Westwater Resources, Inc. Q4 FY2022 Earnings Call

Thank you for your patience. This is the conference operator. Welcome to the Westwater Resources, Inc. full-year 2022 results and business update conference call. Please note that all participants are in listen-only mode and the call is being recorded. I would now like to hand the floor over to Frank Bakker, President and CEO. Please proceed.

Thank you, moderator, and thanks to those attending our 2022 year-end business update and results call. I'm excited to lead the company and to have this first earnings call since becoming the CEO of Westwater Resources. With me 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 make are based on management judgments, including, but not limited to, future graphite demand and price forecasts, schedule and cost projections, and economic expectations related to the Kellyton graphite plant, the Coosa graphite deposit, and capital raising activities. These and other similar statements are subject to certain risks and uncertainties, of which a description can be found on slide 2 within this presentation and in our 10-K for 2022 and our other SEC filings. Please read our cautionary statement and realize that actual results may differ materially from what's discussed today. Slide 3, construction of Phase I of our Kellyton graphite processing plant has been ongoing for over a year. When completed, the Kellyton graphite processing plant will provide anode material necessary to support the energy transition. Interest from potential customers is strong, and samples continue to be requested. Recently, Westwater Resources entered into an agreement with an electric vehicle battery producer. Under the agreement, the two companies will work together to ensure that the CSPG expected to be produced at our Kellyton plant can be used as a high-performance anode for their batteries. Subject to those efforts and terms and conditions yet to be negotiated in a future agreement, this agreement allows for the sale of potentially all anode material from our Kellyton plant for those batteries. This is another significant advancement in our graphite business and our engagement with potential customers. And we are anticipating making a joint announcement with our partner later this month. At that time, we expect to be in a position to provide further details. We also hold mineral rights to approximately 42,000 acres across the Alabama Graphite Belt. Once in operations, the Kellyton graphite processing plant and the Coosa deposit represents the first fully vertically integrated domestic battery-grade graphite company in the US. We believe this will provide significant competitive advantages given the passing of the Inflation Reduction Act in 2022 with its domestic content requirements for electric vehicle battery materials. Turning to slide 4, in response to growing demand and customer feedback to increase our planned production capacity, we are pleased to announce that we have completed an optimization study of the Kellyton graphite processing plant, which we believe will significantly improve the economics of the project. As a result, we now expect to double our throughput capacity in Phase I to approximately 16,000 metric tons per annum, more than doubling our estimated CSPG production to 7,500 metric tons per year. The higher throughput results in an expected increase in the estimated pre-tax NPV, compared to the original DFS of over three times, to $417 million and an increase in the estimated cumulative pre-tax cash flow to $1.9 billion and an increase in estimated pre-tax IRR of 65% to 24.7%. With the optimization, we now estimate the total cost of Phase I to be approximately $271 million. We expect to begin testing and commissioning of Phase I in late 2023, with first production to occur in the first half of 2024, subject to closing the additional funding to complete construction. Additionally, we expect to spend the additional capital necessary for the Phase I optimization in 2024 and are targeting completion of this optimization and increasing the throughput in the second half of 2024. Slide 5, we also have incorporated the optimization of Phase II at a pre-feasibility level, increasing the planned CSPG production to approximately 40,500 metric tons per year, nearly tripling the expected pre-tax NPV to $2.2 billion, and increasing the estimated cumulative pre-tax cash flow to $10.3 billion and the estimated IRR to 36.3%. The total combined cost of Phase I and Phase II is currently estimated at $736 million. We plan to begin a definitive feasibility study on the Phase II expansion in 2023 and will provide an update once completed. Turning to Slide 6 for a construction progress update, since the beginning of construction at our Kellyton graphite project in late 2021, we have had zero recordable safety incidents by our contractors and Westwater teammates. This is a significant accomplishment. Safety is and will continue to be our number one core value, as well as the protection of the environment where we live and operate. During 2022, we completed the earthwork, the building foundations, and the majority of the underground utilities. Significant progress has been made on the buildings. Two of the major buildings are close to being finished, and the other three buildings will be completed in March and April of this year. Long lead equipment starts to arrive at the site. And we will start putting the equipment in place in March of this year. Regarding our Coosa graphite deposit on slide 7, in April 2022, we completed our exploration drilling program and completed our geological model and published a technical report in the fourth quarter, which identified about 3.8 million short tons of graphite, enough to supply the estimated feedstock requirements for the Kellyton graphite processing plant for over 35 years. It's worth noting that the technical report was completed based on drilling approximately 4,100 acres of the approximately 42,000 acres to which we hold mineral rights. We continue to expect the Coosa deposit to come online by the end of 2028, subject to its own definitive feasibility study, obtaining the required permits, and financing. I am extremely proud of the Westwater team, our contractors, the dedication, and hard work of all involved to make Westwater Resources successful. Now, I would like to turn it over to our Chief Financial Officer, Mr. Steve Cates.

Thank you, Frank, and good morning, everyone. Slide 8, Westwater finished the year with a cash balance of $75.2 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. Regarding financing, we are pleased to announce that we have signed a non-binding, non-exclusive indicative term sheet for $150 million of private debt, which will cover the balance of the current estimated Phase I capital requirements. We are targeting to close on this transaction in the second quarter of this year. Since beginning construction, cash expenditures totaled approximately $55 million related to the Phase I construction. And we estimate approximately $216 million of cash spend remaining of the now estimated total costs of $271 million, which includes the Phase I optimization. Turning to the financial summary on slide 9, detailed discussion of these items is included in our recently filed Form 10-K as well as our 2022 year-end press release. Net cash used in all operating activities for 2022 was approximately $13.2 million, as compared with $16.9 million for 2021. The $3.7 million decrease in cash used for our operations was primarily due to reduced product development expenses and lower costs related to our arbitration against the Republic of Turkey. Those decreases were offset partially by the gain recognized on the sale of equity securities in 2021 and the purchase of feedstock inventory in the fourth quarter, ahead of beginning testing and commissioning later this year to produce additional product samples for our customers. Cash used in investing activities for 2022 totaled $52.8 million and was related to the ongoing construction of Phase I of the Kellyton graphite processing plant. As mentioned previously, product development costs decreased $4.8 million during the current year. In 2021, we incurred costs to complete our definitive feasibility study for Phase I and our pilot program. We continue to operate our pilot program to provide additional samples of our battery-grade products for shipment to and evaluation by potential customers. Lastly, net loss for 2022 was $11.1 million, or $0.25 per share, compared to a net loss of $16.1 million, or $0.49 per share, in 2021. The $5 million reduction in net loss was due primarily to lower product development and arbitration costs and higher interest income earned on our cash balances. These were partially offset by higher G&A expenses as we continue to build out our team and the absence of the gain recognized in the fourth quarter of 2021 related to equity securities held by Westwater that we received in 2020 with the final sale of our former uranium business. With that, I'll turn the call back to you, operator, for questions. Thank you.

Thank you. We will now begin the question-and-answer session. Debra Fiakas, Crystal Equity Research.

Thank you, operator. First, let me offer congratulations to Frank Bakker for his new position. I wish you well in your new role. I, first off, wanted to ask about the optimization plan that you disclosed today. What triggered this study to optimize the plant? What was the impetus to make some tweaks and adjustments to the process?

Yeah. Thank you, Debra, for the question. So I think there were two main reasons. The first reason was that there is an increased demand for CSPG material in the domestic market in the US. The second reason is that if you look at the IRR before we made this optimization and after optimization, the IRR increased from 15% to close to 25%. So that's also the other reasons why we did the optimization. And it's good to know that for the optimization, we didn't change the technology, actually. We only rerouted the process flows and removed the bottlenecks in the facility.

Excellent. That is actually what my next question is. What is the means of the optimization? If it's just the process flows, are you still going to be working with the same set of equipment that you had previously planned on using? Do you have to add equipment? Is that part of the cost increase?

Yes, you're correct. We're only going to reroute the process flows and reuse the existing equipment. We do need to add additional equipment to reach that capacity. That's correct.

I would like to discuss the cost increase. You mentioned in the annual filing that the additional costs stem partly from optimization changes, and there were also indications of delays, cost overruns, and possibly price increases due to inflation. Can you provide some insight into the relative contribution of each of these three factors? Are the cost increases mainly due to the optimization plan, or how much do the delays and cost overruns factor into it?

I believe the increase is primarily driven by the optimization project. We announced our intention to begin commissioning by the end of this year, initiate material production in the first half of next year, and progressively ramp up production in the second half. This means it will take a bit longer to reach full capacity in relation to the optimization, which also results in higher costs due to the extended timeline.

Certainly. Can you confirm that the project is still on its original schedule? Or has it been pushed back somewhat?

It's in line with what was announced in the last call. So we start commissioning at the end of this year. For one building, we have all the steel in. The equipment is arriving as we speak. So the building is finished. So we're going to start setting that equipment, and then we start testing and commissioning at the end of this year.

I noted that with the increase in CSPG production possible through the optimization plan, I wanted to confirm the planned product mix. Your report also mentions SPG fines, or spherical purified graphite fines, and I am curious about its position in the new mix under the optimization plan.

Yeah. So we have the option actually to also make purified fines, but it really depends on the economics if we're going to do it. Because most likely, the CSPG product will have a higher margin. So we'll focus on the CSPG production.

I don't want to take up too much time, but I have one final question. This pertains to the new development agreement you announced today with a battery manufacturer that produces EV batteries. I understand you can't disclose their name, but has this entity been mentioned before? Is it one of the five LOIs you've previously referenced, or is it a completely new entity that has not been brought up in any press release or conference call?

Yeah. We are planning to make a joint announcement with our partner later this month. And at that time, we will be in a position to provide further details.

Do those details include a name?

Yes. It will include a name. That's correct.

All right. Very good. I do have additional questions, but I'm going to bow out and just get back in the queue and allow others to ask additional questions. Thank you for your answers. I appreciate it.

Thank you.

Good morning, everyone. I appreciate you taking my call. Congratulations on the positive developments, including the increased production in Phase I and Phase II, as well as the agreement signed with a top-tier battery manufacturer. I have a couple of questions for clarification. When you refer to this new agreement and the potential customer taking all of CSPG, are you referring to the 3,700 metric tons initially targeted for Phase I production, or the 7,500 metric tons that will be the CSPG production run rate once the improvements are completed by the end of 2024?

Yeah. Those details will be provided in the joint announcement that we will make with our partner.

Thanks for that. It sounds like you’re expecting a production of at least 3,700 metric tons, possibly more. Additionally, regarding the increase in Phase I production, it seems like this phase will now produce as much as you initially intended for Phase II. You have effectively more than doubled your Phase I output, and it appears that this has not resulted in a significant rise in costs compared to the original budget of just over $200 million. So my question is, if it’s relatively straightforward to double production with a slight increase in capital expenditure for Phase I, could you potentially scale up Phase II significantly if necessary, based on what you've learned from Phase I and the production capacity enhancements that might be achieved with more investment?

Yes, I think you're correct. The internal rate of return for Phase II is around 35% to 36%. The total capacity of the facility in Phase II will be 40,500 metric tons per year. We used a modular approach, so many units in the facility are essentially replicated. There is one unit that we need to optimize for Phase II, but for the majority of the facility, it's modular, which simplifies the process significantly.

So it's possible that for just over $736 million for Phase I and Phase II, you have the capability within your current footprint to boost Phase II production if demand and customer interest remain strong.

Yes, that's correct. Yes. We have enough footprint over there to increase our capacity.

Okay, great. And then just one final question, just to make sure I understand. So you complete the construction and testing and ramp up by the end of '23. You get into production at the beginning of '24. And then you talk about finishing the optimization by the end of '24. So does that mean that your initial production will be at the 7,500 metric ton run rate? And then by the end of 2024, you're going to get to a 16,000 metric ton run rate. Is that the way to think about it?

We will begin commissioning at the end of this year, and that process will extend into early next year, 2024. In the first half of 2024, we will start producing graphite and will gradually increase our output throughout the year until we reach full capacity.

Okay. Okay. That's all the questions I have. Thank you for your time.

Okay. Thank you.

Debra Fiakas, Crystal Equity Research.

Thank you. I didn't expect to come around on the queue quite so quickly. This question might be more for Steve Cates, if you will, Steve. You talked about the financing agreement or the non-binding term sheet. And I just wondered if you could give us a little bit of color on how far along you are in these negotiations? Have you gotten enough details so that you, for example, can model an interest rate? Is it fixed? Is it variable? Have you discussed repayment terms? And do you have an idea, then, of what the cash flow impact would be of the interest and principal repayments?

Yes, Debra. So it is an indicative term sheet, so there are aspects of those in that as far as coupon rate, repayment terms. But all that's still subject to going through the process, as you're probably well aware, until we get to closing and negotiating kind of the final terms and seeing if pricing moves at all. So while we do have that and have modeled that in, we're not in a position yet until we actually sign the definitive agreement, close the transaction, and communicate that to the market. But we'll do so when we close.

Okay then. Certainly. You mentioned that an investment bank is involved. Are they intending to make the loan themselves or are they acting as an intermediary and putting a syndicate together? Can you just clarify what their role is?

Yeah. I don't believe we ever said that it's an investment bank, but this is a third party that has closed billions of dollars of transactions over the past couple of decades within the energy sector of debt. And that's who we're working with and going through the process to close. And so, there'll be a lot more to update once we're able to close this.

So they're making the loan themselves, this third party?

It will remain to be seen when we get to the final negotiation, whether it ends up being a single party or a couple of parties involved. And so we're working through that right now.

I noticed that the arbitration panel reached a decision regarding the Turkey dispute and awarded Westwater $1.3 million. Can you explain what factors make you believe that receiving this money is likely and when we might see this reflected in your financials? The earliest we might see this could be in March. Please walk us through what we should expect next in this matter.

Debra? This is Terence Cryan.

Yeah, Debra. Please go ahead, Terry.

Thanks for your question. Appreciate that. The decision by the arbitration tribunal was only announced on Friday. And so, I think it's a little early for us to be definitive about that. And I think that while we're pleased that the tribunal found in our favor on the merits, obviously, we're disappointed in the amount ordered. But I would note that the decision of the tribunal is binding and non-appealable.

Yes, understood. That's what arbitration is all about. And then this last final question is, again, for Frank. I wondered if you could maybe go back to the timeline that's been outlined for the Coosa graphite deposit. It's been pushed out now to 2028. We jump out in two-year increments with this. Could you maybe give us an idea of what is the strategic thinking in pushing it out another two years? I'm not sure if this was done recently or a couple of months ago, but it has been pushed out to 2028. What's the driving strategy behind that timeline, if you will? And that is my last question. And I do thank all of you for all of your answers.

Thank you. The timeline has not changed; it has always been set for 2028 for the mine to be operational. We have a program in place to secure all the necessary permits and conduct the required research to ensure it is operational by 2028.

As there are no further questions, this concludes the question-and-answer session. I would like to turn the conference back over to Frank Bakker for any closing remarks.

Thank you. I think we've made a tremendous amount of progress over the last couple of months. We doubled our production capacity of Phase I, increased our Phase II capacity to 40,500 metric tons per year. By doing this, we improve the project economics significantly. Next to this, we executed a term sheet for the Phase I capital requirements. So I think the future looks bright for Westwater Resources. I want to thank everybody for their attention and looking forward to speaking to you on the next call. Thank you.

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