Why Galaxy Resources Limited shares have gone gangbusters today

It has been a great day for shareholders of lithium miner Galaxy Resources Limited (ASX: GXY). Its shares are up over 9% to 50.2 cents today after the company confirmed pricing agreements for 2017.

According to the release Galaxy Resources has signed binding agreements with its existing Chinese customers for 120,000 tonnes of lithium concentrate for delivery in 2017.

The price that Galaxy Resources will receive has been confirmed as US$905 per tonne for 6% lithium oxide.

This is based on a price of US$830 per tonne for a minimum of 5.5% lithium oxide and an extra US$15 per tonne for each 0.1% improvement in grade of lithium oxide delivered.

According to management initial lithium concentrate production has delivered lithium oxide grades of between 5.8% and 6.4%. The high quality end product has been achieved through design changes at the processing plant and represents a big improvement on previous grades.

In 2017 Galaxy Resources expects to produce 160,000 tonnes of lithium carbonate. With 120,000 committed to its Chinese customers and the remainder being used to satisfy outstanding contracts, the miner can’t pull it out of the ground quick enough.

Judging by today’s release the insatiable demand for lithium looks likely to continue for some time to come. The Financial Times recently reported that supply and demand was fairly balanced, but this report may prove to be off the mark. This bodes well for fellow Australian lithium miners Orocobre Limited (ASX: ORE) and Pilbara Minerals Ltd (ASX: PLS).

But should you invest? Galaxy Resources is clearly in a strong position, but I would still class it as a high risk investment.

My fear is that high lithium carbonate prices will attract more miners into the space in the next 12 months. This could eventually lead to supply exceeding demand, causing prices and Galaxy’s share price to tumble. For me, I’m happy to sit on the sidelines with this one and focus on other areas of the market.

The lithium miners may have made many people rich in the last couple of years, but those big gains may now be a thing of the past. Instead I would suggest investors look at these hot stocks which I'm tipping to be big winners in 2017.

Big, Fat, Dividends

This company's dividend is almost the stuff of legends. Its reliable cash flows support a high payout ratio, and the company's stash of franking credits are the cherry on the top of the dividend cake. Based on the last 12-months of dividends, shares are offering a fully-franked 6.5% yield, which grosses up to a whopping 9.3%, when those franking credits are included.

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Motley Fool contributor James Mickleboro has no position in any 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 Bruce Jackson.

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