Westwater Resources, Inc. (WWR) Q4 2018 Earnings Report, Transcript and Summary

Welcome to the Westwater Resources Inc. Full Year 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.

Thanks, Aerial and thanks to all of you for joining us today. And welcome to the Westwater Resources 2018 results and Energy Materials Business Update 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. Westwater has moved forward on all of its business goals set in 2018. In the first half of the year, the company finalized the Alabama Graphite acquisition and made notable progress on our business plan to unlock shareholder value. The second half of 2018 saw continued progress in the development of our graphite business with further production and testing in commercial quality purified micronized graphite. Just a couple of months ago, we also announced a significant Canadian discovery at our Coosa Graphite Project in Alabama. All of the progress comes due to the hard work of the Westwater team who have many decades of combined experience, operating mining, processing and manufacturing facilities of up to a billion dollars in annual revenue. Our current business development plan outlines pilot plant operations beginning in the second half of 2019. The plan startup and initial operations will use graphite feedstock purchased on the open market, allowing us to bring revenues and the cash flow forward over time. The initial revenues from the processing facilities are anticipated in 2020 with Westwater's graphite business projected to generate positive cash flows by 2021. Also keep in mind that we have over two dozen non-disclosure agreements signed and in place with potential suppliers and customers relating to our battery grade graphite materials. During 2018, Westwater produced over 4 kilograms of commercial grade PMG with the quality of that product confirmed by an independent lab. This confirms that Westwater can produce battery grade graphite products in the United States, making the Coosa project all that much more attractive to customers and suppliers. This high quality graphite product is being produced in sizes from 5 to 45 microns, making it compatible with a broad range of batteries, given the high electrical performance that it has demonstrated. Note the PMG is the first of three battery ready graphite products Westwater plans to manufacturer as we roll out our business plan. During the second half of 2018, we also announced the addition of partners Metpro and Polaris to our technical services space. Metpro is assisting us in the development of our graphite purification and concentrate enhancement process. The fact that Metpro also worked with the Coosa Graphite Projects prior owners brings significant additional value to the project. Polaris was brought on as an independent lab to perform key conductivity testing in the materials from Coosa. These tests are required as part of customer pre-qualification programs, which are critical in gaining customer acceptance and commercialization. We have shared the results of these tests with several potential customers and their response has been uniformly positive, and they are excited about working with us. Carly Anderson also recently joined our board of directors. She brings decades of experience in the mining industry and the investment community to the table, and will be a major asset to the company in executing our business plans. The company's balance sheet ends 2018 strong. We finalized and registered direct offering with Aspire Capital and also utilized our ATM facility with Cantor Fitzgerald to provide necessary liquidity as we execute our plan. At this point, I would like to turn things over to Jeff Vigil for a corporate update.

Thanks Chris. Good morning everyone. First let's look at our capital structure on Slide 6. Our recent share price of $0.17 and was approximately 74.4 million shares outstanding. Our market capitalization stands at $12.9 million. During 2018, our stock performance was influenced largely by continued pressure on the mental space along with their mining and exploration license being revoked for our Temrezli and Sefaatli projects in June 2018. Fundamentally, our business is strong and we believe our current asset diversification strategy expanding into the battery material supply chain sector and other factors provide significant upside potential for the company in the long-term. Please turn to Slide 7, our financial summary for the year ended December 31, 2018. Net cash used in operating activities was $11.7 million in 2018 compared to $11.6 million in 2017. The increase of $0.1 million reflected an increase in cash used for prepaid and accounts payable of $1.1 million, which was mostly offset by a decrease in operating expenses of $1 million. Mineral property expenses for the year ended December 31, 2018 were $3.5 million as compared to $4.6 million for the year ended December 31, '17. The decrease was primarily due to a reduction in exploration activity in our lithium projects in Utah and New Mexico and a reduction of land holding costs for the Cebolleta and Juan Tafoya uranium properties of $0.4 million. General and administrative expense increased by $0.7 million for the fiscal year 2018 compared with fiscal year 2017. The increase of $0.7 million in 2018 was due to increases in salaries and payroll burden of $0.3 million, largely due to a higher head count and consulting and professional expenses of $0.4 million, which was primarily related to the post-acquisition Alabama Graphite operations. Additionally, stock compensation expense increased by $0.2 million as compared to the corresponding period in 2017. These increases were partially offset by a decrease in legal, accounting and public company expenses of $0.1 million and office expenses of $0.1 million. Our consolidated net loss for the year ended December 31, 2018 was $35.7 million or $0.77 per share as compared to a loss of $19.3 million or $0.78 per share for the same period in 2018. The increase in our consolidated net loss for the prior year was primarily due to the result of larger impairment charges on our uranium properties in 2018. And the increase in general and administrative expenses of $0.7 million and the gain recorded in 2017 of $4.9 million from the sale of our Churchrock and Crownpoint uranium properties to Laramide Resources. These increases were mostly offset by a decrease in mineral property expenses of $1 million. As of December 31, 2018, company's cash balance was $1.6 million and the company had a working capital balance of $1 million. With that I'll turn it back to you, Chris.

Thanks Jeff. Turning to Slide 8, you can see our Green-Energy asset portfolio on this slide. Westwater's portfolio includes our Coosa Graphite Project and our lithium and uranium assets. Note that all three of these minerals have been identified as critical to national security and economic prosperity by the U.S. Secretary of the Interior. Turning to Slide 9. The Coosa Graphite Project is located close to Sylacauga, Alabama of about 50 miles southeast of Birmingham. The graphite mining area is part of a geologic trend that spans tens of thousands of acres known as the Alabama Graphite belt. Alabama is a business friendly state and recently secured a billion dollar commitment for Mercedes Benz to build a lithium ion battery factory near their automobile assembly plant in Alabama. This plant will be one of six global factories providing batteries for Mercedes electric cars in the future. Several other auto manufacturers also have production facilities in Alabama. On Slide 10, you can see that the Coosa Graphite Project increases our leverage in the rapidly growing energy minerals end markets, and substantially increases revenue and cash flow opportunities. This project is the only battery grade graphite project in the contiguous United States. Current global graphite production is controlled by China, utilizing an unsustainable environmental footprint. Having a sustainable United States supply with graphite provides improved operational efficiency while not compromising on the required quality. The U.S. is currently 100% import dependent on graphite. We are involved in negotiations with officials in Alabama and Coosa County to cite and permit the full scale processing facility, as well as exploring mutually beneficial business practice. On Slide 11, this illustrates the three graphite materials with enhanced conductivity performance that are used by battery manufacturers; Purified Micronized Graphite or PMG; Delaminated Expanded Graphite, DEXDG; and Coated Spherical Purified Graphite CSPG; producing all three products meaning that we can provide battery materials to a wide variety of customers. Westwater announced back in September that we produced 4 kilograms of PMG that was tested in an independent lab and was determined to add excellent electrical performance. PMG is used as a conductivity enhancement material for non-rechargeable lithium batteries, alkaline power cells and lead acid battery applications, so there's significant opportunity here. Our PMG samples are currently being tested by two potential customers. Turning to Slide 12, we announced in late November our discovery of significant Vanadium values at our Coosa Project. The discovery came as a result of an inspection of the site led by our geology and engineering staff. We've already begun exploration and assay work to determine the extent and quality of Vanadium at the Coosa project. At the end of the year, we took over 1,900 samples that were evaluated at two independent labs. The results are outlined in a press releases issued today, and we are very pleased to report that we see values above the 0.4% V205 and over a widespread area beyond the deposit described in the PEA from 2015. We will design an exploration plan for this area and share it in the coming weeks. As of last week, vanadium pentoxide was trading at roughly $17 per pound after reaching multi-year highs of $33 per pound in late October, which was 300% increase over the prior 12 months. On Slide 13, we see why the discovery poses a significant opportunity for the company. As is the case with our graphite opium and uranium assets, vanadium is also considered one of the critical resources listed by the U.S. geological Survey. However, there is no significant production of vanadium or mining operations in the United States, which is why it's generally important. Approximately 85% of vanadium production originates in South Africa, China and Russia with China being leader at nearly 40% of worldwide production. Vanadium is a highly versatile materials used in the production of steel alloys as a catalyst for the chemical industry, used in making the ceramics glasses and pigments and vanadium flow batteries. The demand for vanadium throughout the world is strong and growing. As more power is generated through wind and solar, these sources of energy are going to need more reliable power storage and vanadium flow batteries are designed for this application in particular. In fact, market research firm Roskill, predicted recently that there will be 45% increase in demand for vanadium mostly in China. Turning to Slide 14. We illustrate how much we have de-risked the Coosa Graphite project. This project will use proven environmentally sustainable technology. Processing will start with purchase feedstock, which is widely available. Moreover until mining operations are now deferred until 2026 permitting timelines are no longer critical path. Note our pilot plan is projected to start operations this year generating products for pre qualification in large batches. Full scale processing using our first furnace will begin in 2020. This means that the company's revenues are no longer solely dependent on coated spherical graphite. Production of PMG is slated to begin in 2020, DEXDG production is slated for 2021 and then CSPG production is scheduled to kick off in 2023. Taking product introductions in this manner allows us to take full advantage of customer product qualification timelines. Moreover, since mine production starts in 2026 some eight years away, we no longer have to be concerned about critical timelines associated with the permitting of the mine. It is clear that speed to market counts in battery material space and our revised plant schedule makes it possible to places advanced graphite materials on market earlier than originally contemplated. On Slide 15, this slide illustrates the impact of our new business plan and the project economics for Coosa. We've increased the NPV by almost $50 million at the same time, significantly reduced capital expenditures. Positive cash flows move forward by one year from 2022 to 2121, and revenues are moved forward two years from 2022 to 2020. Turning to Slide 16, we'll cover our lithium projects. On Slide 17, this slide offers more detail on these ongoing lithium projects. Columbus basin now covers more than 14,000 acres with good highway and groundwater access. We own the critical water rights for this project. Our phase one drilling program is completely pass the results and phase two planning is underway. On our Sal Rica project, we have more than 13,000 acres in Utah with good road and power access. Sample results up to 100 parts per million from shallow aquifers have already been made public. We have applied for an exploration permit and water rights with the State of Utah, and we have geophysical data that has been evaluated. At our lithium project in Railroad Valley in Nevada, we own 9,300 acres of federal plaster mining claims. Keep in mind that this project is an area for reconnaissance and sediment samples, return lithium values as high as 366 parts per million. We plan to continue to develop our water rights positions and geologic knowledge on these properties. Turning to Slide 18, we’ll cover our uranium assets. Moving to Slide 19, as this slide makes clear uranium remains a key strategic focus for Westwater. Around 35% more nuclear reactors are expected to be built in the next decade and they all require uranium. China, India, Russia, and Korea are all building reactors and have ordered 130 new reactors in the last couple of years. We expect the demand for processed uranium to grow as these reactors come closer to going online in the next year or so. Earlier this fall, we publicly released an analysis of the current uranium market that confirms our belief that a continued rise in uranium prices is probable. Spot market prices for uranium concentrate are up from $17 to $28.5 since 2016 and we're up nearly $5 a pound in 2018 alone. Also note that market volumes for uranium concentrate exceeded 60 million pounds in 2018, the highest spot market volume since 1992. This year suggest strong market interest in securing uranium supplies at lower prices that has a hedge. In a related move, five year uranium for futures have also risen above $35 a pound in the last few months. Slide 20 highlights our management team, all veteran leaders and energy minerals development. Westwater has a total of 36 people and employee safety is a key part of our company mission. We are proud to announce that as of the first of the month, we had gone over three years without any reportable incidents in either environmental or personal safety. That means not a single employee has had a stitch or broken finger, or anything that requires more than basic first aid for the last three years. That's quite an achievement for any company and I'm very proud of our team. Turning to Slide 21, we explain why Westwater is a great investment. Moreover, given the current stock price, we believe that we are significantly undervalued today. Throughout 2018, we continue to expand our portfolio in green energy materials, all of which are critical to national security. Investors with particular interest in green energy probably already know that batteries for electrical storage are the key to electrifying our transportation system. Electric vehicles are already 1% of all cars sold and sales are growing rapidly. Solar and wind power technologies also require batteries to store power, so that it can be released to the grid when the wind is calm or the sun doesn't shine. The various graphite battery products we are producing our critical ingredients for these batteries. Furthermore, Westwater will be producing these critical graphite products in the United States, greatly reducing the chances of production halts or regulatory issues compared to China and other foreign companies. The scale of the opportunities for Westwater is significant and we are moving forward to execute our plan as fast as possible. Our vanadium discovery has the potential to significantly increase the value of the Coosa project and the company. With the growing demand for vanadium and it's variety of uses, this could be a tremendous opportunity for us to expand our green energy assets portfolio, all of which are critical minerals in the United States. The company is debt free. We have financial facilities in place to support our operations through January 2020 and we remain active monetizing our non-core assets. Finally on Slide 22, we illustrate our strong asset portfolio and our upside potential is demand fundamentals for graphite and lithium proof. As an American supplier of graphite, lithium and uranium, Westwater can participate in the Green Energy revolution, while adhering to U.S. regulatory standard environmentally sustainable practices. In closing, I want to mention that while the company plans ahead with a longer term view, we project our graphite business to generate revenue in 2020 and be cash flow positive by 2021. This will make it possible to develop the business beyond the initial startup using the cash flows it generates. This means we can reinvest and grow the business to a 15,000 ton per year graphite business in just a couple of years, while we're building out the mine. Keep in mind that an electric car has several hundred pounds of batteries. Those cars regardless of manufacturer have hundreds of pounds of graphite and lithium in those batteries. These opportunities in graphite and lithium are why we focused on these businesses. At the same time, we are moving forward to complete reclamation activity from Texas. We select to reduce our overall company cost profile and provide for bond release, a cash benefit to us longer term. Our sale of Churchrock continues to supply cash to Westwater as a result of Laramide Resources mortgage to us. And we retain leverage to the rising uranium market with our royalty portfolio that includes that property, as well as interest in others around the United States. We are hoping we may be able to craft other creative deals like this one in uranium space, particularly given that uranium prices are currently rising. Moreover, we will continue to look for deals and opportunities to strengthen our asset portfolio and enhance shareholder value in all of our business segments. With that, I'd like to open up the call to questions. Ariel?

Thank you [Operator Instructions]. Our first question comes from Debra Fiakas of Crystal Equity Research.

Thank you. Congratulations on your safety and health record, that's actually quite exceptional given the fact that perhaps a good share of your employees are out there in the field and mixing it up with the elements. I have a couple of questions. And I think maybe I'll get the housekeeping questions out of the way first, and these are mostly for Jeff. The budget is $42 million for plant construction and the pilot plant, and then there is a net present value of $400 million and $500 hundred million. I assume that those numbers are not -- and I just want to clarify that those numbers do not include then the vanadium opportunity that we might see a change in these numbers once you get the next round of testing completed.

No, they do not include the vanadium economics at all. So we’re too early stages in that the vanadium exploration opportunity.

And then maybe you could just give us a hint as to the timeline. These first tests were completed pretty fast and the next round of testing is intended to give you a little bit more clarity on the numbers. When do you anticipate that you'll have a better graph of how the cost -- what the cost might be of adding that vanadium processing to the mix and also then what impact that might have on your revenue and earnings?

Debra, this is Chris. And by the way, thanks for that compliment on our safety and health. That is the hard work of our guys down in Texas, primarily in doing all the right stuff. We're very proud of that. With regard to the vanadium. Yes, it has been very short cycle from October through a sampling of our existing drill holes in December. We have been able to report now results from those 1,900 plus samples. I want to say that the vanadium is far more widespread than we thought, which is a good news story. And the grades are ranging from about 0.12% up to 0.4%, we're very excited about the possibilities there. Over the next few weeks, we’ll be designing an exploration plan in order to fully explore and quantify that vanadium story. And as you know, once we execute the exploration story, some modeling is involved and an upgrade to our resource model should take place. You should plan for result certainly by the end of this year, if not before.

And then the other housekeeping question for you Jeff is in regard to the line item related to the impairment of the uranium properties. And of course this relates to the Turkey project. But I noticed that there was a significant increase in the year-end report versus the year-to-date figure in the third quarter. And I wondered if you could perhaps just provide me with a little bit of education on why that number should increase?

Through September 30th, Debra, the impairment that we recorded and actually it was in June was related to Temrezli and Sefaatli that’s about $18 million. And through the course of the -- and I think in our past discussions, we've mentioned that we plan to use our Rosita uranium processing facility as part of the infrastructure in Turkey. So along with the verification of those licenses, the opportunity average really utilizes Rosita equipment went away as well. So we've looked at alternative operating plans relative to the mill at Rosita and determined that at this point in time, it's purely a valuation and an impairment type of an approach to evaluation. We looked at it we didn't have a current operating plan otherwise to put that facility into. And so from an valuation standpoint, the best use of the facility from a valuation standpoint is its sales value. So we did an impairment analysis on the net realizable sales value of equipment and that resulted in about close to $6 million impairment entry that we made. The facility is still there, still in good shape and certainly it's an opportunity to utilize that, it's available and ready to be put into the business plan. So it was Rosita facility and some of that equipment in Texas that resulted in the second charge that we recorded in the fourth quarter.

And if I am still allowed, if I can ask just one more question and this is in regard to the graphite market, I wondered and the process is for you Chris. Just clarify what's in the presentation and what is in your remarks. The presentation suggests revenues from the graphic project in 2021 with positive cash flow into 2022. But in your prepared remarks I thought I heard both of those two actually in 2020 and 2021. If you could just clarify that the revenues are coming along in 2020?

The plant is designed for startup in 2020 and with revenues soon to follow. So it is a fourth quarter '20 and 2021 revenue…

And then again on -- in regard to the graphite market, it's great that you've got a couple dozen NDAs out there and that there are prospects that are testing it. I just wondered if maybe you could -- I know, you really tried to adhere very carefully to their privacy and to your competitive position. But if you can maybe just give us a little bit of color on your potential relationships with these prospects? Are they mostly coming to you and talking to you about meeting and further criteria? Or they bring even early enough that you can get involved with actually helping to design a material or helping to design a project? I'm just trying to get an idea of how collaborative these relationships might be.

Debra, it's a little bit of both. Companies that have been making for instance alkaline power cells are in the United States for years, already have a predefined set of criteria. And our products need to conform to that, so that's the design of their testing. Other customers that are exploring enhanced performing materials for batteries that due to our NDA, we do need to keep confidential. They're exploring many uses in the battery spaces, and it is very exciting for us to work collaboratively with folks like that. We've had one relationship that it's been ongoing for two years and develop some battery materials, so it spans both spectrums.

I do have additional questions, so I'll just step back out and we'll have someone else to ask and then come back in later. Thank you.

[Operator instructions] Our next question comes from Michael Drummond, the Private Investor.

What is the strategy with the NASDAQ de-listing of March the 11th?

As you would note, we put in along with our K late last week, we did put a proxy into the SEC for evaluation. In that proxy, which is public information, we do include a request for them and for our shareholders to evaluate and vote on a reverse split. The NASDAQ requires a positive action by us to remain listed. We regard that listing as very precious and important to the company. It provides access to American capital markets in a way that no subsidiary listing would. In addition, compliance with the NASDAQ and the positive parts of having a share price over $1 are important to draw critical strategic investors to our company as well. So hopefully, that answers your question, Michael.

And you anticipate achieving that prior to March 11th?

Somewhere in that timeframe, we would need to achieve that price. So the NASDAQ allows for -- if you have a positive plan of action to do something, the NASDAQ has some allowance for that. And we’ll be working with NASDAQ to explore that.

[Operator instructions] We have a follow up question from Debra Fiakas of Crystal Equity Research.

This question actually is a new topic of discussion. I wanted to ask a little bit about your efforts to go to arbitration with the Turkey mining authority. And I wondered if you might be able to tell us what the next step is. Are you are you waiting for some date, or you now expect it to respond in some way? And I wondered if you could tell us whether or not the panel, the arbitration panel has actually been ceded?

So unlike American trial procedures and practices, exit works confidentially for most of its actions. So there's not a lot of we can talk about. So whether or not the panel has been impaneled or charged it's something that resides within exits purview right now. We can say that our next point of process with the International Court is a hearing that we expect sometime mid-summer or earlier to establish the procedures and the go forward plan for the trial. But anything apart from that, we’re really not at liberty to talk about except to say that we are aggressively pursuing our rights and compensation from the Republic of Turkey.

And then my very last question would be in regard again to the graphite market. I heard you mentioned in your prepared remarks that you're starting to do a little bit of negotiation in terms of site permitting. And I just wondered what concerns or what things that you might be working on at this early date for the site permitting in the graphite projects in Alabama?

So there's a number of aspects to site permitting, they're a little bit counterintuitive. One is we are a considerable consumer of electricity. So working with Alabama Power for instance is paramount in our site selection. We want to be near their distribution lines to take full advantage of the right structures they can put in place versus people to buy power from unlike other co ops. Secondly, we want to make sure that the site is located near enough the mineral property, so the transportation factors all turn into a larger component than they need to. So citing the facility within 10 or 20 miles is certainly a great idea. And thirdly, there are counties like Coosa County in Alabama that, because of their economic circumstance, provide an avenue for some fantastic economic incentives for us to site there. So we're evaluating all three of those aspects as we look for a place to cite the facility.

And I guess and perhaps given the fact that Amazon has been very publicly booted out of Long Island City here in my hometown of New York. Perhaps, I should be also asking you whether or not you have reached out to various or have plans to reach out to the various local government groups or community groups to make them aware of your plans and to include them in some dialogs that will ensure that you are a welcome addition to the community?

Well, I'm not in a position to comment on the Amazon's exit from Long Islands…

I don't need that. I just need to know how things are going into Alabama.

The local politicians and civic leaders in Coosa and surrounding counties are pretty excited about having these jobs and our retails have been greeted over not just this year as we've own the property but prior managements reach out, have been greeted with considerable enthusiasm by the locals. So, I don't think we have the same worries as Amazon.

[Operator Instructions] 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, Ariel. And thank to all of you for attending the call and a special thanks to those that participated in by asking questions. We appreciate it and we want to wish you all a great day and a good week. Thank you.

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