphene and graphite?

In reverse order: Simply put, graphite flakes tend to be hundreds of layers thick, while graphene is essentially one atomic layer thick but many atoms wide. Graphene's properties are significantly enhanced, but it is more challenging to handle and manufacture. We are currently embracing this as an R&D effort, collaborating with industry experts. Regarding supply chain issues, that's precisely why our VP of Tech, Cevat Er, and I traveled to Europe last week—to ensure we understood our suppliers' constraints and manage them effectively. We received assurances that with timely ordering, we'll receive our equipment on schedule.

Thank you very much.

Thank you, Mike.

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, Charisse, and thank you all for attending our conference call for this quarter. It's an exciting time for our business, and we're happy to share that with you. Stay tuned for more updates as we advance, and please have a safe and productive day. Good day.

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