Lithium Shorts

July 19, 2018

Many of the more actively traded lithium stocks have seemingly found support, and are mostly moving sideways over the past few months.  However, one issue still seems to be keeping a lid on share prices: high short interest. Looking at those companies listed on the major US exchanges, Lithium Americas (LAC) has 10.69% of the float short, Albemarle Corp. (ALB) 11.21%, and SQM a whopping 18.4%. These numbers caused us to think about two important questions: why is it important to keep an eye on these figures, and when will the shorts start to unwind?

Why is it important?

While there are a plethora of public lithium plays out there, we focus on these three because they are listed in the US on the most actively traded markets in the world, and where most professionals actively invest.  As such, these stocks are a good representation of those investors that may not be experts on lithium or EVs but that know enough to want exposure one way or the other.

Seeing such high short interest in representative stocks tells us that the market is still betting against the lithium story. As contrarian, fundamental investors, this certainly doesn’t bother us.  In fact, we almost look at it in a positive light as well because when those positions start to unwind on the back of positive news, prices are catalyzed to converge to their intrinsic values. For anyone not familiar with short squeezes, just look at Tesla’s price action a few months ago when it ripped over 20% in a matter of days.  

That being said, new shorts will need to stop piling in before the stocks can start to take off again.  As we mentioned, over the past few months lithium stocks have mostly gone sideways. Over this time, we believe the buyers have been there to put a floor under the stocks, preventing them from getting too cheap.  However, on the flip side the sellers have also been there to keep a lid on things. For example, both times ALB crossed over $100, it quickly sold back down to the low $90s, with Pilbara and Lithium Americas similarly being range bound as well.  

Interestingly we’d like to note that SQM hasn’t followed the same pattern,which may be one of the reasons why it’s more heavily shorted than the others.  While most lithium stocks retraced significantly from all time highs, SQM fared relatively better. They do have multiple business lines as well as JVs with two of the more promising junior lithium plays, which help cushion things.  But beyond that they were obviously the company that analysts picked to be the clearcut winner when they prematurely declared the lithium story dead.

When will it end?

After such a big run up in the sector over the years leading up to 2018, even if investors and analysts hadn’t turned bearish, we believe such a pause in the rally is healthy. Looking forward we have our eye on a few events that could jumpstart the lithium stocks again as we’ve mentioned in the past:

  • More positive earnings: It’s earnings season again which means we get to hear from Albemarle, SQM, and FMC.  ALB will likely discuss their position in the arms race some more. SQM should provide great detail and commentary about the industry as a whole.  FMC, which is inching closer to their spin off, may also spend some more time discussing the lithium business as well. Combined, the market should continue to see the positive fundamentals affecting the lithium industry.
  • FMC Spinoff:  Speaking of FMC’s spinoff, we believe this will be a key event for investors. It will be the first pure play lithium company in production listed on a major US exchange.  We believe this will make them an attractive option for institutions looking to gain exposure to the story. The event will also allow investors to see how the market values lithium businesses.
  • Ganfeng IPO: Finally, Ganfeng’s IPO will similarly attract investor attention while also enabling us to see how the market values such a company.  Furthermore, the cash generated from the transaction will likely be put to work as well via M&A, JVs, or other partnerships, which should provide further positive newsflow to the industry.

Combined, these three events should help bring in new investors, and start to catalyze the rally again.  And if these companies continue to put out positive commentary quarter after quarter, it will likely warrant deeper looks by analysts and professional investors. When that starts to happen, the misinformation should get corrected, and that is when we would likely start to see shorts unwind on a larger scale.

So stay tuned via twitter and email to get our analysis and updates as they hit the tape!

Disclaimer: We own Albemarle, SQM, Lithium Americas, and Pilbara.  The information presented here are our own opinions, not advice, and should not be taken as such.  Investors should do their own research prior to investing.