Lubricating Potential in Capital Raise for Energy Materials Developer

There has been a mix of current events for energy materials developer Westwater Resources (WWR:  Nasdaq).  The company released a business plan for its recently acquired natural flake graphite asset in Alabama.  The plan brings into a single focus a series of tactical decisions Westwater management has made since the deal closed to bring battery grade graphite to market.  In mid-June 2018, a private placement of common stock and prepaid warrants was completed, bringing $2.9 million in new capital to Westwater.  Proceeds are to be used for working capital purposes and, in particular, near-term expenditures for the graphite project. 

Shareholders barely had time to digest the lubricating potential in a capital raise when news was received that mining licenses were being revoked for its Temrezli uranium project in Turkey.  The Turkish government agency in charge of mining indicated compensation would be offered, but no amount was stipulated.  The company has sixty days to respond.  There is likely a wide range of possible outcomes from a reinstatement of the licenses by the government to Westwater’s exit from the Turkey region with some level of compensation for the foregone licenses.

Revocation of Mining License

Mid-June 2018, Westwater Resources disclosed that the Republic of Turkey has revoked the mining licenses for the Temrezli and Sefaatli uranium projects.  Unspecified compensation has been offered by Turkey’s mining authority, the General Directorate of Mining Affairs.  The Company has sixty days to respond. 

The action was apparently not anticipated by Westwater management and does not follow any previous correspondence or notifications related to ongoing development of mining operations at either project.  The Company is current with all obligations to pay annual fees and complete minimum work at the sites.  The licenses stipulate the eventual payment of royalties to the Turkish authority based on commercial production and uranium selling prices.

Westwater originally paid $17.4 million for the Turkey assets composed of $1.5 million in cash and stock valued at $15.9 million.  The assets are carried at $18.0 million on Westwater’s balance sheet, unchanged from the original purchase price.  Since the deal was completed in November 2015, Westwater has recorded $1.2 million in total expenses related to the mineral property and operations in Turkey.

Graphite Business Plan

In late June 2018, management released a business plan for its recently acquired natural flake graphite asset in Alabama.  The document pulls the Company’s development strategy into a single cohesive presentation, beginning with a discourse on the battery market and demand drivers and extending to a timetable for reaching commercial stage with battery-grade graphite materials. 

Key takeaways from the graphite business plan:

Reprioritization of graphite materials products for expedited, lower-cost product launch.  Westwater is moving forward with a portfolio of value-added graphite materials products for use in battery anodes and performance enhancement. 

Moving forward with pilot plant and purification facility.  The business plan confirms plans to construction a pilot plant to produce low volume graphite materials for testing purposes.  The pilot plant remains in the design stage with a goal of completion by 2019.  A large high-volume purification facility is also planned, most likely located in Alabama.

Progress in qualifying graphite concentrate suppliers.  The business plan explains Westwater rationale for sourcing graphite concentrate from third parties to produce initial PMG production and delaying development of the Coosa County graphite asset.  The key advantage is that capital investment required in Alabama can be delayed to a later period when commercial sales of PMG are beginning to generate cash flows.

Capital Raise

Mid-June 2018, Westwater completed a registered direct offering of common stock to a single institutional investor, Aspire Capital Fund.  The Company raised $2.9 million in new capital through the sale of 3.7 million shares of common stock sold at $0.34 per share and 5.0 million pre-funded warrants sold at $0.33 per share.  The warrant exercise price is $0.34 with the last penny per share paid at the time of exercise.  The selling price represented a 22% discount to the 20-day moving average price of $0.44 at the time of the offering.

Proceeds of the capital raise were slated for working capital purposes.  Management has reiterated the prioritization of graphite materials development, although expenditures in the uranium and lithium segments would be carried out as necessary to maintain asset control or compliance with regulatory or contractual obligations.

Rating and Target Price

Crystal Equity Research as rated WWR at Speculative Buy with a $1.50 price target.  The rationale is that the shares are deeply undervalued based on the mineral assets in Westwater portfolio and the market opportunity for those assets.  The case can be made that the market has over reacted to recent developments.  The shares are currently trading at 42% of estimated book value per share of $0.95 at the end of June 2018, subsequent to the graphite asset acquisition and capital raising activity.  From a worst case scenario, in which the Turkey assets are written off entirely with no compensation, book value would be $0.55 per share, we estimate the shares are 28% undervalued.

Conditions in all end-markets are favorable.  Neither high purity graphite nor lithium supplies are keeping pace with ramping demand for battery materials.  The nuclear power industry appears to be working through an excess in uranium inventory and the prognosis is good for high enough uranium selling prices to coax minders like Westwater back into production.   These positive conditions notwithstanding, a bull-case position in WWR requires patience to look beyond the next few months to evaluate the merits of the company’s long-term business prospects.

WWR shares remain under pressure as shareholders mull over recent strategic actions and news.   Since disclosure of the capital raise in mid-June 2018, the shares have closed lower on each successive trading day except one.  It is noteworthy that trading volumes have increased in recent weeks, which should help clear near-term supply out of the way.

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 published a rating, target price and commentary on WWR under its CER series for sponsored research for small-capitalization companies.