There are three ASX lithium shares among the top 10 ASX shares with the biggest short positions today.
To clarify, short selling is where professional traders try to profit from a fall in the share price. They borrow the shares and sell them with the intention of buying them back later, when they fall, to make a profit.
As my Fool colleague James reports, these three ASX lithium shares are likely shorted due to high valuations and highly volatile lithium prices, which have fallen dramatically since November 2022.
And the outlook for lithium prices is very mixed.
But falling lithium prices are a problem for every lithium start-up and producer, so that's not a unique concern for these three particular ASX lithium shares.
Another common theme is they're not producing any lithium yet, or they've only just started.
In other words, they're young players among ASX lithium shares.
That means they're riskier than the established producers in terms of valuation.
Totus Capital portfolio manager Ben McGarry says this is why many funds, including his own, are short-selling several ASX lithium shares today.
McGarry says (courtesy smh.com.au):
So from an outsider's or short seller's point of view, you're looking at a company that has got no real business and is priced as if everything is going to work out best for the long term.
Which ASX lithium shares are the most shorted?
The three ASX lithium shares in the top 10 most shorted stocks are as follows.
Core Lithium Ltd (ASX: CXO) shares have a short interest of 10%, up from 1.7% this time last year. This is the greatest level of short interest among the three ASX lithium shares in the top 10.
The company's share price has fallen by 32% over the past 12 months to 87 cents at the time of writing.
Core Lithium is a small-cap ASX lithium share with a market capitalisation of $1.63 billion.
The company sent its first shipment of lithium to China in January. This was Core Lithium's first revenue event.
In its 1H FY23 results released this month, the company reported a $9.2 million loss for the period.
Liontown Resources Ltd (ASX: LTR) has a short interest of 8.7%, up from, 1.1% this time last year.
At the close of trade on Monday, the Liontown share price was down 20% over the previous 12 months at $1.52. But everything changed yesterday on news of a takeover bid by US lithium giant, Albemarle (NYSE: ALB).
Liontown shares are now trading at $2.60, up 1.2% today, after an astonishing 68.5% surge yesterday. This took its market valuation to $5.65 billion.
First production at Liontown's flagship Kathleen Valley project is slated for mid-2024.
In its 1H FY23 results released this month, the company reported a $6.9 million loss for the period.
Lithium and graphite producer Sayona Mining Ltd (ASX: SYA) also has 8.7% of its shares shorted, up from 0.9% this time last year.
The Sayona share price has fallen by 12% over the past year. It's trading at 21 cents at the time of writing today.
Sayona is also a small-cap ASX lithium share with a $1.82 billion market cap.
The miner produced its first saleable commercial-grade spodumene lithium concentrate at its North American project just this month.
In its 1H FY23 results released this month, the company reported an $18.7 million loss for the period.
Why do the share prices fluctuate so much?
The prices of younger ASX lithium shares are more prone to major fluctuations as both traders and investors take a punt on how the future will pan out for these small and currently non-profitable players.
If you get the bet right, there could be big rewards. That's the draw. So, this element of speculation can push share prices northwards.
And lithium prices going gangbusters in 2021 and 2020 added to it.
Those massive commodity price gains, which were prompted by the rapidly increasing global uptake of electric vehicles (EVs), got the market very excited, providing buying momentum for ASX lithium shares.
This pushed many of them into the S&P/ASX 200 Index (ASX: XJO). That means they are automatically bought by the index funds, which gave them more support and pushed their valuations further.
So, their valuations went up based on speculation and momentum, not necessarily business fundamentals.
You see, all three ASX lithium shares listed above are non-profitable, yet they're among Australia's biggest 200 companies by market capitalisation.
Doesn't sound quite right, does it?
This sort of thing gets short sellers into a bit of a lather because they see an opportunity to profit from the market's exuberance and mispricing.
Which ASX lithium shares are the least short-sold?
There is far less short selling among the established ASX lithium shares.
Matthew Frydman, a senior research analyst specialising in metals and mining at MST Financial, says there are four "globally significant" lithium producers on the ASX 200.
They are Mineral Resources Ltd (ASX: MIN), IGO Ltd (ASX: IGO), Pilbara Minerals Ltd (ASX: PLS), and Allkem Ltd (ASX: AKE).
According to figures from the Australian Securities and Investments Commission (ASIC), these four companies have very little capital shorted at 1.15%, 1.8%, 4.1%, and 1.9% respectively.
