Short interest for Lithium Americas isn't huge by any stretch, up to July 31st 2016 its only 1.42% of the total outstanding, or 4,254,140 shares. Still that represents an increase of 691,631 from the last update of July 15th when the total was 3,562,509 shares.
I sometimes refer to short selling as "artificial dilution". There are just shy of 299.5 million shares of LAC that have been issued, current up to July 31st. However there are another 4,254,140 on top of those 299.5 million shares sitting in people's brokerage accounts, because some people have bought shares that don't physically exist.
I want to be perfectly clear on one point here. I am not one of those commentators who is going to tout a possible short squeeze as a reason for being bullish and to encourage others to buy shares of Lithium Americas. Why? Quite simply because short sellers are frequently right, not always, but they have a very good batting average. Better than longs in my opinion, that's why Hedge Funds are the whales of 'The Street'.
I do not view short players as evil or "out to destroy shareholder value" as you often see on message boards and investor forums. For me they are an essential part of the game. Bears do two vital things, they provide for an orderly market and they improve liquidity. Without short selling the volatility in the markets would be insane, and buyers might find it difficult to locate willing sellers.
Thankfully, (for me) as noted at the beginning, the short position in Lithium Americas is small. If it were in and around 10% of the OS count or higher, then I would have to reevaluate my position. But at less than 2% of the total, I view it as noteworthy but not something to worry too much about.
Why noteworthy?
To short any stock a bear needs to have a big bank roll because of margin requirements. And to short a stock like LAC, (trading at less than one Northern Peso or only about 72 US pennies) not only does a player need deep pockets but also cajones made of near 100% cast iron.
Short interest for LAC has been climbing steadily for months. Back on March 31st it was just 769,200 shares. By May 31st it had climbed to over 1.9 million and now it sits at over 4.2 million. And during this time LAC has gone from around 50 cents a share at the end of March to 96 cents currently...nearly doubling.
Bears must be hurting.
But remember, for a long player holding a stock that has dropped...a paper loss isn't a capital loss until the shares are sold. And for a short seller a loss on a rising stock isn't a capital loss until the position is covered, or bought back.
Many longs, if they buy 10,000 shares of a stock at a dollar....and if they see it drop to 75 cents, they'll buy another 10,000 to lower their average cost to .875.....And if the price drops further to 50 cents they'll buy another 10,000 shares to bring their average cost down to 75 cents. Of course that's just an example but you get the idea, its called averaging down. If someone is convinced that a company will be a long term winner, and assuming he or she has the capacity to do it....averaging down can be great strategy if the company being invested in succeeds.
Bears can do the same thing, just in reverse.
Someone who shorted 500,000 shares of LAC at 50 cents, could short another 500,000 at 75 cents and another 500,000 at $1.00. Now our notional bear would be short a total of 1.5 million shares of LAC at an average selling price of 75 cents. Those sales would have netted Mr. Bear $1,125,000 but if forced to buy them back at a buck, they would cost him $1.5 million for a loss of $375,000 plus brokerage fees. But it isn't a loss until he either chooses or is forced to cover. If he can ride out the rising share price, and if the company he's short on ultimately fails....then he can still be a big winner.
See what I mean about short sellers needing to have deep pockets? Margin requirements for shorting a penny stock like LAC can be huge. Yes it trades on Canada's big board TSX and not the riskier Venture, and yes they have the JV with SQM and are a holding in the only Lithium ETF, but its still a penny stock. And shorting a penny stock can mean margin requirements of as much as 100%.
Let me put that in perspective for you.
Using the previous example of someone who's short 1.5 million shares of LAC at an average selling price of 75 cents CDN. That means the short seller netted $1,125,000 from the sales. But if LAC is trading for $1.00 CDN a broker can require the short seller to have $3,000,000 on deposit in a margin account, $1.5 million for the current share value plus an additional 100% on top. And if LAC climbs to $1.25 then the amount of money in the margin account would have to go up another 25% to $3,750,000 in total....and so it goes.
Now, it could be that there are long players looking to accumulate LAC who have used short selling as a means to "shake the tree". Retail investors are notoriously price sensitive, so seeing LAC drop from $1.10 down to 90-95 cents, its reasonable to expect that some likely decided to sell.
But there are many commentators out there who are calling the overall Jr Lithium mining space a bubble. I do not consider it unreasonable to expect that there might just be a Hedge Fund out there, and maybe more than one, that have decided to play Lithium Americas to the short side.
Canadian Hedge Funds are smaller than their American cousins, but still sources like the Financial Post report many with $100 million or more in assets, and a few with over $1 billion. Those are very deep pockets. And if LAC does start moving higher again they may just be able to ride it out in hopes that the longer term bubble thesis proves accurate.
There are a number of expected events that could drive buy side interest in the coming weeks and months:
- Project update for the Argentinian mine
- An updated Feasibility Study (FS) with more current Li prices
- Updates on the Nevada property
- The start of construction at Cauchari-Olaroz
Anyway we'll see how it all plays out. I'm a shareholder here so my opinions are not without bias. And with that being said I still consider the risks here to be substantial, with a very real possibility for losses from current levels. And should the PPS take off causing a Hedge Fund to find its survival threatened? I won't cry, I don't dislike short players....they're part of the game, and I'm sure they don't cry when retail investors lose money.
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