In morning trade the Galaxy Resources Limited (ASX: GXY) share price has been amongst the best performers and is up 4% to $3.74.
This brings the lithium miner's six-month return to an impressive 72%.
Why are its shares higher today?
This morning Galaxy announced that it has signed binding offtake agreements for a minimum of 200,000 tonnes per annum of lithium concentrate with multiple customers for a period of five years.
This equates to 100% of the total planned lithium concentrate production from its Mt Cattlin site and will be sold at a higher price in 2018 than it achieved in 2017. After which, annual price reviews will be undertaken in the fourth quarter of each calendar year.
As of the second quarter of FY 2018 Galaxy was selling its product for US$843 per dry metric tonne before royalties and marketing fees.
If Galaxy can command a price of US$900 per dry metric tonne, it stands to generate sales of US$180 million in calendar year 2018 from its Mt Cattlin site alone.
Furthermore, its production costs have been falling at a solid rate this year, dropping 18% quarter-on-quarter to US$320 per dry metric tonne.
If this continues to fall as production ramps up, then I think Galaxy will be in a position to generate significant amounts of free cash flow in FY 2018 and beyond.
Should you invest?
Due to the unstoppable rise of electric vehicle usage and its portfolio of world-class lithium assets, I think Galaxy is one of the best long-term investment options in the resources sector.
Demand for lithium is growing at an extraordinary rate due to its use in electric vehicle batteries. Proof of this can be seen in these offtake agreements. Galaxy quite literally cannot pull lithium out of the ground quick enough to satisfy demand.
However, its shares are a little on the expensive side at the moment and investors may want to consider holding out for a better entry price.
In the meantime, I see value in the shares of lithium peer Mineral Resources Limited (ASX: MIN).
