Principles of Mining: Valuation, Organization and Administration

by Herbert Hoover

The cost of production embraces development, mining, treatment, management. Further than this, it is often contended that, as the capital expended in purchase and equipment must be redeemed within the life of the mine, this item should also be included in production costs. It is true that mills, smelters, shafts, and all the paraphernalia of a mine are of virtually negligible value when it is exhausted; and that all mines are exhausted sometime and every ton taken out contributes to that exhaustion; and that every ton of ore must bear its contribution to the return of the investment, as well as profit upon it. Therefore it may well be said that the redemption of the capital and its interest should be considered in costs per ton. The difficulty in dealing with the subject from the point of view of production cost arises from the fact that, except possibly in the case of banket gold and some conglomerate copper mines, the life of a metal mine is unknown beyond the time required to exhaust the ore reserves. The visible life at the time of purchase or equipment may be only three or four years, yet the average equipment has a longer life than this, and the anticipation for every mine is also for longer duration than the bare ore in sight. For clarity of conclusions in mine valuation the most advisable course is to determine the profit in sight irrespective of capital redemption in the first instance. The questions of capital redemption, purchase price, or equipment cost can then be weighed against the margin of profit. One phase of redemption will be further discussed under "Amortization of Capital" and "Ratio of Output to the Mine."

The cost of production depends upon many things, such as the cost of labor, supplies, the size of the ore-body, the treatment necessary, the volume of output, etc.; and to discuss them all would lead into a wilderness of supposititious cases. If the mine is a going concern, from which reliable data can be obtained, the problem is much simplified. If it is virgin, the experience of other mines in the same region is the next resource; where no such data can be had, the engineer must fall back upon the experience with mines still farther afield. Use is sometimes made of the "comparison ton" in calculating costs upon mines where data of actual experience are not available. As costs will depend in the main upon items mentioned above, if the known costs of a going mine elsewhere be taken as a basis, and subtractions and additions made for more unfavorable or favorable effect of the differences in the above items, a fairly close result can be approximated.

Mine examinations are very often inspired by the belief that extended operations or new metallurgical applications to the mine will expand the profits. In such cases the paramount questions are the reduction of costs by better plant, larger outputs, new processes, or alteration of metallurgical basis and better methods. If every item of previous expenditure be gone over and considered, together with the equipment, and method by which it was obtained, the possible savings can be fairly well deduced, and justification for any particular line of action determined. One view of this subject will be further discussed under "Ratio of Output to the Mine." The conditions which govern the working costs are on every mine so special to itself, that no amount of advice is very useful. Volumes of advice have been published on the subject, but in the main their burden is not to underestimate.

In considering the working costs of base-metal mines, much depends upon the opportunity for treatment in customs works, smelters, etc. Such treatment means a saving of a large portion of equipment cost, and therefore of the capital to be invested and subsequently recovered. The economics of home treatment must be weighed against the sum which would need to be set aside for redemption of the plant, and unless there is a very distinct advantage to be had by the former, no risks should be taken. More engineers go wrong by the erection of treatment works where other treatment facilities are available, than do so by continued shipping. There are many mines where the cost of equipment could never be returned, and which would be valueless unless the ore could be shipped. Another phase of foreign treatment arises from the necessity or advantage of a mixture of ores,—the opportunity of such mixtures often gives the public smelter an advantage in treatment with which treatment on the mine could never compete.

Fluctuation in the price of base metals is a factor so much to be taken into consideration, that it is desirable in estimating mine values to reduce the working costs to a basis of a "per unit" of finished metal. This method has the great advantage of indicating so simply the involved risks of changing prices that whoso runs may read. Where one metal predominates over the other to such an extent as to form the "backbone" of the value of the mine, the value of the subsidiary metals is often deducted from the cost of the principal metal, in order to indicate more plainly the varying value of the mine with the fluctuating prices of the predominant metal. For example, it is usual to state that the cost of copper production from a given ore will be so many cents per pound, or so many pounds sterling per ton. Knowing the total metal extractable from the ore in sight, the profits at given prices of metal can be readily deduced. The point at which such calculation departs from the "per-ton-of-ore" unto the per-unit-cost-of-metal basis, usually lies at the point in ore dressing where it is ready for the smelter. To take a simple case of a lead ore averaging 20%: this is to be first concentrated and the lead reduced to a concentrate averaging 70% and showing a recovery of 75% of the total metal content. The cost per ton of development, mining, concentration, management, is to this point say $4 per ton of original crude ore. The smelter buys the concentrate for 95% of the value of the metal, less the smelting charge of $15 per ton, or there is a working cost of a similar sum by home equipment. In this case 4.66 tons of ore are required to produce one ton of concentrates, and therefore each ton of concentrates costs $18.64. This amount, added to the smelting charge, gives a total of $33.64 for the creation of 70% of one ton of finished lead, or equal to 2.40 cents per pound which can be compared with the market price less 5%. If the ore were to contain 20 ounces of silver per ton, of which 15 ounces were recovered into the leady concentrates, and the smelter price for the silver were 50 cents per ounce, then the $7.50 thus recovered would be subtracted from $33.64, making the apparent cost of the lead 1.86 cents per pound.

CHAPTER V.

Mine Valuation (Continued).

REDEMPTION OR AMORTIZATION OF CAPITAL AND INTEREST.

It is desirable to state in some detail the theory of amortization before consideration of its application in mine valuation.

As every mine has a limited life, the capital invested in it must be redeemed during the life of the mine. It is not sufficient that there be a bare profit over working costs. In this particular, mines differ wholly from many other types of investment, such as railways. In the latter, if proper appropriation is made for maintenance, the total income to the investor can be considered as interest or profit; but in mines, a portion of the annual income must be considered as a return of capital. Therefore, before the yield on a mine investment can be determined, a portion of the annual earnings must be set aside in such a manner that when the mine is exhausted the original investment will have been restored. If we consider the date due for the return of the capital as the time when the mine is exhausted, we may consider the annual instalments as payments before the due date, and they can be put out at compound interest until the time for restoration arrives. If they be invested in safe securities at the usual rate of about 4%, the addition of this amount of compound interest will assist in the repayment of the capital at the due date, so that the annual contributions to a sinking fund need not themselves aggregate the total capital to be restored, but may be smaller by the deficiency which will be made up by their interest earnings. Such a system of redemption of capital is called "Amortization."