Short-selling of shares in lithium miners SQM, Albemarle, Galaxy and Orocobre has ballooned this year, reflecting what fund managers say is a sign of growing scepticism of an imminent battery boom.
The heavy shorting of the stocks puts investors at risk of a short squeeze if project timelines meet or beat expectations, or if near-term oversupply of battery chemicals proves to be more seasonal than structural, fund managers and analysts said.
Short-selling entails a bearish investor selling shares he or she does not own in the hope of profitably buying them back at a lower price in the future. If the shares rise instead, an investor would need to close, or “cover”, their position by buying back the shares for a loss.
“There’s a raft of reasons why people will short a name, but I’d say today it would be a perception that in the short term there’s a bit of oversupply, the price of lithium could fall,” said Darko Kuzmanovic, portfolio manager at Janus Henderson Investors in Sydney.
“People might say, ‘If I’m a shorter, maybe there’s a risk that it takes longer, it costs more, they don’t achieve the criteria that they say they will’, so maybe the stock won’t perform as well.”
There are signs China’s battery chemical market is oversupplied. Prices of lithium carbonate and its raw material spodumene have slumped 38 per cent this year.
Morgan Stanley shocked lithium bulls in February with a forecast for rising supply to “swamp” demand from next year, hitting prices.
Investors listened, with an eye on rising production at Australia’s Greenbushes, the world’s largest lithium mine, where several smaller projects are starting up.
Reuters calculations show that the short positions in Australian lithium miners Galaxy Resources and Orocobre, among the country’s most-shorted stocks, amount to some $260 million but that is dwarfed by short positions in New York-listed Albemarle totalling around $US1 billion.
“Galaxy and Orocobre are arguably the highest quality, largest and the most liquid of the Australian-listed (lithium) names. This higher market turnover and institutional ownership makes them more vulnerable to short selling,” said Canaccord analyst Reg Spencer.
Canaccord has a buy rating on both miners, but acknowledged a poor pricing environment could further weigh on shares.
Galaxy and Orocobre have said that price weakness was largely seasonal and demand should pick up in the second half.
Falling lithium prices could slow development of notoriously complex brine projects, where lithium is effectively evaporated out of saltlake deposits.
Orocobre suffered repeated delays and investors see potential for similar drags on Galaxy’s Argentine project, one fund manager said.
Shares in Galaxy are also being held back until a preliminary deal to sell some Argentine mining leases to steelmaker POSCO is signed off. The deal is expected to close next month.
Ben Cleary, portfolio manager at Tribeca Investment Partners in Singapore, expects POSCO to close the $US280 million deal with Galaxy given its new focus on battery raw materials.
“I don’t see much risk of POSCO not closing the transaction … I would say the potential for a short squeeze on completion is high.”