Ratio of Output to the Mine

DETERMINATION OF THE POSSIBLE MAXIMUM; LIMITING FACTORS; COST OF
EQUIPMENT; LIFE OF THE MINE; MECHANICAL INEFFICIENCY OF PATCHWORK
PLANT; OVERPRODUCTION OF BASE METAL; SECURITY OF INVESTMENT.

The output obtainable from a given mine is obviously dependent
not only on the size of the deposit, but also on the equipment
provided,--in which equipment means the whole working appliances,
surface and underground.

A rough and ready idea of output possibilities of inclined deposits
can be secured by calculating the tonnage available per foot of
depth from the horizontal cross-section of the ore-bodies exposed
and assuming an annual depth of exhaustion, or in horizontal deposits
from an assumption of a given area of exhaustion. Few mines, at the
time of initial equipment, are developed to an extent from which
their possibilities in production are evident, for wise finance
usually leads to the erection of some equipment and production before
development has been advanced to a point that warrants a large or
final installation. Moreover, even were the full possibilities of
the mine known, the limitations of finance usually necessitate a
less plant to start with than is finally contemplated. Therefore
output and equipment are usually growing possibilities during the
early life of a mine.

There is no better instance in mine engineering where pure theory
must give way to practical necessities of finance than in the
determination of the size of equipment and therefore output. Moreover,
where finance even is no obstruction, there are other limitations
of a very practical order which must dominate the question of the
size of plant giving the greatest technical economy. It is, however,
useful to state the theoretical considerations in determining the
ultimate volume of output and therefore the size of equipments,
for the theory will serve to illuminate the practical limitations.
The discussion will also again demonstrate that all engineering
is a series of compromises with natural and economic forces.

OUTPUT GIVING LEAST PRODUCTION COST.--As one of the most important
objectives is to work the ore at the least cost per ton, it is
not difficult to demonstrate that the minimum working costs can
be obtained only by the most intensive production. To prove this,
it need only be remembered that the working expenses of a mine
are of two sorts: one is a factor of the tonnage handled, such as
stoping and ore-dressing; the other is wholly or partially dependent
upon time. A large number of items are of this last order. Pumping
and head-office expenses are almost entirely charges independent
of the tonnage handled. Superintendence and staff salaries and
the like are in a large proportion dependent upon time. Many other
elements of expense, such as the number of engine-drivers, etc., do
not increase proportionately to increase in tonnage. These charges,
or the part of them dependent upon time apart from tonnage, may be
termed the "fixed charges."

There is another fixed charge more obscure yet no less certain.
Ore standing in a mine is like money in a bank drawing no interest,
and this item of interest may be considered a "fixed charge," for
if the ore were realized earlier, this loss could be partially
saved. This subject is further referred to under "Amortization."

If, therefore, the time required to exhaust the mine be prolonged
by the failure to maintain the maximum output, the total cost of
working it will be greater by the fixed charges over such an increased
period. Conversely, by equipping on a larger scale, the mine will
be exhausted more quickly, a saving in total cost can be made, and
the ultimate profit can be increased by an amount corresponding
to the time saved from the ravages of fixed charges. In fine, the
working costs may be reduced by larger operations, and therefore
the value of the mine increased.

The problem in practice usually takes the form of the relative
superiority of more or of fewer units of plant, and it can be considered
in more detail if the production be supposed to consist of units
averaging say 100 tons per day each. The advantage of more units
over less will be that the extra ones can be produced free of fixed
charges, for these are an expense already involved in the lesser
units. This extra production will also enjoy the interest which
can be earned over the period of its earlier production. Moreover,
operations on a larger scale result in various minor economies
throughout the whole production, not entirely included in the type
of expenditure mentioned as "fixed charges." We may call these
various advantages the "saving of fixed charges" due to larger-scale
operations. The saving of fixed charges amounts to very considerable
sums. In general the items of working cost alone, mentioned above,
which do not increase proportionately to the tonnage, aggregate
from 10 to 25% of the total costs. Where much pumping is involved,
the percentage will become even greater.

The question of the value of the mine as affected by the volume
of output becomes very prominent in low-grade mines, where, if
equipped for output on too small a scale, no profits at all could
be earned, and a sufficient production is absolutely imperative
for any gain. There are many mines in every country which with
one-third of their present rate of production would lose money.
That is, the fixed charges, if spread over small output, would be
so great per ton that the profit would be extinguished by them.

In the theoretical view, therefore, it would appear clear that
the greatest ultimate profit from a mine can be secured only by
ore extraction under the highest pressure. As a corollary to this
it follows that development must proceed with the maximum speed.
Further, it follows that the present value of a mine is at least
partially a factor of the volume of output contemplated.

FACTORS LIMITING THE OUTPUT.

Although the above argument can be academically defended, there
are, as said at the start, practical limitations to the maximum
intensity of production, arising out of many other considerations
to which weight must be given. In the main, there are five principal
limitations:--

1. Cost of equipment.
2. Life of the mine.
3. Mechanical inefficiency of patchwork plant.
4. Overproduction of base metal.
5. Security of investment.

COST OF EQUIPMENT.--The "saving of fixed charges" can only be obtained
by larger equipment, which represents an investment. Mining works,
shafts, machinery, treatment plants, and all the paraphernalia cost
large sums of money. They become either worn out or practically
valueless through the exhaustion of the mines. Even surface machinery
when in good condition will seldom realize more than one-tenth of its
expense if useless at its original site. All mines are ephemeral;
therefore virtually the entire capital outlay of such works must
be redeemed during the life of the mine, and the interest on it
must also be recovered.

The certain life, with the exception of banket and a few other
types of deposit, is that shown by the ore in sight, plus something
for extension of the deposit beyond exposures. So, against the
"savings" to be made, must be set the cost of obtaining them, for
obviously it is of no use investing a dollar to save a total of
ninety cents. The economies by increased production are, however,
of such an important character that the cost of almost any number
of added units (within the ability of the mine to supply them)
can be redeemed from these savings in a few years. For instance,
in a Californian gold mine where the working expenses are $3 and
the fixed charges are at the low rate of 30 cents per ton, one
unit of increased production would show a saving of over $10,000
per annum from the saving of fixed charges. In about three years
this sum would repay the cost of the additional treatment equipment.
If further shaft capacity were required, the period would be much
extended. On a Western copper mine, where the costs are $8 and the
fixed charges are 80 cents per ton, one unit of increased production
would effect a saving of the fixed charges equal to the cost of
the extra unit in about three years. That is, the total sum would
amount to $80,000, or enough to provide almost any type of mechanical
equipment for such additional tonnage.

The first result of vigorous development is to increase the ore in
sight,--the visible life of the mine. When such visible life has
been so lengthened that the period in which the "saving of fixed
charges" will equal the amount involved in expansion of equipment,
then from the standpoint of this limitation only is the added
installation justified. The equipment if expanded on this practice
will grow upon the heels of rapid development until the maximum
production from the mine is reached, and a kind of equilibrium
establishes itself.

Conversely, this argument leads to the conclusion that, regardless
of other considerations, an equipment, and therefore output, should
not be expanded beyond the redemption by way of "saving from fixed
charges" of the visible or certain life of the mine. In those mines,
such as at the Witwatersrand, where there is a fairly sound assurance
of definite life, it is possible to calculate at once the size of
plant which by saving of "fixed charges" will be eventually the
most economical, but even here the other limitations step in to
vitiate such policy of management,--chiefly the limitation through
security of investment.

LIFE OF THE MINE.--If carried to its logical extreme, the above
program means a most rapid exhaustion of the mine. The maximum output
will depend eventually upon the rapidity with which development
work may be extended. As levels and other subsidiary development
openings can be prepared in inclined deposits much more quickly
than the shaft can be sunk, the critical point is the shaft-sinking.
As a shaft may by exertion be deepened at least 400 feet a year on
a going mine, the provision of an equipment to eat up the ore-body
at this rate of sinking means very early exhaustion indeed. In
fact, had such a theory of production been put into practice by
our forefathers, the mining profession might find difficulty in
obtaining employment to-day. Such rapid exhaustion would mean a
depletion of the mineral resources of the state at a pace which
would be alarming.

MECHANICAL INEFFICIENCY OF PATCHWORK PLANT.--Mine equipments on
speculative mines (the vast majority) are often enough patchwork,
for they usually grow from small beginnings; but any scheme of
expansion based upon the above doctrine would need to be modified
to the extent that additions could be in units large in ratio to
previous installations, or their patchwork character would be still
further accentuated. It would be impossible to maintain mechanical
efficiency under detail expansion.

OVERPRODUCTION OF BASE METAL.--Were this intensity of production of
general application to base metal mines it would flood the markets,
and, by an overproduction of metal depress prices to a point where
the advantages of such large-scale operations would quickly vanish.
The theoretical solution in this situation would be, if metals
fell below normal prices, let the output be reduced, or let the
products be stored until the price recovers. From a practical point
of view either alternative is a policy difficult to face.

In the first case, reduction of output means an increase of working
expenses by the spread of fixed charges over less tonnage, and
this in the face of reduced metal prices. It may be contended,
however, that a falling metal market is usually the accompaniment
of a drop in all commodities, wherefore working costs can be reduced
somewhat in such times of depression, thereby partially compensating
the other elements making for increased costs. Falls in commodities
are also the accompaniment of hard times. Consideration of one's
workpeople and the wholesale slaughter of dividends to the then
needy stockholders, resulting from a policy of reduced production,
are usually sufficient deterrents to diminished output.

The second alternative, that of storing metal, means equally a
loss of dividends by the investment of a large sum in unrealized
products, and the interest on this sum. The detriment to the market
of large amounts of unsold metal renders such a course not without
further disadvantages.

SECURITY OF INVESTMENT.--Another point of view antagonistic to
such wholesale intensity of production, and one worthy of careful
consideration, is that of the investor in mines. The root-value of
mining stocks is, or should be, the profit in sight. If the policy
of greatest economy in production costs be followed as outlined
above, the economic limit of ore-reserves gives an apparently very
short life, for the ore in sight will never represent a life beyond
the time required to justify more plant. Thus the "economic limit
of ore in reserve" will be a store equivalencing a period during
which additional equipment can be redeemed from the "saving of
fixed charges," or three or four years, usually.

The investor has the right to say that he wants the guarantee of
longer life to his investment,--he will in effect pay insurance for
it by a loss of some ultimate profit. That this view, contradictory
to the economics of the case, is not simply academic, can be observed
by any one who studies what mines are in best repute on any stock
exchange. All engineers must wish to have the industry under them
in high repute. The writer knows of several mines paying 20% on
their stocks which yet stand lower in price on account of short
ore-reserves than mines paying less annual returns. The speculator,
who is an element not to be wholly disregarded, wishes a rise in
his mining stock, and if development proceeds at a pace in advance
of production, he will gain a legitimate rise through the increase
in ore-reserves.

The investor's and speculator's idea of the desirability of a proved
long life readily supports the technical policy of high-pressure
development work, but not of expansion of production, for they
desire an increasing ore-reserve. Even the metal operator who is
afraid of overproduction does not object to increased ore-reserves.
On the point of maximum intensity of development work in a mine all
views coincide. The mining engineer, if he takes a Machiavellian
view, must agree with the investor and the metal dealer, for the
engineer is a "fixed charge" the continuance of which is important
to his daily needs.

The net result of all these limitations is therefore an invariable
compromise upon some output below the possible maximum. The initial
output to be contemplated is obviously one upon which the working
costs will be low enough to show a margin of profit. The medium
between these two extremes is determinable by a consideration of
the limitations set out,--and the cash available. When the volume
of output is once determined, it must be considered as a factor
in valuation, as discussed under "Amortization."