Westwater Resources, Inc. (WWR) Q1 2020 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Westwater Resources Inc First Quarter 2020 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 Chris Jones, President and CEO. Please go ahead, sir.

Thanks, Arielle, and good morning, everyone. Welcome to the Westwater Resources first quarter 2020 results and energy minerals business update conference call. We appreciate all of you joining us this morning. For of you on the call, I trust you and your families are healthy and safe. Joining me on the call today is Jeff Vigil, our CFO and Vice President of Finance; and 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. Turning to Slide 3. Westwater is a green energy material developer with a diverse portfolio of assets in graphite, lithium and uranium. We are in the process now of developing a battery-ready graphite business in Alabama, scheduled for production in 2022. And now with the vanadium discovery and we'll talk about that a little bit later. We're exploring for lithium in Nevada and Utah on two highly prospective properties, and we retain the leverage to a rising uranium price with two licensed processing plants in Texas, and about 200,000 acres of mineral rights in development properties in Texas and New Mexico. But before we speak to plants and results, please turn to Slide 4. Our first priority is the safety of our employees, their families, and the community in which we operate. We have worked with our teams, state and local authorities, as well as integrated guidelines from the CDC to ensure our employees and their families were safe. Listed here are a few of the measures we put in place to make sure we can work safely together. Our sites in Texas and our office in Colorado have site specific requirements in addition to those listed here. On Slide 5, we speak to ensuring our business is safe as well. Graphite process and product development continues without interruption or delay. Our partners in Germany, Dorfner Anzaplan, continue to turn out test results that are helping us to design our pilot plant for operation in the fourth quarter of this year. Our plan to finance our business continues without delay as well with shares to be issued to Lincoln Park Capital approved by our stockholders last month, we can work to enter into an agreement for an equity line of credit along similar lines as our last one and with an APTM in place, we can use these capital markets to our advantage. In addition, our subsidiary in Texas was able to secure a PPP loan of approximately $331,000 to defray expenses for our employees there as well, also a win for our side. The ICSID tribunal rule that the Republic of Turkey's request to argue jurisdiction was turned down and we can proceed to argue the merits of the case. We've requested $36.5 million dollars plus fees in reparations from the Republic of Turkey in our Memorial and a hearing is scheduled for September 2021. With that I'd like to turn it over to Jeff Vigil, our CFO. Jeff?

Thank you, Chris, and good morning everyone. On Slide 6, let's look at our capital structure. The closing share price yesterday was $1.52 with approximately 5.6 million shares outstanding. It leaves our market capitalization at about $8.5 million. During the first quarter of 2020, our stock performance was influenced largely by the coronavirus pandemic, which impacted the entire market, but has made it particularly challenging for the environment for a small cap companies. WWR share price decreased 63% during the 20 trading sessions from February 14, 2020 to March 16, 2020, that's from $2.57 to $0.95. Over nearly the same period, the Dow Jones industrial average dropped almost 11,000 points. I see in certain economic conditions and tumultuous the capital markets we face in quarter one, we were able to maintain adequate liquidity to keep our graphite business moving forward and avoid workforce reductions at our South Texas operations. Now turning to Slide 7, our financial summary for the first quarter of 2020. Net cash used in operating activities was $3.5 million for the quarter. This compared to $2.7 billion for the same period in 2019. The increase in cash used during the current quarter was primarily due to the legal and consulting cost related to the Turkey arbitration process. For the quarter ended March 31, 2020, mineral property expenses increased by approximately $100,000 as compared with the corresponding period in 2019. The increase was primarily due to work related to the Coosa Graphite Project. General and administrative expenses were approximately $100,000 higher than the corresponding period in 2019. The increase was primarily due to higher consulting, payroll and insurance costs. Our consolidated net loss for the three months ended March 31, 2020 was $3.3 million, or $0.82 per share, as compared with the consolidate net loss of $3.1 million, or $2.15 per share for the same period in 2019. This $200,000 increase in our consolidated net loss was partially due to the result of the increase in legal and consulting expenses related to the Turkey arbitration process. On March 31, 2020, the company's cash balances were approximately $900,000 and the company had a working capital deficit of $2.2 million. We are grateful to our shareholders for approving our proposal to enter into a new financing agreement with Lincoln Park Capital at the Annual Shareholders Meeting, which we held on April 28th. Once this new agreement is in place, we should be able to maintain funding levels to support our current business plan. Due to the pandemic surge in the coming months and negatively impact the capital markets, we will carefully review our resource allocation priorities and take necessary actions to sustain the company for the long-term. And with that, I'll turn it back to you, Chris.

Thanks, Jeff. On Slide 8, we've listed our asset portfolios as it stands today. This includes our Coosa Graphite Project, our lithium projects, our uranium assets and our vanadium discovery. Turning to Slide 9, our Coosa Graphite Project will position Westwater as the leading battery-grade graphite supplier in the United States, located in Western Coosa County in east-central Alabama. We are ideally situated geographically to take advantage of the rapidly growing energy minerals end markets, which include several of the leading battery and automobile manufacturers. I will discuss in the next several slides, how milestones we've met and the project have allowed us to accelerate our planning, which will be the catalysts to securing contracts, realizing revenue and cash flow opportunities quicker than originally anticipated. I will also speak to the strengthening fundamentals and underpin our efforts to develop the project. The U.S. is currently 100% import dependent for graphite with current global graphite production controlled by China, which may not practice environmental standards equivalent to those in the United States. Having a domestic supply of graphite provides improved operational efficiency while not compromising on product quality and superior environmental performance. Turning to Slide 10, we plan to construct the Coosa Graphite Processing facility to produce the three advanced battery graphite products that are on this slide. That have been developed and demonstrated in laboratory scale processes over the past several years. Purified micronized graphite or ULTRA PMG, delaminated expanded graphite, ULTRA DEXDG, and coated spherical purified graphite, or ultra-CSPG. We announced last year that we were requested to provide 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 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, as these tests are successful, manufacturers then ask for a bulk sample of the 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. On Slide 11, we've provided a flow chart that illustrates the battery graphite manufacturing process we are undertaking. We have secured the 95% to 98% pure graphite concentrate for the pilot and initial production and plan on transitioning to mined feedstock in 2028. This first step in processing graphite concentrate is to pure – purify the material to 99.98% pure carbon from there sizing, sorting and shaping is performed with jet mills and air classifiers. Turning to Slide 12, we provided updated economics for the Coosa Graphite Project. We're projecting a CapEx of $53.4 million by 2022, which includes a 15% contingency and allowance for working capital. We anticipate the first year of positive cash flow in 2023 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 13, you see a map showing our Columbus Basin and Sal Rica projects in Nevada and Utah respectively, which we established in 2016. We currently control mineral rights encompassing approximately 36,920 acres across two perspective lithium brine basins. The Columbus Basin project now covers more than 14,000 acres with good highways available and ample groundwater access. We own the water rights for this project. For 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 ground water per year in State of Utah. The right to use water is very important in the arid of American West. These rights are essential to the development of lithium brine resources at both projects. On Slide 14, despite what's been a challenging environment for uranium over the past several years, we're starting to see a comeback in uranium prices. Perhaps the biggest recent catalyst has been the result of the Nuclear Fuel Working Group report, which represents a fundamental shift in nuclear policy not seen at the federal level in several decades, included in the report are several initiatives to fund and support the purchase of uranium from domestic producers for the creation of a new national stockpile. This is a uniquely bipartisan issue as the United States relies heavily on nuclear power for carbon free baseload electric with more than 20% of all uranium produced in the world, consumed here in the United States. Nuclear power represents the only electrical baseload solution for global electric power growth driven by carbon emissions reduction. Uranium is still a strategic focus for Westwater. They're expected to be 35% more nuclear reactors in 10 years than there are right now and they all need uranium to produce power. In addition, 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 $34 a pound today. On Slide 15, we announced early last year, 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. Since the initial discovery, the values that have been determined through an independent analysis to 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 uranium as well as increased use in electrical energy storage systems, these factors shape the landscape for an expected increase in demand for vanadium. Turning to Slide 16, our company is led by a team of highly tenured leaders with track records 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. 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, which include graphite, lithium and vanadium. Moving to Slide 17, why would somebody consider Westwater as an investment opportunity? I think based on what we presented today and what we anticipate in our plans for developing our green energy materials, Westwater is a compelling investment opportunity. We benefit from strong fundamental market drivers, which we expect will lead to improve pricing and greater demand. We put financial mechanisms in place to ensure we can fund our business today. Finally, on Slide 18, Westwater will purchase concentrated graphite from a third-party for processing in our manufacturing plant in 2022. Please remember that this contract is already in place. We have a strong asset portfolio with upside potential. Adoption of electric cars and buses is forecasted to grow at a 23% compound annual growth rate and they use batteries containing graphite. We are a proven management team with experience in energy materials development and financial management. Milestones investors should look for throughout the remainder of 2020 include further updates on our Coosa Graphite Project developments and achievements. Please look for those as we go throughout the year. I want to thank you for spending your time with us. And with that I am happy to take any questions.

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

Good morning and thank you. I – my first question is perhaps for Jeff. I wondered if you could elaborate just a little bit on the $300,000 that you received from the stimulus program, the 3Ps program. Is that a commitment for a certain number of people for a certain period of time and ordered for it to be converted into a grant rather than a loan?

Good morning, Debra, and that's a good question. And we looked very hard at that. And we very specifically took out the loan at the subsidiary level for UR-Energy Inc that's our Texas subsidiary. And it's very specific to the employees that we have working in South Texas. And it was certainly designed to keep our employment and our employees in place for permitting the reclamation activities in South Texas. And without that loan – without the loan proceeds, we would have had a difficult time doing that. To answer your question about forgiveness convert into a grant, we're very confident and when we did the calculations we're very confident that we'll be able to – to be able to get very close if not all of the forgiveness. And the one thing I'd like to point out is that, as I've mentioned in my portion of the discussion, it was a very challenging quarter for us and so this payment was – this – these proceeds were quite important to us. And one thing to note is that it did not include any of the – any of our corporate group in Centennial, Colorado. So I just – I want to do – I want to specifically mention that and say that it was very directed towards maintaining our workforce in South Texas.

Okay. And if I could follow up on that, you say that you'll get very close to qualifying fully for the loan forgiveness and having it converted into a grant. Is it a matter of, not having enough work for everyone to do such that they would be employed for a long enough period or that the number of people would be employed for a long enough period? And then also I wanted to ask you, what is the new employee count for the entire company, if you could? I wondered if that had changed in the last few months.

No, it has not. To answer your question, we have 23 folks in South Texas and we have a seven in Centennial and one located in Nevada, sorry, headcount. And so, we – we've – fortunately we've been able to maintain that headcount. So I don't see any, any issues in West being able to during the – the calculation is based on 2.5 months of payroll and benefits costs for these South Texas employees. And during the – effectively the 60-day period after receipt of the proceeds, we have to ensure that 75% of the loan proceeds was directed towards payroll and benefits costs. I did not see any problem in being able to accomplish that.

Excellent, thank you. And then also, if I could ask another question, I was hoping to learn a little bit more about the work that's being done in Germany. Maybe just tell us – I appreciate that it's engineering activity, but I – and I assume that they've been working from home. I know that there've been some restrictions in Germany as there have been here in the United States, which is perhaps quite easily accomplished given our computing capacity and so forth. But I also wanted to just learn a little bit more about what it is that they're working on? Is it a matter of chemistries? Is it mechanical – designing of mechanical processes? What – could you perhaps just give us a little bit more color on what it is that the group in Germany is doing?

Yes, Debra, I'm happy to take that and good morning to you. The work they're doing, first of all, the lab itself is located in Bavaria in a little town near Hamburg. And as you might expect, lab work is done basically with protective gear on any way. And they were able to continue without stop or interruption in practicing safe self distancing as well as protecting their health. And we're happy to report nobody has reported any illnesses whatsoever at that lab. The work they're doing is designing the method of upgrading our production level from the gram level to the kilogram level and onto our pilot plant level. And as you might expect, lab processes translate partially, but not fully into production level processes and that's what we've been asking them to do. The results thus far have been good and solid and as we reported in our presentation without interruption and on time. So we're super pleased with what they're doing. All the work we're doing right now is pointed at running our pilot facility in the fourth quarter of this year and we're on time.

Excellent. And if I could just sneak one more question in, and this is an entirely different topic in regard to the uranium. There's been a lot of chatter about uranium stockpiles and special committees and so forth here in the United States. And I wondered if you could also just give us some high level color on the impact of uranium pricing, not only on and this whole stockpile concept, not only on your decisions as to whether you produce or not produce, but also on your company's asset values [indiscernible] portfolio of various energy materials assets. And as regards to the uranium, how – just how does the value of your port – that uranium portion of your portfolio, how’s it impacted by pricing and changes in pricing?

Great question. In terms of – let me bend that question just a little bit. The return to work, the return to production issues around pricing are still north of the current pricing. So at $34 a pound, which is virtually a doubling of price since 2015-16 timeframe, it's still shy of almost all production costs in the United States on an all-in sustaining basis. So you might consider that Texas and all Texas operations tend to need about $45 or better a pound to restart production as a breakeven price. And the underground operations tend to need something north of 60. So there's still a lot of work to do in the price before there's actually a return to work, we call it incentive pricing now for production. That said the working group has made a number of recommendations and expressed concern about the supply chain in the United States. And to that end, they recommended and it is included in the president's budget proposal for fiscal year 2021, $1.5 billion, that's billion with a B dollar expenditure of monies to secure this strategic stockpile of uranium, so that the nation's fuel supply is secured. That is split up into $150 million a year for 10 years in the budget proposal. Now, fiscal year 2021, of course, begins in October. And it's hard to expect that there will be a budget approved between now and October, but it could happen, but the proposal has already written. It has already submitted. And I think the uranium industry as a whole and Westwater Resources is pretty pleased about that.

Thank you.

[Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Jones for any closing remarks.

Thanks again, Arielle, and thanks to you all for taking time out of your day and listening to our call. Have a great day. Have a safe day.

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