The Amount of Risk in Mining Investments.
RISK IN VALUATION OF MINES; IN MINES AS COMPARED WITH OTHER COMMERCIAL
From the constant reiteration of the risks and difficulties involved
in every step of mining enterprise from the valuation of the mine
to its administration as a going concern, the impression may be
gained that the whole business is one great gamble; in other words,
that the point whereat certainties stop and conjecture steps in
is so vital as to render the whole highly speculative.
Far from denying that mining is, in comparison with better-class
government bonds, a speculative type of investment, it is desirable
to avow and emphasize the fact. But it is none the less well to
inquire what degree of hazard enters in and how it compares with
that in other forms of industrial enterprise.
Mining business, from an investment view, is of two sorts,--prospecting
ventures and developed mines; that is, mines where little or no ore is
exposed, and mines where a definite quantity of ore is measurable or can
be reasonably anticipated. The great hazards and likewise the Aladdin
caves of mining are mainly confined to the first class. Although all
mines must pass through the prospecting stage, the great industry
of metal production is based on developed mines, and it is these
which should come into the purview of the non-professional investor.
The first class should be reserved invariably for speculators, and
a speculator may be defined as one who hazards all to gain much.
It is with mining as an investment, however, that this discussion
RISK IN VALUATION OF MINES.--Assuming a competent collection of
data and efficient management of the property, the risks in valuing
are from step to step:--
1. The risk of continuity in metal contents beyond sample
2. The risk of continuity in volume through the blocks
3. The risk of successful metallurgical treatment.
4. The risk of metal prices, in all but gold.
5. The risk of properly estimating costs.
6. The risk of extension of the ore beyond exposures.
7. The risk of management.
As to the continuity of values and volumes through the estimated
area, the experience of hundreds of engineers in hundreds of mines
has shown that when the estimates are based on properly secured
data for "proved ore," here at least there is absolutely no hazard.
Metallurgical treatment, if determined by past experience on the
ore itself, carries no chance; and where determined by experiment,
the risk is eliminated if the work be sufficiently exhaustive. The
risk of metal price is simply a question of how conservative a
figure is used in estimating. It can be eliminated if a price low
enough be taken. Risk of extension in depth or beyond exposures
cannot be avoided. It can be reduced in proportion to the distance
assumed. Obviously, if no extension is counted, there is nothing
chanced. The risk of proper appreciation of costs is negligible where
experience in the district exists. Otherwise, it can be eliminated
if a sufficiently large allowance is taken. The risk of failure to
secure good management can be eliminated if proved men are chosen.
There is, therefore, a basic value to every mine. The "proved"
ore taken on known metallurgical grounds, under known conditions
of costs on minimum prices of metals, has a value as certain as
that of money in one's own vault. This is the value previously
referred to as the "_A_" value. If the price (and interest on it
pending recovery) falls within this amount, there is no question
that the mine is worth the price. What the risk is in mining is
simply what amount the price of the investment demands shall be
won from extension of the deposit beyond known exposures, or what
higher price of metal must be realized than that calculated in
the "_A_" value. The demands on this _X, Y_ portion of the mine
can be converted into tons of ore, life of production, or higher
prices, and these can be weighed with the geological weights and
the industrial outlook.
MINES COMPARED TO OTHER COMMERCIAL ENTERPRISES.--The profits from
a mining venture over and above the bed-rock value _A_, that is,
the return to be derived from more extensive ore-recovery and a
higher price of metal, may be compared to the value included in
other forms of commercial enterprise for "good-will." Such forms of
enterprise are valued on a basis of the amount which will replace
the net assets plus (or minus) an amount for "good-will," that is,
the earning capacity. This good-will is a speculation of varying
risk depending on the character of the enterprise. For natural
monopolies, like some railways and waterworks, the risk is less
and for shoe factories more. Even natural monopolies are subject
to the risks of antagonistic legislation and industrial storms.
But, eliminating this class of enterprise, the speculative value
of a good-will involves a greater risk than prospective value in
mines, if properly measured; because the dangers of competition
and industrial storms do not enter to such a degree, nor is the
future so dependent upon the human genius of the founder or manager.
Mining has reached such a stage of development as a science that
management proceeds upon comparatively well-known lines. It is
subject to known checks through the opportunity of comparisons
by which efficiency can be determined in a manner more open for
the investor to learn than in any other form of industry. While
in mining an estimate of a certain minimum of extension in depth,
as indicated by collateral factors, may occasionally fall short,
it will, in nine cases out of ten, be exceeded. If investment in
mines be spread over ten cases, similarly valued as to minimum of
extension, the risk has been virtually eliminated. The industry,
if reduced to the above basis for financial guidance, is a more
profitable business and is one of less hazards than competitive
forms of commercial enterprises.
In view of what has been said before, it may be unnecessary to refer
again to the subject, but the constant reiteration by wiseacres
that the weak point in mining investments lies in their short life
and possible loss of capital, warrants a repetition that the _A,
B, C_ of proper investment in mines is to be assured, by the "_A_"
value, of a return of the whole or major portion of the capital.
The risk of interest and profit may be deferred to the _X, Y_ value,
and in such case it is on a plane with "good-will." It should be said
at once to that class who want large returns on investment without
investigation as to merits, or assurance as to the management of the
business, that there is no field in this world for the employment
of their money at over 4%.
Unfortunately for the reputation of the mining industry, and metal
mines especially, the business is often not conducted or valued on
lines which have been outlined in these chapters. There is often
the desire to sell stocks beyond their value. There is always the
possibility that extension in depth will reveal a glorious Eldorado.
It occasionally does, and the report echoes round the world for years,
together with tributes to the great judgment of the exploiters. The
volume of sound allures undue numbers of the venturesome, untrained,
and ill-advised public to the business, together with a mob of
camp-followers whose objective is to exploit the ignorant by preying
on their gambling instincts. Thus a considerable section of metal
mining industry is in the hands of these classes, and a cloud of
disrepute hangs ever in the horizon.
There has been a great educational campaign in progress during the
past few years through the technical training of men for conduct
of the industry, by the example of reputable companies in regularly
publishing the essential facts upon which the value of their mines
is based, and through understandable nontechnical discussion in
and by some sections of the financial and general press. The real
investor is being educated to distinguish between reputable concerns
and the counters of gamesters. Moreover, yearly, men of technical
knowledge are taking a stronger and more influential part in mining
finance and in the direction of mining and exploration companies.
The net result of these forces will be to put mining on a better