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

Okay. Good afternoon, ladies and gentlemen, and welcome to another presentation of Water Tower Research fireside chat. My name is Dmitry Silversteyn, and I'm a Chemicals and Materials Technology senior analyst with Water Tower Research. Joining me today on the call are Terence Cryan, Executive Chairman and Chairman of the Board of Westwater Resources, which trades on the New York Stock Exchange under the ticker WWR; and Steven Cates, the company's Chief Accounting Officer and Controller. Welcome, gentlemen.

Glad to be here.

Terry, perhaps you can begin by telling our audience a little bit about Westwater Resources. The company used to be uranium miner, if I'm not mistaken, but has transformed itself in recent years and is now on the verge of becoming a supplier of graphite materials for the lithium battery industry. Is that correct?

It is. So starting in the second half of 2017, we made a strategic pivot towards the graphite space and began a process, which led to the acquisition of Alabama Graphite in March of 2018. Since that point in time, we have been developing our strategic plan for advanced graphite materials. We've raised a substantial amount of capital in the markets to support that effort. We undertook a definitive feasibility study, which was completed in October of last year. We also ran a pilot plant, which produced 13 tonnes of graphite material and led to the development of proprietary processing technology, which is patent pending. After the completion of the feasibility study last October, the Board elected to move forward with the construction of our processing plant located in Kellyton, Alabama. And we have been underway on that process since that time. We moved aggressively in the fall of last year to put into place contracts for long lead time items. And our construction process is well underway. We have 2 buildings fully completed and renovated, comprising 90,000 square feet. And we're on track and we're on budget for completion of our Phase 1 processing plant at the end of the second quarter of 2023. So about 13 months from now.

Okay. That's helpful. You referenced that you have a natural graphite deposits in Alabama, but have not developed the mine yet and instead of focusing on construction of a graphite plant that you mentioned, that's somewhat unusual for a new entrant into a market as you are -- as you would be with graphite. So can you speak to the reasons why the decision was made to go with the plan first and develop the mine at a later time? And before the mine is developed, what will your plan be processing in terms of graphite? Where will you be getting it from? And what is the structure to the extent you can share with us of that agreement in terms of length and the ability to ramp up volumes as your demand ramps up?

Right. So you're absolutely right that we've taken a different approach than is often the case by developing our processing plant first and our deposit second. We think there's a number of advantages to taking that approach. First, it's lower capital cost, getting us to revenue and cash flow sooner and providing us with the ability to then self-finance the development of the deposit. We only get to mine our resource in Alabama once. And I think many of the viewers may be aware of the fact that graphite -- natural flake graphite prices have been trending upward. There is projections of a significant shortage of process graphite material for the electric vehicle and battery storage markets. And so with the anticipation that we're going to see much higher graphite prices in years to come, we made the strategic decision to take advantage of the opportunity to put in place a supply contract with a third party to purchase natural flake graphite for our processing plant until our Coosa graphite deposit comes online, which is targeted for 2028. So we think there's a number of advantages to this approach. The supply agreement that we have in place is with a non-Chinese source. And we believe it positions us to develop our Coosa deposit for production in 2028. And it derisks any permitting delays that could occur as we go through the process of developing the mine.

Understood. That's actually a very sound strategy sounds like, and certainly can alleviate the risk for investors for used to perhaps investing in mines with an undetermined time to start up. It sounds like your approach basically gets you to a revenue in a profit place a lot faster than it would the other way around. So understanding of that, I think, is helpful for investors. You mentioned non-Chinese source of flake graphite that you will be getting. China controls the overwhelming majority of graphite production as they do with many other metals and materials that go into particularly the EV batteries and lithium batteries in general. Can you talk about sort of the motivation of getting away from Chinese-sourced materials and building a domestic infrastructure and supply chain for battery production here in North America and particularly in the U.S.?

Sure. So at this point in time, the United States is 100% dependent on imported graphite materials. And that obviously represents some significant supply chain risks to the electric vehicle industry, to the battery storage and to a lot of other industrial applications. And so Westwater, with our Kellyton plant coming on stream at the end of the second quarter of next year will be the first U.S. processing plant for advanced graphite materials to serve those markets. The U.S. government is clearly recognize the risk of being 100% dependent on imported process graphite materials. And they recently invoked the Defense Procurement Act to help facilitate the development of domestic supplies. So we're excited to be at the vanguard of that effort. And we are well along in our process. And as I said earlier, with our plant coming on stream in the second quarter of next year, we'll be well placed being in that Alabama automotive cluster of companies to supply the demands of that industry.

Okay. That's very clear. And obviously, anybody who has followed the EV battery space, understands the problems with the long supply chain and logistics concerns, not to mention the geopolitical risks of having the production concentrated in China. People obviously pay attention to what's going on with the lithium and cobalt and the nickel and other metals that go on the cathode side of the business. But I don't think investors appreciate enough the need to develop the anode side of the business, which is where our graphite actually will be used from your manufacturing facility and other places. So with that in mind, can you talk about your most recent sort of developments when it comes to your planned construction? Where you are in terms of getting the permitting? You mentioned acquiring the building. You've already put in some capital or committed some capital for long-term lead items. Can you talk about the progress on the planned construction? And where you are in terms of budget and timing for the start-up?

Sure. So this is obviously a challenging time to be building a new plant. We took advantage of the opportunity late last year to place some long lead time orders. We're monitoring those orders carefully to ensure that we remain on time, on schedule. As of now, we are in a good place to finish that as contemplated. And I think as we think about where we're going to be in that EV and battery storage industry, we're going to be in a position to provide the advanced graphite materials, which, as you noted, comprise a significant component of a lithium-ion battery. So graphite as the anode active material represents by weight, about 50% of a lithium-ion battery, significantly more in percentage terms than lithium itself. So this is obviously a key component. And we're excited about the opportunity to bring Phase 1 online next year. We're already planning for a Phase 2, larger capacity. We want to take all of the learning that's going to occur in Phase 1 and incorporate that into our definitive feasibility study for Phase 2. And we anticipate that, that study will kick off shortly after we complete construction of Phase 1.

Okay. We've spoken about the plant a little bit, but again, I'm getting back to the graphite deposits that you have in Alabama. I know you've done some drilling results and some early exploration work on determining exactly what this deposit is and how economical it is to process and mine. Can you update us on what your recent drilling results were? Talk about maybe some of the graphite tailings that you're maybe counting in your deposit? And whether or not they may have some economic value in the future? Obviously, this is all 2028 time frame. But that's still 5, 6 years away and investors may want to start paying attention to what's going on with your mine, not just your plan in terms of development.

Sure. Well, Alabama has a long history of graphite mining, which dates back to the first and second World War. And we currently control approximately 42,000 acres of mineral rights at the Coosa deposit. We have just recently completed a more than year-long exploration drilling program. Our core recoveries were excellent. We're now in the process of building a resource model using those drilling results that will significantly enhance our ability to move forward with the development of the Coosa deposit. Concurrent with that, because we have identified the existence of vanadium at the Coosa deposits, we'll be in a position to better incorporate the potential economic benefit of vanadium into our projections and financial models. As of this time, until we complete that analysis, we're not including any contribution from vanadium in our projections.

It sounds like you're approaching this from a fairly conservative perspective, and that's probably the right way to go until we get further into the development and exploration process. So thank you for updating us on that. One of the things that investors are probably focusing on is the fact that your announced budget or CapEx budget for the Phase 1 construction of the plant is a little bit over $200 million. You've already invested some of that capital into this project as you mentioned. You have about $150 million of cash on hand and note that. But the inference is that you will probably need more capital at some point during this year or early next year to finish the project. So can you talk about sort of how you're thinking about that? And what are some of the sources of capital you may be using or looking to use? You've mentioned the defense act that was involved. Obviously, the DOE program for specifically EV materials development may come into the play as well. So can you share with our audience how you're thinking about the capital needs of your business as you finish up Phase 1 of the plan?

Steve?

Yes. Thanks, Dmitry. So to your point, we have $116 million of cash on hand and no debt. This management team has been able to take advantage over the past 18 months or so of opportunities to raise capital at a low cost through the equity markets. We've deployed that capital to get us where we are today. So Terry mentioned completing our feasibility study, the pilot program, completing the exploration drilling program, acquiring 2 buildings already and renovating them and placing orders for long lead items. So we really were able to look ahead and we've been working on this for a number of years to get us to where we are today. To your point, the budget is $202 million, $116 million of cash on hand at the end of March. We had incurred about $18 million of costs already towards that $202 million. And so there is some additional funding needed. And right now, we're having conversations with many of the third parties you would expect us to be having to look for other sources of capital that may come in the form of something close to like a traditional project debt financing. You mentioned the DOE and the U.S. government and their desire to increase battery production capacity domestically in the United States. About a month ago, they passed a funding opportunity announcement, which is a grant program where they allocated $3.1 billion to increase battery production capacity in the United States. And so we are in that process of evaluating that, seeing what could be available to Westwater if we would qualify and be eligible and the steps that it takes to secure any of that funding, if it is available to us. But I think, overall, there's been a high focus from investors, from the U.S. government, where they're really starting to understand that, that supply imbalance is coming, if it's not here already, and everybody is trying to get out in front of that and secure up the supply chain. So we're going to be really active in seeking those other sources of funding. We're going to be looking for low cost and obviously, see what benefits it and try to maximize the benefit to Westwater and its shareholders.

Got it, Steve. Well, it sounds like there's a lot of secular tailwinds that are -- that the automotive industry, the EV industry in general and the graphite industry specifically may be experiencing. And hopefully, that will help you accomplish what you need to accomplish and get you to the place that you need to get to by mid-2023. In terms of mid- to sort of near to midterm targets or milestones, what should investors look for from the company in the next few months to gauge your progress towards your goals and your targets?

So I think there's a couple of near-term targets that investors can focus on. One is, obviously, getting all of the necessary permits in hand to complete the construction of our processing plant in Alabama. And we feel really good about where we are in that process. Second thing I think investors can look towards is additional commercial progress. We've announced 1 letter of intent with a customer for our production from Kellyton, and we look forward to additional announcements in the weeks and months to come. It is our intent that we would have letters of intent in place for all of our anticipated production out of Kellyton, before commencing operations. So those are, I think there's a couple of key elements. A third would be, we would be in a position to announce additional information about our drilling program and our plan for development of the Coosa deposit. And I would anticipate that, that would occur in the fall of this year. And then lastly, some investors may be aware of that we have gone through an arbitration process at the International Court of Arbitration versus the Government of Turkey relating to a uranium asset that we had in Turkey. That arbitration process is complete. And while we aren't certain about the timing of any announcement of a ruling from the International Court of Arbitration, we think that there is a good chance we would get a ruling sometime in calendar 2022.

Got it. That's very interesting, Terence. So it sounds like you guys have a lot on your plate and a lot of exciting things are happening with the company and the industry. I'm very happy to -- I'm very glad to have an opportunity to expose our audience to your company. I think Westwater Resources is certainly worth investigating by investors. It is an earlier-stage company, but it's a company that sounds like they have their plan in place to get to commercial production and get to a profit and revenue standpoint that can self-support further development. And now may be the good time to take a look at the company closer. So thank you, gentlemen, for giving us an opportunity to get our network exposed to your company, and we wish you the best of luck. And hopefully, we'll chat again soon.

Look forward to it. Thank you.

Thank you.