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Galaxy Resources Limited shares have surged 13% higher in a week

On Wednesday afternoon the Galaxy Resources Limited (ASX: GXY) share price is on course to finish the day higher once again and is up 2% to $3.21.

This brings the lithium miner’s share price gain over the last five trading sessions to an impressive 13.5%.

Why are its shares on such a good run?

Last week Galaxy released its quarterly update which fell short of expectations after lower feed grades led to a sizeable increase in production costs.

As you might expect, this surprisingly weak quarter led to its shares tumbling notably lower on the day.

But since then there has been a positive development related to its Sal de Vida operation that has got the market excited again.

As I have explained before, Sal de Vida is one of the world’s largest and highest quality lithium deposits which management estimates can generate total annual revenues in the region of US$215 million and operating cash flow before interest and tax of US$118 million per annum at full production rates for a 40-year period.

Rumours are circulating that Galaxy may be on the verge of selling a non-controlling interest worth up to $US350 million, which involves an offtake agreement and equity.

The potential buyers include China’s Tianqi and Ganfeng, and Korean steelmaking giant POSCO.

Incidentally, earlier this year POSCO signed an $80 million offtake agreement with Pilbara Minerals Ltd (ASX: PLS) for its lithium concentrate.

While Galaxy has not confirmed reports that it plans to sell a stake, it has advised that it has appointed JP Morgan to assess strategic options for the asset.

What now?

I’m optimistic that Galaxy will sign a deal with one of the three rumoured suitors in the near future to get Sal de Vida up and running sooner rather than later and without the need to take on debt.

However, until a final outcome is known on the matter it is hard to factor it into the equation.

I would class Galaxy as a hold right now until more information is provided and suggest investors consider mining giant BHP Billiton Limited (ASX: BHP) in the meantime.

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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 Scott Phillips.

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