Hedge funds in Asia are increasingly targeting Australian mining companies betting that the rout in the sector will deepen from weak commodity prices and the threat to earnings from elevated costs this reporting season.
Of the top 20 most shorted stocks on the ASX last week, 15 were mining companies, according to data compiled by Shortman, which tracks shorted stocks sourced from the Australian Securities and Investments Commission.
Though lithium stocks have remained a constant on the list of most shorted stocks, they have been joined by a broadening array of miners including rare earths, uranium, gold, iron ore and copper producers.
It comes as the spot price of iron ore extended its decline below the key $US100 a tonne level overnight, and some analysts are warning that prices should be trading below $US90 a tonne. It fell a further 0.5 per cent on Singapore futures to about $US98.70 a tonne.
The 30 per cent plunge in the price of Australia’s key export from its January peak has weighed heavily on the local resources sector as China grapples with the downturn in its property industry. So far this year, the S&P/ASX 200 Resources Index is down 17 per cent, and Rio Tinto, BHP and Fortescue are all down more than 15 per cent.
“There’s real nervousness across the entire commodity suite, and a lot of these miners are under pressure given the China situation is a moving feast which investors are still trying to get their heads around,” RBC Capital Markets’ head of Australian equities, Karen Jorritsma, told the Australian Financial Review.
“The sheer number of these shorts is telling us two things: hedge funds in Asia are back in the [ASX] region in a big way after being gone for a while; and secondly, just the lack of conviction with investors questioning what the end game is for some of these underlying minerals.”
Pilbara Minerals hit
Traders have increased their short positions in mining stocks this year, rotating away from bets against technology companies towards the end of last year as the artificial intelligence boom rocketed the sector higher.
Earlier this year, lithium producer Pilbara Minerals became the fifth most shorted ASX 200 company in data going back to 2010, according to MST Marquee. It continues to hold the top spot, with short positions rising 1.32 percentage points over the past month to 22.1 per cent.
Liontown Resources and Sayona Mining are also in the top 20, with the companies hit by the rout in lithium prices. Spodumene sank a further 4.7 per cent on Monday to $US810 a tonne, according to S&P Global Platts, and is down 90 per cent from the record highs above $US8000 a tonne.
Short sellers continued to profit from their bets against the sector on Tuesday. Pilbara Minerals dropped 4.2 per cent to $2.85 and Liontown tumbled 4.4 per cent to 82¢ by afternoon trading.
Hedge funds are also targeting uranium producers, which last year rallied as a supply crisis unfolded and investors anticipated a surge in consumption for the major ingredient used in nuclear power plants.
But prices of the heavy metal have dropped from a 16-year high around $US106 a pound in February to about $US82 a pound amid concerns of oversupply, which were heightened by the world’s top producer, Kazatomprom, raising production guidance earlier this month.
Paladin Energy, Boss Energy and Deep Yellow all feature in the 20 most shorted stocks, led by Paladin, which has had short interest leap 4.3 percentage points over the past month to 8.3 per cent.
Other miners being targeted over the past month include Lynas Rare Earths and copper producer Sandfire Resources.
It means investors will be closely watching results of mining companies this reporting season given higher labour, transport and raw material costs over the past two years.
“The biggest concern will be that they report negative jaws where cost growth is higher than revenue growth,” Ms Jorritsma said. “The issue this time around is that revenue growth is really fading, but cost growth has maintained its pace, so that’s something we’re watching.”
Iron ore behemoth Rio Tinto sits just outside the top 20 but has had its short interest steadily increase this year to 5.8 per cent as traders become increasingly concerned about the outlook for China and capitalise on the disparity between its UK and Australian listing.
“There’s been a broader commodity issue with stimulus efforts in China not working anywhere near as well as what policymakers wanted,” said MST senior analyst Hasan Tevfik.
“But it’s also about traders shorting the Aussie listing and going long the UK listing and hoping the discount between them closes.”