This matter is further elaborated in some mines, in that winzes and rises are written off at one rate, levels and crosscuts at another, and shafts at one still lower, on the theory that they lost their usefulness in this progression as the ore is extracted.
This course, however, is a refinement hardly warranted.
Plant and equipment const.i.tute another "suspense" account even harder to charge up logically to tonnage costs, for it is in many items dependent upon the life of the mine, which is an unknown factor. Most managers debit repairs and maintenance directly to the revenue account and leave the reduction of the construction outlay to an annual depreciation on the final balance sheet, on the theory that the plant is maintained out of costs to its original value. This subject will be discussed further on.
INHERENT LIMITATIONS IN ACCURACY OF WORKING COSTS.--There are three types of such limitations which arise in the determination of costs and render too detailed dissection of such costs hopeless of accuracy and of little value for comparative purposes. They are, first, the difficulty of determining all of even direct expenditure on any particular crosscut, stope, haulage, etc.; second, the leveling effect of distributing the "spread" expenditures, such as power, repairs, etc.; and third, the difficulties arising out of the borderland of various departments.
Of the first of these limitations the instance may be cited that foremen and timekeepers can indicate very closely the destination of labor expense, and also that of some of the large items of supply, such as timber and explosives, but the distribution of minor supplies, such as candles, drills, picks, and shovels, is impossible of accurate knowledge without an expense wholly unwarranted by the information gained. To determine at a particular crosscut the exact amount of steel, and of tools consumed, and the cost of sharpening them, would entail their separate and special delivery to the same place of attack and a final weighing-up to learn the consumption.
Of the second sort of limitations, the effect of "spread" expenditure, the instance may be given that the repairs and maintenance are done by many men at work on timbers, tracks, machinery, etc. It is hopeless to try and tell how much of their work should be charged specifically to detailed points. In the distribution of power may be taken the instance of air-drills. Although the work upon which the drill is employed can be known, the power required for compression usually comes from a common power-plant, so that the portion of power debited to the air compressor is an approximation. The a.s.sumption of an equal consumption of air by all drills is a further approximation.
In practice, therefore, many expenses are distributed on the theory that they arise in proportion to the labor employed, or the machines used in the various departments. The net result is to level down expensive points and level up inexpensive ones.
The third sort of limitation of accounting difficulty referred to, arises in determining into which department are actually to be allocated the charges which lie in the borderland between various primary cla.s.ses of expenditure. For instance, in ore won from development,--in some months three times as much development may be in ore as in other months. If the total expense of development work which yields ore be charged to stoping account, and if cost be worked out on the total tonnage of ore hoisted, then the stoping cost deduced will be erratic, and the true figures will be obscured.
On the other hand, if all development is charged to "capital account"
and the stoping cost worked out on all ore hoisted, it will include a fluctuating amount of ore not actually paid for by the revenue departments or charged into costs. This fluctuation either way vitiates the whole comparative value of the stoping costs. In the following system a compromise is reached by crediting "development"
with an amount representing the ore won from development at the average cost of stoping, and by charging this amount into "stoping."
A number of such questions arise where the proper division is simply a matter of opinion.
The result of all these limitations is that a point in detail is quickly reached where no further dissection of expenditure is justified, since it becomes merely an approximation. The writer"s own impression is that without an unwarrantable number of accountants, no manager can tell with any accuracy the cost of any particular stope, or of any particular development heading. Therefore, aside from some large items, such detailed statistics, if given, are to be taken with great reserve.
WORKING COST SHEETS.--There are an infinite number of forms of working cost sheets, practically every manager having a system of his own. To be of greatest value, such sheets should show on their face the method by which the "spread" departments are handled, and how revenue and suspense departments are segregated. When too much detail is presented, it is but a waste of accounting and consequent expense. Where to draw the line in this regard is, however, a matter of great difficulty. No cost sheet is entirely satisfactory. The appended sheet is in use at a number of mines. It is no more perfect than many others. It will be noticed that the effect of this system is to throw the general expenses into the revenue expenditures, and as little as possible into the "suspense" account.
GENERAL TECHNICAL DATA.
For the purposes of efficient management, the information gathered under this head is of equal, if not superior, importance to that under "working costs." Such data fall generally under the following heads:--
LABOR.--Returns of the shifts worked in the various departments for each day and for the month; worked out on a monthly basis of footage progress, tonnage produced or tons handled per man; also where possible the footage of holes drilled, worked out per man and per machine.
SUPPLIES.--Daily returns of supplies used; the princ.i.p.al items worked out monthly in quant.i.ty per foot of progress, or per ton of ore produced.
POWER.--Fuel, lubricant, etc., consumed in steam production, worked out into units of steam produced, and this production allocated to the various engines. Where electrical power is used, the consumption of the various motors is set out.
SURVEYS.--The need of accurate plans requires no discussion. Aside from these, the survey-office furnishes the returns of development footage, measurements under contracts, and the like.
SAMPLING AND a.s.sAYING.--Mine sampling and a.s.saying fall under two heads,--the determination of the value of standing ore, and of products from the mine. The sampling and a.s.saying on a going mine call for the same care and method as in cases of valuation of the mine for purchase,--the details of which have been presented under "Mine Valuation,"--for through it, guidance must not only be had to the value of the mine and for reports to owners, but the detailed development and ore extraction depend on an absolute knowledge of where the values lie.
CHAPTER XVIII.
ADMINISTRATION (_Concluded_).
ADMINISTRATIVE REPORTS.
In addition to financial returns showing the monthly receipts, expenditures, and working costs, there must be in proper administration periodic reports from the officers of the mine to the owners or directors as to the physical progress of the enterprise. Such reports must embrace details of ore extraction, metal contents, treatment recoveries, construction of equipment, and the results of underground development. The value of mines is so much affected by the monthly or even daily result of exploration that reports of such work are needed very frequently,--weekly or even daily if critical work is in progress. These reports must show the width, length, and value of the ore disclosed.
The tangible result of development work is the tonnage and grade of ore opened up. How often this stock-taking should take place is much dependent upon the character of the ore. The result of exploration in irregular ore-bodies often does not, over short periods, show anything tangible in definite measurable tonnage, but at least annually the ore reserve can be estimated.
In mines owned by companies, the question arises almost daily as to how much of and how often the above information should be placed before stockholders (and therefore the public) by the directors. In a general way, any company whose shares are offered on the stock exchange is indirectly inviting the public to become partners in the business, and these partners are ent.i.tled to all the information which affects the value of their property and are ent.i.tled to it promptly. Moreover, mining is a business where compet.i.tion is so obscure and so much a matter of indifference, that suppression of important facts in doc.u.ments for public circulation has no justification. On the other hand, both the technical progress of the industry and its position in public esteem demand the fullest disclosure and greatest care in preparation of reports. Most stockholders" ignorance of mining technology and of details of their particular mine demands a great deal of care and discretion in the preparation of these public reports that they may not be misled. Development results may mean little or much, depending upon the location of the work done in relation to the ore-bodies, etc., and this should be clearly set forth.
The best opportunity of clear, well-balanced statements lies in the preparation of the annual report and accounts. Such reports are of three parts:--
1. The "profit and loss" account, or the "revenue account."
2. The balance sheet; that is, the a.s.sets and liabilities statement.
3. The reports of the directors, manager, and consulting engineer.
The first two items are largely matters of bookkeeping. They or the report should show the working costs per ton for the year.
What must be here included in costs is easier of determination than in the detailed monthly cost sheets of the administration; for at the annual review, it is not difficult to a.s.sess the amount chargeable to development. Equipment expenditure, however, presents an annual difficulty, for, as said, the distribution of this item is a factor of the life of the mine, and that is unknown. If such a plant has been paid for out of the earnings, there is no object in carrying it on the company"s books as an a.s.set, and most well-conducted companies write it off at once. On the other hand, where the plant is paid for out of capital provided for the purpose, even to write off depreciation means that a corresponding sum of cash must be held in the company"s treasury in order to balance the accounts,--in other words, depreciation in such an instance becomes a return of capital. The question then is one of policy in the company"s finance, and in neither case is it a matter which can be brought into working costs and leave them any value for comparative purposes. Indeed, the true cost of working the ore from any mine can only be told when the mine is exhausted; then the dividends can be subtracted from the capital sunk and metal sold, and the difference divided over the total tonnage produced.
The third section of the report affords wide scope for the best efforts of the administration. This portion of the report falls into three divisions: (_a_) the construction and equipment work of the year, (_b_) the ore extraction and treatment, and (_c_) the results of development work.
The first requires a statement of the plant constructed, its object and accomplishment; the second a disclosure of tonnage produced, values, metallurgical and mechanical efficiency. The third is of the utmost importance to the stockholder, and is the one most often disregarded and obscured. Upon this hinges the value of the property.
There is no reason why, with plans and simplicity of terms, such reports cannot be presented in a manner from which the novice can judge of the intrinsic position of the property. A statement of the tonnage of ore-reserves and their value, or of the number of years" supply of the current output, together with details of ore disclosed in development work, and the working costs, give the ground data upon which any stockholder who takes interest in his investment may judge for himself. Failure to provide such data will some day be understood by the investing public as a _prima facie_ index of either incapacity or villainy. By the insistence of the many engineers in administration of mines upon the publication of such data, and by the insistence of other engineers upon such data for their clients before investment, and by the exposure of the delinquents in the press, a more practicable "protection of investors" can be reached than by years of academic discussion.
CHAPTER XIX.
The Amount of Risk in Mining Investments.
RISK IN VALUATION OF MINES; IN MINES AS COMPARED WITH OTHER COMMERCIAL ENTERPRISES.
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-cla.s.s 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 quant.i.ty of ore is measurable or can be reasonably antic.i.p.ated. The great hazards and likewise the Aladdin caves of mining are mainly confined to the first cla.s.s. Although all mines must pa.s.s 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 cla.s.s 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 is concerned.
RISK IN VALUATION OF MINES.--a.s.suming 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 faces.
2. The risk of continuity in volume through the blocks estimated.
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 a.s.sumed. 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 a.s.sets 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 cla.s.s 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 compet.i.tion 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.