CHAPTER 8

ASSET OTHER THAN ORE

Arranged by M.A
Given a deposit of ore of quantity and quality that can be exploited at a profit, capital
and labour must be added in order to place the property on producing basis. The returns
from the property must be sufficient not only to redeem the purchase price of the land
with interest commensurate with the risk involved, but also to return all capital required
to put the property on a producing basis together with a fair rate of interest.
PLANT AND EQUIPMENT The plant

and equipment of a mine are of value only in

proportion to their ability to produce ore. If ore cannot be mined, plant and equipment are
worth practically nothing, as they have very limited resale value when their usefulness for
ore production is finished. The engineer, in estimating the value of operating property,
must determine whether or not the plant is adequate to produce the desired quantities of
ore at the required cost per unit. In mining, as in every other business, there is a
determinable point of equilibrium between the plant investment and the rate of
production at which the greatest net profit may be realized. The engineer is concerned,
therefore, with the estimate of the cost of all new process and equipment necessary to
convert the existing plant into one which will produce a maximum of ore values at a
minimum cost. This cost represents money which must the spent on revision of plant and
practice prior to production and, therefore, like other development cost, must be deduced
from the valuation of the property in arriving at a fair purchase price.
DEVELOPMENT Development

includes shafts, crosscuts, drifts, and other access

openings needed for production, as distinguished generally from similar openings made
for purposes of exploration, although there is no sharp line of the marcation between the
two.
Money spent for development of a property is even more intimately tied up with the
ore than that spent for plant and equipment. Although sometimes a market may be found
for items of mine equipment which may be moved after the mineral is exhausted or a
property proved valueless, it is rate indeed for the development work done for one
property to have any value to another property.
As will be noted later in outlining the relation of the royalty interest to valuation, the
irretrievable association of development moneys with the ore body is recognized by low,
wherein the operator of a property on a lease basis is considered, in some cases at least, to
acquire an interest in the ore by the expenditure for development openings, though title to
the ore rest with fee owner, the other party to the contract.

VALUE TO FUTURE OWNERAlthough

money spent for development will seldom be

assigned much value in the case of a forced sale of an unprofitable operation, it is readily
conceivable, providing the deposit does contain mineral values, that
the difference between the actual development cost and its transfer asset value may be
sufficient to convert the operation to a profitable business. It any case of transfer, this
capital loss by the first owner represents a gain to the new purchaser, providing the
development openings are located advantageously and are usable.
To illustrate this point, suppose that A, the present operator of a mine has spent, say,
$500,000 in sinking shaft and developing levels, only to find that the grade of the deposit
is not quit high enough to net a profit over and above capital and operating cost. Having
reached his financial limit, A offers the property for sale. B has the property appraised
and buys it a figure that allows very little for plant, equipment, and development already
in place. With reduce overhead, B finds that the grade of ore is sufficient for him to show
a profit.
In addition to the capital necessary for plant, equipment, and
development, money must also be provide to keep the business functioning on a
production basis. This is known as working capital. Supplies have to be purchased in an
amount dependent on the size and nature of the property, and kept on hand to avoid
delays; labour must be paid and other running expenses met until such time as the ore or
mineral is marketed and cash is being received in a quantity sufficient to meet current
expenses. If the market for the product is seasonal (as it is with Lake Superior iron ore or
with coal) or if, in order to get the best price for the product, it is necessary to withhold it
from the market at times so that inventories are built up, there may be a considerable
variation in the amount of working capital required at different times of the year on from
year to year. There should be sufficient moneys provided in the capital or surplus of the
company to cover the minimum requirements for working capital; money for seasonal
needs or to carry unusual inventories may, under normal conditions, be obtained by
commercial loans. But whether these requirements are met by owned or borrowed money,
the interest on this money is a proper and necessary charge against the business.
Since working capital in intimately tied to the production process, it is subject to the
same risk as capital invested in real property unless provided under separate guarantee.
Companies operating several mines may be able to finance their working capital need on
the basis of a combined pool more cheaply than the individual who can borrow only on
the asset of a single property.
The minimum amount of working capital may generally be computed by taking the
total cash outlay of the operation from the time the ore is broken until the cash is received
in payment for that ore.
WORKING CAPITAL

MISCELLANEOUS ASSETS In examining any mining property, the engineer should

AND CIRCUMSTANCES take into consideration such assets as timber holdings, land, and

potential and actual power sites and water supplies, not so much for their cash values as
for their possible economic advantage in making the business more self-sufficient. The
actual cash worth of these various items is usually added to the mineral valuation of the
property to obtain the purchase price, except when these out side asset are
disproportionately high with respect to the mineral worth.
Water is essential for milling by gravity and flotation methods. Whether or not any
substantial value is assigned to this asset in the case of a mine and mill, it must be

recognized that the adequacy of the water supply may well be critical to the business.
Whereas the removal of water from mine openings is a cost item and may, at times,
become difficult to handle, a good supply of water on surface for milling is distinctly an
asset. Thorough investigation of the water supply is an important part of the examination
whenever the ore is to be milled at the property. If water has to be brought from any
distance, pipeline (or flume) construction and transmission may called for heavy capital
expense. The alternative may be a transportation charge of similar magnitude for hauling
the mine ore to the mill.
Timber holdings, likewise, may be an important asset to a mining property,
particularly in sparsely timbered areas where freight from the nearest lumbering center is
a considerable cost item. With selective logging, a moderate area of forest can yield a
continuing supply of timber sufficient for all underground support and other construction
about the mine.
In remote localities water power, when available and developed, is an advantage to
mine operation and to community facilities; in more populated areas water-power
development for a mine may well expand in to a stable subsidiary business selling power
to nearby communities. Power development, usually at considerable capital outlay and
not often critical to mine operation in view of the availability of fuels, is an asset in
appraisal.
Other less tangible assets of a mine will include its labour force and community. An
established community, with housing, schools, sanitary and other public facilities, is
important to the welfare of a mining business, though difficult to assess in money value.
For a new property more than a few miles from towns or other settlements, the
assembling of a labour force and the provision of housing and community facilities will
be a cost of the operation. For an established property under examination for transfer or
consolidation, these adjuncts must likewise be given consideration.