CHAPTER IV.

Mine Valuation (_Continued_).

RECOVERABLE PERCENTAGE OF THE GROSS ASSAY VALUE; PRICE OF METALS;
COST OF PRODUCTION.

The method of treatment for the ore must be known before a mine
can be valued, because a knowledge of the recoverable percentage
is as important as that of the gross value of the ore itself. The
recoverable percentage is usually a factor of working costs. Practically
every ore can be treated and all the metal contents recovered, but
the real problem is to know the method and percentage of recovery
which will yield the most remunerative result, if any. This limit to
profitable recovery regulates the amount of metal which should be
lost, and the amount of metal which consequently must be deducted
from the gross value before the real net value of the ore can be
calculated. Here, as everywhere else in mining, a compromise has to
be made with nature, and we take what we can get--profitably. For
instance, a copper ore may be smelted and a 99% recovery obtained.
Under certain conditions this might be done at a loss, while the
same ore might be concentrated before smelting and yield a profit
with a 70% recovery. An additional 20% might be obtained by roasting
and leaching the residues from concentration, but this would probably
result in an expenditure far greater than the value of the 20%
recovered. If the ore is not already under treatment on the mine,
or exactly similar ore is not under treatment elsewhere, with known
results, the method must be determined experimentally, either by
the examining engineer or by a special metallurgist.

Where partially treated products, such as concentrates, are to be
sold, not only will there be further losses, but deductions will
be made by the smelter for deleterious metals and other charges.
All of these factors must be found out,--and a few sample smelting
returns from a similar ore are useful.

To cover the whole field of metallurgy and discuss what might apply,
and how it might apply, under a hundred supposititious conditions
would be too great a digression from the subject in hand. It is
enough to call attention here to the fact that the residues from
every treatment carry some metal, and that this loss has to be
deducted from the gross value of the ore in any calculations of
net values.

PRICE OF METALS.

Unfortunately for the mining engineer, not only has he to weigh
the amount of risk inherent in calculations involved in the mine
itself, but also that due to fluctuations in the value of metals.
If the ore is shipped to custom works, he has to contemplate also
variations in freights and smelting charges. Gold from the mine
valuer's point of view has no fluctuations. It alone among the
earth's products gives no concern as to the market price. The price
to be taken for all other metals has to be decided before the mine
can be valued. This introduces a further speculation and, as in
all calculations of probabilities, amounts to an estimate of the
amount of risk. In a free market the law of supply and demand governs
the value of metals as it does that of all other commodities. So
far, except for tariff walls and smelting rings, there is a free
market in the metals under discussion.

The demand for metals varies with the unequal fluctuations of the
industrial tides. The sea of commercial activity is subject to
heavy storms, and the mine valuer is compelled to serve as weather
prophet on this ocean of trouble. High prices, which are the result
of industrial booms, bring about overproduction, and the collapse of
these begets a shrinkage of demand, wherein consequently the tide
of price turns back. In mining for metals each pound is produced
actually at a different cost. In case of an oversupply of base metals
the price will fall until it has reached a point where a portion of
the production is no longer profitable, and the equilibrium is
established through decline in output. However, in the backward
swing, due to lingering overproduction, prices usually fall lower
than the cost of producing even a much-diminished supply. There is
at this point what we may call the "basic" price, that at which
production is insufficient and the price rises again. The basic
price which is due to this undue backward swing is no more the
real price of the metal to be contemplated over so long a term
of years than is the highest price. At how much above the basic
price of depressed times the product can be safely expected to
find a market is the real question. Few mines can be bought or
valued at this basic price. An indication of what this is can be
gained from a study of fluctuations over a long term of years.

It is common to hear the average price over an extended period
considered the "normal" price, but this basis for value is one which
must be used with discretion, for it is not the whole question when
mining. The "normal" price is the average price over a long term.
The lives of mines, and especially ore in sight, may not necessarily
enjoy the period of this "normal" price. The engineer must balance
his judgments by the immediate outlook of the industrial weather.
When lead was falling steadily in December, 1907, no engineer would
accept the price of that date, although it was then below "normal";
his product might go to market even lower yet.

It is desirable to ascertain what the basic and normal prices are,
for between them lies safety. Since 1884 there have been three cycles
of commercial expansion and contraction. If the average prices
are taken for these three cycles separately (1885-95), 1895-1902,
1902-08) it will be seen that there has been a steady advance in
prices. For the succeeding cycles lead on the London Exchange,[*]
the freest of the world's markets was £12 12_s._ 4_d._, £13 3_s._
7_d._, and £17 7_s._ 0_d._ respectively; zinc, £17 14_s._ 10_d._,
£19 3_s._ 8_d._, and £23 3_s._ 0_d._; and standard copper, £48 16_s._
0_d._, £59 10_s._ 0_d._, and £65 7_s._ 0_d._ It seems, therefore,
that a higher standard of prices can be assumed as the basic and
normal than would be indicated if the general average of, say,
twenty years were taken. During this period, the world's gold output
has nearly quadrupled, and, whether the quantitative theory of
gold be accepted or not, it cannot be denied that there has been
a steady increase in the price of commodities. In all base-metal
mining it is well to remember that the production of these metals
is liable to great stimulus at times from the discovery of new
deposits or new processes of recovery from hitherto unprofitable
ores. It is therefore for this reason hazardous in the extreme
to prophesy what prices will be far in the future, even when the
industrial weather is clear. But some basis must be arrived at,
and from the available outlook it would seem that the following
metal prices are justifiable for some time to come, provided the
present tariff schedules are maintained in the United States:

[Footnote *: All London prices are based on the long ton of 2,240
lbs. Much confusion exists in the copper trade as to the classification
of the metal. New York prices are quoted in electrolytic and "Lake";
London's in "Standard." "Standard" has now become practically an
arbitrary term peculiar to London, for the great bulk of copper
dealt in is "electrolytic" valued considerably over "Standard."]

==========================================================================
| Lead | Spelter | Copper | Tin | Silver
|------------|----------|----------|----------|---------------
|London| N.Y.|Lon.| N.Y.|Lon.| N.Y.|Lon.| N.Y.| Lon. | N.Y.
| Ton |Pound|Ton |Pound|Ton |Pound|Ton |Pound|Per oz.|Per oz.
------------|------|-----|----|-----|----|-----|----|-----|-------|-------
Basic Price | £11. |$.035|£17 |$.040|£52 |$.115|£100|$.220| 22_d._|$.44
Normal Price| 13.5| .043| 21 | .050| 65 | .140| 130| .290| 26 | .52
==========================================================================

In these figures the writer has not followed strict averages, but
has taken the general outlook combined with the previous records.
The likelihood of higher prices for lead is more encouraging than
for any other metal, as no new deposits of importance have come
forward for years, and the old mines are reaching considerable
depths. Nor does the frenzied prospecting of the world's surface
during the past ten years appear to forecast any very disturbing
developments. The zinc future is not so bright, for metallurgy
has done wonders in providing methods of saving the zinc formerly
discarded from lead ores, and enormous supplies will come forward
when required. The tin outlook is encouraging, for the supply from
a mining point of view seems unlikely to more than keep pace with
the world's needs. In copper the demand is growing prodigiously,
but the supplies of copper ores and the number of copper mines
that are ready to produce whenever normal prices recur was never
so great as to-day. One very hopeful fact can be deduced for the
comfort of the base metal mining industry as a whole. If the growth
of demand continues through the next thirty years in the ratio of
the past three decades, the annual demand for copper will be over
3,000,000 tons, of lead over 1,800,000 tons, of spelter 2,800,000
tons, of tin 250,000 tons. Where such stupendous amounts of these
metals are to come from at the present range of prices, and even
with reduced costs of production, is far beyond any apparent source
of supply. The outlook for silver prices is in the long run not
bright. As the major portion of the silver produced is a bye product
from base metals, any increase in the latter will increase the
silver production despite very much lower prices for the precious
metal. In the meantime the gradual conversion of all nations to
the gold standard seems a matter of certainty. Further, silver
may yet be abandoned as a subsidiary coinage inasmuch as it has
now but a token value in gold standard countries if denuded of
sentiment.

COST OF PRODUCTION.

It is hardly necessary to argue the relative importance of the
determination of the cost of production and the determination of
the recoverable contents of the ore. Obviously, the aim of mine
valuation is to know the profits to be won, and the profit is the
value of the metal won, less the cost of production.

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.