Why the Australian Vanadium share price was smashed today

The Australian Vanadium Ltd (ASX:AVL) share price has been smashed on Wednesday. Here's why…

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The Australian share market may have dropped lower again on Wednesday, but that 0.2% decline is nothing compared to the decline being made by the Australian Vanadium Ltd (ASX: AVL) share price.

The vanadium-focused mineral exploration company's shares were as much as 22% lower in earlier trade. They have since recovered slightly but are still down almost 18% in afternoon trade.

Why is the Australian Vanadium share price being smashed?

This morning Australian Vanadium announced the pre-feasibility study (PFS) results and the release of a maiden ore reserve for its 100%-owned Gabanintha vanadium deposit in Western Australia.

According to the release, the results of the PFS build upon the initial base case and indicate a project with a well-defined resource base, robust economics and utilising an industry standard, low-risk method of beneficiation and refining to produce a vanadium pentoxide (V2O5) flake product.

Furthermore, the work has identified a reduction in capital costs and confirmed the low C1 operating costs with further opportunities identified.

Management expects the average C1 operating expenses to be US$4.15/lb V2O5 equivalent, which is competitive with the world's lowest quartile producers.

Given that current V2O5 prices are at US$22/lb and there is expected to be an ongoing supply shortfall until at least 2025, this project could be very profitable based on those costs.

Finally, the study estimates the post-tax NPV (based on an 8% discount rate) to be between US$125 million and US$1.41 billion, depending on the pricing assumption. Management believes this indicates a robust project.

So why the selling?

While this study appears to be very positive and shows a lot of promise for the project, it appears that many investors were hoping for better.

In addition to this, the release explains that its current timeline indicates that production is expected to commence in 2022. This means it will be some time before the company is generating meaningful cash flows.

I think Australian Vanadium is worth keeping a close eye on, but I would sooner buy the shares of mining giants BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) instead.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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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