Market wrap: worst losing streak since the GFC continues
WEEKLY MARKET REPORT
Try as it might the Australian share market has put in its seventh weekly loss and is now sitting on its longest losing streak since the middle of the GFC back in 2008.
On Friday, the ASX 200 index shed 0.2% to 6955.2 points, and was down 0.6% for the week.
There were a few broad factors that fed into the disappointment with a falling iron ore price hitting mining shares – although an uptick on Friday led a bit of a recovery.
Generally banks weakened further on global worries about rising interest rates following on from official rate rises in the UK, Switzerland and Norway.
Block shares hammered by critical report
However, the really big mover on the Australian market was Afterpay owner Block (ASX: SQ2), with its shares shedding a hefty 18.4% or $20.05 to $88.94 after the release of a highly critical report from influential short selling company Hindenburg Research.
Hindenburg, run by Nathan Anderson, is best known for its scathing report on billionaire Gautam Adani’s business empire earlier this year which also caused massive share price falls.
It has spent two years examining Block, which used to be called Square and is run by Twitter co-founder Jack Dorsey.
The report – ironically released on Twitter – did not make happy reading for investors with allegations of widespread fraudulent use of its Cash app and also a claim that its US$29 billion purchase of Australian buy now pay later company Afterpay was a flop.
Australian investors unfamiliar with US Block assets
Many Australian Block shareholders who entered the company through that takeover are probably not very familiar with Block’s other business assets so the report caused a major ripple here after investors crunched the shares in the US first.
In short, Hindenburg claimed that Block’s very popular US Cash app was likely to have helped scammers to take advantage of government-stimulus programs in the United States during the pandemic.
In response to a public-records request, the state of Massachusetts told the short seller that it sought to claw back more than 69,000 unemployment payments from the bank behind Cash app accounts, an amount that exceeded those it sought to reverse from major banks like JPMorgan and Wells Fargo, which have far more customers.
“Block ignored both internal and external warnings that multiple individuals using the same bank account number to receive government funds was a brazen red flag of fraud,” Hindenburg said in the report.
“Multiple key lapses in Cash app’s compliance processes facilitated billions in government payment fraud.”
Afterpay purchase “flopping”
The Afterpay purchase was also heavily criticised with the report claiming that the buy now pay later (BNPL) company had avoided responsible lending rules in Australia to extend a form of credit without income verification or credit checks.
It also claimed that while Afterpay was claimed to be interest free, it could effectively charge as much as 289% in interest annually by applying late fees to customers.
The deal has already been criticised as BNPL loan losses have climbed as the economy weakens and regulators have taken a closer look at introducing rules for BNPL operators.
Hindenburg said the acquisition was “flopping” as losses blew out from US$184 million in 2021 to US$357 million in 2022 with a Fitch Ratings report that Afterpay delinquencies to March 2022 had more than doubled to 4.1% from 1.7% in June 2021.
It claimed total processing volumes also declined 4.8% from the previous year.
Block calls in the lawyers
Block hit back at the report, saying it would work with the US Securities and Exchange Commission “and explore legal action against Hindenburg Research for the factually inaccurate and misleading report they shared about our Cash app business today.”
“We have reviewed the full report in the context of our own data and believe it’s designed to deceive and confuse investors,” Block said in a statement.
“We are a highly regulated public company with regular disclosures, and are confident in our products, reporting, compliance programs and controls.”
Since it started operating in 2020 Hindenburg has researched about 30 companies with the average share price fall for “target” companies being 15%, according to Bloomberg calculations.
After six months, shares were down an average of 26%.
Hindenburg can make big gains by short selling target shares.
Gold the best performer
Overall, five out of the 11 industry sectors posted gains on the ASX, with gold stocks the main positive as investors searched for a safe haven.
Evolution Mining (ASX: EVN) put in a great performance, up 14.3% for the week, while the banks and real estate shares fared worst.
A takeover offer from US private investment firm, Bain Capital, helped Estia Health (ASX: EHE) shares to rise 14.1% to $2.67.
The proposed offer would give shareholders $3 cash per share, with the Estia Health board now “considering the indicative proposal.”
Small cap stock action
The Small Ords index fell 1.14% this week to close at 2706.1 points.
ASX 200 vs Small Ords
Small cap companies making headlines this week were:
Akora Resources (ASX: AKO)
Infill drilling has returned more high-grade mineralisation at Akora Resources’ Bekisopa Southern Zone iron ore target in Madagascar.
Of the 86 holes drilled at the target, 72 intercepted direct shipping ore (DSO) mineralisation, with some areas suitable for DSO lumps and fines products.
Drilling aimed to increase the size and confidence of the Bekisopa Southern Zone mineral resource, and the results will be used for an updated resource estimate to be released later this year.
Latest assays are expected to result in an upgraded resource classification from inferred to indication of around 12Mt of DSO mineralisation across an area of 700m by 500m.
This accounts for only 12% of the known strike length, and indicates that Akora will achieve over 20Mt of DSO lump and fines product grade iron ore from Bekisopa.
Ramelius Resources (ASX: RMS) and Breaker Resources (ASX: BRB)
Gold producer Ramelius Resources has made a $130.7 million off-market takeover offer for Breaker Resources, which owns the Lake Roe gold project in Western Australia.
The acquisition aims to combine the Lake Roe project with Ramelius’ Rebecca project to create a new regional production hub.
Ramelius’ all-scrip offer implies a price of $0.40 per share, with Breaker shareholders receiving one Ramelius share for every 2.82 Breaker shares held.
Lake Roe’s updated mineral resource estimate in December 2021 totalled 32Mt grading 1.6 grams per tonne gold for 1.7Moz.
Breaker chief executive officer Sam Smith said Ramelius’ offer was “compelling”.
“This is a logical and sensible combination of assets which will eventually see the Lake Roe discovery become a mine after many years of definition,” he said.
TMK Energy (ASX: TMK)
Oil and gas explorer TMK Energy has signed a cooperation and electricity offtake agreement with Mongolian mining conglomerate Mongol Alt (MAK Group) to advance the Gurvantes XXXV coal seam gas project in the South Gobi Basin.
The agreement aims to improve Mongolia’s energy security, reliability, and independence.
TMK’s pilot well program will include up to three production wells and related facilities, with the gas used for onsite modular power generation, which will be sold to MAK at local wholesale prices.
Additionally, TMK will provide MAK with excess water produced during the early stages of the pilot program, while MAK will offer TMK access to its machinery, equipment, and personnel.
The collaboration will help optimize resource utilisation and address the South Gobi region’s growing energy demands.
St George Mining (ASX: SGQ)
St George Mining is set to acquire full ownership of seven hard rock lithium projects in Western Australia, covering 653 square kilometres in the goldfields region.
The transaction with vendor Chariot Corporation will involve a cash payment of $300,000 and $400,000 worth of St George shares, with a milestone payment of 15 million St George shares if an inferred mineral resource of at least 10Mt grading 1% lithium oxide is confirmed.
Chariot will retain a 2% net smelter royalty, and St George can buy back half the royalty for $5 million in cash.
The projects are in regions with significant lithium results, and St George aims to unlock their resource potential through systematic exploration.
BPH Energy (ASX: BPH)
BPH Energy has resumed trading on the ASX after a three-month suspension, following clarification of details regarding its controversial PEP-11 offshore gas project.
BPH, which owns 36.1% of the project’s operator Advent Energy, clarified its claim of a mineral resource estimate of 5.665 trillion cubic feet (TCF) of gas.
The company justified the claim based on a 2010 announcement and a recent reassessment of PEP-11, which indicated a sum of 5.7 TCF of the P50 estimates of all identified prospects and leads within the permit boundary.
BPH also provided clarification about its investment in the project, indicating exposure to 1.73 TCF of P50 gas resources.
Trading on the ASX was allowed to resume after BPH retracted its cost estimate statement, and noted that investors should not rely on it for any investment decision.
The week ahead
Every little bit of data will be examined in the coming week for its bearing on the 4 April Reserve Bank of Australia’s rate decision, which at this stage looks set to be another 25 basis point rise.
February retail trade and inflation will be the main indicators this week, with retail numbers having been particularly volatile recently.
For the inflation numbers, the market will be hoping to see the inflation peak of 7.4% in the rear vision mirror, with the extent of inflationary “stickiness” an important factor in the course of interest rate rises.
In the US, the biggest thing to look for will be the personal income and spending report which contains measures that indicate if core US inflation is trending down.