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Why the Galaxy Resources Limited share price has given back gains

Galaxy Resources Limited (ASX: GXY) a lithium production company has tumbled 25.6% from its all time high of $4.46 to $3.32, following an agreement on 16 January 2018 between Chilean development agency Corfo and Sociedad Quimica y Minera (SQM).

The agreement will allow SQM to produce up to 180,00 metric tons of lithium annually, which would more than triple the company’s output. Demand for lithium ion battery applications has accelerated primarily due to growth in electric vehicle consumption across the globe. However, if lithium supply increases, market forces will dictate a decline in the commodity price, impacting profit margins. 

Galaxy Resources’ share price had seen an increase of 175% over the last 6 months prior to the announcement, and I believe investors saw this as a good excuse to cash in their winnings, considering the company’s December 2017 quarter results showed its EBITDA grew 58% to $34.2 million, while realising a 10% increase in lithium concentrate production. 

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Motley Fool contributor Daniel Deanhas no position in any of the 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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