Shorting Copper

There may be a rush to off load investment in metals following recent price volatility, but will this deter the growing, seemingly unmanageable problem of copper being stolen from the UK railways? Copper has fallen by 22% in September alone, reaching 14-month lows. Not far behind is steel, which is putting pressure on producers such as United States Steel (X), which is the fifth top faller out of all U.S. large caps’ since August (click here). Elsewhere, gold is also in decline, but jewelers are struggling with its exorbitant price. Average short interest across the global Metals and Mining sector (comprising of 170 stocks) stands at 3.3% of total shares, which is on par with the S&P 500. However, of significance is the 105% increase in average short interest across the sector over the past month. We look at investor sentiment towards metal focused stocks including: Quadra FNX Mining Ltd. (TSE:QUX), Copper Mountain Mining Corp (TSE:CUM), Freeport McMoran Copper and Gold Inc. (NYSE:FCX), First Quantum Minerals Ltd. (TSE:FM), Keegan Resources Inc. (TSE:KGN), Zale Corporation (NYSE:ZLC).

As the price of copper has fallen, the key copper stocks have been closely followed as share prices fall to annual lows. We look at securities lending data in these stocks.

Rising shorts : The share price of Quadra FNX Mining Ltd. (TSE:QUX) has continued its descent over the third quarter to new annual lows. The share price is now half of that recorded in September 2010 and short interest over the year has doubled to new annual highs of 19% of total shares. In the last two weeks alone, short interest has jumped from 16%.

Bearish longs and shorts: Earlier this month, Copper Mountain Mining Corp (TSE:CUM) recently made its first shipment of concentrate to Japan, but along with it sailed a third of its share price. Short sellers have been growing gradually more negative since the second quarter and short interest has doubled to a new annual high of 4% of total shares in the past two weeks alone. Institutional investors who lend have also been bearish towards the stock, decreasing holdings since June by 13% to new annual lows. Total holdings now account for 17.5% of the total market cap’ having bounced slightly to above annual lows. This stock does have a convertible bond in issue, but stock borrowing does not display a high rate of convertible bond arbitrage.

Low short interest Copper names: Despite bearish sentiment across the industry, short sellers have remained clear of Freeport McMoran Copper and Gold Inc. (NYSE:FCX) and First Quantum Minerals Ltd. (TSE:FM). Short interest in Freeport remains flat at insignificant levels, while institutional investors who lend have increased their total holdings to return to 27% of total shares. First Quantum observed a sharp fall in short interest from 10% to 2% of total shares in August and has since remained flat. Institutional investment of funds who lend stands at 21% of total shares. Both stocks have convertible bonds in issue.

Gold

This shiny investment safe haven caught investors and producers by surprise this week as it shed 15%, the biggest four day drop since 1983. However, on the retail side, jewellers may be taking a nervous sigh of relief as they have been crippling under the pressure of the rising cost of gold which has been keeping customers away.

The disconnect between the price of gold and its exploration and mining has long seen divergence as looked at here (http://www.dataexplorers.com/news-and-analysis/gold-outshines-producers).

Shorts caught by surprise in Canadian gold miner: The share price of Keegan Resources Inc. (TSE:KGN) has plummeted by 40% from annual highs in less than two weeks. This was prompted by analysts’ downgrades on the back of a disappointing pre-feasibility study of a gold project. Short interest had been tracking at less than 0.5% of total shares, but has jumped to 2% on the back of this news.

Zale Corporation (NYSE:ZLC) has shed more than half of its share price since July as its 1,800 stores across North America struggle to sell their jewellery with rising wholesale costs, which consumers are just not prepared to pay. Short interest has doubled over the third quarter to 14% of total shares as the price tumbles to annual lows. Almost half of the lendable supply is out on loan, but institutional investors remain bullish towards the stock, gradually increasing holdings. Institutional investment of funds who lend has reached 28% of the market cap’.

European equivalent Pandora A/S (CPH:PNDORA) has been trading flat at unprecedented lows, below its IPO offering, since August after falling continuously throughout this year as its business strategy was scrutinized. Short sellers have also covered their positions down from annual highs of 16% of total shares to 6.7%. However, almost all of the lendable supply is still out on loan as institutional investors have reduced their holdings by half to just 6% of the total market cap’.