There are many clear arguments against buying Westwater Resources (NASDAQ:WWR). For example, investors may not like the financial fundamentals behind it. That’s logical: they clearly do not paint a great investment case for the company. Investors also have to contend with the potential environmental hazards of graphite mining itself: it’s a dirty business. But while there are some downsides to the investment case for WWR stock, some investors are still hopeful.
The question is — should they be hopeful?
Westwater Resources makes it immediately clear on their landing page that it’s going “all in on graphite.” If Westwater Resources can alter its operational model to overcome the implications of its “dirty” business, the bullish thesis behind the stock gains traction.
In the end, it all comes down to two key questions. Will graphite production take off domestically, and can Westwater Resources capitalize on that success to become operationally sound? If these two things happen, WWR stock will skyrocket
WWR Stock and Graphite
Despite the risks outlined above, some investors see reasons for bullishness towards Westwater Resources. For example, the United States should control its own graphite production. According to Westwater, “The United States has no domestic production of natural graphite, but it is consumed by roughly 90 U.S. companies.” Graphite itself has also been designated as having strategic national importance.
Consider that supply is also projected to be stagnant, and demand is scheduled to rise. Thus, graphite prices should have every reason to increase. Also consider that even if supply and demand factors weren’t favorable, prices would be artificially buoyed anyway. The government would likely subsidize production as it has designated graphite as strategically important. It will eat the loss rather than be beholden to China for graphite production.
So, when investors find out that Westwater Resources exists, and that it is aligning itself to capture this wide-open market, eyebrows are likely to rise, and ears to perk up.
However, there’s the pesky reality of time to production and operations themselves. This puts a dent in the bullish thesis.
The CEO Letter Is Telling
There are a few things that stick out on the CEO letter from WWR on its landing page. First of all, operations are facing lead time. The company will have graphite production online at the end of 2022. Prior to that it will run a pilot plant for testing, but primarily to gauge customer feedback. So the first step is to actually test the market with a pilot plant and figure out how to really supply customers. It could simply be that the markets are not receptive to WWR’s products and services at all. Demand would languish, the company would fail.
However, this phase could be a success. Then Westwater Resources would likely have a plant online by late 2022. It would buy feedstock to process — this is important — and isn’t scheduled to begin mining operations in Alabama until 2028. So essentially the company will not achieve vertical integration until 8 years from now. Therefore, WWR’s ability to profitably source non-Chinese graphite feedstock is paramount. That’s the next 8 years of operations that WWR faces.
Profitability Matters
Investors have to assume the pilot study, feasibility test and sourced feedstock graphite production all go well. Otherwise, they wouldn’t likely be investing in the first place. Then it will be 2028, and WWR becomes vertically integrated with 40,000 acres of graphite mines in Alabama, as they come online.
Yes, investors should assume that the company would then be very profitable as it will be controlling its supply. And the supply is projected to have 27 years of use. Therefore, WWR stock would then be operating through 2055 in Alabama until the mine is emptied.
This all sounds good in theory. Yet, it is also a long time away. I can’t imagine many investors have that kind of time horizon in mind when investing today. And I also can’t imagine many investors believe that best-case scenario projections (that’s what these are) are likely to occur.
There’s multiple things that can change and sink WWR’s business even by 2028. And remember, that’s when vertical integration should occur.
The Bottom Line on Westwater
The company has a long road ahead toward profitability. That much is clear from what I’ve written above. Unfortunately, the road behind is littered with loss as well.
The company’s latest earnings report lists the company as a going concern. Meaning it may very well fold. Also noteworthy is that the company hasn’t shown operational profitability since 2009.
Investors won’t find much to take confidence from in those two facts. All of this leads me to my concluding thoughts on Westwater Resources.
With that in mind, my takeaway is stay away. Above, I tried to state the business in the clearest way I could. That was the best case scenario I could piece together based on what the company presented. I also completely skipped over environmental concerns and regulations. WWR will have to face those, which won’t be easy. Even if it does surmount those, investing now is simply funding a ramp-up to 2022 and non-vertically integrated production. So I can’t see the investment case outside of the broad trend toward strategically important resources.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.
