Valuation of Mines
VALUATION OF MINES WITH LITTLE OR NO ORE IN SIGHT; VALUATIONS ON
SECOND-HAND DATA; GENERAL CONDUCT OF EXAMINATIONS; REPORTS.
A large number of examinations arise upon prospecting ventures
or partially developed mines where the value is almost wholly
prospective. The risks in such enterprises amount to the possible loss
of the whole investment, and the possible returns must consequently
be commensurate. Such business is therefore necessarily highly
speculative, but not unjustifiable, as the whole history of the
industry attests; but this makes the matter no easier for the mine
valuer. Many devices of financial procedure assist in the limitation
of the sum risked, and offer a middle course to the investor between
purchase of a wholly prospective value and the loss of a possible
opportunity to profit by it. The usual form is an option to buy the
property after a period which permits a certain amount of development
work by the purchaser before final decision as to purchase.
Aside from young mines
such enterprises often arise from the possibility
of lateral extension of the ore-deposit outside the boundaries of
the property of original discovery (Fig. 3), in which cases there
is often no visible ore within the property under consideration
upon which to found opinion. In regions where vertical side lines
obtain, there is always the possibility of a "deep level" in inclined
deposits. Therefore the ground surrounding known deposits has a
certain speculative value, upon which engineers are often called to
pass judgment. Except in such unusual occurrences as South African
bankets, or Lake Superior coppers, prospecting for deep level of
extension is also a highly speculative phase of mining.
The whole basis of opinion in both classes of ventures must be
the few geological weights,--the geology of the property and the
district, the development of surrounding mines, etc. In any event,
there is a very great percentage of risk, and the profit to be gained
by success must be, proportionally to the expenditure involved,
very large. It is no case for calculating amortization and other
refinements. It is one where several hundreds or thousands of per
cent hoped for on the investment is the only justification.
OPINIONS AND VALUATIONS UPON SECOND-HAND DATA.
Some one may come forward and deprecate the bare suggestion of an
engineer's offering an opinion when he cannot have proper first-hand
data. But in these days we have to deal with conditions as well as
theories of professional ethics. The growing ownership of mines
by companies, that is by corporations composed of many individuals,
and with their stocks often dealt in on the public exchanges, has
resulted in holders whose interest is not large enough to warrant
their undertaking the cost of exhaustive examinations. The system
has produced an increasing class of mining speculators and investors
who are finding and supplying the enormous sums required to work
our mines,--sums beyond the reach of the old-class single-handed
mining men. Every year the mining investors of the new order are
coming more and more to the engineer for advice, and they should
be encouraged, because such counsel can be given within limits,
and these limits tend to place the industry upon a sounder footing
of ownership. As was said before, the lamb can be in a measure
protected. The engineer's interest is to protect him, so that the
industry which concerns his own life-work may be in honorable repute,
and that capital may be readily forthcoming for its expansion.
Moreover, by constant advice to the investor as to what constitutes
a properly presented and managed project, the arrangement of such
proper presentation and management will tend to become an _a priori_
function of the promoter.
Sometimes the engineer can make a short visit to the mine for data
purposes,--more often he cannot. In the former case, he can resolve
for himself an approximation upon all the factors bearing on value,
except the quality of the ore. For this, aside from inspection of
the ore itself, a look at the plans is usually enlightening. A
longitudinal section of the mine showing a continuous shortening of
the stopes with each succeeding level carries its own interpretation.
In the main, the current record of past production and estimates
of the management as to ore-reserves, etc., can be accepted in
ratio to the confidence that can be placed in the men who present
them. It then becomes a case of judgment of men and things, and
here no rule applies.
Advice must often be given upon data alone, without inspection
of the mine. Most mining data present internal evidence as to
credibility. The untrustworthy and inexperienced betray themselves
in their every written production. Assuming the reliability of data,
the methods already discussed for weighing the ultimate value of
the property can be applied. It would be possible to cite hundreds
of examples of valuation based upon second-hand data. Three will,
however, sufficiently illustrate. First, the R mine at Johannesburg.
With the regularity of this deposit, the development done, and
a study of the workings on the neighboring mines and in deeper
ground, it is a not unfair assumption that the reefs will maintain
size and value throughout the area. The management is sound, and
all the data are given in the best manner. The life of the mine
is estimated at six years, with some probabilities of further ore
from low-grade sections. The annual earnings available for dividends
are at the rate of about £450,000 per annum. The capital is £440,000
in £1 shares. By reference to the table on page 46 it will be seen
that the present value of £450,000 spread over six years to return
capital at the end of that period, and give 7% dividends in the
meantime, is 4.53 x £450,000 = £2,036,500 ÷ 440,000 = £4 12_s_.
7_d_. per share. So that this mine, on the assumption of continuity
of values, will pay about 7% and return the price. Seven per cent
is, however, not deemed an adequate return for the risks of labor
troubles, faults, dykes, or poor patches. On a 9% basis, the mine
is worth about £4 4_s_. per share.
Second, the G mine in Nevada. It has a capital of $10,000,000 in
$1 shares, standing in the market at 50 cents each. The reserves
are 250,000 tons, yielding a profit for yearly division of $7 per
ton. It has an annual capacity of about 100,000 tons, or $700,000
net profit, equal to 14% on the market value. In order to repay
the capital value of $5,000,000 and 8% per annum, it will need
a life of (Table III) 13 years, of which 2-1/2 are visible. The
size of the ore-bodies indicates a yield of about 1,100 tons per
foot of depth. At an exhaustion rate of 100,000 tons per annum,
the mine would need to extend to a depth of over a thousand feet
below the present bottom. There is always a possibility of finding
parallel bodies or larger volumes in depth, but it would be a sanguine
engineer indeed who would recommend the stock, even though it pays
an apparent 14%.
Third, the B mine, with a capital of $10,000,000 in 2,000,000 shares
of $5 each. The promoters state that the mine is in the slopes of
the Andes in Peru; that there are 6,000,000 tons of "ore blocked
out"; that two assays by the assayers of the Bank of England average
9% copper; that the copper can be produced at five cents per pound;
that there is thus a profit of $10,000,000 in sight. The evidences
are wholly incompetent. It is a gamble on statements of persons
who have not the remotest idea of sound mining.
GENERAL CONDUCT OF EXAMINATION.
Complete and exhaustive examination, entailing extensive sampling,
assaying, and metallurgical tests, is very expensive and requires
time. An unfavorable report usually means to the employer absolute
loss of the engineer's fee and expenses. It becomes then the initial
duty of the latter to determine at once, by the general conditions
surrounding the property, how far the expenditure for exhaustive
examination is warranted. There is usually named a money valuation
for the property, and thus a peg is afforded upon which to hang
conclusions. Very often collateral factors with a preliminary sampling,
or indeed no sampling at all, will determine the whole business.
In fact, it is becoming very common to send younger engineers to
report as to whether exhaustive examination by more expensive men
In the course of such preliminary inspection, the ore-bodies may
prove to be too small to insure adequate yield on the price, even
assuming continuity in depth and represented value. They may be
so difficult to mine as to make costs prohibitive, or they may
show strong signs of "petering out." The ore may present visible
metallurgical difficulties which make it unprofitable in any event.
A gold ore may contain copper or arsenic, so as to debar cyanidation,
where this process is the only hope of sufficiently moderate costs.
A lead ore may be an amorphous compound with zinc, and successful
concentration or smelting without great penalties may be precluded.
A copper ore may carry a great excess of silica and be at the same
time unconcentratable, and there may be no base mineral supply
available for smelting mixture. The mine may be so small or so
isolated that the cost of equipment will never be justified. Some
of these conditions may be determined as unsurmountable, assuming
a given value for the ore, and may warrant the rejection of the
mine at the price set.
It is a disagreeable thing to have a disappointed promoter heap
vituperation on an engineer's head because he did not make an exhaustive
examination. Although it is generally desirable to do some sampling
to give assurance to both purchaser and vendor of conscientiousness,
a little courage of conviction, when this is rightly and adequately
grounded, usually brings its own reward.
Supposing, however, that conditions are right and that the mine is
worth the price, subject to confirmation of values, the determination
of these cannot be undertaken unless time and money are available
for the work. As was said, a sampling campaign is expensive, and
takes time, and no engineer has the moral right to undertake an
examination unless both facilities are afforded. Curtailment is
unjust, both to himself and to his employer.
How much time and outlay are required to properly sample a mine
is obviously a question of its size, and the character of its ore.
An engineer and one principal assistant can conduct two sampling
parties. In hard rock it may be impossible to take more than five
samples a day for each party. But, in average ore, ten samples for
each is reasonable work. As the number of samples is dependent
upon the footage of openings on the deposit, a rough approximation
can be made in advance, and a general idea obtained as to the time
required. This period must be insisted upon.
Reports are to be read by the layman, and their first qualities
should be simplicity of terms and definiteness of conclusions.
Reports are usually too long, rather than too short. The essential
facts governing the value of a mine can be expressed on one sheet
of paper. It is always desirable, however, that the groundwork data
and the manner of their determination should be set out with such
detail that any other engineer could come to the same conclusion
if he accepted the facts as accurately determined. In regard to the
detailed form of reports, the writer's own preference is for a single
page summarizing the main factors, and an assay plan, reduced to a
longitudinal section where possible. Then there should be added,
for purposes of record and for submission to other engineers, a
set of appendices going into some details as to the history of
the mine, its geology, development, equipment, metallurgy, and
management. A list of samples should be given with their location,
and the tonnages and values of each separate block. A presentation
should be made of the probabilities of extension in depth, together
with recommendations for working the mine.
The bed-rock value which attaches to a mine is the profit to be
won from proved ore and in which the price of metal is calculated
at some figure between "basic" and "normal." This we may call the
"_A_" value. Beyond this there is the speculative value of the
mine. If the value of the "probable" ore be represented by _X_,
the value of extension of the ore by _Y_, and a higher price for
metal than the price above assumed represented by _Z_, then if
the mine be efficiently managed the value of the mine is _A_ +
_X_ + _Y_ + _Z_. What actual amounts should be attached to _X,
Y, Z_ is a matter of judgment. There is no prescription for good
judgment. Good judgment rests upon a proper balancing of evidence.
The amount of risk in _X, Y, Z_ is purely a question of how much
these factors are required to represent in money,--in effect, how
much more ore must be found, or how many feet the ore must extend
in depth; or in convertible terms, what life in years the mine
must have, or how high the price of metal must be. In forming an
opinion whether these requirements will be realized, _X, Y, Z_
must be balanced in a scale whose measuring standards are the five
geological weights and the general industrial outlook. The wise
engineer will put before his clients the scale, the weights, and
the conclusion arrived at. The shrewd investor will require to
know these of his adviser.
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