Weekly review: market rises despite Evergrande default and falling oil price

Evergrande default falling oil price ASX December 2021
WEEKLY MARKET REPORT

The Australian share market might have closed down on Friday, but at least it still managed to eke out a weekly gain of 1.6% – the first weekly rise for five weeks.

That came despite a slump in technology and energy stocks which dragged the ASX 200 down 0.4% or 31 points to 7353.5 points.

The weekly rise still points to the recent pull back in markets being more of a refreshing pause rather than anything more sinister.

It appears the pause in recent weeks was just fear of the Omicron variant and signs of a less accommodating mood from the US Federal Reserve.

The lack of a more significant drop in the market was all the more impressive given looming US inflation numbers and news that troubled Chinese property group Evergrande has finally defaulted on its debts, refreshing fears about the economic environment in China.

Chinese fears hurt the oil price

It was those Chinese fears that caused oil prices to drop, sending energy stocks south and also leading to weakness in the health care sector as CSL (ASX: CSL) fell more than 2%.

Technology stocks also followed the US lead and fell, led by a 4% drop in Afterpay (ASX: APT), although WiseTech (ASX: WTC) managed to push against the trend with a 2.9% gain.

It was a fantastic week for Gina Rinehart-backed Vulcan Energy (ASX: VUL) which managed to keep rising after recording a stellar 14% jump on Thursday.

On top of the announcement of an offtake agreement for its zero-carbon lithium with auto giant Volkswagen, Vulcan managed to buy an operational geothermal renewable energy power plant in the Upper Rhine Valley.

That sent its shares up another 3.9% to cap off a fantastic week.

Fortescue loses a chief but gains an ambassador

The most significant company news was Fortescue Metals (ASX: FMG) chief executive Elizabeth Gaines deciding to step down from her role as the $56 billion iron ore miner seeks to transform itself into a renewable energy powerhouse and resource group.

She may no longer be in the top job but Ms Gaines will become an ambassador for the company’s global green hydrogen brand and remain as a non-executive director on the Fortescue board.

Fortescue’s non-executive chair and founder Andrew Forrest said Fortescue had been “immensely lucky” to have had “one of Australia’s truly inspiring leaders” helming the iron ore giant for the past three years.

Since Ms Gaines took over as chief executive, Fortescue’s share price has quadrupled and the number of shareholders has shown similar growth, although on Friday the company’s shares were down 0.8%.

Ms Gaines said it was a good time to go as the company broadens its executive team across green energy and resources and said she will be involved in the global search for her replacement.

The other stock specific news on Friday was the completion of the $22 billion merger between Santos (ASX: STO) and Oil Search (ASX: OSH), with both stocks falling by more than 2% in common with other energy companies.

Small cap stock action

The Small Ords index gained 2.61% for the week to close on 3468.8 points.

ASX 200 December 2021 chart small ords
ASX 200 vs Small Ords

Small cap companies making headlines this week were:

Argenica Therapeutics (ASX: AGN)

Argenica Therapeutics is anticipating a formal patent “within months” from the United States Patent and Trademark Office for its lead neuroprotective drug ARG-007, which is designed to treat stroke, traumatic brain injury (TBI) and hypoxic ischaemic encephalopathy (HIE) patients.

The US patent and trademark office issued Argenica with a “notice of allowance” this week, which essentially confirms the company’s Neuroprotective Peptides patent application has been allowed for issuance.

Argenica has developed ARG-007 to reduce brain cell death following stroke, TBI and HIE, which has been proven effective in research with animal models.

The patent application also covers ARG-007 for use in other neurological conditions including Alzheimer’s disease, Huntington’s disease, multiple sclerosis, Parkinson’s disease, motor neuron disease, neuropathic pain, spinal cord injury and epilepsy.

Galan Lithium (ASX: GLN)

Aspiring producer Galan Lithium has revealed updated economic studies for its flagship Hombre Muerto West and Candelas lithium brine projects in Argentina.

The study was based on a revised long-term lithium price assumption of US$18,594/t, which is an increase on the previous study’s assumption of US$11,687/t of lithium.

This higher lithium price forecast has bumped up the combined pre-tax NPV for both assets to US$3.4 billion (A$4.74 billion).

For HWE, the pre-tax NPV was 120% higher from US$1 billion in the previous study to almost US$2.2 billion (A$3.06 billion).

The higher lithium price prediction also increased expected EBITDA from US$174 million to US$287 million, while capital expenditure (US$439 million) and operating costs remain the same.

Wellnex Life (ASX: WNX) and Australian Dairy Nutritionals Group (ASX: AHF)

Health and wellness focused Wellnex Life has teamed up with Australian Dairy Nutritionals Group to bring to market the first organic infant formula range using 100% Australian milk.

ADNG will manufacture the products over an initial 12 months from its southwest Victoria facility and Wellnex will sell the range through its retail and pharmacy distribution network.

The partnership will begin next month, but is conditional on the two new ranges being sold through a major pharmaceutical retailer.

Wellnex chief executive officer George Karafotias said the joint venture allows the company to distribute and sell unique, in-demand premium milk products through a substantial network.

Race Oncology (ASX: RAC)

Another positive effect of Race Oncology’s lead candidate Zantrene has been identified after a preclinical research program found it is able to protect the heart muscles from cell death caused by chemotherapy drug carfilzomib.

Research was undertaken at the University of Newcastle and found that as well as synergising with carfilzomib to improve cancer cell eradication, Zantrene could provide protection to heart muscle cells.

Carfilzomib is known to cause serious and permanent heart damage in many patients.

“Zantrene was shown to be able to significantly protect the heart muscles and these results are genuinely remarkable, as we have observed a much lower protection rate with other clinically used cardioprotective drugs,” University of Newcastle associate professor Doan Ngo said.

On Friday, Race announced this research would be expanded with the University of Newcastle.

Boss Energy (ASX: BOE)

Advanced explorer Boss Energy is continuing its strong progress towards the re-start of mining and processing at its Honeymoon uranium project in South Australia.

Front-end engineering design work has passed the 50% completion point and is expected to finish in the next quarter.

Boss managing director Duncan Craib said the progress at Honeymoon was “outstanding”.

“Our strategy is aimed at ensuring Boss can move from a final investment decision into execution and production as rapidly as possible.”

Once the final investment decision is made, Boss expects to be producing from Honeymoon within 12 months.

Manhattan Corporation (ASX: MHC)

“Significant” gold mineralisation has been intercepted during Manhattan Corporation’s 20-hole for 2,100m reverse circulation drilling program at its Tibooburra project in NSW’s north.

The company has received assays from the program, which showed mineralisation was hit in all holes.

Notable results were: 8m at 40.5g/t gold from 70m, including 3m at 105.34g/t; 16m at 13.89g/t gold from 1m, including 3m at 69.20g/t gold; 7m at 2.89g/t gold from 56m, including 1m at 15.45g/t gold; and 6m at 1.93g/t gold from 12m, including 2m at 4.29g/t gold.

Manhattan executive director Kell Nielson said he was “extremely pleased” with the significance of the results indicating the project’s multi-million-ounce gold potential.

Vintage Energy (ASX: VEN)

Vintage Energy and its joint venture partners Metgasco (ASX: MEL) and Bridgeport will sell all gas produced from the Vali field to a wholesale gas subsidiary of AGL Energy.

The joint venture parties have executed a conditional deal to supply 9-16 petajoules of gross sales gas from the Cooper Basin field from the start of production through to the end of 2026.

It is expected production will begin mid-next year, with gas to be sold at a mix of firm and variable prices based on market rates.

As part of the deal, AGL will provide a $15 million upfront payment to the joint venture parties in three tranches to assist with pushing the project to first gas.

The week ahead

We might be closing in on Christmas but there is no shortage of potentially market moving releases to look out for.

The US Federal Reserve decision on tapering its bond purchases is probably the major one but there are some others to pay attention to as well.

Locally, the release of the Mid-Year Economic and Fiscal Outlook (MYEFO) should show what sort of a debt the rush of Federal Government spending on the COVID-19 pandemic has added up to.

The betting at the moment is that the budget deficit for 2021/2022 will hit around the $106 billion mark.

However, the Victorian Government has announced a budget blow out to a deficit of $19.5 billion – despite healthy land tax and stamp duty revenue – so federal budget blow out estimate could even be conservative.

At the very least we’ll all be paying plenty of taxes just to meet the interest bill on those budget deficits for years to come.

Other local releases to watch out for include job vacancies, consumer confidence, population growth, wealth figures, RBA board meeting minutes and job and wages numbers.

Internationally, US figures on producer prices, retail sales, economic growth and home sales and prices are out.

US growth is expected to come in around a 2.3% rate, but with inflation running hot any slippage could be a problem.

Chinese retail, investment and production figures and purchasing manager indexes should add some extra detail on how much the Chinese economy is slowing in the wake of solvency issues with its debt-ridden property companies such as Evergrande.

This week’s top stocks

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