As we covered here earlier this week, Pilbara Minerals Ltd (ASX: PLS) shares dethroned travel agent Flight Centre Travel Group Ltd (ASX: FLT) to become the most shorted share on the Australian share market this week.
The lithium miner achieved this unwanted milestone after its short interest increased to 10.5%.
In case you're not familiar with the terminology, this essentially means that 10.5% of all Pilbara Minerals shares are being held by short sellers, who want its price to fall in order to profit.
It is also worth noting that short sellers don't target shares for small gains. Given the risks involved with shorting, they are usually targeting outsized returns. But why are short sellers targeting this lithium miner?
Why are Pilbara Minerals shares the most shorted on the ASX?
As far as I'm aware, none of the short sellers targeting the company have explained why they are doing so.
However, it seems quite likely that they believe that lithium prices are going to tumble. Should this happen, it would have a major negative impact on Pilbara Minerals' profitability, dividends, and, importantly, its valuation.
One broker that expects this to be the case is Goldman Sachs. Its most recent forecasts include the following versus spot and January prices:
- Lithium carbonate (per tonne)
- January 2023: US$66,750
- Current spot: US$25,032
- 2023: US$38,794
- 2024: US$15,331
- 2025: US$11,000
- 2026: US$16,883
- Lithium spodumene 6% (per tonne)
- January: US$5,990
- Current spot: US$3,010
- 2023: US$4,341
- 2024: US$1,763
- 2025: US$800
- 2026: US$1,126
And while Pilbara Minerals will still be highly profitable if prices fall to these levels, it just won't be as profitable as the bulls would've hoped.
Time will tell whether short sellers have made the right call.