Graphite Game Plan

Renewable energy and the systems that use alternative power sources require a plethora of minerals.  Crystal Equity Research recently updated coverage of Westwater Resources (WWR:  Nasdaq), an energy minerals company with uranium, lithium and graphite assets and products.  Historically, the company was a producer of ‘yellow cake’ uranium and its solid it products to electric utilities engaged in nuclear power generation. With uranium selling prices at a depressed level, the company has temporarily shuttered its uranium operations and diversified into the lithium and graphite markets.    

The company recently acquired a graphite materials developer, Alabama Graphite, and has wasted no time in putting the Westwater imprint on plans to introduce high purity graphite materials to the fast-growing battery manufacturing market.  The graphite asset in Coosa County, Alabama could be the first domestic source of natural graphite in decades. 

As the principal product Alabama Graphite had planned to produce a high purity, spherical graphite material they called Coated Purified Spherical Graphite (CSPG) suitable for use in lithium ion batteries.  Tests sponsored by Alabama Graphite and conducted in early 2017, determined a purity level of 99.99997% carbon by weight.  Additional products, including Purified Micronized Graphite (PMG), were to be produced from about 25% of the graphite output that was not suitable for the more refined CSPG. 

The PMG material has been met with strong interest among producers of conventional batteries as a performance enhancement material.  In October 2017, a letter of intent was received from an unnamed battery manufacturer for 10 metric tons per year of PMG for use in enhancing performance in conventional batteries.  Interest from this customer was apparently triggered in part by test results completed earlier in 2017, by battery research and development company, RSR Technologies.  The tests focused on PMG as an additive for lead-acid batteries.  The test determined the addition of PMG to a proprietary formula increased battery capacity by 7%, from 87 to 92 mAh per milligram.

With such strong customer interest, Westwater has put a priority on producing PMG.  A pilot plant is planned for production of testing samples and initial orders from the unnamed battery manufacturer.  The pilot plant is expected to have a capacity of 30 kilograms per hour or at a rated capacity of 6,000 hours per year or about 180 metric tons per year.  Design work and construction are now expected to be completed by the beginning of 2019.

Westwater has also moved forward with plans for a purification facility that will be located in the immediate vicinity of the Coosa County graphite asset.  This site will be used for commercial scale production of all graphite materials, including the high-margin CSPG product.  When completed in 2021, the purification facility will have an initial capacity of 5,000 metric tons per year with potential to be expanded to 16,500 metric tons per year.  Management is negotiating for the most economic alternative given long-term requirements for power, water and transportation. 

Westwater shares have traded off in recent weeks, providing an even more compelling bull case.  Notably, trading volumes have slumped in the last three months compared to the previous three months, suggesting the pessimism that is undercutting the share price is not widespread.

A good number of investors are taking a wait-and-see attitude, particularly shareholders that received WWR shares through the Alabama Graphite deal.  Longer-term holders for whom lithium and uranium were an initial interest may have some concerns regarding the ability of management to stretch capital resources across three segments. 

Based on these broad guidelines available today, over the next two years it is  estimated that the company will need to as much as $7.0 million in new financing to move forward with the Coosa graphite project. Furthermore, another capital raise for as much as $12.0 million will be needed to commence construction of the purification plant in Alabama by the beginning of 2020.  Including cash to support operations, total required capital could be as much as $55.0 million over the years three years.  Most of the capital could come from the equity agreements already in place.  However, by the end of 2020 another debt or equity capital raise may be necessary.

Adjustments in the development timetable and investment budget for the graphite segment could be a source of comfort as these changes appear to conserve near-term cash requirements.  The company has announced progress in both its uranium and lithium segments by moving forward to with a technical study of the New Mexico uranium property and acquiring additional claims near its main Nevada lithium stake.  While not momentous on their own, the two accomplishments should provide investors with additional comfort that the company can manage exploration and development efforts on several fronts.

News on new customer interest or movement forward with the battery manufacturer that recently signed a letter of interest in the company’s PMG graphite material could be strong catalysts for the stock.  Quarter reports during the 2018 could also provide valuable updates on pilot plant construction progress and implementation plans for the graphite purification facility.   Such news could serve to reduce uncertainty and flip the supply/demand balance in favor of demand.

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. Westwater Resources is the subject of research by Crystal Equity Research under the CER Report series for issuer sponsored research coverage. Please note the important disclosures and disclaimers at end of all Crystal Equity Research reports.