Mechanical Inefficiency of Patchwork Plant.—Mine equipments on speculative mines (the vast majority) are often enough patchwork, for they usually grow from small beginnings; but any scheme of expansion based upon the above doctrine would need to be modified to the extent that additions could be in units large in ratio to previous installations, or their patchwork character would be still further accentuated. It would be impossible to maintain mechanical efficiency under detail expansion.
Overproduction of Base Metal.—Were this intensity of production of general application to base metal mines it would flood the markets, and, by an overproduction of metal depress prices to a point where the advantages of such large-scale operations would quickly vanish. The theoretical solution in this situation would be, if metals fell below normal prices, let the output be reduced, or let the products be stored until the price recovers. From a practical point of view either alternative is a policy difficult to face.
In the first case, reduction of output means an increase of working expenses by the spread of fixed charges over less tonnage, and this in the face of reduced metal prices. It may be contended, however, that a falling metal market is usually the accompaniment of a drop in all commodities, wherefore working costs can be reduced somewhat in such times of depression, thereby partially compensating the other elements making for increased costs. Falls in commodities are also the accompaniment of hard times. Consideration of one's workpeople and the wholesale slaughter of dividends to the then needy stockholders, resulting from a policy of reduced production, are usually sufficient deterrents to diminished output.
The second alternative, that of storing metal, means equally a loss of dividends by the investment of a large sum in unrealized products, and the interest on this sum. The detriment to the market of large amounts of unsold metal renders such a course not without further disadvantages.
Security of Investment.—Another point of view antagonistic to such wholesale intensity of production, and one worthy of careful consideration, is that of the investor in mines. The root-value of mining stocks is, or should be, the profit in sight. If the policy of greatest economy in production costs be followed as outlined above, the economic limit of ore-reserves gives an apparently very short life, for the ore in sight will never represent a life beyond the time required to justify more plant. Thus the "economic limit of ore in reserve" will be a store equivalencing a period during which additional equipment can be redeemed from the "saving of fixed charges," or three or four years, usually.
The investor has the right to say that he wants the guarantee of longer life to his investment,—he will in effect pay insurance for it by a loss of some ultimate profit. That this view, contradictory to the economics of the case, is not simply academic, can be observed by any one who studies what mines are in best repute on any stock exchange. All engineers must wish to have the industry under them in high repute. The writer knows of several mines paying 20% on their stocks which yet stand lower in price on account of short ore-reserves than mines paying less annual returns. The speculator, who is an element not to be wholly disregarded, wishes a rise in his mining stock, and if development proceeds at a pace in advance of production, he will gain a legitimate rise through the increase in ore-reserves.
The investor's and speculator's idea of the desirability of a proved long life readily supports the technical policy of high-pressure development work, but not of expansion of production, for they desire an increasing ore-reserve. Even the metal operator who is afraid of overproduction does not object to increased ore-reserves. On the point of maximum intensity of development work in a mine all views coincide. The mining engineer, if he takes a Machiavellian view, must agree with the investor and the metal dealer, for the engineer is a "fixed charge" the continuance of which is important to his daily needs.
The net result of all these limitations is therefore an invariable compromise upon some output below the possible maximum. The initial output to be contemplated is obviously one upon which the working costs will be low enough to show a margin of profit. The medium between these two extremes is determinable by a consideration of the limitations set out,—and the cash available. When the volume of output is once determined, it must be considered as a factor in valuation, as discussed under "Amortization."
CHAPTER XVI.
Administration.