Westwater Resources Inc (WWR) 2021 Q3 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Westwater Resources, Inc., Q3 2021 results and business update conference call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. (Operator Instructions)

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

Thank you, Charisse. And thank you, everyone, for taking time this morning to listen to our Q3 results presentation and offer up your questions. We really appreciate it.

But before we get started, a quick safety message and turning to slide 3. To ensure the health and safety of our employees and the communities where we work, we continue to ensure that our employees are permitted and encouraged to take time off due to illness or the illness of those around them without penalty.

On to slide 4, we continue to maintain our advanced battery graphite product development schedule. We've completed the definitive feasibility study for our graphite processing facility and approved construction of Phase I. We've secured the site for our intended processing plant near Kellyton, Alabama, together with financial incentives in the state county and industrial development boards.

And we have purchased two buildings adjacent to our Kellyton site totaling 90,000 square feet to accelerate our construction schedule. And we continue to work to ensure adequate financial liquidity to support our key operations and business activities. We have a cash balance of $119 million as of September 30.

And with that, I'd like to turn it to Jeff.

Thank you, Chris. Good morning, everyone.

First, let's take a look at our capital position on slide 5. The closing price on Monday, November 9, was $3.74. And with approximately $34.6 million shares outstanding that September 30, our market capitalization stands at approximately $129 million. The share price began the third quarter at $4.74 and ended the second quarter at $3.58.

Average daily trading volume over the past three months is approximately 767,000 shares per day. During the third quarter of 2021, the company used its equity line with Lincoln Park Capital to raise approximately $4.1 million from stock sales. We continue to take advantage of this opportunity to raise cash at a low cost of capital.

The company is currently in a fundamentally strong position to execute its budget business plans through 2022 and to fund a substantial initial investment in the commercial graphite processing facility in Coosa County, Alabama during the remainder of 2021 and thru 2022.

Turning to slide 6, we provided financial summary for the period ended September 30, 2021. For the nine months ended September 30, 2021, net cash used in all operating activities was $13 million as compared to $10.1 million for the same period in 2020. The $2.9 million increased cash was used primarily due to increased product development expenses, exploration, general and administrative costs, and arbitration costs in 2021.

Net loss from continuing operations was $4.6 million and $3.4 million for the three months ended September 30, 2021 and 2020, respectively. The $1.2 million increase compared to 2020 was largely the result of an increase in product development, exploration, general and administrative costs from 2021, offset partially by an unrealized gain related to the enCore common stock.

On September 30, 2021, as Chris mentioned, the cash balances were approximately $119 million, and the company had a working capital balance of approximately $117 million. In October, the company liquidated its holdings of enCore Energy common stock for net proceeds of approximately $3.6 million, realizing a gain of nearly 100% from the value of the stock when received in December 2020, at the time the company sold its uranium business.

Again, these cash resources will be used to fund ongoing operations, fund development of our graphite business plan, and allow for a substantial initial investment in the commercial graphite processing facility.

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

Thanks, Jeff. And onto slide 7. Our core values are based on continuous improvement in safety, and that's the safety of each other, of our environment, our assets, the communities where we work, and our reputation. Cost, meaning effective and efficient use of our shareholders' assets and a focus on first quartile, cost performance. And integrity, meaning the highest level of performance every day, improving our processes, and conservative promises well kept.

On to slide 8. We are executing our business plan. The feasibility study is complete and construction of Phase I is approved by the board. Showed here on our slide are photographs from our pilot plant where we produce more than 13,000 kilograms of products for testing by us and by prospective customers as we go along. Samples are now in prospective customers' hands as we speak.

On to slide 9, we selected Kellyton, Alabama for our graphite processing facility site. This was important, and on June 22, community leaders from the State of Alabama, Coosa County, the Alexander City, and the Lake Martin industrial development board celebrated the unveiling of our project with us and a group of local officials.

On slide 10, a quick photograph and a quick description of how our site lays. The original Kellyton site footprint is that the state and the local industrial board have supported us and awarded us at no cost. Building A, shown on the left of that, is one of the two facilities we've acquired, and we intend to be our administration building once refitted. Building B, a 60,000 square foot warehouse, will be for product storage and spares warehousing, et cetera.

We're presently utilizing offices in Building B as we've refit and begin to refit building A. We're pretty excited about our now 100-acre footprint near Kellyton, Alabama.

On slide 11, key attributes for our products -- our project rather include a proprietary technology to high purity conversion of graphite concentrate at some 95% or so, to 99.95% or greater. Simple and robust process.

The cost advantage. This is US-manufactured battery graphite. Vanadium in our deposit potentially improves our project economics, and the drilling program we are executing right now is expected to further our knowledge along not only the graphite resource, but the vanadium resource as well.

And sustainability. We have an environmentally sustainable and sound process.

On slide 12, a little bit about our battery markets. We expect that the transportation segment of our market, and by that we mean electric vehicles, is going to grow at a compounded annual growth rate of around 23% per year. We see that in the adoption rates for electric cars. Everywhere you work, everywhere you live, and everywhere you drive, you see more electric cars every day. And the US government and automakers have jointly announced a goal of 50% of all autos sold here in the United States will be electric by 2050.

A second segment, energy storage systems, and by this, we really mean grid energy storage systems. We expect an 11% growth rate over the next 10 years. Qualification cycles tend to be a little shorter than the EV market, and these are the enabling technologies for wind and solar power, so that you can provide electricity when the wind does not blow, and the sun does not shine.

Large markets like consumer electronics are still growing at 3% a year, and it's a well-established value chain. Consumer electronics like the phone you may be using right now or the laptop on your desk. Qualification cycles tend to be shorter as well than the automobile markets. Large market, some growth rate.

And specialties like defense and aerospace and medical with major players here in the United States. And there is government and major contract base business for us to bid on as we develop our products.

On to slide 13, know that graphite is a major component of all batteries. That includes the lead-acid battery in most vehicles on the road today, alkaline power cells like those that run your smoke alarms and flashlights at home, and non-rechargeable lithium cells like those coin cells you have in your remotes and other things.

Coated Purified Spherical Graphite which is CSPG is a critical component in lithium-ion batteries. These are the batteries that power electric cars. And the United States government has defined graphite as quote critical to the nation's security and prosperity and prosperity. And Presidential Executive Orders asked US government agencies to act with alacrity.

On to slide 14. The Coosa Graphite Project is a near-term source of domestic US battery-grade graphite. Samples are under evaluation of potential customers as we speak. Westwater's graphite will be produced using environmentally sustainable processes here in the United States.

And Westwater's graphite products serve important battery markets. And again, Westwater's vanadium discovery at Coosa could contribute revenues. Exploration is underway.

Slide 15. We developed a new technology for graphite purification. One that does not use hydrochloric acid or elevated levels of energy to produce our graphite. It's a chemical process with lower temperature bakes that produces graphite of more than 99.95% purity.

Our process also allows for flexible feedstock with consistent performance. This purification technology has a more sustainable footprint than those currently used in China where environmentally damaging and expensive to manage hydrochloric acid is used.

On to slide 16. Our project plan simply is this. Westwater's feasibility study led by Samuel Engineering is complete. Phase I construction is approved. Expected completion is in the latter part of Q1 of 2023. We increased the amount CSPG, the stuff that goes in lithium-ion batteries in order to accommodate market demand and, in doing so, delayed our DFS by just a couple of months which put our production timeline one quarter later than originally planned, but with greater production.

Exploration drilling has begun to further define the Coosa project. We expect to be complete this quarter with our drilling activities, and then geologic model is expected in 2022. Following that, we began the permitting process for our mine located in Western Coosa County. And we expect to be operating that mine in 2028.

In slide 17, really a graphic of our project plan, noting that feasibility study is indeed complete at the end of Q3 of 2021. Commercial production starting in Q1 of 2023. Phase II of our plant is anticipated to be built and operational in 2025 sometime, subject to another feasibility study based on the increased production.

Until then, we'll be using an alternative source for graphite, not sourced from China, but from somewhere else. Our supplier asks that we keep their name confidential. And then we will transition to US-based feedstock expected in 2028.

On slide 18, our team is growing. These are tenured leaders in energy minerals development. Certainly, you've heard from Jeff and I over the years that we've each got over 40 years of experience in the energy space. Recently, we added Chad Potter to our organization, and it's 25 years of operational and executive experience in the metals business.

We added Steve Capes. He joined us in May of '21, nearly 20 years of financial experience in mining oil and gas and public accounting. Dain McCoig, our longest serving employee at this company, joined us in 2004. Not only is he experienced in all phases of ISR uranium development, but he has been one of the leaders of our developmental effort with our feasibility study for Phase 1.

Cevat Er, our VP Tech Services, has more than 30 years of experience and the technical leader of our team to develop this process and this business as we go along. John Lawrence, been with us since 2012, our General Counsel, 35 years in law and licensing across a nuclear fuel cycle and mine operations. And Jay Wago, who joined us in 2020, our VP Sales.

In all, this team has the kind of leadership this company needs to make its promises real.

On slide 19, energy, minerals exploration, and development require discipline and diligent capital stewardship. We restructured and capitalized the company, positioning Westwater as a green energy materials company with a laser-focus on battery-grade graphite materials. And we have an experienced management team with a demonstrated history in finance and green energy development from concept to production.

And why Westwater as an investment? Turn to Slide 20. We have a battery-grade graphite development business with strong upside potential. We have the largest graphite property in the contiguous United States. Graphite has been designated critical mineral by the United States government.

Our sales and marketing team have engaged with a number of potential battery supply chain customers. And we have a proven team with experience in energy minerals development and financial management. And you should anticipate catalysts for the remainder of '21 and '22 along the lines of Coosa exploration and geologic model results and construction milestone achievement.

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

(Operator Instructions) Debra Fiakas, Crystal Equity Research.

Thank you. And thank you for taking my questions particularly on this very auspicious day, where we honor our veterans. I have a couple of housekeeping questions and several others afterwards. So whenever you get tired of answering my questions, you can just cut me off.

First, I wanted to just ask one of those housekeeping questions in regard to the arbitration action with Turkey. Your filing suggests that you've spent $2 million and some change on legal expenses in 2021. And I wondered if those expenses that are being currently incurred can still be included in what you're asking Turkey to compensate you for.

And then also if you could just maybe give us some guidance on what additional expenses you think you might incur in this final quarter of 2021 and then on into 2022 as you await the panel's decision on the action.

First, Debra, thank you for calling in, and we never tire of answering your questions.

The arbitration itself -- so the final hearing for witnesses occurred in the latter part of September, and we expect that the panel will deliberate over the next 12 months. There is a little paperwork in between now and then, the end of this quarter, and possibly in January. But the case, other than questions from the panel after that, is finished. So we expect expenditures for the arbitration to idle down to a very low level until the decision is rendered some 11 months from now.

Okay. Thank you. And are -- is any communication allowed between Westwater Resources as a complainant and Turkey as the respondent? Can you pass some love notes back and forth to each other or are you prohibited from engaging in any discussions?

We're certainly permitted to communicate with the counterparty and would do so had we seen a reason to do that. And likewise, Turkey has that opportunity as well. For now, the communications have been limited to the arbitration proceedings, and we're happy with that for now.

Okay. Very good. And then maybe shifting then to something else that was in your quarter filing, and that is in regard to capital spending. Now I know you have given us an aggregate budget for the construction of the processing -- the graphite processing facility, but there was a suggestion in your filing that there will be some significant capital spending in the fourth quarter. That's to be understood, of course.

But I was hoping you might give us some guidance on what your capital spending might be in this quarter. And then maybe Jeff could give us some idea of when we might be able to see the assets going onto the balance sheet. Will we see even in the fourth quarter something like a construction in progress asset or something like that, that will begin to reflect what value you're creating in the assets at that site in Kellyton?

Jeff, why don't you go ahead?

Okay. Very good. Thank you, Debra. The -- during the fourth quarter, our expectations for expenditures in the near-term mostly revolves around long lead items. So those would be deposits if they do occur, and certainly in that case, those deposits will go in the balance sheet. At such time as we do start actual construction activities relative to the projects, then what would be expected for investors to see is certainly a construction in progress account.

And we will accumulate the capital costs in that account till those assets are put in service. And then obviously it will be transferred into their respective fixed asset categories with appropriate depreciation schedules and so forth. So I wouldn't expect there to be much. And there's potential for some significant expenditures, but they'll be treated as deposits initially to answer your question.

Okay. Excellent. Thank you. That helps a great deal. And then maybe if either one of you or both of you could talk a little bit about what the 4Q activities look like. You've shown us the illustrations in the presentation. That was helpful. Is there any activity going on at this time, modifications to the existing buildings? Or is there any kind of site preparation like land clearance or utilities work that's already underway at the site?

Debra, we are anticipating a construction start before the end of the year. We anticipate that that is Building A and building out the office. We have home for the employees we need to hire. From a cost perspective and a capital equipment perspective, to build a little bit on Jeff's answer to your question, we'll be laying down deposits for long lead items, and they basically come in some half a dozen categories.

These long lead items are required deposits ahead of time for delivery at the end of next year, so that we can continue to maintain our schedule. We were in Germany with four of our vendors last week, and we have assurances from each of those four vendors that they can meet our schedules if we order with some efficiency and haste. So if that helps a little bit.

Typically, a project like this follows an S-curve for expenditures. They tend to be a little heavy at the front, and they tend to attenuate as product -- as the project is beginning to be commissioned.

Okay, great. I also wanted to take your attention back to your slide number 8 in your presentation. It was very helpful that you've given us the two images of the equipment that was used to create the 13 kilograms of products. Could you maybe identify what we're looking at, what the names of the pieces of equipment are, and then give us an idea of where, if we were to come to visit in a couple of years and see the finished building, where would we see this equipment in your site?

It's a great question for everybody on slide 8. The photograph at the lower left is the result of a filter press. When our product comes out of the leaching process where we leach with caustic and then clean with acid, it's wet. And we need to dry that cake through a filter press.

It's basically a porous belt that conveys the materials from one end of a device to the other and presses much like you would press a biscuit as you are making it. But the result of this particular press is that you would dewater it, defluidize it. That way, when it goes to the baking cycle of the thermal finished process, you're not drawing out water to the extent that you can possibly do something.

The [lights] on the upper right is a kiln. It's part of making our coated spherical graphite product. We shape it, and we size it, and then we coat with it hard carbon. That process requires a baking step to calcine the carbon onto the spheroids of graphite. So what you're looking at right there is the kiln that we used in the pilot plant for doing that.

Excellent. Thank you. And where would we ultimately see these or not perhaps these exact pieces, but the corresponding items. Where would we ultimately see these at your site in Kellyton when everything is constructed?

There's two or three new buildings that go up in that red circled area for the original acquisition. The first of the buildings in the process is the purification building. And you would see the filter press and you would see some thermal dryers like that kiln -- resembling that kiln in that particular process as we bake that material.

The next building after that is then utilized almost entirely by the coating of the material, hard carbon going on to these small spheroids of graphite. There will be other buildings associated with water purification in cleanups so that our effluence is limited to high-quality water that can enter our normal domestic sources.

Excellent. Thank you. That's very helpful. Now both those images on slide 8, I have to tell you they look expensive, so I wanted to turn to the topic of capital and the availability of capital. You have two existing agreements in place: an equity agreement with Lincoln Park and an ATM with Cantor Fitzgerald, and I believe, correct me if I'm wrong on this, Jeff, you have approximately about $80 million worth of -- or in value available to you yet through those two agreements. Are either of them subject to any kind of expiration or deadline, or will they be available to you through 2022?

Debra, those are -- both those facilities are available to us through 2022 and beyond. They also -- I'd also point out that it's more like about $120 million of availability on those lines on those two facilities. And so just wanted to clarify that as well.

Excellent. And can you break that down between the two of them? That's total, right? Between the two of them.

It's about $70 million and $50 million.

With Lincoln being the $70 million?

Correct.

Okay. Thank you very much for that clarification, and I was off by quite a bit, so I appreciate that. And then the last question that I wanted to ask is in regard to the continued maybe internal testing, if you will, that you're doing sampling and new product development kind of activities. If you could maybe give us a little bit of an update on that.

I know in your prepared remarks you mentioned that you anticipate the exploration of the graphite deposit to be completed soon in the next few months. Would there be any more vanadium sampling taking place? And then also to extend that onto questions about testing the developed product, and what work that you might be continuing to do to perfect your process or protect the final graphite product?

In something of a reverse order, the vanadium testing has been ongoing as part of our graphite exploration efforts. So the simple answer is yes. We were doing the testing we need for [vanadium] In terms of product testing, we have an ongoing product testing of matrix if you will. One line is we are testing internally the products that we have made through various vendors that give us something of a good housekeeping seal of approval on the work we've done independently but for us, so that we know what we're sending to our prospective customers.

In addition, our prospective customers are testing our material, and in the iterative process on some of these customers, we have the ability to provide samples of products with enhanced characteristics in some cases for individual customers, and so that process is ongoing as well.

And then finally, no company in our business would be okay without a strong R&D effort on new product development. And we're pretty proud of the labs, the organization, and the technical folks we have on board that are directing that R&D effort, so that we continue to upgrade these products and make them ever better and better for the battery business.

Excellent. Thank you. I appreciate your graciousness in answering all those questions. I'll stand down now.

Debra, my pleasure. And thank you.

(Operator Instructions) Dan Hubert, Aces Group.

Thank you. I'll correct you on the pronunciation. I'm a Canadian from quite a while ago, but it's pronounced Aver in typical fashion. But thank you for taking my questions.

Just a couple of observations. First, I'm involved in energy storage, and I've worked directly -- my company works directly with a number of large grid power utility companies. And I would say that your estimates on the 11% aggregated growth rates for energy storage, 11% in that the EV rate at 23% is -- that needs to be adjusted.

And all the power utility companies are terrified right now because they do not have the capacity to meet the peak demands for recharging electric vehicles as they become more and more a larger percentage of the automotive or just vehicle space. And so they are rapidly pressing hard on their integrated resource planning initiatives to include tremendous amounts into the terawatts across the US for energy storage so that they can offload the peak demands for charging electric vehicles. In fact, they say, the greatest threat to the adoption of high rates of electric vehicles will the grid's ability to recharge them. And we're not talking about just along interstates but at the residential level.

They are also talking about how they bring in energy storage behind the meter at the individual residences that help offload some of that peak demand. Now, what does that have to do with Wastewater Resources? Well, we know that the only basic commercial-grade graphite belt in the US is there in the Coosa belt where you have your operations set up. There are some new energy storage technologies that are almost 100% based on graphene.

There is -- the top three largest energy storage systems in the world. One, is Tesla Megapack in South Australia. The largest one anywhere is in Moss Landing in Northern California. And then another one is Arizona Public Service near the Phoenix area. And all three of them have had massive fires and explosions due to lithium.

And so, there's the panic that lithium is not only an unsustainable resource, it's a dangerous resource. And it has a long-term environmental impact whereas graphene is -- although it has some environmental impact in its manufacturing, it does not represent a long-term environmental hazard in the same way lithium does. And in fact, they anticipate just to build out the lithium recycling infrastructure is a $700 billion endeavor. All of that goes away with graphene-based, super capacitor-based, energy storage systems.

So having said that though, my question is, I think you're well-positioned to meet -- I think your demand is going to be greater than you anticipate. I think you're in a good position for that. And then the last part is, when do you anticipate being into full production, and then do you also have any designs in graphene manufacturing?

To answer your question, I would direct you to one of our basic three principles here at Westwater Resources. One is conservative promises well kept. We tend to be conservative in our estimates. We know our business works at those growth rates, and we anticipate like you do that they may well be conservative in nature. They may be lower than we expect. But at these lower growth rates, we have a terrific business.

Secondly, we don't share some of your thoughts with regard to the lithium mining cycle, and that's strictly an opinion piece on my part. And I'm happy to engage offline in a longer discussion.

Sure.

But part 3, with regard to graphene, as luck would have it, our finest product from our CSPG manufacturing is also 99.95% or better pure. And we are in discussions with some graphene manufacturers for utilization of that product on their part. Of course, these names would be confidential. We're excited about the graphene business.

We are building our business based on batteries because we are very confident of the maturity of CSPG and to use it in rechargeable batteries. But as we answered in previous questions, we have a robust R&D effort to make sure that our products go to the right markets without regard for what they might be. But I appreciate your comments. Thanks.

Back to you, Charisse.

Michael Porter, Porter La Vei En Rose.

Good morning, Chris. Two quick questions. One, are you seeing any negative things going on from the supply chain for you getting your equipment and so forth into Alabama? And the second question is, could you briefly discuss the difference between graphene and graphite and how it works and so forth and so on?

Yes. In reverse order, simply put, graphite flakes tend to be hundreds of layers thick at the atomic level. And when you roll them up into CSPG, they tend to remain in that state. And that's what makes them pretty good for rechargeable batteries using normal electrolytes.

Graphene is really graphite at the atomic layer level. So in its purest sense, graphene is single atom thick and many, many atoms wide. The properties of graphene are significantly enhanced over graphite balanced by a little bit of difficulty to handle and some difficulty in manufacture. So we're embracing this technology as an R&D effort right now to provide our graphite to those guys out there in the business that are far more adept right now at making those atomic layer, single layer molecules.

With regard to supply chain, that was precisely why our VP Tech Services, Cevat Er, and myself travelled to Europe last week was to work eyeball-to-eyeball with our major suppliers to make sure that we understood their supply chain constrictions, and they exist, certainly, and how best to manage them, so we still got our equipment on time.

And as I said, we received assurances that if we act with alacrity and efficiency in getting these machines ordered, they will be there in time for us to install them in the plant. So, yes, there's supply chain issues. I think everybody in the oilfields (technical difficulty) one way or another. But we were out there mitigating those supply issues for that subset of four different sets of machines last week, and we're confident at this point that they will not unduly delay the construction of the machine.

Thank you very much.

Thank you, Mike.

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

Thank you, Charisse, and thank you all for attending our conference call for this quarter. It's an exciting time for our business, and we're happy to share it with you. Stay tuned, there will be more bulletins as we go along. And please, have a safe and productive day. Good day.

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