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Why the AVZ Minerals Ltd (ASX:AVZ) share price has been smashed today

Unfortunately for its shareholders the AVZ Minerals Ltd (ASX: AVZ) share price is in freefall again on Thursday.

In afternoon trade the lithium-focused mineral exploration company’s shares are down 23% to 9.2 cents. At one stage the AVZ Minerals share price was down as much as 28%.

This means that the company’s shares have now fallen 60% over the last three months.

Why are AVZ Minerals’ shares being crushed today?

This morning AVZ Minerals released a change of director’s interest notice which revealed that its CEO, Klaus Eckhof, has offloaded more than half of his 63 million shares in the company.

According to the release, Mr Eckhof sold 32.5 million shares through off-market and on-market trades over the course of the last three days. No reason has been provided for the sale.

This is never a good look for a company, but even less so after questions about the viability of its operation have been raised.

As I mentioned on Monday, the company’s update warned that the freight costs to port may be a significant operational cost and warrants due consideration of options prior to progressing into the feasibility study stage.

This is because AVZ Minerals’ Manono lithium project is extremely far from the coast in a risky country with poor infrastructure.

Management proposed three potential ways for its lithium to reach international customers. These three potential options were Manono to Dar es Salaam Port in Tanzania, Manono to Lobitu Port in Angola, and Manono to Durban Port in South Africa.

Should you buy the dip?

No. While there are a thousand reasons that the company’s CEO could be selling shares, I just think the timing is incredibly bad and it doesn’t fill me with confidence about the future of the Manono project.

There is no doubt that AVZ Minerals is sitting on a potentially world class asset, but the costs to get that product to customers could prove to be too high, making the operation unfeasible. Especially if lithium prices soften in the coming years as supply increases.

Because of this, I would suggest investors focus on companies already producing the battery-making ingredient and generating free cash flows such as Galaxy Resources Limited (ASX: GXY) and Orocobre Limited (ASX: ORE). Though both are high risk investments and investors may want to wait for a pullback before snapping up shares.

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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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