The Motley Fool

Why the Galaxy Resources share price has dropped lower today

The Galaxy Resources Limited (ASX: GXY) share price has dropped lower in morning trade after providing an update on its Sal de Vida operation.

At the time of writing the lithium miner’s shares are down almost 3% to $2.17.

What was in the update?

According to the release, project development activities at the Argentina-based operation have been largely focused on the Front-End Engineering Design (FEED) and optimisation phase, as well as improving its operational readiness in order to minimise executional risks and maximise financial returns.

The company expects to appoint Worleyparsons Limited (ASX: WOR) as project management consultant to lead the FEED and the optimisation work program in the near future.

In addition to this, management advised that it has received several offers from potential strategic partners which it is currently evaluating.

As negotiations continue to progress, the board has extended the process timeline to ensure proper consideration is given to the strategic merits and proposed terms and structure of each of the offers. I suspect this delay may be the reason for the share price weakness today.

Management advised that it made this decision to extend the process timeline as it “will only proceed with a strategic partner if the final terms of the relationship properly recognize the fundamental underlying value of Sal de Vida and the partner can add additional value to the Project either through technical and/or financial input.”

For now, though, project development activities will continue and can be funded internally due to Galaxy’s strong financial position thanks to the recent sale of a selection of tenements at Sal de Vida to South Korean conglomerate POSCO for US$280 million.

In addition to this, Galaxy has zero debt and is generating solid cash flow from its Western Australia-based Mt Cattlin operation.

Should you invest?

While I think that Galaxy, Kidman Resources Ltd (ASX: KDR), Orocobre Limited (ASX: ORE), and Pilbara Minerals Ltd (ASX: PLS) could all be good investments if lithium prices remain favourable over the medium term, I have been left concerned by recent weakness in the prices being commanded by Orocobre.

This month Orocobre advised that during the December quarter it averaged a price of US$10,800 per tonne for its lithium carbonate, down 15% from the US$14,699 per tonne it commanded in the September quarter.

Management advised that soft market conditions in China have had a direct impact on shorter term contracts, leading to the fall in prices.

In light of this, I would suggest investors wait to see how prices fare during the first quarter of 2019 before considering an investment.

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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