Are ASX short sellers right about Core Lithium shares?

Two top brokers give their verdict on this junior ASX lithium miner.

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Core Lithium Ltd (ASX: CXO) shares closed at 27 cents on Friday, down 3.6% for the day.

The ASX lithium share hit a new two-year low of 26.5 cents this week.

In the year to date, the stock has spiralled 73%. And it looks like plenty of pro traders expect Core Lithium to fall further, given the short position today.

Core Lithium shares remain among the top 10 most shorted equities on the ASX.

According to the latest ASIC data, 10.8% of Core Lithium shares are short-sold.

So, are the short sellers right?

What do the brokers think of Core Lithium shares?

Citi has just downgraded Core Lithium shares from a neutral rating to sell.

The broker has also reduced its 12-month share price target by almost 24%, from 38 cents to 29 cents.

Citi explains:

On spot pricing i.e. lithium of US$1500/t, CXO's balance sheet screens the weakest across our lithium coverage. i) the stock has outperformed ASX lithium peers by 5% MTD, ii) CXO sits at the top of our CY23 propriety spodumene cost curve with spot now eating into ASIC margin, iii) CXO trades on >1x P/NAV on spot vs our lithium coverage of <0.8x, iv) macro: we are neutral on lithium until a post CNY restock.

We reduce our Target Price based on a blend of 4.0x forward EV/EBITDA and 1.0x NAV to 29cps from 38cps.

Goldman Sachs is similarly bearish on the outlook for Core Lithium shares.

The broker thinks continually falling lithium commodity prices may impact the company in a uniquely negative way.

The obvious impact for all lithium producers is that they will earn less for the lithium they dig out of the ground if commodity prices continue to fall.

But as my Fool colleague James reports, Goldman thinks falling lithium values will also mean that Core Lithium will likely need another capital raising.

Goldman said:

Given the more rapidly declining lithium pricing environment than we expected when we upgraded the stock to Neutral in Aug, we now see increased risk that funding from existing cash/operating cash flows may be insufficient to fund BP33 development (which may be required to continue spodumene production as Grants pit production ends; FID targeted Mar-24 quarter), particularly with recent underground cost escalations, where, since the DFS in Jul-21, we estimate underground mining costs are up ~40% (on our bottom-up quarterly analysis of >30 listed Australian gold assets).

The broker thinks lithium prices are unlikely to bottom out until 2025.

It notes a 71.5% decline in the lithium carbonate spot price to US$17,076 per tonne (p/t). The lithium hydroxide price is US$14,663 p/t, down 78.3%, and the spodumene 6% price is US$1,580 p/t, down 64%.

For 2024, Goldman forecasts the lithium carbonate price to fall to US$13,377 p/t, the lithium hydroxide price to fall to US$14,263 p/t, and the spodumene 6% price to fall to US$1,250 p/t.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Bronwyn Allen has positions in Core Lithium. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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