Westwater Resources Inc (WWR) 2020 Q3 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Westwater Resources, Inc. third-quarter 2020 results and business update conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

I would now like to turn the conference over to Chris Jones, President and CEO. Please go ahead, sir.

Thanks, Anastasia. And good morning, and welcome to Westwater Resources Q3 2020 results call. I'm Chris Jones, President and CEO, and with me here in Centennial at our main office is Jeff Vigil, Vice President of Finance and Chief Financial Officer. And with us, by phone from Alabama, is Dain McCoig, our Vice President of Operations.

Please turn to page 2. On page 2, we have cautionary statements. We will be referring to some forward-looking information, and we invite you to read these cautionary statements at your leisure.

Page 3, a quick safety bulletin and message on ensuring the safety of our employees. To ensure the safety of our employees and the communities where we work, we have eliminated unnecessary travel, instituted health protocols for working together, and instituted remote working arrangements for our employees based on CDC and state guidelines.

We've ensured that our employees are permitted and encouraged to take time-off due to illness, or the illness of those around them without penalty. That said, our reclamation activities in South Texas are continuing using protocols designed to ensure the safety of our employees, and they have been successful.

Page 4. We continue to work with our business partners to maintain our advanced battery graphite product development schedule. Dorfner Anzaplan, our engineering partner in Germany, is presently commissioning our pilot plant for operations this quarter. Operations will take place in Germany, New York, and Illinois.

We continue to work to ensure financial liquidity to support our key operations and business activities. We have a cash balance of over $53 million as of October 31, enough to finance our base business through 2022.

Westwater has prevailed in a key decision in its case for compensation from the Republic of Turkey. Our hearing is scheduled for September 21, '21, and we request $36.5 million plus fees.

With that, I'd like to turn it over to Jeff Vigil, our CFO. Jeff.

First, let's take a look at our capital position on slide 5. Our closing share price yesterday was $4.14. And with approximately 19 million shares outstanding, our market capitalization stands at approximately $79 million.

During these past nine months, our stock performance was influenced largely by the ups and downs in the capital markets due to the country's reaction to the COVID-19 pandemic. Certainly, enactment of the CARES Act at the end of March added some stability to the capital markets.

Our share price began the third quarter at $2.35 and ended the quarter at $2.51. However, a series of events triggered exceptional down -- upward stock price movement and trading volume in the first week of October. These events included Elon Musk's presentation at the Battery Day Conference on September 22 where he projected a shortage of battery materials in the next five years as demand for electric vehicles grows exponentially.

That was followed by the announcement on October 28 by Piedmont Lithium of a supply contract with Tesla for its lithium project in North Carolina. And then on September 28, the President issued an executive order declaring a national emergency for US production of critical minerals, and this included graphite and vanadium. That propelled exceptional interest in Westwater's stock during the 10 trading sessions beginning on September 28 and ending on October 9. Trading volume totaled 667 million shares or 67 million shares per day average. And the dollar value of this trading activity amounted to more than $4.5 billion, for an average price of $6.77 over that period.

Also, during this period, the company utilized its ATM facility with Cantor Fitzgerald and its equity line with Lincoln Park Capital to raise approximately $50 million from stock sales. By taking advantage of this opportunity to raise substantial cash, the company is now in a fundamentally strong position to execute its budgeted business plan for 2021 and beyond.

Importantly, because of the improved liquidity, management has removed the going concern disclosure from its financial statements.

During the quarter, the company also made the strategic decision to focus management and resource allocation towards execution of its business plans. On September 1, we entered into a binding letter of intent to sell Westwater's uranium business to enCore Energy Corp, a Vancouver based public company listed on the TSX Venture Exchange. At closing, Westwater will receive approximately USD2 million of enCore common stock and will retain a royalty interest in the New Mexico uranium properties being sold.

Also, and importantly, the sale of the uranium business will remove $6 million of asset retirement obligation from our balance sheet and allow us to reallocate to nearly $4.5 million annual uranium budget to the graphite business.

Turning to slide 6. We provide a financial summary for the third quarter of 2020. Net cash used in operating activities was $4.1 million for the quarter ended September 30, 2020, as compared to $2.9 million for the same period in 2019. The increase in cash used during the current quarter was primarily due to increased graphite product development expenses, including pilot plant engineering costs and graphite product testing.

For the quarter ended September 30, product development expenses were $1.6 million compared to approximately $19,000 in the corresponding period of 2019. The significant increase is reflective of the company's strategic decision to orient additional resources to the graphite business plan.

General and administrative expenses from continuing operations for the three months ended September 30, 2020 increased by $500,000 from the comparative period in 2019. However, this increase was due primarily to a non-recurring item in 2019, and this was the reversal of executive bonuses of approximately $400,000, which lowered cost in 2019, again, from a non-recurring standpoint.

Net loss from continuing operations represents operating activities related primarily to the company's graphite business; corporate, general and administrative costs; and arbitration costs for the company's claim against the Republic of Turkey. The increase in net loss of $2.2 million for the three-month period ended September 30, compared to the prior year period in 2019, was primarily due to increased product development costs for product testing, pilot plant planning, and these arbitration costs.

The net loss from discontinued operation represents the activities of uranium and lithium businesses, which are reported as discontinued operations in accordance with our decision to sell the uranium business and discontinue investment in the lithium business, both actions undertaken to orient additional resource to the graphite business. Net loss from discontinued operations was $6.4 million for the three-month period ended September 30.

The $5.7 million increase from the prior period in 2019 was largely due to a $5.2 million impairment charge recorded against uranium property, plant, and equipment in the third quarter as a result of the terms of our agreement with enCore Energy Corp.

On September 30, 2020, the company's cash balances were approximately $5.5 million, and the company had a working capital balance from continuing operations of $2.9 million. Our cash balance stands, at October 31, at $53.3 million.

We believe our current treasury balance significantly mitigates the company's capital risks through 2021 as the company's 2021 non-discretionary budgeted graphite plant program and the remaining budgeted product development initiatives are now fully funded. The company is pursuing project financing to support the primary funding of the capital expenditures for construction of the commercial plant set to occur in the second half of 2021.

And with that, I'll turn it back to you, Chris.

Thanks, Jeff. And a quick reminder on page 7 of our core values here at Westwater. Safety First, that means the safety of each other, the safety of our environment, our assets, the communities where we work, and our reputation. Cost management, that's effective and efficient use of our shareholders' assets, a focus on first-quartile cost performance. And integrity, the highest level of performance every day, improving our processes, and conservative promises well kept.

On page 8. We are the owner of the leading graphite development property in the United States. We've developed a new environmentally sustainable proprietary process for purifying graphite, and we've applied for a US patent. Our pilot plant, scheduled for operations this quarter, expects to produce battery-grade graphite for customer testing and validate the design of our commercial-scale facility.

Turning to page 9. Coosa Graphite Project has these three key attributes: proprietary technology, as we previously spoke, a high purity conversion process that is simple and robust; a cost advantage, US manufactured battery-grade graphite, with vanadium potentially improving our project economics; and sustainability, we have an environmentally sustainable process, and our graphite used in electric vehicles can save 300,000 tons per year of CO2 emissions.

On page 10. Battery market segments include transportation, such as electric vehicles. We expect a 23% growth rate over the next 10 years. This is predominantly lithium-ion batteries, with a qualification cycle for our products of three to five years. Consider this really our CSPG product that we'll be speaking about here in the next couple of slides.

Energy storage systems, like those for grid, power, and others, had an 11% growth rate expected over the next 10 years. This is the enabling technology for wind and solar power generating facilities. And consumer electronics, like the phone you may be using right now or the laptop on your desk, we see a 3% compounded annual growth rate for this well-established value chain. Qualifications for these products tend to be in the one- to three-year timeframe. And specialty markets that we will be working to develop in defense, aerospace, medical, with major players in the United States government and major contract base businesses.

On page 11. Graphite is a component of all batteries. This includes lead-acid batteries, like the vehicle you may have driven to work this morning, or is parked in your garage; alkaline power cells, like those in your smoke detectors or your flashlights; and non-rechargeable lithium cells, like the coin cells you see on the end caps at places like Home Depot and Lowe's.

Coated purified spherical graphite, CSPG, is a critical component in lithium-ion batteries, like those that go into electric vehicles. And the United States has defined graphite as, quote, critical to the nation's security and prosperity, unquote, and presidential executive orders ask US government agencies to act with alacrity.

On page 12, we talk about the graphite supply. And let me summarize this slide in saying simply that China is responsible for more than 80% of the graphite produced worldwide and almost all of the graphite we use here in the United States.

The US produces only 11,000 metric tons of domestic graphite a year, none of which is mined here. And the United States is projected to require more than 124,000 metric tons in 2030; that's only 10 years from now. Westwater Resources is poised to provide a direct solution to the security of domestic supply for graphite.

On slide 13, the Coosa Graphite Project provides key advantages. It is a near-term source of domestic US battery-grade graphite. Pilot plant commissioning is underway right now. Customer qualification on some products is underway right now, with a one-tonne bulk sample order previously announced.

Westwater's graphite will be produced using, as we have previously described, an environmentally sustainable process here in the United States. And Westwater's graphite products serve all battery markets. Our vanadium discovery at Coosa could contribute revenues, and exploration is planned for the first part of 2021.

On page 14, we talk a little bit about our products. ULTRA-PMG is Purified Micronized Graphite. This is the material that goes into alkaline power cells, for instance, and lead-acid batteries as a conductivity enhancer. Think of the alkaline power cell market as 10 billion units per year, with a gram of graphite in each battery.

Our ULTRA-DEXDG product, which is Delaminated and Expanded Graphite, goes into those batteries, and lead-acid and lithium-ion batteries as a conductivity enhancer. ULTRA-CSPG, this is the material that goes into lithium-ion batteries for electric vehicles, mostly, and hand tools, as you see in the hardware stores. This is a high-performance anode material for lithium-ion batteries.

Our target market, remembering it from previous slides, is the electric automobile sector. Our CSPG can save over 300,000 metric tons of CO2 emissions per year when used in electric vehicles. This is enough material for 85,000 electric vehicles per year.

On page 15, we show our process flowsheet. The first step after the graphite is concentrated to 95% by our supplier is to purify that material to 99.95% or greater. This is done through a process for which we have applied a patent for with the United States Patent Office. It involves several steps, and we'll be talking about that in just a moment.

This material right now is being piloted in Germany and in New York. Our DEXDG process is being piloted in Illinois. Germany is responsible for CSPG and PMG development, and we're using three different locations in Germany to do this work. It is a complex project that is already underway and managed quite well by our management team.

Let's talk about purification for a moment. Our purification methodology has a more sustainable footprint than those currently used in China where environmentally damaging and expensive-to-manage hydrofluoric acid is used. This process yields graphitic carbon grade of at least 99.95%.

Our three-step process allows for flexible feedstock and consistent performance. It basically consists of three process steps: caustic roasting of the graphite concentrate sample, acid leaching of the roasted sample, and thermal treatment of that sample to get rid of the remaining contaminants.

On slide 17, we talk about project investment options. As we look for project financing going forward from here, we're looking for loans or loan guarantees to take on some measure of debt against the project, and the process facility can be used as collateral. Direct equity investments by PE firms or other investors interested in an equity level of return, and that can happen at the parent or the project level. And joint ventures. We are considering all options. We have executed on none of those so far. We have retained a project finance firm to assist this experienced team in evaluating these various sources of capital.

On slide 18, our pilot plant commissioning is underway in Germany, New York, and Illinois. We expect our pilot plant start-up to occur as early as next week, generating products for prequalification in large batches to facilitate sales. Full-scale production is expected from purchased feedstock in 2022, producing battery-grade graphite, and we expect to begin mining at the Coosa Graphite Project in Alabama beginning in 2028.

On slide number 19, we talk about our economics. Our pre-tax NPV for this project is $603 million. Internal rate of return is 36%, and initial CapEx is only $118 million. We'll commission that plant in 2022, and we expect revenues in 2023. We'll remind our listeners that these are PEA level estimates going forward from here, and our feasibility study to be completed at mid-year 2021 will further refine these numbers as we go along.

We have a graphical representation of our project plan on slide 20. Remember that we have a feedstock supply contract through 2027 to serve the mine start-up in 2028. And we have ensured adequate financial liquidity to support our key operations and business activities through the next couple of years.

On slide 31 (sic -- "21"), we announced a year ago that we had discovered vanadium on our property. We'll be exploring for that vanadium in the first half of 2021 with results at mid-year. There are solid indications that vanadium is present. The drilling activities we proposed for that site will explore those vanadium concentrations and also give us some information on metallurgic work needed to recover. We will be able to speak to the economics sometime during 2021 as we finish those activities.

On slide 22, we talk about our team. I've been in business for something over 35 years, we like to say. And I've been in various mining environments, from gold and silver, and molybdenum and coal, and oil sands and others. And I've been able to lead high-performance teams like this one on several different occasions.

Jeff Vigil's got more than 40 years of financial experience in mining and manufacturing. Dain McCoig joined us in 2004. He is experienced with all phases of ISR development and production for uranium. But he's leading our graphite development business as a licensed Professional Engineer in Bachelor of Science in Mechanical Engineering.

Cevat Er joined us in 2015. He is founder of SRK Ankara, with more than 30 years of Turkish and US mining and environmental experience, taking projects from concept to production. John Lawrence joined us in 2012, with more than 30 years of experience in law and licensing across the nuclear fuel cycle. He has a B.S. in Nuclear Engineering from Purdue University and a J.D. from Catholic University, Columbia School of Law.

Our newest addition, Jay Wago, joined in 2020, with more than 20 years of experience in sales and marketing to the lithium-ion and electric vehicle manufacturers and markets in the United States and Asia.

On slide 23, experience matters, we restructured and recapitalized this company, repositioning Westwater as an energy materials company, with a laser focus on battery-grade graphite products. Our experienced management team has a demonstrated history in finance and green energy development from concept through production. And we've executed a proactive M&A program: sale of our non-core uranium properties to redeploy capital and expanding our resource base into green energy materials.

On slide 24, why Westwater as an investment? We have a battery-grade graphite development business with strong upside potential. Graphite has been designated a critical mineral by the United States government. We have a proven management team with experience in energy minerals development and financial management.

And you can anticipate catalysts for the remainder of 2020 and 2021 through pilot plant operational results, vanadium exploration results, feasibility study results, and Coosa Graphite Project development and project milestone achievement.

And with that, I'd like to open it up for questions. Anastasia?

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

Thank you. And thank you for taking my questions. First, just a couple of housekeeping questions, and one is in regard to the impairment charge that was taken on the uranium properties. Is this charge primarily triggered by the pending purchase agreement that you have? The pending sale. And can we anticipate that this would be all the impairment charges that that sale might trigger? Or can we expect additional charges when the deal finally closes perhaps in the fourth quarter of 2020?

Thanks for your question, Debra. Two questions, really. Yes, the impairment charge is triggered by the valuation as a result of the deal. And no, there will be no further impairment charges as we finish the deal during this quarter.

Okay. Very good. Thank you. And also, I did want to ask a little bit more about the recent capital raise. And first, it's a very nice little kitty of cash that you have now. I wondered if you could perhaps just give us a little bit more color on what you think that amount of money will support in terms of the strategic plans that you have over the next year or two? Can we expect it to fully fund everything related to the pilot plant? Can we expect it to help fund -- I noted that you had mentioned a feasibility study some time, I guess some time in 2021. Maybe you could just provide us with a little color on what you expect to use those funds for.

You bet. The pilot plant, the feasibility study, the exploration project, and all of our base business activities are fully funded for 2021 as a result of this particular raise as well as well into 2022. The project itself at $118 million of capital raise is not yet funded but could be partially funded through some of this cash. We await results from the feasibility study before we execute fully on project-level financing.

Okay. Very good. And then maybe if I could just ask a couple of more questions about that pilot plant. You mentioned commissioning in your presentation, and I just wondered what there was left to build, what's left to connect in the various locations, there's multiple locations. And maybe you could talk a little bit more about why you chose to approach it that way. And then maybe just give us a little bit of color on what that commissioning involves.

You bet. So commissioning means it's built. We're just running it to make sure it works. It's simply put. And that is taking place at several different locations: the lab in Hamburg, Germany, where Dorfner is doing most of our primary work; the furnace in New York; the work in Illinois to make our DEXDG; and our shaping and sizing efforts in Frankfurt.

So the reason we chose to execute our pilot plant in this particular way is because it utilizes on-the-ground expertise important to our graphite processing at each of these locations without importing those people all over the world.

I want to say that our staff was [present] in defining our pilot plant this way, because with travel restrictions being what they are between -- even here in the United States, but certainly between here and Europe, we don't have to move their experts to us. We can utilize their expertise in their locations, where it's best utilized, and we can supervise from afar as we need to.

Okay, very good. And then you mentioned the project financing and that you've begun to work with an advisory group on how to approach the various options that you have. Is that project financing that you're looking for at this point, the $118 million approximately that's needed for the initial capital expenditure that's involved in constructing and starting operations in Alabama?

Yes, the $118 million includes the project itself, all the hardware that we need to buy, the pots and pans, and the land acquisition, et cetera. But it also includes working capital estimates and other things folded up inside there. As well as remember, this is a PEA-level estimate, so we seek further refinement through our feasibility study that happens during the first part of 2021.

Okay. And when would you expect -- do you have a date in mind as to when you want to see the feasibility study done and when you want to have this project financing in place?

June 30 on the feasibility study, and the project finance soon thereafter.

Alright, thank you very much. I'll get back into the queue.

Thanks, Debra.

[Russell Lucara], an investor.

Good afternoon and thank you for taking my call. Very quick question as far as the project financing goes. As an individual investor, I'm very concerned about whether or not there's a possibility of making a partnership, say, with a automobile dealership. Is that something that you guys are looking at as possible project financing, or are you just looking to raise that in other ways?

Thanks, Russell, for your question. I'm sure that you actually mean automobile manufacturer. And while we're not in direct talks right now with automobile manufacturers in terms of a partnership, we are certainly in talks -- preliminary talks with some automobile manufacturers in terms of product sales.

As we elucidated a little bit on the slide, we are interested in considering joint venture partnerships on our project as we go forward, as one of our three basic methods to finance: debt, equity, and a JV.

So I hope that answers your question.

It does. And one last question. If that is a possibility, is that possibility anytime in the next quarter?

Typically, project financing takes place after the feasibility study is finished, which is at mid-year of 2021.

Got you. Thank you, and I'll return to the queue.

Thanks, Russell.

[Alicia Levy], an investor.

Hi, thank you so much for taking the question. I'd like to know: how is your mining more sustainable than your competitors?

Great question, Alicia, and thanks for that. The mining of our project will be done under US law, as is currently applied, which is the most legally robust and environmentally sensitive legislation in the world.

But to remind all of our listeners that mining doesn't take place until 2028. And the larger footprint for our processing is really in the post-processing of graphite concentrate from 95% into our three product streams. So that's really where the footprint and the environmental sustainability meets the road, if you will.

Okay. Thank you very much.

(Operator Instructions) [Sahil Khan], an investor.

Hello. I was just wondering how come insiders do not own any of the shares.

The question basis may be a little bit distorted. We do own shares. And insiders have been investors along the last seven to eight years. What we have done in order to refinance and re-task this business is to reshape the share structure, which has resulted in significant dilution of insider ownership. I hope that answers your question.

Thanks.

[Robert Duarte], a private investor.

Hi, Chris.

Hi. Good afternoon.

My question is -- I know we've talked previously. My question is specifically on the executive order. And obviously, the political platform is changing as we see it, and we still have to wait on results for that. But considering that the US government has signaled specific minerals as strategic to the well-being of our country, my question is, as we seek financing for additional projects and the building of the plant, are we seeking some government support as well as a business, maybe some grants, considering that this is now flagged as strategic to the success and security of our country?

Well, thanks for that. And thanks for that [lead in] actually. With regard to the presidential executive order, we believe that the executive order is true no matter which kind of a President we have going forward, to be quite frank and blunt. These materials are indeed strategic and important to the United States and the safety of -- security of this country.

On your second question on whether or not we are seeking grants or other types of financing from the United States government, I will allow that there is a clause in place, a previous to the Trump administration in 2005 and 2007, that allowed for development funds through Department of Energy to be made available to companies that develop, for instance, electric vehicles.

Tesla was a major beneficiary of those loan programs to the tune of several billion dollars. We are in conversations with all-comers, including the DOE, for financing for this project as we go along. As you might expect, these conversations with the various entities take months, not weeks, and we have already begun some conversations with some players for a resolution come June when we present our feasibility study. I hope that answers your question.

Thank you. I appreciate that. And then in regards to -- you mentioned earlier having conversations with electric vehicle manufacturers and, of course, other battery manufacturers, in reference to sales. So earlier in the call, you mentioned some probably additional catalysts going into the end of 2020 and possibly into 2021. Is the business expecting a success in those conversations in the near term?

Obviously, the projections for mining, they're not near term. I think EVs understand that considering some of the deals that have gone out there. Is that something that the business is actively pursuing and foresees a successful way on?

Let me answer your question by saying that we did discuss, during our presentation, as much forward-looking information as we can. And I would refer you also to our slide around integrity. We make conservative promises, and we keep them.

And with that as a backdrop, I would say that when we achieve results and we can publish them, we will do so with alacrity as we have been for these last almost eight years. We adopt a very conservative ethic with regard to publishing our news, but we do so on-time and in-full as soon as it's real. So I hope that answers your question perhaps a little differently than you intended.

Yes. Thanks, Chris. And last, and I might have missed it, but you mentioned that you're actively pursuing Department of Defense support, and hopefully, financing. When and if that comes to fruition, will that be something that will be announced?

One small correction, what we said is that we see Department of Defense markets as one of the places we can place materials. We didn't speak directly to any conversations directly with DOD right now. And it will be really up to the DOD, if we get a contract, approximately how much of that we will be able to disclose at that time.

Okay. Thank you. I'll go back into the queue.

Thank you. Anastasia, back to you.

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

Thanks, Anastasia. And I want to thank you all for spending a little bit of your morning today with us to hear our story and to allow us a chance to talk about our success. We invite you to take a look at our website in our disclosures for any further information you desire. And with that, I'd like to wish you all a great day. Thank you.

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