Galaxy Resources Limited (ASX:GXY) shares rise on broker upgrade

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

In early trade the lithium miner’s shares are up almost 5% to $3.50.

Why are Galaxy Resources’ shares storming higher today?

With no further news out of the lithium miner, today’s gain is likely to be attributable to a broker note out of the Macquarie Group Ltd (ASX: MQG) equities desk.

According to the note, the broker has upgraded Galaxy’s shares all the way from an underperform (sell) rating to an outperform (buy) rating.

Macquarie’s analysts have also lifted the price target on the company’s shares from $3.00 up to $3.90.

The broker made the move after Galaxy announced the sale of a package of tenements at its Sal de Vida operation in Argentina to South Korean conglomerate POSCO for US$280 million (A$371 million).

The deal was better than Macquarie had expected and appears pleased that Galaxy now has the funds in place to develop the asset alone.

And although it has noted that successfully delivering the Sal de Vida brine project will be no cakewalk, it sees the development as a key catalyst for its shares.

Should you invest?

I agree with Macquarie on this and believe that the Sal de Vida deal with POSCO has been a huge positive for the company and puts it in a strong position to grow its earnings and cash flows at a robust rate in the future.

However, that doesn’t make an investment in Galaxy any less risky. Although I remain confident that lithium prices will remain at favourable levels in the long-term, there are some that are predicting that prices will halve in the coming years as supply increases.

Were that to happen, it would almost certainly reduce the profitability of lithium miners such as Galaxy, Orocobre Limited (ASX: ORE), and Pilbara Minerals Ltd (ASX: PLS) and weigh on their share prices.

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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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