Neither can properties be valued from the market value of their securities, for the price of mining shares is fixed by the state of expectation of the owners, by the prospect of selling them to others at a profit, by the state of the money market, by tips and rumors, and the operations of stock pools, and by a variety of matters which have nothing to do with the profit which can be made out of an ore body.
The worth of a mining share to the purchaser is the present worth of the income it assures. But since it costs money to develop a mine, there is an invested sum to be amortized, as well as an income to be bought. We may define the value of a share, then, as that sum upon which the assured annual dividend will yield the desired rate of interest, after a sinking fund payment sufficient to amortize the investment in the assumed period has been deducted.
If we assume a stock with a yield of $20 per annum, held to be safe for ten years, and assume further that a sinking fund can be established at 5 per cent com pounded semi-annually, we can say what price must be paid for the stock to preserve the investor's capi tal intact and yield him interest at the rate of 10 per cent per annum. The dividend must equal the interest and the proper sinking fund on the amount bid. From sinking-fund tables, we know that the sum required to redeem $100 in 20 periods at 21/2 per cent is $.03915, hence $.0783 per annum. Let us call the bid X. The income wanted then is 10 per cent of X for interest and $.0783 for each $100 of X or 7.83 per cent of X for sinking fund, making a total of 17.83 per cent of X.
17.83 per cent of X = $20.00 $20 1 per cent of X = = $1.1216 17.83 If 1 per cent of X = $1.1216, 100 per cent of X = 1.1216 X 100 = $112.16. The proper bid for the stock is then $112.16.
The proof by substitution is as follows: Income = $20.00 Sinking fund = $.0783 X 112.16 = 8.782 Net income $11.218 $11.218 is approximately 10 per cent of $112.16.
It is reasonable to modify such conclusions, arrived at on the basis of the safe dividend period, by an ad dition to represent the value of the chance that new ore bodies will be revealed by the progress of work ing.
10. Leave prospects mining engineers unite in urging small investors not to con sider prospects which are not yet mines. The United
States Smelting and Refining Company has a de partment of structural geology which examines all properties offered to it. The results of the work of that bureau in certain recent years is as follows: Of all the properties covered by these very constant ratios, only 17 per 'cent survived the first glance ; only 5 per cent stood a preliminary examination, and after measuring and sampling, but one-third of 1 per cent were deemed worth buying.
If so few properties have merit in the eyes of ex perts, what chalice has the investor to buy into one thru the ordinary promoter? The only proper method for the investor, who has some other busi ness or profession to look after and who wishes to en gage in mine promoting, is to invest in the shares of development companies large enough to employ the highest grade of talent, and to average the risks of individual ventures.
11. Signs of the signs of danger to be found in the claims of prospectuses and stock salesmen, the following may be mentioned: (a) The mine has now come into excellent ore, the previous poor record being due to bad management— the situation for such claims is often created in the mining of irregular ore bodies where, upon the ex tension of the working face into a rich spot, opera tions are suspended in that gallery to hold the show ing, and claims are made, with measurements and, perhaps, with the offer to take prospective investors into the mine.
(b) Very high assay values reported—the higher these values the less the probability of a permanent proposition. Rich ores are almost always very small in amount and very irregular in distribution. They are, therefore, an unsafe basis for calculations.
(c) Increasing size of the ore body with depth.— Such a conclusion is likely to characterize the early stages of development, before average dimensions are known, and when local enlargements are mistaken for general tendencies.
(d) Increasing richness with depth.—Important if true. It contradicts general experience, which is that ore bodies become more lean and refractory with depth.