Domestic U.S. Battery Graphite Closer to Reality

In early May 2022, Westwater Resources (WWR:  NYSE) reported financial results for its first quarter ending March 2022.  It was an unremarkable report and very similar to most of the reports from this company:  still pre-revenue and clear evidence of a frugal mindset at play in the operating expenses.  However, management’s update on the company’s battery-grade graphite project in Alabama was anything but usual.  After years of planning and strategizing, Westwater is finally bringing to reality a commercial-scale graphite production facility in the U.S.  It has been decades since the U.S. produced graphite materials and so far battery-grade graphite production in the U.S. has been at low volumes from pilot or demonstration plants. 

Westwater leadership has targeted second quarter 2023, to begin commercial production of battery graphite materials near its graphite resources in Coosa County, Alabama.  To meet the deadline, the company needed to have shovels in the ground in early 2022.  This has been accomplished and the site at the Lake Martin Area Industrial Park near Kellyton, Alabama is well along in the first step of site preparation.  Although Chad Potter has been promoted to chief executive officer, a chief operating officer has not been appointed to replace him in that now vacant position.  Potter remains well focused on the project.  He along with mining engineer Dain McCoig have frequent meetings with contractors at the site to work through any issues or obstacles that may arise.     

During the earnings call management reported success in securing commitments for long lead-time equipment that will eventually be housed in a new building for the purification, spheronization and categorizing steps.  Schedules have already been commenced for other equipment and supplies that are not necessarily long-lead time items.  The team is cognizant of the supply chain issues that have delayed some projects and hope to used advanced planning to minimize if not eliminate back orders.

Westwater's central Alabama neighborhood is quickly shaping up as an automotive hub.  The Lake Martin Area Economic Development Alliance in Kellyton provides a map marking locations of nearby automotive manufacturing sites.  At the center is Coosa County and Tallapoosa County, where Westwater's graphite deposit is located and its graphite materials production facility is under construction.  This is a fortuitous location given that lithium-ion batteries for cars and trucks are the company's primary target market.

As the company proceeds with construction of its graphite processing facility, much of Westwater’s story will play out on its balance sheet.  Essentially, cash assets are being converted to hard assets in the form of buildings and equipment, with which graphite can be processed to the high purity form that attracts battery manufacturers.   

At the end of the first quarter, fixed assets designated at property, plant and equipment increased to $31.8 million following the addition of $17.1 million in a new asset category ‘construction in progress.’  Included in the addition to fixed assts is $12.1 million in capital investments.  During the earnings conference call management indicated the company has spent $17.8 million out of the $202 million budget designated for its graphite facility under construction at the Lake Martin Regional Industrial Park near Kellyton, Alabama. 

The WWR price has come under considerable pressure in recent weeks.  We note short interest increased in just two months from 4.6% to 5.1% of the float.  The building negative view comes despite only favorable fundamental developments in the Company’s operations.  It is acknowledged that in those two months the world’s commodity markets have been jarred by the invasion of Ukraine by Russia.  However, the onset of war has had no direct impact on graphite resources for supplies.  Thus, we observe no logical reason for an increase in the short interest other than speculation.

That said, with the quarter report shareholders learned of recent share issuance that could be dilutive to their interests.  Cash on the balance sheet at the end of March 2022, was $116.0 million.  Cash balances were impacted by cash used for operations and capital expenditures totaling $14.8 million as well as cash inflow from the sale of common stock totaling $15.6 million.  The company sold 7.45 million shares at an average price of $2.09 per share pursuant to an existing at-the-market stock offering agreement.

Subsequent to the quarter close, Westwater sold an additional 4.4 million shares to raise at additional $9.0 million in new capital through the same stock purchase agreement.  The shares were sold at an average $2.07 per share.  Based on spending and investment rates implied by the first quarter financial results, it is estimated that the cash balance was approximately $110.52 million at the end of May 2022.  The share issuances in the first five months 2022, added 11.85 million shares to total outstanding common stock.  Implied dilution for existing shareholders was an estimated 25%. 

The verdict is still out on whether management made the right decision to issue shares near $2.00 per share.  So far, with the stock prices just over $1.00, the issuances appear quite prescient.  If and when the stock price moves higher, there may be some gnashing of teeth.    

One alternative to stock issuance to raise new capital is failure in a project that has the potential to add considerable value for shareholders.  It is not likely that shareholders want to explore that outcome.  Another alternative to common stock issuance might be bank loans or notes, which would likely increase business risk and therefore reduce stock valuation.  This option does not seem to be must more palatable than dilution.  Indeed, if the company fails to complete the project there will be no earnings (at least none from graphite materials sales) to spread over the smaller share base. Failure hardly seems preferable to dilution.

   

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.