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The Short Report

Australia | Oct 02 2014

This story features ILUKA RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: ILU

Guide:

The Short Report draws upon data provided by the Australian Securities & Investment Commission (ASIC) to highlight significant weekly moves in short positions registered on stocks listed on the Australian Securities Exchange (ASX). Short positions in exchange-traded funds (ETF) and non-ordinary shares are not included. Short positions below 5% are not included in the table below but may be noted in the accompanying text if deemed significant.

Please take note of the Important Information provided at the end of this report. Percentage amounts in this report refer to percentage of ordinary shares on issue.

Stock codes highlighted in green have seen their short positions reduce in the week by an amount sufficient to move them into a lower percentage bracket. Stocks highlighted in red have seen their short positions increase in the week by an amount sufficient to move them into a higher percentage bracket. Moves in excess of one percentage point or more are discussed in the Movers & Shakers report below.

Summary:

Week ending September 25, 2014.

Is there a pattern here? The table below is a see of red, reflecting short position increases across the board of either one percentage point or more, or "bracket creeping" of under one percentage point. Names in the red include Regis Resources, Arrium, Iluka Resources ((ILU)), Mineral Resources ((MIN)), Kingsgate Consolidated ((KCN)), Beadell Resources and Evolution Mining ((EVN)), along with UGL, Bradken ((BKN)), ALS ((ALQ)) and Downer EDI ((DOW)). All are either miners or exposed to mining through mining services and/or engineering & construction. The driver? Brokers have lately been scrambling to downgrade their commodity price forecasts in the wake of slowing global growth and a stronger US dollar.

That mining related sectors have seen price weakness as a result this past month has been lost amongst the general Sell Australia trade. The difference is there are buyers clearly ready to pick up any beaten down non-mining names where value has become more attractive, while mining names are currently poison. One exception is Boart Longyear, which is near death's door and may be an M&A target. Meanwhile, rumours of the pending death of the department store model ensures Myer continues to hold top spot as the most shorted stock on the ASX.
 

Weekly short positions as a percentage of market cap:

10%+

MYR   15.9
ACR    14.6
AGO   12.1
MTS    11.7
COH   11.2
JBH     10.9
RRL    10.9
PDN    10.8
NXT    10.2

In: RRL           Out: OMI

9.00-9.99%

NWS, ARI, ILU

In: ARI, ILU              Out: RRL, TRS

8.00-8.99%

MND, UGL, CAB, FMG, TRS, MIN, BKN

In: TRS, UGL, MIN, BKN    Out: ILU

7.00-7.99%

KAR, WHC, DSH, WSA, KCN

In: KCN                      Out: UGL, MIN, BKN, BLY

6.00-6.99%

ASL, MSB, NUF, SGM, BDR, BLY, VET, ALQ, BRU, FLT

In: BLY, MSB, BDR, ALQ, FLT                  Out: ARI, KCN

5.00-5.99%

BCI, LYC, SXL, SPL, PBG, TEN, CRZ, EVN, VRT, DOW

In: PBG, EVN, DOW                        Out: ALQ, FLT, OZL

Movers and Shakers

This from last week’s Short Report: Vietnamese casino operator Donaco International ((DNA)) has spun off the mobile payments and banking technology business it acquired late last year, iSentric ((OMI)). It would appear those holding DNA are not particularly keen on holding OMI and hence shorts in the spun-off entity jumped 18.9ppt last week to 21.6%, which would represent a pre-sale ahead of receiving the new scrip. This has temporarily shot OMI to the top of the most shorted list, by a mile, but this will no doubt prove a short visit.

And indeed it did, with OMI shorts falling 21.6ppt last week to zero.

This leaves Myer ((MYR)) now officially as the most shorted stock in the market, and the shorters would have been smiling this week as a disappointing August retail sales result showed another big fall in department store sales and subsequent drop in the MYR share price.

In third is Atlas Iron ((AGO)), which the week before saw its shorts fall 1.5ppt while last week saw another 1.7ppt to 12.1% from 13.8%. The falling iron ore price is providing shorters with the ongoing opportunity to take profits, albeit AGO has not yet lost its place in the table as a result.

Shorters also bought back their Boart Longyear ((BLY)) positions last week, reducing shorts by 1.3ppt to 6.1% from 7.4%. Having fallen on news the company was considering its future, with regard possible recapitalisation, BLY shares rallied last week despite no further clarity. Punting on an opportunistic takeover?

Speaking of recapitalisation, the week before last Arrium ((ARI)) announced a capital raising and subsequently saw its shorts jump 2.4ppt. The same play continued last week with another 2.9ppt jump to 9.2% from 6.3%. The shorters are trying to lock in an arbitrage by picking up new shares at a discount in the raising to lock in profits, but there is always a risk they don’t get the allocation they want.

It’s been a tough year for goldminer Regis Resources ((RRL)) and the stock has been climbing steadily up our most shorted table. While the company’s FY14 result, released last week, met broker expectations the share price has fallen ever since. With cash flow needed to pay down debt ahead of any dividend consideration, RRL appears still to be a shorters’ target, with shorts increasing another 1.8ppt to 10.9% from 9.1% last week. Welcome, Regis, to the elite 10% club.

Beadell Resources ((BDR)) is another junior goldminer suffering price falls recently along with a drifting gold price, and another drawing the attention of shorters. BDR shorts rose 1.3ppt last week to 6.1% from 4.8%.

The ups and downs of UGL ((UGL)) shorts is becoming so frequent as to become monotonous. Suffice to say UGL is clearly a pairs trade favourite among the current batch of popularly shorted engineering & construction/mining services companies and last week saw a 1.1ppt increase to 8.3% from 7.2%.

To see the full Short Report, please go to this link.
 

IMPORTANT INFORMATION ABOUT THIS REPORT

The above information is sourced from daily reports published by the Australian Investment & Securities Commission (ASIC) and is provided by FNArena unqualified as a service to subscribers. FNArena would like to make it very clear that immediate assumptions cannot be drawn from the numbers alone.

It is wrong to assume that short percentages published by ASIC simply imply negative market positions held by fund managers or others looking to profit from a fall in respective share prices. While all or part of certain short percentages may indeed imply such, there are also a myriad of other reasons why a short position might be held which does not render that position "naked" given offsetting positions held elsewhere. Whatever balance of percentages truly is a "short" position would suggest there are negative views on a stock held by some in the market and also would suggest that were the news flow on that stock to turn suddenly positive, "short covering" may spark a short, sharp rally in that share price. However short positions held as an offset against another position may prove merely benign.

Often large short positions can be attributable to a listed hybrid security on the same stock where traders look to "strip out" the option value of the hybrid with offsetting listed option and stock positions. Short positions may form part of a short stock portfolio offsetting a long share price index (SPI) futures portfolio – a popular trade which seeks to exploit windows of opportunity when the SPI price trades at an overextended discount to fair value. Short positions may be held as a hedge by a broking house providing dividend reinvestment plan (DRP) underwriting services or other similar services. Short positions will occasionally need to be adopted by market makers in listed equity exchange traded fund products (EFT). All of the above are just some of the reasons why a short position may be held in a stock but can be considered benign in share price direction terms due to offsets.

Market makers in stock and stock index options will also hedge their portfolios using short positions where necessary. These delta hedges often form the other side of a client's long stock-long put option protection trade, or perhaps long stock-short call option ("buy-write") position. In a clear example of how published short percentages can be misleading, an options market maker may hold a short position below the implied delta hedge level and that actually implies a "long" position in that stock.

Another popular trading strategy is that of "pairs trading" in which one stock is held short against a long position in another stock. Such positions look to exploit perceived imbalances in the valuations of two stocks and imply a "net neutral" market position.

Aside from all the above reasons as to why it would be a potential misconception to draw simply conclusions on short percentages, there are even wider issues to consider. ASIC itself will admit that short position data is not an exact science given the onus on market participants to declare to their broker when positions truly are "short". Without any suggestion of deceit, there are always participants who are ignorant of the regulations. Discrepancies can also arise when short positions are held by a large investment banking operation offering multiple stock market services as well as proprietary trading activities. Such activity can introduce the possibility of either non-counting or double-counting when custodians are involved and beneficial ownership issues become unclear.

Finally, a simple fact is that the Australian Securities Exchange also keeps its own register of short positions. The figures provided by ASIC and by the ASX at any point do not necessarily correlate.

FNArena has offered this qualified explanation of the vagaries of short stock positions as a warning to subscribers not to jump to any conclusions or to make investment decisions based solely on these unqualified numbers. FNArena strongly suggests investors seek advice from their stock broker or financial adviser before acting upon any of the information provided herein.

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CHARTS

ALQ BLY DNA DOW EVN ILU KCN MIN MYR RRL

For more info SHARE ANALYSIS: ALQ - ALS LIMITED

For more info SHARE ANALYSIS: BLY - BOART LONGYEAR GROUP LIMITED

For more info SHARE ANALYSIS: DNA - DONACO INTERNATIONAL LIMITED

For more info SHARE ANALYSIS: DOW - DOWNER EDI LIMITED

For more info SHARE ANALYSIS: EVN - EVOLUTION MINING LIMITED

For more info SHARE ANALYSIS: ILU - ILUKA RESOURCES LIMITED

For more info SHARE ANALYSIS: KCN - KINGSGATE CONSOLIDATED LIMITED

For more info SHARE ANALYSIS: MIN - MINERAL RESOURCES LIMITED

For more info SHARE ANALYSIS: MYR - MYER HOLDINGS LIMITED

For more info SHARE ANALYSIS: RRL - REGIS RESOURCES LIMITED