The battle lines have been drawn for Mineral Resources Ltd (ASX: MIN) shares, with many investment funds betting heavily against the mining and services company.
Shares in the lithium and iron ore miner are down 45% this year to date, sliding 14% in the last month alone. Now, the stakes are high, with short sellers aiming to profit from further declines.
Reports show that hedge funds have significantly increased their short positions in the company amid sluggish iron ore prices and a weaker lithium market.
But with management putting a raft of measures on the table, could Mineral Resources shares be poised for a comeback? Let's see.
Shorts continue on Mineral Resources shares
Mineral Resources shares currently find themselves on the radar of hedge funds who believe the stock has further to drop. These funds can profit from stock prices going up (long) or going down (short).
According to market data obtained from ASIC, these funds have ramped up their short positions to nearly 11% of the company's issued equity as of this week.
The short positions are driven by a series of concerns regarding its $5.4 billion debt load, as well as its exposure to a slowing Chinese economy and declining commodity prices, particularly iron ore and lithium.
All these factors are clamping the company's earnings and profitability. For instance, several brokers have forecast the potential for a US$80 per tonne iron ore price.
Whereas Mineral Resources has break-even iron ore prices of US$80 per tonne, leaving no wiggle room in that scenario.
Short sellers believe that unless circumstances change, the share price could face further declines.
While these hedge funds go on their hunt, management has been working in the background to reduce asset intensity and strengthen the balance sheet.
It is selling off non-core assets like its Onslow Iron Ore Haul Road and its gas interests. This could inject much-needed capital into the business.
For now, most of the investment debate on Mineral Resources shares looks hinged on the outlook for iron ore and lithium. The risk for short sellers is these commodities start to swing higher at a rapid pace.
Brokers are divided
The battle over Mineral Resources shares isn't just confined to the hedge fund crowd. Brokers are weighing in, too.
Jarden's Ben Lyons has consistently advised clients to sell Mineral Resources since early 2022. This was when the stock was trading at $85 apiece, according to The Australian Financial Review.
Lyons believes the company is too exposed to the volatile commodity market, particularly lithium and iron ore.
On the other hand, those at Bell Potter see significant upside potential. The broker has reiterated its buy rating on the stock, setting a price target of $66 apiece.
Bell Potter points to the recent asset sales which it says could inject $1.1 billion into the company and strengthen its balance sheet without the need for a capital raise.
Foolish takeaway
The showdown between Mineral Resources shares and the short sellers is far from over.
As to who will triumph? For now, the shorts have it, with Mineral Resources down 43% in the past year. But time will tell what the long-term outcome will be.
