Westwater Resources, Inc. (WWR) Q1 2023 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Westwater Resources, Inc. First Quarter 2023 Results and Business Update Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Frank Bakker, President and CEO. Please go ahead.

Thank you, moderator, and thanks to those attending our first quarter 2023 business update and results call. With me today is Terence Cryan, our Executive Chairman of the Board; and Steve Cates, our Chief Financial Officer. During this presentation, the forward-looking statements we make are based on management's judgment, including, but not limited to, future graphite demand and price forecast, schedule and cost projections and economic expectations related to the Kellyton graphite plant, the Coosa graphite deposits and capital raising activities, including the estimated timing of those activities. These and other similar statements are subject to certain risks and uncertainties of which the description can be found on Slide 2 within this presentation and in our 10-K for 2022 and our other SEC filings. Please read our cautionary statement and realize that actual results may differ materially from what's discussed today. Slide 3. We remain focused on becoming the first U.S.-based vertically integrated anode graphite supplier. Also, we continue to believe that the location of our Kellyton plant in East Central Alabama, places our operations in the heart of the growing U.S. EV battery market. When completed, the Kellyton graphite processing plant will provide anode material necessary to support the energy transition. Recently, the EPA announced new emission targets, which is expected to increase critical material demand for electric vehicles by 78% over the next 9 years according to the Benchmark Mineral Intelligence. As we have mentioned previously, graphite is considered a critical mineral by the U.S. government. And when produced in the U.S., it helps battery and EV manufacturers meet the domestic content requirements contained in the Inflation Reduction Act. The IRA has been an important catalyst to our engagement with potential customers, because of this domestic content requirement. Slide 4. Last week, we announced a joint development agreement with SK On, which was the follow-on announcement we referred to during our 2020 year-end update call. SK On is a Tier 1 global battery manufacturer that currently operates 2 EV battery plants in Georgia and is building 3 additional EV battery plants in the U.S. under its BlueOval, joint venture with Ford. Additionally, SK On has announced plans to build a $5 billion EV battery manufacturing facility in Georgia with Hyundai. We are extremely excited to work with a significant Tier 1 battery manufacturer like SK On. Under the JDA, we will work with SK On and work has already begun to ensure that the CSPG produced at our Kellyton plant will be used as a high-performance anode material for their batteries. Subject to those efforts and terms and conditions yet to be negotiated in the future agreement, the JDA allows for the sale of potentially all anode material from our Kellyton plant for those batteries. Interest from potential customers remain strong and samples continue to be requested and produced and not only for those customers for which we have an LOI or JDA in place, but other interested battery manufacturers as well. Turning to Slide 5 for the construction update. We've been under construction for Phase 1 of our Kellyton plant for over a year. And since the beginning of construction, we have had 0 recordable safety incidents by our contractors and Westwater teammates. This is a significant accomplishment. Safety is and will continue to be our #1 core value as well as the protection of the environment where we live and operate. As of the date of this call, we've completed the construction of 5 primary processing buildings, and those buildings are ready for equipment installation. Long-lead equipment continues to arrive at site. To date, we have begun receiving equipment related to our patent pending purification process, the shaping and milling process and expect to receive additional equipment in the coming months, subject to receipt of additional equipment and closing on additional financing. We plan to begin installation of equipment later this year and are still targeting to have Phase 1 of the Kellyton plant ready to produce at the optimized annual run rate of 7,500 metric ton of CSPG per year in the second half of 2024. Slide 6, our side that Kellyton has significant expansion potential. Approximately 70 acres allows for the Phase 2 expansion on the current footprint. The estimated capital cost for Phase 2 at a pre-feasibility level is $465 million, subject to a definitive feasibility study, which we intend to begin in the second half of 2023. The Phase 2 expansion is expected to produce 40,500 metric tons per year of CSPG. Currently, there are approximately 15 battery manufacturing plants either under construction or planned to be built in the United States, all these battery plants on graphite that meets the domestic content requirements of the IRA. And Westwater plans to be a significant part of the graphite supply solution for these plants. Turning to Slide 7. We also hold mineral rights to approximately 42,000 acres across the Alabama graphite belt, once in operations, the Kellyton graphite processing plant and the Coosa deposit represents the first fully vertically integrated domestic battery trade graphite company in the U.S. We believe this will provide significant competitive advantages, given the domestic content requirements in the IRA previously mentioned. In April 2022, we completed our exploration drilling program and completed our geological model and published a technical report in the fourth quarter, which identified about 3.8 million short tons of graphite, enough to supply the estimated feedstock requirements for the Kellyton graphite processing plant for over 35 years. It's worth noting that the technical report was completed based on drilling approximately 10% of the approximate 42,000 acres to which we hold mineral rights. I am extremely proud of the Westwater's team, our contractors, the dedication and hard work of all involved to make Westwater resources successful. Now I would like to turn it over to our Chief Financial Officer, Mr. Steve Cates.

Thank you, Frank, and good morning, everyone. On Slide 8. Westwater finished the quarter with a cash balance of approximately $40 million and no debt. We are progressing through the process required to be in a position to close a private debt transaction for $150 million and plan to update investors upon executing a definitive transaction. Turning to the financial summary on Slide 9. Detailed discussion of these items is included in our recently filed Form 10-Q as well as our first quarter press release. Net cash used in all operating activities for the first quarter increased by approximately $260,000, primarily due to the purchase of feedstock inventory. This increase was partially offset by higher interest income earned of approximately $600,000 and a decrease in prepaid and other assets during the quarter. Cash used in investing activities for the first quarter totaled approximately $34 million and was related to the ongoing construction of Phase 1 of the Kellyton plant. Approximately $21 million of the current quarter cash spend related to Q4 construction activity that was included in our working capital liabilities as of December 31, 2022. Since beginning construction, cash expenditures related to Phase 1 construction totaled approximately $90 million, and we estimate approximately $180 million of Phase 1 cash spend remaining. As of March 31, 2023, our current liabilities include approximately $13 million of Phase 1 construction related liabilities. Product development costs for the first quarter increased by approximately $260,000 compared to Q1 of last year. The increase relates to additional sample production for customers during the first quarter. We expect to continue to incur product development costs related to customer sample production during the remainder of 2023 as we work to put additional LOIs and customer contracts in place. We believe continuing to work through the qualification process with customers is important to maintain early market mover advantages and reaching our goal of having Phase 1 volumes under contract prior to the Kellyton plant commencing operations. Lastly, net loss for the first quarter was approximately $2.4 million or $0.05 per share compared to a net loss of $2.8 million or $0.08 per share in Q1 of 2022. The $400,000 reduction in net loss was due primarily to higher interest income earned on our cash balances and lower exploration costs as well as lower arbitration costs related to the arbitration against the Republic of Turkey. These reductions to net loss during the quarter were partially offset by higher G&A expenses, primarily related to our executive management change announced in January of 2023 and the higher product development costs previously discussed. With that, I'll turn the call back to you, operator, for questions.

[Operator Instructions] Our first question comes from [ Michael Pierce ] of [ Dean Law Firm ].

I am calling to ask you're saying you have $182 million yet to spend close to $40 million cash on hand. If the debt financing is finalized, how much more funding will the company need in order to operate the business until it can become profitable on an ongoing basis?

Thanks, Michael. Good talking to you. I think the way to think about this is there's a lot of moving factors. We're pleased with where we are on progressing towards closing a debt transaction, and we'll continue to move that forward. Obviously, we do have some corporate capital needs. But I think to be able to close 150 million fully funds Phase 1 construction. And you'll see us when that's closed, continue to monitor our treasury, keep costs low and manage that to try to avoid needing a significant amount of additional raises beyond the $150 million for normal operating costs. As fellow shareholders, management definitely understands the concern for dilution and significant dilution. And that's why we continue to focus on this debt transaction.

And is the debt transaction still on track to potentially close this quarter?

That's our goal. That's what we're working towards. It takes 2 parties. There's a long process that sometimes you have to go through. Obviously, the financial markets being where they are, things aren't moving at what I would say, historical speeds, but we are pleased with where we are in the progress and the discussions we're having. The other thing, Michael, as we mentioned in our Q4 call, this was a nonexclusive deal. And so we want to keep some flexibility open as we still have other interested parties that are interested in the project that we don't want to necessarily eliminate, because we're still wanting to find the best deal available for Westwater and its shareholders. So -- but we are pleased with where we are in the process of working through the debt finance rates.

Our next question comes from Dmitry Silversteyn of Water Tower Research.

A couple of questions. First of all, on the SK On deal. When you talk about the development agreement leading potentially to a supply agreement, and you were talking about SK On potentially taking all of the CSPG production. Was that referring to Phase 1 or Phase 1 and Phase 2 together?

Yes. Thank you, Dmitry for the question. That's referring to Phase 1 and potentially also Phase 2 later on. But for those [Indiscernible] related to Phase 1.

Okay. Got it. All right. And then speaking of that, you talked about getting to the full 7,500 ton of CSPG production by the second -- or sometime in the second half of 2024. Originally, you were looking to finish Phase 1 construction by the end of '23 and start getting into production at the beginning of 2024. Is that still the plan and you were just talking about ramping up to full 7,500 metric ton annual run rate in the second half of the year? Or do you expect to start ramping up the plans in the second half of the year?

Well, we start -- previously announced that in the second half, we'll start ramping up and reach full production in the second half of 2024. So that's still the case.

Okay. So you -- so the planned construction is -- I'm just trying to understand because you have expanded the the production footprint, if you will, or ambition quite significantly on the last quarter's call. So I'm just trying to make you see if the timing of the completion of the plan has moved at all because you're putting in either extra lines or rearranging your flow sheet to be able to produce twice as much as you originally intended under Phase 1?

Yes. So we'll be starting some commissioning in the first half of 2024, and then continue commissioning and then start up and reach full production in the second half of 2024. And that's in line with what we communicated on our last call that our target is to produce 7,500 metric ton CSPG per year to be at that run rate in the second half of 2024.

Okay. Okay. That's what I was getting at. Okay. Perfect.

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

Yes, I want to thank you for your interest in our company, and I look forward to speaking to you again on our next call. Thank you.

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