The AVZ Minerals Ltd (ASX: AVZ) share price returned to trade this afternoon and immediately sank into the red.
At one stage the lithium-focused mineral exploration company's shares were down as much as 22% to a 52-week low of 7.5 cents.
Its shares have since recovered slightly but still finished the day down 6% at 9 cents after being suspended just before the market close.
Why are AVZ Minerals' shares being crushed?
This afternoon AVZ Minerals released the results of its scoping study for the Manono project in the Democratic Republic of the Congo.
Although management believes the study confirmed the potential for a world class, high margin, long life mining project, it appears as though the market is not convinced.
According to the release, based on a lithium concentrate price of US$920 a tonne and a 100% interest, the Manono project has been valued at US$1.6 billion.
I suspect the market isn't pleased with the price that has been used for the study, especially given how bearish many analysts have become on the battery making ingredient.
For example, a recent definitive feasibility study by industry peer Pilbara Minerals Ltd (ASX: PLS) used a life of mine forecast spodumene concentrate price of US$633 a tonne. This also includes cost insurance and freight.
AVZ Minerals' management believes its high-quality produce is deserving of a premium and based its price on an average of US$800 a tonne concentrate with a 5% Li2O grade. It then added US$15 for each 0.1% Li2O grade higher.
But I believe for this sort of study it is prudent to be conservative with pricing. So, based on a price in line with Pilbara Minerals and its actual 60% interest in the project, the net present value of the operation drops to as low US$500 million for AVZ Minerals.
Considering management estimates that funding in the order of approximately US$150 million to US$160 million will be required to achieve the outcomes in the scoping study, it looks as though Manono isn't going to be the cash cow many hoped.
In addition to this, management has warned that there is no certainty that it will be able to raise the funds required to start up the operation. And if it can, it may only be available on terms that are dilutive to existing shareholders.
The next step will be for AVZ Minerals to focus on its Full Feasibility Study, which is expected to be completed in the second quarter of 2019.
Should you buy the dip?
I would suggest investors stay well clear of AVZ Minerals and watch on from the safety of the sidelines until things become clearer. At this point I feel there are too many unknowns which make this an incredibly risky investment option.
Investors wanting exposure to lithium might want to consider Orocobre Limited (ASX: ORE) or Galaxy Resources Limited (ASX: GXY), but they too are high risk investments.
