Westwater Resources, Inc.
Q2 2018 Earnings Call Transcript

Published: 9 Aug 2018

[Operator:]

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

[Christopher Jones:]

Thank you, Steve, and thanks to all of you for joining us today and welcome to the Westwater Resources’ second quarter results 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. 2018 has been a very active year for Westwater. One in which we completed the Alabama Graphite acquisition and released our business plan to unlock shareholder value. These efforts are backed by a team, that over the last 40 plus years has operated mining, processing and manufacturing facilities ranging in size from small to more than a $1 billion of revenue. In summary, our Pilot plant operations are scheduled for 2019. The plant start-up and initial operations will utilize purchased graphite feedstock, bringing forward revenues and cash flow over time. First revenues from the plant are expected in 2020. With positive cash flows for the graphite business expected in 2021. The mine is planned for construction in 2025, with planned production in 2026. This will be funded from operating cash flow rather than external financing. Net present values are great, estimated to be $400 million and $500 million, depending on contingency. Capital expenditures, including pilot plant studies and final pilot plant design, are estimated at $41.6 million. We have already begun to engage both potential suppliers and customers for battery grade graphite materials and have over 30 non-disclosure agreements in place. Sample material has been sent to some of these customers for qualification test work designed to ascertain suitability for purchase. We have also strengthened our balance sheet, by completing a registered direct offering with Aspire Capital, where we raised $2.9 million providing us necessary liquidity to the later part of 2019. With that, I would like to turn it over to Jeff Vigil for a corporate update.

[Jeff Vigil:]

Thanks, Chris. Good morning everyone. First, let’s look at our capital structure on Slide 6, a recent share price of $0.34 and with approximately 51.9 million shares outstanding, which also includes an additional 8.5 million shares from our registered direct offering with Aspire Capital. Our market capitalization stands at $17.7 million. During second quarter, our stock performance was influenced largely by lagging uranium prices together with our mining and expiration license being revoked for our Temrezli and Sefaatli. Frankly, this only fortifies our current asset diversification strategy expanding into the battery and material supply chain sector, which we believe has significant upside potential for the Company. Turning to Slide 7, and our financial summary for the second quarter and the first half of 2018. Net cash used in operating activities was to $2.4 million in the second quarter of 2018 compared to $3 million in the second quarter 2017. Decrease of 600,000 was primarily due to a decrease in mineral property expenses In the first half of 2018, net cash used in operating activities were $6.1 million compared to $6.3 million in the first half of 2017. Slight decrease of $200,000 was due to less cash used for payment of trade accounts payable. Mineral property expenses decreased by approximately $600,000 for both second quarter and the first half of 2018 versus respective periods in 2017. The decrease was mostly result of decreases in the land maintenance and holding costs for the Juan Tafoya and Cebolleta uranium properties. General and administrative expenses, however, increased by $400,000 and $600,000 during the second quarter and first half of 2018 respectively, as compared with the corresponding periods in 2017. These increases were mostly due to a $300,000 increase in consulting and professional services primarily related to Alabama Graphite post-acquisition operations, a $200,000 increase in salaries and payroll burden and a $100,000 increase in stock comp expense. Our consolidated net loss for the three months ended June 30, 2018 was $20.5 million, or $0.51 per share, as compared with a $2.6 million, or $0.11 per share for the same period in 2017. The increase was $17.1 million in our consolidated net loss from the corresponding period in 2017, primarily the result of the one-time impairment charge taken for the Temrezli and Sefaatli uranium mineral interests. With that I'll turn it back to Chris.

[Christopher Jones:]

Thanks, Jeff. Turning to the Slide 8. We have our Green-Energy asset portfolio, which includes our Coosa Graphite Project along with our lithium and uranium assets. Importantly, all three of our portfolio minerals have been identified as critical to the nation's security and economic prosperity by the U.S. Secretary of Interior. Turning to Slide 9. The Coosa Graphite Project is the only battery grade graphite project in the contiguous United States. In a market that's currently controlled by China we view this as a great opportunity to become an American supplier of graphite to end-users. One that it adheres to a high level of environmentally sustainable supply chain management, while reducing shipping costs. We have continued to work with state and local officials in Alabama and Coosa County to site and permit the full scale processing facility and explore mutually beneficial business incentives. Alabama is a terrific place to do business. It's no wonder that they have landed Mercedes, Toyota and Honda. Most recently, Mercedes committed another $1 billion to build a battery assembly plant less than a couple of hours drive from our Coosa project. On Slide 10, these are the three component products, which provide graphite materials with enhanced connectivity performance for battery manufacturers. Purified Micronized Graphite or PMG, Delaminated Expanded Graphite or DEXDG, and Coated Spherical Purified Graphite, CSPG, this allows us to provide battery products to a wide variety of end-users. On Slide 11, our business plan for COOSA has resulted in a de-risking of the project plan and product profile. Processing now intends to use a fifty-year old proven environmentally sustainable technology using a version of an electric furnace. Processing begins on purchased feedstock widely available right now. And the mine is deferred permitting is no longer on a critical path but it remains a value enhancement project going forward. The pilot plant starts in 2019, generating products for pre-qualification in large batches and processing on a production level begins in the fourth quarter of 2020. And the economics are no longer solely dependent upon us CSPG the Coated Spherical Purified Graphite. We de-risk the product profile as well with the products discussed on the previous slide. Production starts with a simpler PMG product, that goes into lead acid batteries as the conductivity enhancement. Remember that 50% of all batteries sold are still lead acid. DEXDG, which is Delaminated and Expanded Graphite begins production in 2021. These are conductivity enhancers for alkaline power cells and other batteries. Then CSPG production starts in 2023. Note that mining is not expected to start until 2026. This removes permitting time lines from the critical path and de-risking the production of graphite products for us. Speed to market accounts on the battery material space and this plan works to place advanced graphite materials in the markets sooner than originally contemplated. On Slide 12, you can see the effect of our business plan on the project economics for Coosa. We've increased the NPV by almost $50 million, while reducing capital expenditures. Positive cash flows are advanced by one year from 2022 to 2021 and revenues are advanced from 2022 now to 2020. On slide 13 we talk about our Coosa Graphite Project schedule including important milestones that we’ll refer to time and again as we began to develop this project. On Slide 14, the lithium ion battery is important as it relates to graphite because graphite is a major component. It takes 10 to 20, 30 times more graphite than lithium to make lithium ion battery. The minimum graphite, purity required is 99.95% carbon. Coated Spherical Purified Graphite is a critically important material for the anode in lithium ion batteries and sells for a significant premium to graphite flake concentrates, which projected strong demand growth. Each electric car contains 100 to 200 pounds of graphite. Again, graphite is a critical strategic material and while there is over 200 graphite applications, the one with the most significant enduring future demand is in lithium-ion batteries. On Slide 15, large battery storage is an enabling technology for solar and wind power and has the potential to greatly reduce the issue of intermittent associated with these important next-generation technologies. Energy storage unlocks the value on those assets. Moving to Slide 16, global electric vehicle sales are projected to increase at a compounded annual growth rate of 13% annually through 2025. The transportation sector accounts for 23% of all greenhouse gas emissions, which is accelerating demand for low emission alternatives like electric cars. In addition to the transportation sector, the large energy storage battery market is growing as well. Demand is expected to be driven by grid and peak demand management. This is again the enabling technology for renewal energy, it enables solar panels to release electricity when the sun doesn't shine and wind turbines to release electricity when the wind does not blow. Storage battery demand growth is expected to be more than 11% per year. And with demand for consumer electrics like smartphones, tablets and laptops we expect that market growth will continue to drive battery demand going forward as well. On Slide 17, we see that the ongoing global shift towards low and zero-emission transportation alternatives will continue to drive graphite and lithium demand. The United Kingdom and France have announced they will prohibit the sale of gasoline and diesel powered vehicles by 2040. While China, the largest new car market in the world has mandated all auto manufacturers sell a minimum of 8% new energy vehicles, which includes plug-in hybrid, battery electric, and fuel cell powered cars. Volvo vowed to cease production of the internal combustion engine, promising every vehicle the automaker produces after 2019 will have an electric motor. Governments around the world continue to incentivize electric vehicle ownership through corporate subsidies and tax-incentives for buyers. Turning to Slide 18, we speak to demand drivers for battery materials. 230-gigawatt hours of capacity additions are expected in 15 to 20 battery facilities worldwide at an investment cost of over $10 billion. This includes lithium ion, alkaline power cells and lead acid batteries. Lithium is a key supply component for the growing market in transportation batteries. But remember that all of these battery types use conductivity enhancers made from advanced graphite products. Turning to Slide 19, will cover our lithium projects. On Slide 20, our three lithium projects, Columbus Basin, Sal Rica and Railroad Valley are all undergoing exploration work at varying stages. Phase 1 drilling is already completed at Columbus Basin. And Phase 2 drilling is planned. Railroad Valley geophysical information is being evaluated for future drilling targets. Turning to Slide 21, will cover our uranium assets. On Slide 22, 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. China, India, Russia and Korea are building reactors or have ordered 130 new reactors. We think the demand side is going to grow as these reactors come close to – coming online. On June 20, 2018, the Turkish government notified us that the mining and exploration licenses for our Temrezli and Sefaatli projects located in Turkey have been revoked and potential compensation has been offered. We are investigating the legality of this action and what remedies, including compensation, might be available. On Slide 23, experience matters. Energy mineral exploration and development of the projects requires discipline and diligent capital stewardship. We restructured and recapitalized our company making it debt-free and with current facilities in place we have liquidity through the latter part of 2019. Our experience management team has a demonstrated history of developing and operating operations, large and small in the energy base and precious metals sectors. We have demonstrated ability to raise capital. A property rationalization program has helped reposition Westwater's uranium asset base around low production cost assets by selling our non-core uranium properties for capital, which was redeployed to cost-effectively expand our resource base into lithium in 2016 and now into graphite. Again, we acquired Alabama Graphite in April of 2018 to cost-effectively expand our energy material resource base. We’ve also consistently reduced mineral property and G&A expenses over the last several years. Slide 24, features our management team, a group of tenured leaders in energy minerals development. Turning to Slide 25, why is Westwater a great investment? Well, we didn’t include the bullet point but looking at the stock price, we are significantly undervalued today. We've continued to expand our portfolio on green energy metals, all of which have been deemed critical to the national security. We are leveraging our graphite assets to the battery materials sector with the Coosa Graphite Project in Alabama and three lithium exploration projects in the western U.S. We have one of the largest uranium mineralization bases in United States and two licensed uranium processing facilities in Texas. And the demand fundamentals are getting better as new reactors come online. We are debt-free with cash and financial facilities in place to fund us through late 2019. We are actively monetizing our non-core assets. And we have a lot to look forward to for the rest of the year including updated developments at Coosa, our exploration milestones on our lithium projects and our water rights application process at Railroad Valley and Sal Rica. Finally on Slide 26, we reiterate our strong asset portfolio with upside potential. As demand fundamentals for graphite and lithium are expected to improve. By being an American supplier of graphite, lithium and uranium, Westwater offers U.S. participation in the green energy revolution at hearing to the American environmentally sustainable practices. We have a proven management team with experience in energy minerals development and financial management. One last comment before the Q&A. Last year when we were in negotiations to acquire Alabama Graphite, it was an everyone's best interest to support Alabama Graphite through the process. This included extending loan advances and providing capital to Alabama Graphite in the amount of US$1.7 million. Frankly, I believe we are all on a better position today, Westwater and Alabama Graphite together. We released our business plan on the Coosa project, which provides investors a clear picture of our plans to unlock increased shareholder value at Coosa. We remain consistent in our policy of full and fair disclosure and will announce developments as they materialize. Again, thanks for your time and attention today, Steve, will you please open the lines for questions?

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Neil Holstein, a Private Investor. Please go ahead.

[Unidentified Analyst:]

Hi, Chris, first, I'd like to say I think that the graphite is just a terrific idea which apparently the market has not yet realized. But what the market is currently realizing is uranium. And it would appear that Westwater has deemphasized this to some degree, which is why the stock price is not traveling with the other uranium companies, but in fact it has a tremendous uranium asset base. I don't know exactly how but is there a way that you could somehow – I mean, for example if uranium hits $50, could I assume that Westwater would put a plan into place to start drilling?

[Christopher Jones:]

Good question. And thanks Neil. Appreciate your time today. With regard to uranium, there are plans in place for every price point from $35 north here at Westwater. The importance of uranium price at $50 so that makes all projects economic and potentially develop – provided that uranium price is sustainable. What we see in that recent movement in the uranium price is pretty interesting and that the – we watch the futures market as many people do. And for the first time in quite a while and I would say many months, the five-year price for uranium, spot uranium has cleared $30, and this morning was at $31.25. That represents a new high for us and represents really an opportunity for utilities to come back into the market and buy on that price curve. So we're pretty excited about what we see in that one, three and five year time frame for uranium pricing. And I think time will tell on that. Thanks.

[Unidentified Analyst:]

Thank you.

[Operator:]

The next question is from Debra Fiakas with Crystal Equity Research. Please go ahead.

[Debra Fiakas:]

Thank you. And thank you gentlemen for taking my questions. I have a couple one for Jeff and one for Chris. First Jeff, it looks like you kept a fairly tight grip on the purse strings this quarter. But I also noted that in your – in some commentary in the quarterly report, you mentioned that you thought you had enough cash and resources, financial resources to support operations through September of 2019. And I just wondered if you could provide just a bit more color on the equation there, what's in the budget. And in particular, does that analysis include the pilot plant for your graphite development?

[Jeff Vigil:]

Thanks for your question, Debra. The scenario for the funding through 2019 is effectively the ongoing operations as it stand today for Westwater resources, any type of capital expenditures relative to the Alabama Graphite will be funded on a project basis. And what I mean by that is we would like to fund that by either off-take agreement, secured debt or convertible debt type instrument.

[Debra Fiakas:]

Okay, good. And if I could just ask one follow-up to that, I noticed in your opening remarks and in your slide presentation that seven million is listed as the budgetary requirement for that pilot plant and the land. And I know you've been working very hard on coming up with an improved design for the pilot plant and improved process and it sounds like you've made some progress there. But does that mean though that you haven't really been able to get the budget requirement or the capital requirement down and it's still at about seven million?

[Christopher Jones:]

No, I think we still look at it as a level of expenditure.

[Debra Fiakas:]

Okay, thank you very much. And then if I could just ask one more question, Chris, in regard to the uranium and the situation that is in Turkey. I wondered you said in your opening remarks that you had been investigating the situation and what your options are? Have you been able to determine whether or not you're alone in this plate of having your mineral licenses or your mining licenses revoked, has there been any kind of precedent in Turkey. And are you – how do you’ve been able to determine that there's any other company that’s had a similar revocation of their licenses?

[Christopher Jones:]

Thanks for the question, Debra and your time and attention to. We are unique in Turkey and at least one respect and that we were the only uranium developer there. And what we're interested in continuing to develop that project again the licenses have been pulled by the country. Historically there have been other license revocations by the country for various reasons and I don't have the specifics here at hand. But what we're doing is awaiting a response now from the Turkish government on what they believe for compensation is. But once we've had a chance to evaluate that, we have a number of options. One is to accept the number as it stands, two; is to negotiate it and three; is to throw it out and go to extra legal means up to and including international court for that. The precedents in international arbitration are many and are quite favorable to us in a situation like this. So treat this however as a reasonably lengthy process. If we don't get the compensation we think we need for the licenses from the Republic of Turkey. One note and for everybody is we will not negotiate in the press. We only negotiate directly with the parties so as to maintain positive negotiations wherever we can and we will provide news releases and updates as soon as we have points of success. Thanks Debra.

[Debra Fiakas:]

Thank you. Just to clarify something that you just said. I think when your original notice came out a press release, there was an indication that you had about 60 days or so to respond to the mining agencies or the government notice. Have you already made that response.

[Christopher Jones:]

Yes.

[Debra Fiakas:]

Okay, so the ball is really in their court at this juncture.

[Christopher Jones:]

And the ball is in their court at this point to offer us a number before the compensation

[Debra Fiakas:]

Okay, thank you very much for your answers.

[Christopher Jones:]

You bet, thank you.

[Operator:]

[Operator Instructions] The next question is from Preston McDougall, a shareholder. Please go ahead.

[Preston McDougall:]

Hello, can you guys hear me.

[Christopher Jones:]

You bet, thanks Preston.

[Preston McDougall:]

Okay, how you guys doing. The last time, I spoke with you guys. I mentioned a question on what the government can do to assist the sector and therefore just bring more attention. And then, news hits about what Energy Fuels, they actually petitioned the government. And that kind of lit up the uranium sector a little bit, which I’m surprised Westwater wasn’t able to just take more advantage of for some reason. With the graphite being a critical mineral and now therefore a national security issue. What can the Westwater do to be more proactive like say Energy Fuels in bringing more attention to its position and therefore energizing the markets and just increasing a much deserved shareholder value. I mean as shareholders of Westwater, we believe in the vision. It's a great defense. I know there's a feeling that Westwater doesn’t really play a greater offence in being more proactive like some of the other companies to bring more attention, to petition the federal government. I mean you guys have an amazing mix of minerals, on critical mineral federal list and it just seems like you guys are kind of just sitting back waiting for the market to recognize what kind of jewel you have instead of taking it out there advertising or riding the government in bringing more attention to create your own news. I mean you guys have the goods, why not flaunt it

[Christopher Jones:]

Well, thank you for that. And thanks for the compliment. Now two thing the 232 action by Energy Fuels and URG we think is ill-advised. And the reason we don't support it is because it really treats their customers unfairly and unwisely. So, from a trade restriction and allocation standpoint we're not supporters. In the meantime, however inclusion on the critical minerals list was supported by us through the National Mining Association, a far more powerful lobbying organization and Westwater really has in its own health. And secondly, the contemplated tariffs by the U.S. trade representative right now there are 200 pages of tariffs by the way contemplated as to what appears to be retaliatory measure on the Chinese institution of other tariffs. All three of our products are included on that additional tariff list and again we have made comment and continue to make comments to organizations like the U.S. Trade Representative and the National Mining Association, they're not necessarily press worthy. Comments and support of the things the enemy does but the enemy is very vocal in their support and their press releases. We’ve really used that. And thirdly we have – over the last 90 days hired PLR as our Investor Relations arm and the tremendous outreach that they have been doing to shareholders like you and to other organizations has really gotten our word out in ways that we had not been able to in the past. Well thanks again for your question Preston

[Preston McDougall:]

Okay, if I could just follow up on that. Usually, when you have companies with you know they have a lot of hype, you see a lot of news releases. It's because they really just they don't really have anything going on. They want to kind of con people. From what it looks like you guys really, really have been strategizing, you acquired Alabama graphite, awesome move. Uranium is poised, the lithium thing I'm not so much – I don't know too much about that but with the battery market it seems good. You guys have the goods. There has to be something the Company can do to energize investors, the market. I mean you guys really, really had it – I would say flaunted, if you have to spend a little bit money on advertising to let people know what you really have, so investors, investors aren't stupid, they're just busy. And sometimes they don't notice things. You guys need to be noticed and if I were working for your Company those are the things that I would be focusing on. I have my $0.02. Thank you, very much.

[Christopher Jones:]

Well, thanks for that offered advice and we take that counsel – and we know PLR is listening and as is the management team. And we thank you once again for your time today. We appreciate it.

[Jeff Vigil:]

Thank you.

[Operator:]

This concludes the question-and-answer session. I’d like to turn the conference back over to Christopher Jones for any closing remarks.

[Christopher Jones:]

Thanks Steve. And thanks to all of you for your time and attention today and your thoughts and questions. We really appreciate the chance to present our business plans and our thoughts to you. And with that, we'd like to wish you all a great day and a good weekend. Take care.

[Operator:]

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