Graphite's New Best Friend

The rapid adoption of electric vehicles and the shift in electricity production to intermittent sources such as wind and solar, has shined a bright light on electric storage.  Investors have been flocking to battery producers as well as companies with plans to develop the lithium, cobalt and graphite materials needed to build those batteries.  Yet, even with the only graphite asset in the continental U.S. in its control, one graphite developer has had a surprisingly difficult time winning new friends. 

Unique Business Model

In their efforts to raise new capital, management of Alabama Graphite (CSPGF, CSPG) found a lukewarm reception in world capital markets.  Given that other graphite developers had raised capital during 2017, it may be the company’s unique business model that has been the stumbling block.   The market may have had difficulty in digesting AGC’s plans to refine and sell battery grade materials from its Coosa graphite asset in Alabama rather than placing graphite concentrate with distributors like virtually all of its peers.  AGC has developed a proprietary process to upgrade and purify graphite  to finished materials that command superior selling prices in battery markets.  AGC’s Coated Spherical Purified Graphite (CSPG) is for use in lithium ion batteries and Purified Micronized Graphite (PMG) shows promise as a conductivity enhancement material in other battery types.

AGC’s management has argued its stock has been undervalued.  That should have made the stock an interesting target for risk tolerant investors with an interest in materials technology, resource commodities or even renewable energy.  It also made the company susceptible to take over by an acquisitive strategic buyer.  Now mineral resource developer Westwater Resources (WWR:  Nasdaq) has made an all-stock offer that it seems AGC shareholders may not be able to refuse. 

Stock-for-Stock Buyout Offer

A shareholder meeting and vote has been scheduled on March 9, 2017, to approve the pending offer.  Westwater is offering 0.8 shares of its own common stock in exchange for 1.0 shares of Alabama Graphite.  Holders of options and warrants against Alabama Graphite common stock will be given comparable securities in Westwater Resources.  Upon closing, Alabama Graphite shareholders would own 29.5% of the combination.  At least two-thirds of Alabama Graphite shares must be voted in favor of the offer for approval. 

AGC’s management team and board of directors have already weighed in on the choice, recommending unanimously for acceptance of the offer.  The team has even agreed to turn in their options and warrants as one of the terms of the deal and AGC’s chief executive officer and chief financial officer have stepped aside in favor of interim personnel. 

The motivation of AGC leadership to strike deal with Westwater is better understood with the recent release of financial performance in this first fiscal quarter 2018.  AGC reported a total cash balance of CN$64,149 (US$53,680) and negative working capital of CN$738,075 (US$572,978) at the end of November 2017.  A management information circular filed on February 12, 2018, with Canadian authorities also warns that AGC’s ability to continue as a going concern would be in question if the deal is not approved.

Graphite’s New Best Friend

The dire warning of a weakened financial condition belies continued efforts and progress by AGC management to move forward with business development activities.  Technical personnel continue to work with prospective customers that include battery recyclers and manufacturers interested in using the company’s proprietary graphite materials.While the deal awaits approval by shareholders, Westwater has agreed to make US$2.0 million in new capital available to AGC to rectify the current account deficit and keep conversations with prospective customers moving forward. 

The extra capital has apparently made it possible to work with an unnamed manufacturer on testing and qualifying the PMG product for use in a line of fast-charge automotive and stationary batteries.  AGC has committed to supply a total of twenty metric tons of PMG and other battery-grade graphite materials over the next two years to prepare for full commercial production by 2020.  The progress is a plus for AGC’s value, but sets a deadline for producing commercial volumes of the battery-ready graphite materials AGC management has been promising.

Energy Materials Developer

Here is where the Westwater offer becomes especially interesting. The proposed buyer is planning its own separate shareholder vote on the proposed acquisition of Alabama Graphite.  In a preliminary proxy filed on January 12, 2018, Westwater laid out the merits of the deal from its perspective and touted its plan to become an energy materials supplier with a triple threat of lithium, uranium and graphite.   

Management is so keen on its proposal to acquire AGC, they are apparently prepared to divert both capital and engineering talent to support graphite development.  The pledge is impressive given the capital constraints under which AGC has been operating.  Previously, the AGC management team had estimated US$6.5 million (CN$6.8 million) was needed to completed development work, including building a second pilot plant for small volumes of its CPSG and PMG products.   Another US$33.5 million (CN$43.2 million) would be required to build mining and commercial-scale processing infrastructure at its Coosa graphite project in Alabama.  

Westwater management is also relaying new plans for AGC’s Coosa graphite project once the deal is approved by shareholders.  In a press release last week a plan was outlined to reduce near-term capital requirements and accelerate commercial sales of the PMG material for use as a conductivity enhancement material in lead acid batteries.  A conventional purification method could be used rather than the low-temperature method AGC had been planning.  Additionally, Westwater intends to temporarily outsource some raw graphite delaying the need for investment in mining infrastructure at the Coosa project.  These two shifts in near-term tactics could make it possible to deliver not only the graphite materials needed for customer sampling and testing, but meet first orders from that unnamed battery manufacturer by 2020.

Timing is Everything

The Westwater press release may have been well timed the week before the Alabama Graphite shareholder meeting  -  a signal of their sincerity in making graphite the top priority for the combination.  It also lets Westwater engineers demonstrate that even without any direct graphite industry experience, they can bring good ideas to the table.  No proof yet in the new ‘pudding’ Westwater proposes.  The first step is already underway to understand the properties of Coosa graphite and how to find good substitutes for near-term production.  Then there is the matter of the purification process change.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  Crystal Equity Research publishes commentary on Alabama Graphite through its Focus Report series for issuer-subscribed research coverage.  Reports are available at the Crystal Equity Research web site.