Lease Western Australia to China – Everyone Would Get $250k

Why not just lease all of Western Australia to China for about AU$500 billion plus future royalties?

The idea came to us like a bolt of lightning when we read in the Herald Sun yesterday that China's new State Investment Company might covet the crown- jewel of Australia's resource sector, BHP. Bell Potter's Peter Quinton says, "If you were the Chinese government, what would you do? If they get BHP they've got a diversified resource company, they've got oil, they're got iron ore, they've got base metals."

Before you dismiss it out of hand, let's put a deal like that in perspective, and run the numbers. First, we're not saying Australia should sell WA to the Chinese. That would be stupid. The French sold the Louisiana territories to Thomas Jefferson for a mere US$15 million. That turned out to be about a US$1 million for each state that was eventually incorporated in the territory.

Back then, US$15 million was a lot of money, not just half the salary of a major corporate bank bosses (we know, in real terms it was a bigger number.) With interest, America ended up paying around US$21 million for French territory in the New World. But oh what a world it was.

America suddenly owned some of the richest, most fertile farmland in the world. All together it came to about 2.1 million square kilometres of land teeming with the resources that would be the engine of America's economic emergence onto the global stage. The treaty was signed in 1803, and the rest, as they say, is histoire.

At 2.5 million square kilometres, WA is slightly bigger than the Louisiana territory. And its quality as a resource base is markedly different. But to the Chinese...there's gold in them thar hills...and iron ore...and zinc...and nickel.

So here's our proposal. The government of WA should sell the Chinese a 50 year exclusive license to develop WA minerals and resources. BHP, Rio, Fortescue, and other minerals and mining firms would continue to do the work, but as contractors for the Chinese.

The upfront cost of the lease should could be based on either the market cap of the Aussie resource sector (currently around AU$354 billion total) or on the net current assets of BHP and Rio Tinto (around AU$53 billion, combined), or on some multiple of current sales for the two firms (about AU$50 billion in the last twelve months) discounted at a rate agreed upon by both parties.

Let's settle on a generous multiple of ten times combined sales and say the upfront cash cost of the lease is AU$500 billion. Annual royalties will be paid as well, at a rate determined by both parties.

Does this sound like a good deal to you? Let's put it this way: would you sell the rights to develop iron ore in WA for an upfront cash payment of AU$250,000, in small bills if you prefer?

There are about two million people in WA. So AU$500 billion distributed evenly between each man, woman, and child, comes out to about AU$250,000 per person. The government, of course, would like to get its greedy hands on the money and invest in something ridiculous like US government bonds. But we would do this deal only for the people and by the people of WA. And think of it this way; instead of having to give some bogus tax incentive of AU$4k to encourage people to have children, you'd get AU$250k a pop for every new child. Now there's an incentive people could learn to enjoy.

Of course this proposal will probably fall on deaf ears. But mark these words; some kind of deal will go down in the next year. It will favour the firms, which indirectly favours the workers, and shareholders. But if the whole world seems to moving to a Putin-Chavez-China style model of state investment/ownership of resources, why not direct more of the profit from natural resources directly to the people, instead of foreign corporations or the government? Free market zealots...discuss.

Dan Denning
The Daily Reckoning Australia

Should WA be leased to China, with a cash payment for all residents? Leave a comment below.

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