Who’s Shorting Geo Energy Resources?

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Since my recent investing thesis on Geo Energy Resources, the share price has shot up crazily, in tandem with rising coal prices, such that I’m sitting on a nearly 100% return in just 1 month. That’s just crazy.

Here are my earlier posts, the 2nd one is also published on NextInsight:

Geo Energy Resources Investing Thesis – Part I

Geo Energy Resources Investing Thesis Part II

I got a nice surprise when my stake was borrowed under the SGX SBL programme. It’s nice because I get a time-weighted 4% for lending out my shares. It’s pretty rare though, I think this is only the 3rd time I’ve ever had shares loaned out.

I simply cannot figure out why anyone would want to borrow my shares though, a quick check with my broker confirmed that it’s most likely to short.

Which begs 2 questions:

  1. Short Geo Energy Resources?! Seriously? You might be right… or horribly wrong. I can think of many catalysts coming up.
  2. Even if you want to short, why borrow shares? Although I am no expert in this, I believe utilizing CFDs would be much safer and much cheaper

As it stands, 2 individuals/entities have borrowed a total of 55,000 shares from me. Yes, they could be the same guy, but it’s unlikely. The small bit player who borrowed 5,000 has covered his short position just yesterday, probably in light of the Q3 results.

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294) Short Geo Energy II.jpg

This is simply great for me.

The borrower pays a prorated interest fee of 6%, based on the value of the loaned shares, based on the closing price of the share every day.

Of this 6%, I get 4% while SGX gets 2% for their troubles.

The share price has risen strongly since my previous published investing thesis, which is why this is doubly fantastic for me.

Why?

Because 4% of a much higher share price, is >>>4% of my purchase price.

I bought at an average of approximately $0.16 as indicated in my previous posts (rounded off for simplicity sake here)

The share price is $0.26 as I type this.

This means at the end of today, the borrower pays 4% x $0.26 (prorated), but this 4% is in reality, the equivalent of a ROI of 6.5% based on $0.16.

We all heard of holding costs. This is the reverse of that.

I’ve “holding income” of 6.5% (and rising), just to sit tight and do nothing.

My 1st thoughts though, are that gosh, did I miss out something in my analysis? Surely the shorts would know something I don’t, otherwise who’d dare to risk 6% of shorting costs? Plus the shorts are severely underwater right now, with the rapid rise in the share price.

So I went back to do more research. I’ve yet to study in detail, the latest 3Q results. Just a cursory look though, and the figures pretty match up to what I’d expected. I’m not ready to share that here right now though, will need to take a closer look at the figures and compare that against my projections.

If anyone knows any reason whatsoever, why anyone would borrow shares, other than to short, please let me know.

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10 comments

  1. Depending on individual companies, even if you use CFD to short, companies do need to borrow shares to deliver (especially for direct market access CFDs). It just boils down to who do they borrow the shares from.

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    1. Hi Jon
      Thanks for your comment.
      I’ve next to zero experience with CFDs, typically I short using options (for foreign markets).
      So you’re saying that the institutions could be the one borrowing, to deliver for CFDs?

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  2. Hi TTI
    yes you can say that. In fact there is another product which some houses have but not so common, SBL, where you borrow shares to short or do you whatever hedge you need.

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    1. Hi Foolish chameleon
      I don’t think it’s “bad news” because there’s still a million++ shares available for borrowing for shorting. If one has high conviction bad news, surely you’d take up a much stronger position in your shorts.
      My guess is someone simply sees that it has gone up very strongly, and thinks it’s time to pull back. Perhaps that may be true… but the guy shorting is around down by an estimated 25% or so… add on an annualized 6% of holding costs, he’ll need a major crash from here to be profitable.
      The risks-reward scale just doesn’t look very favorable.
      Perhaps a black swan event would help shorts: I just read a couple of mins ago, that there’s a relatively minor bombing in East Kalimantan, where the coal mines are located. Any of such news though, are not going to changes the fundamentals of my investing thesis though.

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