Westwater Resources, Inc. (WWR) Q3 2019 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Westwater Resources, Inc. Third Quarter 2019 Results and Business Update Conference Call. [Operator Instructions]. I would now like to turn the conference over to Chris Jones, President and CEO. Please go ahead, sir.

Thanks, Arielle, and good morning, everyone. Thanks for joining us today, and welcome to the Westwater Resources Third Quarter 2019 Results and Energy Minerals Business Update Conference Call. With me on the call today is Jeff Vigil, our CFO and Vice President of Finance; and with us by phone is Dain McCoig, our VP 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. On to Slide 3, which covers our highlights for the first 9 months 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. On September 19, we announced an agreement to purchase natural flake graphite for the Coosa Project, allowing previously planned startup of the Coosa graphite processing facility years earlier than possible with internally mined graphite. We previously announced that our purified micronized graphite, ULTRA PMG, under testing with a major battery manufacturer, has resulted in a request for a bulk sample of 1 metric tonne of our battery-grade product for further testing. This is a major milestone for Westwater. At the same time, we also have laboratory testing ongoing with 4 additional potential customers. We are also among the first in the graphite development space to release long-term cycling performance results of our purified coated spherical graphite materials from our Coosa Graphite Project. We are not aware of anyone to date to report long-term cycling data for U.S.-sourced natural graphite materials from the United States. We announced the sale of 4 royalties owned by Westwater on future uranium production for mineral properties in South Dakota, Wyoming and New Mexico, as well as advanced the collection of a cash stream in the amount of $2 million for a total consideration of $2.75 million, including $0.5 million paid at signing. We closed that transaction on August 30. We entered into an equity purchase agreement with Lincoln Park Capital Fund for up to $10 million under very favorable terms to Westwater and its shareholders. We also announced a new drilling and sampling exploration plan to explore for and define vanadium resources on 5 target areas at our Coosa Project in Alabama. We've achieved reclamation milestones at our Vasquez property. We also announced that Utah granted us the water rights for our Sal Rica project, and our request for arbitration was accepted by the International Centre for Settlement of Investment Disputes] relating to our Turkish uranium projects. And with that, I'll turn the call over to Jeff to go over our financial results. Jeff?

Thank you, Chris. Good morning, everyone. First, let's look at our capital structure on Slide 4. Our recent share price was $3.16 and with approximately 2.9 million shares outstanding, our market capitalization stands at $9.1 million. During these 9 -- past 9 months, our stock performance was influenced largely by continued pressure on the mineral space along with the 1-for-50 reverse split, which was effective after market close on April 22, 2019, as 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 vanadium discovery at our Coosa Project and other factors internally and within our industry provide significant upside potential for the company in the long term. Turning to Slide 5 and our financial summary for the third quarter as well as the 9 months to date. Net cash used in operating activities was $2.8 million in the third quarter of 2019 compared to $2.9 million in the third quarter of 2018. For the 9 months ended September 30, 2019, net cash used in operating activities was $7.2 million compared to a $9 million over the same 9-month period of 2018. For both the 3- and 9-month periods, the decrease in 2019 was due to less cash used for payment of short-term liabilities compared to 2018. General property expenses were $850,000 in the third quarter of 2019 compared to $955,000 in the third quarter of 2018. Decrease was partially due to the reduction of operating activities at the Temrezli Project because of the revocation of our mining licenses by the government of Turkey in June of 2018, and a reduction of reclamation activities at the Vasquez and Rosita projects during the quarter. General administrative costs decreased by $345,000 for the 3 months of 2019 compared to 2018 primarily due to reversal of accrued 2018 executive bonuses that will not be paid. Our consolidated net loss for the 3 months ended September 30, 2019, was $1.8 million or $0.95 per share, down from $3.1 million or $3.07 per share for the same period in 2018. Decrease in consolidated net loss with the result of a gain of $729,000 recorded from the sale of non-core uranium assets and the reversal of the accrued 2018 bonuses. At September 30, the company's cash balance was $716,000 and the company had a working capital deficit of $2.6 million versus a positive working capital balance of 1 point -- of $1 million at December 31, 2018. Decrease in working capital is due in part to a $400,000 increase in the accounts payable and a $2.8 million decrease in current assets as a result of the sale of the noncore uranium assets during 2019. As of October 31, 2019, the company's cash balance was $2.3 million. The company will continue to opportunistically use its equity finance facility with Lincoln Park Capital to fund its base, nondiscretionary expenditures. The company intends to pursue project financing to support execution of the graphite business plan, including discretionary capital expenditures associated with graphite, battery material product development, construction of pilot plant facilities and construction of commercial production facilities. The company will also pursue project financing in the way of possible joint venture partners to fund discretionary greenfield expenditures for its lithium business. And with that, I'll turn it back to you, Chris.

Thanks, Jeff. Turning to Slide 6, 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 7. The Coosa Graphite Project leverages our -- increases our leverage in the rapidly growing green energy materials end markets, and notably increases revenue and cash flow opportunities. The U.S. is currently 100% import-dependent for graphite with global current graphite production controlled by China, where environmental standards and procedures can be inferior to the robust practices here in the United States. Having a U.S.-based supply of graphite provides improved operational efficiency while not compromising on the required quality. On Slide 8, this illustrates the 3 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 3 products means we can provide battery products to a wide variety of customers. Westwater announced earlier this year that we were requested to provide a bulk sample of 1 metric tonne or 2,200 pounds of our ULTRA PMG for further testing. So why is this such an important milestone? Product qualification testing at battery manufacturers is typically a staged approach, each test dependent upon the success of the last. Our product has passed the initial testing rounds consisting of a few grams and then a kilogram in size. The -- 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 our products that we've developed to meet the requirements of the worldwide battery industry. On Slide 9, we provided a flowchart that illustrates the battery graphite process we are undertaking. We secured a 95% pure graphite concentrate supply for the pilot and initial production. We plan on transitioning to mined feedstock in 2028. We then purify the graphite using an environmentally safe proven technology. From there, sizing and sorting is performed with jet mills and air classifiers. Turning to Slide 10. We've provided updated economics for the Coosa Graphite Project. We are projecting a total CapEx of $54.5 million by the end of 2022, which includes a 15% contingency and an allowance for working capital. We anticipate the first year of positive cash flow in 2022 with a pretax NPV of $481 million and an internal rate of return of 41%. These figures don't account for the potential upside from our future vanadium exploration, which can enhance these economics. We are considering equity, project-level debt and joint venture structures for financing. Turning to Slide 11. We're going to discuss our two lithium projects. On Slide 12, we've listed those lithium projects, including the Columbus Basin and Sal Rica, which we established in 2016 and currently control mineral rights encompassing more than 27,000 acres across 2 prospective lithium brine basins in Nevada and Utah. The Columbus Basin project now covers more than 14,000 acres, with good highways available and ample groundwater access. We own the minimal rights for this project. In terms of the 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 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 arids in the American West. These rights are essential to the development of lithium brine resources at the Sal Rica. Turning to Slide 13. Battery market fundamentals remain very strong for us. It's projected that electric cars and buses are forecasted to grow at a 23% annual growth rate and automakers 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 the continued growth is forecasted through 2025. Lithium prices are estimated to stay at over $10,000 a tonne through 2027 and meaningful amounts of capital are being invested into expanding lithium-ion batteries -- factories worldwide, which post a terrific opportunity for the underlying materials. Turning to Slide 14. We'll discuss our uranium investments. On Slide 15, uranium is still a strategic focus for Westwater. There are expected to be 35% more nuclear reactors in 10 years than there are right now. And they all need uranium to produce electricity. China, India, Russia and Korea are building reactors or have ordered over 130 new reactors. We think the demand side is going to grow as these reactors come close to going online. Spot market prices for uranium concentrate are up from $17 a pound in 2016 to $24 a pound today. On Slide 16. We'll discuss our vanadium discovery. On Slide 17, we announced the discovery of significant widespread levels of vanadium concentrations throughout the central portion 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 have shown a high grade of vanadium contained in the rock, which according to current market prices, reflects a potential opportunity for Westwater. With steel markets providing a baseload demand for vanadium as well as increase in the electrical energy storage systems, these factors shape the landscape for an expected increase in demand for vanadium. The market price for vanadium has come down from its recent highs last fall as the new rebar standards in China were set to take place. However, these new standards were not immediately enforced, and together with seasonal short-term destocking, led to an oversupply in the market. On Slide 18, we show a team of tenured leaders in energy minerals development at Westwater. On Slide 19, experience truly matters. Together, we have demonstrated a track record of highly disciplined management, and we've maintained diligent capital stewardship. We restructured and recapitalized the company over the past several years, repositioning Westwater as a 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 dilution. Our team has a demonstrated history of developing mineral properties from concept all the way to production. And a proactive merger and acquisition program has helped reposition Westwater's singular uranium asset base into a portfolio of diverse, low-cost production assets, while selling noncore uranium properties, redeploying capital to cost-effectively expand our resource base into lithium, graphite and now, vanadium. Concluding on Slide 20. Why invest in Westwater? The underlying fundamental market drivers of our business are strong across all 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 already know that 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 technologies also require batteries to store power so they can be released to the grid when the wind is calm or the sun is shining. The various graphite battery products we are producing are 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 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 to be a rising uranium market with one of the largest uranium mineralization bases in the United States along with 2 licensed uranium processing facilities in Texas. The lack of uranium quotas post-Section 232 provides significant upside potential as utilities come back into the market. As well, our vanadium discovery at Coosa has the potential to provide entry into steel markets. Our recent customer acceptance and progression into a bulk sample test of our ULTRA PMG demonstrates our ability to develop these high-quality products with the promise of becoming a reliable producer and supplier of battery-grade graphite materials to the worldwide battery industry. Together, our strong asset portfolio has significant upside potential, surely, on the underlying end-user fundamentals alone. 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 manufacture, providing a domestic manufacturer like Westwater favorable economics. Our proven management team with significant experience in energy minerals development and financial management provides a key advantage in our industry. With that, I'll open up the call to questions. Arielle?

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

It's gratifying to hear a description of the doing of the graphite project as opposed to just planning of it. And I wondered if you could perhaps go into a bit more detail on the practical aspects of the things you're doing now. Taking the graphite concentrate to shipment to delivery, and then also processing it and moving it onto your prospective customer. Perhaps you could tell us a little bit more about what you're learning as you've begun to do the processing and storage and shipment details, if you could.

You bet. And thanks for the question, Debra. As to the materials itself and the execution around that, we signed a long-term supply agreement for graphite so that we can supply this business for the next several years up until the point that we'd start to mine. So we're very pleased with that. It comes at market pricing with periodic adjustments and a cap. And so we're very happy we were able to negotiate and execute that agreement. The best part of that agreement, of course, was receiving 20 tonnes of material from New Orleans and getting it into our Sylacauga facility. That material, that 20 tonnes of material now is destined for primarily the use in pilot plant. But secondarily, additional lab samples, ready-to-hand and easy to ship to any point in the globe from Sylacauga, so we're pretty excited about that. So those two areas of execution are probably some of the most exciting in our particular business right now. Add to that the 1 tonne ask from the alkaline power cell manufacturer here in the United States, that's exciting stuff. Remember that the alkaline power cell market is 10 billion units a year worldwide and every alkaline power cell takes 1 gram of graphite. That's a lot of grams and those are a lot of grams going to that particular manufacturer at this time. But that allows them to test that in real-world situations over the coming months and then to allow them to make sure that we can be one of their suppliers going forward. So we're pretty excited about that. Those are the -- from the supply and certainly, that bulk-sample standpoint, those are the 2 areas of primary execution we're proudest of over this last quarter, Debra.

Excellent. And from the work that you've done so far, are you finding that you're the -- the practical experiences are as you had expected? Are you learning new things? Are you finding -- are you surprised by anything? Let's perhaps pose the question that way.

Well, we're happily surprised in several respects. Securing that contract was something we worked hard at and was certainly less of a surprise. A couple of the surprises in recent weeks, are frankly, are around the birth of battery-development communities around the United States. Everywhere from Binghamton, New York to believe it or not, Boulder, Colorado is a hotbed of battery development as spawned by the University of Colorado. And 45 minutes from our office doorstep so that's one of our happy surprises. And we attended a conference where they were talking about batteries 10 to 15 years into the future and what they might look like and what performance attributes they might need. There's a battery community in, of all places, Rapid City, South Dakota, where -- near my alma mater. And we'll be exploring that as we go along and we've discovered a hotbed of activity around the Colorado School of Mines. Again, about 45 minutes away from our doorstep. So we'll be attending a battery conference this week and a couple, 3 of them in 2020 where we get to explore not just those battery communities but we expect continued surprises so we see other people developing their needs for battery materials, and technical resources we can draw upon to develop our own knowledge in the space. It's pretty exciting times for us.

Okay. Excellent. And then if I could just ask one more question, again, in regard to the graphite and your battery experience. You mentioned during your opening remarks that there was lab testing work that's currently being done by 4 additional customers. And perhaps you could just describe a little bit more about what you expect out of that. And maybe a little bit about the time line, as far as you know, from these prospective customers, what their timelines might be.

Timelines are a little bit difficult for us to forecast with regard to the testing of the materials. But typically, we see a couple of years' cycle for our advanced products like CSPG, shorter cycles, as little as 12 to 18 months potentially, for our PMG products. So that's kind of a range of values that we tend to work with. We don't have any additional insight into any other customers' development curves at this point but the alkaline power cell manufacturer fit well within that a-couple-year time frame for the PMG products. So if that's any indicator, that's what we think we can expect going forward.

Okay. And if I could just sneak one more in. This will be my last question, and I'll relinquish the line to other people. If you could just confirm or clarify that these prospective customers are testing all of your various planned projects, the ULTRA PMG as well as the spherical graphite and the expandable graphite.

Primarily, it's PMG and CSPG.

[Operator Instructions]. We currently have no questions in the queue. I would like to turn the conference back over to Chris Jones for any closing remarks.

Thanks, Arielle, and thanks, everybody, for listening. Please feel free to call or write with your thoughts. Please have a great, safe day. Good day.

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