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

Thank you for standing by. This is the conference operator. Welcome to the Westwater Resources, Inc. First Quarter 2022 Results and Business Update Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Chad Potter, President and CEO. Please go ahead, sir.

Thank you, and thank you for all attending our first quarter 2022 results call. With us today are Terence Cryan, our Executive Chairman of the Board; Jeff Vigil, our Vice President and Chief Financial Officer; and Steven Cates, our Chief Accounting Officer. Slide 2, during this presentation, the forward-looking statements we will be making are based on management's judgment, including projections related to Kellyton's graphite plant and the Coosa graphite deposit. These statements are subject to certain risks and uncertainties, a description of which can be found on Page 2 in this presentation, our 10-K for 2021 and our SEC filing. Actual results may differ materially from what may be discussed today. On to Page 3. Why Westwater as an investment? Westwater is an energy technology company focused on producing battery-grade natural graphite materials for advanced batteries here in the United States, and we're using a patent-pending proprietary purification process. We made a lot of progress during the first quarter, with our construction activities, which include civil and earthwork, which began in March, hiring our various general contractors and other contractors. We continue the process of ordering long lead time equipment and the build-out and completion of our administration's offices in April. Also in April, we hosted a ceremonial groundbreaking at our Kellyton facility, which was attended by the Governor of Alabama and other state, local and federal officials. In April, we completed the exploration drilling program at our Coosa graphite deposit, and we expect our geological model to be completed by the end of the year. Slide 4. I'd like to turn it over to our Chief Financial Officer, Mr. Jeff Vigil.

Thank you, Chad, and good morning, everyone. First, let's take a look at our capital position on Slide 4. The closing share price on Wednesday, May 4, was $1.37 and with approximately 47.2 million shares outstanding, our market capitalization stands at approximately $65 million. Our average daily trade volume over the past 3 months was approximately 3.2 million shares per day. The share price began the quarter at $2.15 and ended the quarter at $2. We believe investors have taken a more cautious approach to Westwater as we embark on the construction of our graphite processing facility in Alabama and the large capital expenditures associated therewith. We finished the first quarter with a cash balance of $116 million and a working capital balance of approximately $109 million. During the first quarter, the company utilized its ATM facility with Cantor Fitzgerald to raise approximately $16 million from stock sales. In April 2022, we raised an additional $9 million from ATM stock sales. Our working capital balance of 0 debt provide us with the ability to continue to move the construction of Phase 1 of the Kellyton graphite plant forward. Since beginning the construction of Phase 1, we have incurred $17.8 million of the estimated total cost of $202 million. Our 2 financing facilities with Cantor and Lincoln Park provide the company with an opportunity to raise cash flow at low cost of capital and may be used in the future to support the company's business plan in 2022. However, management is currently engaged in the process of identifying additional or alternative sources of low-cost capital funding, which potentially could include project level debt, offtake agreements, loan and grant programs provided by the U.S. Department of Energy, a strategic partner, or a combination of these. Turning to Slide 5. We provide a financial sum for the quarter ended March 31, 2022. Net cash used of all operating activities was $2.7 million for the quarter as compared with $4.8 million for the same period in 2021. $2.1 million decrease in cash used was primarily due to reduced product development expenses and arbitration costs. Product development costs for the 3 months ended March 31, 2022, decreased $1.6 million compared to the same period in 2021. The costs incurred for the first quarter of 2022 were related to continued product optimization costs, while the prior year period was impacted by expenses related to our DFS report for the Kellyton plant and the company's pilot program, both of which were completed in the second half of 2021. General and administrative expenses for the 3 months ended March 31, 2022, increased by $100,000 from the prior year period. The increase year-over-year is due primarily to increased payroll costs as the company continues to build out its team and to invest in sales and marketing. Net loss from continued operations for the 3 months ended March 31, 2022, was $2.8 million or $0.08 per share compared to a net loss of $5.4 million or $0.19 per share for the same period in 2021. $2.6 million reduction in net loss was due primarily to decreased product development expenses and arbitration costs. And with that, I'll turn it back to you, Chad.

Thank you, Jeff. On to Slide 6, ensuring the health and growth of our business. We continue to -- with construction of our graphite processing plant as well as the exploration and modeling of our Coosa graphite deposit. Also, we are continuing to work to ensure the adequate financial liquidity to support our key operations and business activities. To reiterate Mr. Vigil's comments, we have a cash balance of $116 million and 0 debt. Also, we are active -- we are in active discussions on a range of alternative sources, with additional capital necessary to complete Phase 1 of the Kellyton graphite processing plant, with a focus on securing low-cost capital available. Slide 7. Graphite is a major component of all batteries, batteries, which include lead-acid, alkaline power cells and nonrechargeable lithium cells. Coated purified spherical graphite is a critical component of lithium-ion batteries. And the U.S. government has defined graphite as critical to national security and the prosperity, and the White House has invoked the Defense Production Act. And recently, the Department of Energy Funding Opportunity Announcement allocated $3.1 billion to expand the advanced battery manufacturing capabilities in the U.S. Slide 8. A typical lithium-ion battery contains considerably more graphite than lithium. Approximately half of all lithium-ion battery cells is made up of graphite, as depicted on the graph on the screen. Typical electric vehicle contains approximately 200,000 pounds of anode graphite. Slide 9. Battery markets, they continue to grow, and graphite is a critical component as outlined in the previous slide, Slide 8. But the EV sector of the market is expected to grow at a 24% compound annual growth rate and will drive demand for lithium-ion batteries in the future. The SPG is the principal product what makes up the anode lithium-ion battery. The demand for battery storage sector, battery storage is enabling technology for many renewable energy technologies, such as wind and solar, enabling power to be stored and then released during periods of peak demand. Other sectors, such as consumer electronics and defense, will provide additional markets for our graphite materials. On to Slide 10. As you can see on this slide, our Kellyton graphite processing plant is scheduled to be completed in 2023. And our Coosa graphite mining project is anticipated to begin in 2028. We've taken a different approach here by developing our processing plant first, then bringing our graphite mining project expected around 2028. This project has a lower upfront capital cost, a faster path to revenue and cash flow. And it derisks the time line of permitting at the Coosa deposit as we have third-party non-Chinese source natural graphite in play until the production of our graphite from our Coosa deposit comes online in around 2028. This will vertically integrate our operations and provide long-term security of supply to our Kellyton processing facility. On Slide 11. Our focus on graphite processing is easily understood when you take a look at the value created during the processing of natural graphite flake, which sells for around $1,000 a tonne in the CSPG, which sells for approximately $9,000 per tonne, resulting in a value multiplier of approximately 9x. On to Slide 12. This slide tells you exactly why we went all in, in developing advanced graphite materials. The blue bottom section represents existing and projected Chinese anode material production. Yellow section represents expected non-Chinese anode material supply, and the dotted segment represents required new anode material capacity needed to meet demand. U.S. is currently 100% dependent on foreign imports advanced graphite materials, with 85% of global output coming from China. Our Kellyton processing plant is expected to be the first-of-its-kind in the United States. Our proprietary purification technology. Westwater has developed a new technology for graphite purification. We have filed a provisional patent application with the U.S. Patent and Trademark Office for this technology. It has a more sustainable footprint than currently used in China, where environmentally damaging and expensive-to-manage hydrofluoric acid is used. This process yields graphitic carbon of more than 99.95%, allows for flexible feedstock and consistent performance. It consists of 3 steps, including caustic roasting of the graphite concentrate sample, acid leaching and thermal treatment of the sample. On to Slide 14. In 2021, we purchased 2 buildings comprised of 90,000 square feet of warehouse and office space immediately adjacent to the plant site. These new buildings were purchased on very favorable terms to really jump start our development at Kellyton facility. We expect the plant to be completed at the end of the second quarter of 2023, currently on time and on budget and have ordered long lead time items, such as our first in late 2021. While construction is underway, we have samples from our pilot plant in the hands of our prospective customers undergoing customer review and testing. This positions us ideally to announce customer LOIs in advance, commencing operations next year. On to Slide 15. Coosa graphite deposits is a source of domestic U.S. natural graphite. The exploration drilling to further define the graphite deposit is complete and geological modeling, is expected by the end of 2022. Westwater's vanadium discovery at its deposit could contribute to the revenues. Battery-grade graphite products will initially be produced from a non-Chinese source of natural flake graphite until the Coosa graphite deposit is developed. Our graphite processing plant and our Coosa graphite deposit together represent the first fully integrated battery-grade graphite project in the United States. On to Slide 16, This slide represents our leadership team. I was proud to join as the CEO in February. This team represents highly experienced individuals, both from the mining, financial sector as well as those that have experience in high leadership roles. I'm very proud to be part of this team and the experience that they represent. Looking forward to the future with them. On to Slide 17. Westwater is proud of a strong culture we have built and our commitment to safety and ESG. Every meeting at our company starts with a safety share. We are committed to environmental stewardship in manufacturing practices, which are environmentally superior to a majority of the existing CSPG manufacturing processes in the world. We have a proprietary graphite purification process that is patent pending, and we're aiming for an industry-leading low carbon footprint, which we think customers will increasingly demand. We are committed to being trustworthy stewards of our shareholders' company and have developed a gender-balanced Board of Directors made up entirely of mid-career, C-suite executives. In closing, this is an exciting time for Westwater Resources, and we appreciate your interest in our company. Team and I will now take questions that you may have. Operator, back to you for questions. Thank you very much.

[Operator Instructions] The first question comes from Debra Fiakas with Crystal Equity Research.

I think most of them are numbers related. So I'm putting Jeff in the hot seat first. I appreciate your disclosure that you've spent $17.8 million out of the $202 million budget for the graphite processing plant project. I also noted in your filing that you had added $17.1 million to construction in progress to the balance sheet. And I wanted to sort of get an idea of how we relate the two. Is it going to tad over like that as you go along in executing on your budget? Will we see the numbers pretty much equal between what you've spent in construction in progress?

Debra, that's a very good question -- sorry, go ahead.

This is Terence Cryan, Debra. Appreciate your question. Appreciate you joining us this morning. I'm actually going to direct this one and put the spotlight on Steve Cates.

Okay.

Debra, thanks for joining. Yes, those, over time, will line up. Really the difference between the $17.1 million and the $17.8 million incurred really had to do with some year-end accruals that were already in CIP at 12/31, mostly related to some of our engineering work as well as the build-out of the administrative offices, which, as Chad mentioned, were completed in April of this year.

Okay. And then a follow-up along those same lines. The capital expenditures that were reported in the first quarter were $12.1 million. And can I assume or can we assume that, that capital expenditure was principally part of this construction in progress and then, therefore, also a part of what you've worked off the project plan as well?

Yes. So the $12.1 million, to your point, that is all related to our Kellyton processing facility and the construction, and that's the actual cash spend. The $17.8 million is what we have incurred, which includes amounts that remained unpaid at period end.

Got it. Got it. And then an unrelated question, I was wondering, you had -- the company held its annual meeting yesterday. And I wondered if the results are now available. Can we know that everybody get elected? Or...

So Debra, I'm happy to report that, yes, all of the resolutions on our proxy statement passed. And we will be filing an 8-K and a press release with those details today.

And the other proposals were accepted as well?

All proposals passed.

Okay. And this is more of a forward question. Again, it is numbers related, but I kind of wondered if, as in the first quarter, we don't really see a whole lot of the construction project effects in the operating expenses. Can we kind of expect that to be the case forward that the most of what is going on in that $202 million budget, now with $17.8 million worked off, that we're really not going to see that at the operating line, that's mostly going to be going on in CapEx and construction in progress?

Steve?

Yes, Debra, you are correct. The vast, vast majority is substantially all of the $202 million you will see as CapEx and running through our construction in progress line until we get through commissioning.

The next question comes from David Eidelman with Eidelman Virant Capital.

Yes. My question is concerning the ATM. I was surprised at how much the share count went up. And I'm concerned going forward that there will be too much dilution, especially with the stock at this price. And I wondered if you could comment on what the future plans are for selling shares somewhere around this price. And second of all, how you plan to raise the extra funds to complete the plant once you go through the current cash on hand?

Thank you, David. Appreciate you joining us today. Steve, would you like to fill that?

Sure. Yes. David, as we said in the prepared remarks that we have engaged in the process of identifying alternative and additional sources of capital. And our focus is on obtaining the lowest cost of capital that is available to us. And so we are in the middle of that process, having discussions with the type of counter-parties one would expect as part of that, and hope to be able to update more as we progress through that. Regarding the ATM sales in the current period, it did provide, as Jeff said, the ability to raise some funds at a low cost of capital. And as you know that recently, the Fed chair had raised some rates, about 0.5 point. And so there was an opportunity there to be diligent and raise some additional funds at a low cost. But again, we are interested in seeking additional sources of low-cost capital. But I have nothing more to report at this time.

We know that you can't comment on whether you would continue to sell shares near the current price.

All I can really reiterate is that we're in process of seeking additional low-cost capital. I don't -- we have to get through this process of identifying and seeking that additional financing. And so right now, I can't say whether or not we would or would not be. They're available to us, but we are highly interested in identifying those other forms of low-cost capital.

Okay. Could you comment on what some of those could possibly be?

Sure. I think with our balance sheet with $116 million of cash and no debt, it does provide an opportunity, we believe, and some optionality to not only move the project forward and continue to make a cash investment, but look at something that's maybe a little more along the lines of traditional project debt financing. As Chad mentioned in the prepared remarks, there's the funding opportunity announcement, which allocates $3.1 billion of grants to increase battery production capabilities in the U.S. And we are closely monitoring those and looking at those types of facilities or programs to determine what benefit, if any, there is to Westwater and its shareholders. And whether we'd be able to participate in those.

This concludes the question-and-answer session. I would like to turn the conference back over to Chad Potter for any closing remarks.

Thank you, Sherise. I'd like to first thank all of our teammates for their continued focus on safety and the environment. Also, I'd like to thank all those of you who are listening and your interest in Westwater Resources. Thank you, all, and have a great day.

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