Pilbara Minerals Ltd (ASX: PLS) shares have been under pressure over the past 12 months, down nearly 40% in that time.
As we move through the new financial year, Pilbara shares currently rank among the most shorted stocks on the ASX. According to my colleague James, the lithium player entered this week with short interest levels of 20.6%.
This makes it the most heavily shorted ASX stock as we speak.
It is trading at $2.93 per share at the time of writing. But is the situation really that bleak? Here's what the experts say.
Why are Pilbara Minerals shares shorted?
Short sellers are typically professional investors and fund managers betting on stock price declines. They borrow shares, sell them at the current price, and hope to buy them back at lower prices to profit from the difference.
If the price declines, they bag a profit. But the risks are high.
But so is going long or buying ASX lithium stocks, as my colleague Bernd recently showed.
The lithium market has seen a dramatic shift in 2024. Lithium carbonate prices in China have fallen to their lowest levels in three years.
Prices are down more than 85% from their peak, causing significant headwinds for lithium producers. At the time of writing, the battery metal sells at CNY85,500 per tonne.
Short sellers consequently have zeroed in on Pilbara Minerals following this weakness in lithium, making it the most shorted stock on the ASX.
What do the experts say?
Oscar Oberg from Wilson Asset Management remarked that such a high short position was unusual. Speaking to The Australian, he said it was "very rare" to see a company with more than 20% of its shares being sold short.
Oberg noted short sellers were not convinced by the company's cash flows or its prospects in the lithium market. Instead, they are betting on continued weakness in lithium prices.
If you are a large hedge fund and bearish on the lithium sector there are not many companies to choose from globally.
Pilbara is a big company and is very liquid compared to an array of global lithium companies which are not – so perhaps hedge funds are picking the most liquid one.
Despite Oleg's view, many brokers are bearish on Pilbara Minerals shares. UBS has a sell recommendation on the stock with a target price of $2.50. It cited concerns over stretched valuations despite the company's strong production performance, according to The Australian.
Analyst Levi Spry also downgraded lithium carbonate price forecasts, reflecting an oversupplied market and weak demand from Western electric vehicle (EV) markets.
Spry said UBS was underweight on the sector due to "increased uncertainty on the long-term demand outlook ex-China and continued opaqueness on near-term supply additions from China/Africa…"
Goldman Sachs also maintains a sell rating on Pilbara shares with a $2.60 price target. The broker foresees free cash flow decreasing due to a combination of falling lithium prices and increased spending.
Pilbara Minerals is expected to invest around $850 million in its 'P1400 project,' bringing total capital expenditures to approximately $3 billion from FY24 to FY28.
The company is expected to release its quarterly update on 24 July, and analysts are keenly watching for production and sales figures.
Foolish takeaway
Pilbara Minerals faces a tough road ahead with a weaker outlook on lithium pricing. This is likely the major reason why its shares have such high short interest.
Investors should carefully consider these factors whilst conducting due diligence before making any investment decisions.
