Galaxy Resources Limited (ASX:GXY) shares rocket 18% higher on POSCO deal

The Galaxy Resources Limited (ASX:GXY) share price has rocketed higher after announcing a deal with POSCO for tenements at its Sal de Vida operation…

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In morning trade the Galaxy Resources Limited (ASX: GXY) share price has been one of the best performers on the market.

At the time of writing the lithium miner's shares are up 18% to $3.53.

Why are Galaxy Resources' shares rocketing higher?

This morning Galaxy announced that it has agreed to sell a package of tenements in the northern basin of its Sal de Vida operation in Argentina to South Korean conglomerate POSCO for US$280 million (A$371 million).

The package of tenements contains approximately 1.58 million tonnes lithium carbonate equivalent (LCE) of JORC compliant measured and indicated resources and 2.54 million tonnes LCE of JORC compliant total resources.

The remaining tenements that Galaxy controls now contain approximately 4.09 million tonnes LCE of JORC compliant measured and indicated resource and 100% of the previously announced reserves of 1.14 million tonnes of LCE.

Management has advised that the proceeds from the transaction with POSCO will be available to progress the development of Sal de Vida.

Though it is worth pointing out that the sale is a non-binding agreement and conditional on completion and execution of definitive documentation and receipt of POSCO board approval. This is expected to be satisfied during the third quarter of 2018.

Is this a good deal?

I think this is a great deal for Galaxy and its shareholders. By selling a small undeveloped part of Sal de Vida the company is now able to fund the development of its world class asset which has the potential to generate significant free cash flow for upwards of four decades.

In addition to this, the two companies have entered into a cooperation agreement which is intended to maximize potential development, operational, infrastructure and logistical synergies for their respective projects.

It isn't the first time that POSCO has done a deal with an Australian lithium miner. Earlier this year it signed a life-of-mine off-take agreement with Pilbara Minerals Ltd (ASX: PLS).

Should you invest?

While I think that lithium miners such as Galaxy, Pilbara Minerals, Kidman Resources Ltd (ASX: KDR), and Orocobre Limited (ASX: ORE) have bright futures ahead of them, a lot will ultimately come down to future lithium prices.

With opinion incredibly divided on future prices due to supply increases, it has made the lithium miners extremely volatile. If your risk profile allows it, a small investment in Galaxy with a long-term view could be very rewarding. But if high risk shares are not suitable then I would suggest you look elsewhere in the resources sector at more stable mining shares.

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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