Westwater Resources, Inc. (WWR) Q2 2019 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Westwater Resources Inc. Second Quarter 2019 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'll 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.

Thanks, Ariel, and good morning everyone. Thanks for joining us today and welcome to the Westwater Resources’ second quarter 2019 results and energy minerals business update conference call. With me on our call is Jeff Vigil, our CFO and Vice President of Finance; and Dain McCoig, our Vice President of Operations. I'd 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. On to Slide 4 which covers our highlights for the second quarter of 2019, a busy quarter for us with lots of moving parts both inside and outside the company. So we're going to try to shed some light and a bit more context around a number of those for you this morning before we take your questions. We announced today that our ULTRA purified micronized graphite under testing with a major battery manufacturer has requested a bulk sample, one metric ton in size of our battery grade graphite for further testing. This is a major milestone for Westwater. At the same time, we also have laboratory testing ongoing with additional potential customers. We are also among the first in the graphite development space to release long-term cycling performance results of our spheronized graphite materials from our Coosa graphite project. We're not aware of anyone to date to report long-term cycling data for U.S. sourced natural flake graphite materials. We announced the sale of four royalties owned by Westwater on future uranium production for mineral properties on South Dakota, Wyoming, and New Mexico, as well as a mortgage we hold in the amount of $2 million on the Church Rock property in New Mexico owned by Laramide Resources for a collective total consideration of $2.75 million, including $500,000 paid at signing. We recently agreed to extend the date for closing to August 30, 2019, and we received an additional $1 million as a nonrefundable deposit. We entered into an equity purchase agreement with Lincoln Park Capital Fund, our current investor in Westwater for up to $10 million under very favorable terms to Westwater and its shareholders. We're proud to say that our shareholders approved this agreement on August 6. We also announced a new drilling and sampling exploration plan to explore four and define vanadium resources on five target areas at the Coosa project in Alabama. We've achieved reclamation milestones that are Vasquez property. We also announced the granting of mineral, I'm sorry, water rights at our Sal Rica property and had our request for arbitration accepted at the International Court for Settlement of Investment Disputes related to our Turkish uranium projects. And with that, I'll turn the call over to Jeff to go over our financial results. Jeff?

Okay, thanks, Chris. Good morning, everyone. First, let's look at our capital structure on Slide 5. Our recent share price is $3.19 and with approximately 1.8 million shares outstanding our market capitalization stands at 5.9 million. During the second quarter of 2019, our stock performance was influenced largely by continued pressure on the mineral space along with a one-for-fifty reverse split, which was effective after the markets – closed of market – excuse me, after market close on April 22 is a necessity to maintain our NASDAQ listing. Fundamentally, our business is strong and we believe our current asset diversification strategy, our expansion and commitment towards the battery material supply chain sector, our recent vanadium discovery at the Coosa graphite project and other factors internally and within our industry, provide significant upside potential for the company in the long term. Turning to Slide 6 and our financial summary for the second quarter and first half of 2019. Net cash used in operating activities was $1.6 million in the second quarter of 2019, compared with $2.4 million in the second quarter of 2018. A decrease of $800,000 was primarily due to less cash being used for payment of liabilities. In the first half of 2019, net cash used on operating activities was $4.3 million compared to $6.1 million in the first half of 2018. Similarly, the decrease of $1.89 million was due to less cash supplied the liabilities, as well as the $300,000 decrease in mineral property expenses for the period. Mineral property expenses decreased by approximately $100,000 in the second quarter and $300,000 in the first half of 2019. The decrease was partially due to a reduction and operating activities at the Temrezli Project of $100,000 from the prior year because of the revocation of our mining licenses by the government of the Republic of Turkey in June 2018. Additionally, there was a reduction of $200,000 in reclamation activities at the Vasquez and Rosita uranium projects due to adverse weather conditions in 2019. General and administrative costs were comparable over both the three-month and the six-month periods. In both periods, increases in legal financing and public company expenses were offset by reductions in stock compensation, consulting and office expenses. Our consolidated net loss for the three months ended June 30, 2019 was $2.8 million, or $1.81 per share, down from $20.5 million, or $25.63 per share for the same period in 2018. This decrease in consolidated net loss was mainly the result of the $18 million impairment charge for the Temrezli, Sefaatli uranium mineral interests in Turkey made during the second quarter of 2018. As of June 30, 2019, the company’s cash balance was $1.2 million with a working capital deficit of $2.7 million, compared with a cash balance of $1.6 million and positive working capital of $1 million as of December 31, 2018. The decrease in working capital is due in most part to a $2.6 million decrease in accounts, excuse me, increase in accounts payable and accrued liabilities in the second quarter of 2019 as compared to the year end 2018. Please note that $1.5 million of this $2.6 million increase in liabilities is the deposit received from Uranium Royalty Corp. for the asset sale transaction set to close on August 30. With that, I'll turn back to you, Chris.

Thanks, Jeff. And turning to Slide 7, we'll be going through our green energy asset portfolio. This includes our Coosa Graphite Project, our lithium projects, our uranium assets, and our vanadium discovery. Turning to Slide 8, you can see that the Coosa Graphite Project increases are leveraged in the rapidly growing energy, minerals and markets and notably increases revenue and cash flow opportunities. This project is the only battery grade graphite project in the United States at this stage of development. Current global graphite production is controlled by China and involves an unsustainable environmental footprint having a United States-based supply of graphite provides improved operational efficiency, while not compromising on the required quality. The U.S. is currently 100% import-dependent on graphite. Slide 9 goes through our business plan for the Coosa Graphite Project. We use proven environmentally sustainable technology. Processing we will start with purchased feedstock, which is widely available. Moreover, since mining operations are now deferred until 2026, permitting is no longer on the critical path to development. Note our pilot plant is projected to start operating next year, generating products for pre-qualification in large batches. Full-scale processing using our first furnace is expected to begin in 2022. On Slide 10, we illustrate the three graphite materials with enhanced conductivity performance that are used by battery manufacturers, purified micronized graphite or PMG, delaminated expanded graphite or DEXDG and coated spherical purified graphite, cSPG. Producing all three products means we can provide battery materials to a wide variety of customers. Westwater announced this morning that a major battery manufacturer requested a bulk sample of one metric ton or 2,200 pounds of our ULTRA-PMG product for further testing. So why is this such an important milestone? Product qualification testing battery manufacturers is typically a staged approach with each test dependent upon the success of the last. Our product has passed the initial testing rounds consisting of a few grams than a kilogram in size. As these tests are successful, manufacturers then ask for a bulk sample of material. The fact that we've reached this advanced stage demonstrates the high quality of the products that we've developed to meet the requirements of the worldwide battery industry. Turning to Slide 11, I'm sorry 12. We're going to discuss our lithium projects. On Slide 12, we've listed our lithium projects including Columbus Basin and Sal Rica. The Columbus Basin project now covers more than 14,000 acres with good highway and groundwater access. We own the water rights for this project. In terms of the Sal Rica project, we have more than 13,000 acres in Utah with good road, power access, sample results of up to a 100 parts per million from shallow aquifers have already been made public. We were recently granted water rights for the use of 1,500 acre feet of groundwater per year from the State of Utah. The right to use water is very important in the arid American West. These rights are essential to the development of lithium brine resources at the Sal Rica project. Turning to Slide 13. Battery market fundamentals remain very strong for us. It's projected that electric car and bus adoption rates are forecasted to grow at 23% annual growth rate and auto manufacturers are actively making the change to electric. In fact, in England, they've made the decision not to build any more gasoline and diesel vehicles by the end of 2040. While in China there are government mandates that 10% of total vehicle sales are either electric or hybrid. Lithium ion batteries use lithium and graphite and that's clearly an important catalyst in the supply, demand equation for batteries. New applications are constantly arising for batteries and continued growth is forecasted through 2025. Lithium prices are estimated to stay over $9,000 per ton through 2027 and meaningful amounts of capital are being invested into expanding lithium battery factories worldwide, which pose a terrific opportunity for the underlying materials. Turning now to Slide 15. We'll discuss our uranium assets. We believe that the completed Section 232 investigation and the decision by President Trump not to implement new trade restrictions, will be an important near term factor in driving uranium prices higher and with that meaningful upside potential for Westwater. Throughout the investigation, utilities have largely stayed out of the uranium market for more than year. Utilities restocking for inventory can drive underlying uranium prices higher as we are able to move past the uncertainty created by the investigation. Currently, the U.S. relies heavily on nuclear generation for baseload power. In fact, more than 20% of all uranium produced in the world is consumed in the U.S. Nuclear power represents the only electrical baseload solutions for global electric power growth driven by economic expansion with a focus on carbon reduction. On Slide 17, we will now discuss our vanadium discovery. We announced the discovery of significant widespread levels of vanadium concentrations throughout the of the Coosa project. The widespread distribution of highly anomalous vanadium mineralization is commonly associated with strong graphite mineralization. The values that have been determined through an independent analysis show high grades of vanadium contained in the rock, which according to current market prices reflects a potential opportunity for Westwater. The steel markets providing a baseload demand for vanadium, as well as increased used in electrical energy storage systems, these factors shape the landscape for higher value for Westwater. The market price for vanadium has come down from its recent highs as the new rebar standards in China were set to take place. Market fundamental show the balance between supply and demand going forward, supporting prices in the more reasonable $9 to $10 per pound range. On Slide 18, we show a team of tenured leaders in energy minerals development in Westwater. On Slide 19, that experience truly matters. Together, we have demonstrated a track record of highly disciplined management and we've maintained diligence capital stewardship. We restructured and recapitalize the company over the past several years, repositioning Westwater as diversified energy materials company. We've enacted a financing strategy through our $10 million purchase agreement with Lincoln Park Capital that allows for lower cost and less dilutive equity to provide working capital rather than using typical secondary equity offerings that can come with high price discounts and significant warrant coverage. We opted for a strategy that uses low price discounts and provides opportunistic timing options that take advantage of market events that cannot be anticipated. As a result, this agreement lowers our cost of capital while reducing our warrant coverage to below industry norms successfully financing our working capital needs while minimizing pollution. Our team has a demonstrated history of developing mineral properties from concept all the way to production. In a proactive merger and acquisition program has helped reposition Westwater’s singular asset base into a portfolio of diverse, low production cost assets, while selling non-core uranium properties redeploying capital to cost effectively manage and expand our resource base into lithium, graphite and vanadium. Concluding with Slide 20, why invest in Westwater? The underlying fundamental market drivers of our business are strong across all of our mineral assets. We also are continuing our commitment to expand our portfolio into green energy materials all of which are critical to national security. Investors with interest in green energy probably all the batteries for energy 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 and the sun does not shine. The various graphite products we are producing are critical elements 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 operations in China or other foreign countries. The scale of the opportunities for Westwater is significant and we are moving forward to execute our business plan as fast as possible. We are also leveraging what we believe will be the rising uranium market with one of the largest uranium mineralization bases in the U.S. along with two licensed uranium processing facilities in Texas. The lack of uranium quotas post 232 provides significant upside potential as utilities come back into the market. And our vanadium discovery at Coosa has the potential to provide entry into steel markets along with the upside potential this valuable mineral presents. We’re currently debt free as well. Our recent customer acceptance and progression into bulk sample test of our ULTRA-PMG demonstrates our ability to develop high quality products with the promise of becoming a reliable producer and supplier of battery grade graphite materials to the worldwide battery industry. Our strong asset portfolio has significant upside potential purely on the underlying end user fundamentals. Electric cars and buses are forecasted to grow at a 23% annual growth rate and these vehicles are going to need lithium and graphite for their manufacturer. Providing a domestic manufacturer like Westwater favorable economics, a proven management team, the significant experience in energy, minerals development, and financial management, provides a key advantage in our industry. And with that, I’d like to open up the calls to questions, Ariel?

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Debra Fiakas of Crystal Equity Research.

Thank you. And thank you for taking my questions. Congratulations, of course on progress with battery grade graphite customer. And actually it’s going to be the focus of my first question. I wondered if you could tell us a little bit more about where this metric ton is going to come from? Is getting the production of that potential order for testing materials dependent on getting the pilot plant completed, or do you have other means by which you can produce those test quantities?

Well, thanks for your question Debra. And good day to you. As we previously shown, we’re able to produce materials outside of a pilot plant in quantities for test. And this metric ton has no exception. We’ll be able to produce that on a contracted basis using the very same processes we’ll use in our pilot plan.

Okay, excellent. And then maybe just a little bit more about that pilot plant you mentioned several times in your prepared remarks. What are the next steps in order to get it up and running sometime next year? What do you have to do next?

Debra, I’d like to pass that question on to Dain McCoig, our VP Ops if I could.

Thanks, Dain.

Hello, Debra. Thank you for the question. So the next step in the pilot project is we are working on engineering and we are refining the process. So that step you’ve got to define the facility, you’ve got to define the equipment, and the sizing and of course the location of everything there. So, we are starting the engineering phase right now and then we will move towards either building our own facility, or having it operated through a contractor. But at this moment, we are searching different options as far as that goes.

Okay. Alright, thank you. And then just another one more question in regard to the battery graphite materials. There had previously been an announcement regarding battery producer that was looking closely at the PMG product. And I noted also that your slide presentation actually indicated there’s four potential customers that are currently testing the graphite. Is that previously announced, interested party different from the party that you’re talking about today? And I realize you can’t name names and you have to be very circumspect, to preserve your customer relationship. But if you just could kind of differentiate the two, or confirm the two as being one.

Debra, let me confirm it in this way. In order to get to this step, we had to work with somebody for quite awhile. So, I think it’s logical to assume that this party is one of those parties with whom we’ve been working for quite a while.

Okay. But not necessarily the one that had been previously announced?

We didn’t have any specific announcements with regard to this customer, in particular what we’ve been doing. And it’s unfortunate, I think, for this particular conversation that we are bound by our nondisclosure agreements from announcing the names of these customers. And while we’d really like to do so, we need to respect their wishes in this particular – certainly in this particular phase of our development. So I think, suffice to say that the products that we’ve had in test for the past well over a year, in several cases are to the point of today’s announcement where one of our customers says, yes, we’d like a lot more of that stuff. So we’re pretty excited about that, all things meaningful.

Okay. And then just one last thing, is there any kind of timing or deadline that this battery manufacturer has given to you when they want to receive this material, this large amount of material for testing?

I hope just as soon as possible. So we’re very excited about that.

Okay. Well, then I’ll make the rest of my questions very short so you can get back to getting that all sent out. But I did also want to take this chance to ask you just a couple of other little mop up questions. In regard to the lithium also and maybe this is a question for Dain as well, just could you just kind of give us a little bit of a description about the next things that you’re going to do for your lithium projects, what’s going to be going on in say the second half of 2019?

Debra, I’m happy to answer that. For the lithium business itself, please remember that graphite is our firm and clear focus for our business right now in terms of expanding cash, making time, and getting things up and running. The lithium business for us is a lot longer period. We need still to develop our thinking around the resource potential on Sal Rica and Columbus Basin as well. So whatever activity does occur in the next, let’s call it 12-month time period, we’d really be restricted to development of the water rights exploration type activity. But our firm and clear focus is on developing graphite business.

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

Thanks Debra.

[Operator Instructions] Our next question comes from Don Palmer of Palmer Investment Group.

Thank you. Chris, could you please try to give us a little bit more color on this potential customer? And I don’t know from my perspective if a ton is a lot for him to or for them to do, but could you give us all some more information about it without divulging anything you’re not supposed to?

You bet. And without leading statements as to the actual brand name of these guys, think of battery manufacturers as household names. And this is a United States, domestically based manufacturer of batteries and a ton of material. You don’t add a whole lot of graphite per unit, but you make a lot of units, okay. And that’s really the way this works. So these will go into test cells for future reference. And we hope that it leads to some sort of a supply agreement ultimately. There’s certainly never a guarantee in this business, but we’re so pleased with the performance of this product as is this potential customer that we’re quite optimistic on how this is going to go.

Thank you.

Thank you, sir.

[Operator Instructions] Our next question is a follow-up from Debra Fiakas of Crystal Equity Research.

Okay. Yes, just one last thing and this is in regard to the arbitration action with Turkey. I wonder [indiscernible] you have got to the point where you – I know that the panel has been seated, but I wondered if you have had any final decision provided to you as to the location of the – where the panel will meet and where you’ll have to present your case.

Great question. So, you’re right. The panel has been seated and they have begun to set calendar. There was a conference call within the last 10 days to do that. And we expect in the first week or so of September that the panel is going to evaluate two things. One is establish the venue for the court itself. But the default location for exit disputes is Washington D.C. And we expect to stay over there. And it doesn’t provide any unfair advantage to either side, except that quite frankly, our attorneys are located in Washington D.C. So from our standpoint that’s far more cost effective. The second thing that the court will be deciding is whether or not to entertain a motion on whether or not the court has jurisdiction as presented by the Republican Turkey. We call it a case bifurcation. What happens is if there is a question in the court side on whether or not they have jurisdiction or a decent case by the parties is made that they do not have jurisdiction, they will evaluate that first. It takes about a year. And in the case of our particular dispute, excuse me, the international, or the bilateral investment treaty is crystal clear on whether or not the two countries have ceded their rights to jurisdiction to the exit they have. So once the court decides that they have jurisdiction then the wheels will begin to turn on presenting our case. And it’s different than a U.S.-based court case. In the case of an international dispute or international arbitration like this, basically you provide the entire book and witness statements and et cetera, to the court for evaluation upfront. So over the next year or the next several months at least, we’ll be building that case book, building all of the expert statements and whatnot into that particular folder so that they can evaluate the case. And then the court comes back presumably with questions for each of the two sides. So that’s a little bit different process. And in terms of timelines, we expect that if there is no case bifurcation, then it’s a couple of years. And if the case is bifurcated, it adds a year to the process, but not a lot of cost. So, that’s where we sit.

Alright. Thank you very much.

Thank you, Debra.

[Operator Instructions] We currently have no questions in the queue. This concludes the question-and-answer session. I would like to turn the conference back over to Christopher Jones for any closing remarks.

Thanks, Ariel. And thanks Debra and Don for asking those questions. And for the rest of you, thank you for listening. Please feel free to call or write with your thoughts. Please have a great, safe day.

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