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Why the AVZ Minerals crashed 21% lower to a 52-week low today

Unfortunately for its shareholders, the AVZ Minerals Ltd (ASX: AVZ) share price has crashed to a 52-week low in afternoon trade.

At the time of writing the lithium-focused mineral exploration company’s shares are down 21% to 5.3 cents.

Why are AVZ Minerals shares crashing lower?

This morning AVZ Minerals shares returned from their trading halt following the launch of a share purchase plan to raise between $5 million and $10 million.

$5 million has been underwritten by Patersons Securities, which is acting as the lead manager of the offer as well.

According to the release, the new shares will be issued at a 20% discount to the VWAP trading price over the five trading days before the date of issue of the new shares (Feb 25) and will only be offered to eligible shareholders.

This effectively means that no price has been set and will only be decided on February 20, five days before the issue of new shares. Which seems like an odd way to do things and is likely to have put extra pressure on its share price today. After all, a lower share price on February 20 means a cheaper issue price.

What are the funds for?

Management advised that the funds are being raised to advance its Manono Lithium and Tin Project in the Democratic Republic of Congo and for general working capital.

While this project has world class potential and a monster mineral resource, it is so far from ports in a country with such dire infrastructure that I’m not overly convinced that it will ever be commissioned.

Especially after recent updates out of Galaxy Resources Limited (ASX: GXY) and Orocobre Limited (ASX: ORE) revealed that they experienced sharp declines in the price of their lithium in 2018. And, at least in the case of Galaxy, further pricing pressure has occurred in 2019 as well.

In light of this, I would suggest investors stay well clear of AVZ Minerals shares even if they are trading at a 52-week low.

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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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