![Mongolia's request for financial rescue by the International Monetary Fund has done nothing to alter the debt-burdened ...](/content/dam/images/g/r/n/8/p/1/image.related.afrArticleLead.620x350.grtvim.png/1475490329039.jpg)
Mongolia's request for financial rescue by the International Monetary Fund has done nothing to alter the debt-burdened mining frontier's standing on the Rio Tinto rankings of sovereign risk.
Western Australia remains number one, well out in front of cash-strapped Mongolia, an increasingly volatile South Africa and the even more politically uncertain Madagascar and Guinea.
This unlikely achievement results, as we have noted before, from the commercially obtuse but politically acute plan by the WA National Party to solve the state's very obvious balance sheet problem with a new great big iron ore tax that would suck new life out of the world's biggest iron ore province.
The net tax would take the form of an increase in lease rentals that are charged on production once mines have been producing for 15 years. Currently the rent is 25 cents a tonne. New Nationals leader Brendon Grylls thinks it is a spiffing idea to increase that to $5 a tonne.
Pretty much everyone attached to reality has rejected Grylls thought bubble. But still he persists. Over the weekend, five months out from the state election, the Nationals launched a two-step advertising campaign that will first highlight flaws created by the state's unfair share of GST revenues and the second will illuminate the budget-resuscitating quality of the answer proposed by Grylls.
The retail politics here are that the PIlbara's legacy miners are on the nose over in the west. The drive down the global iron ore cost curve has been running for four years so far and there is no sign that any of the majors have finished yet. Right or wrong, the Pilbara pain is blamed on Rio Tinto and BHP Billiton. And the tax increase proposed would, for the time being, affect only them.
That is because, even though it feels like Fortescue Metals has been around forever, in fact the Pilbara's third force opened its mining campaign in 2008 so it would be immune from the Grylls Tax for another seven years. And, even then, the lease where Fortescue began a mining life represents only about half of its current production. The other half, the Solomon's stream, produced first ore in 2010.
The numbers illustrate starkly why the Pilbara's pioneers are so actively concerned at the Grylls proposition and why Fortescue too has rejected the plan.
Given both Rio and BHP are the targets this year, the production-based rent charged for access to their leases would increase from about $150 million to about $3 billion. Not only would that bill continue to rise with any production increase but the price-indiscriminate nature of the fee means that the proportion of the miners' income it absorbs would actually increase with falling prices.
Currently Rio and BHP pay a state royalty of 7.5 per cent on revenues earned from sales of iron ore. This is before they pay 30 per cent on the profit generated by mining.
So, for argument's sake, let's imagine iron ore trades at $70 a tonne. Rio or BHP would pay $5.25 a tonne in royalties and a further 25 cents in rent to WA. If you lift that rental component to $5, then the total state bounty would rise to $10.25 a tonne. That represents 14.6 per cent of the total revenue earned.
If the price was to fall to say $60 a tonne, then the royalty would fall to $4.50 a tonne and the state would earn $9.50 a tonne in total. That is nearer 16 per cent of the total revenue earned.
Needless to say, from pretty much any standpoint, this is a bad idea. When prices fall, profit margins are squeezed. And when margins are under pressure then the last thing anyone needs is for a greater proportion of their cash flow to head to government rather than be devoted to sustaining business.
Riding Dark Horses
Having been banned from developing any of its $50 million portfolio of essentially uncontroversial Victorian gas finds, Lakes Oil has opted instead to head to the birthplace of Santos for inspiration and, just maybe, an oily future.
Doubtless at the invitation of one of its directors, Nick Mather, Lakes has invested $400,000 of its scarce financial resources to secure 4 per cent of the oil and gas arm of the aptly named Dark Horse Resources.
The vehicle is named Navgas Pty Ltd and holds exploration country around Queensland's home of gas, Roma. More relevant to Lakes' interest, though, is that Navgas has also applied for a suite of exploration licences in South Australia that hold shale and conventional targets. Among the old-fashioned options is a place called Wilkantana.
Oil was first revealed in a water bore at Wilkantana as long ago as 1934. Back in 1956 the area, which also has a long history of visible surface seepages of oil, played host to as many as six Santos oil rigs. Exploration revealed good qualities of medium and heavy grade crudes but the drillers just could not get the stuff to flow for want of the pressures necessary, which result from effective geological trapping of the oil.
According to Lakes boss Roland Sleeman, no one has drilled around Wilkantana since Santos walked away.
Drilling is not the only oil technology to have been revolutionised over the past two decades. The development and effective deployment of seismic technologies means that explorers start their searches with a far more profound understanding of what they are standing on than ever before. The Dark Horse punt is that modern technology will identify oil traps within the bounds of the country that Santos drilled in the 1950s.
Dark Horse is one of five or six listed oil and minerals plays that sit within the ownership thrall of Mather's DGR Global. Less directly, the battle-scarred Lakes is another.
For the record, Mather is chairman of Dark Horse and sits on the board of Lakes as one of two directors appointed by Armour Energy. The Mather-chaired DGR owns 23.25 per cent of Armour which, in turn, owns 17.91 per cent of Lakes. Mather is executive chairman of Armour.
Mather, of course, is better known as the co-founder of Arrow Energy, the coal-seam operator that was bought out by partners Shell and PetroChina back in 2010 in a deal that valued the business at $3.3 billion.
Since then Mather has been working to repeat that grassroots success story through DGR, which has collected a suite of mature and immature greenfields opportunities.
The DGR model is interesting. It owns positions of between 15 and 23 per cent in five petroleum and metals operators and draws income from each in the form of various levels of payment for management services. Because the Lakes stake is owned through Armour, the Victorian junior has no direct financial obligation to Mather's business.
So is this the start of a migration westwards for Lakes, which is reviewing its legal options after being financially kneecapped by Victoria's unique and self-destructive decision to ban both conventional and unconventional petroleum exploration and extraction in the state?
Well, sort of, according to Sleeman.
"Our acreage in Victoria is outstanding, the potential is just huge and we are certainly not walking away from that. We have to think that, in the fullness of time, commonsense just has to prevail.
"Victoria will experience [energy] difficulty at some stage with prices and gas access. Anyone using gas for feedstock in Victoria will not survive, in my opinion, without new sources of proximate domestic supply.
"But if you stand still you die. We cannot let Lakes just wilt on the vine. The government is still charging us to retain our permits even if they will not let us drill them," Sleeman notes. "So yes, we are looking to expand our horizons. And South Australia has made it clear that it is open to gas drilling and gas development."
To be clear on the permit situation, its costs $10,000 annually to secure a permit and Lakes has seven onshore and two offshore permits. The process has been reduced to absurdity with permit owners being required to apply annually for another suspension of the obligations attached to the leases, obligations that are unable to be met because of government edict.
Speaking on Monday, Sleeman repeated advice published in the Lakes annual report that the company is working to develop an understanding of its legal rights as a result of Victoria's bans and is close to a decision on whether to pursue those rights through the courts.