The Short Report – 23 Jan 2020

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

See Guide further below (for readers with full access).

Summary:

Month ending January 16, 2020

Welcome to the first FNArena Short Report for 2020. As the Short Report has been taking its annual leave this past month, the first report of the year will track changes in short positions over the period of the month to January 16. As of next week, the report will revert to its usual mode of weekly updates.

Over the month to January 16, the ASX200 rallied a net 3.7%, and rallied 5.3% from the December 31 book-squaring sell-off. As of yesterday the index was up 5.3% and 6.7% respectively.

It may be hard to fathom exactly what, beyond momentum and FOMO, has driven the market to such giddy heights when there’d be every excuse to think otherwise, but we can note that short-covering has had little to do with it. Over the period, only four stocks saw moves in either direction of one percentage point or more.

We can dismiss the first stock straight up. Kirkland Lake Gold ((KLA)) is a Canadian-based miner listed in all of Toronto, New York and Australia and as such its short position – up to 28.8% now from 22.6% a month ago – is almost certainly the reflection of a geographical arbitrage play (sell in one location and buy in another) and is not worth analysing again in this Report in 2020, as it was tedious enough in 2019.

In the real world, shorts in graphite miner Syrah Resources ((SYR)) have risen to 16.8% from 15.8%, shorts in Resolute Mining ((RSG)) have risen to 11.1% from 9.0%, shorts in Mineral Resources ((MIN)) have fallen to 8.8% from 10.7%, and shorts in oOh!media ((OML)) have fallen from 6.6% to below 5%. Hence the latter stock has fallen off the table.

See Movers & Shakers below.

Weekly short positions as a percentage of market cap:

10%+
KLA    28.8
GXY   17.8
SYR    16.8
ORE    13.7
SDA    13.0
ING     12.1
NEA    12.0
GWA  11.9
NXT    11.9
JBH     11.4
RSG    11.1
BGA   11.0
CGC    10.7
WEB   10.2
MTS    10.0

In: RSG           Out: MIN, DMP, BKL

9.0-9.9
DMP, BKL, SUL

In: DMP, BKL, SUL              Out: RSG
                                               
8.0-8.9%
MIN, HUB, IVC, NUF, PLS

In: MIN, PLS              Out: SUL, A2M

7.0-7.9%
PPT, CUV, HVN, NCZ, A2M, CTD, MYR, IFL

In: A2M, CTD                        Out: PLS, CGF, BIN

6.0-6.9%
BEN, BIN, BOQ, RWC, CGF, PNI, SGM, NEC, BWX

In: BIN, CGF, PNI                 Out: CTD, OML

5.0-5.9%
CLH, MND, AMP, RFF, CLQ, MYX, GMA, MSB, COE, JIN, WOR

In: MSB, JIN              Out: PNI, DCN, GNC, CMW, BEN, SLR

Movers & Shakers

The problem for Syrah Resources, as with lithium miners such as Galaxy Resources ((GXY)) and Orocobre ((ORE)), is that they are ahead of their time. Few question the assumption the demand for new-age batteries will surge in the years ahead, for EVs and power storage in particular, but at this stage the supply curve remains well ahead of the demand curve.

To that end, Syrah has been forced to reduce production at its Balama graphite mine in order to sustain commercial pricing. Lithium is in similar oversupply and battery-related commodity prices in general (which includes nickel) were highly volatile over 2019, and thus so too miner share prices.

2020 will likely bring more of the same. Hence we can expect these stocks to remain atop the most shorted table for now, and weekly moves one percentage point or more in short positions to be common. Over the month, Syrah shorts rose to 16.8% from 15.8%.

Shorts in Resolute Mining were on the rise late in 2019 as the company struggled with production problems at its Syama gold sulphide processing plant. The company has since divested of its high-cost Ravenswood mine, alleviating a risk of further capital requirement and allowing a greater focus on its West African assets. December quarter production was mixed but not unexpected; shorts have risen to 11.0% from 9.0%.

Most notable is that with gold at US$1550/oz, Resolute Mining is the lone gold miner on the 5% plus shorted table.

Mineral Resources ((MIN)) is a lithium miner, hence no surprise it had moved up into the 10%-plus shorted group late last year. What is often overlooked in the company is also a mineral processor – the revenues from which are far more stable than mining – and also an iron ore miner. With the iron ore price hanging in there around the US$95/t mark, shorts on MinRes have fallen to 8.8% from 10.7%.

Out-of-home (OOH), meaning outdoor, advertiser ohH!media surprised the market with a downgrade to forward guidance at its full-year result back in August last, due to weak trading conditions. And then lo and behold didn’t trading conditions suddenly snap back in the December quarter. The result was a brief period of the stock appearing in the 5%-plus shorted table last year, before last month it dropped off from 6.6% shorted.

ASX20 Short Positions (%)

Code	Last Week	Week Before	Code	Last Week	Week Before
AMC	0.7	0.7	NCM	1.4	1.4
ANZ	0.5	0.5	RIO	4.0	4.1
BHP	3.1	3.1	SCG	0.5	0.6
BXB	0.3	0.2	SUN	0.6	0.6
CBA	0.7	0.7	TCL	0.4	0.5
CSL	0.1	0.1	TLS	0.3	0.3
GMG	0.3	0.3	WBC	0.5	0.5
IAG	0.5	0.4	WES	0.7	0.8
MQG	0.4	0.3	WOW	0.6	0.6
NAB	0.5	0.5	WPL	0.8	0.8

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

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.

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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