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Why Galaxy Resources Limited (ASX:GXY) shares jumped 11% higher today

The Galaxy Resources Limited (ASX: GXY) share price has been amongst the strongest performers on the market on Tuesday.

In early afternoon trade the lithium miner’s shares are up almost 4.5% to $2.89. At one stage they were as much as 11% higher at $3.07.

Why did Galaxy’s shares jump higher today?

This morning the lithium miner announced that South Korean conglomerate POSCO has signed a binding agreement to purchase a package of tenements from it on the northern basin of Salar del Hombre Muerto in Argentina for a cash consideration of US$280 million.

While it has looked like a forgone conclusion for some time, judging by the share price reaction, it appears that not all investors were convinced that the POSCO board would approve the purchase.

But the POSCO board has approved the purchase and Galaxy will now begin the relevant tenement transfer and registration procedures. Completion of the transaction is expected by the fourth quarter to 2018.

This is a major positive for Galaxy and its shareholders and will leave the company well-funded to fuel its growth.

Galaxy’s chairman, Martin Rowley, stated that: “This transaction with POSCO underlines the significant previously unrecognized value of Galaxy’s tenements on the Salar del Hombre Muerto and provides a substantial cash injection which underwrites the development of the Sal de Vida lithium brine project.”

The company also sees opportunities for the two parties to work closely with each other. As a result, they plan to explore potential cooperation to maximise future development and operational synergies for their respective projects on the Salar del Hombre Muerto.

Should you invest?

I think that Galaxy is one of the best lithium miners in the world with a portfolio of assets capable of generating significant free cash flow. However, a lot of its future success will come down to lithium prices.

This week Chilean lithium mining giant SQM tipped prices to fall 10% in the September quarter on the back of rising production in Australia. While this wouldn’t be overly damaging, it depends what happens from there.

I’m optimistic that demand from battery makers will support higher prices over the long-term, but if this isn’t the case then lithium miners like Galaxy, Orocobre Limited (ASX: ORE), and Pilbara Minerals Ltd (ASX: PLS) could take a hit.

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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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