It is quite possible for a company to have reserves which are too large in proportion to the capacity of its works. The proportion which is correct does not depend upon tons but upon prices paid for the ore body or the price which might be realized by the sale of it, and so the interest charge which has to be car ried. To acquire reserves to safeguard the distant future sometimes means that the force of compound discount is not understood. It means to run the risk that a change will take place in the arts, or that new deposits will be found which will depress prices. All gold reserves have been greatly decreased in value by the discovery of the Witwatersrand. All silver re serves were lessened in value by the failure of the 16 to 1 agitation, and the improvement of the process of parting silver and lead. All Bessemer iron ore re serves were influenced by the introduction of the basic process. All bee-hive coal is now being influenced by the progress of the by-product coking process.
8. Metallurgical and engineering conditions.—The engineer and the metallurgist preside over the con centrating and reduction works. No permanent mill ing or reduction works should be constructed until a prospect has been developed and a considerable body of ore has been blocked out so as to show the duration of the deposit, the scale on which works can be operated, and the nature of the process to be used. Particular attention should be given to the ques tion of whether the process proposed is suitable for the ore lying below the region of surface leaching and oxidation. Mineral deposits are subject to the action of percolating water, and chemical changes brought about in this way may cause definite changes in the nature of the ore itself. A deposit of copper may be found that will require a certain type of plant to handle. Below the limit of oxidizing agencies the deposit may have an entirely different chemical com position. When this copper is reached it may be found that it will require different treatment. Unless this has been foreseen a valuable plant may be found to be entirely useless. It is a common practice for amateur or dishonest promoters to rush the erection of a mill in order to make a showing. The dividing line between a prospect and a mine is the development of the ore body to such a point that it is possible to predict that ore exists in sufficient quantity to repay with profits the capital invested in the necessary min ing operations and reduction plant. This line is not passed by the construction of premature headworks.
9. Financial are properties of wasting assets. Their dividends are primarily sink ing fund payments made to the stockholders to amor tize the original investment. Only the return over
and above such payments is profit. Inasmuch as the amount of the annual sinking fund required to amor tize a sum cannot be stated unless the number of periods is given, a clear idea of the profit element in mining dividends cannot be obtained until the extent of the ore bodies has been determined. These con ditions show why mining shares should yield a larger annual return than businesses whose assets are not wasting. They show also the folly of buying mining stock at a price which capitalizes the net earnings at a low rate of interest.
It has been suggested that mining companies should establish sinking funds to amortize their capital.
However reasonable it may seem and however correct it may be in theory, yet in view of the proved in capacity of investors to establish such sinking funds individually, the existing practice of mining finance pays no attention to it. The average mining direct orate would be a poor body to intrust with the invest ment of a sinking fund.
It is not correct to value mining stocks on the basis of the cost of the property. This point is explained in Mr. J. It. Finlay's famous report on the mines of Michigan, in the following words.
The value of a mine depends wholly upon the ore; that is, the equipment of a mine has no value except as applied to the ore. It is therefore useless to appraise mining plants as if they were in themselves an asset. It is true that a mine cannot be worked without equipment. A mine fully equipped is more valuable than a mere ore body without equipment, but this fact is fully taken into consideration in all appraisals. The point to be especially borne in mind is that mining equipment in itself is of no value; when the ore plays out the equipment is mere junk, no matter bow costly it may have been in the first place; and this junk is so likely to be unsalable that it is fully as likely to entail expense for watchmen and insurance as it is to yield any salvage. This fact may be surprising to many people, but a little consideration will show that it is true. The equip ment of a mine consists very largely of structures that can not by any possibility be moved. The shafts and other ex cavations are a part of the equipment. The buildings and machinery may occasionally yield some salvage but neces sarily a small amount. It must be borne in mind that a large part of the expense of any installation of machinery consists of labor and materials for foundations, housing and erection. This is wholly lost when it is proposed to move the machine. Furthermore, the value of a machine de preciates rapidly on account of mere age.