Mining investments and how to judge them

Contents

Chapter Page

I. The Organization and Financial Development

of a Mining Company 7

Preface

In preparing a preface to this, a third edition of " Mining Investments and How to Judge Them," I wish first to extend sincere thanks to the kind readers who have thought well of my efforts and have made a third edition possible. I desire especially to thank the eminent educators who have done me the honor of using my book in their technical classes, their lectures and their recommendations for courses of reading in regard to mining.

We are now passing through a transition period in mining affairs, with a tendency to severe criticism which has in many instances gone beyond reasonable justice. It seems to me that we expect too much of mining, but mining stocks are so frequently put forward as investments, when the word speculation, or venture, would be more fitting, that expectations are raised which are rarely fulfilled. As a usual thing mining cannot come up to the standard of an investment, and too frequently brings only disappointment to those vi PREFACE

who judge mining ventures by investment standards. Such disappointments would not occur if mining were, held more to its true position. Still mining investments are constantly being discussed, and if the public will persist in so considering them it becomes a duty to know how, and by what standards, they may be judged. For this purpose my book was written and has now been carefully revised for its third edition.

The Author

The Organization and Financial Development of a Mining Company

If one who casually buys a mining stock, believing, so he says, that he is "stuck," yet hoping that the reports may prove true , could know all the struggle, pathos, hopes, despair and moments of triumph attending the effort for the financial development of a mining enterprise; one would sympathize with the promoter, and wonder at the determination, which, if success is to be obtained, must meet and overcome prejudices, must encounter doubts, and incredulous disbelief during years of effort to find success in beating down all barriers, and obtaining the necessary capital to operate the mine. One who is strong enough to obtain his end against such opposition is calculated to succeed, and usually does make a success of his mine after obtaining the money to operate it. There is pathos and sorrow in the effort because all do not succeed, even though a life time is dedicated to the effort. One instance comes to my memory. A miner prospecting some years ago discovered a mine, and thought it a good one; obtained the title and set to work to raise the money for its equipment, but without success. The mine was in Central America, a place not too well esteemed, and few would listen to his story. Yet he labored on, he and his wife together. Sometimes they made a little money at one work or another, and then would spend it looking for someone who would hear their story, and advance the capital required to work the mine. Time went by, they grew old together and died in want, and the mine was never worked.

What pathos of hopes and disappointments were hidden in these wasted lives none knew, nor is this an isolated example. Many are waiting, working and hoping today; some will succeed, others are doomed to disappointment; but they will struggle on, for the mining spirit, like the gambling fever, is hard to subdue; and it is all so plain to those who own the mines, and feel sure as to their worth, that it seems impossible that someone will not harken, and take a venture with them, where they themselves have risked their all; and ydl how little encouragement is found. If this were different, and if people who had money to invest gave better heed to those who actually own a mine, and sought for capital to establish works which they would themselves operate, the story of mining would be very different and many permanent successes would be chronicled each year; but people doubt the miner, who with blunt story and rough ways seeks for financial help, and asks for partners to share in his venture. So the mining company and its financial development comes on the scene. The mine owner, weary in his search, receives offers that a promoter, banker, broker, or other personage will take up his proposition, provided suitable terms are arranged. I remember well how one old prospector replied to such a proposition. "She's a good prospect, but she ain't worth no million dollars; may be when she's opened up, but that's not now." "Precisely," the promoter said; "we capitalize the prospective, not the present worth and then sell shares based on the present worth at low prices which advance as values are developed; those who put their money out for development thus reap the benefit, and this is what I propose." "Each person who invests at prospect prices in a capitalization for prospective worth knows that if our expectations are brought to realization his profit will be in holding a great number of our shares." So the prospect was capitalized for $1,000,000.

This was the first step in the financial development of the mine. When a proposition is put forward on this basis and is honestly managed, the proposition is fair, but unfortunately the offering is not always justly managed and a greater value is placed on the present worth than conditions warrant; and here is the first influence which makes for loss in mining stocks. Capitalization for prospective worth, but the price representing the present worth, the money asked for the shares, is often more than actual present worth will warrant.

If a prospect is worth $10,000 and the company owning the prospect is capitalized for $1,000,000 then the present actual worth of shares is 1 % ; and if, as usual, the par value of the shares is $1.00 then the actual worth is just one cent a share, and on such a basis, and at such a price would be well worth buying; but this investment would be in nothing more than a prospect, and except the shareholders or partners, for such they really are, spend something on the mine to open it for operation ; and then provide machinery to treat the ore, it will remain a prospect worth just one cent a share and nothing more. This is not good business, and one goes at hazard in a mine to make a profit, not to hoard money, so funds must be provided to operate and work ; and this brings forward the next step in the financial development of a mining company.

The miner being asked as to the division of the shares naturally replies that being partners he and the promoter should divide, but this is not a satisfactory basis for those proposing to promote the scheme: explanation is made that in order to raise money shares must be sold, and that some must be donated to the treasury for purposes of development; so after much discussion it is generally agreed that of the shares, one-third shall go to the owner, the promoters take a third, and one-third is placed in the treasury; the old miner, doubtful as to what he had done takes his paper, yields his titles to the company, and goes back to the mine; the promoters undertaking to produce funds by selling treasury stock to keep him at work.

This is now the situation, a prospect worth in cash $10,000 has been capitalized at $1,000,- 000, and one-third of the shares must provide all the money for operation and development. In ordinary business a person contributing the total capital might be contented with one-third the profits, but would probably ask more and would control whatever property the business owned. In mining similar arrangements should be made, and they who contribute capital should not only be preferred in shares and dividends, but should be given actual liens upon the property to make their preferences secure* This is not often done because it is of little advantage to promoters, and the offerings are of shares alone, usually appearing with glowing prospects, and the statement that so many shares are in the treasury to be sold at a low price, probably twenty-five cents a share. Frequently the announcement is made with great show of virtue that no officer receives compensation for his work, a suspicious circumstance, because men cannot afford to work for nothing, and do not work for nothing even in a mine. It is a better proposition when those who promote state exactly what they have as profit, and better yet when a mining company pays its officials and obtains men competent to do successfully the work required of them.

There seems a tendency among mining promoters to pose as philanthropists, who work for nothing, and with the mining proposition under discussion the usual offerings appear; the miner has gone back to his mine now incorporated, and obedient to instructions writes glowing letters, his own enthusiasm developing more and more. What he writes is quoted, and the shares begin to sell, not very freely, because they never do; and the promoters, in order that sales might be made in greater volume, offer large commissions, incur expenses and offer special terms, so that in the end often not more than one-third of the money realized for shares goes to operate the mine; and this small proportion has to do the work in which all the great number of shares have equal participation. If of the treasury shares one-third are sold at twenty-five cents each, and one-third the money realized is put to actual work in mine, then the money so placed would represent about two and eight-tenths per cent, of the capitalization; this, with the one per cent, which the prospect was actually worth at the beginning makes an aggregate of three and eight-tenths per cent, actual value, real money, in the proposition, and this small percentage must earn dividends for the total capitalization. So if the old miner is not mistaken in his mine, and it does yield shipping ore from which a profit can be made, the mine must return in profits nearly 200% each year on the money actually in the proposition in order to pay 6% on the capitalization. There are many propositions which do as well as this, but the rocks of disaster are never very far away; funds are apt to run low, leaving the enterprise not wrecked but stranded; and another is added to the long list of mines owned by corporations, but not in operation.

The promoters were eager for very great profits, if the mine had paid, as they anticipated from the very start, all would have been well; but the financial development of the proposition not being on a secure foundation, nothing was provided for contingencies, and troubles appearing, the burden of the capitalization was too great. This is the history of most mining enterprises, though some succeed, even at this great disadvantage, and if better provision were made, the number of successes would be in favorable comparison.

These are the usual conditions of most mining propositions though not all ; many are well organized, and the investor should learn to select those which are organized on proper lines, and to show what these lines of proper organization may be is the object of the following chapters.

It does not cost much to put forward a mining proposition, and where expenses of promotion are deducted from the treasury stock the promoters take but little risk ; a risk which may not exceed the figures in the following calculation of expenses for bringing out a mining proposition at one million dollars capitalization.

Calculation of minimum expenses in bringing out a mining stock.

Charter, in one of the cheaper states. . $25.00

Stock book, ledger and seal 10.00

Printing the prospectus, 1,000 copies. . 25.00 Advertising at $25.00 per week for one

Postage and office rent (frequently desk

One month's expenses, after which it is expected that money will be coming in. If the stock sells the promoters make a big profit, and the mine is operated; if the stock does not sell the loss to the promoters is not great and they can try again with some new proposition.

With such excellent prospects for a profit, with mine owners grown weary looking for partners to do actual mining, with mines and prospects to be had for shares in the companies incorporated to take them over, it is little wonder that mining promoters are many; yet mining pays such splendid returns that even with the great disadvantages attending the American system of company promotions, among the many who buy mining stocks thousands make handsome returns, and win fortunes out of such investments ; and the desirable position for an investor is to learn how to discriminate and select the good from the bad; because there are desirable mining propositions brought forward constantly, and money is to be made if only one uses good judgment in selecting.

These statements are not idle words. It is a too frequent occurrence in the financial development of a mining company that of the money subscribed an adequate proportion does not go into the property, and the shares sold for cash are far in the minority, a basis not calculated to be of advantage to those who invest; and one should look well to this point before purchasing. It is like having too many partners who have not contributed any cash to the business, and if such a proposition is offered the investor should demand that the mine be pledged as security for the money actually contributed.

When it is found that a proposition is not over-burdened with promoters' shares in its financial development, or that those who are promoting the enterprise are giving full value for what they reserve for themselves in shares, then the financial proposition is on a fair basis and can so far be considered favorably.

II The Organization and Physical Development of a Mine

It takes money to work a mine, it takes money for the equipment; but those who manage a mine, and yet are not accustomed to the business think that no impediment stands against the easy money they expect to win. Take out the ore and remit the proceeds, write the directors; this is the sense of the meeting, and the puzzled miner looks at his instructions and sends some practical suggestions as to the best methods for opening up the mine, and the machinery which will probably be required. The directors hold a meeting and generally resolve with great show of wisdom to send machinery without delay, effort is made to raise more money through the sale of stock, or if money is in the treasury it is at once appropriated; people who have machinery to sell are called in consultation; and the next thing an equipment is sent out to the puzzled miner, and word goes too that it must be placed in position, without delay, and returns sent in. It is returns, money coming in, that the directors want to see; the stockholders expect dividends, hurried calls are sent to the manager; but all in vain, such is not the way to operate a mine, failure almost certainly comes to oppress, and once a mining company has failed there is poor chance of re-establishing the enterprise. That disaster follows too hasty effort at results is because, before the character of the ore is known, before its proper treatment has been ascertained, and often times before the mine is even opened, machinery has been bought and shipped; the directors expecting it will fit requirements, and hazarding the money on a guess are generally obliged to meet, and to explain the disappointments; because machinery bought in this haphazard way can hardly be expected to give good results.

An incident of such work as this can be found in numerous mines. One which has for some years past been prominently before the public is a good example. It was a prospect, and as such had merit, but neither the character of the ore, the amounts to be obtained or the physical requirements had been well established ; yet beneath the magic touch of capital great undertakings were commenced, men swarmed about the property, shafts were sunk, electric plants gave light in all the galleries under ground, mills were in process of erection, houses, railway sidings, everything which engineering, directed by those who had machinery to sell, could devise was being done; and after thousands had been spent it developed that the machinery was not suited to the ore, then other plans were tried; new equipment recommended by those who had machinery to sell was purchased. Three times were failures the sole reward for thousands spent, and the mine was brought to such an ill repute that where a good result might easily have been attained, were debts, a property involved, machinery of little use; and all just struggling to be maintained. Then one of the directors, prominent in business life, admitted that he was a fool, that is, when it came to mining propositions; and so he was, and so are most men who, as directors of mining enterprises, force the issue, seek quick returns and vote to build and establish equipment before the mine is opened. Luck may be with them, and by chance the equipment may be suited to the requirements of the ore, but usually luck leads a man astray, and when an investor hears of rapid work of equipment and development going hand in hand, it will be safe to let such propositions go to others ; for where good mining practice is not well maintained the chances of success are very poor. Naturally one may inquire, what is good mining practice? This question does not admit of easy answer, for no two mines are found the same, and what is good practice in one would probably lead to disaster in another. Yet certain general principles can be considered as bearing on the question, and these being understood the enquirer can form an opinion as to whether the organization and physical development of the mine is proceeding as it should.

Mines may be divided into three classes.

First, those which produce ores very high in value, with every ounce of ore worth careful handling.

Second, those yielding rich ores and by their indications promising supplies of mineral which can be milled to certain profit.

Third, mines which yield a low grade of ore from which a profit can be had, if the product can be treated to advantage.

Then there is another class of mining propositions, prospects, indicating that by opening up the ground mineral-bearing deposits will be found.

Each class of mines requires different treatment. Those which yield such rich ores that every ounce is worth careful handling are rare and the best practice is to take the course usually recommended by boards of directors not skilled in mining and get ore, not with such eagerness, however, that mining operations are so conducted that future work must be more and more expensive ; but get ore without too much regard for future operations, because such mines usually do not last long; and though some do continue to great depth it may be taken as a rule, to which there are some exceptions, that very rich mines do not last so long as others, and the best practice is to make a drive for all that can be had in values without great equipment. When such a proposition is presented it is fair to take a chance on it, if the capitalization is not high ; but where a rich ore is reported running into the hundreds or even thousands to the ton and a great equipment is proposed, that proposition is safe to let alone, because the chances are that the ore obtained will not be worth the cost of the equipment. Of course, there are exceptions, but chance rules in mines and the chances are that a very rich mine cannot be a big mine and therefore a big equipment will be out of place. The second class, those mines which yield good ores, require very different treatment, and from the viewpoint of a stockholder, the following steps should be taken as good mining practice.

At the beginning of the proposition, while the mine is still an undeveloped prospect, the shares should be sold at a low rate, and the money obtained applied to work of development; not to the purchase of machinery or to arrangements for selling ore, but to development work and nothing else. The shares should advance in price as this work progresses, and the presence of ore bodies is established and ore reserves are blocked out; that is, opened by first sinking down a shaft near the vein, and at a certain depth cross-cutting by digging a tunnel from the bottom of the shaft to where the vein should be; and then finding the vein as expected, drifting, that is, tunneling along it; then an assured expectation can be entertained that the vein found on the surface and encountered again by tunneling from the bottom of the shaft extends from the surface down to where it has been encountered, all ore, a body opened up and ready to be taken out. This practice may be varied, but the principle is the same, the operations should be to prove up a large body of ore before going to the expense of erecting machinery. Sometimes the mine is so formed that the shaft can be run directly on the vein itself, a very satisfactory method of proving ore when it can be done to advantage ; but usually the shaft is placed near the vein and no attempt is made at burrowing, that is, following the irregularities of a mineral formation for the sake of always working in the ore. This is not now well regarded, although it was the ancient practice.

In other mines, where the mineral deposits are found high among the mountains, the situation admits of tunneling to reach the vein, rather than sinking down a shaft beside it, but the principle is the same, the object being to open up and prove the presence of the ore from the top, or outcropping of the mine, to the place at depth where the vein is cut; and' having established that an abundance of the ore is there, the next step is to equip the mine with machinery to treat the ore. Good practice is to make careful test, and when a plan for treatment has been satisfactorily proven the plant can be purchased with assurance that the mine will be successfu 1

Where a proposition is presented under conditions of operation as here outlined, it is a fair risk to take a chance, provided that the price is right. At first, before the mine is opened, the share should be very cheap because everything is risk, and if enough shares are not sold the mine may never be opened up at all. Then, as the work proceeds, there should naturally be a gradual advance in the price asked for the shares, particularly so if proofs of mineral to be found at depth are brought to light; until, when the ore is found at depth there should be a material advance; and when the ore bodies have been drifted on, and proven as to extent a good price should be asked for the shares. Finally when the equipment has been put in place and the mine is set to earning dividends a high price should be asked and will be had, because then everybody wants the investment; and those who took the risk at first, and would have met a total loss if ore had not been found at depth now have their reward.

Sometimes long periods pass in development work; often it is carried on too far, and when once a paying ore deposit is encountered, it should be operated, because the object of mining is not to develop a fine engineering plant, but to get ore and get it with the least possible expense. This being held in mind, it is fair to take a chance in mining where good prospects are reported on the authority of one who knows what indications really promise good prospects, and those in charge of the proposition propose good mining practice.

In the third group or class of mines, where lower grade ores are found, good practice is the same as has been stated, but it must be carried out with greater care, because the equipment required to make money out of low grade ores is very costly. Much money must be raised, and before such large amounts are risked the presence of a very great deposit of the ore must be established; and the mine opened up, and proved at several different points and places, to establish beyond peradventure that great bodies of ore are at hand to supply the extensive plant which must be operated to make money out of low grade ores.

With mines in prospect, that is, mineral ground where ore deposits are expected, but are not certainly known to exist, all is speculation, and usually the chance is poor and safe to let alone. However, as sometimes strikes are made, and prospects worth but a few cents a share advance to dollar values over night, some people will be willing to accept the risk, and if the shares are cheap enough it is a fair gamble, nothing more; yet if the management is honest and their plans for exploration vigorously prosecuted, the risk can be taken, but only at such prices that if the mine wins out the profit will be manyfold the money put at risk.

These general statements give but an outline of the different questions involved in the physical development of a mine. Incomplete certainly, but if the proposition is looked at with critical analysis along the line of inquiry here suggested an accurate opinion can be formed as to whether the physical development of the mine is proceeding along lines which indicate success.

Ill

Why Mining Companies Fail

The admission must be made with regret that most mining companies are failures, but while this is true of mining it is also true of all companies; for the records show that some ninety per cent, of corporations are failures, and go out of existence, many of them after only a year's existence. This being the fact it must be admitted that failures in mining are not more frequent than among ordinary corporations; still the fact remains that most mining companies are failures, a large majority of them; which in the aggregate represent the hopes of thousands come to naught. Why this should be when mining is such a profitable business seems strange, for one would think that records of successes would be more pronounced, and must look with interested concern at the causes which produce such bad results. The reasons why are many, and those who hold mining stocks should take heed of these reasons, and perhaps discern approaching failure in time to protect their holdings. Oi the reasons why mining companies fail, one, a potent reason, is scarcely known. It happens many times that the stockholders bring about the ruin of their own interests, and put burdens on the efforts of those who have the enterprise in charge which doom the company to certain failure. Rarely it happens that the progress of a mine is up to expectations, delays and difficulties are almost sure to be encountered; and then comes criticism, and they who own the shares bewail their disappointment, and declare they have been cheated, denouncing often that the undertaking is a fraud, and, bringing it in ill repute, make further progress well nigh an impossibility; and the enterprise discredited becomes a dismal failure, where a good word in support of those who had the enterprise in charge might have brought about a great success. If a management is found to be dishonest, those who have bought the stock should lose no time in taking legal action, and not be content with idle words of disapproval. Where a management is found to be just, and making due effort to attain success, even though disappointments are encountered, that management should have a good word now and then to help their efforts, and it is a poor man who speaks badly of that which he owns himself; if he does so, he should not expect anything but deterioration in the values of his property.

Here are some of the reasons why stockholders become dissatisfied and criticise. Results may not be quick enough to suit them for which the management is frequently denounced. It may be that some who have taken a chance on an unestablished mine at a low rate wish to sell out their holdings, and in place of looking for a purchaser go to the management demanding that the stock be immediately repurchased from them; forgetting that those who have gone in together to prove up an untried mine are in fact, if not in law, partners, the money which has been subscribed must be applied for work on the mines to benefit them all, and that managers who are so engaged have not the time to leave their work and hunt up a purchaser; then it may be that the mine requires all the money which the managers can raise, and to divert some of this money to repurchasing shares which holders may wish to sell might work serious injury to those who are not seeking to dispose of what they hold. For these reasons, while a mine is going through its stages of development those who buy should do so with the full understanding that such shares bought at low prices must be held and put away till the mine has been developed, then, of course, shares can be freely sold.