The choice of the interest rate to be used in discounting future receipts to present worth likewise is a financial and not a geologic matter. Again, however, the geologist must give consideration to this factor, in view of the fact that the interest rate must be varied to cover the different degrees of hazard and doubt in the geologic factors. For instance, to the extent to which the estimate of ore reserves is doubtful, it is necessary to use a high rate of interest to allow for this hazard. In a large, well-developed mineral deposit, with the geological factors all well known and the demand and market well established, it is reasonable to use a lower rate of interest. In general, the mineral industry is regarded in financial circles as being more hazardous than many other industrial lines; and money is put into the industry with the expectation of a high rate of interest, no matter how safe the investment may be. In actual practice interest rates used in making valuations vary from 6 to 15 or 20 per cent.
It is clear that, where a property has long life, the interest will very materially reduce the present value of the ores to be mined far in the future. Reserves to be mined more than thirty years hence have relatively little or no present value. Beyond a certain point, therefore, the acquirement and holding of reserves for future use by private companies has little commercial justification. This is a matter which is too often not sufficiently well considered. Man's natural acquisitiveness often leads him into investments which, because of the time and interest factor, have little chance of successful outcome. Of course a large corporation, anticipating an indefinitely long life, or perhaps aiming at monopoly, may afford to hold reserves as a matter of general insurance longer than a small company,—even though, because of the interest rate, these reserves have no present value on their books. It is likewise true that governments, looking forward to the future of the nation, and without the necessity of paying so much attention to interest and taxes, are not so limited by this consideration.
An illustration of the limiting effect of the interest rate on the acquirement of long-lived coal deposits by private interests is discussed in Chapter XVII on Conservation. Investments made many years ago have so augmented, even at low interest rates, as to make it practically impossible to count on a return of capital and interest; or if the return were to be exacted from the public it would mean excessive charges, which are not possible in competition with other mines not so burdened.
In the commercial valuation of oil wells and pools, much the same method is used as has been described for mineral resources in the solid form, but the estimate of reserves or life is based on consideration of curves of production of the sort mentioned on pages 134-136.
The essence of the ad valorem method of valuation above described is income-producing capacity. This method recognizes the fact that the value of the mineral deposit depends, not only on its physical constitution, but also on what performance can be expected from it.
Stock quotations on mineral properties in the standard markets are based substantially on estimates of income capacity, more or less on the ad valorem basis. However, the quotations also reflect the hopes and fears of the public, often resulting in valuations quite different from those based on studies of the objective conditions.
The war introduced new considerations into the problems of ad valorem valuation. Under peace conditions there is a tendency toward the establishment of normal costs, selling prices, and markets, which can be taken more or less for granted by anyone attempting to value mineral deposits. Under war and post-war conditions, few of these elements can be taken for granted; it becomes necessary to consider the entire world situation in regard to a mineral commodity, the effects of the Peace Treaty (which greatly concerns minerals), future international relations, tariffs, and other matters of a similar sort. If a person were today valuing a manganese deposit according to the method above outlined, and were to confine himself solely to a narrow consideration of past markets and profits on individual properties, he would be very likely to go wrong,—for the world manganese situation has an immediate and practical bearing on each local problem (see pp. 173-176).
Other Methods of Mineral Valuation and Taxation
We have discussed the ad valorem method of valuation at some length because it is the one in widest commercial use, and also because the principles involved underlie practically all other methods of mineral valuation. The ad valorem method is used in appraisals for taxation in some districts and for some commodities, as, for instance, the iron mines of Michigan and Wisconsin. Its application, however, requires skill and judgment if equitable results are to be secured. For taxation purposes, therefore, it is not uncommon to adopt purely arbitrary or empirical methods which eliminate the element of judgment, and which often result in valuations quite different from those used commercially.
The state of Minnesota divides its iron ore deposits into a series of classes, on each of which a more or less arbitrary flat value per ton is placed, based on the spread between cost and selling price. The adjustments of flat values on the several classes through a series of years, however, as well as the assigning of specific ores to the different classes, have been based on the same factors as are used in ad valorem valuations.