WESTWATER RESOURCES, INC. The following management's discussion and analysis of the consolidated financial results and condition of Westwater for the three and nine months endedSeptember 30, 2021 , has been prepared based on information available to us as ofNovember 10, 2021 . This discussion should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes thereto included herewith and the audited Consolidated Financial Statements of Westwater for the period endedDecember 31, 2020 and the related notes thereto filed with our Annual Report on Form 10-K, which have been prepared in accordance withU.S. GAAP. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth elsewhere in this report. See "Cautionary Note Regarding Forward-Looking Statements" herein.
INTRODUCTION
Westwater Resources, Inc. is a 44-year-old public company trading on theNYSE American Stock Exchange ("NYSE American") focused on battery graphite development under the symbol "WWR." Originally incorporated in 1977 asUranium Resources, Inc. to mine uranium inTexas , our company pivoted to an energy materials developer. Westwater is focused on battery-grade graphite materials after its acquisition ofAlabama Graphite Corp. ("Alabama Graphite") and itsCoosa Graphite Project ("Coosa Project ") inAlabama inApril 2018 . Combined with the anticipated construction of a battery graphite processing facility nearKellyton, Alabama , the Company is executing an exploration plan to further investigate the size and extent of mineral concentrations at Coosa graphite deposit, located nearRockford, Alabama , to increase our knowledge of the deposit as a whole.
RECENT DEVELOPMENTS
Graphite Processing Pilot Programs
During the quarter endedSeptember 30, 2021 , the Company continued, and inOctober 2021 substantially completed, its pilot program at Dorfner Anzaplan's facilities near Amberg,Germany , as well as at facilities inFrankfurt, Germany ,Chicago, Illinois andBuffalo, New York . The combined effort at these facilities produced approximately 13 metric tonnes of Westwater's three battery-grade graphite products: ULTRA-PMG™, ULTRA-CSPG™ and ULTRA-DEXDG™, which were previously produced at a bench scale.
As of
10.8 metric tonnes of ULTRA-PMG™ in six sizes (6, 8, 10, 15, 30 and 44
? microns): Production is now complete, and samples will be packaged and shipped
to a laboratory for testing.
2.0 metric tonnes of the precursor (Spherical Purified Graphite) for
? ULTRA-CSPG™ in three sizes (10, 18 and 24 microns): Production of this product
is now complete and has been sent to a laboratory for pitch coating to make
ULTRA-CSPG™, and test its electrical performance.
? 0.4 metric tonnes of ULTRA-DEXDG™: Production is now complete and samples were
packaged and shipped to a laboratory for testing.
Westwater undertook its pilot program operations to inform and enhance design
work for its commercial production facility and to produce products for testing
by potential customers. The information from the pilot program was incorporated
into the Definitive Feasibility Study ("DFS").
Definitive Feasibility Study on the
OnOctober 11, 2021 , the Company announced the results of the DFS pertaining to Phase I of its Coosa Graphite Processing Facility (the "Project"). The Company intends to develop the Project to purify natural graphite concentrates and to produce battery ready graphite products in two phases. The capital costs of Phase I of the Project are 19 Table of Contents estimated at$202 million . Beginning in early 2023, the Project is expected to begin producing from purchased feedstock from outside sources until at least 2028, after which the Company expects to produce graphite feedstock from itsCoosa Project . After processing and purification, the Company expects approximately 7,500 mt per year of two products to be commercially available in the following quantities: ? CSPG: 3,700 mt per year
? Fine Products from SPG milling: 3,800 mt per year
? Project Duration: 35 years
? Pre-Tax NPV-8 percent:
? IRR: 15%
? Annual
? Project
Also onOctober 11, 2021 , the Company announced a plan and design for Phase II of the project at a pre-feasibility level ("PFS"). The PFS for Phase II of the Project estimates capital costs of$464 million , and after processing and purification, the Company expects approximately 32,400 mt per year of two products will be available in the following quantities: ? CSPG: 15,800 mt per year
? Fine Products from SPG milling: 16,600 mt per year
? Project Duration: 35 years
? Pre-Tax NPV-8 percent:
? IRR: 20.5%
? Average Annual
? Project
The Company intends to initiate a DFS for Phase II upon completion and commissioning of Phase I of the Project.
Approval of Construction of Phase I and Purchase of Industrial Space
On
In addition, onOctober 13, 2021 the Company completed the purchase of two buildings by its subsidiary,Alabama Graphite Products, LLC , that total 90,000 sq. ft. in size, to support the development of the Project. These buildings will be used for administrative offices, a laboratory, and warehousing space, and each are adjacent to the planned processing plant. The purchase of these two buildings avoids the need for certain construction activities.
Vanadium Target Identification
In lateNovember 2018 , Westwater announced the discovery of a concentration of vanadium mineralization at several locations in the graphitic schists at theCoosa Project . Westwater subsequently commenced the first of a four-phase exploration program designed to determine the extent, character and quality of the vanadium mineralization at theCoosa Project . The first phase demonstrated widespread positive values for vanadium that extended beyond the graphite deposit, as defined in the 2015 Preliminary Economic Assessment for the site. The second phase of the vanadium exploration project began inApril 2021 and is expected to continue throughout the remainder of the year. Scope for this effort includes drilling various targets to expand the Company's knowledge of the geology, examining the core and/or cuttings for mineral constituents, and adding to the existing geologic model. In addition, vanadium mineralization is expected to be evaluated using extractive metallurgy techniques to ascertain any economic potential. 20 Table of Contents
Graphite and Vanadium Listed as Critical Materials
OnFebruary 24, 2021 , the President signed an Executive Order that seeks to provide for more resilient supply chains to revitalize and rebuild domestic manufacturing capacity and maintain America's competitive edge in research and development. Graphite and vanadium are specifically named as critical minerals in whichthe United States is heavily dependent onChina for its supply. The President's declaration asked the Secretary of Energy, as part of larger study involving several branches ofthe United States government, to submit a report identifying risks to the supply chain for high-capacity batteries including those that power electric vehicles. OnJune 8, 2021 , theWhite House released a response to the findings of this study in support of securing an end-to-end domestic supply chain for advanced batteries, including investment in domestic production and processing of critical minerals. Key recommendations in theJune 8, 2021 release include, among other things, providing funding and financial incentives to encourage consumer adoption of electric vehicles, providing financing to support advanced battery production, and investing in the development of next generation batteries. TheFebruary 2021 Executive Order and the key recommendations in theJune 8, 2021 White House release, builds upon the prior Administration's Executive Order issued onSeptember 30, 2020 , related to critical minerals, and could be important to Westwater's plans to develop its battery graphite business inthe United States . Presently,the United States is almost 100% dependent on imports for battery-grade graphite, which is currently the primary anode material in the Lithium-Ion batteries that power smartphones, laptops, electric vehicles, and store power generated from intermittent renewable energy sources. Westwater intends to develop theCoosa Project to supply natural flake graphite for beneficiation into battery-grade graphite for all types of batteries. Further details on the Executive Order on America's Supply Chains can be found at https://www.whitehouse.gov/briefing-room/presidential-actions/2021/02/24/executive-order-on-americas-supply-chains/.
Further details on the
Westwater intends to support the efforts by the relevant
The COVID-19 Pandemic and our Actions to Ensure Safety
OnMarch 11, 2020 , theWorld Health Organization designated COVID-19 as a global pandemic. The pandemic spread outside ofChina during the first quarter of 2020 and has impacted businesses and economies throughout the world. In theU.S. , many state and local governments have, based on local conditions, either recommended or mandated actions to slow the transmission of COVID-19. These measures range from limitations on crowd size to masking to mandatory orders for non-essential citizens to test and quarantine. Borders between many countries have been closed to contain the spread of COVID-19. Uncertainty with respect to the economic effects of the pandemic has introduced significant volatility in the financial markets. To the extent that the COVID 19 pandemic continues or worsens, including by reason of the emergence of variant strains of the virus, local governments or governmental agencies may impose additional restrictions. The result of COVID 19 and those restrictions could result in a number of adverse impacts to Westwater's business, including but not limited to additional disruption to the economy, additional work restrictions, and supply chains being interrupted, slowed, or rendered inoperable. As a result, it may be challenging to obtain and process raw materials to support business needs, and individuals could become ill, quarantined, or otherwise unable to work and/or travel due to health reasons or governmental restrictions. Governments may also impose other laws, regulations or taxes which could adversely impact Westwater's business, financial condition or results of operations. The potential effects of COVID 19 could also impact Westwater in a number of other ways including, but not limited to, laws and regulations affecting business, the availability of future borrowings, the cost of borrowings, and potential impairment of the carrying value of long-lived tangible assets. 21 Table of Contents
This pandemic, and the uncertain economic conditions it has created, could adversely affect our operations, major facilities, or employees' health. Westwater has the following priorities while managing business activities during this period of volatility and uncertainty:
? First, to ensure the health and safety of our employees and the communities
where they work.
? Second, to work with our business partners to maintain the advanced graphite
product development schedule in a safe and measured manner.
? Third, to ensure the Company has access to adequate financial liquidity to
support key operations and business activities.
Westwater's corporate business activities are largely unaffected at this time by the COVID-19 pandemic. Prior toMarch 1, 2021 , Westwater reduced utilization of its offices and remote working arrangements were instituted to ensure that some employees were able to work remotely using systems that already were in place. OnMarch 1, 2021 , Westwater reopened its Centennial corporate facility and allowed employees to return to the office to work together with appropriate health protocols in place. Westwater's continued focus on the health and safety of employees, the safety of operations, and the safety of the communities in which our employees live and work remains paramount. To that end, Westwater has continued to restrict unnecessary travel, and ensured that employees are permitted to take time off due to illness or the illness of those around them without penalty. Equity Financings
Capital Raises during three and nine months ended
During the three months endedSeptember 30, 2021 , the Company sold 1.1 million shares of common stock for net proceeds of$4.0 million pursuant to theDecember 2020 PA entered into withLincoln Park . During the nine months endedSeptember 30, 2021 , the Company received net proceeds of$81.9 million from its equity facilities, resulting in a cash balance of approximately$119.0 million atSeptember 30, 2021 . The significant treasury balance has mitigated the Company's capital risk through 2021 and 2022 as the Company's budgeted pilot program for processing battery-grade graphite and the remaining budgeted product development costs are now fully funded. The Company anticipates making a substantial initial investment in the Project in the fourth quarter of 2021.
Transfer of Common Stock Listing to the
OnMarch 8, 2021 , the Company, acting pursuant to authorization from its Board of Directors, determined to voluntarily withdraw the listing of the Company's common stock, par value$0.001 per share, fromThe Nasdaq Capital Market ("Nasdaq") and transfer the listing to the NYSE American. The Company informed Nasdaq onMarch 8, 2021 , of its intent to transfer the listing of its common stock to the NYSE American. The Company's listing and trading of its common stock on Nasdaq ended at market close onMarch 18, 2021 , and trading began on the NYSE American onMarch 19, 2021 . The Company's common stock continues to trade under the ticker symbol "WWR" on the NYSE American. RESULTS OF OPERATIONS Summary Our net loss from continuing operations for the three months endedSeptember 30, 2021 , was$4.6 million , or$0.13 per share, as compared with a net loss from continuing operations of$3.4 million , or$0.42 per share for the same period in 2020. The$1.2 million increase in our net loss from continuing operations was due primarily to increases in general and administrative, arbitration, exploration, and product development expenses; offset partially by an unrealized gain related to the enCore common stock of$0.5 million . 22
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For the nine months endedSeptember 30, 2021 , our net loss from continuing operations was$13.4 million , or$0.42 per share, as compared with a net loss from continuing operations of$6.9 million , or$1.18 per share for the same period in 2020. The$6.5 million increase in our net loss from continuing operations was due primarily to increases in product development, arbitration, general and administrative, and exploration expenses; offset partially by an unrealized gain related to the enCore common stock of$1.9 million .
Product development expenses
Product development expenses for the three and nine months ended
Product development costs were primarily comprised of expenses for our DFS, which began inFebruary 2021 and was completed inOctober 2021 , and our product development program continued through the first nine months of 2021. The product development program includes costs incurred to collaborate with outside experts for lab work, product testing and other auxiliary costs associated with theCoosa Project .
Arbitration Costs
During the first nine months of 2021, Westwater incurred legal and expert consulting costs of$2.2 million associated with the Request for Arbitration against theRepublic of Turkey . This represents an increase of 152%, or$1.3 million in costs compared to the nine months endedSeptember 30, 2020 . For further reference, see discussion below in Part II, Item 1.
Mineral property expenses
Mineral property expenses were$0.1 million for both the three and nine months endedSeptember 30, 2021 , an increase of$0.1 million compared to the same periods in 2020. The increase in mineral property expenses was due to higher payments to land and surface owners for increased activities related to our exploration program.
General and Administrative Expenses
Significant expenditures for general and administrative expenses for the three
and nine months ended
For the Three months ended For the Nine months ended
September 30, September 30,
2021 2020 2021 2020
(thousands of dollars)
Stock compensation expense $ 299 $ 142 $ 594 $ 170
Salaries and payroll burden 748 811 2,007 2,344
Legal, accounting, public company expenses 575 558 2,090 1,681
Insurance and bank fees 146 160 490 494
Consulting and professional services 106 46 491 149
Office expenses 145 128 352 329
Sales and marketing 157 97 393 196
Other expenses 13 (1) 53 16
Total general and administrative expenses
(Less) General and administrative expenses from discontinued operations - (405) - (1,273) General and administrative expenses from continuing operations$ 2,189 $ 1,536 $ 6,470 $ 4,106 General and administrative expenses for the three and nine months endedSeptember 30, 2021 , increased by$0.3 million and$1.1 million from the same periods in 2020. The increase quarter over quarter is due primarily to higher costs 23 Table of Contents
related to an increase in stock compensation, and higher costs related to the Company's sales and marketing efforts that began in the third quarter of 2020.
The increase for the first nine months of 2021 compared to the same period in 2020 is due primarily to higher costs related to an increase in stock compensation, higher public company expenses related to the annual shareholder meeting and moving to the NYSE American from the NASDAQ, and higher costs related to the Company's sales and marketing efforts that began in the third quarter of 2020. These increases for the three and nine month periods were offset partially by lower personnel costs due to the sale of our uranium business atDecember 31, 2020 .
Net Loss from Discontinued Operations
Westwater sold its uranium business onDecember 31, 2020 . As a result, the net loss from discontinued operations was$6.4 million and$8.6 million for the three and nine months endedSeptember 30, 2020 , respectively. See Note 3 to the financial statements for additional information.
FINANCIAL POSITION
Operating Activities
Net cash used in operating activities was$13.0 million for the nine months endedSeptember 30, 2021 , as compared with cash used in operating activities of$10.1 million for the same period in 2020. The$2.9 million increase in cash used in operating activities was due primarily to increased graphite product development, exploration, general and administrative, and arbitration costs.
Investing Activities
Net cash used in investing activities decreased by$0.1 million for the nine months endedSeptember 30, 2021 , as compared to the same period in 2020. The decrease was a result of cash deposits related to the two buildings that were purchased onOctober 13, 2021 , offset by the receipt of$0.3 million held in escrow for the balance of the outstanding Paycheck Protection Program. The loan was officially forgiven in full by theSmall Business Administration onMarch 31, 2021 , and the entire balance of the escrow fund was transferred to the Company.
Financing Activities
Net cash provided by financing activities was$81.7 million for the nine months endedSeptember 30, 2021 , due to sales of common stock through the Company's ATM Offering Agreement with Cantor and the Company'sDecember 2020 PA withLincoln Park . Net cash provided by financing activities for the same period in 2020 was$13.9 million . The$67.8 million increase was due to greater shelf registration capacity with which to offer registered shares under the Company's financing agreement with Cantor and increased sales activity under the Company's financing agreement withLincoln Park during the first nine months of 2021 compared to the same period in 2020.
LIQUIDITY AND CAPITAL RESOURCES
The Company last recorded revenues from operations in 2009. Since 2009, the Company has relied on equity financings, debt financings and asset sales to fund its operations. The Company expects to rely on debt and equity financing to fund its operations for the foreseeable future. In 2016, the Company began to expand its business plan into acquisition and development of energy-related materials. First, in 2016 the Company obtained lithium mineral leases inNevada andUtah as an exploration opportunity. Then, in 2018 the Company acquiredAlabama Graphite Corp. and itsCoosa Graphite Project inAlabama for the purpose of developing a commercial sized graphite mineral deposit and processing the flake graphite into advanced graphite products for use in batteries. In the third quarter of 2020, the Company executed the strategic decision to focus its resources on the graphite business inAlabama , discontinuing its investment in its lithium mineral properties and selling its uranium business, located inTexas andNew Mexico , to enCore. As discussed in Note 3, the sale to enCore closed onDecember 31, 2020 , and included the elimination of a$9.3 million bonding liability, the elimination of$5.2 million in asset retirement obligations, and the elimination of more than$4.0 million in annual expenditures related to reclamation and compliance 24
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costs. The Company received approximately$1.8 million of enCore common stock and retained royalty interests on theNew Mexico uranium properties as consideration for the sale. The Company retained its uranium interests inTurkey , which are subject to ongoing international arbitration proceedings, in which the Company is seeking damages. During the first nine months of 2021, the Company focused on graphite process development activities including operation of a pilot program for processing flake graphite into battery-grade graphite products and a DFS on Phase I of theCoosa Graphite Project . The data generated and experience gained from the pilot program was used to inform the Phase I DFS that was completed inOctober 2021 and will also inform the requirements and specifications for building a commercial graphite processing facility. OnSeptember 30, 2021 , the Company's cash balance was approximately$119.0 million . During the nine months endedSeptember 30, 2021 , the Company sold 9.3 million shares of common stock for net proceeds of$47.3 million pursuant to its Controlled Equity OfferingSM Sales Agreement with Cantor and 6.1 million shares of common stock for net proceeds of$34.6 million pursuant to theLincoln Park December 2020 PA. As ofSeptember 30, 2021 , the Company has$50.0 million remaining available for future sales under the ATM Offering and has 9,700,252 of common stock available for future sales pursuant to theLincoln Park December 2020 PA.
Subsequent to
Management believes the Company's current cash balance is sufficient to fund its planned non-discretionary expenditures through 2022. The Company anticipates the continued use of the Cantor andLincoln Park financing facilities to support construction of the commercial graphite processing facility. While the Company has been successful in the past in raising funds through equity and debt financings as well as through the sale of non-core assets, no assurance can be given that additional financing will be available in amounts sufficient to meet its needs, or on terms acceptable to the Company. Stock price volatility and uncertain economic conditions caused by the COVID-19 pandemic, including the recent emergence of variant strains of the virus, could significantly impact the Company's ability to raise funds through equity financing. Market conditions, including but not limited to, inflation and supply chain disruptions could adversely impact the planned cost of the Company's commercial graphite processing facility. Along with evaluating the continued use of the Cantor andLincoln Park financing facilities, the Company may consider project financing to fund the construction of the Project. The alternative sources of project financing could include, but are not limited to, convertible debt or pursuing a partnership or joint venture. In the event funds are not available for project financing to complete construction of the Project in 2023, the Company expects to be able to fund its non-discretionary expenditures, however, the Company may be required to change its planned business development strategies.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
With the exception of historical matters, the matters discussed in this report
are forward-looking statements that involve risks and uncertainties that could
cause actual results to differ materially from projections or estimates
contained herein. We intend such forward-looking statements to be covered by the
safe harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
include, without limitation, statements regarding the adequacy of funding,
liquidity, access to capital, financing activities, the timing or occurrence of
any future drilling or production from the Company's properties, potential
effects of the COVID-19 pandemic, the strategic goals of the business,
arbitration matters, costs of Phase I of the Project and estimated completion
date, expected production quantities for Phase I of the Project , the
realization of expected benefits from recent business combinations and the
Company's anticipated cash burn rate and capital requirements. Words such as
"may," "could," "should," "would," "believe," "estimate," "expect,"
"anticipate," "plan," "forecast," "potential," "intend," "continue," "project"
and variations of these words, comparable words and similar expressions
generally indicate forward-looking statements. You are cautioned not to place
undue reliance on forward-looking statements. Actual results may differ
25
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materially from those expressed or implied by these forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements include, among others:
the spot price and long-term contract price of graphite (both flake graphite
? feedstock and purified graphite products) and vanadium, and the world-wide
supply and demand of graphite and vanadium;
? the effects, extent and timing of the entry of additional competition in the
markets in which we operate;
? the ability to obtain contracts with customers;
? available sources and transportation of graphite feedstock;
? government regulation of the mining and processing industries in the United
States;
? our ability to maintain and timely receive mining and other permits from
regulatory agencies;
? the ability to control costs and avoid cost and schedule overruns during the
development, construction and operation of the Project;
? risks associated with our operations and the operations of our partners,
including the impact of COVID-19 and supply chain disruptions;
? unanticipated geological, processing, regulatory and legal or other problems we
may encounter;
the results of our exploration activities, and the possibility that future
? exploration results may be materially less promising than initial exploration
results;
? any graphite or vanadium discoveries not being in high enough concentration to
make it economic to extract the metals;
? our ability to finance growth plans; and
? currently pending or new litigation or arbitration.
In addition, other factors are described in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , and the other reports we file with theSEC . Most of these factors are beyond our ability to predict or control. Future events and actual results could differ materially from those set forth herein, contemplated by or underlying the forward-looking statements. Forward-looking statements speak only as of the date on which they are made. We disclaim any obligation to update any forward-looking statements made herein, except as required by law.
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