The Economic Aspect of Geology

by C. K. Leith

POPULAR CONCEPTION OF MINERAL VALUATION

The total returns from mining may not in the aggregate be far above the expenditure for exploration, development, and extraction; yet the total mineral wealth of the United States, on the basis of earning power and aside from the industries based on it, cannot be far from sixty billions of dollars, and this wealth has virtually come into existence since the 1849 gold rush to California. The mining industry supports a large population. These facts are the solid basis for the widespread popular interest in mineral investment—and mineral speculation. But there are other reasons for this interest,—the gambler's chance for quick returns, the "lure of gold," the possibility of "getting something for nothing," the mushroom nature of certain branches of the industry, the element of mystery related to nature's secrets, and the conception of minerals as bonanzas with ready-made value, merely awaiting discovery and requiring no effort to make them valuable. In the United States a factor contributing to the popular interest is the large freedom allowed by the laws to discover and acquire minerals on the public domain. Perhaps no other field of industry comes so near being common ground for all classes of people. The mineral industry is a field in which it is easy to capitalize not only honest and skillful endeavor, but hopes, guesses, and greed. It is not to be wondered at, therefore, that in the popular mind the valuation of a mineral resource is little more than a guess, and sometimes not even an honest one.

Nevertheless, the mineral industry has become second only to agriculture in its capital value and in its earning capacity. In this industry it is hardly possible to arrive at valuations as securely based as in many other industries, but the elements of hazard are not so hopeless of measurement as might be supposed. The great mineral and financial organizations do not depend on mere guesses, but use well-tried methods. If the general investor were to give more attention to these methods he would doubtless save himself money, and the mineral industry would be rid of a great incumbrance of parasites who live on the credulity of the public. To anyone familiar with the mineral field, it is often surprising to see the rashness with which a conservative business man, who would not think of entering another industrial field without close study of all the factors in the situation, will invest in minerals without using ordinary methods of analysis of values.

In the following account of valuation of minerals in the ground, and the closely related subject, taxation of such minerals, the attempt is made to state some of the principles briefly and simply with a view to making them intelligible to the layman. Values beyond the mine are concerned with so many factors of a non-geologic nature that they are not here discussed.

VALUATION AND TAXATION OF MINES

Intrinsic and Extrinsic Factors in Valuation

It is essential to recognize at the outset that the value of a mineral deposit, like the value of any other commercial material, comprises two main elements; an intrinsic element based on the qualities of the material itself, and an extrinsic element based on its availability and the nature of the demands for it. The two elements may not be sharply separated, and neither exists without the other. A mineral deposit in easy reach of a populous community, which has sufficiently advanced methods and requirements to use it, may have high value; an exactly similar deposit, if far removed from points of consumption, handicapped by transportation, or available only to people without developed methods for its use, may have little or no value. Intrinsically the deposits are alike; but extrinsically they are far different, and their values are correspondingly unlike. Even two adjacent properties, differently managed and controlled, and with different relations to markets, may have somewhat different values depending on the use made of them. The value of a deposit may vary from year to year with changes in demand for its output, or with changes in metallurgical and other processes which make its use possible. Minerals of small bulk and high value, as for instance gold, platinum, and diamonds, have a nearly standard value related to their intrinsic properties, because they can be transported so easily to any part of the world. On the other hand, materials of large bulk and low unit value, such as coal, iron ore, and clay, may have highly varying values independently of their physical characteristics, because of their relative immobility. But the values even of gold and precious stones represent a combination of intrinsic qualities and of demand. A diamond is made of carbon but is more valuable than coal or graphite because it appeals to the esthetic taste. It is only because man introduces an element of demand that the diamond takes on value. In short, man is the multiplier and the mineral substance is the multiplicand in the product known as value.

Recognition of the two elements of value is vital to a clear understanding of the methods and problems of valuation of minerals. It is too often assumed that the physical properties constitute the sole factor.

Looked at in a large way, the returns from the mineral industry are commensurate with the effort put into discovery and development of mineral resources, even though the returns to lucky individuals have been excessive. In respect to the importance of the human energy element, the mining of minerals is not unlike the cropping of soils. Some interesting economic studies have been made of mining districts to ascertain whether the total return has been equal to the total investments by both successful and unsuccessful participants. The results show that, even in some of the most successful districts, there is not a large "social surplus,"—that is, a surplus of receipts over total expenditures. It is difficult to generalize from such studies with any degree of accuracy; but it seems likely that if we could measure the vast amount of fruitless effort which has been expended in non-productive territories, the result would tend to bear out the general conclusion that the social surplus for the mineral industry as a whole is a modest one, if it exists at all. Of course, it is to be remembered that the total benefits from mineral resources are not to be measured in terms of gain to the producers,—but that their measurement must take into account the satisfying of all the complex demands of modern civilization.

Values of Mineral Deposits Not Often Established By Market Transfers

While minerals as extracted and used may have standard market values, mineral deposits in the ground are not bought and sold on the open market with sufficient frequency to establish standard market values. A sale may establish a criterion of value for the particular deposit, but not for the class of deposits,—for no two mineral deposits are exactly alike. Stock quotations may establish a certain kind of market value, but these are often vitiated by extraneous considerations. For these reasons the valuation of a mineral deposit is in each case a special problem.