Lithium stocks leading short bets as earnings season kicks off

Joshua PeachMarkets reporter

Feb 5, 2024 – 3.36pm

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Short sellers targeting lithium stocks are standing their ground as earnings season gets under way, betting slowing economic conditions will continue to erode the beaten-up sector.

Lithium short targets Pilbara Minerals, Sayona Mining and Core Lithium remained in the top five most shorted stocks on the ASX as of January 29, according to data from the Australian Securities and Investments Commission.

Hedge funds betting against the lithium sector are standing pat. Peter Braig

All three stocks have already charted strong declines in the past six months after crashing lithium prices and growing costs withered the outlook for the sector.

Ray David, partner and portfolio manager at funds house Blackwattle, named lithium among the sectors he expected to come under pressure this earnings season.

“The sectors which are most prone to the jaws of slowing sales and higher costs impacting profit margins are really consumer and resources, as well as healthcare services,” he told The Australian Financial Review.

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“Lithium is a great example. A number of those high-cost, low-quality-reserve miners have updated the market, which has seen share prices fall by 30 to 40 per cent.”

Mr David confirmed Blackwattle’s Long-Short 130/30 Fund still held shorts targeting the lithium sector.

Core Lithium shares fell more than 20 per cent last month after the miner halted production at its Northern Territory operation. Later in January, Liontown shares also sank after the lithium developer revealed it had lost a $760 million debt funding package from creditors which was intended to help complete the company’s Kathleen Valley project in WA.

Last week, IGO became the latest lithium miner to disappoint the market, confirming production from its joint-owned Greenbushes mine in Western Australia was likely to fall. Shares in IGO have almost halved in the past six months.

IGO will report its half-year earnings on February 22, alongside fellow lithium producers Pilbara Minerals and Mineral Resources.

‘Tricky’ February ahead

Lithium plays haven’t been the only stocks making big moves in the lead-up to earnings season.

Fellow short sellers QVG Capital said the fund had noted several oversized moves in share prices rippling through the market in January, citing Megaport, Nanosonics and Domino’s as examples.

“So far, share price reactions to trading updates suggest that a combination of positioning (or popularity) is just as important as fundamentals in driving outsized share price moves,” QVG co-founder Chris Prunty said in a note over the weekend.

“This could make navigating February tricky.”

Last week, Megaport shares jumped 28 per cent to $12.48 after the Brisbane-based company beat its quarterly earnings target and flagged the addition of a large US-based healthcare customer worth $4.2 million.

Totus Capital was among the short sellers squeezed by the Megaport rally, citing its short position in the tech stock as a primary detractor from performance during January. Its short position in National Australia Bank also dragged its one-month performance.

The fund nevertheless returned 4.1 per cent over the month, helped by holdings in coal miner Whitehaven.

In a note to investors, Totus said the size of its short book remained largely intact ahead of earnings season, despite the ASX rallying to an all-time high in January.

“Despite the market rip, we have barely trimmed our short book and therefore should remain well-protected if the current market euphoria turns sour,” the fund said.

“Amazon, our largest US long position, just reported exceptionally strong results, and we feel good about our book heading into Australian reporting season this month.”

As of January 31, Totus’ portfolio had a gross exposure of 191 per cent, with its short book comprising 76 per cent.

Gross short positions across the ASX 100 came off in January to around $27.2 billion, after peaking at just over $30 billion in late December.