These large earnings justified the resumption of dividends on the junior stock and 2 per cent. on the issue was paid. The balance after dividends was $62,742,860, but special appropriations for proposed expenditures on the Gary plant and for other purposes were made, calling for $50,000,000, this making the net carried to surplus account only $12,742,860.
Another important event of the year in the Corporation’s history was the incorporation of the Universal Portland Cement Co., which was formed to take over the cement plants operated by the Illinois Steel Co., and to erect new plants for the manufacture of this profitable by-product. The production of cement had grown from 486,357 barrels in 1902 to 2,076,000 barrels in 1906. The Universal Company immediately started work on the erection of two new plants, one at Buffington, Indiana, within a few miles of the Gary plant, and the other at Universal, Pa., near Pittsburgh. The results of this enterprise have entirely justified the expectations of the Corporation’s management, and the manufacture of the by-product has increased until an output of 11,197,000 barrels was reached in 1913.
But the most notable event of 1906 was the negotiation of a lease by the Corporation on the ore properties owned by the Great Northern and Northern Pacific Railway companies. This was commonly known as the Hill Lease.
That the Corporation would eventually make some arrangement to secure control of the mining rights on the Hill ore properties had long been believed in the steel trade. It was pointed out by trade authorities that the big company did not have ore reserves commensurate with its immense output, and the obvious conclusion was that it would not fail to secure such reserves sooner or later. The vast properties in the Mesaba Range owned by the railroad dominated by James J. Hill constituted, it was claimed, the only commercially valuable supply of importance which had not yet been appropriated by one steel company or another, so the natural conclusion was that the Corporation must eventually attach to itself these supplies of ore.
Negotiations leading up to the lease went on for several years before the matter was finally brought to a head in December, 1906. The lease, which was probably the most voluminous document of its kind ever written, gave the Corporation the right to mine the Hill ores until exhaustion, or, at the Corporation’s option, until January 1, 1915, the exercise of this option being contingent upon a two-year notice to be given before that date. The Corporation positively declined to enter into the lease unless it contained provision for cancellation, and it later exercised this right, the directors at the close of 1912 serving notice of their intention to abandon the lease in two years.
Comprised in the Great Northern ore land were some of the richest and best iron deposits in the country. Of a total area of more than 65,000 acres owned or leased by the Hill interests, 39,296 acres with an estimated ore content of something like half a billion tons were included in the lease to the Great Western Mining Co., a Steel Corporation subsidiary and the nominal lessee.
The volume of ore to be mined and the royalties to be paid were arranged on an ascending scale. In 1907 the Western company was to take out 750,000 tons of ore and this tonnage was to be increased by as much again every year the lease continued up to 1917, when the tonnage to be mined was fixed at 8,250,000 tons, at which figure it was to remain thenceforward until the contract expired by reason of ore exhaustion.
Royalties on the ore mined were based on a price of eighty-five cents per ton of dried ore with a metallic content of 59 per cent. for the first year of the lease, this base price being increased by 3.4 cents a ton each year—i.e., to 88.4 cents in 1908, 91.8 cents in 1909, etc. To this royalty was to be added transportation charges of 80 cents a ton to the docks at Superior, Wis., the contract providing that all the ore was to be shipped via the Great Northern Railway. For each variation of 1 per cent. above or below the 59 per cent. metallic content, it was further stipulated, the base price was to be increased or diminished by 4.82 cents a ton.
Critics of the Corporation have charged that the Hill lease was entered into with a view of giving the big company a practical monopoly of the ore reserves of the country. Those responsible for the deal have strongly asserted that their sole object was to ensure an adequate ore reserve for the future. The question resolves itself into one of motives and is therefore not susceptible of proof. But whatever were the motives of the Steel Corporation’s management the fact remains that, according to the opinions of the best-qualified experts outside the Corporation itself, the big company, at the time the lease was made, did not have a supply of ore such as its vast output demanded, and probably does not now have such a necessary supply although it has acquired large reserves in Cuba and elsewhere. Further, it is doubtful if, outside of the Hill holdings, a large enough reserve of commercially available ore is to be obtained in the United States.
The claim that the royalties paid under the Hill lease were too high is supported by the undisputed fact that royalties paid on other ore deposits in the same territory at the time of the signing of the contract were much lower than those paid under the lease by the Corporation. Unusual conditions governed this transaction, however. The lessors were well aware of the Corporation’s need of ore and that they were probably the only ones in a position to fill this need. They were therefore able to drive a hard bargain. The price originally demanded by Mr. Hill and his associates, it is understood, was one dollar a ton and it took some years’ negotiations before a price which both parties to the matter would accept could be arrived at.