Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis of the consolidated financial results and condition of Westwater for the three and nine months ended September 30, 2021, has been prepared based on information available to us as of November 10, 2021. This discussion should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes thereto included herewith and the audited Consolidated Financial Statements of Westwater for the period ended December 31, 2020 and the related notes thereto filed with our Annual Report on Form 10-K, which have been prepared in accordance with U.S. GAAP. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth elsewhere in this report. See “Cautionary Note Regarding Forward-Looking Statements” herein.
INTRODUCTION
Westwater Resources, Inc. is a 44-year-old public company trading on the NYSE American Stock Exchange (“NYSE American”) focused on battery graphite development under the symbol “WWR.” Originally incorporated in 1977 as Uranium Resources, Inc. to mine uranium in Texas, our company pivoted to an energy materials developer. Westwater is focused on battery-grade graphite materials after its acquisition of Alabama Graphite Corp. (“Alabama Graphite”) and its Coosa Graphite Project (“Coosa Project”) in Alabama in April 2018. Combined with the anticipated construction of a battery graphite processing facility near Kellyton, Alabama, the Company is executing an exploration plan to further investigate the size and extent of mineral concentrations at Coosa graphite deposit, located near Rockford, Alabama, to increase our knowledge of the deposit as a whole.
RECENT DEVELOPMENTS
Graphite Processing Pilot Programs
During the quarter ended September 30, 2021, the Company continued, and in October 2021 substantially completed, its pilot program at Dorfner Anzaplan’s facilities near Amberg, Germany, as well as at facilities in Frankfurt, Germany, Chicago, Illinois and Buffalo, New York. The combined effort at these facilities produced approximately 13 metric tonnes of Westwater’s three battery-grade graphite products: ULTRA-PMG™, ULTRA-CSPG™ and ULTRA-DEXDG™, which were previously produced at a bench scale.
As of September 30, Westwater had produced through the pilot program:
● 10.8 metric tonnes of ULTRA-PMG™ in six sizes (6, 8, 10, 15, 30 and 44 microns): Production is now complete, and samples will be packaged and shipped to a laboratory for testing.
● 2.0 metric tonnes of the precursor (Spherical Purified Graphite) for ULTRA-CSPG™ in three sizes (10, 18 and 24 microns): Production of this product is now complete and has been sent to a laboratory for pitch coating to make ULTRA-CSPG™, and test its electrical performance.
● 0.4 metric tonnes of ULTRA-DEXDG™: Production is now complete and samples were packaged and shipped to a laboratory for testing.
Westwater undertook its pilot program operations to inform and enhance design work for its commercial production facility and to produce products for testing by potential customers. The information from the pilot program was incorporated into the Definitive Feasibility Study (“DFS”).
Definitive Feasibility Study on the Coosa Graphite Project
On October 11, 2021, the Company announced the results of the DFS pertaining to Phase I of its Coosa Graphite Processing Facility (the “Project”). The Company intends to develop the Project to purify natural graphite concentrates and to produce battery ready graphite products in two phases. The capital costs of Phase I of the Project are
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estimated at $202 million. Beginning in early 2023, the Project is expected to begin producing from purchased feedstock from outside sources until at least 2028, after which the Company expects to produce graphite feedstock from its Coosa Project. After processing and purification, the Company expects approximately 7,500 mt per year of two products to be commercially available in the following quantities:
● CSPG: 3,700 mt per year
● Fine Products from SPG milling: 3,800 mt per year
● Project Duration: 35 years
● Pre-Tax NPV-8 percent: $119 million
● IRR: 15%
● Annual Pre-Tax Cash Flow (After the year 2024): $24 million per year
● Project Pre-Tax Cash Flow: $656 million.
Also on October 11, 2021, the Company announced a plan and design for Phase II of the project at a pre-feasibility level (“PFS”). The PFS for Phase II of the Project estimates capital costs of $464 million, and after processing and purification, the Company expects approximately 32,400 mt per year of two products will be available in the following quantities:
● CSPG: 15,800 mt per year
● Fine Products from SPG milling: 16,600 mt per year
● Project Duration: 35 years
● Pre-Tax NPV-8 percent: $767 million
● IRR: 20.5%
● Average Annual Pre-Tax Cash Flow (After the year 2024): $129 million
● Project Pre-Tax Cash Flow: $3.7 billion
The Company intends to initiate a DFS for Phase II upon completion and commissioning of Phase I of the Project.
Approval of Construction of Phase I and Purchase of Industrial Space
On October 11, 2021, the Company’s Board of Directors approved estimated expenditures of $202 million to execute the construction and commissioning plan for Phase I of the Project. Construction related activities are expected to begin before the end of 2021.
In addition, on October 13, 2021 the Company completed the purchase of two buildings by its subsidiary, Alabama Graphite Products, LLC, that total 90,000 sq. ft. in size, to support the development of the Project. These buildings will be used for administrative offices, a laboratory, and warehousing space, and each are adjacent to the planned processing plant. The purchase of these two buildings avoids the need for certain construction activities.
Vanadium Target Identification
In late November 2018, Westwater announced the discovery of a concentration of vanadium mineralization at several locations in the graphitic schists at the Coosa Project. Westwater subsequently commenced the first of a four-phase exploration program designed to determine the extent, character and quality of the vanadium mineralization at the Coosa Project. The first phase demonstrated widespread positive values for vanadium that extended beyond the graphite deposit, as defined in the 2015 Preliminary Economic Assessment for the site.
The second phase of the vanadium exploration project began in April 2021 and is expected to continue throughout the remainder of the year. Scope for this effort includes drilling various targets to expand the Company’s knowledge of the geology, examining the core and/or cuttings for mineral constituents, and adding to the existing geologic model. In addition, vanadium mineralization is expected to be evaluated using extractive metallurgy techniques to ascertain any economic potential.
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Graphite and Vanadium Listed as Critical Materials
On February 24, 2021, the President signed an Executive Order that seeks to provide for more resilient supply chains to revitalize and rebuild domestic manufacturing capacity and maintain America’s competitive edge in research and development. Graphite and vanadium are specifically named as critical minerals in which the United States is heavily dependent on China for its supply.
The President’s declaration asked the Secretary of Energy, as part of larger study involving several branches of the United States government, to submit a report identifying risks to the supply chain for high-capacity batteries including those that power electric vehicles. On June 8, 2021, the White House released a response to the findings of this study in support of securing an end-to-end domestic supply chain for advanced batteries, including investment in domestic production and processing of critical minerals. Key recommendations in the June 8, 2021 release include, among other things, providing funding and financial incentives to encourage consumer adoption of electric vehicles, providing financing to support advanced battery production, and investing in the development of next generation batteries. The February 2021 Executive Order and the key recommendations in the June 8, 2021 White House release, builds upon the prior Administration’s Executive Order issued on September 30, 2020, related to critical minerals, and could be important to Westwater’s plans to develop its battery graphite business in the United States.
Presently, the United States is almost 100% dependent on imports for battery-grade graphite, which is currently the primary anode material in the Lithium-Ion batteries that power smartphones, laptops, electric vehicles, and store power generated from intermittent renewable energy sources. Westwater intends to develop the Coosa Project to supply natural flake graphite for beneficiation into battery-grade graphite for all types of batteries.
Further details on the Executive Order on America’s Supply Chains can be found at https://www.whitehouse.gov/briefing-room/presidential-actions/2021/02/24/executive-order-on-americas-supply-chains/.
Further details on the June 8, 2021 White House press release can be found at https://www.whitehouse.gov/briefing-room/statements-releases/2021/06/08/fact-sheet-biden-harris-administration-announces-supply-chain-disruptions-task-force-to-address-short-term-supply-chain-discontinuities/
Westwater intends to support the efforts by the relevant United States governmental agencies to ensure that they remain aware of the importance of battery-grade graphite, its importance to the nation’s security, and how the Coosa Graphite Project fits into the critical minerals-equation.
The COVID-19 Pandemic and our Actions to Ensure Safety
On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. The pandemic spread outside of China during the first quarter of 2020 and has impacted businesses and economies throughout the world. In the U.S., many state and local governments have, based on local conditions, either recommended or mandated actions to slow the transmission of COVID-19. These measures range from limitations on crowd size to masking to mandatory orders for non-essential citizens to test and quarantine. Borders between many countries have been closed to contain the spread of COVID-19. Uncertainty with respect to the economic effects of the pandemic has introduced significant volatility in the financial markets.
To the extent that the COVID 19 pandemic continues or worsens, including by reason of the emergence of variant strains of the virus, local governments or governmental agencies may impose additional restrictions. The result of COVID 19 and those restrictions could result in a number of adverse impacts to Westwater’s business, including but not limited to additional disruption to the economy, additional work restrictions, and supply chains being interrupted, slowed, or rendered inoperable. As a result, it may be challenging to obtain and process raw materials to support business needs, and individuals could become ill, quarantined, or otherwise unable to work and/or travel due to health reasons or governmental restrictions. Governments may also impose other laws, regulations or taxes which could adversely impact Westwater’s business, financial condition or results of operations. The potential effects of COVID 19 could also impact Westwater in a number of other ways including, but not limited to, laws and regulations affecting business, the availability of future borrowings, the cost of borrowings, and potential impairment of the carrying value of long-lived tangible assets.
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This pandemic, and the uncertain economic conditions it has created, could adversely affect our operations, major facilities, or employees’ health. Westwater has the following priorities while managing business activities during this period of volatility and uncertainty:
● First, to ensure the health and safety of our employees and the communities where they work.
● Second, to work with our business partners to maintain the advanced graphite product development schedule in a safe and measured manner.
● Third , to ensure the Company has access to adequate financial liquidity to support key operations and business activities.
Westwater’s corporate business activities are largely unaffected at this time by the COVID-19 pandemic. Prior to March 1, 2021, Westwater reduced utilization of its offices and remote working arrangements were instituted to ensure that some employees were able to work remotely using systems that already were in place. On March 1, 2021, Westwater reopened its Centennial corporate facility and allowed employees to return to the office to work together with appropriate health protocols in place. Westwater’s continued focus on the health and safety of employees, the safety of operations, and the safety of the communities in which our employees live and work remains paramount. To that end, Westwater has continued to restrict unnecessary travel, and ensured that employees are permitted to take time off due to illness or the illness of those around them without penalty.
Equity Financings
Capital Raises during three and nine months ended September 30, 2021
During the three months ended September 30, 2021, the Company sold 1.1 million shares of common stock for net proceeds of $4.0 million pursuant to the December 2020 PA entered into with Lincoln Park.
During the nine months ended September 30, 2021, the Company received net proceeds of $81.9 million from its equity facilities, resulting in a cash balance of approximately $119.0 million at September 30, 2021. The significant treasury balance has mitigated the Company’s capital risk through 2021 and 2022 as the Company’s budgeted pilot program for processing battery-grade graphite and the remaining budgeted product development costs are now fully funded. The Company anticipates making a substantial initial investment in the Project in the fourth quarter of 2021.
Transfer of Common Stock Listing to the NYSE American Stock Exchange
On March 8, 2021, the Company, acting pursuant to authorization from its Board of Directors, determined to voluntarily withdraw the listing of the Company's common stock, par value $0.001 per share, from The Nasdaq Capital Market (“Nasdaq”) and transfer the listing to the NYSE American. The Company informed Nasdaq on March 8, 2021, of its intent to transfer the listing of its common stock to the NYSE American. The Company’s listing and trading of its common stock on Nasdaq ended at market close on March 18, 2021, and trading began on the NYSE American on March 19, 2021. The Company’s common stock continues to trade under the ticker symbol “WWR” on the NYSE American.
RESULTS OF OPERATIONS
Summary
Our net loss from continuing operations for the three months ended September 30, 2021, was $4.6 million, or $0.13 per share, as compared with a net loss from continuing operations of $3.4 million, or $0.42 per share for the same period in 2020. The $1.2 million increase in our net loss from continuing operations was due primarily to increases in general and administrative, arbitration, exploration, and product development expenses; offset partially by an unrealized gain related to the enCore common stock of $0.5 million.
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For the nine months ended September 30, 2021, our net loss from continuing operations was $13.4 million, or $0.42 per share, as compared with a net loss from continuing operations of $6.9 million, or $1.18 per share for the same period in 2020. The $6.5 million increase in our net loss from continuing operations was due primarily to increases in product development, arbitration, general and administrative, and exploration expenses; offset partially by an unrealized gain related to the enCore common stock of $1.9 million.
Product development expenses
Product development expenses for the three and nine months ended September 30, 2021, were $1.8 million and $5.8 million, respectfully, an increase of $0.2 million and $3.8 million compared to the same periods in 2020. Product development costs were primarily comprised of expenses for our DFS, which began in February 2021 and was completed in October 2021, and our product development program continued through the first nine months of 2021. The product development program includes costs incurred to collaborate with outside experts for lab work, product testing and other auxiliary costs associated with the Coosa Project.
Arbitration Costs
During the first nine months of 2021, Westwater incurred legal and expert consulting costs of $2.2 million associated with the Request for Arbitration against the Republic of Turkey. This represents an increase of 152%, or $1.3 million in costs compared to the nine months ended September 30, 2020. For further reference, see discussion below in Part II, Item 1.
Mineral property expenses
Mineral property expenses were $0.1 million for both the three and nine months ended September 30, 2021, an increase of $0.1 million compared to the same periods in 2020. The increase in mineral property expenses was due to higher payments to land and surface owners for increased activities related to our exploration program.
General and Administrative Expenses
Significant expenditures for general and administrative expenses for the three and nine months ended September 30, 2021 and 2020 were:
For the Three months ended
For the Nine months ended
September 30,
September 30,
2021
2020
2021
2020
(thousands of dollars)
Stock compensation expense
$
299
$
142
$
594
$
170
Salaries and payroll burden
748
811
2,007
2,344
Legal, accounting, public company expenses
575
558
2,090
1,681
Insurance and bank fees
146
160
490
494
Consulting and professional services
106
46
491
149
Office expenses
145
128
352
329
Sales and marketing
157
97
393
196
Other expenses
13
(1)
53
16
Total general and administrative expenses
$
2,189
$
1,941
$
6,470
$
5,379
(Less) General and administrative expenses from discontinued operations
—
(405)
—
(1,273)
General and administrative expenses from continuing operations
$
2,189
$
1,536
$
6,470
$
4,106
General and administrative expenses for the three and nine months ended September 30, 2021, increased by $0.3 million and $1.1 million from the same periods in 2020. The increase quarter over quarter is due primarily to higher costs
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related to an increase in stock compensation, and higher costs related to the Company’s sales and marketing efforts that began in the third quarter of 2020. The increase for the first nine months of 2021 compared to the same period in 2020 is due primarily to higher costs related to an increase in stock compensation, higher public company expenses related to the annual shareholder meeting and moving to the NYSE American from the NASDAQ, and higher costs related to the Company’s sales and marketing efforts that began in the third quarter of 2020. These increases for the three and nine month periods were offset partially by lower personnel costs due to the sale of our uranium business at December 31, 2020.
Net Loss from Discontinued Operations
Westwater sold its uranium business on December 31, 2020. As a result, the net loss from discontinued operations was $6.4 million and $8.6 million for the three and nine months ended September 30, 2020, respectively. See Note 3 to the financial statements for additional information.
FINANCIAL POSITION
Operating Activities
Net cash used in operating activities was $13.0 million for the nine months ended September 30, 2021, as compared with cash used in operating activities of $10.1 million for the same period in 2020. The $2.9 million increase in cash used in operating activities was due primarily to increased graphite product development, exploration, general and administrative, and arbitration costs.
Investing Activities
Net cash used in investing activities decreased by $0.1 million for the nine months ended September 30, 2021, as compared to the same period in 2020. The decrease was a result of cash deposits related to the two buildings that were purchased on October 13, 2021, offset by the receipt of $0.3 million held in escrow for the balance of the outstanding Paycheck Protection Program. The loan was officially forgiven in full by the Small Business Administration on March 31, 2021, and the entire balance of the escrow fund was transferred to the Company.
Financing Activities
Net cash provided by financing activities was $81.7 million for the nine months ended September 30, 2021, due to sales of common stock through the Company’s ATM Offering Agreement with Cantor and the Company’s December 2020 PA with Lincoln Park. Net cash provided by financing activities for the same period in 2020 was $13.9 million. The $67.8 million increase was due to greater shelf registration capacity with which to offer registered shares under the Company’s financing agreement with Cantor and increased sales activity under the Company’s financing agreement with Lincoln Park during the first nine months of 2021 compared to the same period in 2020.
LIQUIDITY AND CAPITAL RESOURCES
The Company last recorded revenues from operations in 2009. Since 2009, the Company has relied on equity financings, debt financings and asset sales to fund its operations. The Company expects to rely on debt and equity financing to fund its operations for the foreseeable future.
In 2016, the Company began to expand its business plan into acquisition and development of energy-related materials. First, in 2016 the Company obtained lithium mineral leases in Nevada and Utah as an exploration opportunity. Then, in 2018 the Company acquired Alabama Graphite Corp. and its Coosa Graphite Project in Alabama for the purpose of developing a commercial sized graphite mineral deposit and processing the flake graphite into advanced graphite products for use in batteries. In the third quarter of 2020, the Company executed the strategic decision to focus its resources on the graphite business in Alabama, discontinuing its investment in its lithium mineral properties and selling its uranium business, located in Texas and New Mexico, to enCore. As discussed in Note 3, the sale to enCore closed on December 31, 2020, and included the elimination of a $9.3 million bonding liability, the elimination of $5.2 million in asset retirement obligations, and the elimination of more than $4.0 million in annual expenditures related to reclamation and compliance
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costs. The Company received approximately $1.8 million of enCore common stock and retained royalty interests on the New Mexico uranium properties as consideration for the sale. The Company retained its uranium interests in Turkey, which are subject to ongoing international arbitration proceedings, in which the Company is seeking damages.
During the first nine months of 2021, the Company focused on graphite process development activities including operation of a pilot program for processing flake graphite into battery-grade graphite products and a DFS on Phase I of the Coosa Graphite Project. The data generated and experience gained from the pilot program was used to inform the Phase I DFS that was completed in October 2021 and will also inform the requirements and specifications for building a commercial graphite processing facility.
On September 30, 2021, the Company’s cash balance was approximately $119.0 million. During the nine months ended September 30, 2021, the Company sold 9.3 million shares of common stock for net proceeds of $47.3 million pursuant to its Controlled Equity Offering SM Sales Agreement with Cantor and 6.1 million shares of common stock for net proceeds of $34.6 million pursuant to the Lincoln Park December 2020 PA. As of September 30, 2021, the Company has $50.0 million remaining available for future sales under the ATM Offering and has 9,700,252 of common stock available for future sales pursuant to the Lincoln Park December 2020 PA.
Subsequent to September 30, 2021, and through the date of this release, the Company has sold 637,200 common shares for net proceeds of $2.3 million pursuant to its financing facility with Cantor Fitzgerald & Co., and liquidated its holdings of enCore common stock for net cash proceeds of $3.6 million.
Management believes the Company’s current cash balance is sufficient to fund its planned non-discretionary expenditures through 2022. The Company anticipates the continued use of the Cantor and Lincoln Park financing facilities to support construction of the commercial graphite processing facility. While the Company has been successful in the past in raising funds through equity and debt financings as well as through the sale of non-core assets, no assurance can be given that additional financing will be available in amounts sufficient to meet its needs, or on terms acceptable to the Company. Stock price volatility and uncertain economic conditions caused by the COVID-19 pandemic, including the recent emergence of variant strains of the virus, could significantly impact the Company’s ability to raise funds through equity financing. Market conditions, including but not limited to, inflation and supply chain disruptions could adversely impact the planned cost of the Company’s commercial graphite processing facility. Along with evaluating the continued use of the Cantor and Lincoln Park financing facilities, the Company may consider project financing to fund the construction of the Project. The alternative sources of project financing could include, but are not limited to, convertible debt or pursuing a partnership or joint venture. In the event funds are not available for project financing to complete construction of the Project in 2023, the Company expects to be able to fund its non-discretionary expenditures, however, the Company may be required to change its planned business development strategies.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
With the exception of historical matters, the matters discussed in this report are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from projections or estimates contained herein. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, statements regarding the adequacy of funding, liquidity, access to capital, financing activities, the timing or occurrence of any future drilling or production from the Company’s properties, potential effects of the COVID-19 pandemic, the strategic goals of the business, arbitration matters, costs of Phase I of the Project and estimated completion date, expected production quantities for Phase I of the Project , the realization of expected benefits from recent business combinations and the Company’s anticipated cash burn rate and capital requirements. Words such as “may,” “could,” “should,” “would,” “believe,” “estimate,” “expect,” “anticipate,” “plan,” “forecast,” “potential,” “intend,” “continue,” “project” and variations of these words, comparable words and similar expressions generally indicate forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements. Actual results may differ
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materially from those expressed or implied by these forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements include, among others:
● the spot price and long-term contract price of graphite (both flake graphite feedstock and purified graphite products) and vanadium, and the world-wide supply and demand of graphite and vanadium;
● the effects, extent and timing of the entry of additional competition in the markets in which we operate;
● the ability to obtain contracts with customers;
● available sources and transportation of graphite feedstock;
● government regulation of the mining and processing industries in the United States;
● our ability to maintain and timely receive mining and other permits from regulatory agencies;
● the ability to control costs and avoid cost and schedule overruns during the development, construction and operation of the Project;
● risks associated with our operations and the operations of our partners, including the impact of COVID-19 and supply chain disruptions;
● unanticipated geological, processing, regulatory and legal or other problems we may encounter;
● the results of our exploration activities, and the possibility that future exploration results may be materially less promising than initial exploration results;
● any graphite or vanadium discoveries not being in high enough concentration to make it economic to extract the metals;
● our ability to finance growth plans; and
● currently pending or new litigation or arbitration.
In addition, other factors are described in our Annual Report on Form 10-K for the year ended December 31, 2020, and the other reports we file with the SEC. Most of these factors are beyond our ability to predict or control. Future events and actual results could differ materially from those set forth herein, contemplated by or underlying the forward-looking statements. Forward-looking statements speak only as of the date on which they are made. We disclaim any obligation to update any forward-looking statements made herein, except as required by law.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide this information in our Quarterly Reports.
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