For most of 2020, I assumed that energy materials development company Westwater Resources (NASDAQ:WWR) would be a terrific business to invest in. A recent executive order from the White House only seemed to confirm my bullish thesis on WWR stock.
Thank goodness I’m in the habit of checking with my colleagues at InvestorPlace before taking a position in a stock. In the case of WWR stock, reading one of their counter-arguments has caused me to reconsider my enthusiasm for Westwater Resources.
I won’t go so far as to allege that the company is committing any sort of malfeasance. However, I feel the need to report the issues that might be problematic for current and prospective WWR stock investors.
These issues are both environmental and financial in nature. So, for mindful traders who wish to see a strong return on their investment, WWR might not be ideal.
A Big Pop in WWR Stock
We can already see the problems associated with WWR stock just by looking at its price action. This is a textbook example of what I call a “pop and drop.”
The price pop was based on a news development that originated from the White House. Specifically, President Donald Trump enacted an executive order intended to “reduce the Nation’s vulnerability to disruptions in the supply of critical minerals.”
Graphite is mentioned several times in the text accompanying the executive order, so WWR stock traders probably assumed that the U.S. would take actions to promote exports and/or limit imports of graphite.
And after Westwater Resources agreed to sell its uranium business to enCore Energy (OTCMKTS:ENCUF), it effectively went all-in on graphite. Thus, with the White House’s executive order in early October, WWR stock popped from $3 to a 52-week high of $14.50.
Then Came the Drop
The problem with chasing a stock after a massive run-up is that oftentimes, the assumption of good news is already priced into the stock.
In the case of WWR stock, it appears that the market assumed that the White House would quickly act to promote America’s graphite business. Yet, this hasn’t panned out as the Westwater Resources bulls probably hoped it would.
Hence, WWR stock dropped all the way down to $4.10 by the end of October. This should serve as a lesson on the hazards of chasing stock prices. It’s also a warning against buying stocks based on the assumption of events that haven’t transpired yet.
Moreover, there’s an environmental issue that might create problems in the near future for WWR shareholders. Evidently, mining graphite can be a messy business in more ways than one.
An Issue for Mindful Traders
InvestorPlace contributor Chris Markoch schooled me on a potential problem with Westwater Resources. This issue could make WWR stock unappealing for socially conscious investors.
What I learned from Markoch is that mining graphite can have a harmful impact on the environment. Without proper controls, graphite powder can become airborne dust. This dust can drift for miles and, directly or indirectly, lead to breathing difficulties, lung disease and even heart attacks.
Not only that, but chemicals from graphite operations can leak into local waters. Hence, there’s the potential for both air and water pollution. China’s been trying to clean up its act from an environmental perspective, even to the point of shutting graphite producers down.
As Markoch explains, with China heavily regulating its graphite market, “you can bet that graphite mining in the United States will be a highly regulated industry. And that means that it’s unlikely the U.S. will be able to capture the cost-efficiency hoped for.”
Markoch’s argument is compelling. Westwater Resources might or might not be able to mine graphite cleanly. Either way, if the U.S. implements stricter environmental controls, this will likely have a negative impact on the company’s bottom line.
The Bottom Line
Will the U.S. get tough on the graphite mining industry? Only time will tell. Still, there are potential issues with graphite mining that WWR stock investors should be aware of.
It was a bold move for Westwater Resources to go all-in on graphite. And, the White House’s executive order seemed to be massively bullish for WWR stock.
Yet, the stock’s price action should provide a lesson about investing based on assumptions. WWR’s pop was followed by a swift drop, which could continue downwards. Given the potential for regulatory issues, it’s probably best for mindful investors to avoid Westwater Resources.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.