Funnily enough I have had exactly the same problem on my bog-standard 56 VH500, and just this weekend had to be rescued by recovery van from Anglesey with no spark from the mag at all
. Not the end to my holiday I wanted! Oil had been dripping out of end of the dynamo for some while too. So I took the mag off on Sunday, and right enough, all the earth ring and brush were covered in oil inside, so it was not earthing back. Cleaned all this up, and hey presto, a spark.
But the issue remains, why is this oil being pushed up into the magdyno front casing in the first place?? I also have a thin home-made seal either side of the mag shaft, (made of gasket paper), which helps a bit, but there's nothing to stop oil going into the dynamo. I also assume that the timing chain flings it all up that end of the casing anyway, so it's a case of the oil being in the wrong place at the wrong time.
Best suggestion I've had so far, (thanks Jim Haydock), is that the breathers really aren't good enough, and I might be better off removing the non return valve on the timing case one. The crankcase breather on the other side is just an open pipe, but it seems even these two might not be able to relieve pressure in the cases. I read the other posts about rocker cover breathers, but frankly got a bit confused about the various ideas about pressure differentials - I've never had this issue on any number of other old knackered British bike engines, with or without worn bores/rings etc., it seems to be an Ariel thing. Lucky us!
Volker, thanks for your comment about the oil holes and gaskets, I did remember checking these, and I don't think any were blocked off by the new gasket I used, but as I have the case off I can double check.
Has anyone successfully modified the existing breathers to solve this issue perhaps? (I am no engineer, so won't be able to make up new brass pipes, add threads etc...or anything like that).