Shorting on BMN and Largo 2018-19

Alfacomp

13 May 2019

Bushveld Minerals

The appearance on Friday the 10th May of the following notification of a short position on Bushveld Minerals confirmed what had been suspected for some time - namely that in the last few weeks there had been systematic shorting of BMN.


This of course followed hard on the heels of our article describing FCA complaint ref 205882095 which detailed patterns of trading which we have flagged up as potential market manipulation. Examples of the unusual trading in that complaint are highlighted in the following chart but subsequent episodes have also been  observed and every single trade, of course, remains under strict observation.


A little investigation on the nature of the named shorting organisation leads to the following record, describing a US company operating out of Texas but apparently registered for tax in the state of Delaware, who those in the field will appreciate is famed for its tax sheltering capabilities.




Under FCA rules a short only needs to be declared once it goes over the 0.5% threshold of a company's shares in issue. In Bushveld's case this is 1,123 Million shares so 0.54% would equate to a short exposure of 6.06 Million shares. This is 6M shares that they have sold, have the cash for, but which would still need to be bought back in order to give back to whoever lent them these shares.

There have been some suggestions that those who were previously share owners, and who had been reducing their share ownership (eg such as First Island) might have lent their shares out in order to allow someone else to conduct shorting operations. I'm afraid that I do not see the logic of such a suggestion as it could ultimately lead to a reduction in the value of those lent shares together with the value of any other shares still owned by the lending institution. 

It would be reasonable to ask then why would any institution ever lends out the shares that they own, if the potential value of those shares might be impacted. The answer of course is if the larger picture is viewed it may be discovered that the point of the lending is not to lower their share holding, but instead it is used as a strategic tool to lower the share price so that MORE shares can be acquired. I don't see First Island as fitting this model and that's a question for another day,  I digress...

Without knowing when the 6M short position was built up it is hard to know how much profit the shorting organisation is currently looking at. However looking back at the BMN share price history it is clear that approximately 2 months ago the SP was relatively stable in the 35-37p band with a long period of low, but stable volume. 


At the start of April it would appear that volumes significantly increased and the SP was driven down towards the 25-27p range it is currently sitting at. Thus a very simple assumption that the short was started in the 35-37p range would yield a calculation of the profit currently sitting on the 6M short position at (36-26p = 10p) x 6M - or currently £600,000.

The true short position may of course be significantly larger than this as FCA rules only require disclosure above 0.5% of a single short holding - so numerous organisations, possibly working together may each have sub 0.5% - the £600K is a minimum realistic figure - with others playing sub 0.5% and an earlier short establishment the overall value of shorts currently laid could be 5 times larger.


Largo Resources

It is illuminating to compare the short on Bushveld Minerals described above with that of the similarly pure-play Vanadium producer Largo Resources (TSE:LGO) where shorting data extends back over a significant period of time ( FINRA OTC short notifications system) , albeit without the additional help of knowing precisely who is nominally behind the shorting exercise.


Shown above is a comparison of Largo's Share Price with the size of the declared short position - you can see how the short position was significantly increased between the 31st of October and the 15th of November, at which point the Largo Share price started moving down.

What is fascinating about the timing of this short increase is that it happened more that 2 weeks before any reductions in V2O5 pricing were announced - as the graphs on the Bushveld Perspective show the first reductions in V2O5 price were observed on the 7th of December 2018. This reveals either remarkable clairvoyance from those shorting Largo or some kind of inside information.

The most recent increase in the Largo short comes about following the 22nd April announcement that Largo was being forced to revise its anticipated financial results for Q1-2019 following the recent rapid changes in V2O5 price and as a result might only break-even for the quarter. It was believed that the small drop in share price around this time was down to this news, but it could equally have been as a result of the increase of the short selling on the back of that news (alas the total short positions are only reported every 2 weeks). The SP drop was quite quickly reversed despite the increase in short position, and seemingly despite what appears to be a remarkable component of recent naked short selling that has been reported here:- (fortunately the UK does not permit naked short selling - selling shares that you do not own, and haven't even borrowed yet either.)


It is quite helpful to be able to have short positions tracked down to very low levels as it allows the point at which the short was taken out to be revealed - and this of course permits the short sell price to be determined. The short seller has sold shares (that they have borrowed) and now has cash sitting in their bank account. The average short sell price, shown below, estimated from the information we are permitted to see shows that average short sell price, over the last 6 months of shorting works out around CAD 3.20.


Of the 529 Million shares currently issued for Largo Resources this short position of 15.8M equates to almost 3% of the shares in issue. What is even more shocking is that the short would appear to be currently almost 25 Million CAD in profit. 

 

One wonders how much longer this situation will stay as it is - with such a significant profit potentially being at risk should Largo start purchasing its own shares, as Leon Cooperman suggested only last Thursday it is more than possible those shorting Largo will bail out as soon as possible rather than risk a full-on short squeeze.

Whether those shorting Bushveld Minerals do so at the same time will be interesting, as if it did, and this happened again before European V2O5 prices reported increases, it might suggest a degree of unexpected correlation between the BMN and Largo shorts that would merit further significant investigation.


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