Pilbara Minerals (ASX: PLS) shares are Australia’s most shorted again. Large short positions in PLS shares do not, not necessarily, mean that the price is going to go down. They are though an indication that some to many people think the Pilbara price is going to decline from its current price. So, why is it that so many think so?
It’s worth starting with the fact that the start here was one of the great mining deals of all time for Pilbara Minerals: “We’ve mentioned this before but it’s worth explaining properly about Pilbara: “The basic deal at Pilbara is that it's the result of one of the truly great bargains in mining industry history. Back in 2013 or so there was a run up in the lithium price. This meant more exploration, more mines tried to come online. One, within a company called Altura, got financed, went into production and then went bust. It went bust because the finance costs could not be covered by the now low - low because lots of mines got financed - lithium price. Pilbara bought that mine out of the bankruptcy and then, almost exactly then, the lithium price soared again. Pilbara has near 50% net profit margins on $2 billion of sales as a result. The timing was exquisite.””
The result of this is that there are high volumes and high margins at the company. But there’s a fly in that ointment for Pilbara: “However, the next question about Pilbara is where does the market go from here? “Sky-high prices for lithium carbonate, the key element for batteries that last year surged to $80,000 a tonne when fears over a supply crunch peaked, also played a role. Miners and refiners greenlit projects or maxed out capacity to cash in on the boom, pushing production up and prices down. Lithium carbonate last week traded at $21,000, a 75 per cent fall.””
Pilbara Minerals share price from Google Finance
The reason for that lithium price fall we’ve also pointed out when discussing PLS shares: “This is more than just a worry about Pilbara Minerals. It's something that crosses the entire lithium sector. It's entirely true that minor metals shortages lead to a boom in prices. But there's no physical shortage of any of these elements. Only a shortage of mines and processors who can turn dirt into the lithium we want to use. So, the shortage and the high prices will only last as long as it takes to finance and build new mines and processors.
This is just the way minor metals work. Price boom followed by price bust as supply expands - usually over-expands - to meet the new demand. In fact, a useful rule is that this will happen, it's just a matter of when?”
There simply isn’t a shortage of lithium out there. There is a shortage - or was perhaps - of people extracting it. So, more extract, more is available, the lithium price comes down.
It slightly depends upon who we want to believe. One source has Pilbara as the most shorted Australian share, retaking the position from Genesis Minerals. S&P Global Market Intelligence has those positions reversed.
The reason for the short positions is simply that Pilbara Minerals makes a fortune out of producing large quantities of lithium at high lithium prices. As more mines open those lithium prices fall - as will the price Pilbara gets and so their profits. The only question is by how much?
