Westwater Resources, Inc. Q3 FY2022 Earnings Call

Thank you for standing by. This is the conference operator. Welcome to the Westwater Resources, Incorporated Third Quarter 2022 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 Chad Potter, President and CEO. Please go ahead, sir.

Thank you, moderator. And thank you all for attending our third-quarter 2022 results call. With us today is Terence Cryan, our Executive Chairman of the Board; and Steve Cates, our Chief Financial Officer. During this presentation, the forward-looking statements we will be making are based upon management's judgment, including, but not limited to, future graphite demand and price forecast, cost and scheduled projections related to the Kellyton Graphite Plant and the Coosa graphite deposit, and capital raising activities. These and other similar statements are subject to certain risks and uncertainties, which a description can be found in our SEC filings. Please read our cautionary statement and realize that actual results may differ materially from what may be discussed with you today. Westwater is an energy technology company focused on producing advanced natural graphite materials in the United States using our proprietary technology, including our patent-pending purification process. We are currently constructing Phase I of our Kellyton graphite processing plant, which has a projected total cost of $202 million. Samples continue to be produced and have been sent to 27 potential customers for evaluation. We have executed four LOIs to date and we are actively working to put more LOIs in place before operations begin. We also hold mineral rights to approximately 42,000 acres across the Alabama Graphite Belt, which we call our Coosa graphite deposit. Today, we are reaffirming our value proposition as a domestic source of battery-grade natural graphite materials. In addition, we continue our ESG focus, including environmental stewardship and our business plan that includes the potential for future expansion of our graphite business. Industry experts believe that the battery markets and the demand for graphite will experience significant growth for the foreseeable future. We believe that the advanced graphite materials produced at the Kellyton Graphite Plant will support the energy transition to electric vehicles, and there are a number of other tailwinds present in the graphite market. As many industry experts have pointed out, graphite is the number one material by weight in lithium-ion batteries, and the U.S. is currently dependent on foreign imports of this critical mineral. The global battery energy storage business news channel recently reported that automakers plan to increase spending on electric vehicles to $1.2 trillion by 2030, including for batteries and related raw materials. In August, the U.S. Government passed the Inflation Reduction Act or IRA. This is an important piece of legislation for the battery materials industry in the U.S. because it includes a domestic content threshold related to battery materials for EV batteries that must be met for buyers of electric vehicles to take advantage of the clean vehicle tax credit. Governments around the world have passed legislation regulating the transition from the internal combustion engine to electric vehicles, which should result in an even further increase in demand. Therefore, we believe the supply shortage projections for graphite that have already been identified by many third-party resources hold firm. Given these tailwinds, we remain firm in our belief in the fundamentals that underlie our business plan. Slide 6 depicts the importance of graphite in the lithium-ion battery as it accounts for approximately 50% of the critical minerals by weight. A typical electric vehicle has around 175 to 210 pounds of natural graphite. It's worth noting that lithium makes up less than 10% of a lithium-ion battery; perhaps it would be better to refer to the lithium-ion battery as a graphite-nickel battery. We took a different approach than other companies with metal deposits by developing our graphite processing plant first and planning our Coosa deposit second, and we believe there are a number of strategic advantages to this approach. First, it lowers the capital cost and gets us to revenue and positive cash flow sooner. Second, this approach, along with securing our supply of natural graphite flake from a non-Chinese source, will allow us to take near-term advantage of the growing market for batteries and electric vehicles. Lastly, the approach de-risks the permitting process in preparation for the Coosa deposit being brought online in 2028. We see the value created in processing natural graphite concentrate into an active anode material for batteries. The conversion of graphite slate concentrate into this active anode material results in a value multiplier of approximately nine times. This is another reason we chose to put the processing plant ahead of the deposit. We’re able to source graphite concentrate feedstock from a non-Chinese source until the Coosa deposit is developed and we can take advantage more quickly of the value created by producing this material at the Kellyton graphite plant. Given the tailwinds already mentioned and the strong fundamentals in the battery materials market, demand for natural battery-grade graphite is projected to significantly increase, resulting in a supply shortage for the foreseeable future. We believe putting the Kellyton Graphite Plant first allows us to develop relationships with potential customers, take near-term advantage of the value created when producing active anode material from the Kellyton plant, and process our flake graphite from the Coosa deposit in a higher price environment due to the forecasted supply shortage. As mentioned, graphite has been designated a critical mineral by the U.S. Government. Along with the domestic requirement already mentioned, the Inflation Reduction Act passed in the third quarter provided a 10% refundable tax credit on the cost to produce battery minerals. The IRA removed the limit on electric vehicles that an auto manufacturer can sell before the clean vehicle credit is phased out or eliminated. Based on our discussions, our potential customers are aware of this legislation. As a result, the interest of our potential customers remains strong and has intensified since the passing of this legislation. We believe the domestic requirement, including this significant piece of legislation, will provide a future competitive advantage to Westwater as a domestic producer of active anode material. Since the beginning of the construction of our Kellyton graphite project in late 2021, we've had no recordable safety incidents by our contractors or Westwater teammates. This is a significant accomplishment and I would like to thank all of our teammates and contractors who have continued to keep safety the number one priority. There is nothing more important than the core value of safety, safety of our teammates, the contractors that work on-site with us, and the protection of the environment where we live and operate. We hosted a tour of our Kellyton graphite site for over 100 first responders and local officials. We look forward to continuing to engage with our local community. During the quarter, we completed earthwork and site drilling for 132,000 cubic yards of soil moved. We began pouring foundations, and as of today, we are substantially complete with three out of five building foundations, which will total over 86,000 square feet when completed. We are also nearing completion of our underground utilities. Prefabrication of our buildings progressed during the quarter, and in October we began erecting one of our primary buildings. Additionally, our technical teammates visited multiple vendors in Europe that manufacture our long lead time equipment prior to shipments, and we’ve begun receiving some of that equipment. We continue to make strong construction progress amidst supply chain challenges and expect to begin testing and commissioning midyear of 2023, expecting commissioning into the second half of 2023. We will look to provide a more definitive update related to testing, commissioning, and operational startup of the Kellyton Graphite Plant as we work through the construction next year. Regarding our Coosa graphite deposit, in April 2022, we completed our exploration drilling program and therefore began preparing a resource model and technical report, which is nearing completion. We expect to provide an update on the resource at the Coosa deposit by the end of the year once the resource model and technical report are finalized. I'm extremely proud of the Westwater team and their hard work and the significant progress we have made. We look forward to future contributions to advance our graphite business.

Thank you, Chad, and good morning, everyone. Westwater finished the third quarter with a cash balance of $100 million and no debt. Our strong financial position has allowed us to continue to advance our graphite business, including the construction of Phase I of the Kellyton graphite processing plant. Since beginning construction of Phase I, we have incurred over $50 million of the estimated costs of $202 million. Management continues to aggressively seek out additional sources of capital funding. As stated previously, we have not and are not currently limiting the form or source of potential funding for Phase I. We continue to focus on executing our business plan, and management is currently having discussions with a number of third parties under NDAs related to financing. While the equity and debt markets continue to experience volatility in an environment marked by rising interest rates and high inflation, we continue to diligently work to close the funding gap for the construction of Phase I of the Kellyton plant. Market uncertainty and tightening in the capital markets have impacted our target of raising additional capital by year-end. However, we are still working towards securing that funding within the next few months. Westwater's cash position and no debt provide us the flexibility to evaluate potential funding opportunities while focusing on securing the lowest cost of capital. Turning to the financial summary. Detailed discussion of these items is included in our Form 10-Q filed yesterday, as well as our third-quarter press release. However, I want to point out a couple of items. First, net cash used in all operating activities was approximately $8.6 million for the first nine months of 2022 compared to $13 million for the same period in 2021. The reduction in cash used for operations was primarily due to lower product development expenses and the absence of any costs related to our arbitration against the Republic of Turkey. Second, the cash used in investing activities for the first nine months of 2022 totaling $32 million was related to the ongoing construction of Phase I of the Kellyton graphite processing plant. Third, product development costs decreased $1.6 million during the third quarter compared to the same quarter in 2021. Last year, we incurred costs to complete our definitive feasibility study for Phase I and our pilot program. We continue to provide samples of our battery-grade products for shipment to and evaluation by potential customers. Fourth, net loss for the third quarter of 2022 was $3.5 million or $0.07 per share compared to a net loss of $4.6 million or $0.13 per share for the third quarter of 2021. The reduction in net loss was due primarily to lower product development costs and lower arbitration costs. These decreases were partially offset by higher G&A expenses as we continue to build out our team and the absence of the unrealized gain recorded in the third quarter of 2021 related to equity securities held by Westwater that we received in 2020 with the final sale of our former uranium business.

Thank you, Steve. Now to slide 15. We continue to add to our leadership team. In October, Frank Bakker joined the Westwater team as our Vice President and General Manager of Alabama Graphite Products. Mr. Bakker has assumed management responsibility for construction, commissioning, and operation of the Kellyton Graphite Plant. He brings to Westwater extensive experience in engineering, project management, and plant operations for large-scale facilities that produce a wide variety of industrial products. I am grateful to have him and his leadership team at Westwater. Our core values are set around the pillars of safety, environmental and financial stewardship, and strong corporate governance. We are committed to conducting our business with integrity, keeping our teammates safe, and protecting the environment where we operate and live. Before opening the call to questions, I want to reiterate that the fundamentals in the battery materials market are strong. In addition, automakers are working to meet the growing demand of customers for electric vehicles, and now that growth is supported by the IRA's directive to secure a U.S. domestic supply of graphite for batteries. As a result, we believe in and are committed to our business plan. We're encouraged by the strong progress made at the construction of Phase 1 of the Kellyton Graphite Plant. We received positive customer feedback on our battery products, and we are seeing intensified interest in U.S. produced battery minerals as a result of the IRA. Thank you for your continued interest in Westwater and your time today.

Our first question comes from Rich Beaven from Signia Capital.

Just curious about, I know, Syrah is building a facility in Louisiana. And can you give us a little bit of color as it relates to any concerns about possible oversupply for process graphite as a result of that plant, or just curious as to what your thoughts are there?

I think as we look at the expected market demand for anode materials with 14 giga plants announced for the United States in addition to the existing Tesla plant, we think that the benchmark forward forecast of a significant shortage in anode materials is going to prove to be accurate. So while we fully expect there to be other producers here in the United States, we don't see that changing the fundamental demand-supply equation.

And also any consideration besides graphite, any other critical metals that you would consider moving towards, in addition to the graphite business?

At the present time, we are fully focused on developing our Kellyton graphite processing plant. I can't speculate as to what the future might hold, but that's our focus today.

When the plant is fully operational, considering that your Coosa deposit will not be permitted and ready for some time after the processing plant is operational, do you have any thoughts on where you might source the material to run through the plant?

As we have previously said, we have a third-party non-Chinese source of natural flake graphite concentrate under contract for Kellyton. We do have an NDA in place with that entity, so we are not able to disclose any additional information about that. But we feel confident that we have adequate concentrate supplies for Kellyton.

Can you give us an idea if the source would likely be from Africa? Would that be accurate?

We're unable to comment.

Quick question for you. You talked about the 27 potential customers that are evaluating your products currently. Can you talk about what the evaluation process is in terms of how long it typically takes? And are any of these evaluations at the point where we can get some positive announcements before the end of the year or the next, let's call it, two or three months?

I think the interesting thing is, earlier in our presentation, we talked about the value that's created in converting natural flake graphite into active anode material, which has a value multiplier of approximately nine times. The reason that value is there and created is that each customer has a unique specification. As we work with customers through the evaluation process, we provide our products, and they'll come back and want to select an additional sample, perhaps a different size or tap density that works for their application. This process is iterative and takes time; it really is an engineered final product that they are willing to pay that value multiplier for. The timeline is different with each customer. Their testing and evaluation process can vary.

And then second question regarding your resource model that you're building for your Coosa plan. Is the target still to have this published before the end of the year, and are you in the process of evaluating the results, or are you still in the drilling and data collection phase?

We've completed all our drilling that was finished early last year, and gathered all that data to put into the resource model. We're still on track to have that resource model completed by the end of the year, and we expect to provide a more definitive update.

And then final question, you mentioned the litigation areas in your expenditures being attributed to the litigations related to Turkey. I know you guys sort of won the international court decision. But can you update us on the process and what can materialize in the near to midterm future?

Dmitry, just one point of clarification, a final decision on that has not been met. There were hearings done in the third quarter of 2021. The International Court of Arbitration had a goal of putting out their final decision in a year. We are still awaiting that right now. Once we have some definitive information, we'll provide an update. But we do not yet have a final decision.

So once the decision is rendered, which should be sometime before the end of this year or early next year, what would be the next steps?

The next steps would be updating everyone on what that decision is, and dependent upon that there could be more to come or it could be the final decision.

A couple of questions. Do you have the final costs for building the plant and getting into production and revenue production? So that's question one. How much of the cost do you need from here to there, and how much more capital does the company need to get into operations?

So the estimated budget currently is $202 million to complete Phase I in totality. Through September 30, we had incurred over $50 million of that, with a cash balance of $100 million. So there's a gap there that we're working to secure financing.

Has the company been able to obtain any grant funding in the package last year specifically aimed at battery and other technologies? Any decisions on how that's being handed out?

The natural graphite industry here in the U.S. is really an emerging market. We are trying to participate in that. Any legislation that comes out of government agencies that helps establish this industry, we support. Regarding the Department of Energy, how they award grants or their programs, we really don't have any comment on that. What I can say is that we continue to execute our business plan and are excited about the $100 million cash on the balance sheet.

So the grants that have been handed out, your company did not receive any yet. Is that correct?

Correct. When we secure the additional funding we need, we will definitely provide an update to investors at that time, but you're correct.

Given capital markets, which are not a kind environment for growth companies, I noticed a huge increase in share count over the past 12 months. Is that just an ATM offering? Are you selling that during this time?

The cash balance we have has allowed us to raise money in the equity markets at a low cost to get the business where it is today. We are not limiting any form of funding right now. In this tightening environment, we think it's prudent to keep all options open. $100 million on the balance sheet and no debt gives us flexibility and time to evaluate financing sources.

First, let me congratulate you and everyone else at Westwater for your fantastic safety record. I've been on a few of these calls; that isn't always the case. Sometimes there are accidents, and no one likes to hear that. Congratulations on what must be meticulous management to keep everyone safe. I wonder if we could extend the discussion just a bit on financing, the Department of Energy grants. Based on your research and conversations, could you give an update on your current thinking on equity versus loans?

Yes, we have said before that we are not limiting ourselves to any potential source of financing. With $100 million on the balance sheet at 9/30, and $50 million of the project incurred, we effectively have about two-thirds of the project funded. Debt makes sense, but in a rising rate environment, we need to be diligent in ensuring the financing terms are beneficial today and in the future, without impairing our growth plans beyond Phase I.

Will we see about the same pace of CapEx spending and operating cash usage in the fourth quarter, or will it speed up?

From an operating cash usage perspective, our team is being very diligent about spending and cash use. There will be additional cash to be spent next year as we get closer to operations and testing.

What would be the pace of starting construction on the other two foundations, assuming favorable weather in Alabama?

The pace will be as fast as we can go. The foundation and building erection pace should pick up over the next quarter.

It sounds like the project is going faster now than it was in the third quarter.

Steel is going up as quickly as we can get it up there.

With your trip to see the equipment, did you actually watch your own machine working or just a model?

No, the team went to Europe to inspect our machines. They were running and performing as they should. We are already receiving parts of that equipment and expect to see the pace pick up moving into the fourth quarter.

Can you give us some color about what you're worried about regarding supply chain and weather, and how that will affect your timetable for the plant?

We've looked at that and built considerations into our schedule. Currently, the delivery of our long-lead items is on track.

There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back to Terence Cryan for any closing remarks.

Thanks everyone for joining us this morning. We appreciate your interest in our company and look forward to keeping in regular touch with all our stakeholders. We'll be in touch shortly. Thanks again. Good day.

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