Why the Galaxy Resources share price stormed higher today

The Galaxy Resources Limited (ASX:GXY) share price has stormed higher on Monday after confirming the sale of tenements to POSCO…

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The Galaxy Resources Limited (ASX: GXY) share price has had a strong start to the week.

In morning trade the lithium miner's shares have returned from their trading halt and pushed as much as 6% higher to $2.25.

Why is the Galaxy share price on the rise today?

On Friday Galaxy requested a trading halt pending an announcement regarding the sale of a package of tenements located on the northern area of the Salar del Hombre Muerto in Argentina to South Korean conglomerate POSCO.

This morning it emerged from its trading halt after management announced that the settlement of the tenements sale has now been completed. This follows the registration of the tenement and usufruct transfers by the local Mining Court in Salta Province.

According to the release, Galaxy will now receive US$271.6 million (after US$8.4 million in withholding taxes was paid in November 2018).

This will comprise US$257 million consideration held in escrow plus interest accrued which will be released by the escrow agent to Galaxy by February 26 and US$14.6 million which will be paid by POSCO directly to Galaxy by March 1 now that the registration of the usufruct transfers has also been completed.

What now?

At the end of the last quarter Galaxy had a cash and liquid assets balance of US$41.1 million and zero debt. This sale will bring its cash balance up towards the US$312 million mark or $436 million in local currency.

So, with a market capitalisation of approximately $870 million, Galaxy now has roughly half its market capitalisation in cash.

This essentially means that the market now values its cash flow generating Mt Cattlin operation, its promising James Bay project, and the remaining tenements of the Sal de Vida project at just ~$434 million. Which seems absurdly cheap in my opinion.

But whilst I do think Galaxy looks great value right now, because of its high levels of short interest and weakening lithium prices I'm not expecting the market to re-rate its shares any time soon.

Until lithium prices improve and the improvements are sustained, I suspect that the shares of Galaxy, Orocobre Limited (ASX: ORE), and Pilbara Minerals Ltd (ASX: PLS) will remain under pressure no matter how attractive they look on paper.

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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