Please see following. This is a must read on the current shorting scenario that is going on at present.
The closing paragraph reads "Morgans, significantly, says a share issue will not be needed, echoing a position adopted by Orocobre management, and a key reason for it to forecast a future share price for the stock of $5.36 – 63% higher than Friday’s close, and a very worrying price tip for any short-seller."
IF YOU thought lithium was an exciting mineral just wait for the financial fireworks which Dryblower suspects could ignite in the next few weeks as short-sellers of Orocobre shares, the lithium leader, face the prospect of being squeezed back into the stock.
LithiumCitigroupDeutsche BankMacquarieMorgansOrocobreShort-selling
The first whiff of concern, it can’t be called panic yet, was wafting around the Australian stock market last week as Orocobre shares moved back above A$3, briefly touching a one-month high of $3.49 in late Wednesday trade, before easing to close at $3.29.
Over the course of the week Orocobre shares rose by 6% which, on one level might not seem particularly exciting, but it does get more interesting when measured against the 6% fall in the overall mining market.
Orocobre’s rise gets even more interesting when it is considered that at the start of the week close to 22% of its shares had been sold short, the highest “shorted” position on the Australian market, and one of the highest ever seen in an ASX stock.
For any reader unfamiliar with short-selling it is a share-trading technique in which an investor “borrows” shares (for a fee) and sells them because he believes the stock is more likely to fall in the future so he can buy back at a lower price, trousering the profit.
In the case of Orocobre the “shorts” have done well for much of the past 12-months as the company has struggled to complete construction of its Olaroz lithium project in Argentina with technical troubles causing delays in the delivery of lithium carbonate to customers.
From a high of $5.05 in June last year Orocobre fell to a low of $2.62 about eight weeks ago, a drop of around 48%, which is precisely the sort of fall that shorters love.
The problem for shorters is that it is getting harder to see Orocobre continuing its downward journey with a number of investment banks recently dusting off their research into the stock and coming up with a substantially higher future share price.
You don’t need a science degree to know that a rising share price in a heavily shorted stock is a financial market equivalent of two trains racing towards each other on the same track with the short-sellers hoping for a price fall and other investors hoping for a price rise.
In simple terms it is a case of who blinks first, investors with a positive view of lithium and Orocobre who will continue buying, or the short sellers who try to sell more to force the price lower, or start buying back, if they can.
If the shorters can’t buy back a “short squeeze” develops and the price of the stock under pressure could rocket up because of a scarcity of shares. They are effectively being squeezed back in at whatever price they have to pay to cancel out their shorted positions.
When the share price of a stock which has been as heavily short-sold as Orocobre starts moving up it’s a sign that something significant is brewing, and perhaps we did see the start of the shorters cancelling out their exposed positions.
The question which no-one can answer just yet is whether Orocobre has successfully resolved its operational problems and is on the way to financial success after a few false starts in the complex business of processing salt-lake brine to recover lithium.
In its March quarter report, and at a Macquarie Bank investment seminar last week, Orocobre painted an optimistic picture of rising production and solid cash flows which were eating into project debt.
Production of 2784 tonnes of lithium carbonate was down on the December quarter output of 3529t, but the reason for the fall is easily explained, caused by miscounting lithium concentration in the process ponds, a blooper which is being fixed.
Cash generated from lithium sales in the March quarter amounted to US$32.1 million, up 19% with the price per tonne up 13% to provide a comfortable gross cash margin of $6646/t.
Rising cash income is helping Orocobre retire debt while also leaving enough to fund a potential doubling of lithium carbonate capacity and work on a value-adding lithium hydroxide plant in Japan.
Deutsche Bank likes the outlook for Orocobre, so do Citi and Morgans with all three telling clients the stock is a buy. Macquarie is less certain and suggests hold.
A critical test of the future is whether Orocobre can fund its expansion plans with a mix of cash flow and debt, avoiding the need for a price diluting share issue, something the shorters might have been betting on.
Morgans, significantly, says a share issue will not be needed, echoing a position adopted by Orocobre management, and a key reason for it to forecast a future share price for the stock of $5.36 – 63% higher than Friday’s close, and a very worrying price tip for any short-seller.
ORE Price at posting:
$3.31 Sentiment: Buy Disclosure: Held
