In 2020, we’ve seen the story of Westwater Resources (NASDAQ:WWR) stock play out repeatedly. A small bit of news in a hot industry sends a thinly traded name soaring. Retail investors pile in, the rally reverses and the story ends in tears.
For WWR stock, the catalyst was an executive order from President Donald Trump. Trump declared a national emergency to deal with the “threat” of America’s “undue reliance” on foreign countries for key commodities including graphite.
To some extent, that order is good news for Westwater Resources. As the company’s own home page declares, Westwater is “all in on graphite.” It sold uranium assets in New Mexico and Texas in order to focus solely on its Coosa project in western Alabama.
So Westwater seems to have an opportunity. But a stunning 750% rally in just nine trading sessions starting in late September ignores a key problem: There’s not much evidence yet that the company can capitalize on that opportunity.
Again, we’ve seen this story over and over again so far this year. More often than not, investors chasing these hot names have been burned. I’m not convinced WWR stock will be any different.
Chasing the ‘Hot’ Name
The 2020 market unquestionably has been driven by what InvestorPlace analyst Matt McCall has called megatrends. Electric vehicle and alternative fuel plays — think Tesla (NASDAQ:TSLA), Nio (NYSE:NIO) and Plug Power (NASDAQ:PLUG) — have soared.
The novel coronavirus pandemic created huge rallies in vaccine developers. The pandemic’s long-term effects have driven other sectors to huge gains. Likely permanent shifts in how the world does business spiked Zoom Video Communications (NASDAQ:ZM) and DocuSign (NASDAQ:DOCU). Changing consumer behaviors boosted e-commerce names.
But on the back of these legitimate trends, we’ve seen gains in stocks that have little real ability to actually profit. iBio (NYSEMKT:IBIO) went from well under $1 in February to over $7 in July on hopes that it could be part of the solution to the pandemic. Yet the company lacked capital, was fighting massively larger rivals and had a long history of disappointment. It is little surprise that IBIO stock is back under $2.
In EVs, we have seen Electrameccanica Vehicles (NASDAQ:SOLO) go from $1 to $6 in about five weeks thanks to sector optimism. It has given back half of those gains. Ideanomics (NASDAQ:IDEX) rose 600% in a matter of weeks on the back of a supposed effort to become part of the EV market in China. The pump faded and so did the stock.
WWR Stock Doesn’t Look Any Different
I could name many more of these stocks. But the stories all seem roughly the same. Traders who timed their buys and, just as importantly, timed their exits, did well. But too many investors chased the highs, buying a stock that was moving in a key sector simply because of a broad opportunity. They ignored the key problem: Not every stock in those sectors will be a winner.
Westwater Resources has its own bull case based on these trends. The anode in a lithium-ion battery is made from graphite. And so, particularly if EV adoption soars as is expected, graphite demand should spike. Energy storage efforts could drive further need for graphite. In turn, prices should rise, making Westwater’s Coosa project more valuable.
There is a big if in there, however. Westwater actually has to produce graphite at Coosa. There’s not much edge in having the only U.S. graphite mine if the mine never opens.
And there are reasons to believe that mine will not open. The executive order has little real force, As far as we know right now, it has minimal direct impact on Westwater’s operations. (A management call on Thursday admittedly could give more color on that front). What appears to be an election win by former Vice President Joe Biden could undercut any momentum at the federal level. The environmental impact of graphite mining could lead to local opposition as well.
A Narrow Path
At the very least, Westwater has a long and tricky path to getting Coosa into production. We have not seen much evidence the company is capable of navigating that path.
After all, this is a former uranium miner (the company was known as Uranium Resources until 2017), and not a particularly good one. Save for a burst of production in the mid-2000s thanks to higher prices, production was relatively minimal. It has funded itself since going public in the 1990s mostly through stock sales.
Meanwhile, Westwater acquired the Coosa project in its early 2018 acquisition of Alabama Graphite. The all-stock deal saw Westwater issue 14.1 million shares, shares that at the time of the acquisition announcement were trading just above $1.
In other words, Alabama Graphite shareholders were willing to sell the mine for roughly $16 million in stock in a company that itself was struggling badly. Yet Westwater now has a market capitalization well past $40 million.
The Bottom Line
Again, we are seeing the same kind of story we have elsewhere. A U.S.-based graphite mine unquestionably would be a valuable asset. So would a viable EV business, or a coronavirus vaccine.
The question is whether Westwater can get to that point. When investors bid WWR stock to $12, they ignored that question. At $4, it is still important. And Westwater needs to deliver some answers before its stock winds up like so many other briefly hot names this year.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.
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