Westwater Resources, Inc. (WWR) Q3 2018 Earnings Report, Transcript and Summary

Thank you for standing-by. This is the conference operator. Welcome to the Westwater Resources Inc. Third Quarter 2018 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 Christopher Jones, President and CEO. Please go ahead, Sir.

Thank you, Steve, and thanks to all of you for joining us today. Welcome to the Westwater Resources’ third quarter results conference call. With me here in our Centennial Headquarters is Jeff Vigil our CFO and Vice President of Finance and with us by phone is Dain McCoig, our Vice President of Operations. I would like to remind our listeners to read our cautionary statements on the following pages, as we will be discussing some Forward-Looking Statements and information. With that please turn to Slide 5. 2018 has been a very active year for Westwater. One in which we completed the Alabama Graphite acquisition and released our business plan to unlock shareholder value. These efforts are backed by a team, that over the last 40 plus years have operated mining, processing and manufacturing facilities ranging in size from small to more than a $1 billion of revenue. We continue to make progress on enacting our plant. Our Pilot plant operations are scheduled for 2019. The plant start-up and initial operations will utilize purchased graphite feedstock, bringing forward revenues and cash flow overtime. The first revenues from the plant are expected in 2020 with positive cash flows for the graphite business expected in 2021. We have over two dozen non-disclosure agreements in place with potential suppliers and customers for battery grade graphite materials at this time. We announced that we successfully produced more than four kilograms of purified micronized graphite, with quality confirmed by an independent lab, this is huge because it confirms that we have the ability to produce battery grade graphite product in the United States, which makes our Coosa Project that much more attractive to customers and suppliers. Our advance battery products have been produced in sizes from five to 45 microns making it compatible with a wide variety of battery types given the electrical performance it has demonstrated. This is the first of three battery ready graphite products we intend to manufacture. We also announced the addition of Metpro and Polaris to our technical services base. Metpro is helping us in the development of graphite purification and concentrate enhancement process. In fact, A port with the Coosa Graphite Projects prior owners which we believe brings a lot of value to the project. We engaged Polaris as an independent lab to perform critical conductivity testing of the materials from Coosa as part of the customer prequalification program which, is an important part of gaining customer acceptance and commercialization. We have already discussed this relationships with several potential customers and the response has been more than gratifying very excited as we are. We also added Carly Anderson to our Board of Directors. She brings a wealth of experience in the mining industry and the investment community, both of which will be critical assets to Westwater. We have strengthened our balance sheet by completing a registered direct offering with Aspire Capital earlier this year, as well as an ATM facility with Cantor Fitzgerald, which provide the necessary liquidity through January of 2020. With that, I would like to turn it over to Jeff Vigil for a corporate update.

Thank you, Chris. Good morning everyone. First, let's look at our capital structure on Slide 6. Our recent share price is $0.23 and was approximately 6.3 million shares outstanding and our market capitalization stands at 15.3 million. During the third quarter, our stock performance was influenced largely by a continued pressure on the mineral space along with the revocation of the mining and exploration licenses for a Temrezli and Sefaatli projects earlier in the year, as well as tax owing at this time of the year. Fundamentally, our business is strong and we believe our current asset diversification strategy expanded into the battery materials supply sector provides significant upside potential for the Company in the long-term. Now turning to Slide 7, and our financial summary for the third quarter and nine months ended September 30, 2018. Net cash used in operating activities was $2.9 million for the third quarter of 2018 compared to $2.5 million in the third quarter of 2017. For the nine months of 2018, cash used in operating activities was $9 million compared to $8 million for the same period in 2017. The increases in both periods reflect increases in cash used for general working capital purposes. Mineral property expenses decreased by approximately 400,000 in the third quarter of 2018 compared to the third quarter of 2017. The decrease was primarily due to a reduction in exploration activities in our lithium project. For the nine months of 2018 mineral property expenses decreased by $900,000 from the same period in 2017, this decrease was mostly the result of a reduction of exploration activities in our lithium projects of $600,000, and a reduction in land owing cost for the Cebolleta and Juan Tafoya uranium properties of $400,000. General and administrative expenses increased by 100,000 thousand and $700,000 for the third quarter and nine months of 2018 respectively, as compared with the corresponding periods in 2017. The increase of 100,000 for the third quarter of 2018 was due to an increase in stock compensation expense. The increase of 700,000 for the nine months of 2018 was due to increases in salaries and payroll burden of 300,000, and consulting and professional expenses of 400,000 both primarily related to the post acquisition of Alabama Graphite operations. Additionally, stock compensation expense increased by $200,000 as compared to the corresponding period in 2017. These increases were partially offset by a decrease in legal, accounting and public company expense of $200,000. Our consolidated net loss for the third quarter of 2018 was $3.1 million or $0.06 cents per share as compared to a loss of $3 million or $0.12 per share for the same period in 2017. The increase in our consolidated net loss from respective prior period was primarily the result of an increase in the loss on sale of marketable securities of $400,000 and an increase in general and administrative expenses of $100,000. These increases were mostly offset by a decrease in mineral property expenses of $400,000. Consolidated net loss for the nine months of 2018 was $27 million or $0.68 per share, as compared to $3.8 million or $0.16 per share for the same period in 2017. The increase in the consolidated net loss of $23.1 million was a result of the combination of the $18 million impairment charge for the Temrezli and Sefaatli uranium mineral interests recorded in 2018 plus a one-time gain of $4.9 million from the sale of the Churchrock and Crownpoint projects recorded in 2017. The Company’s cash balance and working capital was $1.4 million and $900,000, respectively, at September 30, 2018. This compares to working capital of $3.9 million at December 31, 2017. The $3 million decrease in working capital was due to $1.5 million in loan advances and acquisition costs for the acquisition of Alabama Graphite properties, a $400,000 reduction in accounts payable and continued funding of operating losses. As of October 31, 2018, the Company held cash and cash equivalents totaling approximately $1.7 million. The Company’s working capital, along with the anticipated funding from the Company’s financing agreements described in the Company’s 10-Q filed on November 7th is expected to provide the necessary liquidity through January 31 of 2020. With that, I will turn it back to you Chris.

Thanks Jeff. Turning to Slide 8, our Green-Energy Asset portfolio, which includes our Coosa Graphite Project along with lithium and uranium assets. Importantly, all three of our portfolio minerals have been identified as critical to the nation's security and economic prosperity by the U.S. Secretary in the Ontario. Turning to Slide 9, the Coosa Project is located near Sylacauga, Alabama approximately 50 miles southeast of Birmingham. The area has been a past producer of graphite utilizing a geological trend spanning tens of thousands of acres known as the Alabama Graphite belt. Alabama remains a friendly business jurisdiction exemplified by successfully securing a $1 billion commitment from Mercedes-Benz to build a lithium-ion battery factory near their automobile assembly plant in that state. This facilities this building of electric SUVs in Alabama. The Alabama battery plant will be one of six global factories supplying batteries for future Mercedes electric cars. In addition to Mercedes-Benz there are several other auto manufacturers with production facilities in the vicinity. On Slide 10, our acquisition of Alabama Graphite and the Coosa Project increases our leverage to the fast-growing energy, minerals and markets, while simultaneously going forward, revenue and cash flow opportunities. This project will be the only battery grade graphite project in the contiguous United States. Current production is controlled by China with an unsustainable environmental footprint. Having supply in the United States provides operational efficiency without compromising on consistent premiums slightly. The U.S. is 100% import dependent for Graphite. We have continue to work with state and local officials in Alabama and Coosa County the site and permit full scale processing facility and explored mutually beneficial business in incentives. On Slide 11, these are the three component products, which provide graphite materials with enhanced conductivity connective performance for battery manufacturers, Purified Micronized Graphite or PMG, Delaminated Expanded Graphite DEXDG and Coated Spherical Purified Graphite CSPG. This allows us to provide battery products to a wide variety of end-users. We have highlighted PMG, we announced in September that we produced four kilograms of that product that we then had tested at an independent lab for electrical performance. PMG is used as the conductivity enhancement material for rechargeable lithium lion batteries non-rechargeable lithium batteries, alkaline power cells and lead acid battery application. So there is a significant opportunity for PMG across the battery spectrum. Samples of PMG are being tested by potential customers at this time. On Slide 12 we talked about how we have derisked the Coosa Graphite project. This project is now planned to use proven environmentally sustainable technology. Processing begins on purchased feedstock which is widely available right now and the mine is now deferred until 2026. As such, permitting is no longer the critical path. Our pilot plant is expected to start operations next year, and generating products for prequalification in large batches and full-scale processing start on our first furnace is planned for 2020. The economics are no longer solely dependent on coated spherical purified graphite. PMG production starts in 2020, production of DEXDG which is Delaminated Expanded Graphite is slated for 2021 and production of CSPG is slated for 2023 this stage product introduction allows us to take full advantage of customer product qualification timelines and again the mine begins production in 2026, some years away. We don't have to worry about critical timelines associated with permitting at the mine, speed to market accounts in the battery material space and this plan works to place advance graphite materials for the market earlier than originally contemplated. On Slide 13, you can see the effect of our business plan of the project economics for Coosa. We have increased the [NPV] (Ph) by almost $50 million, while reducing capital expenditures. Positive cash flows are advanced by one year from 2022 to 2021 and revenues are advanced from 2022 now to 2020. Turning to Slide 15, we will cover lithium our projects. Our lithium projects are still progressing. We expanded Columbus basin to include over 14,000 acres and the project has good highway power and groundwater access, we own most of the water rights there. Our phase 1 drilling program is complete with encouraging results in phase II planning is underway. At Sal Rica, we have got over 13,000 acres in Utah with good road and power access, sample results ranging up to hundred parts per million from shallow aquifers have already been released to the public. Our application for exploration permit and water rights is under way with the state of Utah and we have geophysical data that has been evaluated at this time. Railroad Valley in Nevada we have acquire approximately 9300 acres of federal plaster mining claims. The project covers an area where reconnaissance by Westwater has returned lithium values as high as 366 parts per million. Our water rights applications underway there. We will continue to develop our water rights positions in geological knowledge on these projects. Turning to Slide 17, we will cover our uranium assets. Uranium is still a strategic focus for Westwater. They are expected to be 35% more nuclear reactors in 10 years than there are right now and they all need the uranium to produce power. We think the demand side is growing as these reactors come close to coming online. Additionally, 130 more reactors are in the planning stages now. Back in September, we announced an analysis that we had made up of the current uranium market that backs up our belief that a continued price rise in uranium is happening. The spot market prices for uranium concentrator up from $17 a pound to now $29 a pound since 2016 and have increased over $5 a pound this year alone. Market volumes for uranium concentrate are almost 78 million pounds so far in 2018, the highest spot market volume since 1992. This makes it clear there is strong interest in securing uranium supplies at lower prices now and has a hedge. Five year futures have also risen to $35 a pound since August. Slide 19 features our management team. A group of tenured leaders and energy and minerals development. I would like to add that we have 36 people on our business overall, we all make sure that those people are as safe as they can possibly be in every way. We have now gone over three years without any kind of a reportable incident in either environmental or personal safety. That means not so much as a single incident that required medical care of any kind over the last three years that is quite an achievement for any sized group, and we congratulate the Westwater team for a job very well done. Turning to Slide 20. Why is Westwater a great investment. Well we didn't include the bullet point, but looking at our stock price we are significantly undervalued today. We continue to expand our portfolio and Green Energy materials, all of which have been deemed critical to national security. I would like to point out for those investors with particular interest in Green Energy, the batteries for energy storage are the key to electrifying our transportation system. Electric vehicles are already 1% of all cars sold and they are growing rapidly. In addition, solar and wind power need batteries to store power when not needed, so they can be released to the grid when the wind is calm and the sun does not shine. Our graphite battery products, which we are developing and have already produced are essential ingredients for these batteries. When you factored in that we can produce these products in the United States, this presents an opportunity with great potential. We remain debt free with cash and financial facilities in place to fund us through January 2020. We are actively monetizing our non-core assets and we have a lot to look forward too for the rest of this year, including updated development to Coosa, our exploration and water rights milestone achievement on our lithium projects and our water rights application process at Railroad Valley and Sal Rica. Finally, on Slide 21, in reiterating our strong asset portfolio with upside potential. By being an American supplier of graphite, lithium and uranium Westwater offers U.S. participation in the Green Energy revolution, while adhering to its American environmentally sustainable practices. We have a proven management team with experience in energy minerals development and financial management. I would like to end this portion of the call by stating that while we have operated with a longer term view. We are expecting our graphite business to generate revenue in 2020 and be cash flow positive in 2021, which then creates all kinds of favorable tailwinds for us. It allows us to develop and grow the business beyond the initial startup using cash flows generated from that business. We will have the ability to reinvest and growth projects to a 15,000 tons per year graphite business over the course of just a couple of years while building out the mine. There is all kinds of exciting things happening with graphite business. At the same time, we are developing a lithium exploration effort and provided we discover the positive significant size, we will add a second line of development to go into the same markets that our graphite market is going to. Remember that an electric car has many hundreds of pounds of batteries in it, the chief components of those batteries are graphite and lithium. You may see at Tesla, we see a over a 100 pounds of lithium and almost 200 pounds of graphite. With this in mind, we continue to reduce holding costs for our uranium properties as we complete reclamation activities in Texas and as we have placed some uranium properties in the hands of those that are better suited for development. For instance, when we sold Churchrock to Laramide Resources, we return to property that would have cost $60 a pound to develop to a company that could develop that for $35 a pound with that sale we took our royalty of Laramide Resources had on property. Now at $35 a pound that property has a real shot at development at the same time, we kept a small royalty, so we can participate in Laramide success and have an ownership position in the company to go along with the mortgage. It enabled us to enter into creative deals which is something we can still do in uranium space, particularly as the prices only a cent. We continue to pursue deals and opportunities that we believe will strengthen our asset portfolio and enhance shareholder value. With that, I would like to open up the call to questions, Steve.

[Operator Instructions] The first question is from Debra Fiakas with Crystal Equity Research Equipment. Please go ahead.

Thank you. Thank you for taking my questions. Perhaps we have one question each for the three materials. In regard to the lithium, I understand from your opening remarks that you have a couple of permits or applications pending on exploration permit, water rights applications. Are you in a holding pattern waiting for decisions on those permits are there other things in your development agenda that you can pursue while you are waiting for approvals.

Good question and thanks for asking Debra. With regard to the permit and Sal Rica, we are working right now with the states to detail out what requirements further they will need and that process is working. With regard to Railroad Valley, we are at the ahead of the class with regard to our water rights application and the exploration permit is pending as well with the state, so basically were waiting on the state. With regard to Columbus basin it's further advanced, we already have the water rights of course there, and at this point we have detailed out what we believe to be a potential exploration plan for us over the coming year or so that we will seek to do two things to prove up what we believe is the potential for a resource there and our water rights at the same time.

Excellent, thank you. And then in regard to the uranium not only your analysis, but others as well have noted that there has been considerable progress in soaking-up the inventory, the excess capacity in the uranium market. We see some upward movement on the prices. Is it time now to start walking around and kicking the tires of your assets in Texas and refining say a schedule of events or timeline and a cost to bring those assets back online.

Our assets in Texas are very well known to us with regard to plan for executing worth of production there. So further planning really isn’t needed at this point and $29 a pound we are excited about the price potential. The Texas needs prices in the low 40s, before it's reliable, so I think if you would have talk to us a year ago about uranium prices, we would have said three to five years, I think were in of a mood right now with this incredible spot market activity. The price rise from $17 to $29 already over the past 12 or 15 months that we feel the price rises sooner rather than later and we are frankly pretty excited about the space.

Okay, excellent. And then the last couple of questions are about graphite. You mentioned I think also in the opening remarks as well as in the press release that you have got signed NDA's with a number of entities. Are any of those brand-new NDAs, are those kind of holdovers from previous quarters and maybe if you could just kind of give us an idea about what kinds of entities are have signed these NDA's.

Well as always because they are NDAs they are disclosing on restricted disclosure documents, but I can say that we are working with household names in the battery business, and they continue to test our material. As we talked about on previous occasions, the product qualification timelines for some of these products can be a couple years long, but for PMG, they tend to be a little bit shorter, so we produce the four kilograms of PMG, so we could get it to market faster and into the hands of those folks that are ready to test. We view some of that material to qualify our own house lab to Polaris guys and without being anymore specific as to who and how were having discussions with individual customers, I can say that we are further along than we were and we are pleased with the progress thus far.

Excellent. I will maybe get back into the queue and come back later with other questions. Thank you.

Well, Deb feel free to ask any other questions you would like right now, we are happy to have them and we always enjoy the questions you ask.

[Operator Instructions] The next question is from [Sherry McGuire] (Ph), a Private investor. Please go ahead.

I’m a private investor, I invested in Alabama Graphite. Probably I don’t know, I couldn’t even find them on the internet, so it’s been what five years or something. Anyway, so I’m not a knowledgeable person, I have had to basically learn the stock market and learn about where the graphite comes from and what not. So you will have to excuse me if I’m not as educated as those around you. My question is when Alabama first started out, I understood that they were going to do the Coosa mine and they have the other one is well. And what I’m understanding from what you have had to say that you are not going to be in a full production of the Coosa mine well into 2026 or something like that is that correct?

Yes. It is correct.

So, is there going to be any revenue, I’m a long-term investor I really believe in the project. I’m a long-term investor, I’m just wondering would I possibly see any return on my money, before 2026, in your estimation?

So I can explain the plan in a little bit more detail. So the reason we put the mining in 2026 was because we don't believe that prior owners accurately identified the permitting timelines. They tend to be five years or so in United States no matter what you do. So what we did is we advanced the production of graphite through the use of purchased feedstock, so we are going to start up the processing facilities far earlier than originally contemplated and we will build the mine later. So that we can then control quality and production aspects in the house. What we did in doing that was we derisked the investment materially in terms of time and brought forward revenues to 2021 previous planning would have been far later than that under the original Alabama Graphite plant. So as to your second question, can you ever expect returns on your investment? I can't promise the things. I can promise that this particular team is the right to give you the best chance at it and that is what we are doing as hard as we can.

So you are actually building the processing plant.

Sooner rather than later and the mine comes later, that is exactly right.

After you have the processing plant or plants in built and ready to go, you life those unless you are opening the mine and getting the graphite from the mine to go into the processing plant. Is that correct.

Actually, we are going to buy the graphite to process in the plants on the open market. We will produce our own graphite later, but we can run the plant on purchased material early in early stage and we are prequalifying that material as we speak.

And is that going to come from China then.

Not likely, the basic and potential suppliers for graphite tend to be Southeast Africa. So places like Mozambique, Madagascar and Canada and potentially Brazil.

Okay, so I have a better understanding now. You are going to supplement the graphite and then as the business grows you are going to open the mine and then eventually switch over to the Alabama Graphite as opposed to buying it from an outside source.

That is exactly correct, we may well blend going into the future, we may do it exclusive on our own graphite, but we would retain that option so that we can make the very best materials for the customers that we have. So you have got - you do have…

It is also my understanding that the graphite taken from the Coosa mine was put into fully processed material and that material was sent to different investors for them to test with their products, like in batteries or whatever and they wanted to make sure that each sample was consistent so that they could indeed make an agreement to buy from Alabama in the future knowing the graphite itself was going to be consistent at whatever place they were taking it from. Is that right?

Yes, we endeavor to do the same thing, a consistent product to the end users is certainly critical even the manufacturing...

So you have to make sure in the graphite from how is this consistent of a product of the Coosa mine.

I think exactly. So, first of all you make sure you are getting proper quality feedstock. You make sure that you are manufacturing process is capable of making a consistent product and that is really what we are focused on right now.

Okay. Well I have taken up on to your time and I appreciate it. Thank you.

Not a problem. Thanks for the question.

The next question is from Debra Fiakas with Crystal Equity Research. Please go ahead.

Thank you, I was just hoping maybe to extend the questioning from the previous caller. When you are out in the market and looking for the graphite materials to buy for the initial production rounds, are you going to have to sign any kind of purchase commitment or is it just simply going to be spot market purchases?

Great question Debra. There is a blend of risk management to do, we tend to like longer term arrangements with suppliers and so do they.

Okay, so perhaps there would be some kind of purchase commitment or some sort of agreement or understanding once you decide on who is an appropriate supplier.

Yes, that is our design.

Alright. Thank you.

Not at all. Thanks once again Debra.

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

Thank you, Steve. Again, thanks for taking the time to hear our story. Please have a great day.