Part 16 (2/2)
3. The reports of the directors, manager, and consulting engineer.
The first two items are largely matters of bookkeeping. They or the report should show the working costs per ton for the year.
What must be here included in costs is easier of determination than in the detailed monthly cost sheets of the administration; for at the annual review, it is not difficult to a.s.sess the amount chargeable to development. Equipment expenditure, however, presents an annual difficulty, for, as said, the distribution of this item is a factor of the life of the mine, and that is unknown. If such a plant has been paid for out of the earnings, there is no object in carrying it on the company's books as an a.s.set, and most well-conducted companies write it off at once. On the other hand, where the plant is paid for out of capital provided for the purpose, even to write off depreciation means that a corresponding sum of cash must be held in the company's treasury in order to balance the accounts,--in other words, depreciation in such an instance becomes a return of capital. The question then is one of policy in the company's finance, and in neither case is it a matter which can be brought into working costs and leave them any value for comparative purposes. Indeed, the true cost of working the ore from any mine can only be told when the mine is exhausted; then the dividends can be subtracted from the capital sunk and metal sold, and the difference divided over the total tonnage produced.
The third section of the report affords wide scope for the best efforts of the administration. This portion of the report falls into three divisions: (_a_) the construction and equipment work of the year, (_b_) the ore extraction and treatment, and (_c_) the results of development work.
The first requires a statement of the plant constructed, its object and accomplishment; the second a disclosure of tonnage produced, values, metallurgical and mechanical efficiency. The third is of the utmost importance to the stockholder, and is the one most often disregarded and obscured. Upon this hinges the value of the property.
There is no reason why, with plans and simplicity of terms, such reports cannot be presented in a manner from which the novice can judge of the intrinsic position of the property. A statement of the tonnage of ore-reserves and their value, or of the number of years' supply of the current output, together with details of ore disclosed in development work, and the working costs, give the ground data upon which any stockholder who takes interest in his investment may judge for himself. Failure to provide such data will some day be understood by the investing public as a _prima facie_ index of either incapacity or villainy. By the insistence of the many engineers in administration of mines upon the publication of such data, and by the insistence of other engineers upon such data for their clients before investment, and by the exposure of the delinquents in the press, a more practicable ”protection of investors” can be reached than by years of academic discussion.
CHAPTER XIX.
The Amount of Risk in Mining Investments.
RISK IN VALUATION OF MINES; IN MINES AS COMPARED WITH OTHER COMMERCIAL ENTERPRISES.
From the constant reiteration of the risks and difficulties involved in every step of mining enterprise from the valuation of the mine to its administration as a going concern, the impression may be gained that the whole business is one great gamble; in other words, that the point whereat certainties stop and conjecture steps in is so vital as to render the whole highly speculative.
Far from denying that mining is, in comparison with better-cla.s.s government bonds, a speculative type of investment, it is desirable to avow and emphasize the fact. But it is none the less well to inquire what degree of hazard enters in and how it compares with that in other forms of industrial enterprise.
Mining business, from an investment view, is of two sorts,--prospecting ventures and developed mines; that is, mines where little or no ore is exposed, and mines where a definite quant.i.ty of ore is measurable or can be reasonably antic.i.p.ated. The great hazards and likewise the Aladdin caves of mining are mainly confined to the first cla.s.s. Although all mines must pa.s.s through the prospecting stage, the great industry of metal production is based on developed mines, and it is these which should come into the purview of the non-professional investor.
The first cla.s.s should be reserved invariably for speculators, and a speculator may be defined as one who hazards all to gain much.
It is with mining as an investment, however, that this discussion is concerned.
RISK IN VALUATION OF MINES.--a.s.suming a competent collection of data and efficient management of the property, the risks in valuing are from step to step:--
1. The risk of continuity in metal contents beyond sample faces.
2. The risk of continuity in volume through the blocks estimated.
3. The risk of successful metallurgical treatment.
4. The risk of metal prices, in all but gold.
5. The risk of properly estimating costs.
6. The risk of extension of the ore beyond exposures.
7. The risk of management.
As to the continuity of values and volumes through the estimated area, the experience of hundreds of engineers in hundreds of mines has shown that when the estimates are based on properly secured data for ”proved ore,” here at least there is absolutely no hazard.
Metallurgical treatment, if determined by past experience on the ore itself, carries no chance; and where determined by experiment, the risk is eliminated if the work be sufficiently exhaustive. The risk of metal price is simply a question of how conservative a figure is used in estimating. It can be eliminated if a price low enough be taken. Risk of extension in depth or beyond exposures cannot be avoided. It can be reduced in proportion to the distance a.s.sumed. Obviously, if no extension is counted, there is nothing chanced. The risk of proper appreciation of costs is negligible where experience in the district exists. Otherwise, it can be eliminated if a sufficiently large allowance is taken. The risk of failure to secure good management can be eliminated if proved men are chosen.
There is, therefore, a basic value to every mine. The ”proved”
ore taken on known metallurgical grounds, under known conditions of costs on minimum prices of metals, has a value as certain as that of money in one's own vault. This is the value previously referred to as the ”_A_” value. If the price (and interest on it pending recovery) falls within this amount, there is no question that the mine is worth the price. What the risk is in mining is simply what amount the price of the investment demands shall be won from extension of the deposit beyond known exposures, or what higher price of metal must be realized than that calculated in the ”_A_” value. The demands on this _X, Y_ portion of the mine can be converted into tons of ore, life of production, or higher prices, and these can be weighed with the geological weights and the industrial outlook.
MINES COMPARED TO OTHER COMMERCIAL ENTERPRISES.--The profits from a mining venture over and above the bed-rock value _A_, that is, the return to be derived from more extensive ore-recovery and a higher price of metal, may be compared to the value included in other forms of commercial enterprise for ”good-will.” Such forms of enterprise are valued on a basis of the amount which will replace the net a.s.sets plus (or minus) an amount for ”good-will,” that is, the earning capacity. This good-will is a speculation of varying risk depending on the character of the enterprise. For natural monopolies, like some railways and waterworks, the risk is less and for shoe factories more. Even natural monopolies are subject to the risks of antagonistic legislation and industrial storms.
But, eliminating this cla.s.s of enterprise, the speculative value of a good-will involves a greater risk than prospective value in mines, if properly measured; because the dangers of compet.i.tion and industrial storms do not enter to such a degree, nor is the future so dependent upon the human genius of the founder or manager.
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