Westwater Resources (NASDAQ:WWR) is looking to become a leading supplier of mined graphite, also known as natural graphite. While a meaningful amount of graphite is used in the batteries of all electric vehicles (EVs) and in electricity-storage solutions, the outlook of natural graphite in particular is unclear. Therefore, I believe WWR stock is too risky to buy or hold at this point.
Importantly, there are two different types of graphite: natural graphite and synthetic graphite.
Each has advantages and disadvantages, and it’s difficult to determine what the demand for each will be in coming years. For now, Westwater appears to be exclusively exposed to natural graphite, making the company’s future performance hard to predict.
In November 2019, the website Greentech reported that, “Graphite comes in two forms: natural graphite, which is mined, and synthetic graphite, which is produced from petroleum coke or coal tar.”
According to the website, synthetic graphite is more expensive, but is also more pure and generally preferred by the manufacturers of “premium batteries.”
As a result, the most advanced batteries are increasingly being made with synthetic graphite, the publication reported. Moreover, “synthetic graphite is expected to become increasingly dominant” in electricity-storage solutions, the website stated.
On the other hand, more energy is required to produce synthetic graphite, and production of the material generates a large amount of pollutants other than carbon dioxide. In general, “synthetic also has more severe environmental implications to consider” than natural graphite, according to Greentech.
Still, research firm Wood McKenzie expects synthetic graphite to account for 70% of the graphite used in batteries by 2030.
Meanwhile, in a recent article about WWR stock, a Seeking Alpha columnist stated that “natural graphite is a tough market to be in because synthetic graphite is the preferred choice due to its superior consistency and purity.”
Low Natural Graphite Prices and WWR Stock
Perhaps due to relatively low demand for natural graphite, as of January 2020, the price of natural graphite had dropped to just above $2,000 per ton, down from $3,500 in 2016.
Worse, the owner of the world’s largest graphite mine sold just three kilotons of “finished product inventory” in the third quarter at an average price of only $470 per ton, according to Seeking Alpha.
Based on current prices, the graphite mine that Westwater is building in Coosa, Alabama would be “worthless.”
Westwater has claimed that it has developed a “purification technology” which will enable it to develop graphite in a “more sustainable manner” than standard methods. But it’s unclear if this technique will actually work and whether it will boost the company’s revenue in the future.
Similarly, those who are bullish on WWR stock have pointed to an executive order by President Donald Trump. The order told the Interior Department to consider using the Defense Production Act (DPA) to speed production of certain minerals important to technology companies.
It also directed the Interior and Energy Departments to facilitate the mining of these minerals.
But it’s unclear whether the Interior Department will actually use the DPA to spur production of natural graphite, and it’s unknown if a Biden administration would look to aggressively carry out the executive order.
Indeed, given Joe Biden’s aversion to confronting China, the world’s current top producer of natural graphite, when he was vice president, I would be surprised if his administration energetically carries out Trump’s executive order.
Additionally, it’s important to note that Westwater doesn’t plan to start obtaining graphite from its Coosa mine until 2028. That’s a long time from now. And by then, it’s possible that graphite will be replaced by a totally different mineral or technology.
The Bottom Line on WWR
Westwater is facing a meaningful threat from synthetic graphite, while the demand for natural graphite and the mineral’s prices appear to be extremely low.
Finally, it’s far from clear whether Westwater’s new technology will pay dividends, and it’s impossible to determine if Trump’s executive order will help the company or if demand for natural graphite will be strong eight years from now.
Despite all of these issues and the fact that Westwater did not have any revenue from 2017 through this year, WWR stock has a market capitalization of $100 million. As a consequence, the shares are not at all enticing and should be sold.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.