This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Thank you for standing by. This is the conference operator. Welcome to the Westwater Resources, Inc. second quarter 2023 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. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, You may signal an operator by pressing star and zero. I would now like to turn the conference over to Frank Bakker, President and CEO. Please go ahead, sir.
spk00: Thank you, moderator. Thanks to those attending our second quarter 2023 business update and results call. With me today is Terence Kryan, our Executive Chairman of the Board, and Steve Gates, our Chief Financial Officer. During this presentation, The forward-looking statements we make are based on management's judgments, including, but not limited to, future graphite demand and price forecasts, schedule and cost projections, and economic expectations related to the Calentan graphite plant, the Cusa graphite deposit, 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 a description can be found on slide two 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. Westwater is an energy technology company focused on producing advanced natural graphite materials in the United States. Using our proprietary technology, including our patent-pending purification process. Slide 4. We remain focused on becoming the U.S. first-based vertically integrated natural graphite anode supplier. Also, we continue to believe that the location of our Calenton plant in east-central Alabama places our operations in the heart of the growing U.S. EV battery market. When completed, the Calenton graphite processing plant will provide anode material necessary to support a domestic 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 nine years, according to Benchmark Mineral Intelligence. Many auto manufacturers have announced commitments to either increase the number of electric vehicles produced or completely rectify their lineup. Turning to slide five. As a result of government legislation in the U.S. and around the globe and increased plant production of electrical vehicles, global demand for lithium ion batteries is expected to grow at a compounded annual rate in the double digits through 2035. Demand growth for lithium ion batteries is also expected to drive increased demand for Westwater's primary product, Coated Spherical Purified Graphite, or CSBG. The demand growth in North America for CSBG is expected to grow to approximately 200,000 tons per year by 2030 and to over 400,000 tons by 2035. Our Callenton plant that's under construction is in a prime location within 15 plant or existing gigafactories within a one-day delivery of the plant. On slide 6 illustrates the importance of graphite in a lithium-ion battery, as it accounts for approximately 50% of the critical minerals by weight. A typical electrical vehicle has around 175 to 210 pounds of graphite. Currently, the US is 100% dependent on foreign imports of battery graphite products. Slide 7. The growing demand for lithium-ion batteries, the government support for the energy transition, and the need to secure supply of key materials has led the U.S. government to designate graphite as a critical mineral. As we have mentioned previously, when CSPG is 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 and continues to be an important catalyst to our engagement with potential customers because of the domestic content requirement. Since Westwater has secured its feedstock of graphite concentrate from Shirari sources, a non-Chinese source, and we plan to perform 100% of the conversion process here domestically, we expect the CSPG produced at Callenton will be IRA compliant. Moving to slide eight. We continue to focus on our value proposition and believe Westwater is well positioned as a future domestic source of IRA-compliant CSBG with first market mover advantages to become the first vertically integrated natural graphite project based 100% in the US. In addition, we continue our ESG focus, including environmental stewardship, commitment to follow SASB standards, and the purification process that doesn't plan to use hydrofluoric acid. Our business plan also includes the potential for significant future expansion of our graphite business, both at the Calenton site and the Coosa deposit. Turning to slide 9, we took a slightly different approach than other companies with mineral deposits by developing our graphite processing plant first and planning our Coosa deposit second. And we believe there are a number of strategic advantages to this approach. First, it gets us to revenue and positive cash flow sooner. The conversion of graphite flake concentrate into CSBG results in a value multiplier of approximately nine times. Second, this approach, along with securing our supply of natural graphite flake from a non-Chinese source, will allow us to take near-term advantages of the growing market for battery materials. On to slide 10. Earlier in the year, we announced a joint development agreement with Eskion, a Tier 1 global battery manufacturer that currently operates two EV battery plants in Georgia and is building three additional EV battery plants in the US under its Blue Oval joint venture with Ford. Additionally, Eskion has announced plans to build a 5 billion EV battery manufacturing facility in Georgia with Hyundai. Work with Esquion under the JDA continues and involves collaboration, preparation, and testing of additional samples and ongoing product development. The feedback we have received regarding the latest sample evaluated by Esquion was extremely positive. While some companies get stuck in basic battery testing with small sample sizes, sometimes requiring as many as 10 sample iterations before they can progress, to large-format cell testing, Westwater was able to move to large-format cell testing with Esquion after a few iterations. This is not only the result of the positive collaboration with the R&D team at Esquion, but also the abilities of Westwater's highly skilled technical team. As a result of the significant progress made under the JDA, Esquion and Westwater are currently negotiating terms for an offtake agreement to sell CSPG from the Calliton plant. Slide 11. We continue our engagement with other potential customers as well. In June, we announced the signing of an LOI with Denon for the supply and purchase of CSPG. Denon offers high-performance natural graphite anode materials to leading Japanese manufacturers of automotive lithium ion batteries. We believe that this LOI with Denon and subsequent work with them could accelerate Westwater's entrance in the Japanese automaker battery market. We believe continuous engagement with potential customers is important for our Phase 2 expansion of the Calentum plant. From May through July, we have sent 36 product samples to potential customers, as interest in our future production remains strong. We continue to receive positive feedback on our samples. Turning to slide 12 for a construction update. We've been under construction for phase one of our Calentan plant for over a year. And since the beginning of construction, we have had an excellent safety record by our contractors and Westwater teammates. Safety is and will continue to be our number one core value, as well as the protection of the environment where we live and operate. As of the date of this call, we have completed the construction of five primary processing buildings. installed internal overhead cranes, completed and are operating our internal R&D lab, and have begun installing our mechanizer shaping mills and other equipment in the SPG building. Subject to the receipt of additional equipment and closing on additional financing, we plan to install additional equipment later this year and are targeting to have Phase 1 of Calenton plant ready to produce at optimized annual run rate of 7,500 metric ton of CSBG by the end of 2024. Our site at Calenton has significant expansion potential. The approximately 70 acres allows for the Phase II expansion on the current footprint. The estimated capital cost for Phase II at the pre-feasibility level is $465 million, subject to a definitive feasibility study, which we intend to begin later in this year. 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 want 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 40. We also hold mineral lights to approximately 40,000 acres across the Alabama graphite belt. Once in operations, the Calatin graphite processing plant and the GUSA deposit represents the first fully vertically integrated domestic battery-grade 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 of 2022, which identified about 3.8 million short tons of graphite, enough to supply the estimated feedstock requirements for the Gallatin Graphite Processing Plant for over 35 years. It is worth noting that the technical report was completed based on drilling approximately less than 10% of acres to which we hold mineral rights. During the second quarter, we began work on preliminary economic assessment for the KUSA deposit and expect to complete this assessment by the end of this calendar year. Before turning the call over to our Chief Financial Officer, I want to reiterate that these are exciting times at Westwater. I believe we have the team to execute this business plan and I'm extremely proud of the Westwater team and our contractors. The dedication, flexibility, and hard work of all involved has been exceptional. We remain diligent in advancing our business plan and creating long-term value for our shareholders. Now I would like to turn it over to our Chief Financial Officer, Mr. Steve Gates. Thank you, Frank, and greetings, everyone.
spk03: Slide 15. Since beginning construction, Cash expenditures related to Phase 1 have totaled approximately $107 million, and we estimate approximately $164 million of cash spend remaining, inclusive of contingency. Westwater finished the quarter with a cash balance of approximately $17.3 million and no debt. We are making significant progress towards finalizing a debt transaction to fund the balance of the estimated cost to complete Phase 1. We are engaged with multiple lenders, that are interested in projects related to the energy transition and battery materials. We are currently negotiating term sheets with a subset of those lenders. While the credit markets have been tight over the past year, we are encouraged by the group of lenders that are looking to invest in the energy transition and specifically our project. We believe securing a definitive sales agreement is key to finalizing a debt transaction. Our potential lenders have been encouraged by the positive progress we've made with SKON and other potential customers. Turning to the financial summary on slide 16. Detailed discussion of these items is included in our recently filed Form 10-Q, as well as our second quarter press release. Net cash used in all operating activities in the first half of 2023 increased by approximately $3 million compared to the first half of 2022. This increase for the first six months is primarily due to purchases of additional feedstock, higher product development costs, and higher general and administrative expenses. These increases in operating cash used were partially offset by higher interest income earned on our cash balance. Cash used in investing activities for the first half of the year totaled approximately $52 million and are related to the construction of Phase 1 of the Kellyton plant. Product development costs for the second quarter increased by approximately $800,000 compared to Q2 of last year. This increase relates to additional sample production for customers and ongoing work pursuant to the JDA with SKON. We expect to incur additional product development costs related to customer sample production during the remainder of 2023 as we work to put 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, reaching our goal of having phase one volumes under contract prior to the Kellyton plant commencing operations, and securing the additional financing needed to complete construction. General and administrative expenses for the second quarter remained essentially flat compared to Q2 of last year due to managing our overhead costs. Lastly, net loss for the second quarter was approximately 3.6 million, or seven cents per share, compared to a net loss of $3.2 million, or $0.07 per share, in Q2 of 2022. The increase in net loss was due primarily to the higher product development costs, partially offset by higher interest income earned during the quarter. With that, I'll turn the call back to you, operator, for questions.
spk01: Thank you. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. We will pause for a moment as callers join the queue. Our first question comes from Michael Pierce of Gene Law Firm. Please go ahead.
spk04: Hey, guys. How are you doing? Good. So, I saw in your release that you're providing a mass sample to SK on. Can you go through that a little bit more and explain what level you have to get to in order to get to a sample of that size? My understanding would be is that you've been able to meet the qualifications and specifications necessary for SK, it's just they want to see if you can do it at a larger scale now. Would that be true?
spk00: Yes, Michael. This is Frank. Yes, you're completely correct. So when I was in Korea last month, SKYON was very positive about our sample, and it completely meets the specification, and we're targeting to produce a mass production sample end of this year for SKYON.
spk04: Okay. Okay. You've also indicated that you're in active negotiations for a finalization of a supply agreement. Is that something that the company is anticipating being able to finalize this year, or is that something that's going to take longer?
spk00: No, the anticipation is that we finalize that this year. Our opinion is that we are in the final stages of the negotiation. That's where we stand at this moment.
spk04: Okay. So, at this point, it's just being able to come together on all the different terms?
spk00: That's correct. Yep.
spk04: Okay. You've also stated you're going to do a release of the PEA on the KUZA deposit later this year. Is that something that's going to have, you know, a net present value based on projected graphite prices? and things of that nature that shareholders can look at and project the value to the company of that deposit.
spk03: Hi, Michael. This is Steve. Yeah, we will follow the SEC rules on reporting that analysis, but it will include an economic analysis, a cash flow estimate based upon a preliminary mine design. Then following that, we start moving more into the full pre-fees and definitive feasibility study. And we have a qualified expert that we have contracted with to help us with this that is very familiar with our deposit as well as the rules that we need to follow.
spk04: Okay. And lastly, let's say the company is able to complete the sales agreement with SK on or another end user. How confident are you once that sales agreement's complete, that the financing can be completed.
spk03: Hi, Michael. This is Steve again. I think that's a critical milestone to reach. I think a couple things to keep in mind. The closing of the financing has taken longer than anticipated, mainly due to a couple things. The rising rate environment, the debt capital markets have been tight over the past six to nine months, as everybody's trying to see if the Fed actually is able to execute a soft landing or not. But more importantly, this is a new market. For us here in the United States, China dominates the market. So it's taken some time to get the lenders up to speed and get them used to that. But we also think that there is definitely positive steps. There's multiple lenders that are interested in the battery material space. And all of them are looking towards that offtake to help finalize the deal. Also, I think from Westwater's perspective, getting an offtake will bring forward either more lenders and or more term sheets to help us negotiate the best deal possible for our investors.
spk04: Okay. Are there special funding groups that are able to provide better terms for, you know, green energy ESG type loans versus just a regular loan for, let's say, an oil company?
spk03: Yeah, this is Steve again. So the group of lenders that we're engaged with and talking to, most of them have money set aside for the energy transition and specifically battery materials. And so they're interested in the space. They're looking at The ESG component, so sometimes, depending upon the lender we're talking to, that might be on their infrastructure fund. Others, it's within their energy team. It just kind of depends. They each have a different view, but they're definitely interested in this energy transition.
spk04: I appreciate it. I hope to hear a bunch of good news from you guys over the rest of the year.
spk03: Thank you, Michael. Thank you, Michael.
spk01: Once again, if you have a question, please press star, then 1. Our next question comes from Dimitri Silverstein of Water Tower Research. Please go ahead.
spk02: Good morning, gentlemen. Thank you for taking my call. A couple of questions, if I may. First of all, just looking at the SKON agreement and sort of the size of the potential selling relationship that you will have with them, it sounded to me like it was going to basically or could consume most of your phase one production. So first of all, is that a correct interpretation? And secondly, to continue to work with other battery manufacturers, are you now looking at phase two production as a way to meet the demand that may be coming from other battery manufacturers that you're negotiating with or anode manufacturers?
spk00: Hi, Dimitri. This is Frank. Yes, you're correct on the volume. It's the majority of the volume of our Phase 1 plant. And we continue to engage with other potential customers also to sell the remaining of Phase 1 and also make agreements or term sheets for our Phase 2 production.
spk02: Has there been any thought given to sort of the time? I mean, I know we haven't gotten through the Phase 1 construction and startup yet, but given the strong demand that seems to be that seems to be taking place in the industry, especially with the IRA passing and a lot of interest in domestic production. Have you given any thought to what the timing of phase two may be relative to your expectations, let's say, a couple of years ago?
spk00: Yeah, actually, we discussed it last week. And I think based on our design, because it's a modular design, so a lot of units of the facility are copy-paste. So probably... we can speed it up somewhat, our phase two project.
spk02: Okay, but basically you're just working on making sure that phase one is up and running by the end of 24 and the design specs, and then hopefully it will be sold out by that point, and then you'll be looking at phase two, more definitive timing of phase two at that stage. Would that be the correct way of thinking about it?
spk00: Yes, but as soon as we have the financing in place, we want to start also the feasibility study on phase two based on the market.
spk02: Got it. Okay. And then the last question, again, related to your work on securing the financing to complete the phase one and get into production and start phase two considerations. You talked about speaking with lenders and some of these agreements perhaps being contingent and you getting a firm sales agreement in place. Have you looked at sort of kind of asset-level financing, so maybe not institutional, I'm sorry, not financial lenders, but maybe more strategic partnership or an off-take type of agreement with an earn-end potential as a way to fund your operations and your capital needs?
spk03: Hi, Dimitri. This is Steve. We have We have turned over every stone possible looking for the best terms that we can and cost of capital on financing. And so we have explored some of those avenues. Some of those avenues still remain. But what we have found, especially with kind of ABL lending, the cost is pretty high. And considering we are pre-revenue right now, the cost and the amount of of debt to asset coverage that we would need just is not the best source of capital right now. And the lenders that we're talking to now are much more attractive on their pricing.
spk02: Got it. Okay. That's good to hear. Okay. Thank you, Steve. That's all the questions I have.
spk03: All right. Thanks. Thank you.
spk01: This concludes the question and answer session. I would like to turn the conference back over to Frank Bacher for any closing remarks.
spk00: Thank you. I want to thank you for your interest in Westwater Resources. I think we made significant progress during the last quarter. The feedback from our customers on the quality of our CHPG samples is very positive. And based on this, we made significant progress in our engagement with our customers. And we are negotiating offtake agreements for our product from the Calenton plant. We installed our first equipment, and the construction is on track to produce 7,500 metric tons of CSBG by the end of 2024. I'm looking forward to speaking to you on our next call. Thank you.
spk01: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
Disclaimer