The recent run-up in electric vehicle stocks brought several mid- and small-cap companies to the forefront. One is former uranium producer Westwater Resources (NASDAQ:WWR), which went through a reincarnation of sorts this year. The company sold off its stagnant uranium business and is now squarely focusing on developing electric vehicle battery-grade graphite products. It plans to become a vertically integrated graphite company, completing its Coosa Graphite project in Alabama. However, the company has a history of burning through cash and destroying investor value. Moreover, with production still a couple of years away, it’s tough to get excited about WWR stock at this time.
The company’s pivot to graphite is likely to pay a lot of dividends in the future. Graphite is used in the anodes of EV lithium-ion batteries. The EV market is growing exponentially and is expected to reach $802.8 billion by 2027.
However, its supply chain is reliant on China, which produces 80% of all-natural graphite produced. Though, that situation could change with President Donald Trump’s executive order pushing for the development of critical minerals domestically.
Hence, Westwater Resources is likely to benefit from these long-term tail-winds, but meaningful production is still way-off.
The Potential of the Coosa Graphite Project
Westwater Resources plans to develop a 42,000-acre graphite producing facility in Alabama for $118 million. In 2018, the company bought the project in an all-stock deal, including the issue of 14.1 million shares with Alabama Graphite. Moreover, the company holds all the mineral rights over its production facility. The Colorado-based company will soon begin production as early as 2022. Initially, it would have to rely on imported feedstock, but in the long run, it has plans to mine its own graphite by 2028.
Its pilot production plant is nearing competition and will produce three graphite products. Additionally, the company developed a unique environment-friendly process for the purification of graphite. It has applied for a U.S. patent, potentially saving 300,000 tons per year of CO2 emissions. Moreover, the company will send finished products to customers for evaluation.
The facility could receive support from the government if the incoming administration of Joe Biden maintains the “tough on China” approach. It could be a significant boost for local graphite producers as China currently dominates the industry.
At this point, it seems that the company would be unable to generate meaningful revenue until 2023. Its facility will gradually ramp up production and substantially grow output in achieving economies of scale. Before that, however, I don’t foresee it becoming profitable. It would have to rely on high graphite prices to generate some profits.
Though its pivot to graphite has a lot of potential, there’s plenty to skeptical about at this time. Firstly, natural graphite tends to have significantly lower consistency and purity compared to synthetic graphite. When it comes to batteries, it has a better rate capability and cycle life. Naturally, battery life is significantly more important in an EV than a smartphone. Moreover, it also costs a lot higher, which equates to higher margins. What is more surprising is that the base case for Alabama Graphite pitches the selling prices for coated spherical graphite (CSPG) at more than $8,000 per ton. Such a selling price is highly unrealistic and is more in line with synthetic graphite.
Furthermore, several things could go wrong in the testing phase and with the processing plant. For instance, Aqua Metals (NASDAQ: AQMS) facilities burned down in a fire while working to bring lead recycling technology to market. From a financial standpoint, though, Westwater seems to have enough liquidity to stay on track in pursuing its targets. It has raised over $50 million from stock sales and removed $6 million in liabilities after selling its uranium business.
Final Word on WWR Stock
WWR stock is up 151% for the year, making it one of the hottest speculative stocks in the EV space. Westwater Resources’ rebirth seems interesting with the potential of graphite and its application in EV batteries. Its Coosa Project could prove to be a gamechanger down the road, but meaningful cash flows and profits are still way-off.
Moreover, margins remain a concern as well as the effectiveness of natural graphite compared with its synthetic counterpart. But I am bullish about WWR stock’s prospects at this time.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.