UBS is the latest broker upgrading one of the ASX’s most heavily shorted stocks

A battle line seems to be forming between brokers and short-sellers over lithium miner Galaxy Resources Limited (ASX: GXY) with UBS the latest big broker to upgrade its recommendation on the stock.

It will be interesting to see if short-sellers back down given that Galaxy is the third most shorted stock on our market with around 15% of its shares loaned out to these bearish traders.

The top two favourite stocks of short-sellers are graphite miner Syrah Resources Ltd (ASX: SYR) and fast food chain Domino’s Pizza Enterprises Ltd. (ASX: DMP).

Short-selling is when a trader borrows stock to sell on market in the hopes of buying it back later at a lower price to profit from the difference.

Short sellers are probably feeling nervous that UBS has become the second broker to upgrade the stock over the past week after Macquarie Group Ltd (ASX: MQG). UBS has lifted its recommendation on the stock to “buy” from “neutral”, while Macquarie bumped up the stock two notches to “outperform” from “underperform”.

Brokers are feeling more bullish about Galaxy since the miner announced an updated Definitive Feasibility Study (DFS) for its Sal de Vida project and the sale of some tenements north of this project to POSCO for US$280 million.

This equates to around 91 cents a share and UBS notes the proceeds will cover more than half of the US$474 million bill to develop Sal de Vida – a lithium brine deposit in Argentina that is tipped to produce 25,000 tonnes of battery-grade lithium carbonate and 40,000 tonnes of potash every year for the next 40 years.

But the sale of the tenements isn’t the only positive for the project. While our politicians continue to bicker over the company tax cut, Argentina has joined the US to provide relief to companies.

“Recent Argentinian policy reforms have led to lowering the corporate tax rate to 25% by 2020 (prev. 35% in 2017) and GXY will receive a 2.5% rebate on gross export revenues for operating in the Puna Region and a further 3% rebate for being a lithium company,” said UBS.

There are at least two catalysts for the stock this calendar year. Securing permitting approval for Sal de Vida and signing an off-take and/or sell-down agreement – both of which will further de-risk the flagship project for the miner and trigger a further re-rating in the stock.

The Galaxy share price jumped 3% yesterday to $3.59 – taking its one-year gain to 64% compared to the 5% rally on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.

UBS has a price target of $3.95 on the stock while Macquarie is pegging a target of $3.90 a share.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Domino's Pizza Enterprises Limited. 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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