Let us, therefore, remove the odium from this title and give our approbation to those persons who are earnestly endeavoring, by honest means, to place mining enterprises upon strictly business-like footings. The mining industry needs promotion and promoters.
[XV
INCORPORATION AND
CAPITALIZATION.]
Let us consider the legitimate financing of a new or a reorganized, worthy, mining proposition. It is the universal custom to own and work a mine under the laws that govern a corporation and, for this reason, the mining man of the day is familiar with the practices of incorporating.
It is something of a question at the start to decide what is a fair price to fix upon a property as a whole—that is, to decide what the capitalization should be. There is no rule to be followed in this matter. Some organizers will decide to capitalize at what is expected will be the value of the property after some time. Other men will stick to the idea that it is the proper thing to capitalize for what the property will invoice at the time. The higher the capital stock, the greater number of shares there are for sale, usually. With a conservative capitalization, there may be fewer shares for sale, but each share is worth correspondingly more and the chances are much better for an advance in the price per share whenever the mine becomes productive. There are investors who will carefully investigate this feature and will shun any mining stock which has any appearance of over-capitalization. It would be well if all investors were to follow this precaution.
But what about the price at which to capitalize a prospect? By a prospect we here mean a property that has been favorably reported upon as worthy of development but in which, up to date, there is little, if any, showing of values or reserves. The engineer's report has recommended the property as containing the possibilities of a mine. How much is it worth? Can he or can anybody even roughly estimate the sum? An engineer frequently does fix the sale-purchase price of a property, but it is not so usual for him to decide upon a valuation for capitalization. A very good guess may be made, perhaps, if there are similar and neighboring properties which have been developed.
Assuming a prospect that has been reliably reported to the owners as possessing the earmarks of a mine and as warranting expenditures for exploitation, upon what basis should a company be capitalized? If the owners of the property have capital, the chances are that they will not care to share their holdings with other parties. But very frequently worthy "prospects" are held by men of no means, and in order to develop their mines the owners feel the necessity of coöperation with parties who can furnish working funds. In every such instance, there will arise this debate as to the proper basis of capitalization.
There is no human means of arriving at a close valuation of any prospect, so it becomes a matter of pure judgment as to future probabilities and the possibility of placing the stock at the most advantageous price. A company will, therefore, be stocked for some round number of shares, say 100,000, upon which some empirical par valuation, say $1, is placed per share. This is not to be understood as stating nor assuming that the property has a present valuation equalling the par of the entire capitalization. Who would assert that any mere prospect ever had such a value as $100,000? No, it is not the intention of the organizers to claim that the ground is worth the par valuation; but some start must be made and so, in the absence of something precise, round numbers are made to do service.
Stock is then offered at figures much below the par valuation and in such quantities as will maintain sufficient capital in the treasury of the new concern to get the property's exploitation under way and to so sustain it as to make the prospect grow into a mine.
If shares are offered at 10 cents, it does not mean that a prospect is worth even that valuation. It does mean (we are considering now only the operations of honest concerns) that the men who are managing affairs believe that the sale of so many shares at ten cents each will furnish adequate means for the development and equipment of the mine. Therefore, there is a prospective valuation placed upon all such enterprises.
Is an investment in such a company to be considered as gambling? If there have been sound assurances from reliable examiners concerning the likelihood of the ground carrying the essentials of a mine and the only uncertain element is the ultimate magnitude of the mine, then we might say that the investment is not a gamble at all, since there is no chance to lose. The purchase of such stock is a very sane investment and there is no telling what the returns may reach.