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Why Galaxy Resources Limited shares have been on fire this week

One of the best performers on the local share market this week has been the Galaxy Resources Limited (ASX: GXY) share price.

Although in morning trade the lithium miner’s shares are down 2% to $3.37, their week-to-date gain is still an impressive 11%.

Why have its shares been on a tear?

There have been a couple of catalysts for this push higher. The first has been improved sentiment amongst many leading brokers.

A broker note out of Citi at the start of the week revealed that its analysts have upgraded Galaxy’s shares to a buy rating from neutral following an industry sell-off which it described as “overdone”. The broker has a sizeable $4.60 price target on Galaxy’s shares. Citi also upgraded Orocobre Limited (ASX: ORE) shares to a buy rating as well.

This was hot the heels of Ord Minnett initiating coverage on Galaxy with a buy rating and $4.00 price target last week.

The second potential catalyst for its push higher is a report in The Australian which speculates that German automaker giant BMW is going to sign an offtake agreement with Galaxy.

As 100% of the planned production at Galaxy’s Mt Cattlin project is already secured with multiple customers throughout Asia for the next five years, this potential offtake agreement with BMW would have to be related to its yet to be commissioned Sal de Vida asset in Argentina or James Bay asset in Canada.

I think that bringing either of these assets on line would be a huge boost to the company’s growth prospects and put it in a position to generate bumper free cash flows. Hence why I’m not surprised to see its shares rise on the speculation.

Should you invest?

Regardless of the potential offtake agreement with BMW, I think that Galaxy is one of the best options in the resources sector today.

The lithium miners are, however, still very high risk investments. Which makes Galaxy, Orocobre, and Pilbara Minerals Ltd (ASX: PLS) largely unsuitable for the average investor.

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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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