Westwater Resources, Inc. (WWR) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the Westwater Resources Business Update Conference Call and Webcast. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Christopher Jones, CEO. Please go ahead, sir.

Thanks, Anastasia, and thanks, everyone, for attending our call this morning. With me here are Jeff Vigil, our VP, Finance, and CFO; and Dain McCoig, our VP, Operations. Turning to Slide 2. We will be speaking about some forward-looking information today, and I caution you to read our cautionary statements at your leisure. On to Slide 3. We have announced that we have entered into a binding agreement with enCore Energy to sell all of our uranium assets. With this sale, we'll save $4.3 million at least in annual operating costs. Westwater receives $1.95 million in shares of enCore Energy. Westwater participates then in any upside for uranium markets at no cost to Westwater. We transfer all of our New Mexico properties to enCore. Royalties on all New Mexico properties come to Westwater as a result of that transfer, a 2.5% net profit interests royalty on Juan Tafoya and Cebolleta and a 2% net smelter return on all other New Mexico properties. We'll also transfer our Texas properties to enCore. This transfers all reclamation responsibility to enCore Energy, including bonds and some collateral, Westwater then saves, as I said before, $4.3 million per year, money that can be devoted to graphite development. We expect to close this transaction by December 31, and we'll provide updates as we go along. Westwater is the owner of the leading graphite development property in the U.S., and we are laser-focused on developing that property now. We continue to work with our business partners to maintain our advanced battery graphite product development schedule. And we've developed a new proprietary process for purifying graphite and we've applied for a U.S. patent. Dorfner Anzaplan, our technical consultant, continues to provide results that will shape our pilot plan operations scheduled for Q4 of this year and Q1 of next. And Westwater has prevailed in a key decision in its case for compensation from the Republic of Turkey. The ICSID tribunal turned down Turkey's request for bifurcation of the case. Westwater requests $36.5 million, plus fees, in a hearing scheduled for September of '21. On to our graphite business. As we said before, we now have a proprietary technology for purifying graphite. That means we take graphite from 95% pure as a concentrate to 99.95% as a product. It's a simple and a robust process. And again, we've applied for patent protection. We have a cost advantage because we're a U.S. manufactured natural graphite. And our vanadium discovery on the property provides some improvement potential to our project economics. And as a result of working in the United States and with this new process for purification, we have an environmentally sustainable process making clean graphite for the battery industry. Batteries and their role in clean energy cannot be deemphasized. Transportation is the primary growth engine for batteries. As we stand right now, global electric vehicle sales are projected to be half of the global market in 2040, a 25-fold increase in electric vehicle adoption from today. That is about a 23% annualized growth rate. Emblematic in that is GM's $2 billion investment this week -- in Nikola this week, a truck manufacturer. For energy storage of all types, demand is expected to be driven by grid and peak demand management. This enables renewable energy like solar and wind power, so that power can be delivered from these outfits when the sun does not shine and the wind does not blow. And again, we expect an 11% growth rate in that market. And consumer electronics, like the phone that you may be using today, the laptop on your desk, still have a 3% growth rate in a very large market. Graphite is a component of all these batteries. It is a critical component of batteries, including lead-acid like that in your car, alkaline power cells like that in your flashlight or your smoke detector and nonrechargeable lithium cells like you see on the end caps [ that hit ] Home Depot. Coated purified spherical graphite or CSPG (sic) [ CPSG ] is a critical component in lithium-ion batteries like those that power cars. The U.S. government has defined graphite as "critical to the nation's security and prosperity." On Slide 8. The Coosa Graphite Project provides key advantages. It is the only near-term source of domestic U.S. natural graphite. Pilot plant design and preconstruction work for that pilot are underway right now. Customer qualification is underway, and a recent 1-tonne bulk sample order has been announced. Westwater's graphite, once again, will be produced using environmentally sustainable processes here in the United States. And Westwater's graphite products serve all battery markets. On Slide 9. The 3 products we make now at the lab scale and now at the -- and soon to be at the kilogram level are our ULTRA-PMG product. This is a conductivity enhancer for all types of batteries. The largest market in the world is lead-acid batteries, fully half of all batteries sold. ULTRA-DEXDG improves electrical conductivity in batteries further. And it acts much like PMG but on a higher level for lithium-ion, lithium nonrechargeable, lead-acid and alkaline power cells. And our CSPG product, ULTRA-CSPG, is the high-performance anode material for lithium-ion batteries for the growing electric vehicle market. On Slide 10, we have a quick look at our flow sheet and the important and key technology of purification, where we filed for a patent for this proprietary technology developed with our partners in Germany. This is key to making low-cost, high-efficiency graphite as we go forward. On Slide 11. The business plan for the Coosa Graphite Project is still the same as it was. Our pilot plan is underway and certainly on the design aspects, parts ordering and light construction as we speak now with Dorfner Anzaplan in Germany. We expect to start this machine up in the final quarter of this year, generating products for prequalification in large batches to facilitate sales. Full-scale production is expected on purchased feedstock in 2022, producing battery graphite. And Westwater expects to mine the Coosa graphite deposit, beginning in 2028. Until then once again, we'll be working on purchased feedstock. On Slide 12, a little bit more on the project plan and a bit of a graphic showing customer qualification between the final quarter of this year through 2022. Commercial production starts in 2022 and ramps up in 2028 to 15,000 tonnes per year. And once again, we're starting up on a non-Chinese natural graphite source that we purchase on the open market. The mine is expected to start in 2028. On Slide 13, we talk about our project economics. Project CapEx is currently expected to be $54.5 million, subject to feasibility studies in the first half of next year. Our first full year of positive cash flow is in 2023. Our pretax NPV, $481 million with an internal rate of return 41%. And once again, our vanadium discovery can enhance these economics as we go forward. We're currently considering equity, project-level debt and joint venture structures for financing [ this effort ]. A year ago, we announced a significant vanadium discovery on our property. We're going to explore that vanadium, expected in the second half of 2021. But our recent assay results show 0.15% to 0.4% V2O5, which has a chance to be economic. We need to do more work here, but we're pretty excited about the potential. There's no downside. It's all upside with vanadium. And this vanadium is expected to serve the steel markets. On Slide 15, our team, tenured leaders in energy minerals development, guys like Jeff Vigil, here on the call with me, more than 40 years of financial experience in mining and manufacturing. Dain McCoig is also on this call, mechanical engineer from the Colorado School of Mines, experienced leader in project development and ISR operations for uranium mines, now becoming experienced in graphite development. Cevat Er, our VP, tech services, 30 years of Turkish and U.S. mining and environmental experience taking projects from concept to production. And John Lawrence, our General Counsel, with more than 30 years of experience in law and licensing across the nuclear fuel cycle and also a B.S. in nuclear engineering from Purdue University. And our newest addition of Jay Wago. He's our VP, Marketing and Sales. He came to us in July with more than 20 years of experience in sales and marketing to the lithium-ion and electric vehicle markets in the U.S. and Asia. On Slide 16. Experience matters. Energy minerals development and -- exploration and development requires discipline and diligent capital stewardship. We have restructured and recapitalized the company, repositioning Westwater as an energy materials company with a laser focus on battery graphite products. We have an experienced management team with a demonstrated history in finance and green energy development from concept to production. And we've executed a proactive M&A program, sale of noncore uranium properties to redeploy capital, spending -- expanding our resource base into green energy materials. On Slide 17, why Westwater as an investment. We have a battery graphite development business with strong upside potential, proven management team with experience in energy minerals development and financial management. And you can anticipate catalysts for the remainder of '20 and 2021 through the graphite project development and project milestone achievement as we build and operate our pilot plant. We are the leading graphite developer in the United States, and look for news as vanadium presents a possible upside. And with that, I'd like to turn it over to questions.

[Operator Instructions] The first question comes from Howard Brous with Wellington Shields.

Congratulations, Chris. Job well done. There's been a long history of foreign appropriation of U.S. assets held abroad and subsequent to reimbursement for those appropriations. And usually, in many instances, I should say that those awards could be substantial. So the $36.5 million, plus fees, does that include interest? That's my first question.

Yes. And Howard, thanks for the question. Yes, it includes fees, but before I get too much further down, I want to just mention that this uranium sales was a big team effort, and I'm very proud of the guys that -- with whom I am associated to make this happen.

Well, then congratulations to all of you. Job well done. So, does that -- does the 36 million -- go ahead. Sorry.

And -- yes. It is awards, fees and interest.

So the $36.5 million doesn't include interest.

No, sir. It's over and above.

All right. So on a per share basis, what would that represent should you win? I mean obviously close to $40 million, $45 million on a per share basis. What would that represent?

Based on $40 million, because I can do the math in my head, it's about $5 a share.

In 2021, is that the first hearing? Or is there a subsequent hearing after that?

The schedule is for a hearing in 2021, with a decision some months down the road after that. So we can expect that -- the award to happen sometime in 2022, as I understand the schedule.

I'm just thinking about how to discount that to present day value assuming that you win the award, as hopefully that you should. That's the only question I had. Again, congratulations to all of you.

Thanks, Howard. I appreciate that.

The next question comes from Debra Fiakas with Crystal Equity Research.

In the agreement with enCore, do you envision a lockup of the shares that you anticipate receiving as compensation for the assets?

Debra, also thanks for calling in. We don't anticipate a lockup, but we're not fussed with one if we decide to negotiate one. The reason is, as we plan on participating with enCore for at least a period of time in any market upside, again, we can do that at no cost to Westwater.

Okay. Very good. And as the deal has been discussed so far, who's going to be getting custody of some of the engineering personnel that have been associated with the Texas operations? Will they be -- will you be losing them? Or will they be staying with Westwater?

The majority of our team stays with enCore Energy as we pass that along. We are going to take Dain McCoig, our VP, Operations; and Josh Holland, our Manager of Environmental Affairs, over with us to run this new business.

To run the -- continue to work on Westwater operations, you mean.

Certainly, our graphite business.

Yes.

Okay. Very good. And then as regards the graphite initiative and the patent application, you're applying for protection in the United States or in the U.S. and Europe as well. What jurisdictions will be -- will you be seeking protection?

Time will tell on the various jurisdictions. What we've initiated right now is what's called a provisional patent process. So it's a special kind of application that keeps our technology confidential for a year while we work with patent office to go forward.

Okay. And that's in the U.S. alone.

Yes.

Okay. And then the last question is in regard to your comments during your prepared remarks about seeking financing, quite obviously, I don't think anyone is surprised that you're looking at all different avenues. And -- but I wanted to ask, in particular, if it came to a joint venture, you would be receiving funds from some sort of joint venture partner. In your view, what would be the ideal joint venture candidate, if that was the route that you were going to take?

Well, that's a very hard question to answer, Debra...

[indiscernible] why I chose it.

Exactly. So...

Put on your thinking cap.

I think the ideal joint venture partners in our land are those that are [ well held ] financially, are interested in our business and interested in pushing it forward in the same way we are. So that could be somebody as large and complicated as an automobile manufacturer. It could be somebody that has a technology to add to ours, to put it into different kinds of batteries. There's all kinds of options in there for us. And at our stage right now, it's exciting to think about things like, as I mentioned in the presentation, GM taking $2 billion and sticking it in Nikola. Nikola is a $20 billion company. And GM at a 10% or 11% participation level is still large, but that's a great act of faith on the part of an automobile manufacturer to stick that kind of money into an electric car manufacturer that's just getting started. So these are all very exciting possibilities for us, and we're open to discussions on any number of them.

Okay. I have a couple more questions, but I'll get back into the queue and take my turn later.

Debra, we know you always have a couple of more questions. We're grateful for those. And I ask the operator to let you go until you run out.

Okay. Well, just the last question then really is in regard to the new sales strategy and the new personnel, the new firepower that you've put into place in terms of sales. And I wondered if you could tell us a little bit more about how you're going to be relating what's happening in your business pipeline. For example, you've got an automotive manufacturer that's doing some development work on the CSPG, the coated spherical purified graphite. How can we learn a little bit more about what's happening there? What -- do you get updates from them? How do you intend to provide us with updates on your pipeline?

A good question. So when you're working with an automobile manufacturer, for instance, it's really up to them on how they want to release the information. We work first under an NDA. And we need to seek permission from the -- from our counterparties to release information. And releasing that information has to be advantageous to both of us. So with regard to that and the identity, for instance, of the 1-tonne order, those potential customers have asked to be confidential for now as they develop their thinking. But that won't always be true, and it is certainly customer specific. But as we develop our pipelines [ of ] products, as we develop our products from the gram to the kilogram to the 1-tonne order business, we're going to keep the markets apprised of production as it happens in that area, even if we can't talk about specific customers, just so that people know the stuff is being made, the stuff is high quality and the stuff is available for customers as we go along.

[Operator Instructions] The next question comes from Michael Porter with Porter, LeVay & Rose.

I have a couple of questions that -- Chris, I have a couple of questions that came in overnight from a couple of shareholders that I felt would be of interest to everybody. The first question is, will Westwater have to take any write-downs as a result of the uranium transaction?

It's a good question, Mike. I'm going to ask Jeff to go ahead and answer that one.

Mike, thanks so much for the question. Yes, there will be a write-downs -- yes, there will be a write-down. The -- for anyone that's interested in the how we come to that, the second quarter financial statements provide a pretty good picture. [ Go to ] footnote 6 and footnote 14. Footnote 6 is a property, plant and equipment footnote. We will -- [ net income of about ] $2 million, we'll be writing off book value of closer to $13 million and which again is right on the balance sheet, public disclosed financial statements. And so -- and then -- and that includes not only the property, plant and equipment and mineral properties for Texas and New Mexico but also the -- a portion of the restricted cash that supports the surety bonds that we have in Texas. And that's all offset by the reclamation obligation that we have recorded on the balance sheet of about $6.3 million. And so it should be in the range of around $5 million. The one thing that I would point out is that not included in these numbers that you get off of the balance sheet is the fact that, as Chris mentioned in the presentation, we're going to be saving about $4 million a year in expenditures. They're not including any of that. So really, within 1 year, we've recouped the loss. We would have been -- if we would have continued on with the reclamation program and on an accelerated pace, it still would have taken 5 to 6 years. And 5 to 6 years at $4 million a year, you can see that there's quite a bit of value that we're saving that's really not on the balance sheet. And I think that's really important to point that out.

Chris, I'd like to ask you a couple of questions about the graphite business. So one of the questions that we're always getting is, what's unique about the graphite location and the technology? As well as, does the patents create a significant competitive advantage to the company or can you use the patents as a barrier to entry?

In reverse order. Yes, we can use the patents as a barrier to entry for newcomers certainly in the process. The process itself provides a couple of advantages, but the most important advantage is that it's got a lighter footprint than those used. For instance, in China where they use a chemical called hydrofluoric acid, it is effective in removing impurities from graphite, but it's also very difficult and possibly dangerous to handle. So we're not using HF. We're using chemicals that are far more ubiquitous in the American industry and in other places and processes that have a lighter touch so that our people, the communities where we work and the environment in which we work are far safer.

One last question. Could you give us a little bit of an update on exactly what's going on in Germany with your partner?

You bet. So -- and thanks again for the questions, Mike. Our partners Dorfner Anzaplan are working diligently, still testing our materials at the gram and kilogram level as we speak right now. They are preparing designs and planning for the construction of our pilot plant, which will be located in a couple of places in Germany and one in the United States. The reason for these different locations is we are working ourselves into a place where we can use examples of the equipment where we will do the product, using the equipment for processing the materials by brand where we can and by type where we can't. So there's 3 locations in Germany presently contemplated for 1 for our thermal work, high-temperature thermal work; 1 for the sizing and shaping of our products; and then another 1 where we do the leaching and baking. And the process in U.S. is specific to 1 of our 3 products, DEXDG. So all that's being done in Germany at Dorfner Anzaplan in Hirschau as we speak. And we are working with them diligently, if not every day, certainly several times a week to make sure this all goes perfectly.

One last question. It's sort of like out of the box a little bit. Your property in Alabama is basically almost surrounded by the majority of auto manufacturers, are they aware of what's going on with you in the graphite area? [ Have you guys did a closure ]? Or at least they know that -- how close you are to their plants [indiscernible].

It's a great question. Certainly, the Mercedes plant is aware of the proximity to the Coosa project. One of the reasons we brought Jay on and his extensive experience and contact base in the automobile sector is to go ahead and make sure they know where we are, who we are and how fast we're going to make our [ products ].

There are no further questioners. This concludes the question-and-answer session. I would like to turn the conference back over to Christopher Jones for any closing remarks.

Thanks, Anastasia. I want to thank everybody on the call for spending their -- part of their morning with us. And I just want to reiterate one idea, we're all in our graphite here. We're not distracted by any other minerals, any other projects. We are laser being focused on developing this graphite business and keeping our schedule and keeping our promises to our shareholders. So with that, I'd like to thank you once more and wish you a great day.

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