Westwater Resources, Inc. Q2 FY2023 Earnings Call

Thank you for waiting. This is the conference operator. Welcome to the Westwater Resources Inc Second Quarter 2023 Results and Business Update Conference Call. All participants are in a listen-only mode, and this conference is being recorded. After the presentation, there will be a chance for questions. I would now like to turn the call over to Frank Bakker, President and CEO. Please proceed.

Thank you, moderator. Thanks to those attending our second quarter 2023 business update and results call. 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's 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, including the estimated timing of those 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. 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. Slide 4. We remain focused on becoming the U.S. first vertically integrated natural graphite anode supplier. Also, we continue to believe that the location of our Kellyton Plant in East Central, Alabama, places our operations in the heart of the growing U.S. EV battery market. When completed, the Kellyton Graphite Processing Plant will provide anode material necessary to support the domestic energy transition. Recently, the EPA announced new emission targets, which are expected to increase critical material demand for electric vehicles by 78% over the next 9 years, according to Benchmark Mineral Intelligence. Many auto manufacturers have announced commitments to either increase the number of electric vehicles produced or completely rectify their lineup. Turning to Slide 5. As a result of government legislation in the U.S. and around the globe and increased plant production of electrical vehicles, global demand for lithium-ion batteries is expected to grow at a compounded annual rate in the double digits through 2035. Demand growth for lithium-ion batteries is also expected to drive increased demand for Westwater's primary product, Coated Spherical Purified Graphite or CSPG. The demand growth in North America for CSPG is expected to grow to approximately 200,000 tonnes per year by 2030 and to over 400,000 tonnes by 2035. Our Kellyton Plant that's under construction is in a prime location within 15 existing Giga factories within a 1-day delivery of the plant. Slide 6 illustrates the importance of graphite in a lithium high-end battery as it accounts for approximately 50% of the critical minerals by weight. A typical electric vehicle has around 175 to 210 pounds of graphite. Currently, the U.S. is 100% dependent on foreign imports of battery graphite products. Slide 7. The growing demand for lithium-ion batteries, the government support for the energy transition and the need to secure supply of key materials has led the U.S. government to designate graphite as a critical mineral. As we have mentioned previously, when CSPG is produced in the U.S., it helps battery and EV manufacturers meet the domestic content requirements contained in the Inflation Reduction Act. The IRA has been and continues to be an important catalyst to our engagement with potential customers because of the domestic content requirement. Since Westwater has secured its feedstock of graphite concentrate from Syrah Resources, a non-Chinese source, and we plan to perform 100% of the conversion process here domestically, we expect the CSPG produced at Kellyton will be IRA compliant. Moving to Slide 8. We continue to focus on our value proposition and believe Westwater is well positioned as a future domestic source of IRA-compliant CSPG, with first market-mover advantages to become the first vertically integrated natural graphite project based 100% in the U.S. In addition, we continue our ESG focus, including environmental stewardship, commitment to follow SASB standards and the purification process that doesn't plan to use hydrofluoric acid. Our business plan also includes the potential for significant future expansion of our graphite business, both at the Kellyton site and the Coosa deposit. Turning to Slide 9. We took a slightly different approach than other companies with mineral 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 gets us to revenue and positive cash flow sooner. The conversion of graphite flake concentrate into CSPG results in a value multiplier of approximately 9 times. Second, this approach, along with securing our supply of natural graphite flake from a non-Chinese source, will allow us to take near-term advantages of a growing market for battery materials. On to Slide 10. Earlier in the year, we announced a joint development agreement with SK On, a Tier 1 global battery manufacturer that currently operates two EV battery plants in Georgia and is building three additional EV battery plants in the U.S. through its BlueOval joint venture with Ford. Additionally, SK On has announced plans to build a $5 billion EV battery manufacturing facility in Georgia with Hyundai. Work with SK On under a JDA continues and involves collaboration, preparation and testing of additional samples and ongoing product development. The feedback we have received regarding the latest sample evaluated by SK On was extremely positive. While some companies get stuck in basic battery testing with small sample sizes, sometimes requiring as many as 10 sample iterations before progressing to large-format cell testing, Westwater was able to move to large format cell testing with SK On after a few iterations. This is not only the result of the positive collaboration with the R&D team at SK On, but also due to the abilities of Westwater's highly skilled technical team. As a result of the significant progress made under the JDA, SK On and Westwater are currently negotiating terms for an offtake agreement to sell CSPG from the Kellyton Plant. Slide 11. We continue our engagement with other potential customers as well. In June, we announced the signing of an LOI with Dainen for the supply and purchase of CSPG. Dainen offers high-performance natural graphite anode materials to leading Japanese manufacturers of automotive lithium-ion batteries. We believe that this LOI with Dainen and subsequent work with them could accelerate Westwater's entrance into the Japanese automated battery market. Continuous engagement with potential customers is important for our Phase II expansion of the Kellyton Plant. From May through July, we have sent 36 product samples to potential customers as interest in our future production remains strong. We continue to receive positive feedback on our samples. Turning to Slide 12 for a construction update. We've been under construction for Phase I of our Kellyton Plant for over a year. Since the beginning of construction, we have had an excellent safety record by contractors and Westwater teammates. 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. As of the date of this call, we have completed the construction of five primary processing buildings; installed internal overhead cranes; completed and are operating our internal R&D Lab; and have begun installing our micronized shaping mills and other equipment in the SPG building. Subject to the receipt of additional equipment and closing additional financing, we plan to install additional equipment later this year and are targeting for Phase I of the Kellyton Plant to be ready to produce an optimized annual run rate of 7,500 metric tons of CSPG by the end of 2024. Our site at Kellyton has significant expansion potential. The approximately 70 acres allows for a Phase II expansion on the current footprint. The estimated capital cost for Phase II at a pre-feasibility level is $465 million, subject to a definitive feasibility study, which we intend to begin later in the year. The Phase II expansion is expected to produce 40,500 metric tons per year of CSPG. Currently, there are approximately 15 battery manufacturing plants either under construction or planned to be built in the United States. All these battery plants want graphite that meets the domestic content requirements of the IRA. Westwater plans to be a significant part of the graphite supply solution for these plants. Turning to Slide 14. We also hold mineral rights to approximately 42,000 acres across the Alabama graphite belt. Once in operation, the Kellyton graphite processing plant and the Coosa deposit represent the first fully vertically integrated domestic battery-grade graphite company in the U.S. We believe this will provide significant competitive advantages, given the domestic content requirements in the IRA. In April 2022, we completed our exploration drilling program and established our geological model and published a technical report in the fourth quarter of 2022, 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 this technical report was completed based on drilling approximately less than 10% of the acres for which we hold mineral rights. During the second quarter, we began work on a preliminary economic assessment for the Coosa deposit and expect to complete this assessment by the end of this calendar year. Before turning the call over to our Chief Financial Officer, I want to reiterate that these are exciting times at Westwater. I believe we have the team to execute this business plan, and I'm extremely proud of the Westwater team and our contractors; the dedication, flexibility, and hard work of all involved have been exceptional. We remain diligent in advancing our business plan and creating long-term value for our shareholders. Now I would like to turn it over to our Chief Financial Officer, Mr. Steve Cates.

Thank you, Frank, and greetings, everyone. Slide 15. Since beginning construction, cash expenditures related to Phase I have totaled approximately $107 million. We estimate approximately $164 million of cash spend remaining, inclusive of contingency. Westwater finished the quarter with a cash balance of approximately $17.3 million and no debt. We are making significant progress towards finalizing a debt transaction to fund the balance of the estimated cost to complete Phase I. We're engaged with multiple lenders that are interested in projects related to the energy transition and battery materials. We are currently negotiating term sheets with a subset of those lenders. While the credit markets have been tight over the past year, we are encouraged by the group of lenders that are looking to invest in the energy transition and specifically, our project. We believe securing a definitive sales agreement is key to finalizing a debt transaction. Our potential lenders have been encouraged by the positive progress we've made with SK On and other potential customers. Turning to the financial summary on Slide 16. A detailed discussion of these items is included in our recently filed Form 10-Q as well as our second quarter press release. Net cash used in all operating activities in the first half of 2023 increased by approximately $3 million compared to the first half of 2022. This increase for the first six months is primarily due to purchases of additional feedstock, higher product development costs, and higher general and administrative expenses. These increases in operating cash used were partially offset by the higher interest income earned on our cash balance. Cash used in investing activities for the first half of the year totaled approximately $52 million and are related to the construction of Phase I of the Kellyton plant. Product development costs for the second quarter increased by approximately $800,000 compared to Q2 of last year. This increase relates to additional sample production for customers and ongoing work pursuant to the JDA with SK On. We expect to incur additional product development costs related to customer sample production during the remainder of 2023, as we work to put LOIs and customer contracts in place. We believe continuing to work through the qualification process with customers is important to maintain early market-mover advantages, reaching our goal of having Phase I volumes under contract prior to the Kellyton Plant commencing operations, and securing the additional financing needed to complete construction. General and administrative expenses for the second quarter remained essentially flat compared to Q2 of last year due to managing our overhead costs. Lastly, the net loss for the second quarter was approximately $3.6 million or $0.07 per share compared to a net loss of $3.2 million or $0.07 per share in Q2 of 2022. The increase in net loss was due primarily to the higher product development costs, partially offset by higher interest income earned during the quarter. With that, I'll turn the call back to you, operator for questions.

So I saw in your release that you're providing a mass sample to SK On. Can you go through that a little bit more and explain what level you have to get to in order to get to a sample of that size? My understanding would be that you've been able to meet the qualifications and specifications necessary for SK; it's just they want to see if you can do it at a larger scale now. Would that be true?

Yes, Michael. This is Frank. Yes, you're completely correct. So when I was in Korea last month, SK On was very positive about our sample, and it completely meets the specification. And we're targeting to produce a mass production sample by the end of this year for SK On.

You've also indicated that you're in active negotiations for the finalization of a supply agreement. Is that something that the company is anticipating being able to finalize this year? Or is that something that's going to take longer?

No. The anticipation is that we finalize that this year. Our opinion is that we are in the final stages of the negotiation. So that's where we stand at this moment.

So at this point, it's just being able to come together on all the different terms?

That's correct. Yes.

You mentioned that you will release the PEA on the Coosa deposit later this year. Will that include a net present value based on projected graphite prices and related factors that shareholders can use to assess the value of that deposit to the company?

Michael, this is Steve. Yes, we will follow the SEC rules on reporting that analysis, but it will include an economic analysis, a cash flow estimate based upon a preliminary mine design. Then following that, we start moving more into the full pre-feasibility and definitive feasibility study. We have a qualified expert that we have contracted with to help us with this, who is very familiar with our deposit as well as the rules we need to follow.

And lastly, let's say the company is able to complete the sales agreement with SK On or another end user. How confident are you once that sales agreement is complete, that the financing can be completed?

Michael, this is Steve again. I think that's a critical milestone to reach. I think a couple of things to keep in mind. The closing of the financing has taken longer than anticipated, mainly due to a couple of things: the rising rate environment; the debt capital markets have been tight over the past 6 to 9 months, as everybody is trying to see if the Fed is able to execute a soft landing or not. But more importantly, this is a new market for us here in the United States. China dominates the market. So it's taken some time to get the lenders up to speed and used to that. But we also think that there are definitely positive steps. Multiple lenders are interested in the battery materials space, and all of them are looking towards that offtake to help finalize the deal. Also, I think from Westwater's perspective, getting an offtake will bring forward either more lenders and/or more term sheets to help us negotiate the best deal possible for our investors.

Are there special funding groups that are able to provide better terms for green energy, ESG type loans versus just a regular loan for, let's say, an oil company?

Yes, this is Steve again. So the group of lenders that we're engaged with and talking to, most of them have money set aside for the energy transition and specifically, battery materials. They're interested in the space. They're looking at the ESG component. Sometimes, depending upon the lender we're talking to, that might be on their infrastructure fund; others, it's within their energy team. It just kind of depends. They each have a different view, but they're definitely interested in this energy transition.

I appreciate it. I just hope to hear a bunch of good news from you guys over the rest of the year.

Our next question comes from Dmitry Silversteyn of Water Tower Research. Please go ahead.

I have a couple of questions, if I may. First of all, regarding the SK On agreement and the potential size of the selling relationship with them, it seems like it might consume most of your Phase I production. Is that a correct interpretation? Secondly, in continuing to work with other battery manufacturers, are you considering Phase II production to meet the demand from other anode manufacturers you’re negotiating with?

Dmitry, this is Frank. Yes, you're correct on the volume. It's the majority of the volume of our Phase I plant. We continue to engage with other potential customers also to sell the remaining of Phase I and also make agreements or term sheets for our Phase II production.

Has there been any thought given to the timing of Phase II in relation to your expectations from a couple of years ago, especially considering the strong demand in the industry following the IRA's passing and the interest in domestic production?

Yes, actually, we discussed it last week. I think based on our design, because it's modular, a lot of units of the facility are copy-paste. So probably, we can speed it up somewhat with our Phase II project.

You're essentially focused on ensuring that Phase I is operational by the end of 2024 and that the design specifications are in place. Ideally, it should be sold out by that time, and thereafter, you will consider the timing for Phase II in a more concrete manner. Would that be an accurate way to think about it?

Yes. Once we secure the financing, we plan to begin the feasibility study for Phase II, depending on market demand for it.

You mentioned earlier that you are working on securing financing to complete Phase I and move into production while considering Phase II. You talked about speaking with lenders and noted that some agreements might depend on securing a firm sales agreement. Have you explored asset-level financing, possibly through strategic partnerships or off-take agreements based on earning potential, as a way to support your operations and capital needs?

Dmitry, this is Steve. We have turned over every stone possible looking for the best terms that we can get and cost of capital on financing. So we have explored some of those avenues. Some of those avenues still remain. What we have found, especially with kind of ABL lending, is that the cost is pretty high. Considering we are pre-revenue right now, the cost and the debt-to-asset coverage needed just is not the best source of capital right now. The lenders we are talking to now are much more attractive in their pricing.

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 want to thank you for your interest in Westwater Resources. I think we made significant progress during the last quarter. The feedback from our customers on the quality of our CSPG samples is very positive. Based on this, we made significant progress in our engagement with our customers, and we are negotiating offtake agreements for our product from the Kellyton Plant. We installed our first equipment, and the construction is on track to produce 7,500 metric tons of CSPG by the end of 2024. I'm looking forward to speaking to you on our next call. Thank you.

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