Home News MONGOLIA CALLS IMF BUT WA STILL RIO TINTO MONGOLIA CALLS IMF BUT WA STILL RIO TINTO 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. Source:http://www.afr.com/opinion/columnists/mongolia-calls-imf-but-wa-still-rio-tintos-risk-no1-20161003-grtvim