Triple Threat in Energy Materials

Kingsville Dome Uranium Project, Texas

Westwater Resources (WWR:  NYSE) is an aspiring industrial materials company with interests in minerals used in power generation and energy storage applications.  The company’s history is in uranium mining using in situ recovery (ISR) extraction technology.  Weak pricing conditions prompted a shutdown decision for the Company’s operations in south Texas.  Westwater sought additional assets in lower-cost uranium regions such as Turkey, but also set an eye on other energy-related minerals as part of an effort to become a diversified energy materials supplier.  In 2016, Westwater began assembling lithium assets in Nevada and Utah and most recently has made an offer to acquire graphite materials developer Alabama Graphite.  With the graphite deal completed, the Company will have a triple threat portfolio of energy materials assets in uranium, lithium and graphite.

Multiple market forces are driving demand for particular metals in energy and power applications.  While not unanimous, the overwhelming majority of scientists view global warming as the result of fossil fuel combustion and advocate a shift to renewable energy sources.  The argument supports nuclear power as an electricity base load source despite rising capital costs.  Climate concerns are also driving the adoption of wind and solar power.  Additionally, combustion engines in cars and trucks are being replaced with electric drive trains.  These latter two trends are triggering demand for battery storage solutions that will require large supplies of battery metals, including lithium and graphite.  Westwater’s unique asset portfolio could hold key advantages and earnings power in each of these minerals markets.

Battery-Grade Spherical Graphite

With the proposed acquisition of a graphite materials developer, Westwater could return to active production within the next two years.  The target, Alabama Graphite, has successfully proven its battery-grade graphite and has multiple potential customer relationships with battery manufacturers, the most mature of which could reach commercial stage by the end of 2019.  With a successful commercial market entry through the Alabama Graphite deal, Westwater could be the first domestic source of battery-grade graphite in the U.S.

We estimate the graphite materials deal could bring revenue to the company’s top-line as early as 2020, with positive cash flow and profits following in subsequent years.  Progress with final product development and the graphite materials business pipeline should build consistently from closing to those first sales. 

Westwater’s leadership is well experienced with the capital markets and strategic transactions, accumulating key assets and raising required capital.  Yet, there are other skill sets resident with the management team that investors should note.  Historic experience with in situ recovery mining has helped the company’s engineering team to build knowledge of ion exchange systems and water reclamation processes.  Both appear to be of importance in the lithium market as new technologies are being introduced to the lithium brine segment. Additionally, the particular negotiations that occur between nuclear power generator customers and uranium suppliers have given the Company important experience that could be instrumental as well in dealing with battery manufacturers who are beginning to negotiate directly with suppliers of key battery materials.

WWR may be undervalued given promising demand conditions in the Company’s end markets, strong minerals asset portfolio, competitive technology and knowhow, and potential to return to profitable operations within as few as three years.  There is the potential for a series of valuation catalysts for the stock to unfold over the next several months, including completion of the Alabama Graphite acquisition, progress reports on customer testing of proprietary graphite materials, and results of exploration in Westwater’s lithium assets.

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 has a Speculative Buy rating on WWR with an investment case provided in a detail report dated 4/10/18.  Please note important disclosures at the end of the report.