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Why Galaxy Resources Limited shares dropped lower today

Although many of the lithium miners have climbed higher today, the Galaxy Resources Limited (ASX: GXY) share price has not been able to follow suit.

At the time of writing the lithium miner’s shares are down 2% to $3.53.

Why are they lower?

With no news out of the company, today’s decline appears to be related to a broker note out of the Macquarie Group Ltd (ASX: MQG) equities desk.

According to that note, the broker has downgraded Galaxy to an underperform rating with a $3.00 price target. That price target implies potential downside of approximately 15% for its shares over the next 12 months.

Macquarie’s analysts have made the move after revising their lithium carbonate and spodumene price forecasts.

Although in the short-term the broker believes that prices will increase significantly, beyond 2019 it has concerns that supply will finally outstrip demand.

In light of this, the broker isn’t convinced that Galaxy will bring its Sal de Vida asset in Argentina into production.

As a result, it has increased its short-term earnings estimates due to lower costs, but downgraded its long-term earnings estimates to reflect Sal de Vida’s absence.

What now?

I agree with Macquarie that if prices were to fall significantly in 2019 then it is unlikely that Sal de Vida would come on-line.

However, I’m not overly convinced that prices are destined to fall as the broker predicts. Demand for lithium-ion batteries is forecast to grow strongly over the coming years due to the rapid adoption of electric vehicles and renewable energy.

In fact, Macquarie’s own research shows that electric vehicle sales accounted for 1.7% of new car sales in Canada, China, Europe, Japan, and the United States in 2017.

While this is a huge increase on a year earlier, it is still only a fraction of the total market. So with a number of governments pushing forward with plans to ban the sale of internal combustion engine vehicles over the next two decades, I suspect that this growth could accelerate further this year and beyond.

This should create a healthy level of demand which I believe planned supply increases will struggle to satisfy, potentially putting Galaxy and its peers Pilbara Minerals Ltd (ASX: PLS) and Orocobre Limited (ASX: ORE) in a position to profit.

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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 Bruce Jackson.

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