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Lithium miner AVZ Minerals Ltd (ASX:AVZ) storms higher: Should you invest?

In morning trade the AVZ Minerals Ltd (ASX: AVZ) share price has stormed higher following the release of an updated scoping study.

At the time of writing the lithium-focused mineral exploration company’s shares are up 4% to 8.4 cents.

What was in the update?

Earlier this month AVZ Minerals announced that a review found that the company could make significant savings if it used a more cost-effective transport method for its concentrate from the Manono Lithium project to port.

The review found that utilising “bulka bags’ instead of half height 20’ containers would enable “maximisation of available transport methods to port with positive results.”

This morning management revealed that these actions have reduced its transport cost estimates by US$58 a tonne to US$163 a tonne, which is a 26% reduction on its previous estimates.

As a result of this, management estimates that its free on board (FOB) cash costs for the Manono project in the Democratic Republic of the Congo are now US$297 per tonne, 16% lower than its initial estimate.

Further, management is busy investigating a number of other areas for additional cost saving opportunities. These include bulk volume discounts, potential five-year tax concessions, plant design optimisation, and realisation of tin by-product credits.

What impact has this reduction had on the project value?

According to the release, the pre-tax and pre-royalties net present value of the project on (Case 1) 2 Mtpa production has increased by US$190 billion to US$1.79 billion. AVZ Minerals’ 60% share of the project would be worth US$1,040 million.

The IRR of the project is greater than 90% based on ±35% accuracy and including US$36 million in capital contingency.

The capex estimate has remained the same for Case 1 throughput at approximately US$150 million to US$160 million. Once again this is accurate to ±35% and includes US$36M contingency.

It is worth noting that the company has warned that “there is no certainty that AVZ will be able to raise the amount of funding for Case 1.”

Should you invest?

Whilst this is admittedly a positive for AVZ Minerals and its shareholders, I’m still not overly convinced that the project will ever get off the ground.

In light of this, I think investors should stay clear of AVZ Minerals and look elsewhere. Lithium miners such as Galaxy Resources Limited (ASX: GXY), Orocobre Limited (ASX: ORE), and Pilbara Minerals Ltd (ASX: PLS) could be better option, though it is worth remembering they are still high risk investments.

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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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