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Why Argosy Minerals Limited (ASX:AGY) shares have been smashed today

It has been a disappointing day of trade for the Argosy Minerals Limited (ASX: AGY) share price.

In late morning trade the lithium miner’s shares have emerged from their trading halt and are down 27% to 22 cents. At one stage they fell as much as 40% to 18 cents.

Why are Argosy Minerals’ shares being smashed today?

This morning the lithium miner announced that the first batch of lithium carbonate (LCE) has been produced from the stage 1 industrial scale pilot plant at its Rincon lithium project in Salta Province, Argentina.

According to the release, a sample of the first one-kilogram production batch was tested in the company’s laboratory and determined it to be a good quality industrial grade LCE and not the sought-after battery grade LCE.

Disappointingly, no actual grade has been provided by management, which may have some shareholders concerned. By not revealing the grade, it leaves the market to speculate on just how low a grade of LCE the company has produced.

Another reason for concern is the lack of natural gas supply to its operation. Despite the company alluding to its Rincon lithium project being fully operationally, it neglected to mention that it has not yet sourced natural gas so that it can complete the washing stage of production. This is done at a high heat and removes certain soluble impurities.

Should you buy the dip?

I think this announcement has been a bit of a disaster and does not reflect well on the company.

However, it isn’t necessarily the end of the story. When the company finally gets natural gas at its site it may be able to improve the grade of its LCE through the washing stage.

Furthermore, management has advised that talks are progressing with a major international group in regards to an off-take agreement for its stage 1 production.

But having said that, I wouldn’t be in a rush to invest today even after its sizeable decline. Instead, I would keep an eye out for updates on the grade of its LCE once it has gone through the washing stage and its potential off-take agreements.

Until then, I would focus on lithium producers that are already generating meaningful free cash flows such as Galaxy Resources Limited (ASX: GXY) and Orocobre Limited (ASX: ORE). Though, even these two shares are high up on the risk scale.

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Motley Fool contributor James Mickleboro owns shares of Galaxy Resources Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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