The recent Federal Budget handed down by Treasurer Wayne Swan hardly raised a heckle on the collective neck of the Australian mining industry.

Oddly enough that privilege was left to Western Australian Treasurer Christian Porter in handing down his first budget for the mining boom state.

One feature of the budget that poked its head above the parapet was an increase to the state royalty rate for iron ore which will raise an estimated $1.9 billion.

Porter outlined plans to pension off the existing 40-year old deal on iron ore ‘fines’, which has seen them set at a rate of 5.625%, well below the ‘lump’ iron ore rate of 7.5%.

The rate revision will be staggered to maintain the status quo until June 2012, from when things will start to move with a rise to 6.5%, and ultimately hitting 7.5 from July 2013.

According to Porter the new plan will raise an estimated $1.9 billion over the four year budget period, with most funds coming from Federal Government Minerals Resource Rent Tax confidants BHP Billiton, Rio Tinto and Fortescue Metals Group, which was left out of the MRRT discussions.

That will increase the tax take from iron ore royalties to a hefty $17.8 billion by the middle of 2015.

In total the WA State Government will earn $20.58 billion from mining royalties over the next four years, according to Budget papers.

The move is the latest in an intriguing game of chess being played out between Perth and Canberra with Federal Treasurer Wayne Swan previously indicating the Commonwealth could refund any state royalty payments made by mining companies under its new mining tax.

Porter acknowledged a likely consequence of the decision is that WA could lose that same $1.9 billion from its cut of the GST should the Federal Government choose to withhold it, in order to avoid falling into deficit itself.

It seems that no matter which government, State or Federal, chooses to raise mining royalties or taxes, neither seems particularly keen on conversing with the industry beforehand.

The Association of Mining and Exploration Companies chief executive Simeon Bennison said the organisation was, “extremely disappointed that industry bodies and individual companies have not been consulted in respect of the WA Government’s decision to increase the royalty rate on iron ore fines.
 
“This will be yet another unexpected financial impost on iron ore companies in WA.
 
“It will also add to the considerable uncertainty that is being created by the proposed mining tax and price on carbon emissions.
 
“This lack of consultation and uncertainty will undoubtedly undermine investor confidence, particularly for those companies that are currently attempting to raise equity and debt finance in the domestic and overseas market place.
 
“The situation is further exacerbated by the added uncertainty on whether the proposed increase in State royalties will be fully creditable under the proposed MRRT regime.”

Bennison did, however welcome certain initiatives announced in the budget that included funding for social infrastructure, particularly in regional WA, the Pilbara Cities project, skilled migration, trade training centres and training places, and the ppointment of a full time mining warden to deal with objections to mining tenement applications.

“AMEC also welcomes the government’s overall desire to drive investment in infrastructure and services in regional areas and major population hubs in front of forecast demand,” Bennison said.

“Such a strategy is essential in ensuring that undue production and commodity distribution delays are not encountered by the resources sector.”

There probably wasn’t anybody happier with the budget than State Nationals leader and Regional Development and Lands Minister Brendon Grylls with investment in regional WA set to continue with $1.2billion budgeted through the Royalties for Regions program in 2011-12.

Grylls responded to the budget saying that since the creation of Royalties for Regions in 2008 the Liberal-National Government had allocated $6.1billion to programs that were making regional WA a better place to live, work and invest.

“A major component of the Royalties for Regions program is to deliver improved social infrastructure,” Grylls said.

“This year’s initiatives are investing in regional health, education, skills training, water and Natural Resource Management (NRM), Aboriginal initiatives and SuperTowns.

“By 2015 Royalties for Regions will have allocated more than $1billion towards health services and infrastructure in regional areas, including an investment of $538million to strengthen medical care and services in rural communities in the southern part of WA.

“This is the greatest single investment in regional healthcare in WA’s history.”

THE BOURSE WHISPERER: Perth forestry group, RuralAus Investments is about to kick off a full feasibility study for a biomass power plant, fired from plantation timber residue on Kangaroo Island.

RuralAus will spend $374,000 to conduct a full feasibility study into a 10 megawatt renewable power station on Kangaroo Island, which it says will potentially provide a ‘clean green’ energy solution.

For the geographically challenged among us Kangaroo Island is located 15 kilometres off the tip of the southern coast of the Fleurieu Peninsula in South Australia, 110kms south-west of Adelaide.

Measuring in at 55kms wide and 165kms east to west with a coastline of some 509kms Kangaroo Island is Australia’s third largest and is famous for its scenery, geographic features and unique flora and fauna, and is promoted internationally as a premier eco-tourism destination.

It has retained many plants and animals no longer found on mainland Australia and the largest remaining tracts of remnant native vegetation within the agricultural zone in South Australia.

The principal centre of the Island’s administrative and economic activity is the township of Kingscote.

RuralAus’ feasibility study has the full backing of relevant South Australian Government agencies mainly due to the fact the current reliability and performance of the island’s energy network is plagued by high costs and limitations of supply associated with power transmission from the mainland.

RuralAus owns and manages approximately 5,000 hectares of timber plantation on Kangaroo Island, and also owns modern saw milling and processing facilities. It is currently exploring a range of timber development options, including export logs and sawn lumber.

According to RuralAus chief executive officer John Ipsen the biomass power station, which uses residue from timber processing and harvesting as a fuel source, represented a significant growth opportunity for Kangaroo Island and RuralAus.

“We have a real opportunity to make a substantial impact on KI. We have ready access to an excellent source of renewable energy, which can provide a clean and relatively low cost power solution for the island,” he said.

A 10MW renewable energy power plant will take approximately 18 months in planning and construction at an estimated cost of approximately AUD$30 million.

Once operational it will, in conjunction with the sawmill, also have the potential to create considerable employment and economic input into the island economy.

“It allows for RuralAus to add a consistent supply to the energy network especially in times of peak use.  It also allows for other industries to either expand or be created as a result of a consistent supply of ‘base load’ clean energy.” Ipsen said.

“We believe this study reinforces the significance of this project and we are excited about the transformational possibilities for the company.”

As expected, gold didn’t require much effort in smashing through the US$1,500/oz psychological barrier on the back of a host of economic factors in Europe and the US and other politico-economic uncertainties in Africa and the Middle East.

And don’t expect gold to stop: there’s only one direction for the price (amidst profit-taking) and that’s up.

The trigger for gold’s cracking of the US$1500/oz mark was the Standard & Poors’ downgrading of the US triple-A rating credit rating. Coupled with ongoing serious debt worries in Europe, and violence and revolution in the Middle East and North Africa, it’s a perfect storm for precious metals, particularly gold and silver.

Don’t be fooled by the sudden influxes and withdrawals of speculative money from the resource sector. Speculators have seen the opportunity to profit from one of the greatest economic expansions in history, which has provided fertile ground for sizeable swings in commodity prices.

Silver was one of the best (or worst) examples, with the price surging by almost 80% from its low in late January to its recent peak in late April, a period of just three months! Clearly this was unsustainable and something had to give. But silver’s fundamentals are still favourable and the price will recover.

With interest rates remaining low in most countries, there is virtually no reason not to own gold, as the metal currently offers the best returns around, without any significant risks. And irrespective of the potential for handsome returns, gold is also a fabulous insurance policy in the current financial climate.

The move by S&P to downgrade the credit rating of the US is somewhat ironic, because it comes at the same time as it has revised upwards the credit rating of former problem child, Rio Tinto. The Rio upgrade is appropriate and acknowledges the restored financial strength of the company’s balance sheet, which has been achieved through prudent financial management, namely cutting expenditure and eliminating debt.

This is the same sort of fiscal medicine that markets have been calling for the US to swallow, but so far politicians and bureaucrats in the world’s biggest economy have remained complacent, instead seemingly happy to try and spend their way out of trouble. It’s little wonder that S&P have applied the blowtorch to US economy.

All of this, coupled with further serious financial worries in Europe and ongoing violence and revolution in the Middle East and North Africa (which may be spreading to Ivory Coast and Burkina Faso in West Africa), paints a hugely compelling scenario for gold. Inflationary fears will keep interest rates low, which means that the most touted reason not to own gold – the fact that it doesn’t generate any interest – is virtually irrelevant.

Countries with big deficits are happy to see their currencies devalued, which means that the only constant in the world today in terms of value remains gold, the supply of which is fortunately outside the control of governments.

China remains a key player in all of this, which is why comments this week by central bank Governor, Zhou Xiaochuan, are extremely important. In his view China needs to reduce its foreign- exchange reserves as they currently exceed the level the nation requires. The management and diversification of the holdings, which topped US$3 trillion at the end of March, should be improved.
He believes one option would be to consider some new types of investment agencies which focus on new investment areas.

Considering that the US dollar and US Treasuries are the bulk of China’s reserves, what this all boils down to is a warning to the US that China will no longer be buying as many dollar-denominated assets. In fact it might even become a seller. This is a major warning indicator as to the future value and importance of the US$.

Whether industrial commodities perform to the same degree depends on whether the perceived recovery in the economies of the U.S. and Europe continue to gather steam, and Chinese tightening does not cut too significantly into that country’s growth. Irrespective, I am extremely bullish on the outlook for both ‘hard’ commodities (minerals, metals, energy) and ‘soft’ commodities (food, crops), due to growing demand pressures coinciding with supply-side restrictions.

All this has been taking place just as GFMS has released its 2011 gold price outlook. The GFMS price outlook is for gold to average US$1,450/oz in 2011, although this forecast contains significant seasonal volatility, with prices forecast to head down to the US$1,350-$1,370/oz range within the next three months, then rebounding toward US$1,600/oz by year end 2011.

Average gold mine cash costs in 2010 were US$557/oz, +17% (or +$79/oz) compared to 2009. After only 3% cash cost growth during 2009, gold mining cost inflation in 2010 returned to the 15%-25% annual levels seen between 2003 and 2008. The biggest driver of 2010 cost inflation was FX rates, as the currencies of gold-producing countries strengthened relative to the US$, contributing to a US$39/oz increase in cash costs.

A 5% decline in average head-grades to 1.51g/t was the next largest contributor to cash costs, adding US$24/oz. Declining head grades is a major concern for the industry. The industry is being insulated however, with the average total cash margin increasing from US$495/oz to US$668/oz due to a 26% increase in the gold price. I believe that declining grades will necessitate a higher gold price, not only now but in the future.

Don’t forget that the same key factors that have been driving the gold price recently – weakness in the US$ that shows no sign of easing, combined with investor nervousness related to the ongoing ‘quantitative easing’ taking place in the US – have actually been present for the past decade. Now, we have geopolitical concerns in MENA and financial worries in Western Europe added to the mix, with little prospect of resolution.

US fiscal irresponsibility has further raised the spectre of a scenario in which the international role of the dollar has come into question. The US cannot continue to run a current account deficit without jeopardizing the stability of the world economy. Little wonder that the gold price is set to continue its inexorable climb.

Gavin Wendt is the founder of MineLife, publisher of the MineLife Weekly Resource Report

THE DRILL SERGEANT: Spitfire Resources has reported a third manganese discovery to join the Tally-Ho and Contact discoveries at its South Woodie Woodie project in the East Pilbara region of Western Australia.

The new area is imaginatively known as Contact North, as it lies just 700 metres north of the recently discovered Contact deposit.

The first six holes Spitfire put down at Contact North intersected a new zone of manganese mineralisation with visually logged thickness of between 9m and 17m, commencing from an average depth of 47m below surface.

Significant visual intersections of manganese oxide mineralisation have been logged in all six of the holes drilled to date.

To top off a good announcement Spitfire said it has also received initial assay results from the 2011 drilling program at the Contact discovery, where drilling has defined a substantial zone of manganese mineralisation.

Initial assays with up to 30% manganese have been received from the first RC drill holes completed as part of the current drilling program at Contact.

Some of the best results received include:

10m at 21.12% manganese from 27m, including 6m at 27.81% manganese from 30m and 1m at 30.07% manganese from 34m.

6m at 22.47% manganese from 52m including  4m at 25.96% manganese from 52m and 1m at 29.41% manganese from 53m.

4m at 15.22% manganese from 10m including 1m @ 25.22% manganese from 10m.

The Contact area is located in a good neighbourhood for manganese with the north-eastern part of Spitfire’s 100%-owned tenement situated 11km north-west of the company’s Tally-Ho deposit and approximately 70km directly south of the world-class Woodie Woodie manganese mine operated by Consolidated Minerals.

Spitfire Resources managing director John Mackenzie, said the company was delighted to have made a third discovery at South Woodie Woodie hot on the heels of the Contact find.

“These intersections from the Contact North discovery are very encouraging and provide more evidence that the South Woodie Woodie Project has the potential to be an economic development,” he said in a company announcement.

 “Drilling is continuing at both Contact North and Contact with a steady flow of assay results expected over coming weeks and months.”