UBC Theses and Dissertations

UBC Theses Logo

UBC Theses and Dissertations

The financing of mining exploration and development : sources of funds and decision criteria Hales, Frederick William 1966

Your browser doesn't seem to have a PDF viewer, please download the PDF to view this item.

Item Metadata

Download

Media
831-UBC_1966_A4_5 H3.pdf [ 10MB ]
Metadata
JSON: 831-1.0102365.json
JSON-LD: 831-1.0102365-ld.json
RDF/XML (Pretty): 831-1.0102365-rdf.xml
RDF/JSON: 831-1.0102365-rdf.json
Turtle: 831-1.0102365-turtle.txt
N-Triples: 831-1.0102365-rdf-ntriples.txt
Original Record: 831-1.0102365-source.json
Full Text
831-1.0102365-fulltext.txt
Citation
831-1.0102365.ris

Full Text

THE FINANCING OF MINING EXPLORATION AND S o u r c e s o f Funds and D e c i s i o n  DEVELOPMENT  Criteria  by  B.A.Sc,  FREDERICK WILLIAM HALES U n i v e r s i t y o f B r i t i s h Columbia,  1957  A THESIS SUBMITTED I N PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER  OF BUSINESS ADMINISTRATION in  the Faculty of  Commerce a n d B u s i n e s s  Administration  We a c c e p t t h i s t h e s i s a s c o n f o r m i n g t o t h e required standard  THE UNIVERSITY OF BRITISH April,  1966  COLUMBIA  iii  In p r e s e n t i n g the  requirements  British  Columbia,  available mission  for extensive be  representatives.  my  Faculty  advanced degree a t the  and  g r a n t e d by  the  15,  1966  freely per-  his  copying or p u b l i c a t i o n  s h a l l not  be  Administration  Columbia  of  Department or by  permission.  Business  of  thesis for scholarly  I t i s understood that  o f Commerce and  University  I f u r t h e r agree t h a t  Head o f my  gain  fulfillment  L i b r a r y s h a l l make i t  copying of t h i s  The U n i v e r s i t y o f B r i t i s h V a n c o u v e r 8, Canada  April  the  study.  thesis for financial  written  thesis in partial  I agree t h a t  for reference  p u r p o s e s may  of t h i s  f o r an  this  allowed  without  ABSTRACT  The s e a r c h f o r p r o m i s i n g m i n e r a l d e p o s i t s and t h e i r d e v e l o p m e n t i n t o p r o d u c i n g mines r e q u i r e t h e e x p e n d i t u r e o f much l a r g e r sums o f money t h a n was f o r m e r l y n e c e s s a r y f o r success. M i n i n g i s r e c o g n i z e d as a r i s k y b u s i n e s s , and t h e s u p p l i e r s o f v e n t u r e c a p i t a l must be a d e q u a t e l y c o m p e n s a t e d f o r assuming t h i s r i s k . With the p r o g r e s s i v e development o f a p r o s p e c t , the u n c e r t a i n t y r e g a r d i n g i t s v a l u e i s reduced and c a p i t a l i s more r e a d i l y a v a i l a b l e a t l o w e r c o s t . As c a p i t a l r e q u i r e m e n t s h a v e i n c r e a s e d , g r e a t e r r e l i a n c e h a s b e e n p l a c e d upon t h e i n t e r n a l r e s o u r c e s o f e s tablished producers. E q u i t y c a p i t a l i s s t i l l s u p p l i e d by the p u b l i c f o r t h e h a z a r d o u s f i r s t s t a g e s o f p r o s p e c t i n g and exp l o r a t i o n , b u t l a t e r d e v e l o p m e n t and p r o d u c t i o n f i n a n c i n g i s l i k e l y t o be o b t a i n e d f r o m o p e r a t i n g c o m p a n i e s o r f i n a n c i a l institutions. Government g u a r a n t e e s , l o a n s , and p u r c h a s e agreements have been important i n the f i n a n c i n g o f s e v e r a l large ventures. The d e v e l o p m e n t o f a m i n i n g p r o p e r t y i s a s t o c h a s t i c p r o d u c t i o n f u n c t i o n , t h e outcome o f w h i c h i s p r o b a b i l i s t i c . I n o r d e r t o o p t i m i z e t h i s o u t p u t , no more s h o u l d be s p e n t on a p r o p e r t y than the expected r e a l i z a t i o n of i t s present worth. T h i s r e q u i r e s the continuous assessment o f the p r o b a b i l i t y of v a r i o u s outcomes and t h e i r f i n a n c i a l r e s u l t s a t e a c h s t a g e o f the d e c i s i o n p r o c e s s . The p u r c h a s e o f i n f o r m a t i o n t o f u r t h e r r e d u c e t h e u n c e r t a i n t y o f f u t u r e e a r n i n g s may be n e c e s s a r y b e f o r e m a k i n g t h e f i n a l commitment t o p r o d u c t i o n . The dev e l o p e r must a l s o be a s s u r e d o f s u f f i c i e n t c a p i t a l t o c o m p l e t e mine d e v e l o p m e n t and p l a n t c o n s t r u c t i o n .  PREFACE  Some owners p r e f e r t o b u y s h a r e s i n m i n e s a b o u n d i n g i n m e t a l s , r a t h e r t h a n t o be t r o u b l e d t h e m s e l v e s t o s e a r c h f o r t h e v e i n s ; t h e s e men" employ an e a s i e r and l e s s u n c e r t a i n method o f i n c r e a s i n g t h e i r p r o p e r t y . A l t h o u g h t h e i r h o p e s i n t h e s h a r e s o f one o r a n o t h e r mine may be f r u s t r a t e d , t h e b u y e r s o f s h a r e s s h o u l d n o t abandon t h e r e s t o f t h e m i n e s , f o r a l l t h e money e x p e n d e d w i l l be r e c o v e r e d w i t h i n t e r e s t f r o m some o t h e r mine. They s h o u l d n o t buy o n l y h i g h p r i c e d s h a r e s i n t h o s e m i n e s p r o d u c i n g m e t a l s , n o r s h o u l d t h e y b u y t o o many i n n e i g h b o r i n g m i n e s where m e t a l h a s n o t y e t b e e n f o u n d , l e s t , s h o u l d f o r t u n e n o t r e s p o n d , t h e y may be e x h a u s t e d b y t h e i r l o s s e s and h a v e n o t h i n g w i t h w h i c h t h e y may meet t h e i r e x p e n s e s o r b u y o t h e r s h a r e s w h i c h may r e p l a c e t h e i r l o s s e s . This c a l a m i t y o v e r t a k e s t h o s e who w i s h t o grow s u d d e n l y r i c h f r o m m i n e s , and i n s t e a d , t h e y become v e r y much p o o r e r t h a n b e f o r e . So t h e n , i n t h e b u y i n g o f s h a r e s , as i n o t h e r m a t t e r s , t h e r e s h o u l d be a c e r t a i n l i m i t o f e x p e n d i t u r e w h i c h miners s h o u l d s e t themselves, l e s t b l i n d e d by the d e s i r e f o r e x c e s s i v e w e a l t h , t h e y t h r o w a l l t h e i r money away. M o r e o v e r , a p r u d e n t owner, b e f o r e he b u y s s h a r e s , o u g h t t o go t o t h e mine and c a r e f u l l y examine t h e n a t u r e o f t h e v e i n , f o r i t i s v e r y i m p o r t a n t t h a t he s h o u l d be on h i s g u a r d l e s t f r a u d u l e n t s e l l e r s o f s h a r e s s h o u l d d e c e i v e him. Investors i n shares may p e r h a p s become l e s s w e a l t h y b u t t h e y a r e more c e r t a i n o f some g a i n t h a n t h o s e who mine f o r m e t a l s a t t h e i r own e x p e n s e , as t h e y a r e more c a u t i o u s i n t r u s t i n g t o f o r t u n e . N e i t h e r o u g h t m i n e r s t o be a l t o g e t h e r d i s t r u s t f u l o f f o r t u n e , a s we s e e some a r e , who as s o o n a s t h e s h a r e s o f any mine b e g i n t o go up i n v a l u e , s e l l them, on w h i c h a c c o u n t t h e y s e l d o m o b t a i n even moderate w e a l t h .  Georgius A g r i c o l a ,  "DE  RE METALLICA,"  1556.  T r a n s l a t e d from the F i r s t L a t i n E d i t i o n o f 1556 b y H e r b e r t C l a r k H o o v e r and L o u H e n r y H o o v e r , 1912.  V TABLE OF CONTENTS  ABSTRACT  i i  PREFACE Chapter  iv 1.  INTRODUCTION  1  PART ONE: SOURCES OF MINE FINANCING Chapter  2.  THE MINING INDUSTRY I N PERSPECTIVE  Chapter  3.  PRIVATE CAPITAL SOURCES  12  PUBLIC EQUITY FINANCING  20  C h a p t e r 4.  5  S e c u r i t i e s R e g u l a t i o n , 23; L i s t i n g on a S t o c k E x c h a n g e , 27; Methods o f S e l l i n g E q u i t y S e c u r i t i e s , 31. Chapter  5.  ESTABLISHED MINING CONCERNS  50  Chapter  6.  BANK LOANS AND SHORT TERM FUNDS  63  Chapter  7.  LONG TERM DEBT  74  Chapter  8.  GOVERNMENT ASSISTANCE  83  Chapter  9.  COST OF DEVELOPMENT CAPITAL  98  Chapter  10.  SUMMARY OF CURRENT FINANCING  110  S u t t o n - " C o r p o r a t i o n F i n a n c e , " 111; Buck - " S o u r c e o f C a p i t a l F u n d s , " 116; C o r k - " F i n a n c e i n t h e M i n i n g I n d u s t r y , " 119; M e i s e l m a n - " C o r p o r a t e S o u r c e s a n d Uses o f F u n d s , " 123; Creamer - " C a p i t a l i n M a n u f a c t u r i n g a n d M i n i n g , " 128; U.S.B.M. - " M i n e r a l s Y e a r b o o k - 1963," 131; D.N.R. - " C a n a d i a n T a x a t i o n S t a t i s t i c s , " 134; Summary, 144.  VI PART TWO: Chapter  11.  DEVELOPMENT  OF A MINING  PROPERTY  DECISIONS UNDER UNCERTAINTY  147  Examples o f P r o b a b i l i t y D i s t r i b u t i o n s , 149; D e t e r m i n a t i o n o f P r o b a b i l i t i e s , 157; R i s k and U n c e r t a i n t y , 158. Chapter  12.  THE PROSPECT  163  O r g a n i z a t i o n f o r P r o s p e c t i n g , 164; The S e a r c h f o r Ore, 167; F i n a n c i n g t h e S e a r c h , 171. Chapter  13.  SURFACE EXPLORATION Courses o f A c t i o n , t i o n , 187.  Chapter  14.  15.  177; F i n a n c i n g  Explora-  SHAFT SINKING AND UNDERGROUND EXPLORATION Financing  Chapter  176  Shaft  THE PRODUCTION  Sinking,  192  193.  DECISION  197  F a c t o r s t o b e C o n s i d e r e d , 198; S o u r c e s o f F u n d s , 200; The I n v e s t m e n t D e c i s i o n , 203. Chapter  16.  CONCLUSION  206  BIBLIOGRAPHY  210  APPENDIX  216  vii L I S T OF TABLES  Table I  COST OF FLOTATION Registered Issues Offered t o the General P u b l i c , 1951, 1953, & 1955  105  Table  COMPENSATION AND EXPENSES Common S t o c k O f f e r e d t o t h e G e n e r a l 1951, 1953, a n d 1955  107  II  Public,  Table  III  AGENT'S FEES AND EXPENSES C o r p o r a t e I s s u e s P l a c e d P r i v a t e l y , 1951, 1953, a n d 1955  108  Table  IV  NET SOURCE AND APPLICATION OF FUNDS M i n i n g , Q u a r r y i n g a n d O i l W e l l s i n Canada, Average Annual Data  113  Table V  SOURCE OF FUNDS FOR MINE DEVELOPMENT AND EXPANSION IN CANADA, 1945 - 1956  118  Table VI  FUNDS RAISED FROM THE PUBLIC FOR CANADIAN MINING COMPANIES, 1953 - 1960  121  Table VII  SOURCES OF FUNDS - U. S. MINING CORPORATIONS, 1950 - 1955, A n n u a l l y  125  Table  VIII  USES OF FUNDS - U. S. MINING CORPORATIONS, 1950 - 1955, A n n u a l l y  126  Table  IX  SOURCES AND USES OF FUNDS S e l e c t e d Items, as P e r c e n t o f T o t a l Flow, U. S. M i n i n g C o r p o r a t i o n s , 1950 - 1955, Annually  127  Table X  GROWTH OF CORPORATE ASSETS AND RELATIVE IMPORTANCE OF INTERNAL AND EXTERNAL FINANCING, A l l U. S. M a n u f a c t u r i n g a n d M i n i n g C o r p o r a t i o n s , S e l e c t e d Y e a r s , 19191953  130  Table XI  SOURCES OF FUNDS FOR DIRECT FOREIGN INVESTMENTS OF U. S. MINING INDUSTRIES, 1961 - 1962  133  viii Table XII  INCREASE IN ASSETS AND L I A B I L I T I E S , A l l C a n a d i a n M i n i n g Companies, 1957 1962  137  Table  SOURCE OF FUNDS, A l l Canadian Mining  139  XIII  Table XIV  T a b l e XV  Companies,  1957 - 1962  APPLICATION OF FUNDS, A l l C a n a d i a n M i n i n g Companies,  1957 - 1962  140  SOURCE AND APPLICATION OF FUNDS, 48 M e t a l M i n i n g Companies, P r o f i t Companies O n l y - E x c l u d i n g G o l d , 1962  143  IX L I S T OF FIGURES  Figure  1  LOGNORMAL DISTRIBUTION Logarithmic Scale  150  Figure  2  LOGNORMAL DISTRIBUTION Arithmetic Scale  151  Figure  3  LOGNORMAL DISTRIBUTION Probability of Finding a Mineral with Present Value o f a t Least V  152 Deposit  Figure  4  POISSON DISTRIBUTION  Figure  5  EXAMPLE OF EXPLORATION DECISION Expected Value o f Mineral Deposit D r i l l i n g , Lognormal D i s t r i b u t i o n  before  EXAMPLE OF EXPLORATION DECISION Expected Value o f Mineral Deposit D r i l l i n g , Lognormal D i s t r i b u t i o n  after  Figure  Figure  6  7  EXAMPLE Graphic  OF EXPLORATION DECISION Representation o f Decision  153 181  184  188 Process  THE FINANCING OF MINING EXPLORATION AND DEVELOPMENT Sources o f Funds and D e c i s i o n C r i t e r i a  Chapter  1.  INTRODUCTION  Mine f i n a n c i n g today i s as e s s e n t i a l t o the s u c c e s s f u l mining o p e r a t i o n as the i n i t i a l m i n e r a l d i s c o v e r y .  The i  day appears t o be gone when a mining p r o p e r t y c o u l d pay i t s own way from g r a s s r o o t s t o p r o d u c t i o n and y i e l d d i v i d e n d s a s h o r t time t h e r e a f t e r . g r u b s t a k i n g procedure  The p i c t u r e s q u e b u t seldom  j  rewarding  where a s i n g l e venturesome c i t i z e n  advances funds t o a p r o s p e c t o r f o r an equal share o f whatever d i s c o v e r y he might make, has l a r g e l y d i s a p p e a r e d .  In i t s  p l a c e have come the promoter and the s y n d i c a t e , t h e e x p l o r a t i o n and development company, and l a t t e r l y , the mining houses as sponsoring agents and sources o f venture  finance capital.  Today t h e s e a r c h f o r p r o m i s i n g m i n e r a l d e p o s i t s and the develop ment and equipment o f a mining p r o p e r t y f o r p r o d u c t i o n r e q u i r e a much s t r o n g e r o r g a n i z a t i o n and the expenditure o f much l a r g e r sums o f money than was f o r m e r l y necessary f o r s u c c e s s .  2  Over the y e a r s c e r t a i n sources have become t r a d i t i o n a l s u p p l i e r s o f " r i s k " o r venture c a p i t a l , w h i l e o t h e r s have been seldom used i f employed a t a l l .  Mining i s r e c o g n i z e d as  a r i s k y b u s i n e s s , and the f a c t has been w e l l e s t a b l i s h e d  that  the s u p p l i e r s o f venture c a p i t a l must be adequately compensated f o r assuming t h i s r i s k .  With the p r o g r e s s i v e development o f a  p r o s p e c t , the degree o f u n c e r t a i n t y r e g a r d i n g i t s v a l u e i s g r a d u a l l y reduced as more i n f o r m a t i o n i s gathered about the p h y s i c a l nature o f the d e p o s i t and i t s u l t i m a t e worth.  Coinci-  dent w i t h t h i s r e d u c t i o n i n u n c e r t a i n t y i s t h e decreased exposure o f the i n v e s t o r t o r i s k , r e s u l t i n g i n a subsequent i n the c o s t o f funds.  decrease  The o b j e c t o f t h i s study i s t o c o r r e l a t e  the s e l e c t i o n o f sources o f funds w i t h the degree of- r i s k , the c o s t o f funds, and t h e e v a l u a t i o n o f the p r o p e r t y a t each  stage  i n i t s development.  For the purpose  o f t h i s study the mining i n d u s t r y  s h a l l be deemed t o i n c l u d e a l l m e t a l l i c mines, b o t h s u r f a c e arid underground, and c e r t a i n o f the n o n - m e t a l l i c mines whose development and o p e r a t i n g c h a r a c t e r i s t i c s a r e s i m i l a r t o the m e t a l l i c mines.  C o a l mines, b u i l d i n g stone q u a r r i e s , and sand  and g r a v e l o p e r a t i o n s a r e s u f f i c i e n t l y d i f f e r e n t t o be excluded from t h i s a n a l y s i s .  A l s o excluded i s t h e petroleum and n a t u r a l  gas i n d u s t r y which, w h i l e employing  e x p l o r a t i o n and development  techniques s i m i l a r t o the mining  i n d u s t r y , i s f i n a n c e d and  operated i n a d i f f e r e n t manner.  However, r e f e r e n c e w i l l  made t o these techniques where germane t o t h i s  be  investigation.  P a r t i c u l a r a t t e n t i o n w i l l be g i v e n t o Canadian p r a c t i c e i n d e v e l o p i n g mining p r o p e r t i e s , c h i e f l y because o f the  importance  o f the i n d u s t r y t o Canada, the a c c e s s i b i l i t y o f data, and v a r i e t y o f techniques employed.  However, examples o f methods  used i n other mining c o u n t r i e s w i l l be p r e s e n t e d t o those techniques not c u r r e n t l y i n vogue i n t h i s  P a r t One  the  illustrate  country.  o f the t h e s i s examines the sources o f mine  f i n a n c i n g , commencing w i t h a d i s c u s s i o n o f the d i s t i n c t i v e f e a t u r e s o f the i n d u s t r y and the f a c t o r s which a f f e c t degree o f r i s k and the c o s t o f c a p i t a l . d e t a i l e d examination  the  Following t h i s i s a  o f the sources of c a p i t a l , w i t h p a r t i c u l a r  emphasis b e i n g p l a c e d on those c h a r a c t e r i s t i c s p e c u l i a r t o mine development.  No attempt  i s made t o p r e s e n t an e x h a u s t i v e  dis-  course on the techniques o f c o r p o r a t i o n f i n a n c e , a knowledge o f which i s assumed on the p a r t o f the r e a d e r . " T h i s s e c t i o n concludes w i t h a summary of c u r r e n t f i n a n c i n g , as p r e s e n t e d and analyzed i n s e v e r a l p u b l i s h e d works and Royal  Commission  s t a f f s t u d i e s , and which i n c o r p o r a t e s some o r i g i n a l r e s e a r c h by the author based other m a t e r i a l .  upon the Canadian T a x a t i o n S t a t i s t i c s  and  4 P a r t Two erty, and  outlining  examining  this  a n a l y z e s the development o f a mining  the nature of the m u l t i - s t a g e d e c i s i o n  the v a r i a b l e s which impinge  d i s c u s s i o n must n e c e s s a r i l y b e  technical  a d e q u a t e l y p r e s e n t the problems f a c e d by ciding  d e v e l o p m e n t s t r a t e g y and  However, t h i s  discussion w i l l  i a r with the mining  upon i t .  process  Much o f  i n nature  to  t h e o p e r a t o r i n de-  selecting  still  prop-  sources of  permit  funds.  the reader u n f a m i l -  i n d u s t r y to a p p r e c i a t e the d i f f i c u l t y  of  the problems i n v o l v e d .  The  analysis  commences w i t h a d i s c o u r s e on  the  s t o c h a s t i c n a t u r e o f d e c i s i o n s made u n d e r u n c e r t a i n k n o w l e d g e , whereby t h e o u t p u t s determined  by  the  of a p r o d u c t i o n f u n c t i o n are not  inputs but are p r o b a b i l i s t i c .  directly  Each stage  the development o f a p r o p e r t y i s then  examined t o r e l a t e  degree  of the d e p o s i t t o  of r i s k  s o u r c e and  exposure  and  c o s t of funds.  valuation  In g e n e r a l , the p r i n c i p l e  the attempt  to optimize the output  o f i n p u t s t o a c h i e v e t h e most e f f i c i e n t Only in  i n t h i s manner c a n  the  i n d u s t r y and  f u l production.  from a g i v e n use  sufficient  funds  the  process, series  of a l l resources.  t h e o p e r a t o r overcome t h e r i s k  attract  the  of  o p t i m a l i t y u n d e r l i e s a l l stages of the decision-making i.e.,  of  to assure  inherent success-  5  PART  ONE SOURCES OF MINE FINANCING  Chapter  2.  THE MINING INDUSTRY IN PERSPECTIVE  Canada, w i t h i t s wealth o f n a t u r a l r e s o u r c e s and  only  a s m a l l p o p u l a t i o n , i s dependent upon world t r a d e f o r i t s economic h e a l t h .  The m i n e r a l i n d u s t r y p r o v i d e s a l a r g e p r o p o r t i o n  o f t h i s country's exports, about 30 p e r c e n t o f the 1964 o f $6.7  billion.  total  In r e c e n t y e a r s the v a l u e o f exports has been  e q u i v a l e n t t o about 60 p e r c e n t o f m i n e r a l p r o d u c t i o n v a l u e . Due  t o the f a c t t h a t so l a r g e a p o r t i o n o f our metal and  products  i s s o l d overseas,  the Canadian mining  industry i s  s e n s i t i v e t o changes i n world markets and trends i n extraction costs.  mineral  comparative  In t h i s p o s i t i o n Canada i s j o i n e d by most o f  the o t h e r m i n e r a l producing c o u n t r i e s o f the f r e e world,  with  the p o s s i b l e e x c e p t i o n o f the U n i t e d S t a t e s and West Germany.  In an i n d u s t r y c h a r a c t e r i z e d by a h i g h degree o f i n t e r n a t i o n a l c o m p e t i t i o n , Canada possesses  c e r t a i n advantages.  F i r s t , o f course, i s an abundance o f m i n e r a l s which are import a n t i n world markets and which are l o c a t e d i n d e p o s i t s p e r -  6  m i t t i n g economic e x p l o i t a t i o n .  A w e l l - d e v e l o p e d economy and a  h i g h and r i s i n g standard o f l i v i n g h e l p c r e a t e a demand f o r mine r a l products and supply funds f o r t h e e x t r a c t i o n o f those p r o ducts.  But wealthy as t h i s n a t i o n i s , i t s t i l l r e q u i r e s a major  i n f l o w o f c a p i t a l t o permit"development  o f the r e s o u r c e s known  t o e x i s t and t o s e a r c h f o r new d e p o s i t s . which"help  Some o f t h e f a c t o r s  e x p l a i n t h e r a p i d growth o f t h e mining i n d u s t r y i n  Canada a r e : (a) a r e l a t i v e l y s t a b l e economic and p o l i t i c a l climate;  (b) f r e e flow o f f o r e i g n c a p i t a l ;  (d) secure l a n d t e n u r e .  (c) t a x i n c e n t i v e s ;  Venture c a p i t a l i s h i g h l y mobile and  may e a s i l y be d i v e r t e d away from c o u n t r i e s w i t h a c l i m a t e unfavorable to foreign  investment.  When c o n s i d e r i n g t h e f e a t u r e s o f the mining i n d u s t r y , e i t h e r domestic o r f o r e i g n , which a r e l i k e l y t o a t t r a c t capital,  venture  i t must be r e c o g n i z e d t h a t a h i g h degree o f r i s k i s  u s u a l l y a s s o c i a t e d w i t h mining p r o j e c t s due t o t h e u n c e r t a i n t y o f the f u t u r e r e t u r n .  Suppliers o f c a p i t a l are g e n e r a l l y  f u l l y c o g n i z a n t o f t h e r i s k s which they undertake, expect t o be adequately compensated.  and they  T h e r e f o r e o n l y those p r o -  j e c t s which o f f e r the e x p e c t a t i o n o f a r e t u r n a t l e a s t commens u r a t e w i t h t h e r i s k w i l l be a b l e t o a t t r a c t venture away from l e s s r i s k y  capital  investments.  For purposes  of evaluation o f the p r o f i t  potential-  i t i e s o f a mining prospect, t a i n t y o f the r e t u r n may  r i s k f a c t o r s r e l a t i n g to the  be d i v i d e d i n t o two  uncer-  categories:  inter-  2 nal  and  external.  The  i n t e r n a l f a c t o r s are those d i r e c t l y con-  cerned w i t h the i n d i v i d u a l p r o j e c t and t e c h n i c a l and  are dependent upon such  economic f e a t u r e s as: tonnage o f ore i n  and p o s s i b l e e x t e n s i o n s ;  grade o f ore; r e c o v e r a b l e  reserves  percentage  of gross v a l u e ; metal p r i c e s ; c a p i t a l c o s t s ; p r o d u c t i o n and  e f f i c i e n c y of management.  The  e x t e r n a l f a c t o r s are beyond  the c o n t r o l o f the i n d i v i d u a l o p e r a t i o n b a s i c economic trends t a r y and  costs,  and  are r e l a t e d t o :  ( c o n d i t i o n e d by p o l i t i c a l c l i m a t e ) ; mone-  f i n a n c i a l c o n d i t i o n s such as the a v a i l a b i l i t y and  o f c r e d i t and from other  the c h a r a c t e r  o f the e q u i t y market, and  types o f p r o j e c t s seeking  venture c a p i t a l .  must the mining p r o j e c t bear the normal b u s i n e s s and r i s k s shared by a l l manufacturing f i r m s , but  cost  competition Not  only  financial  i t must a l s o  shoul-  der the u n c e r t a i n t i e s o f the ore d e p o s i t under e x p l o i t a t i o n . Perhaps a q u o t a t i o n  from one  o f the s t a f f s t u d i e s  pre-  pared f o r the Royal Commission on Canada's Economic Prospects would i l l u s t r a t e t h i s  point:  At the commencement o f o p e r a t i o n by a mining... company, i t i s o f t e n i m p o s s i b l e t o a p p r a i s e i t and i t s chance o f success, as can o f t e n be done i n other industries. The money put up to take the f i r s t hazardous steps i n mine making has been w e l l c a l l e d ' r i s k c a p i t a l . ' . . . t h i s r i s k c h a r a c t e r i s t i c o f the m i n e r a l i n d u s t r y may be i l l u s t r a t e d by an examinat i o n o f the s t a t i s t i c s c o v e r i n g mining companies  i n c o r p o r a t e d o r l i c e n s e d i n t h e p r o v i n c e s o f Quebec and O n t a r i o . I n Quebec, b e t w e e n t h e y e a r s 1907 and 1941, o u t o f 1,093 m e t a l m i n i n g c o m p a n i e s , o n l y n i n e o r 0.82 p e r c e n t w e r e c o n s i d e r e d t o be e c o n omically successful. In O n t a r i o , i n the 50-year p e r i o d f r o m 1904 t o 1953, o n l y 54 o r 1.54 p e r c e n t o f a l l t h e m e t a l m i n i n g c o m p a n i e s were e c o n o m i c a l l y s u c c e s s f u l , i n the sense t h a t they p a i d d i v i d e n d s . 3 Again, Banking  from and  a staff  study prepared  f o r t h e Royal Commission  on  Finance:  The c h a n c e o f an a v e r a g e p r o s p e c t b e c o m i n g a p r o f i t a b l e mine i s one i n a few t h o u s a n d — o n e e s t i m a t e i s one i n t h r e e t h o u s a n d . I t has been e s t i m a t e d t h a t i n r e c e n t y e a r s t h e r e has b e e n an e x p e n d i t u r e i n e x p l o r a t i o n o f $25 m i l l i o n p e r new mine d e v e l o p e d . ^ This question of r i s k w i l l Chapter  be  considered i n greater d e t a i l  11.  A unique  feature of the mining  number o f h o l d i n g g r o u p s w h i c h s p o n s o r d e v e l o p m e n t o f new gerial  services.  accumulation tures, An  p r o p e r t i e s and  i n d u s t r y i s the  of retained earnings  t h e e x p l o r a t i o n and  p r o v i d e f i n a n c i n g and  from  o l d Mexican proverb  states  that  meaning t h a t  from o t h e r  t h e more e a s i l y  projects.  the  This i s c e r t a i n l y  as t h e s u c c e s s f u l m i n i n g  opportunities i n a business  familiar  the ven-  sources.  " i t takes a s i l v e r  w e a l t h must be g a r n e r e d b e f o r e a t t e m p t i n g  i n d u s t r y today,  mana-  s u c c e s s f u l mining  a l t h o u g h some g r o u p s h a v e a r i s e n  more d i f f i c u l t  small  Generally these organizations represent  t o make a g o l d m i n e , "  new  in  mine  gained  financing  t r u e o f the  of mining  companies i n v e s t  in  t o them i n o r d e r  to  9 perpetuate the organization Important examples o f t h i s participation  i n Labrador  when t h e o r i g i n a l mine i s d e p l e t e d . form o f s p o n s o r s h i p a r e :  i r o n ore;  Noranda's i n t e r e s t i n  Mattagami, and Cominco's s p o n s o r s h i p o f P i n e P o i n t  These h o l d i n g  Hollinger's  Mines.  g r o u p s i n v e s t i n new p r o j e c t s  not only  b e c a u s e t h e y a r e good i n v e s t m e n t s , b u t b e c a u s e t h e y b r i n g advantages as w e l l . the  Foremost o f t h e s e i s d i v e r s i f i c a t i o n and  consequent r e d u c t i o n  for c e r t a i n metals. their bets"  i n sensitivity  slices  a l l their  e f f o r t s on one p r o p e r t y .  refineries price group.  Control  that  substantial benefits  operating  mining properties  increases  this  and  injurious  to the holding  companies have t a x advantages  o v e r t h e n e o p h y t e company i n t h e e x p l o r a t i o n  strong  f o r smelters  and c o n t r o l o f p r o d u c t markets t o p r e v e n t  The f a c t  Also,  such as has happened i n t h e  o f sources o f supply  f l u c t u a t i o n s may b r i n g  rather  m i n e s may l e a d t o c o n s o l i d a t i n g  a m a j o r p o s i t i o n i n one i n d u s t r y , industry.  t o "spread  o f s e v e r a l new p r o j e c t s  c o n t r o l over s e v e r a l operating  nickel  t o market f l u c t u a t i o n s  Some m i n i n g c o m p a n i e s l i k e  by taking  than concentrating  other  trend  and development o f  toward c o n c e n t r a t i o n i n  hands.  One  feature  o f the mining industry  i n Canada w h i c h  merits  s p e c i a l mention i s t h e keen i n t e r e s t o f t h e g e n e r a l  public  i n the a f f a i r s  o f j u n i o r e x p l o r a t i o n and development  companies.  T h i s i s a c a r r y - o v e r from  t h e d a y s when t h e g r u b -  \ \  ! t  s t a k e was i n vogue,- a n d i n d i v i d u a l s pate d i r e c t l y  and groups would p a r t i c i -  i n prospecting expeditions.  p a t i o n h a s become more s o p h i s t i c a t e d , of  the mining  Today t h i s  but the public  f o r the trading  i n shares o f l i s t e d  companies has i t s abuses, funds  f o r those  development. tal"  particisupport  s t o c k m a r k e t a s s u r e s e v e n t h e most modest t y p e o f  m i n e r a l showing a chance a t becoming a mine. ket  first  T h i s a c t i v e mar-  and u n l i s t e d  mining  b u t i t i s e s s e n t i a l as a source o f  faltering  s t e p s i n t h e p r o c e s s o f mine  Money s u p p l i e d a t t h i s  stage  i s truly  "risk  b u t i t i s the t a n t a l i z i n g prospect o f quickly-made  t h a t encourages  this  One f i n a l the mining  comment o n t h e p e c u l i a r  industry relates I n Canada, m i n i n g  producer  o f national wealth  health o f the nation.  fortunes  t o the p o l i t i c a l  characteristics of c l i m a t e mentioned  has been r e c o g n i z e d as an important and c o n t r i b u t o r  t o t h e economic  W i t h few e x c e p t i o n s , m e t a l s  and m i n e r a l  p r o d u c t s have been p e r m i t t e d f r e e e x p o r t i n u n r e s t r i c t e d Recent  m i s g i v i n g s about  have p r e c i p i t a t e d caused  however,  by a l l l e v e l s  f o r e i g n ownership  some a c t i o n s h a r m f u l  some u n e a s i n e s s  general,  capi-  type o f s p e c u l a t i o n .  earlier.  tities.  i  and c o n t r o l  t o t h e i n d u s t r y and  among s o u r c e s o f f o r e i g n c a p i t a l .  the mining  quan-  i n d u s t r y i s l o o k e d upon w i t h  o f g o v e r n m e n t i n Canada, a n d a s s i s t a n c e i s  In favor  provided explained this  i n many d i f f e r e n t i n greater  detail  favorable climate  forms.  i n C h a p t e r 8.)  i n Canada a r e  upon t h e m i n i n g c o m p a n i e s o p e r a t i n g A m e r i c a and and  Africa.  d i c t a t i o n by  ment i n t h e s e development  the  (This a s s i s t a n c e w i l l  the  In c o n t r a s t  restrictions  c o u n t r i e s and  to  placed  i n some c o u n t r i e s o f  What amounts t o a l m o s t c o m p l e t e s t a t e has  be  severely restricted  radically  a l t e r e d the  South  domination  new  invest-  f r e e flow  of  capital.  Footnotes to Chapter  2:  1 R. B. Toombs, P. W. Andrews and W. K e i t h Buck, M i n e r a l s and t h e i r M a r k e t s , Ottawa, D e p a r t m e n t o f M i n e s and T e c h n i c a l S u r v e y s , January 1965. 2 W. F. B o e r i c k e and C. C. B a i l e y , "Mine F i n a n c i n g , " E c o n o m i c s o f t h e M i n e r a l I n d u s t r i e s , New Y o r k , AIME, 1959, p. 241. 3 W. K e i t h Buck,. S o u r c e o f C a p i t a l Funds f o r t h e I n d u s t r y , Ottawa, D e p a r t m e n t o f M i n e s and T e c h n i c a l July 1956. 4 E. K. C o r k , F i n a n c e i n t h e M i n i n g I n d u s t r y , p r e p a r e d f o r t h e R o y a l Commission: on B a n k i n g and Queens P r i n t e r , November 1962.  Mineral Surveys,  a s t a f f study F i n a n c e , Ottawa,  5 A r n o l d H o f f m a n , F r e e G o l d - The S t o r y - o f C a n a d i a n New Y o r k , A s s o c i a t e d Book S e r v i c e , 1947, p . 321.  Mining,  Chapter  3.  PRIVATE CAPITAL SOURCES  Perhaps the e a r l i e s t v e l o p m e n t was individual t a i n him  share  t h e g r u b s t a k i n g agreement whereby a  advanced s u f f i c i e n t  i n the f i e l d  individual,  form o f f i n a n c i n g m i n e r a l  funds  wealthy  t o a p r o s p e c t o r t o main-  f o r a whole season.  In r e t u r n the  i n many c a s e s a l o c a l m e r c h a n t , r e c e i v e d a  i n the proceeds  o f any m i n e r a l d i s c o v e r y .  used w i t h g r e a t success d u r i n g the e a r l y h i s t o r y o f  and  t h e U n i t e d S t a t e s and  areas of Northern found,  Canada.  i n l i m i t e d use  o f s u c c e s s o f t h e g r u b s t a k e was tributing rising  c o s t o f p r o s p e c t i n g and  s e e k e r s toward pation. men  The  the  Also  o f f i n a n c i n g was  conthe  s p e c t a c u l a r forms o f p r o s p e c t o r s has  difficult  probability  the trend of i n d i v i d u a l  number o f i n d e p e n d e n t  company g i v i n g the nebulous  form  more s e c u r e i f l e s s  h a v e come t o p r e f e r  and  s e v e r e l y reduced.  t o the d e c l i n e o f t h i s  easily-  i t became more  f o r t h e s i n g l e p r o s p e c t o r t o make a s t r i k e  Canada  in certain  However, as t h e s u p p l y o f  bonanza-type prospects dwindled,  half  T h i s method  was  is still  de-  wealthpartici-  fallen  as  s t e a d y employment w i t h an e x p l o r a t i o n  limited participation  chance o f s t r i k i n g  in their  discoveries  i t r i c h by t h e i r  C l o s e l y a l l i e d w i t h the grubstake  own  type of  to  efforts.  financing  13  i s the p r o s p e c t i n g s y n d i c a t e . c a t e i s a group o f people who  In i t s s i m p l e s t form the s y n d i u n i t e t o f u r n i s h funds f o r p r o s -  p e c t i n g or p r e l i m i n a r y development o f a p r o s p e c t .  The  amount  o f money f u r n i s h e d by each i n d i v i d u a l member i s r e p r e s e n t e d a number o f u n i t s corresponding enterprise.  t o the share o f each i n the  U s u a l l y the u n i t s are evidenced  by  certificates  o f a c e r t a i n par v a l u e i s s u e d by the s y n d i c a t e manager, not a l l o f the c a p i t a l may  be s u b s c r i b e d a t the o u t s e t .  s y n d i c a t e manager, who  be the p r o s p e c t o r but  may  incurred.  the  acquired.  s y n d i c a t e does not have the advantage o f l i m i t e d  each member b e i n g  The  t o arrange p r o s p e c t i n g e x p e d i t i o n s , or to  d i s p o s e o f mining p r o p e r t i e s staked or otherwise The  although  i s more l i k e l y  to be a promoter, i s g i v e n c e r t a i n powers t o d i s p o s e o f s y n d i c a t e ' s funds,  by  j o i n t l y and  liability,  s e v e r a l l y l i a b l e f o r the debts  In a d d i t i o n , the shares o f the s y n d i c a t e are u s u a l l y  a s s e s s a b l e , a t l e a s t up t o t h e i r par v a l u e , and  s y n d i c a t e mem-  bers may  be r e q u i r e d t o put up f u r t h e r c a p i t a l t o keep t h e i r  interest  alive.  Unincorporated  syndicates d e s i r i n g to issue a s e c u r i t y  are r e q u i r e d to f i l e c e r t a i n i n f o r m a t i o n w i t h the  appropriate  S e c u r i t i e s Commission r e g a r d i n g the o r g a n i z a t i o n o f the s y n d i c a t e and the proposed a l l o c a t i o n o f funds.  The  requirements  are not onerous because o f the l i m i t e d d i s t r i b u t i o n o f s e c u r i t i e s , but s y n d i c a t e u n i t s may  the  not be o f f e r e d t o the  general  public  or traded by r e g i s t e r e d s e c u r i t y  traders.  exempt f r o m t h e r e g u l a r r e g i s t r a t i o n p r o c e d u r e issues  i n British  been accepted provided  Columbia p r o v i d e d  for f i l i n g  for property.  and i s f u r n i s h e d t o each buyer, and  of the syndicate  ent  o f Brokers  unit  Of t h e v e n d o r u n i t s ,  i n a trust  sold  dispose interest  20  i s limited  90 p e r c e n t  must b e e s c r o w e d  agreement), t o be r e l e a s e d by t h e S u p e r i n t e n d -  i n t h e p r o p o r t i o n o f one v e n d o r u n i t  s y n d i c a t e seldom i s f i n a n c i a l l y  o f i t s property i n the equity.  able  t o perform  t o a l a r g e r company i n r e t u r n f o r a n However, i m p o r t a n t  exceptions  to this  notable  among  i s t h e d e v e l o p m e n t o f t h e H o m e m i n e o f N o r a n d a i n Quebec  group, h a v i n g substantial  In this  case  t h e Thompson-Chadbourne  p r o v e d o r e o n t h e N o r a n d a , was a b l e t o s e c u r e  funds by t h e i s s u a n c e  shareholders,  In t h i s his  f o r each  p r e l i m i n a r y development, and u s u a l l y i t expects t o  d u r i n g t h e e a r l y 1920*s.  its  t o a max-  o n e - t h i r d may b e i s s u e d  l i m i t e d p a r t i c i p a t i o n b y t h e s y n d i c a t e do e x i s t : these  persons.  f o r cash by the syndicate.  The more t h a n  security  a s y n d i c a t e agreement has  imum o f $35,000, o f w h i c h n o t more t h a n  (held  for  t h e u n i t s a r e n o t o f f e r e d t o more t h a n  In a d d i t i o n , t h e c a p i t a l  They a r e  o f stock purchase r i g h t s t o  never once h a v i n g  recourse  to thepublic.  e n d e a v o r t h e y w e r e g r e a t l y a s s i s t e d b y Noah Timmins a n d  f o r t u n e d e r i v e d from t h e H o l l i n g e r Mine.^  15 Capital by  available  from i n d i v i d u a l s  the range o f p e r s o n a l c o n t a c t s o f the vendor or  Due  t o the h i g h degree of r i s k  a prospect, too  individual  The  i n v e s t o r s are not w i l l i n g  restricted  grubstake,  to straight  without  security  variation  f o r the  debenture.  In t h i s  his  capital with  the  first  allowed  institutions of  permits  form the  interest  active for  loan or  investor i s permitted  out  of the cash  operation before  i n the p r o f i t s .  I t i s much more p o p u l a r  f o r p r o d u c t i o n and interest  the purpose.  the  cap-  greater  the vendor to r e t a i n  to  a  income recover  flow generated  by  t h e e q u i t y owners  are  T h i s method o f " f i n a n c i n g i s of a prospect  the h i g h degree o f u n c e r t a i n t y surrounding  readied  the  security.  n o t commonly u s e d a t t h e e x p l o r a t i o n s t a g e  loan.  one  t o advance debt  e q u i t y i s the unsecured  several years'  t o share  t o any  i n mine f i n a n c i n g w h i c h p r o v i d e s  i n v e s t o r and  l a r g e r p o r t i o n of the  of  advance  e q u i t y p a r t i c i p a t i o n because o f  adequate guarantees  One  the  to  life  p a r t n e r s h i p , or syndicate i s u s u a l l y  r e l u c t a n c e o f most f i n a n c i a l ital  promoter.  inherent i n the e a r l y  large a proportion of t h e i r personal resources  venture.  to  i s usually limited  the  due  repayment  when t h e p r o p e r t y  of  i s being  f i n a n c i n g group i s t a k i n g  an  i n t h e management o f a company i n c o r p o r a t e d For  this  under E s t a b l i s h e d M i n i n g  reason  Concerns  i t will (Chapter  be  t r e a t e d more  5).  fully  In each o f the p r e v i o u s tion  the l i a b i l i t y  individual any  o f t h e i n v e s t o r was u n l i m i t e d  accruing  For these reasons,  e x p l o r a t i o n and development o f p r o s p e c t s .  the  property  f o r w h i c h t h e company was  first  a c t i v e l y p a r t i c i p a t e i n t h e management manager.  ject  to the legal  will  function  of a l a r g e r mining  sub-  company  In circumstances  company may  f u n c t i o n as t h e o p e r a t i n g  arm  group.  to issue  securities are  f o r r e g i s t r a t i o n and  i n most j u r i s d i c t i o n s  o f Canada.  This  filing  exemp-  i s l i m i t e d t o c o m p a n i e s h a v i n g n o t more t h a n 50 s h a r e -  holders public.  an  i s widely held,  t h e p u b l i c m i n i n g company.  exempt f r o m t h e n o r m a l r e q u i r e m e n t s  the  usually  i n much t h e same p o s i t i o n  Where t h e s t o c k  P r i v a t e companies w i s h i n g  tion  formed w i l l  i s h e l d b y a few i n d i v i d u a l s o r c o m p a n i e s , t h e  private exploration  of a prospectus  The p r o m o t e r o f  l i m i t a t i o n s , the private exploration  like  where t h e s t o c k  instead of a  a p r i v a t e company may b e f o r m e d e x p r e s s l y f o r  the  the syndicate  Also,  t o the i n v e s t o r s would be taxed a t t h e i r  income t a x r a t e s .  mining syndicate,  as  a n d a n y one  c o u l d be sued f o r t h e debts o f t h e e n t e r p r i s e .  profits  personal  forms o f f i n a n c i a l p a r t i c i p a -  and n o t o f f e r i n g s e c u r i t i e s f o r s a l e t o t h e g e n e r a l Specifically  i n the case o f p r i v a t e mining  B. C. S e c u r i t i e s C o m m i s s i o n w i l l updated shareholders  list,  require  financial  companies,  the submission of  s t a t e m e n t s , and  infor-  m a t i o n r e g a r d i n g t h e number o f s h a r e s tion  other than cash.  The  d i s c r e t i o n a r y powers o v e r quirements  and  Superintendent  exemptions,  and  An  h i s consent  from  a private  example o f t h i s  t a k e an  G o l d M i n e s and  40 p e r c e n t b y l e a s e s on  has  wide  300  interest  Hollinger  t h e Hanna M i n i n g square  be  re-  obtained  to a public  i s H o l l i n g e r North  Company L i m i t e d , owned 60 p e r c e n t b y  company h o l d s  must be  p r i v a t e d e v e l o p m e n t company may  whereby e s t a b l i s h e d p r o d u c e r s opment.  of Brokers  the a p p l i c a t i o n o f r e g i s t r a t i o n  where c o n v e r s i o n i s s o u g h t  The  issued for a considera-  the  company.  4  vehicle  i n a new  devel-  Shore E x p l o r a t i o n Consolidated Company.  miles of potential  This iron  r a n g e i n t h e Ungava a r e a o f n o r t h e r n Quebec, p a r t o f w h i c h i s sub-leased  t o I r o n Ore  H o l l i n g e r North since for  (IOCO) f o r  mining.  S h o r e o r i g i n a l l y h e l d s t o c k i n IOCO b u t  transferred  leasing  Company o f Canada  this  to i t s parents  as a d i v i d e n d .  t h e p r o p e r t y t o IOCO, H o l l i n g e r N o r t h  s p e c i a l t y minerals  25 c e n t s p e r  ton.  dated from  their their  By  interests  t h i s means t h e two i n the  P e r h a p s a w o r d on  the  of a l l  w i t h a minimum o f parents  l a n d h o l d i n g s and  direct participation  would n o t be  shipped,  In r e t u r n  Shore r e c e i v e s  a r o y a l t y o f 7 p e r c e n t o f the c o m p e t i t i v e market p r i c e i r o n o r e and  has  have  consoli-  segregated  them  i n IOCO w i t h o t h e r p a r t n e r s .  f u n c t i o n s o f t h e mine p r o m o t e r  amiss a t t h i s p o i n t .  Mine p r o m o t i o n  is a  thorough-  ly  legitimate business  of  many i t c o n n o t e s d e c e p t i o n  mining property, or wishing in  deal.  desirous  to dispose  the area  and i t i s u n f o r t u n a t e and t r i c k e r y . ^  The owner o f a  of obtaining capital  of his interest,  i s usually  to promising  investors willing  prospects  f o r mutual p r o f i t .  securing the best  return  venture  are usually ignorant of their t h e i r worth.  sources  It  two g r o u p s  The judgment a n d e x p e r i e n c e  promoter i s i n d i s p e n s a b l e i n s e l e c t i n g  o f the  o f f i n a n c i n g and  d e a l f o r t h e vendor o f t h e p r o p e r t y .  In  f o r h i s k n o w l e d g e a n d management s e r v i c e s , t h e p r o m o t e r  r e c e i v e s a f e e and u s u a l l y a share It  a successful  t h e f u n c t i o n o f the mining promoter t o b r i n g these  together  in  inexperienced  t o supply  existence or e l s e unable t o p r o p e r l y appraise is  f o r development  o f f i n a n c e and i s u n a b l e t o n e g o t i a t e  On t h e o t h e r hand,  capital  t h a t i n t h e minds  i s unfortunate  Footnotes  i n the property.  t h a t t h e a c t i o n s o f a few u n s c r u p u l o u s  t o r s have b r o u g h t d i s c r e d i t larly vital  interest  t o t h e i n d u s t r y and t o t h i s  operaparticu-  function.  t o Chapter  3:  1 W. F. B o e r i c k e a n d C. C. B a i l e y , "Mine F i n a n c i n g , " E c o n o m i c s o f t h e M i n e r a l I n d u s t r i e s , New Y o r k , AIME, 1959, p . 247. 2 J . P. W i l l i a m s o n , S e c u r i t i e s R e g u l a t i o n U n i v e r s i t y o f T o r o n t o P r e s s , 1960.  i n Canada,  Toronto,  3 A r n o l d H o f f m a n , F r e e G o l d , New S e r v i c e , 1947, p . 325.  York,  A s s o c i a t e d Book  4 W. S. I r w i n , S e c u r i t i e s R e g u l a t i o n s and address forming p a r t of a s e r i e s o f l e c t u r e s B. C. and Y u k o n Chamber o f M i n e s , V a n c o u v e r , 1965. 5 Financial 1965, p . 261. 6  Post, Survey  B o e r i c k e , op.  cit..  p.  o f Mines.  249.  t h e I n v e s t o r , an sponsored by the B. C , M a r c h 4,  Toronto,  Maclean-Hunter,  20  Chapter 4.  PUBLIC EQUITY  FINANCING  Due t o l i m i t a t i o n s on the f i n a n c i a l r e s o u r c e s o f h i s p e r s o n a l acquaintances, the promoter o f a p r o m i s i n g p r o s p e c t u s u a l l y must have r e c o u r s e t o a p u b l i c o f f e r i n g o f e q u i t y securities.  To do t h i s i t i s necessary t o i n c o r p o r a t e a p u b l i c  company and t o r e g i s t e r the i s s u e w i t h the a p p r o p r i a t e r e g u l a tory authorities.  Mining companies i n c o r p o r a t e d i n Canada u s u a l l y have l a r g e c a p i t a l i z a t i o n s ; t h r e e t o f i v e m i l l i o n shares a r e common, although t e n m i l l i o n shares a r e not unknown.  These shares may  have a nominal p a r v a l u e , u s u a l l y o f one d o l l a r , o r may be nopar s t o c k ; both a r e w i d e l y used.  I t i s f r e q u e n t l y asked why  such l a r g e c a p i t a l i z a t i o n s a r e necessary, p a r t i c u l a r l y when the shares a r e t r a d i n g f o r a few c e n t s . in this fact.  The answer l i e s  precisely  Because most o f the t r a d i n g a c t i v i t y and p u b l i c  enthusiasm a r e c o n c e n t r a t e d i n shares s e l l i n g under 50 c e n t s , the company w i l l want t o p l a c e i t s i n i t i a l o f f e r i n g i n t h i s range.  To do so and y e t r a i s e s u f f i c i e n t c a p i t a l ,  i t must i s s u e  l a r g e numbers o f shares; 200,000 shares i s u s u a l l y the minimum issue.  The shares remaining i n t h e t r e a s u r y a f t e r the i n i t i a l  o f f e r i n g w i l l be u s e f u l f o r l a t e r p r o d u c t i o n f i n a n c i n g , o r i f  the  property  new  turns  sour,  for raising  directors ting  i t i s a par value  stock,  after incorporation w i l l  the f i r s t  basis.  This  o f most c o m p a n i e s a c t s  effectively that  issued,  issue part title  vices  p u b l i c m i n i n g company  of i t s treasury t o the mineral  rendered.  This  circumvents  the requirement  received  property  formed by t h e promoter  shares t o the prospector  property  authorized  capital  o f t h e company.  t h e company w i l l  proceeds o f l a t e r  stock  o f the  The a c t u a l amount a n d d i s -  i s subject  to negotiation  p a r t i e s c o n c e r n e d and t o t h e a p p r o v a l  tion,  i n exchange  i s known a s t h e " v e n d o r  and i s l i m i t e d t o a maximum o f 25 p e r c e n t  C o m m i s s i o n i n whose j u r i s d i c t i o n  will  and t o t h e p r o m o t e r f o r s e r -  issue of stock  o f t h e vendor stock  by the  or services.  position,"  tribution  non-  n o m i n a l amount o f t h e s h a r e s  e i t h e r i n cash or equivalent  The  permit-  on a f u l l y - p a i d ,  the consideration  company b e e q u a l t o t h e t o t a l  a c t i o n o f the  be t o pass a by-law  i s s u e o f shares below t h e p a r v a l u e  assessable  the  for a  prospect.  If  for  development c a p i t a l  between  of the S e c u r i t i e s  t h e company r e s i d e s .  In addi-  reimburse the vendors i n cash out o f the sales  f o r o r g a n i z a t i o n a l and i n c i d e n t a l  expenses.  Canadian mining other  country  finance  i n the world.  i s quite  u n l i k e t h a t o f any  The e x t r e m e l y v o l a t i l e m a r k e t f o r  shares i n s p e c u l a t i v e mining e n t e r p r i s e s , as w e l l as more soundly based f i r m s , has c o n t r i b u t e d g r e a t l y as a source o f funds f o r the development o f new p r o s p e c t s .  I t has a l s o engen-  dered much c r i t i c i s m o f the p r a c t i c e s o f some operators  i n this  f i e l d and o f the h i g h c o s t o f o b t a i n i n g funds from t h i s  source.  S e c u r i t y r e g u l a t i o n and improved t r a d i n g r u l e s o f the v a r i o u s stock exchanges have e l i m i n a t e d  some o f the abuses and r e q u i r e d  d i s c l o s u r e o f the f a c t s surrounding an o f f e r o f s e c u r i t i e s t o the p u b l i c .  However, r e g u l a t i o n s cannot prevent some u n s c r u -  pulous operators the s p e c u l a t o r  from p e r p e t r a t i n g t h e i r f a l s e promotions o r  from l o s i n g h i s money o c c a s i o n a l l y .  case the cure can be worse than the d i s e a s e ;  In t h i s  t o o s t r i n g e n t regu-  l a t i o n w i l l remove the i n c e n t i v e f o r honest mine promotion and dry up a source o f funds f o r development o f worthwhile p r o p e r ties.  The chance f o r a s p e c u l a t i v e g a i n must be r e t a i n e d ; the  i n d i v i d u a l promoter o r s p e c u l a t o r statutory information  i s alone r e s p o n s i b l e once the  has been made p u b l i c .  Meanwhile, " . . . i t must be r e g r e t f u l l y admitted  that  a r e c i t a l o f the f a c t s , even when emphasized, seldom seems t o deter the s m a l l s p e c u l a t o r the b e l i e f t h a t  from buying, i f he i s imbued w i t h  'they* a r e going t o advance the p r i c e o f the  shares and t h a t he w i l l have speedy a c t i o n i n unloading h i s stock a t a h i g h e r p r i c e w i t h i n a r i d i c u l o u s l y s h o r t  time."  1  Securities  Regulation Since the  primary purpose of  incorporating  c a p i t a l from the  general public  company i s t o o b t a i n  a primary d i s t r i b u t i o n of comply w i t h the it  resides.  trading  treasury  securities regulations  I n Canada t h e  i n s e c u r i t i e s by a dealer,  individuals  as  Also,  primary d i s t r i b u t i o n to  This  means t h a t  issuer but  written effect all  by  for  the  f x l i n g by  the  sell  required  to  state  i s to  or  a securities dealer.  in British  C o l u m b i a on  A  statutory  i f the  a r e g i s t r a t i o n under the  unless  information  Commission.  regulation  listed  Securities  regis-  a  security-  the  public,  o f f e r i n g i s under-  February 1st,  s e c u r i t i e s , both  prohibit  is prohibited  Securities  new  i n which  security-issuer.  i t s stock d i r e c t l y to  register  through  companies u n l e s s  public  required  public  company must  a m i n i n g company must r e g i s t e r as  underwriters of  hold  the  f o r t h the  i f i t wishes to  i t i s not  and  broker, broker-dealer,  a prospectus s e t t i n g been accepted  of  the  general practice  tered  has  shares,  a  Act  1965, and as  brought  into  requires unlisted, a  that must  broker-dealer,  3  non-trading. of  the  The  e f f e c t has  b e e n an  Commission o v e r u n e t h i c a l  improvement i n t h e  u n d e r w r i t i n g and  control  marketing  practices. The closure  p r o s p e c t u s must c o n t a i n  regarding  f o r which the  the  security  funds are  t o be  t o be used.  full,  true,  offered  and  The  and the  Securities  plain  dis-  purposes Commission  i n B r i t i s h Columbia i s g i v e n v e r y broad d i s c r e t i o n a r y powers i n a c c e p t i n g f o r f i l i n g the p r o s p e c t u s , f i n a n c i a l  statements,  and engineer's r e p o r t submitted in. support o f an a p p l i c a t i o n for  primary d i s t r i b u t i o n .  I f i n i t s judgment these documents  c o n t a i n f a l s e or d e c e p t i v e statements o r i n d i c a t e t h a t an e x o r b i t a n t c o n s i d e r a t i o n has been p a i d f o r p r o m o t i o n a l or  purposes  f o r the a c q u i s i t i o n o f p r o p e r t y , the Commission must r e f u s e  the f i l i n g o f the p r o s p e c t u s .  A l s o , where i t i s obvious  that  the proceeds o f the o f f e r i n g p l u s the o t h e r r e s o u r c e s o f the company are i n s u f f i c i e n t t o accomplish the o b j e c t s s t a t e d i n the p r o s p e c t u s , or where the necessary escrow agreement has been entered i n t o , the Commission may In  not  r e f u s e the p r o s p e c t u s .  a d d i t i o n , the Commission i s empowered t o l a t e r suspend p r i -  mary d i s t r i b u t i o n t o the p u b l i c i f i t i s subsequently l e a r n e d t h a t the prospectus i s not i n accordance w i t h the of ive  the A c t .  requirements  T h i s prospectus must be d e l i v e r e d t o the p r o s p e c t -  purchaser b e f o r e d e l i v e r y o f the w r i t t e n c o n f i r m a t i o n o f  s a l e o f the s e c u r i t y , i . e . , w i t h i n t h r e e days o f the date o f sale.  I n " c o n t r a s t t o the d i s c r e t i o n a r y powers o f the B.  C.  S e c u r i t i e s Commission, the S e c u r i t i e s and Exchange Commission (SEC) i n the U n i t e d S t a t e s must accept f o r f i l i n g a p r o s p e c t u s which makes f u l l , facts.  t r u e , and p l a i n d i s c l o s u r e o f a l l m a t e r i a l  A l l prospectuses i s s u e d under the j u r i s d i c t i o n o f the  SEC must c a r r y the warning, have not been approved  i n b o l d type, "These s e c u r i t i e s  or disapproved by the S e c u r i t i e s  and  Exchange Commission nor has the Commission passed upon the a c c u r a c y or adequacy of t h i s p r o s p e c t u s . to  Any r e p r e s e n t a t i o n  the c o n t r a r y i s a c r i m i n a l o f f e n c e . "  C e r t a i n exemptions from r e g i s t r a t i o n and f i l i n g  are  p r o v i d e d by the B. C. S e c u r i t i e s A c t t o f a c i l i t a t e s p e c i a l types of  primary d i s t r i b u t i o n s .  A company i s not r e q u i r e d t o seek  r e g i s t r a t i o n as a s e c u r i t y i s s u e r o r t o f i l e a p r o s p e c t u s when making an o f f e r of a d d i t i o n a l s e c u r i t i e s o f i t s own the h o l d e r s o f i t s s e c u r i t i e s , commonly known as a o f f e r i n g , p r o v i d e d no commission  i s paid.  n e g o t i a b l e promissory notes o f commercial  issue to "rights"  A l s o , the i s s u e o f paper maturing  not  more than a y e a r from the date o f i s s u e i s p a r t i a l l y exempt from the requirements o f the A c t , as i s the i s s u e by p r i v a t e companies o f s e c u r i t i e s t o o t h e r than the g e n e r a l p u b l i c .  Perhaps  the most important exemption  from f i l i n g a  p r o s p e c t u s a p p l i e s t o s e c u r i t i e s l i s t e d and posted f o r t r a d i n g on a r e c o g n i z e d s t o c k exchange.  Here the c o n t r o l over companies  d e s i r i n g t o r a i s e funds from the p u b l i c i s d e l e g a t e d t o the stock exchange, and the i s s u i n g company must comply w i t h the f i l i n g requirements and t r a d i n g r u l e s o f the exchange. Canada the p r o v i n c i a l s e c u r i t i e s commissions extend  In  recognition  at  t h e i r p l e a s u r e o n l y t o the major s t o c k exchange i n t h e i r  spective provinces, although tended  t o i s s u e s t r a d e d on  shown t o h a v e m e r i t and to  the  occasionally recognition i s  other  the promoters are  not  listed  s t o c k e x c h a n g e a r e t r a d e d on  offices,  i n w h i c h t r a d e s a r e made on  market o f the exchange.  The  t a n t t o neophyte mining on  public actions one  an  exchange b u t  seller OTC  the  i n the  shares  securities  desiring  o f the  firm,  sale of this  (OTC)  lines  market.  joining  the b a s i s  of auction impor-  s e a s o n e d enough f o r  to raise  funds  company w i l l  either  from the  general  i s prepared  to a c e r t a i n  t o buy  which  an  t h e m a r k e t and  A l l trades i n the  unlisted  or  will  actively  clients any  shares  l i m i t e d percentage  assistance of a broker  d i s t r i b u t i o n by  in controlling stock.  The  handled  T h i s means t h a t i t w i l l t o i t s own  list-  Trans-  g e n e r a l l y be  as a g e n t o r p r i n c i p a l ,  company's s h a r e s  t o i t , a t l e a s t up  stock outstanding.  t h e new  recognized  market i s p a r t i c u l a r l y  t o o t h e r s e c u r i t y h o u s e s , and  during a primary tial  a  t o f u r t h e r the development o f t h e i r p r o p e r t i e s .  promote the  offered  acceptable  i n c o n t r a s t t o the  companies not  "make a m a r k e t " i n t h a t s t o c k .  and  issue i s  t o be  the over-the-counter  n e g o t i a t i o n b e t w e e n b u y e r and  by  f o r t r a d i n g on  i s a v a s t , amorphous n e t w o r k o f t e l e p h o n e  brokers'  ing  found  ex-  commission.  Securities  This  e x c h a n g e s where t h e  re-  of  dealer  company i s  essen-  providing orderly issue of OTC  market a r e s u b j e c t t o  the  27 regulations o f the securities  Listing  on a S t o c k  commissions o u t l i n e d p r e v i o u s l y .  Exchange  Once a m i n i n g  company h a s become e s t a b l i s h e d a n d h a s  gained  a p l a c e i n t h e community,  listed  f o r t r a d i n g on a r e c o g n i z e d  many r e a s o n s  fordesiring  p r o v i s i o n o f a ready the  shareholder  listing  pany,  not the l e a s t  o f which a r e the  However, one o f t h e m a j o r  on a s t o c k exchange, e s p e c i a l l y  i s the opportunity to effect  i s a contentious  practice  There a r e  base, and t h e i n c r e a s e d s t a t u r e which  t h e company's s t o c k t h r o u g h This  s t o c k exchange.  market f o r s h a r e h o l d e r s , broadening  gives to the security. of  this,  i t may w i s h t o h a v e i t s s h a r e s  the f a c i l i t i e s  advantages com-  distribution of  o f t h e exchange.  i s s u e i n Canada a t t h e moment,  i s not permitted  listing  f o r a mining  a primary  of  i n the United States.  and t h e  However, i t  has  been t h e source  tal  needed t o f i n a n c e t h e e a r l y e x p l o r a t i o n and development o f  new p r o s p e c t s  of a large p o r t i o n o f the speculative c a p i -  and t h u s  Bearing  s h o u l d n o t be l i g h t l y  i n mind t h a t a l l c a n d i d a t e s  s t o c k exchange a r e d i f f e r e n t  forlisting  a n d must b e e v a l u a t e d  some o f t h e f e a t u r e s o f t h e i d e a l First,  dismissed.  individually,  a p p l i c a t i o n might be i n d i c a t e d .  there should be a working c a p i t a l p o s i t i o n  $50,000 i n t h e company t r e a s u r y .  on a  An u p - t o - d a t e  of at least  engineering  r e p o r t o n t h e company's p r o p e r t i e s i s r e q u i r e d , i n d i c a t i n g t h e  the  feasibility  gram and  of a continued  the estimated  e x p l o r a t i o n and  c o s t o f such  company must f u r n i s h a s h a r e h o l d e r 200  development  a program. list  Third,  the  naming a t l e a s t  150  s h a r e h o l d e r s , w i t h a wide d i s t r i b u t i o n o f h o l d i n g s .  title  t o t h e p r o p e r t i e s must b e  established.  pro-  to  Clear  P r o o f must b e  g i v e n t h a t t h e p r o p e r t i e s were a c q u i r e d f r o m b o n a f i d e p r o s -  | I  i  t  \  pectors or developers,  and  not  acquired at exorbitant p r i c e s  f r o m d i r e c t o r s o f t h e company. p o s i t i o n must s t i l l Finally, further  Sixth,  a reasonable  escrow  r e m a i n i n "the h a n d s o f t h e o r i g i n a l  t h e company must p r e s e n t financing, should  j  i  >  vendors.  an a c c e p t a b l e p r o p o s a l  for  development o f i t s p r o p e r t i e s warrant  4 same. In a d d i t i o n t o the applying  for listing  on  tion—to  with  the  share at  forth a l l this  brokers,  public—the  the  capital,  The  and  on  market.  r u l e s o f the The  listing  the  ex-  statecircula-  interested  fact  a l l of i t s authorized  t h a t not a l l o f i t i s i s s u e d  This requirement  markets from e x i s t i n g  listing  to acquaint prospective investors  d e s p i t e the  of l i s t i n g .  OTC  company  i n f o r m a t i o n i s g i v e n wide  company must l i s t  two  the  the  f i n a n c i a l p r e s s , and  purpose being  facts.  the time  t o abide by  to supply current information.  ment s e t t i n g  the  a s t o c k e x c h a n g e must e n t e r a  agreement whereby i t agrees c h a n g e and  above r e q u i r e m e n t s ,  i n the  Before  i s designed  same s t o c k — o n  the  to  prevent  exchange  e n t e r i n g i n t o a major t r a n s a c t i o n .  the l i s t e d company must submit a f i l i n g statement  and o b t a i n  p e r m i s s i o n o f the F i l i n g Committee o f the Exchange. a p p l i e s e s p e c i a l l y t o the i s s u e o f new  securities.  This About h a l f  of the companies l i s t e d on the Toronto Stock Exchange are exempt from t h i s f i l i n g requirement,  but i n s t e a d i s s u e q u a r t e r -  l y progress r e p o r t s . ^  T h i s f i l i n g statement  i s expressly i n  l i e u o f the prospectus  r e q u i r e d by the S e c u r i t i e s A c t s o f most  provinces.  Thus i t may over mining of  be seen t h a t two  companies r a i s i n g funds  securities.  forms o f c o n t r o l  exist  from the p u b l i c by the s a l e  I f the company's s t o c k i s not l i s t e d on a  r e c o g n i z e d s t o c k exchange, the company f a l l s  d i r e c t l y under  the c o n t r o l o f the S e c u r i t i e s Commission; i t may  be r e q u i r e d  t o r e g i s t e r as a s e c u r i t y i s s u e r , and must submit an ^acceptable prospectus b e f o r e s e l l i n g of  i t s stock.  However, once the  shares  the company have been l i s t e d on an exchange and c a l l e d f o r  t r a d i n g , the exchange accepts complete r e s p o n s i b i l i t y f o r these securities.  The exchange may  suspend from t r a d i n g or  delist  a company which does not comply w i t h the r u l e s or where the exchange has reason t o b e l i e v e t h a t the s t o c k i s b e i n g manipul a t e d t o the detriment o f the s h a r e h o l d e r s .  The a c t i o n s o f the  exchange, i n t u r n , must meet the a p p r o v a l o f the S e c u r i t i e s Commission, but t h e r e i s n e a r l y always complete  concurrence.  T h i s form o f d u a l r e g u l a t i o n extends t o the r e l e a s e from escrow o f vendor s t o c k d u r i n g the development o f a mining property.  F o r u n l i s t e d companies i n the p r o c e s s o f - p r i m a r y  d i s t r i b u t i o n o f i t s t r e a s u r y shares t o the p u b l i c , the B. C. S e c u r i t i e s Commission has adopted the p o l i c y o f the r e l e a s e from escrow o f one vendor share f o r each t r e a s u r y share s o l d t o the p u b l i c .  The purpose o f t h i s i s t o ensure t h a t the com-  pany i s going ahead w i t h i t s development program b e f o r e p e r m i t t i n g the vendors t o p r o f i t from the s a l e o f t h e i r s t o c k .  The  Vancouver Stock Exchange has a somewhat d i f f e r e n t p o l i c y on the r e l e a s e o f escrowed s t o c k o f l i s t e d companies. t h a t 90 days a f t e r l i s t i n g ,  This provides  the Exchange w i l l r e l e a s e 15 p e r c e n t  o f the escrow shares pro r a t a t o the vendors, and t h a t each 90 days t h e r e a f t e r a f u r t h e r 15 p e r c e n t w i l l be r e l e a s e d s u b j e c t t o review a t each due date.  Exceptions t o t h i s r e l e a s e would  be made where the company i s i n the p r o c e s s o f f i n a n c i n g or i f the p r o p e r t y has proved w o r t h l e s s .  T h i s l a t t e r p o l i c y has tended t o p l a c e a more r e a l i s t i c v a l u e upon vendor s t o c k h e l d i n escrow by a s s u r i n g the p r o s p e c t o r t h a t he can expect t o r e c e i v e p o r t i o n s o f h i s shares a t more o r l e s s s p e c i f i e d i n t e r v a l s , p r o v i d e d the p r o p e r t y responds t o development.  A l s o , where the p r o p e r t y does not  warrant f u r t h e r development and the c l a i m s a r e dropped by the  company, t h e vendor s t o c k not r e l e a s e d from escrow i s r e t u r n e d to the treasury.  Methods o f S e l l i n g E q u i t y S e c u r i t i e s A mining company d e s i r i n g t o r a i s e funds from t h e g e n e r a l p u b l i c by t h e s a l e o f i t s common s t o c k may do so i n a v a r i e t y o f ways.  I t may r e g i s t e r i t s e l f as a s e c u r i t y i s s u e r  and o f f e r i t s s t o c k d i r e c t l y t o t h e p u b l i c .  The company may  o f f e r i t s existing.shareholders "rights" t o subscribe f o r addit i o n a l stock.  I t may g i v e c a l l s upon i t s c a p i t a l s t o c k t o  market o p e r a t o r s f o r s p e c i f i e d p e r i o d s , o r i t may pay a broker a s e l l i n g commission f o r any s t o c k s o l d , on a "best basis.  efforts"  However, t h e most common method o f p u b l i c mine f i n a n c i n g  i s t h e f i r m u n d e r w r i t i n g o f a s p e c i f i e d b l o c k o f stock, u s u a l l y w i t h attendant  The  o p t i o n s due a t c e r t a i n  intervals.  f i r s t method, t h a t o f d i r e c t o f f e r i n g s by t h e com-  pany, has been used o c c a s i o n a l l y i n C a n a d a — w i t h success.  indifferent  Those w i s h i n g t o e l i m i n a t e i n t e r m e d i a r i e s a r e o b l i g e d  t o a d v e r t i s e f r e e l y i n t h e d a i l y p r e s s and mining p u b l i c a t i o n s , s t r e s s i n g t h e advantages t o t h e company which r e c e i v e s a l l o f the money r a i s e d .  A l s o , t h e company must supply t h e p u b l i c w i t h  a c o n s t a n t stream o f "news" p u r p o r t e d l y r e p o r t i n g t h e l a t e s t developments on t h e p r o p e r t y . has been c o n s t a n t l y underrated,  "The p u b l i c , whose i n t e l l i g e n c e reasons  t h a t glowing  ads a r e  superfluous  when a p r o p e r t y  i s really  that reputable mining people  attractive.  c a n , a n d do, r e a d i l y  t u r e c a p i t a l when t h e p r o p e r t y  i s r e a l l y hot.  appeals  are confined to small prospecting  quiring  no more t h a n  Rights source  $25,OOO."  o f f e r i n g s a r e used w i t h  has been p a r t i a l l y  developed  funds t o b r i n g i t t o p r o d u c t i o n .  at prices related  stock.  The r i g h t s  u s u a l l y where a  case  ending  offering  as a promising  and r e q u i r e s a d d i t i o n a l  Since  assessable  stocks are  for listing  upon t h e  t o i t s share-  t o t h e c u r r e n t market p r i c e o f i t s  offering  that shareholders  direct  frequency  t h e company must i s s u e t r e a s u r y s h a r e s  holders  in  Usually  ven-  syndicates r e -  some  p r a c t i c a l l y unknown a n d a r e n o t a c c e p t e d exchanges,  obtain  7  o f speculative mining c a p i t a l ,  prospect  I t knows  i s similar  t o t h e assessment  c o n t r i b u t e more c a p i t a l p r o r a t a — i n  up w i t h more p i e c e s o f p a p e r .  call this  However, t h e r i g h t s  i s s u p e r i o r i n p r a c t i c e b e c a u s e t h e " r i g h t s " must b e  t r a n s f e r a b l e as a c o n d i t i o n o f s t o c k exchange l i s t i n g ,  and t h e  shareholder  sell his  "rights." retaining maintain  not wishing The r i g h t s  t o c o n t r i b u t e more c a p i t a l may  offering  o f course  has the advantages o f  c o n t r o l i n e x i s t i n g hands, p e r m i t t i n g s h a r e h o l d e r s their  degree o f p a r t i c i p a t i o n  i n potential profits,  e x e m p t i n g t h e company f r o m n e e d t o r e g i s t e r pectus  provided  no c o m m i s s i o n  and f i l e  to and  a pros-  i s p a i d on t h e t r a n s f e r o f s t o c k .  33 The  securities offered  t o s h a r e h o l d e r s b y way o f  " r i g h t s " may n o t a l w a y s b e s h a r e s o f common s t o c k . ally  t h e company may i s s u e  tures,  usually  preferred  convertible  Occasion-  s h a r e s o r income d e b e n -  i n t o common a t a l a t e r d a t e .  permits t h e s h a r e h o l d e r t o s u b s c r i b e t o an a d d i t i o n a l p a r t i c i p a t i o n with a preferred and  income.  ible  Also,  with  agement c o n t r o l p o s i t i o n .  if  A s a r u l e , however, t h i s f o r m o f common  the conversion p r i v i l e g e i s worth anything a t a l l ,  or package c o n s i s t i n g  shares a r e u s u a l l y  The u n i t  t h e common s h a r e s a r e f r e e ,  incentive  offered  i s generally  or nearly  f o rshareholders t o exercise  Examples o f r i g h t s  (BRINCO), a n d M a t t a g a m i L a k e M i n e s .  scribe  b e made.  plus  constituting  "rights."  additional  Newfoundland  Corp.  The G r a n d u c o f f e r i n g i n d e v e l o p m e n t work on i t s  p r o p e r t y u n d e r t h e LeDuc G l a c i e r b e f o r e a p r o d u c t i o n could  share  o f f e r i n g s b y m i n i n g companies i n  r e c e n t y e a r s a r e Granduc Mines, B r i t i s h  M a r c h 1962 was t o f i n a n c e  the  p r i c e d so  so, thus their  stock;  as a u n i t  o f one d e b e n t u r e o r p r e f e r r e d  number o f common s h a r e s .  that an  to assets  l e s s d i r e c t c h a l l e n g e t o i t s man-  i s m e r e l y a n i n d i r e c t method o f s e l l i n g  debentures o r p r e f e r r e d  a  respect  limited  i t p r o v i d e s t h e company w i t h a more f l e x -  form o f f i n a n c i n g  offering  position with  This  decision  E a c h s h a r e h o l d e r was g i v e n t h e r i g h t t o s u b -  f o r one a d d i t i o n a l  share f o r each four  held,  at a price  34 of  $2.50 p e r s h a r e .  shareholder with  Newmont M i n i n g  a n d manager o f G r a n d u c , t o o k  another  450,605 s h a r e s  h o l d e r s and t h e u n d e r w r i t e r . three shares offering  o f 2,070,793 s h a r e s  taken  up i t s 549,395  The BRINCO o f f e r i n g  being underwritten  t o p u r c h a s e one u n i t  $100.00 p e r u n i t . 6 percent  Each u n i t  secured  major  shares,  up b y t h e o t h e r  In t h e Mattagami Lake o f f e r i n g  given the r i g h t  value,  being  the then  share-  consisted of  f o r e a c h t e n h e l d , a t $1.50 p e r s h a r e ,  ance f e a t u r e .  at  Corporation,  the t o t a l  as an  insur-  shareholders  f o r e a c h 40 s h a r e s  were  held  c o n s i s t e d o f one $100.00 p a r  income d e b e n t u r e o f 12 y e a r o f $1.00 p a r v a l u e .  maturity,  plus  f o u r common s h a r e s  The p r o c e e d s o f  this  o f f e r i n g were u s e d t o f i n a n c e t h e c o n s t r u c t i o n o f t h e g  plant  a n d t o b r i n g t h e mine i n t o  production.  A f o r m o f mine f i n a n c i n g s i m i l a r ing  i n i t s effect  ization.  to the rights  on t h e p r e s e n t - s h a r e h o l d e r s  A company n e e d i n g  more f u n d s  i s the reorgan-  and unable  to s e l l i t s  own s t o c k b e c a u s e t o o much o f i t i s a l r e a d y o u t s t a n d i n g drastically  reduce the e q u i t y o f the present  issues the o l d shareholders  ten o l d shares  held.  presence  i n the mining  one new s h a r e  f o r cash.  which  f o r each, say,  The r e o r g a n i z e d company c a n t h e n  t o i s s u e t r e a s u r y shares  must  shareholders.  T h i s i s f o l l o w e d b y a c h a n g e o f name f o r t h e company, then  offer-  This procedure  proceed  explains the  m a r k e t o f s o many f i r m s whose names  b e g i n w i t h New,  North,  C o n s o l i d a t e d , or Canadian; mute  o f the s h a t t e r e d dreams o f s h a r e h o l d e r s who e q u i t y reduced  have seen t h e i r  to a f r a c t i o n of i t s o r i g i n a l value.  Where a mining  company does not wish to s e l l  as a s e c u r i t y i s s u e r or t o conduct stock, i t may  evidence  shares  a rights o f f e r i n g of i t s  s e l l through a s o - c a l l e d "broker," who  receives  a commission on the shares t h a t he s e l l s and sometimes a cont r i b u t i o n toward h i s s e l l i n g c o s t s .  Or the company may  give  c a l l s u p o n i t s c a p i t a l stock, g r a n t i n g market o p e r a t o r s -  the  p r i v i l e g e o f p u r c h a s i n g c e r t a i n q u a n t i t i e s o f i t s shares w i t h i n s t a t e d time l i m i t s a t predetermined  prices.  The c a l l  broker  then c r e a t e s a market f o r the s t o c k and d i s t r i b u t e s i t t o the p u b l i c a t advanced p r i c e s , the d i f f e r e n c e b e i n g the gross a c c r u i n g t o the b r o k e r .  profit  T h i s method of f i n a n c i n g i s c o n s i d e r e d  to be h i g h l y u n d e s i r a b l e . ^ "  0  By f a r the most common method f o r a mining  company t o  d i s t r i b u t e i t s shares t o the p u b l i c i s through a n e g o t i a t e d u n d e r w r i t i n g by an investment  f i r m or brokerage house.  The  u n d e r w r i t e r w i l l make a f i r m commitment t o purchase a b l o c k o f treasury stock at a s p e c i f i e d p r i c e .  In a d d i t i o n , he  may  arrange o p t i o n s on a d d i t i o n a l b l o c k s a t h i g h e r p r i c e s where these are p e r m i t t e d by the r e g u l a t o r y a u t h o r i t i e s .  In some  i n s t a n c e s the underwriter i s the o r i g i n a l promoter o f the  36 p r o p e r t y and firm  specializing  risks be  the mining  company; more o f t e n i t i s an  i n such  issues.  S i n c e he  has  o f the market p l a c e , the u n d e r w r i t e r ' s  to dispose of the  p r i c e which w i l l  through  may  yield  an a d e q u a t e  direct  agents.  market.  The  clients, ulative  and  the  stock.  market by  handled  by  The  i n the  proceed  up  the  stock.  to  repurchasing  any  be  the  facilities  responsibility may  be  delisted  to maintain  i n the  be  market  t r y to s t a b i l i z e at a  will of the  price  price.  by  on a  recognized  a member  The  broker  same t e c h n i q u e  the broker  has  a  an o r d e r l y m a r k e t s i n c e a o f the  com-  spec-  advance the p r i c e  is listed  handled  although  for infractions  OTC  telephoning  offered, although  o f the exchange.  used to c r e a t e i n t e r e s t ,  exchange,  circulars,  usually w i l l  Where t h e company's s t o c k  through  an  the  work  of the trade t o induce  c o n s i d e r a b l y below the c u r r e n t o f f e r i n g  s t o c k exchange, t r a d i n g w i l l  a  interests,  Hopefully, a r i s i n g  shares  will  "make a m a r k e t " i n t h e  f i r m commitment and  broker-dealer  on  a broker-dealer  u s i n g a l l the t r i c k s  r a p i d l y gobble  and  listed  d i s t r i b u t i n g promotional  interest  concern  t h e d i s t r i b u t i o n h i m s e l f o r may  dealer w i l l  pany's s t o c k by  chief  the  profit.  I f t h e company i s n o t  t h e o f f e r i n g w i l l be  assumed  s t o c k as q u i c k l y as p o s s i b l e , y e t a t  D e p e n d i n g upon h i s q u a l i f i c a t i o n s underwriter  independent  trading rules.  will  greater security This  p o i n t s up since  t h e a d v a n t a g e o f an  i t o b t a i n s w i d e r c o v e r a g e and  c o n t r o l l e d market.  u n l i s t e d market.  and  the  This i s i n d i r e c t  t h e U n i t e d S t a t e s , where s u c h  commitment o f s t o c k ,  a very  may  in this  have a l r e a d y s o l d  fortunate situation,  the r i s k of judged  and  l o s s on  one  i n v e n t o r y and  c o n t r a s t to the  30  time  selling  o f h i s own his  o p t i o n to take  commitments t h r o u g h way  there  may  be  frozen i n i l l i q u i d  and  the  thereby  i f he  has  o r he  the underwriter  assets.  can  may  I f the o f f e r i n g  will short  exercise  fulfill  his  Either  assumes no  i s s t i m u l a t i n g and  mis-  unsold  technically  risk.  the market i s  continue  p l a c e c o n s i d e r a b l e funds  f o r development purposes.  eliminates  open m a r k e t . ^  r e c e p t i v e , the underwriter  o p t i o n s and  be  can  on  This i s  the underwriter  down t r e a s u r y s t o c k , purchases  for his  l e f t w i t h an  he  I f t h e news f r o m t h e p r o p e r t y  his  course,  W i t h an o v e r s o l d p o s i t i o n ,  is a profit,  particularly  days t o pay  Of  t h e company's s t o c k and  stock.  situation  quantity of stock.  I f the market i s v e r y a c t i v e , continue  the  i f the market i s r e c e p -  the t r a n s a c t i o n .  have h i s c a p i t a l  the  are p r o h i b i t e d .  which e f f e c t i v e l y  the market, the u n d e r w r i t e r  with  yet  consequent d e c l i n e of  has  this  company,  t o an a c t i v e  distributions  U s u a l l y the underwriter  t i v e he  access  for a  I t i s e s p e c i a l l y u s e f u l today  l a r g e number o f i s s u e s l i s t e d  in  exchange l i s t i n g  to exercise  i n the  turns sour,  treasury the  underwriter  c a n wash h i s h a n d s o f t h e w h o l e a f f a i r  company a t t e m p t  to find  other  o r moribund companies l i s t e d ample e v i d e n c e stock  The  l e t the  number o f  defunct  i n t h e C a n a d i a n M i n e s Handbook i s  o f promotions t h a t never got beyond the  first  offering.  One  of the  severely c r i t i c i z e d to  financing.  and  the p u b l i c .  destroy  the  for  while  the  stock,  things  f o r which the m i n i n g market has  i s short s e l l i n g  I t has  been claimed  f i n a n c i n g o f a company.  short s e l l i n g i t serves  during primary  distribution  that short s e l l i n g This of course  tends to l i m i t  the  been  tends  i f not  to  true,  increasing price  a d e f i n i t e p u r p o s e by p l a c i n g a f l o o r  of under  17  t h e m a r k e t when t h e has to  gained be  in price,  and  to f a l l  off.  particularly  When a n  the  of the  "street,"  to  "bang" t h e  expectation of a decline.  ready,  stock or s e l l  I f the p r i c e  issue  i f i t i s thought  h i g h l y s p e c u l a t i v e , t h e r e are always people  parlance in  rapidly  issue starts  in  i t short  of the  stock  shorts w i l l  exert  does i n d e e d  d e c l i n e , the b u y i n g - i n  of the  stabilizing  effect  I f , however, t h e p r i c e  tinues to r i s e , cover will  the  on  the market.  short s e l l e r s  a  con-  i n d e s p e r a t i o n must e v e n t u a l l y  t h e i r p o s i t i o n s , and  the  resulting  seriously destabilize  the  market.  One  the  scramble  o f t h e p r o b l e m s f a c e d by. t h e  for  stock  exchange i s  t i g h t n e s s o f t h e m a r k e t when t h e p r o m o t e r does n o t make  the stock  available  f o r short s e l l i n g .  situation  can develop  manipulation  w h i c h may l e a d t o some o f t h e o l d - s t y l e  experienced  p r o m o t e r may e s t a b l i s h  When t h i s h a p p e n s a d a n g e r o u s  around the t u r n o f t h e century.  a corner  on t h e s t o c k by g a i n i n g  o f s o much o f i t t h a t t h e s h o r t s e l l e r s him  when t h e y a t t e m p t  they  are "cornered"  t o cover  control  a r e f o r c e d t o buy from  their positions.  a n d must s e t t l e  The  In e f f e c t ,  a t the p r i c e d i c t a t e d by  13 the  promoter. S i n c e t h e main p u r p o s e o f an u n d e r w r i t i n g  funds and  i n t h e company t r e a s u r y f o r t h e f i n a n c i n g o f e x p l o r a t i o n  development o f a p r o s p e c t ,  cluded ities  i n a l l agreements.  c e r t a i n r e g u l a t i o n s must b e i n -  These v a r y w i t h  the several secur-  commissions and a r e s l i g h t l y d i f f e r e n t  opposed t o u n l i s t e d quirements w i l l  companies.  illustrate  - An u n l i s t e d through  the nature  o f these  restrictions,  i n the other  jurisdictions.  company m a k i n g a p r i m a r y  distribution  a b r o k e r - d e a l e r must b e r e g i s t e r e d w i t h  Securities  C o m m i s s i o n a n d must f i l e  the r e q u i r e d i n f o r m a t i o n .  p a i d 50 p e r c e n t  the Ontario  a prospectus  setting  forth  The minimum f i r m u n d e r w r i t i n g i s  $5,000 a n d t h e minimum p r i c e  maximum  f o r l i s t e d as  An example o f t h e O n t a r i o r e -  which a r e followed r a t h e r c l o s e l y  be  i s to place  i s 10 c e n t s p e r s h a r e ,  w h i c h must  down a n d t h e r e m a i n d e r w i t h i n 60 d a y s .  s i z e o f an u n d e r w r i t i n g  i s one m i l l i o n  shares,  The  split  i n t o maximum s i z e b l o c k s o f 200,000 shares..  The o p t i o n p r i c e s  on  at least  s t o c k a b o v e t h e f i r m commitment must r i s e  cents p e r share thereafter  for  f o r e a c h b l o c k up t o a p r i c e o f 20 c e n t s ,  i n larger  tween b l o c k s  increments  f o r stock s e l l i n g  e x e r c i s i n g the f i r s t  writing,  up t o a s p r e a d  rising  o f 25 c e n t s b e -  a b o v e 80 c e n t s .  The t i m e  o p t i o n i s s i x months a f t e r  a n d t h r e e months f o r e a c h s u c c e e d i n g  Broker-Dealers  2-1/2  t h e under-  option.  A s s o c i a t i o n s e t s t h e maximum p r i c e  limit  The  to the public 14  according t o a schedule  based on t h e p r i c e  of the option.  In B r i t i s h Columbia o p t i o n s a r e n o t p e r m i t t e d listed  stock,  a l l underwritings  Superintendent found  o f Brokers  necessary  being  on un-  f i r m commitments.  The  has s t a t e d t h a t t h i s p o l i c y has been  because i t has been i m p o s s i b l e t o a d e q u a t e l y 1 c  c o n t r o l the use o f options  i n the unlisted  Where a company i s l i s t e d change,  i t i s exempt f r o m f i l i n g  s i o n b u t must p r o v i d e distribution commitment  a prospectus statement  i f r e q u i r e d by t h e Exchange.  with  Stock Ext h e Commis-  relating  to a  The minimum payable  The company may i s s u e no more t h a n  primary  firm  in full  one m i l l i o n  p e r d e a l , c o v e r i n g a l l o f f e r i n g s w i t h i n a three-month  period. price  on t h e T o r o n t o  i s $30,000 o r 15 c e n t s p e r s h a r e ,  immediately. shares  the f i l i n g  market.  Blocks  spreads  must b e no more t h a n  of at least  200,000 s h a r e s  5 cents p e r share  each,  with  up t o a p r i c e o f  50  cents per  share,  thereafter. on  the  The  10  c e n t s t o 70  share,  and  25  cents  E x c h a n g e s e t s t h e maximum d i s c o u n t a l l o w a b l e  f i r m commitment  c e n t below the market percent  cents per  from  the market p r i c e .  T h i s i s 25  f o r i s s u e s s e l l i n g b e l o w 50  f o r t h e r a n g e o f 50  c e n t s t o $1.00, and  cents,  10  per20  percent  above t h a t . ^  Every ation  u n d e r w r i t i n g a g r e e m e n t must c o n t a i n an  c l a u s e , which s t i p u l a t e s  reaches  a certain  level,  t h a t when t h e m a r k e t  the next  o p t i o n must be  c u r r e n t p o l i c y o f the Vancouver Stock t h e u n d e r w r i t e r t o t a k e up reaches  200  g r a n t e d on If  the next  taken  up.  No  and  price  extensions w i l l  i f the market i s above t h e o p t i o n  due,  The  o p t i o n when t h e m a r k e t  i t i s b e l o w , t h e u n d e r w r i t e r must t a k e up  o p t i o n when i t f a l l s  price  Exchange i s t o r e q u i r e  percent o f the o p t i o n p r i c e . option dates  acceler-  one  t h e Exchange w i l l  h a l f of extend  be  price. the  the  17 l x f e o f the other h a l f .  The  a l l o w t h e company t o s h a r e  i n some o f t h e b e n e f i t s o f a  m a r k e t and  to limit  purpose o f t h i s  some o f t h e p r o m o t i o n a l  p e r p e t r a t e d on m i n i n g  regulation  i s to  rising  excesses p r e v i o u s l y  companies d u r i n g t h e p r o c e s s  of  primary  distribution. P e r h a p s a comment on  importance  of  "news," o r  i n f o r m a t i o n r e g a r d i n g the development r e s u l t s  on  the  property,  during primary  the  d i s t r i b u t i o n w o u l d be  mining  useful at  this  point.  The  a mining  interest  prospect  o f the p u b l i c  i s a fleeting  i n f u s i o n o f news i t e m s , g r e s s r e p o r t s , and keep i t a l i v e .  of the p u b l i c  publicity-minded, be  put  almost  latest f o r the  portant  or sinking  an  pro-  information to  results  the  company  i n order to b o l s t e r  stock.  Some f i r m s a r e  the  very  purposes  i n mind.  This practice i s  t o t h e extreme o f  manufacturing  t h e o t h e r hand, t h e d e l i b e r a t e w i t h h o l d i n g o f  i n f o r m a t i o n from  as h a r m f u l  constant  t o t h e p o i n t t h a t a l l r e p o r t s seem t o  dangerous i f i t i s c a r r i e d On  of  t o make a m a r k e t i n a  c o n s t a n t p r e s s u r e on  issued with promotional  "news."  r e q u i r e s the  of t a n t a l i z i n g  A promoter attempting  t o r e l e a s e the  enthusiasm  t h i n g and  reports, d r i l l i n g  other t i d b i t s  company's s t o c k w i l l officials  assay  i n the s p e c u l a t i v e value  the s p e c u l a t i n g p u b l i c  may  im-  have  just  effect.  Apparently  skullduggery i n the mining  market i s not  a  p a r t i c u l a r l y modern i n v e n t i o n , h a v i n g b e e n p r a c t i c e d b y  the  ancients  century.  i n the mining  towns o f Germany i n t h e m i d - 1 6 t h  T h i s q u o t a t i o n o f A g r i c o l a ' s De the p o i n t .  Metallica  "For t o speak o f n o t h i n g e l s e ,  d e c e i t s which are p r a c t i c e d they e i t h e r  Re  i n buying  a d v e r t i s e the veins with  so t h a t t h e y can  sell  t h e y a r e w o r t h ; on  the shares  and  should  illustrate  but only of selling,  f a l s e and  those  i t i s said  imaginary  praises,  i n m i n e s a t o n e - h a l f more  t h e c o n t r a r y , t h e y sometimes d e t r a c t  t h e e s t i m a t e o f them s o t h a t t h e y c a n b u y  shares  for a  than  from  small  p r i c e . "•  The  LO  p r i c e o f an i n d i v i d u a l m i n i n g s t o c k w i l l  c o u r s e be s e n s i t i v e t o g e n e r a l c o n d i t i o n s in addition  i twill  company's own  circumstances.  stock i s usually lies as  show some c u r i o u s  influenced  i n t h e market, b u t  f l u c t u a t i o n s b a s e d on t h e  The m a r k e t f o r a n  exploration  b y t h e p r o m o t e r , whose m a i n  I f t h e r e s u l t s o f development on t h e p r o p e r t y a r e  encouraging, only  the p r i c e o f the stock w i l l  continue r i s i n g  as long  tend t o r i s e ,  q u a l i t i e s o f an a c c e l e r a t o r  inputs  of fresh  present  a prospect,  results  range o f f l u c t u a t i o n s  has  about  the stock a t a o f l o t t e r y on t h e  i n exploration  stocks  tends  interested  t h a n f o r t h o s e w h i c h a r e more i n t e r -  Once i t becomes c l e a r t h a t  make a mine, t h e s t o c k p r i c e u s u a l l y this  excited  f o r t h o s e companies w h i c h a r e h e a v i l y  i n mining.  continual  hole.  in promotional a c t i v i t i e s ested  l a r g e l y on s e l l i n g  a n d s o t h e m a r k e t becomes a k i n d  o f each d r i l l  t o be g r e a t e r  requiring  Once t h e p u b l i c h a s become  i t i s gambling  The  function,  some o f  "news" t o a d v a n c e t h e p r i c e o r e v e n t o m a i n t a i n  level.  quick p r o f i t  but w i l l  as r e s u l t s c o n t i n u e t o improve.  Because o f t h i s t h e p r i c e o f a m i n i n g s t o c k e x h i b i t s  its  interest  i n a d v a n c i n g t h e p r i c e a n d s e l l i n g h i s commitment as s o o n  possible.  the  of  apparent c o n t r a d i c t i o n  i s that  been r e d u c e d and t h e r e f o r e  a property  declines.  The r e a s o n f o r  the element o f  the incentive  will  uncertainty  t o gamble h a s  also  been reduced. going  t o be  Only  a r e a l bonanza i s the p r i c e  the previous highs tion,  of the  likely  to r i s e  exploration period.  and  s t o c k b a s e d on p r o j e c t e d m e t a l  ore reserves.  a price higher  than  the  above  Once i n p r o d u c -  i t i s p o s s i b l e to c a l c u l a t e a reasonable  f o r a mining costs,  i f i t becomes e v i d e n t t h a t t h e mine i s  present  prices,  value  operating  However, t h e m a r k e t u s u a l l y p l a c e s theoretical present value  mines b e c a u s e t h e r e i s s t i l l  an  on  operating  element o f s p e c u l a t i o n about  19 possible  f u t u r e i m p r o v e m e n t s i n t h e company's The  price  at which a mining  t h e open market o n l y i n d i r e c t l y company.  First,  an a c t i v e m a r k e t may o p t i o n s on  at which a mining  h a v e some b e a r i n g on  major  The  finances of  of a proposed  shareholder  under-  especially  also influence  and  offering may  most m i n i n g  g e n e r a l l y have cause t o c o n s i d e r the wishes o f  their  shareholders.  Many e x a m p l e s c o u l d be  in  i f the e s c a l a t o r  l e v e l o f market p r i c e s  relations,  from  t o e x e r c i s e more o f  company c a n make a r i g h t s the  the  A rising price  market p r i c e w i l l  Finally,  on  t h e maximum d i s c o u n t  exchange.  t h e company's s t o c k ,  to i t s shareholders.  panies  the  the  cause the underwriter  c l a u s e comes i n t o p l a y . the p r i c e  affects  r e s t r i c t i o n on  the market p r i c e p e r m i t t e d by  his  company's s t o c k s e l l s  i t i n f l u e n c e s the p r i c e  w r i t i n g because of the  position.  given of underwriting  and  com-  o p t i o n agreements e n t e r e d funds  i n t o by mining  f o r p r o p e r t y development.  ization  companies  However, due t o t h e s t a n d a r d -  o f s e c u r i t y commission and s t o c k exchange r e g u l a t i o n s ,  nearly a l l o f these  a g r e e m e n t s f o l l o w t h e same g e n e r a l p a t t e r n .  One example i s t h a t o f S i l v e r Ontario  i n 1963 t o d e v e l o p  Town M i n e s L t d . , i n c o r p o r a t e d i n  a s i l v e r prospect  near Cobalt.  company i n M a r c h 1963 n e g o t i a t e d a n u n d e r w r i t i n g 400,000 s h a r e s cents;  were t o b e p u r c h a s e d  200,000 s h a r e s  17-1/2 c e n t s .  i n a l l o f these  200,000 s h a r e s  22-1/2 c e n t s  i n a new u n d e r w r i t i n g ,  As o f November  800,000 s h a r e s  options being  exercised  L a t e r , d u r i n g 1964, t h e  a t 20 c e n t s  a n d 200,000 s h a r e s a t  netting the treasury  1964, o p t i o n s w e r e o u t s t a n d i n g  at p r i c e s ranging  on  f r o m 25 t o 40 c e n t s p e r  2 0  In t h e U n i t e d S t a t e s p r i m a r y company s h a r e s  distribution  strictions  a r e much more o n e r o u s t h a n  the e f f e c t  seeking  of  mining  to the p u b l i c i s subject to the regulations o f  t h e SEC a n d v a r i o u s s t a t e " B l u e S k y " C o m m i s s i o n s .  had  a t 10  a t 12-1/2 c e n t s , a n d 200,000 s h a r e s a t  company s o l d  share.  i n which  by the underwriter  $130,000 p l a c e d i n t h e t r e a s u r y .  $85,000.  The  D e v e l o p m e n t work on t h e p r o p e r t y a n d a r e c e p t -  i v e market r e s u l t e d and  needing  those  o f discouraging the mining  development funds  through  These r e -  i n Canada and have  c l a i m owner  public financing.  from The SEC  46 regulations  exempt i s s u e s o f statement  Notification  ( f o r m S-36-1) u n d e r R e g u l a t i o n A.  sales  filing  i t and  of a prospectus  l i t e r a t u r e must be  filed  merely  from  registration  issues the  with  $300,000 o r l e s s  i s not  and  to  c a r e as a f u l l p r o s p e c t u s , be  For  registration the d e t a i l e d ,  such  required, but a l l  c l e a r e d w i t h t h e SEC.  use  effort  so t h a t t h e r e i s l i t t l e  r e q u i r e d and  statement accurate  and  time  lost  advantage  i n preparing a  the expense i n v o l v e d i n o b t a i n i n g  i n f o r m a t i o n r e q u i r e d by  seriously discouraged  underestimate o f the  are high  t h e use  o f the  the  Commission  "Long Form."  his financing  small issues;  i n one  i n order to  of the  that a stock o f f e r i n g  a thoroughly  accounting  $300,000 i s s u e . through  u n s a t i s f a c t o r y procedure  mine f i n a n c i n g h a v e a p p e a r e d  permit  commissions  recent tungsten  t h e s e expenses, p l u s l e g a l and  amounted t o 34 p e r c e n t the b e l i e f  requirements  Further,  temptation  " S h o r t Form." U n d e r w r i t i n g d i s c o u n t s and  f o r such  promotion,  for  This  same t h o r o u g h n e s s  t h e v e n d o r i s o f t e n u n d e r c o n s i d e r a b l e p r e s s u r e and to  of  gained.  The  has  a  require a Letter  o f f e r i n g c i r c u l a r must be p r e p a r e d w i t h t h e and  filing  mine  fees,  So w i d e s p r e a d  legal  t h a t few  channels  is  is such  registrations  i n recent years.  Those u s i n g 21  the L e t t e r o f N o t i f i c a t i o n have u s u a l l y been Primary  distribution  of securities  ultraspeculative. through  the  stock  exchanges i s n o t p e r m i t t e d  i n the United  r e p o r t o f t h e Kimber Committee f i l e d recommended t h a t p r i m a r y  distribution  States.  The r e c e n t  i n the Ontario Legislature t h r o u g h t h e exchange be  22 stopped.  The T o r o n t o  Stock  Exchange i n i t s b r i e f  Committee g a v e a s i t s . , c o n s i d e r e d b u t i o n s h o u l d be r e t a i n e d . of  manipulation  persons and risk  opinion that primary  While  and t h e d i f f i c u l t y  from u s i n g t h e f a c i l i t i e s  underwriting,  t h e TSE f e l t  to the  i t recognized  distri-  t h e dangers  of preventing  undesirable  o f t h e exchange f o r p r o m o t i o n  t h a t t h e advantages o f p r o v i d i n g  capital  t o t h e i n d u s t r y and a f r e e m a r k e t f o r s h a r e h o l d e r s 23 f a r outweighed any o f t h e disadvantages cited. Despite  during primary  t h e abuses o f u n d e r w r i t i n g  distribution  and p r o m o t i o n  t o t h e p u b l i c , and t h e u n d e n i a b l y  h i g h m o r t a l i t y r a t e among s p e c u l a t i v e m i n i n g c o m p a n i e s , t h e "penny d r e a d f u l s " o f t h e m i n i n g m a r k e t h a v e b e e n a s o u r c e o f l a r g e sums o f money f o r p r o s p e c t i n g a n d d e v e l o p m e n t . tionably the underwriting has  estimated  dealer  and b r o k e r a g e c o s t s a r e h i g h .  Cork  t h a t o f t h e t o t a l funds r e c e i v e d by t h e b r o k e r -  i n the primary  distribution  a v e r a g e p e r h a p s 60 p e r c e n t and  Unques-  o f an u n l i s t e d  stock,  i s absorbed by d i s t r i b u t i o n  d e a l e r ' s p r o f i t a n d o n l y 40 p e r c e n t  on t h e  costs  goes t o t h e c o r p o r a t e  24 treasury. fully  spent  W i t h o u t d o u b t some o f t h e l a t t e r money xs w a s t e on i l l - c o n c e i v e d  p r o g r a m s and w i t h o u t  adequate  48 supervision. method, and  However, some m i n e s h a v e b e e n d e v e l o p e d b y i t seems c e r t a i n  that without  the a i d o f  this  wildcat 25  f u n d s , much t e r r i t o r y w o u l d r e m a i n The  m i n i n g m a r k e t i s an e s s e n t i a l  t o d a y and w i l l source o f funds  Footnotes  remain  vitally  f o r mining  t o Chapter  unexplored  indefinitely.  feature of the  important  industry  i n the f u t u r e as  e x p l o r a t i o n and  a  development.  4;  1 W. F. B o e r i c k e and C. C. B a i l e y , "Mine F i n a n c i n g , " E c o n o m i c s o f t h e M i n e r a l I n d u s t r i e s , New Y o r k , AIME, 1959, p . 264. 2 H. S. B r a y , " S e c u r i t i e s A d m i n i s t r a t i o n i n O n t a r i o , " The Commerce J o u r n a l , T o r o n t o , U n i v e r s i t y o f T o r o n t o Commerce Club, 1964. 3 W. S. I r w i n , S e c u r i t i e s R e g u l a t i o n and t h e I n v e s t o r , an address forming p a r t o f a s e r i e s o f l e c t u r e s sponsored by the B. C. a n d Y u k o n Chamber o f M i n e s , V a n c o u v e r , B. C , M a r c h 4, 1965. 4 J . A. Van L u v e n , The V a n c o u v e r S t o c k E x c h a n g e and M i n e F i n a n c i n g , an a d d r e s s f o r m i n g p a r t o f t h e a b o v e s e r i e s , V a n c o u v e r , B. C , M a r c h 9, 1965. 5 J . P. W i l l i a m s o n , S e c u r i t i e s R e g u l a t i o n i n Canada, U n i v e r s i t y o f T o r o n t o P r e s s , 1960. 6  Van  Toronto,  L u v e n , op. c i t .  7 A r n o l d H o f f m a n , F r e e G o l d , New v i c e , 1947, p . 326.  York,  8 F i n a n c i a l Post Corporation Service, Toronto, Maclean-Hunter, 1962.  A s s o c i a t e d Book S e r -  Record  o f New  Issues,  49 9 W. K e i t h Buck, S o u r c e o f C a p i t a l Funds f o r t h e M i n e r a l I n d u s t r y , Ottawa, D e p t . o f M i n e s and T e c h n i c a l S u r v e y s , J u l y 1956. 10 tion,  F r a n k W i l l c o x , Mine A c c o u n t i n g Toronto, Pitman, 1949.  11  H o f f m a n , op.  12  Van  c i t . , p.  Financial  Administra-  356.  L u v e n , op. c i t .  13 G e o r g e L. L e f f l e r , The R o n a l d P r e s s , 1963, p . 447. 14  and  Williamson,  Stock  M a r k e t , New  York,  The  op. c i t .  15 W. S. I r w i n , M i n e F i n a n c i n g and P r o m o t i o n , a p a n e l d i s c u s s i o n s p o n s o r e d b y t h e C a n a d i a n I n s t i t u t e o f M i n i n g and M e t a l l u r g y , V a n c o u v e r , B. C , O c t o b e r 2, 1964. 16  Williamson,  17  J . A.  Van  op. c i t .  Luven, P e r s o n a l  C o m m u n i c a t i o n , M a r c h 23,  1965.  18 G e o r g i u s A g r i c o l a , De Re M e t a l l i c a , t r a n s l a t e d f r o m t h e f i r s t L a t i n e d i t i o n o f 1556 b y H. C. H o o v e r and L . H. H o o v e r , New Y o r k , D o v e r P u b l i c a t i o n s , 1950, p . 21. 19 E . K. C o r k , F i n a n c e Queen's P r i n t e r , 1962.  i n the Mining  20 F i n a n c i a l Post Corporation Toronto, Maclean-Hunter, 1963. 21  Boericke,  op.  c i t . , p.  Industry,  Ottawa,  S e r v i c e , R e c o r d o f New  Issues,  260.  22 "Insider Trading C r i t i c i z e d , " B. C , M a r c h 29, 1965.  The  Province,  Vancouver,  23 T o r o n t o S t o c k Exchange, B r i e f t o t h e A t t o r n e y General's Committee on S e c u r i t i e s L e g i s l a t i o n , T o r o n t o , May 1964. 24  C o r k , op. c i t .  25  Boericke,  op.  c i t . , p.  265.  50  Chapter  5.  ESTABLISHED MINING CONCERNS  F i n a n c i n g t h e e x p l o r a t i o n and development o f m i n i n g properties promoters  r e q u i r e s l a r g e sums o f money, a n d p r o s p e c t o r s a n d h a v e l o n g d e p e n d e d upon t h e m a j o r o p e r a t i n g m i n i n g  companies as an i m p o r t a n t  source o f venture  o r g a n i z a t i o n s have r e t a i n e d fits  generated  investment, ularly  These  substantial portions of the pro-  by the successful  operation of their  which t h e y u s u a l l y have i n v e s t e d i n c a l l securities.  capital.  mines,  l o a n s and s h o r t  term  When p r e s e n t e d w i t h a n a t t r a c t i v e o p p o r t u n i t y f o r t h e s e companies a r e eager  to participate,  s i n c e they are faced with r e p l a c i n g  m i n e s a s t h e y become  The  their  partic-  existing  exhausted.  p r e s e n t t r e n d toward  exploration by the large producers both because o f the s t e a d i l y ment and t h e d i f f i c u l t i e s  rising  greater participation i n seems l i k e l y  to continue,  costs of property  of financing.  I t has been  developestimated  t h a t a s much a s 80 t o 90 p e r c e n t o f t h e f u n d s p r o v i d e d f o r m i n e r a l e x p l o r a t i o n a n d d e v e l o p m e n t i n t h e U n i t e d S t a t e s come from  this  source.*  This p a r t i c i p a t i o n  takes a v a r i e t y o f forms.  Most o f t h e m a j o r p r o d u c i n g m i n e s a n d a l l o f t h e d e v e l o p m e n t companies m a i n t a i n a s t a f f o f e n g i n e e r s and g e o l o g i s t s  actively  51 looking  f o r new p r o s p e c t s ,  w h i c h a r e sometimes d e v e l o p e d b y t h e  company e n t i r e l y w i t h o u t o u t s i d e the  participation.  m i n i n g company may t a k e o v e r a p r o p e r t y  submitted by an  independent p r o s p e c t o r o r development group. company may a d v a n c e f u n d s i n r e t u r n  The i n v e s t i n g  f o r a s h a r e i n t e r e s t o r may  make a r r a n g e m e n t s t o p u r c h a s e t h e p r o p e r t y period.  Conversely,  o v e r an extended  However, a l m o s t w i t h o u t e x c e p t i o n ,  i n presenting  a  v e n t u r e t o a m i n i n g company t h e v e n d o r c a n e x p e c t t o r e l i n q u i s h c o n t r o l a n d management  of the property.  An e s t a b l i s h e d  mining concern has c e r t a i n  over the j u n i o r e x p l o r a t i o n prospect.  Itwill  company i n t h e d e v e l o p m e n t o f a  have t h e knowledge and s t a f f  development r e s u l t s and t o s o l v e It  i s usually  advantage.  difficult  to obtain  technical  Most i m p o r t a n t , however, i s t h a t  the property  through t o  problems.  the established capital to  production.  T h e r e a r e many f a c t o r s c o n t r i b u t i n g  to the trend  toward i n c r e a s e d  internal financing,  one o f w h i c h i s t h a t  internal  i s usually  of least resistance.  funding  avoids the r i s k s o f a high industry  early  i n a p o s i t i o n t o market t h e p r o d u c t t o g r e a t e r  m i n i n g company u s u a l l y h a s command o f s u f f i c i e n t finance  advantages  subject  the l i n e debt  t o wide p r i c e  financial  structure  /  It  i n an  f l u c t u a t i o n s and g e o l o g i c  un-  ; f  I certainty.  I t avoids the high  cost  o f r a i s i n g venture c a p i t a l  1  from the g e n e r a l write  o f f outside  income and tion  public.  gain a saving  In o t h e r  company i s i m p o r t a n t over  operating  company c a n  e x p l o r a t i o n expense a g a i n s t  thereby  company.  An  further stock  cases  over the  i t s taxable  independent  for internal  term c a p i t a l  to the mining  gain.  industry,  L a s t and  internal  may  may  be  prefer  dividend  p e r h a p s most  funding  the  funding  High-income s h a r e h o l d e r s  t h e method b e c a u s e o f t a x a d v a n t a g e s : f o r e g o i n g for a long  explora-  maintenance of c o n t r o l o f  i n the preference  sales.  usually  income  important  the  only  avail-  3  able  source  An prospect sidiary  o f money f o r p r o s p e c t i n g  or  e s t a b l i s h e d m i n i n g company w h i c h d e v e l o p s a  entirely  on  i t s own  company o r as  d e p e n d i n g upon t h e  tax  t i c u l a r l y where t h e  an  may  s e t up  operating  i m p l i c a t i o n s and  be  to incorporate a separate  which r e q u i r e complete  share  may  r e q u i r e s e v e r a l stages  the  f i n a n c i n g and  ation, all  necessary  i t s own  resources  new a  sub-  of the present  risks  involved.  firm,  Parsubject  possible nationalization, i t w i l l company.  o w n e r s h i p by  of holding  local  In  countries  nationals, i t  companies t o  accomplish  control.  example o f a m i n i n g company c o n d u c t i n g  f i n d i n g a prospect,  with  as  subsidiary i s i n a f o r e i g n country  f l u c t u a t i o n s and  An  the property  division  to p o l i t i c a l advisable  exploration.  and  developing  i s the  i t into  raw  explor-  production  I n t e r n a t i o n a l N i c k e l Company  (INCO) a n d i t s Thompson M i n e .  The p r o p e r t y i s t h e r e s i d u e o f  a number o f p r o s p e c t i n g c o n c e s s i o n s o b t a i n e d f r o m t h e M a n i t o b a government. single its  In developing t h i s property into the largest  investment  i n Manitoba,  INCO v e n t u r e d $130 m i l l i o n o f  own r e s o u r c e s o u t o f t h e t o t a l  million  required.  initial  Most o f t h e remainder  e l e c t r i c power d e v e l o p m e n t  e x p e n d i t u r e o f $185  consists  o f a hydro-  f i n a n c e d by t h e Manitoba  government.  Where a m i n i n g company i s d e a l i n g w i t h a p r o s p e c t o r or promoter  f o r t h e development  o f a p r o p e r t y , f i n a n c i n g may  be a r r a n g e d b y a v a r i e t y o f m e t h o d s . an o u t r i g h t  cash purchase,  The company may a g r e e t o  although t h i s procedure  i s unlikely  u n l e s s t h e showing  i s e s p e c i a l l y a t t r a c t i v e and t h e p r i c e an  apparent b a r g a i n .  More common i s t h e " o p t i o n t o p u r c h a s e , " a  form o f e x c l u s i v e tiates  a price  financing  i n which  t h e m i n i n g company n e g o -  f o r t h e p r o p e r t y , t o be p a i d  i n installments  contingent  upon t h e c o n t i n u e d s u c c e s s i n d e v e l o p m e n t  prospect.  U s u a l l y t h e agreement s p e c i f i e s  a minimum p r o g r a m  o f work t o b e done o n t h e p r o p e r t y , s i n c e t i m e essence  i n such  i s always  of the  deals.  Under a "working and p a i d  o fthe  o p t i o n , " development  i s carried out  f o r b y t h e e s t a b l i s h e d m i n i n g company up t o a p r e v -  i o u s l y a g r e e d maximum.  Once t h i s p o i n t  company h a s t h e s e a l t e r n a t i v e s :  either  i s reached,  the mining  i t may a l l o w t h e o p t i o n  54 to lapse  o r i t may i n c o r p o r a t e  treasury  stock  inal  a new company, t a k i n g down  i n c o n s i d e r a t i o n o f work p e r f o r m e d .  owners o f t h e p r o p e r t y  will  r e c e i v e vendor stock  new company up t o a maximum i n t e r e s t o f 25 p e r c e n t , proportion being estimated will  subject  present  value  invariably place  subject  developed.  i n the  the exact  t o n e g o t i a t i o n and r e l a t e d t o t h e of the property.  The m i n i n g  t h e s h a r e s o f t h e newly  company i n i t s i n v e s t m e n t p o r t f o l i o , be  The o r i g -  while  t o an e s c r o w a g r e e m e n t u n t i l  company  incorporated  t h e vendor stock  the property  may  i s fully  P r o v i s i o n i s u s u a l l y made f o r t h e f i n a n c i n g company  to g r a d u a l l y purchase t h e vendor i n t e r e s t . company n o t w i s h t o c o n t i n u e working option complete w i t h  t o lapse,  Should the mining  f u r t h e r development and p e r m i t t h e  the property  r e v e r t s t o the vendors  a n y i m p r o v e m e n t s made d u r i n g  the l i f e  of the  4 option.  A modification of this the western United price  States  i s t h e l e a s e and bond agreement.  i s s e t f o rthe property  appraisal value. intervals  until  the f u l l  r a t e s o r on a s l i d i n g  Royalty  that bears  some r e l a t i o n  A  t o the  Minimum payments a r e s t i p u l a t e d a t r e g u l a r p u r c h a s e p r i c e h a s b e e n met.  ments u s u a l l y a r e i n e f f e c t set  form o f f i n a n c i n g p o p u l a r i n  r o y a l t y payments o n  Such pay-  production—at  s c a l e depending on t h e grade o f o r e .  payments w i l l b e c r e d i t e d o n t h e p u r c h a s e p r i c e a n d may  e x c e e d t h e minimum p a y m e n t s .  The  f i n a n c i n g company w i l l  to  make s l i d i n g - s c a l e payments b e c a u s e t h e y  on  o p e r a t i n g c o s t s , and  the property. the  less  burdensome  w i l l want t o h a v e c o m p l e t e c o n t r o l  I f t h e company d e c i d e s  l e a s e and  are  prefer  to discontinue  b o n d a g r e e m e n t i s c a n c e l l e d arid t h e  over  operations,  property  5 reverts  to the  vendors.  Under some c i r c u m s t a n c e s accept  less  upon t h e The  than  a complete  financial  interest  capability  and  interest  income p r i o r provision  secured  to a d i v i s i o n  be  being  r e c e i v i n g any  debentures,  as much as may  than  Funds may  With t h i s  t h a t he  a  be  and  type  may  depending vendor.  upon  full  majority  advanced  t o be  on  r e p a i d out  by  the  of  permanent  of f i n a n c i n g the  50 p e r c e n t  have t o w a i t  of the  a long  s i g n i f i c a n t payments f r o m h i s  equity,  time  participa-  in profits.  T h i s s o r t o f arrangement i s s i m i l a r interest retains The  of the  usually insist  of the p r o f i t s ,  able to retain  the disadvantage before  and  of equity c a p i t a l .  v e n d o r may  i n the property,  e v e n where i t owns l e s s  i n t h e o p e r a t i n g company.  the b a s i s o f loans  f i n a n c i n g company  reliability  e s t a b l i s h e d m i n i n g company w i l l  management c o n t r o l ,  tion  the  d e a l s common i n t h e o i l i n d u s t r y . title  operator  to the p r o p e r t y but s u p p l i e s a l l the  does not  capital  to the  Here the supply  any  carriedowner financing.  r e q u i r e d which i s  later  r e c o v e r e d b e f o r e t h e two p a r t i c i p a t e properties  also are often  i n any p r o f i t s .  l e a s e d from  t h e owners f o r a  on p r o d u c t i o n , u s u a l l y s u b j e c t t o minimum s p e c i f i e d The  l e a s e may b e r e - a s s i g n e d t o a n o t h e r  ride  i n addition to the o r i g i n a l  The  tions,  risks  a  o p e r a t o r f o r an o v e r -  useful  i n foreign  requirements  associated with foreign  i n the project,  "last-in-first-out,"  opera-  are large.  investment  i n d u s t r i e s may make i t a d v i s a b l e t o l i m i t  equity participation  payments.  i n f i n a n c i n g by an e s t a b -  i s particularly  e s p e c i a l l y where t h e c a p i t a l  Political based  concern  royalty  royalty.  limited participation  l i s h e d mining  Mining  i n resource-  t h e degree o f  and t o advance funds  secured b a s i s .  upon  Of c o u r s e , even t h e  p l e d g e o f s e c u r i t y w o u l d n o t b e w o r t h v e r y much i n t h e e v e n t o f trouble,  a n d u s u a l l y t h e s e l o a n s and d e b e n t u r e s  guarantee The  o f some m a j o r g o v e r n m e n t o r i n t e r n a t i o n a l  s p o n s o r i n g company may e n l i s t  , i n t h e e q u i t y and t h u s still  limit  other mining  i t s participation  institution.  firms t o share and r i s k  exposure  further.  An tion  carry the  example o f t h i s  latter  i s t h e f i n a n c i n g by Southern  development o f i t s l a r g e , located  i n southern Peru.  form o f l i m i t e d  participa-  P e r u Copper C o r p o r a t i o n o f t h e  low-grade  porphyry  copper d e p o s i t s  The o r e r e s e r v e s o f t h e t h r e e  d e p o s i t s were e s t i m a t e d p r i o r  t o t h e time p r o d u c t i o n  started  early  i n 1960  a t 1.1  cent copper. tons  of ore per  quired  the  million, by  To  day  including  $237 m i l l i o n .  while  $72  free  loans.  Export-Import  p r o v i d e d by  up  this  suppliers'  the  out o f cash  Mining  split.  i n the  affecting  this  investments. with the  companies w i t h  for this,  Where t h e  Even i n the case should  $107  com-  invested  form o f  capi-  interest-  edge i n t h a t  they  the  s u r p l u s funds  awaiting  equity  but  industry.  t h e most i m p o r t a n t  stocks are those  expected  g a i n on  i n an the  stocks  Numerous factor  of developing  on  these  companies  i n d u s t r y w e l l known t o investment  o f t h e more m a t u r e c o m p a n i e s ,  e x c e e d t h a t o b t a i n a b l e on  the  i n the  d e c i s i o n i s the r a t e of r e t u r n expected  i n v e s t o r , the  C.  earnings.  s t r o n g growth p o s s i b i l i t i e s ,  yield  supplied  f l o w , w h e r e a s t h e r e t u r n on  o f o t h e r companies engaged i n t h e m i n e r a l are given  $120  Approximately  form o f s t r a i g h t  provided  per-  re-  l o a n s , and  f i n a n c i n g o f a good p r o p e r t y have been i n v e s t i n g  reasons  amount  four sponsoring  e q u i t y was  i n the  m i l l i o n was  p a i d out of  1  30,000  Bank o f W a s h i n g t o n , D.  s u p p l i e d by  taken  Of  These advances have a p o l i t i c a l  are repayable  about  d u r i n g c o n s t r u c t i o n , was  For tax purposes the  tal,  must be  of  m i l l i o n was  m i l l i o n was  of ore averaging  t o b r i n g t h e mine i n t o p r o d u c t i o n  interest  i n e q u i t y was  panies. $35  and  expenditure  A n o t h e r $10  tons  c o n s t r u c t the p l a n t needed t o handle  a l o a n from the  million  billion  the  may  be  large.  expected  government o r  corporate  58 bonds o r i n d u s t r i a l may  stocks.  I n some c a s e s  become p e r m a n e n t , w h e t h e r f o r r e a s o n s  as p r o f i t a b l e are not  s o u r c e s o f income.  likely  to invest  by  of c o n t r o l or  funds  funds  the major mining  i n s p e c u l a t i v e or  T h e i r purchases  c o m p a n i e s and  support the  market f o r mining  s t o c k s and  company t o e f f e c t  a primary d i s t r i b u t i o n  One production  of the r i s k s  make i t p o s s i b l e  sell  to  the f l u c t u a t i o n s  of  t h a t market.  to  affect  developin his secondary  f o r the  i n an  i n t e r n a t i o n a l m a r k e t and  i n p r i c e and w o r l d  demand s o  to a lesser i s just  into  product.  are subject  characteristic  i n t h e c a s e o f a l a r g e mine  supply of a metal  t h e mine i n t o p r o d u c t i o n .  public.  a s s o c i a t e d w i t h b r i n g i n g a mine  Especially  the world  course,  developing  to the general  likely  or m i n e r a l i s i t neces-  sary t o secure s a l e s c o n t r a c t s f o r the output b e f o r e  of  These  i s the u n c e r t a i n t y regarding the s a l e of the  Minerals today  o r e and  poor  a r e needed.  ment g r o u p s o n l y i n d i r e c t l y h e l p t h e mine d e v e l o p e r search f o r financing.  just  concerns  g r e a t e x t e n t due -to t h e  m a r k e t a b i l i t y o f t h e s t o c k when t h e market investments  investments  Established mining  s h o r t term  d e v e l o p m e n t c o m p a n i e s t o any  these  This i s particularly  bringing  true with  e x t e n t w i t h some o f t h e b a s e m e t a l s . the opposite, the producer  iron Gold,  always f i n d i n g  r e a d y m a r k e t a t t h e U n i t e d S t a t e s T r e a s u r y when i t i s i n h i s interest  to s e l l  there.  a  With growing s m e l t i n g and r e f i n i n g terials, marketing  companies  a t r e n d has developed of mineral products  concentrates funds  c o m p e t i t i o n among n a t i o n s a n d among  i n l o n g term  toward  a r e advanced as prepayment  cing  i s t h e $10 m i l l i o n  t y i n g up t h e o u t p u t o f  O c c a s i o n a l l y , development  f o r concentrates,  sometimes  a t the going rate o f i n t e r e s t .  s m e l t e r thus a c q u i r e s an investment  s o u r c e o f raw m a t e r i a l .  o f raw ma-  greater assistance i n the  and t o w a r d  contracts.  i n t e r e s t - f r e e b u t more l i k e l y The  f o r assured sources  An i l l u s t r a t i o n  as. w e l l a s a n a s s u r e d of this  i n U n i t e d S t a t e s funds  type o f f i n a n -  t h a t was t o h a v e  b e e n p r o v i d e d b y A m e r i c a n S m e l t i n g a n d R e f i n i n g Company t o Granduc Mines L t d . and r e p a i d  out of smelter settlements.  t e r e s t was t o h a v e b e e n c h a r g e d  In-  a t 5-1/2 p e r c e n t on t h e o u t -  7 standing balance  a f t e r p r o d u c t i o n commenced.  Many e x a m p l e s c o u l d b e g i v e n o f t h e s p o n s o r s h i p o f new p r o j e c t s b y e s t a b l i s h e d m i n i n g ing with the i n d i v i d u a l  circumstances  strength of the p a r t i c i p a n t s . participation  i n an e x i s t i n g  Mines L t d . by Canadian  concerns,  the d e t a i l s  and t h e b a r g a i n i n g  As a n i l l u s t r a t i o n  of equity  company, t h e f i n a n c i n g o f Endako  E x p l o r a t i o n L t d . m i g h t be c i t e d .  s p o n s o r i n g company a g r e e d  vary-  to provide a t o t a l  The  o f $5 m i l l i o n t o  Endako, o f w h i c h $1.3 m i l l i o n h a d b e e n s p e n t o r a d v a n c e d a t t h e date o f the p r o d u c t i o n d e c i s i o n , of  funds  t h r o u g h bank l o a n s .  and t o a r r a n g e  In return,  f o r the balance  Canadian E x p l o r a t i o n  60 r e c e i v e d 4,935,000 s h a r e s when t h e p r o p e r t y was interest  was  o f the  fully  10 m i l l i o n  equipped  h e l d i n e s c r o w and  authorized,  for production.  released pro  rata  issued  The  as  vendor  develop-  ment proceeded.**  I n b r i n g i n g t h e New into production, $3.8  million.  out  I n r e t u r n , New first  o f 80 p e r c e n t  Noranda w i l l  i n northern  N o r a n d a M i n e s L t d . p r o v i d e d New  amount o f 7 p e r c e n t , repaid  Hosco p r o p e r t y  Hosco  H o s c o i s s u e d $3,150,000  with principal  m o r t g a g e income d e b e n t u r e s ,  o f the net proceeds  manage t h e o p e r a t i o n and  from  Quebec  to  be  production.  purchase a l l concentrates  9 f o r a 10-year p e r i o d .  With regard mining  projects, this  indicative  of the  e s t a b l i s h e d mining  to the  f i n a n c i n g o f f o r e i g n investment  in  q u o t a t i o n from the M i n e r a l s Yearbook i s  importance o f the  internal  resources  concerns:  of  \  To f i n a n c e c a p i t a l e x p e n d i t u r e s and w o r k i n g c a p i t a l , t h e U. S. m i n i n g and s m e l t i n g c o m p a n i e s a f f i l i a t e d a b r o a d . . . r e l i e d p r i n c i p a l l y on i n t e r n a l l y g e n e r a t e d f u n d s — e a r n i n g s and d e p r e c i a t i o n and d e p l e t i o n charges. Of t h e t o t a l $821 m i l l i o n r e q u i r e d f u n d s i n 1962, $680 m i l l i o n came f r o m f o r e i g n a f f i l i a t e s ' own r e s o u r c e s — c a s h f l o w f r o m d e p r e c i a t i o n a n d d e p l e t i o n ($202 m i l l i o n ) and f r o m r e t a i n e d e a r n i n g s ($478 m i l l i o n ) . 1 0  Of  the remainder,  $94  m i l l i o n was  obtained  S t a t e s , p r e s u m a b l y as  guaranteed  obtained  l a t t e r i n c l u d e s domestic  abroad; t h i s  l o a n s , and  from the $47  United  million  was  borrowing,  61 increase  of accrued  liabilities,  and  other  miscellaneous  11 sources. The  disadvantage of t h i s  d e p e n d e n c e upon t h e relates  to the  i n t e r n a l resources  opportunity  many v i a b l e p r o j e c t s as  flow  o f e x i s t i n g m i n e s and  of the  projects,  duced through the the  prospective  is its  the  dissemination mine f i n a n c i n g .  degree o f  life.  and  M i n i n g has  about i t , but requisite  from t h e s e  of  information The  Risks  operators opportunity  must be  regarding  financial  investor  f o r the and  use  an  evaluaof  be  o f h i s money,  f o r the  fact  that  recovered  a i r o f hope and i s not  re-  sources  r e t u r n must  v e n t u r e c a p i t a l must be a l w a y s had  cash  made more a t t r a c t i v e t o  i n d i s c r i m i n a t e gambling  features.  these  As  mines.  investor.  exposure to r i s k ,  a wasting asset  to the  of proper techniques of property  adequate t o compensate t h e for  mines i s t i e d of  Too  financing.  economy must b e a r t h e  institutional use  mines  foregone investments.  summary, m i n i n g must be  i n d i v i d u a l and  t i o n and  the  increased  of established  the w i l l i n g n e s s  revenue foregone  In the  of  d e v e l o p m e n t r a t e o f new  i n v e s t i n new  cost  cost  toward  are h e l d back f o r l a c k of  long  to  the  trend  one  a mine during  speculation  of i t s  62 Footnotes t o Chapter  5:  1 A. P e t r i c k , M i n e F i n a n c i n g a n d P r o m o t i o n , a p a n e l d i s c u s s i o n s p o n s o r e d b y t h e C a n a d i a n I n s t i t u t e o f M i n i n g and M e t a l l u r g y , V a n c o u v e r , B. C , O c t o b e r 28, 1964. 2 W. K e i t h Buck, S o u r c e o f C a p i t a l Funds f o r t h e M i n e r a l I n d u s t r y , O t t a w a , D e p t . o f M i n e s and. T e c h n i c a l S u r v e y s , J u l y 1956. 3  Petrick,  4  Buck,  op. c i t .  op. c i t .  5 W. F . B o e r i c k e and C. C. B a i l e y , "Mine F i n a n c i n g , " E c o n o m i c s o f t h e M i n e r a l I n d u s t r i e s , New Y o r k , AIME, 1959, p . 254. 6 J . E . Thompson, Newmont M i n i n g C o r p o r a t i o n , C o m m u n i c a t i o n , M a r c h 8, 1965. 7 Financial 1965, p . 85.  Post,  8  I b i d . . p.  84.  9  Ibid.,  242.  p.  Personal  Survey o f Mines, Toronto, Maclean-Hunter,  10 U. S. B u r e a u o f M i n e s , M i n e r a l s Y e a r b o o k , 1963, W a s h i n g t o n , U. S. Government P r i n t i n g O f f i c e , 1964, p . 11  Ibid.,  p.  40.  34.  63  C h a p t e r 6.  BANK LOANS AND SHORT TERM FUNDS  In c o n s i d e r i n g  t h e sources o f funds a v a i l a b l e f o r  f i n a n c i n g t h e development o f a m i n i n g p r o p e r t y , to think o f short a  longer  term funds.  i t i s not usual  The f u n d s d e s i r e d a r e t h o s e o f  t e r m — t h e permanent i n v e s t m e n t o f e q u i t y c a p i t a l and  t h e more t e m p o r a r y  long  term d e b t — n e e d e d  ment a n d c o n s t r u c t i o n e x p e n d i t u r e s return a profit.  However, s h o r t  until  to finance  t h e mine s t a r t s t o  term funds a r e u s e f u l i n  d e v e l o p m e n t f i n a n c i n g f o r two r e a s o n s : t e m p o r a r y pending the completion o f senior of working  accommodation  f i n a n c i n g , and t h e p r o v i s i o n  capital.  The  operating  m i n i n g company a n d t h e o r d i n a r y  cial  concern have s e v e r a l sources o f s h o r t  able  t o them. finance  accrued  liabilities.  and f a c t o r i n g companies, The s m a l l e r  d e p e n d more h e a v i l y upon s h o r t lower c r e d i t  term c a p i t a l  Among t h e s e a r e t h e c h a r t e r e d  market,  standing,  avail-  b a n k s , t h e money  trade  c r e d i t , and  term funds because o f t h e i r stability,  inability  lack o f retained earnings,  d e s i r e t o r e t a i n t h e c o n t r o l and b e n e f i t s o f e q u i t y The company s e e k i n g  commer-  companies e s p e c i a l l y w i l l  lack of h i s t o r i c a l  t o t a p t h e c a p i t a l markets,  tion.  develop-  to bring i t s property  and  participa-  into  production  can  generally only a v a i l  loans,  although  itself  credit  f o r temporary  Trade c r e d i t  after production  accommodation.  extended by s u p p l i e r s o f equipment  o f t e n becomes i m p o r t a n t  during  the f i n a l  has been assured.  m a n u f a c t u r e r s and d e a l e r s new m i n e s i n o r d e r  Under some  are w i l l i n g  t o secure  stage  the business.  t r u e when t h e s u p p l i e r s c a n a v a i l  discount  facilities  was s e t up t o p r o v i d e  finance  f o r large orders  years.  Facilities  without of  funds d u r i n g  Canadian against  long term  non-  export  d o m e s t i c payments h a v e n o t  t h e b a n k s do d i s c o u n t Trade c r e d i t  some r e c e i v a b l e s  i s not a major  t h e e a r l y e x p l o r a t i o n and development labor content  source stages  o f t h e work p e r f o r m e d .  c h a r t e r e d b a n k s i n Canada g e n e r a l l y p a r t i c i p a t e  i n mine f i n a n c i n g o n l y when t h e p r o p e r t y production  i ses-  r e q u i r i n g terms i n excess o f f i v e  credit.  because o f t h e h i g h  The  This  insurance  and t o extend  f o r guaranteeing  although  extending  This  terms  o f t h e c h a r t e r e d banks under t h e p r o t e c t i o n  payment b y f o r e i g n p u r c h a s e r s  materialized,  circumstances  themselves o f the  C r e d i t s Insurance Corporation.  Crown C o r p o r a t i o n  o f development  t o extend s p e c i a l  pecially  of the Export  and bank  some f i r m s h a v e b e e n f o r c e d t o go t o t h e  f i n a n c e companies  to  of trade  and a s u p p l y  i s being  o f working c a p i t a l  readied f o r  i s required.  Due t o  65 the  nature  their  of their  assets  large risks.  liabilities,  i n a liquid  t h e banks p r e f e r t o m a i n t a i n  f o r m and g e n e r a l l y a v o i d  This p o l i c y  i s aided by the r i g i d i t y  l e n d i n g r a t e s and t h e r e s t r i c t i o n s p l a c e d t h a t banks a r e p e r m i t t e d  t o take  type  amount drawn down i s r e p a i d a t l e a s t do n o t f e e l  locked  into their  loans which a r e c o n s t a n t l y being  of loans.  of loan  will  be a b l e  to obtain  i s being  funds under a l i n e  spon-  of credit with the  f a v o r a b l e c o n d i t i o n s t h e s p o n s o r may s e c u r e s e c u r i t y under S e c t i o n s  These s e c t i o n s p e r m i t  Under  c r e d i t by  t h e c h a r t e r e d b a n k s t o a d v a n c e f u n d s on  i s of particular  respectively.  importance t o m i n i n g companies,  s e c u r i t y p l e d g e d may i n c l u d e b r o k e n o r e a n d  in  stockpile or i n transit  by  an assignment o f f u t u r e s m e l t e r  of the Act,  notes.  86 a n d 88 o f t h e Bank A c t .  s e c u r i t y o f r e c e i v a b l e s and i n v e n t o r y ,  latter the  with  b y a n e s t a b l i s h e d m i n i n g company, t h e s p o n s o r u s u a l l y  pledging  the  way  renewed.  b a n k m e r e l y on t h e s t r e n g t h o f s i g n i n g p r o m i s s o r y less  In t h i s  as i s t h e case  Where t h e d e v e l o p m e n t o f a p r o s p e c t sored  The  i n which t h e  once a y e a r .  loans,  o f bank  upon t h e s e c u r i t y  i n support  banks p r e f e r t h e r e v o l v i n g c r e d i t  they  assuming  t o the smelter  S e c t i o n 82, p e r m i t s  The since  concentrates  which a r e supported  settlements.  Another  section  b a n k s t o make a d v a n c e s upon t h e  s e c u r i t y o f h y d r o c a r b o n s i n , u n d e r , o r upon t h e g r o u n d , i n place or i n storage.*  T h i s p r o v i s i o n does n o t e x t e n d t o  metallic  ore  reserves.  A d e v e l o p m e n t company s e e k i n g the bank w i l l secured  still  be  able  u n d e r S e c t i o n 88  the  inventory  the  company may  where s u c c e s s  to arrange a r e v o l v i n g  although  a d v a n c e d w i l l be be  except  i n the  grams, i t i s n e c e s s a r y  w e l l assured.  In a d d i t i o n ,  Since  real  or  of  purposes  Canadian banks leasehold  case of government-sponsored l o a n f o r the  the hypothecation  of securities  c h a r g e on  assets  a l l the  credit  funds f o r c a p i t a l  a r e p r o h i b i t e d f r o m t a k i n g m o r t g a g e s on property,  from  the p r o p o r t i o n o f value  somewhat s m a l l e r .  able to obtain  i s reasonably  working c a p i t a l  company t o s e c u r e  the  against a s p e c i f i c  of the borrower.  pro-  loan  and  by  floating  T h e s e m i g h t be  first  mortgage bonds t o g i v e t h e bank the p r e f e r r e d p o s i t i o n w i t h respect  to assets,  or  i f the bank i s the  t h e c a t i o n of a debenture i s s u e d against  only the  lender,  the  assets w i l l  hypo-  elimin-  2  ate  the  n e e d f o r a Deed o f T r u s t and  The o f term loans by  the  c h a r t e r e d banks have not f o r c a p i t a l purposes,  encouraged the  project,  Where t h e y  do  p a r t i c i p a t e i n the  position  in their  as  t o s e c u r i t y and  other  doubt  general  financing of a  i t i s usually i n association with  last-in-first-out basis.  extension  a p o l i c y d i c t a t e d no  d e s i r e t o r e t a i n maximum l i q u i d i t y  loans.  a  Mortgage.  lenders  The  banks r e q u i r e the  may  a l s o r e q u i r e guarantees  new and  preferred of  on  d e f i c i e n c y payments f r o m  t h e s p o n s o r i n g company.  a g r e e m e n t a s s u r e s t h e payment o f i n t e r e s t charges  on  the  first  the cash  flow generated by  and  of  fund  of default  In e x c e p t i o n a l circumstances,  rank p a r i passu w i t h r e s p e c t t o payout  which event  sinking  mortgage bonds i n t h e e v e n t  t h e o p e r a t i n g company. may  and  T h i s type  the  security,  by  banks in  t h e p r o j e c t w o u l d be  a  major c o n s i d e r a t i o n .  An credit 1961, to  2.9  i n d i c a t i o n o f the r e l a t i v e  t o the mining  i n d u s t r y i s the  b a n k l o a n s i n m i n i n g were $101 percent of a l l business  importance  fact  o f bank  t h a t a t December  million.  T h i s was  l o a n s , even though  31,  equal  mining 3  accounted  f o r 5.3  percent o f the gross n a t i o n a l  product.  T o t a l c h a r t e r e d bank l o a n s o u t s t a n d i n g under a u t h o r i z e d c r e d i t s of  $1 m i l l i o n  and  o v e r amounted t o a b o u t  $1.5  billion,  and  of  4 t h e s e about  $50  m i l l i o n were c l a s s i f i e d  Assuming t h a t mining  o b t a i n e d no  l o a n s t h a n o f g e n e r a l l o a n s , and l o a n s t o m i n i n g were no more t h a n  as t e r m  loans.  greater proportion of  term  probably  term  $1.5  i t was  less,  million.  M i n i n g companies have o c c a s i o n a l l y been a b l e  to  a c q u i r e development funds w i t h the a s s i s t a n c e g r a n t e d by f e d e r a l government under t h e S m a l l B u s i n e s s  Loans A c t .  and  $25,000, may  i n t e r m e d i a t e term  provided  credit,  to proprietors  not exceeding  of businesses having a gross  the Short be  annual  revenue e s t i m a t e d not t o exceed  $250,000, f o r t h e  and  In d i s b u r s i n g  modernization  of premises.  required  t o t a k e s e c u r i t y on  property  i n r e s p e c t o f which the proceeds  improvement  funds  the equipment o r r e a l o f the  t h e bank i s or  immovable  loan are to  be  5 expended.  The  a s s i s t a n c e g i v e n t o t h e e x p o r t e r s o f goods  Canada t o f o r e i g n m i n i n g Insurance  A c t has  h a v e s e t up  o p e r a t i o n s under the E x p o r t  a l r e a d y been mentioned.  the Export Finance  d i s c o u n t e d by  The vide  interim  a prospect.  c h a r t e r e d banks  t u r n over  them f o r C a n a d i a n  foreign  financing  to mining  A temporary  credit  companies a t t e m p t i n g i s g i v e n on  s p e c i f i e d p e r i o d from  a  trade  traders.  c h a r t e r e d b a n k s i n Canada a r e a l s o w i l l i n g  t h a t repayment o f t h e bank l o a n s w i l l be  p r o v i d e d by  Credits  C o r p o r a t i o n o f Canada L t d . a s  r e d i s c o u n t bank t o w h i c h t h e b a n k s may obligations  The  from  the  to  to prodevelop  understanding  forthcoming w i t h i n a  the date o f u t i l i z a t i o n ,  the  the s a l e o f t r e a s u r y shares or from  funds  senior  to  be  finan-  7 cmg. the  The  bank n o r m a l l y w i l l  take  s e c u r i t y u n d e r S e c t i o n 88  on  i n v e n t o r y o f t h e company, o r u n d e r a c h a t t e l m o r t g a g e o r  guarantee.  T h i s form o f i n t e r i m  c o n t i n u e o p e r a t i o n s on  which i s r e l a t e d  a developer  the p r o p e r t y w h i l e a r r a n g i n g the  manent f i n a n c i n g n e e d e d t o b r i n g A special  finance enables  to  per-  t h e mine i n t o p r o d u c t i o n .  form o f a s s i s t a n c e t o f o r e i g n  t o bank f i n a n c i n g  i s the  developers  l o a n s and  investments  69 made b y t h e s o - c a l l e d "Edge A c t C o m p a n i e s . " ially  c h a r t e r e d companies s p o n s o r e d b y a commercial bank i n  the United  S t a t e s and r e g u l a t e d by t h e F e d e r a l Reserve  T h e r e a r e two t y p e s in and  o f s u c h companies: one p e r m i t t e d  f o r e i g n commercial banking a c t i v i t i e s the other  investments  without  Corporation  System.  t o engage  and t o a c c e p t  deposits,  t o engage i n f o r e i g n f i n a n c i n g a n d t o make e q u i t y being  example o f t h e l a t t e r  permitted  t o accept  deposits.  An  i s t h e Chase I n t e r n a t i o n a l Investment  (CIIC).  T h i s company i s p e r m i t t e d in  These a r e spec-  t o lend or invest  directly  t h e f o r e i g n s u b s i d i a r y o f a U. S. c o r p o r a t i o n w i t h o u t t h e  guarantee o f the parent. offerings  i n the United  from t h e p a r e n t , t i c i p a t i o n with  I t cannot  finance or  States; the capital  advanced i s secured  t h e company's own r e s o u r c e s , others.  underwrite  or through  par-  C I I C p r e f e r s t o h a v e a U. S. company  a s manager o f t h e p r o j e c t , e v e n t h o u g h c o n t r o l may b e h e l d b y foreign for  investors.  The type  i s tailored  e a c h p r o j e c t , g e n e r a l l y a s a t e r m l o a n o f 5 t o 10 y e a r  maturity  repayable  i n U. S. d o l l a r s .  payments p l u s p a r t i c i p a t i o n options, Later the  o f financing provided  CIIC r e c e i v e s  through c a l l s  s t o c k bonuses, c o n v e r t i b l e loans,  i t will  c r e a t e a market  e q u i t y investment,  or w i l l  on e a r n i n g s , or other  i n the foreign country sell  interest stock  means. t o s e l l out  i t back t o t h e f o r e i g n  s u b s i d i a r y u n d e r an financing  agreed repurchase formula.  i s f a s t e r and  government i n s t i t u t i o n ,  higher.  an  Ontario. on  o f the  into production,  times i s the  panies  than that provided  even though the  illustration  nance a p r o p e r t y  in  interest  Senior  use  of by  a  rate i s  perhaps the b e s t  f i n a n c i n g of the f i n a n c i n g was  a s c a l e unprecedented  o f bank c r e d i t  obtained  results  holes.  the product recognized  o f an  drill  by  t h e u r a n i u m com-  field  simply  to the great  ore  was on  This unusual circumstance  unusual development p r o c e d u r e .  t h a t the  fi-  example i n  i n C a n a d i a n m i n i n g , and  development o f the  o f a few  to  B l i n d R i v e r uranium mines  committed e a r l y i n the  similar  form  8  As  recent  more f l e x i b l e  This  d e p o s i t i o n was  the was  I t was  early  i n conglomerate beds  Rand s e r i e s i n South. A f r i c a ,  and  that  these  b e d s e x h i b i t e d r e m a r k a b l e p e r s i s t e n c e b o t h i n c o n t i n u i t y and metal values. the  Also  c o n t r i b u t i n g strongly to t h i s  uranium s a l e s c o n t r a c t s w i t h  Ltd.,  agent  f o r the  Canadian government.  g u a r a n t e e d a m a r k e t and d u c e d ; on  the  strength  s a l e p r i c e f o r the of these,  t o borrow h e a v i l y from the  equal-ranking  Mining These  and  were  Refining  contracts  u r a n i u m t o be  pro-  t h e m i n i n g companies were  able  banks.  In s e v e r a l i n s t a n c e s f o r m o f two  Eldorado  situation  in  the  senior f i n a n c i n g took  s e r i e s o f bonds, o f which the  the first  71 m o r t g a g e b o n d s were p l e d g e d a s c o l l a t e r a l loan  and t h e f i r s t  mortgage s i n k i n g  p u b l i c and f i n a n c i a l position as  institutions.  of last-in-first-out,  to security—the  less  f u n d b o n d s were  sold to the  W h i l e t h e bank t o o k t h e  t h e bonds were a l l p a r i  bonds h y p o t h e c a t e d  preference respecting  s e c u r i t y f o r a bank  t o t h e b a n k h a v i n g no  payout i n t h e event o f d e f a u l t .  common a r r a n g e m e n t f i r s t  passu  m o r t g a g e b o n d s were  t o t h e bank, w h i l e s e c o n d m o r t g a g e g e n e r a l  In a  hypothecated  b o n d s were  issued  9 to the publxc.  An example o f t h i s t y p e o f f i n a n c i n g was t h e  issue by Consolidated o f 4-1/2 p e r c e n t as  first  D e n i s o n M i n e s L t d . o f $15 m i l l i o n w o r t h m o r t g a g e bonds o f 3 t o 4 y e a r  s e c u r i t y f o r bank l o a n s ,  worth o f f i r s t The l a t t e r  salability  for  the short  c a r r i e d stock  cing.  term  financing  issue. financing  an and  commonly u s e d  i s the production  payment.  a few o f w h i c h a r e now b e i n g a p p l i e d  i n the future  i m m e d i a t e payment. i s usually  This  h a s many  t o mine  of selling  income o f t h e p r o p e r t y This  f o r the pur-  a n d l e s s commonly f o r t h e i r  E s s e n t i a l l y , the procedure consists  interest  maturity.  purchase warrants t o increase  chase o f producing o i l p r o p e r t i e s  variants,  o f $22 m i l l i o n  o f t h e b o n d s ; p r e s u m a b l y t h e y were n o t n e e d e d  A t y p e o f bank  initial  by the issue  mortgage 5 p e r c e n t bonds o f 7 y e a r  issue  the  followed  maturity  finana limited  i n exchange f o r  interest i s transferred  t o t h e bank  s e c u r e d b y a f l o a t i n g c h a r g e on a l l a s s e t s .  The  p r o d u c t i o n payment i s r e t i r e d  under a formula r e l a t e d  volume o f p r o d u c t i o n , c a l c u l a t e d taxable  income.  Interest  s u c h t h a t t h e o p e r a t o r h a s no  i s c h a r g e d b y t h e bank on t h e o u t -  standing balance a t a stipulated rate. p r o d u c t i o n payment i s s i m i l a r for this  a limited  Footnotes  to a royalty,  be used  except that  i t is  a n d i f c e r t a i n c a s e s now p e n d i n g a r e  b y t h e income t a x a u t h o r i t i e s ,  likely  I n many r e s p e c t s t h e  Banks i n t h e U n i t e d S t a t e s h a v e f a v o r e d  form o f f i n a n c i n g ,  approved will  term.  t o the  p r o d u c t i o n payments  t o a greater extent i n the future.  t o Chapter  6;  1 .Canadian Bankers Commission on Banking  A s s o c i a t i o n , Submission t o the Royal a n d F i n a n c e , T o r o n t o , 1963, p a r . 112-118.  2 R. J . Redrupp, An A n a l y s i s o f B a n k ' F i n a n c i n g i n t h e M i n i n g I n d u s t r y , an a d d r e s s g i v e n b e f o r e t h e T o r o n t o Branch o f t h e Cana d i a n I n s t i t u t e o f M i n i n g a n d M e t a l l u r g y , T o r o n t o , M a r c h 28, 1963. 3 E . K. C o r k , F i n a n c e Queen's P r i n t e r , 1962. 4  C.B.A. S u b m i s s i o n ,  5  Ibid.,  p a r . 140.  6  Ibid.,  p a r . 150.  7  Redrupp, op. c i t .  i n t h e M i n i n g I n d u s t r y , Ottawa,  o p . c i t . , p a r . 120.  8 V i c t o r E. R o c k h i l l , "Sources o f F i n a n c i n g and F i n a n c i a l A i d f o r Mining i n L a t i n America," Mining Congress J o u r n a l , December 1963, p . 64.  9  Redrupp, o p . c i t .  10 W. F. B o e r i c k e a n d C. C. B a i l e y , "Mine F i n a n c i n g , " E c o n o m i c s o f t h e M i n e r a l I n d u s t r i e s . New Y o r k , AIME, 1959, p . 251.  74  Chapter  7.  LONG TERM DEBT  Long finance of  term debt c a p i t a l ,  as a s o u r c e o f  f o r mining prospects, i s r e s t r i c t e d  plant  development  to the f i n a l  c o n s t r u c t i o n and i n s t a l l a t i o n o f equipment  duction.  Institutional  funds a r e s u p p l i e d  phase  f o r pro-  t o mining  projects  on a v i r t u a l l y n o - r i s k b a s i s when t h e p r o b a b i l i t y o f s u c c e s s ful  operation  ities  i s extremely high.  A s i d e from t h e debt s e c u r -  i s s u e d b y m i n i n g companies as e v i d e n c e o f l o a n s  from  p a r e n t o r s p o n s o r companies and as c o l l a t e r a l f o r bank the to  volume o f l o n g term debt i n c u r r e d t h e funds r e q u i r e d  i s not large  f o r t h e development  Of t h e s e v e r a l  factors  l o n g t e r m d e b t i n mine f i n a n c i n g ,  loans,  i n relation  o f new p r o s p e c t s .  contributing  to the paucity o f  two a r e o f p a r a m o u n t  impor-  tance: u n c e r t a i n t y r e g a r d i n g t h e orebody  and p r o d u c t i o n r e s u l t s ,  and  O n l y when a  t h e v a g a r i e s o f t h e m i n e r a l market.  large,  r e g u l a r l y - o c c u r r i n g orebody has been d e v e l o p e d and o r e r e s e r v e s sufficient will  f o r t e n t o twenty y e a r s ' p r o d u c t i o n have been p r o v e d  the f i n a n c i a l  investment c a p i t a l . lished  i n s t i t u t i o n s be i n t e r e s t e d  The s p o n s o r s h i p o f a s t r o n g ,  mining concern w i l l  continuity  i n advancing well-estab-  reduce the u n c e r t a i n t i e s  and c o s t o f p r o d u c t i o n .  regarding  A guaranteed sales  contract.  e s p e c i a l l y w i t h a government p u r c h a s i n g the o t h e r major area o f u n c e r t a i n t y . reasonable  assurance  the product,  i t will  institutions  at a l l .  agency, w i l l  In f a c t ,  o f a c o n t i n u i n g and be  difficult  eliminate  without  some  p r o f i t a b l e market f o r  to interest  the  financial  This preference f o r r i s k a v e r s i o n leads the t i o n s to take only a p r e f e r r e d p o s i t i o n w i t h and  security.  will  The  type o f p a r t i c i p a t i o n by  depend- upon t h e i r  their  liabilities.  interested  As  investment  investments,  and  may  The  wish  private pension  in participation and  venture  capital  interested  and  nature  i n v e s t o r s and  the nature  warrants trust  of  are  the h i g h e s t The  life  looking for long to a limited  term  extent i n  or c o n v e r t i b l e s e c u r i -  funds  a r e more  interested  earnings because of the of their  liabilities.  f i n a n c i a l houses a r e  variable Private  particularly  i n developing a very profitable-growth situation,  w i t h management c o n t r o l a s the p r o j e c t  and  institutions  t o repayment.  to participate  i n g r o w t h and  inflation-sensitive  the  with  t h e o t h e r hand a r e  the e q u i t y v i a stock purchase ties.  investment  a p r e f e r r e d p o s i t i o n as  i n s u r a n c e c o m p a n i e s on  r e s p e c t to payout  p r e v i o u s l y mentioned, the banks  o n l y i n s h o r t term  s e c u r i t y and  policies  institu-  the s e c u r i t y o f investment.  i s w e l l e s t a b l i s h e d these  out to l o c a l p a r t i c i p a n t s  i n v e s t o r s may  f o r a c a p i t a l gain.-'  -  Once  want t o  sell  76 Most l o n g mining properties  term debt i s s u e s  are  p r i v a t e l y placed,  l a c k o f p u b l i c i n t e r e s t and requirements o f the the  developing  their  operating  and  company w i l l  the  be  a small  need t o t a i l o r  lower i s s u i n g costs  On  the  the  issue to  the  other  the  s l i g h t l y higher  consideration  compared t o  publicity  R e s t r i c t i o n s on and  of  the  hand,  seek p r i v a t e placements because  desire to avoid  details.  ment o f d i v i d e n d s , may  the  development  both because of  financing institution.  c o n v e n i e n c e and  offerings,  f o r the  i n the  use  and  of  public  disclosure  of assets  debt s e r v i c e  and  of  pay-  charges,  financing of a large  pro-  2 ject. debt  I n some i n s t a n c e s , i s s u e may  a l l y where t h e  be  the  sum  only  p r i v a t e placement of a long  term  acceptable  especi-  required  In g e n e r a l ,  i s very  financial  source of large.  institutions  i n v e s t o n l y where a s u b s t a n t i a l e q u i t y already  e x i s t s and  success  are w i l l i n g  i n t e r e s t i n the  seems p r a c t i c a l l y  of  Security w i l l of  the be  institution  since  to maturity. cash flow  the  the  with  M a r k e t a b i l i t y i s not  institutions  usually hold  D e b t r e p a y m e n t p r o v i s i o n s may  from the  project.  The  d e p e n d upon  nature of  of prime c o n s i d e r a t i o n ,  secondary importance.  important,  and  to  project  assured.  form o f debt instrument a c t u a l l y i s s u e d w i l l practices  funds,  be  the  the  project.  rate of  return  generally the s e c u r i t i e s tailored  to  the  First for  bank l o a n s  mortgage bonds i s s u e d as  have a l r e a d y been d i s c u s s e d ,  forms o f p a r t i c i p a t i o n by p a r e n t Generally,  the  latter  form o f  ferred  i n t o common s h a r e s .  to s t r a i g h t  sponsoring and  as h a v e s e v e r a l  sponsoring  companies.  w h i c h may This  type  o r may of  permits  by  income  n o t be  con-  investment i s pre-  e q u i t y p a r t i c i p a t i o n because  f i r m a more s e c u r e  income, and  or  security  financing i s provided  debentures or p r e f e r r e d stock, vertible  collateral  p o s i t i o n with  i t gives  respect  to  the  capital  i t t o r e c o u p i t s i n v e s t m e n t and  pos-  s i b l y withdraw from the p r o j e c t once i t i s w e l l e s t a b l i s h e d . For  the  operating  of a fixed  company t h i s  debt c a p i t a l  d e b t o r d e f e r m e n t as  and  trust  debt.  floating  lender, and  assets The  the  the  c h a r g e on  the  other  assets.  o f the  company may  be  given  right  mortgage ad-  Where t h e r e be  by  a  as  evidence  every  and  is  dis-  floating  funds have been p r o v i d e d  used have i n c l u d e d p r a c t i c a l l y  pension  funds are  M o r t g a g e may  a debenture i s s u e secured  known, i n d i c a t i v e o f t h e achieving  c o m p a n i e s and  f o r which the  Deed o f T r u s t and  form i n which  of instrument  insurance  assets  the  require.  demand t h e p r o t e c t i o n o f a f i r s t  on  life  exigencies  repayment o f  funds w i l l  pensed w i t h the  conditions  permits  the  vanced p l u s a  on  s t r u c t u r e and  the  Generally,  bond i s s u e s e c u r e d  o n l y one  arrangement avoids  charge  of  the  the  type  method  ingenuity of mining f i n a n c i e r s i n  combination  for their particular  project.  In a d d i t i o n t o prime s e c u r i t y and an i n t e r e s t slightly  above t h e c u r r e n t r a t e f o r i n d u s t r i a l bonds, t h e  i n s t i t u t i o n s p r o v i d i n g development c a p i t a l w i l l cover  their  investment  attached  package p r i c e d lender. be  b y i s s u i n g bonds w i t h  or with  life  t o some d e g r e e i n t h e p r o f i t s  a c c r u i n g t o t h e owners o f t h e e n t e r p r i s e .  may b e a c c o m p l i s h e d warrants  wish t o r e -  a t least within the foreseeable  o f t h e mine and t o p a r t i c i p a t e normally  rate  stock  The l a t t e r  purchase  a bonus o f common s h a r e s ,  t h e whole  t o make t h e common s t o c k n e a r l y f r e e t o t h e  In other  circumstances,  t h e b o n d s o r d e b e n t u r e s may  made c o n v e r t i b l e i n t o common s t o c k a t f a v o r a b l e p r i c e s f o r  limited periods  i n the future.  I f the conversion p r i v i l e g e i s  worth anything  at all,  must b e l o o k e d  upon a s a n i n d i r e c t method o f s e l l i n g  stock.  the issuance o f convertible s e c u r i t i e s  I t h a s t h e a d v a n t a g e s t o t h e company o f b r o a d e n i n g t h e  shareholder  base and m i n i m i z i n g  the cost o f raising  may b e t h e o n l y method o f a t t r a c t i n g t h e o t h e r hand, i t does d i l u t e present  common  shareholders  the necessary  funds, and capital.  On  the equity interest o fthe  a n d may weaken t h e c o n t r o l p o s i t i o n o f  t h e management g r o u p . ^  An ferent  types  indication of the r e l a t i v e of securities  companies i s g i v e n b y t h e s e  importance o f t h e d i f -  o f f e r e d f o r c a s h b y mine figures  developing  from t h e M i n e r a l s  Yearbook  for  1963.  ment b y  U.  r a i s e d by  Of  the  S.  mining firms  (including fuels),  i s s u e o f new  securities.  the  m i l l i o n was  and  only  Apparently  4  b e e n i n c r e a s e d and planning source  billion  and  Of  as the  p l a n t s and $214  this $69  equip-  million  amount, million  $145 for  sale of preferred  the magnitude o f mining p r o j e c t s r i s k of investment decreased  c o s t o f new  T h i s has  f u n d s and  was  by  has careful  meant a  increased  as  a  corresponding availability  capital.  One  o f t h e most i m p r e s s i v e  mine f i n a n c i n g i n r e c e n t R i v e r uranium f i e l d . b o t h h e r e and  itures  new  e v a l u a t i o n , b o n d s h a v e become more i m p o r t a n t  decrease i n the  further.  on  $300,000 f r o m t h e  o f development c a p i t a l .  of venture  spent  r e c e i v e d i n payment f o r b o n d s ,  common s t o c k , stock.  $1.04  years  Much has  elsewhere,  and  S u f f i c e i t t o say  was  uses o f  the  long term debt  development o f the  b e e n w r i t t e n on  there  i s no  t h a t o f the  a m o u n t i n g t o $450 m i l l i o n ,  88  this  for  Blind  subject,  need t o d i s c u s s i t total  percent  capital was  expend-  r a i s e d through  5 b o n d s and  bank l o a n s .  Key  f a c t o r s i n the  l a r g e amount o f d e b t c a p i t a l were t h e of the high  ore horizons,  degree o f p r o f i t  sales  c o n t r a c t s , and  latter, funds,  while  the  existence  likely the  t o be  securing of  i m m e n s i t y and  o f an  assured  realized  enthusiasm of the  on  regularity  market,  the  general  i n f l u e n c e d the  d e c i s i o n o f the  the  government public.  c o n t r i b u t i n g o n l y a small p o r t i o n o f the  certainly  this  The  necessary  institutions  80 to  invest  on  such  an u n p r e c e d e n t e d  More r e c e n t l y ,  the  p r o p e r t y o f Brunswick Mining p r o v i d e s an  financing and  example o f t h e u s e  duction  financing.  Belgium  purchased  The  scale.  o f t h e New  Smelting  o f debt  $11.5  million  Corporation Ltd.  capital  S o c i e t e Generale (U. S.)  Brunswick  des  to complete  Minerais  of 6 percent  mortgage bonds i n a d d i t i o n t o a g r e e i n g t o purchase zinc concentrates (Canadian) sultants company. Chemical  f o r a p e r i o d o f 12 y e a r s .  o f t h e s e bonds were p l a c e d w i t h  L t d . , t h e c o n s u l t i n g and  the  finance the c o n s t r u c t i o n of a smelter, complex. first  Of t h i s  latter  mortgage s i n k i n g  amount, $15  million  by  institutional  Base M e t a l s  and  Ltd., into  million  i n working c a p i t a l .  Funds were o b t a i n e d b y  first  i s s u e o f $6 m i l l i o n  mortgage s i n k i n g  Bruns-  arrange-  production.  including  (Canadian)  fund bonds t o N o r t h g a t e  percent  to bring i t s  a t $10.8  the  5.85  financing  million,  to  buyers.  c o s t s were e s t i m a t e d  through  and  acid plant  t h e New  Capital  Metals  million  f o r the  o f the  E x p l o r a t i o n L t d . of Toronto  wholly-owned s u b s i d i a r y , I r i s h  and  Smelting  refinery,  Somewhat more c o m p l i c a t e d -were t h e ments o f N o r t h g a t e  lead  m i l l i o n o f bonds  fund bonds g u a r a n t e e d  w i c k g o v e r n m e n t were p l a c e d w i t h  first  E n g i n e e r i n g Con-  management f i r m  s a l e o f $20  of  A n o t h e r $8  A wholly-owned s u b s i d i a r y , E a s t Coast Company, a r r a n g e d  pro-  $1  Irish  6-1/2  f o r $5.1  Base  percent million,  and  up t o $6.5  sinking  million  (U. S.)  6-1/4  fund bonds t o o t h e r b u y e r s .  percent f i r s t The  l a t t e r bonds were  purchased a t p a r by the B r i t i s h M e t a l Corp., International addition,  p r e p r o d u c t i o n advances  were r e t i r e d redeemable of  Irish  million  Banks, and t h r e e E u r o p e a n  the Midland  smelting  o f $1 m i l l i o n b y  through the issuance of 5 percent  preference shares.  mortgage  firms.  non-cumulative  Funds f o r N o r t h g a t e ' s  purchase  percent Northgate c o l l a t e r a l  debentures, placed p r i v a t e l y debentures  carried  and  In  Northgate  B a s e M e t a l b o n d s were p r o v i d e d b y t h e i s s u e o f ( C a n a d i a n ) 6-1/2  and  $6  trust  t a k e n up a s r e q u i r e d .  These  a b o n u s o f 40 N o r t h g a t e s h a r e s f o r e a c h 7  $1,000 p r i n c i p a l  amount.  Footnotes to Chapter  7:  1 W. B. D a l e and R. N. B a l e , P r i v a t e U. S. V e n t u r e C a p i t a l f o r I n v e s t m e n t i n Newly D e v e l o p i n g C o u n t r i e s , I n t e r n a t i o n a l C o m p a r a t i v e S t u d i e s - I n v e s t m e n t S e r i e s No. 2, M e n l o P a r k , C a l i f o r n i a , Stanford Research I n s t i t u t e , 1958. 2 G. J . L e n e s s , G. K. M a r t i n , and R. T. G i l m a r t i n , New Money f o r B u s i n e s s , New Y o r k , M c G r a w - H i l l Book Co., 1956. 3 C. James P i l c h e r , R a i s i n g C a p i t a l w i t h C o n v e r t i b l e S e c u r i t i e s , Ann A r b o r , U n i v e r s i t y o f M i c h i g a n - P r e s s , 1955. 4 U. S. B u r e a u o f M i n e s , M i n e r a l s Y e a r b o o k , 1963, U. S. Government P r i n t i n g O f f i c e , 1964, p . 34. 5 E. K. C o r k , Queen's P r i n t e r ,  Washingti  F i n a n c e i n t h e M i n i n g I n d u s t r y , Ottawa, 1962.  6 F i n a n c i a l Post, Survey o f Mines, H u n t e r , 1965, p . 266. 7  Ibid.,  p.  281.  Toronto,  Maclean-  83  C h a p t e r 8.  GOVERNMENT ASSISTANCE  Coincident with g o v e r n m e n t s and the  levels  development. by  more d i r e c t  r e g u l a t i o n of the  the v a r i o u s  tracts;  i n t e r v e n t i o n of the  economy h a s  come g r e a t e r  o f government i n the  central  government assistance  financing of  This assistance i s provided  o f government p u r c h a s i n g  indirectly  direct  extension  land tenure,  The the  developer  license  and  direct  the  economic  prospect  for specified periods, and  Investors  and  disposition  f o r the  by  and  by  providing secure  government  granting  recording of claims,  form the b a s i s  capital.  exclusions  stability.  i s the  of  and  a  the g r a n t i n g  the  of  regulations  of mineral  climate  s e c u r i t y o f i n v e s t m e n t , w h i c h must be venture  and  incentive,  c o n t a c t between the  of a mineral  down f o r t h e h o l d i n g of these  the  s t o c k p i l e con-  finally  favorable to i n d i v i d u a l  political  first  areas  a g e n t s and  o f g o v e r n m e n t l o a n s ; and  to prospect,  concession laid  and  by  mineral  through guarantees of p r i v a t e loans  investment climate  in  i n a v a r i e t y o f ways:  through increased deductions  f r o m income t a x e s ;  All  t r e n d toward s t r o n g e r  d i r e c t payment f o r e x p l o r a t i o n work done; t h r o u g h  facilities  an  the  property.  surrounding  favorable to  the  encourage  e v a l u a t i n g a p o t e n t i a l investment  84 in a developing p r o j e c t w i l l of the country fiscation, action.  and t h e p o s s i b i l i t i e s  l o s s by  A l s o c o n s i d e r e d w i l l be t h e s t a b i l i t y  through  and t h e p o s s i b i l i t y  devaluation.  The p o t e n t i a l  taking  r e t u r n on t h e  the p r o b a b i l i t i e s  p r i s e and o f f a i l u r e  through  A government  s e c u r i t y was  d u r i n g W o r l d War  II.  of success  first  instituted  provide  government w i l l  handled  listed  up t o $250,000 o r 50 p e r c e n t i n the case  p a y up t o 75 p e r c e n t .  i t i s not  States by the  minerals. of the t o t a l  o f s i l v e r where Funds on  the  reasonable  and t h e work must  I f t h e p r o j e c t becomes a mine,  r e p a i d by a 5 p e r c e n t  to  (OME), w h i c h s u p p l i e s f u n d s f o r  t e r m s must b e u n a v a i l a b l e e l s e w h e r e , a p p r o v e d b y OME.  t o encourage  i n the United  T h i s a s s i s t a n c e i s now  c o s t o f t h e program, except  otherwise  being  o f the enter-  deposits strategic  e x p l o r a t i o n programs s e a r c h i n g f o r c e r t a i n  is  investment  decision, this  i n c e n t i v e program designed  Office of Minerals Exploration  will  investment  non-controllable events.  d i s c o v e r y and development o f m i n e r a l  The OME  o f the monetary  monetary v a l u e a c c r u i n g t o t h e i n v e s t o r a f t e r  i n t o account  national  con-  government  of loss of  h a v e a l a r g e b e a r i n g on t h e i n v e s t m e n t  the expected  stability  of nationalization,  p u n i t i v e taxation, or other  unit o f the country  will  consider the p o l i t i c a l  this  be assistance  r o y a l t y on t h e v a l u e o f p r o d u c t i o n ;  repayable.*  85 A s i m i l a r program Saskatchewan ernment, percent  to stimulate  mining a c t i v i t y i n  has r e c e n t l y been announced.  w h i c h owns t h e m i n e r a l  The p r o v i n c i a l g o v -  resources,  will  property. pecting,  Work e l i g i b l e trenching,  drilling,  are  for this  financing w i l l successful.  o f $150,000 on  assistance w i l l  g e o l o g i c a l and g e o p h y s i c a l  and e x p l o r a t o r y  three-year  shaft sinking.  be r e p a y a b l e  from p r o d u c t i o n  from p r o d u c t i o n  of 9  a l s has e x e r t e d  diamond  i f the  share  efforts  has announced  royalties,  t o be  a  followed  up t o a  p u r c h a s e by governments  maxi-  strong  o f s t r a t e g i c miner-  i n f l u e n c e on t h e m i n i n g i n d u s t r y .  known i s t h e s e r i e s o f u r a n i u m c o n t r a c t s w h i c h s p a r k e d boom i n e x p l o r a t i o n and d e v e l o p m e n t i n t h e mid-1950's.  i n Canada  and t h e  Well  the United  A l s o w e l l known i s t h e U. S.  Govern-  ment s t o c k p i l i n g p r o g r a m w h i c h e n c o u r a g e d t h e p r o d u c t i o n many m i n e r a l s  then considered  Most o f t h i s m a t e r i a l was Procurement A d m i n i s t r a t i o n given  pros-  percent.  The d i r e c t  States  each  The g o v e r n m e n t ' s  I n a d d i t i o n , t h e government  exemption  include  surveys,  by a s l i d i n g - s c a l e r o y a l t y a p p l i e d t o net p r o f i t s mum  50  o f t h e c o s t s o f a p p r o v e d work up t o a maximum o f  $50,000 p e r y e a r t o e a c h e n t i t y , o r a t o t a l  of  p a y up t o  necessary  acquired  for national security.  by the Defense  (DMPA) p r i o r  t o 1956,  included o u t r i g h t purchase of products,  guarantees,  loans,  certificates  of  of necessity,  Materials and  floor  assistance price  subsidies,  and  contracts and  t o purchase.  the minerals  T h i s program has s i n c e been  suspended  t r a n s f e r r e d t o t h e U. S. S t r a t e g i c S t o c k p i l e .  A n o t h e r a g e n c y o f t h e U. S. Government t h a t provided  f i n a n c i n g a s s i s t a n c e f o r m i n i n g development-was t h e  Reconstruction  Finance  empowered t o g r a n t projects, several this  Corporation  loans  in  (RFC).  for the production  T h i s a g e n c y was stage  o f mining  and. i t m a t e r i a l l y a s s i s t e d i n b r i n g i n g t o p r o d u c t i o n  l a r g e mines i n t h e U n i t e d  States.  Illustrative of  a s s i s t a n c e was t h e f i n a n c i n g o f S a n M a n u e l ' s l a r g e  c a v i n g mine i n A r i z o n a . $10  formerly  million 1952.  block-  Magma C o p p e r Company h a d s p e n t  on t h e p r o p e r t y b e f o r e  about  s e c u r i n g t h e government  The l o a n c o n t r a c t b e t w e e n S a n M a n u e l C o p p e r  loan  Corpora-  tion  (a w h o l l y - o w n e d s u b s i d i a r y o f Magma) a n d RFC p r o v i d e d a  fund  o f up t o $94 m i l l i o n  a t 5 percent  mine a n d t o c o n s t r u c t f a c i l i t i e s .  interest  t o develop the  The c o n t r a c t s t i p u l a t e d  all  property  o f San Manuel be p l e d g e d  the  company i n v e s t a n a d d i t i o n a l $8 m i l l i o n b e f o r e m a k i n g  drawals  from t h e l o a n fund,  housing  u n i t s be c o n s t r u c t e d .  only  under t h e mortgage,  and t h a t a townsite  a c o n t r a c t was s i g n e d w i t h agreed  from t h e f i r s t  365,200 t o n s  molybdenite concentrate  with-  authorized,  A t t h e same t i m e  DMPA w h e r e b y t h e g o v e r n m e n t  t o p u r c h a s e 347,500 t o n s  that  f o r 1,000  Of t h e $94 m i l l i o n  $76.8 m i l l i o n was a c t u a l l y drawn down.  that  agency  o f c o p p e r a t 24 c e n t s p e r p o u n d  p r o d u c e d , a n d 15,300 t o n s o f  a t 60 c e n t s p e r pound f r o m t h e f i r s t  16,060 t o n s p r o d u c e d . for  The  i n c r e a s e d wages and  were t o be exercised p r i c e of  p r i c e s were s u b j e c t t o  cost of materials.  a t t h e o p t i o n o f San from January  Assistance  pound.  properties  into production  1958,  at the  i n d i r e c t l y by  first  In subsequent y e a r s  through  its  investment  the  limited  through  life  o f o p e r a t i o n o f a new  f r o m income w h i c h  on  i s allowed  e q u i p m e n t i n any  one  year.  r a t e s up  mining initial  t o 100  taxes  levied  three-year  It tax  has  liability  encouraging  percent on  income may  recognize mining percent  expenditures  as d e s i r e d .  a l s o be  be  and  including  amortized  Provincial  suspended d u r i n g  the  period.  o f t e n been asked  g i v e n t o new  new  recover  on b u i l d i n g s , m a c h i n e r y  Preproduction  per year  taxmine.  r a t e o f 30  t h e c o s t o f mine s h a f t s and- d e v e l o p m e n t work may at  to  the heavy usage t o which  D e p r e c i a t i o n at the  new  policies.  exemption from  equipment i s s u b j e c t e d . the d e c l i n i n g balance  and  to finance  company i s p e r m i t t e d  deductions  o f m i n e s and  provincial  incentive tax  three years  the mining  was  negotiated  companies s e e k i n g  C a n a d i a n income t a x r e g u l a t i o n s p r o v i d e an a t i o n during the  agency  4  i s provided  f e d e r a l governments t o mining  Sales to the  Manuel; t h i s p r e r o g a t i v e  t o October,  27.05 c e n t s p e r  adjustment  investment  whether the exemption  m i n e s i n Canada i s e f f e c t i v e i n mining  o r i s o f much v a l u e  from in to  the  new  mine.  "Yes!" early  The life  capital the is  answer t o t h i s  high cash  quickly.  r e t a i n e d by  l o s s and  time  sure,  low  i s especially recovery  i s returned  reinvested in plant  to  cash the  from  income  d e f e r t h e payment i n which c a p i t a l  important  t o the  of can  mar-  flow r e q u i r e s a long p e r i o d  of  investment.  tax  The  three-year  v a l u a b l e to the high-grade  of the e n t i r e  capital  mine,  investment  often  during  period.  O t h e r c o u n t r i e s h a v e a d o p t e d v a r i o u s schemes t o courage mining Republic before  investment  of South A f r i c a  liability  by  d e f e r r i n g income t a x e s .  allows  f o r income t a x  i s incurred.  graduated  make any  rates thereafter.  direct  concessions  Ireland  a four-year tax The  to mining  capital has  exemption  U n i t e d S t a t e s does in this  en-  The  the complete r e t u r n o f  adopted the Canadian system, w i t h and  risk  e x p l o r a t i o n and  the generous deductions effectively  expansion  the exposure to  i n mining  This i s p a r t i c u l a r l y  i n which to amortize  permitting  to recover h i s  capital  f o r several a d d i t i o n a l years,  mine where t h e  unequivocal  tax exemption i n the  This quick r e t u r n reduces  recovered.  exemption  this  t h e company and  To be  an  form o f d i v i d e n d s , the g r e a t e r p o r t i o n  i n successive years  income t a x e s  ginal  i n the  the  the operator  encourages investment  development.  a l s o be  flow p r o v i d e d by  W h i l e some o f t h i s  ventures.  permitted  q u e s t i o n must be  of a p r o j e c t allows  shareholders  o r new of  The  regard,  not  although  89 t h e d e p r e c i a t i o n bonus and  investment  a v a i l a b l e h e l p t o reduce the  tax  I n d e e d , a C a n a d i a n mine owned b y benefit  credits  on  the b a s i s of gross  f o r f o r e i g n taxes  After visions  of the  of taxation. deductible mining  and  the  company l o s e s a l l  on  countering  of commercial no  p r o p e r t y a c q u i r e d as a r e s u l t  p l e t i o n allowance  interest  assistamounts  in a work.  a mine comes  d e d u c t i b l e from o p e r a t i n g income.  o f 33-1/3 p e r c e n t  of the net  taxable  permitted  to operators  o f most m e t a l  and  mines, w h i l e  an a l l o w a n c e  o f 40 p e r c e n t  of p r o f i t s  industrial or  ex-  production.  of the p r o s p e c t o r ' s  development expenses a f t e r  this  produc-  or p r o v i d i n g f i n a n c i a l  s a l e o f a l l o r p a r t o f an  fully  for  development  f o r p r o s p e c t i n g work i s exempt f r o m t a x on  production are  business  Expenses e l i g i b l e  o t h e r p r o p e r t i e s f r o m w h i c h t h e r e was  Current  are  c o m p a n i e s whose c h i e f  to the date  pro-  burden  e x p e n s e s i n c u r r e d i n Canada  t h e p r o p e r t y up  from the  tax i s  payable.  i n c l u d e p r o s p e c t i n g , e x p l o r a t i o n , and  ance t o him received  no  S.  income t a x r e g u l a t i o n s h e l p t o e a s e t h e Preproduction  on  years.  Canadian t a x - f r e e p e r i o d e x p i r e s other  A company e m p l o y i n g a p r o s p e c t o r  is  S.  i n the e a r l y  income, w i t h  i f none a r e  f r o m t a x a b l e income b y  penditures  mining  a U.  or e x p l o r i n g f o r minerals.  deduction  tion,  liability  o f t h e C a n a d i a n t a x e x e m p t i o n b e c a u s e t h e U.  calculated  is  tax c r e d i t g e n e r a l l y  A  into de-  income mineral $4.00 p e r  ounce o f g o l d of  their  i s given  t o mines r e c e i v i n g a t l e a s t  income f r o m g o l d .  Shareholders  are a l s o given a d e p l e t i o n allowance  of mining  70  percent  companies  i n computing t h e i r  per-  5 s o n a l income  tax.  The  Canadian government a l s o extends a s s i s t a n c e  g o l d m i n e s u n d e r t h e Emergency G o l d  Mining  which provides  high-cost producers  basis of a  a subsidy  formula  to certain  amounting t o f i v e - n i n t h s o f the  c o s t a b o v e a b a s i c minimum o f $26.50 p e r ance i s i n t e n d e d tain  their  to lengthen  support  Distinct outlined  of the  policy.  D e v e l o p m e n t Bank concern  e l s e w h e r e on  likely  direct  (IDB),  an  i s to provide reasonable  It will  the  assist-  m i n e s and  main-  are  participation  several quasi-  i n Canada and  largely  the  autonomous i n  B e s t known i n Canada i s t h e o f f s h o o t of the  United their  Industrial  Bank o f C a n a d a .  Its  c r e d i t when i t i s n o t a v a i l a b l e  terms, but  o n l y t o supplement  lend only to those  t o b e _ s u c c e s s f u l and  other  e n t e r p r i s e s which  able to repay  development bank i t i s p a r t i c u l a r l y business.  of these  on  production  This  governmental  operating  These i n s t i t u t i o n s  sources.  life  above i s t h e a s s i s t a n c e g i v e n by  investment  chief  the  ounce.  Act,  towns d e p e n d e n t upon them.  from the  governmental i n s t i t u t i o n s States.  Assistance  to  the  are  l o a n , and  concerned with  small  as  a  The o f new  and  with  the  o i l wells  as  1961  lend to  when 31 finance  to  to the  The but  mitted  to hold  underwrite the tomer.  15  t o mines,  30,  quarries  of  $928,000.  The  peak  $2.6  million.  The  IDB  fixed  assets,  to  IDB  can  not  above the  can  use  be  stock  chartered  increase repay  of the  great  i s u s e d by  compensate  f o r the  e q u i t y b a s e must be  IDB  extent.  granted  i s necessary to obtain  ticipation  financial  with  s e c u r i t i e s by  guarantee loans  rate  being  the  an  assistance,  It is  per-  a loan,  and  approved  t o customers by loan.  of  interest  Equity  r a t e s o r where  b r o a d e n e d t o accommodate g r e a t e r not  exceed a m i n o r i t y  to  custhe  par-  i n s i t u a t i o n s o f above-normal r i s k  rigidity  stock w i l l  is  business.  i n conjunction  issue of equity  and  Repayment  installments  methods o f  t o any  loans  banks' prime  mortgage r a t e .  arranged,  other  done so  equity  I n t e r e s t c h a r g e d on  conventional  years  I t a l s o may  This  o f September  a change o f ownership, o r t o  guarantee.  cash throwoff  b a n k s where t h i s  capital.  purchase of  1 percent  t o d a t e has  As  or  Mortgage s e c u r i t y i s g e n e r a l l y r e q u i r e d ,  u s u a l l y below the  t e r m s o f up  totalled  development  been approached  outstanding  for a total  loans  not  information.  loans  the  sometimes a p e r s o n a l  suited  invested h e a v i l y i n the  to finance  term o b l i g a t i o n s .  p r e s e n t l y about  16  a group,  working c a p i t a l ,  but  not  requisite  t h e r e were o n l y  y e a r was will  has  m i n e s , p o s s i b l y b e c a u s e i t has  presented 1964,  IDB  to  the  loan  position in  the  equity capitalization agreement w i t h the  In  and w i l l  be h e l d  subject  to a  resale  firm.^  the United States the Small Business Administra-  t i o n o f t h e f e d e r a l g o v e r n m e n t p e r f o r m s many o f t h e same  ser-  vices  prob-  a s t h e IDB,  lems o f f i n a n c i n g elsewhere. promoting  The  Through  S.  individuals  l e n d i n g and  industries,  and  particularly  institutions.  c o v e r e d b y t h e U. revolution  the f i n a n c i n g  i n Latin  of  America. to  o f l o a n s made b y  However, t h i s  latter  worthy private form  of  50 t o 75 p e r c e n t o f t h e i n v e s t m e n t i s  S.  Investment  Guarantee  or expropriation,  I n v e s t o r s have not been w i l l i n g assurance  capital  a l s o been v e r y a c t i v e i n  facilitating  investment guarantees  assistance, wherein  war,  Government h a s  various agencies i t provides loan c a p i t a l  p r o j e c t s and  of  i t i s much more c o n c e r n e d w i t h t h e  small concerns unable to o b t a i n  U.  foreign  resource-based  but  from the l o c a l  has  Program i n t h e not proved  event  attractive.  t o a d v a n c e f u n d s w i t h o u t some  government t h a t  the investment w i l l  not  7 be  suddenly  confiscated.  Of t h e a g e n c i e s p r o v i d i n g projects, perhaps to  t h e b e s t known.  foreign  pendent  the Export-Import  subsidiaries  Bank  It will o f U.  upon q u a n t i t y and  S.  grade  direct  assistance to mining  (Eximbank) o f W a s h i n g t o n i s provide project  loan  financing  c o r p o r a t i o n s , t h e amount  de-  of ore reserves, p r o j e c t e d  cash  flow, be  and e x p e c t e d p r o f i t a b i l i t y .  used o n l y  United  Proceeds o f these  loans  may  f o r t h e p u r c h a s e o f goods a n d e q u i p m e n t i n t h e  States.  An example o f t h i s  t y p e o f a s s i s t a n c e was men-  t i o n e d p r e v i o u s l y : t h e $120 m i l l i o n S o u t h e r n Peru Copper C o r p o r a t i o n  l o a n b y t h e Eximbank t o  u s e d t o f i n a n c e mine  develop-  ed  ment a n d p l a n t c o n s t r u c t i o n .  I n a d d i t i o n , t h e Eximbank  g u a r a n t e e - l o a n s made b y p r i v a t e U. S. i n s t i t u t i o n s projects provided and  a s s i s t American exports  Department.  This  r e s o r t , where p o l i t i c a l make d o l l a r loans Also  loans  of local i t will  project  imports.  (AID), a d m i n i s t e r e d  i s d e s i g n e d t o be a l e n d e r considerations  AID w i l l  f o r f o r e i g n purchases by t h e r e c i p i e n t and  currency  to finance  construction of f a c i l i t i e s .  p a y h a l f t h e c o s t o f an i n v e s t m e n t  i s undertaken,  and w i l l  make i n v e s t m e n t risks  s u r v e y i f no guarantees.  of inconverti-  e x p r o p r i a t i o n a n d war, a n d r e q u i r e a b i l a t e r a l  ment a g r e e m e n t .  by the  of last  are important.  These a r e w r i t t e n t o c o v e r t h e s p e c i f i c bility,  and  f i n a n c i n g arm o f t h e U. S. Government i s t h e  Agency f o r I n t e r n a t i o n a l Development State  to foreign  t h e p r o j e c t and t h e i n v e s t o r a r e a c c e p t a b l e ,  t h e funds w i l l Another  will  L o a n s may b e i n s u r e d  for principal  govern-  and i n t e r e s t , 9  and  equity  i n v e s t m e n t s up t o 200 p e r c e n t The  by  o f their par value.  I n t e r A m e r i c a n D e v e l o p m e n t Bank  t h e members o f t h e O r g a n i z a t i o n  (IADB) s p o n s o r e d  o f American States  i s active  94 in  financing  It w i l l  resource-based  p r o j e c t s i n t h e Western Hemisphere.  l e n d o n l y where p r i v a t e  reasonable  terms and c o n d i t i o n s .  will  lend hard  tend  local  charges  currency  currency  a r e about  arranged  funds  over  a r e n o t a v a i l a b l e on  From i t s o r d i n a r y c a p i t a l i t  f o r f o r e i g n purchases,  from  a special  o p e r a t i n g fund.  5-1/2 p e r c e n t p e r y e a r , w i t h  loan capital  f o r mining  (IBRD) i s t h e most i m p o r t a n t .  t h e agreement and g u a r a n t e e  designed  i s located.  and f e a s i b l e ;  the country; the l o a n .  purchases charged raises  t h e World  and c a n l e n d o n l y  with  t h e p r o j e c t must b e w e l l  i t must b e j u s t i f i e d  as b e n e f i c i a l t o  c o u n t r y must b e i n a p o s i t i o n  of the project,  f o rthe foreign  to facilitate  o f m a t e r i a l and equipment.  competitive  Loans a r e n o r m a l l y  t o repay exchange foreign  The r a t e o f i n t e r e s t  i s 1-1/4 p e r c e n t a b o v e t h e r a t e a t w h i c h IBRD the funds.  Bank  o f t h e c o n s t i t u e n t c o u n t r y where  In addition,  and t h e h o s t  institutions  T h i s i n s t i t u t i o n was e s t a b l i s h e d  L o a n s a r e u s u a l l y made o n l y  requirements  repayments  lending  projects,  under t h e a e g i s o f t h e U n i t e d N a t i o n s ,  the p r o j e c t  Interest  8 t o 15 y e a r s .  Of a l l t h e i n t e r - g o v e r n m e n t a l providing  o r i t w i l l ex-  r e p a i d over  itself  15 t o 20  years.  The indirectly.  b e n e f i t s o f IBRD l o a n s may b e f e l t Few d i r e c t  d i r e c t l y or  l o a n s h a v e b e e n made t o m i n e r a l p r o j e c t s  because o f the r i s k the  involved,  nature o f the industry.  t h e n a t u r e o f t h e p r o j e c t , and However, s e v e r a l  large  loans f o r  m i n i n g d e v e l o p m e n t h a v e b e e n made, o f w h i c h t h e $66 m i l l i o n equivalent  a d v a n c e d t o MIFERMA  Mauretania  i s the largest.  made f o r c o n s t r u c t i o n cessing staff  facilities,  i swilling  countries  f o r i r o n o r e development i n  Of g r e a t e r  of hydroelectric f a c i l i t i e s ,  and o t h e r  to provide  related projects.  technical advisory  resources  Two a f f i l i a t e s  Also,  Corporation  prospects.  services to  supply  loan  the guarantee o f the host  or equity  capital  I n t e r e s t charges a r e i n the order  f o rmaturities  type o f f i n a n c i n g . does n o t l e n d  o f 7 t o 13 y e a r s .  t o promising  o f 7 t o 7-1/2  IFC has p a r t i c i p a t e d source o f t h i s  The I n t e r n a t i o n a l D e v e l o p m e n t  t o mining p r o j e c t s  Association  d i r e c t l y but a s s i s t s the  receiving country with the provision o f low-interest, social  capital.  This  assist-  The i n t e r n a t i o n a l F i n a n c e  some m i n i n g p r o j e c t s b u t i s n o t a n i m p o r t a n t  long-  a f f e c t s the industry only  d i r e c t l y by improving the l i v i n g nations.  t h e IBRD  o f t h e W o r l d Bank a l s o p r o v i d e  ( I F C ) does n o t r e q u i r e  government and w i l l  maturity  pro-  and e c o n o m y . ^  ance t o under-developed n a t i o n s .  in  mineral  d e s i r i n g a thorough a p p r a i s a l o f a p r o j e c t and an  unbiased view o f t h e i r  percent  importance a r e the loans  standards o f the  in-  developing  96 In  general,  assistance  t h e i r a g e n c i e s o n l y where p r i v a t e  i s g i v e n by governments funds a r e not a v a i l a b l e  r e a s o n a b l e t e r m s o r where t h e p r o j e c t will of  greatly  further  the n a t i o n a l  receiving  interests.  on  the a s s i s t a n c e  Most,  i f not a l l ,  t h e a g e n c i e s s c r u p u l o u s l y a v o i d any a p p e a r a n c e o f compe-  t i t i o n with private capital, of  and  last  resort.  Nevertheless,  major mining p r o j e c t s medium c o u l d ance,  and p r o f e s s  t o a c t o n l y as a  funds have been p r o v i d e d  on t e r m s w i t h w h i c h no p r i v a t e  compete.  number o f y e a r s ,  to  financing  I n t h e absence o f s u c h government  t h e s e p r o j e c t s might have been d e l a y e d an  lender  assist-  indeterminate  and when u n d e r t a k e n w o u l d u n d o u b t e d l y h a v e  d e v e l o p e d on a much s m a l l e r  initial  scale.  F o o t n o t e s t o C h a p t e r 8: 1 M. H. W r i g h t , " F i n a n c i n g D o m e s t i c M i n i n g V e n t u r e s , " M i n i n g C o n g r e s s J o u r n a l , F e b r u a r y 1964, p . 58. 2 "Program t o S t i m u l a t e M i n i n g i n N o r t h S a s k a t c h e w a n , " C.I-.M. B u l l e t i n , December 1964, p . 306. 3 W. F. B o e r i c k e and C. C. B a i l e y , "Mine F i n a n c i n g , " E c o n o m i c s o f t h e M i n e r a l I n d u s t r i e s , New Y o r k , AIME, 1959, p . 252. 4 V. B. D a l e , M i n i n g , M i l l i n e r , and S m e l t e r Methods, San M a n u e l C o p p e r C o r p . , P i n a l C o u n t y , A r i z o n a , U. S. B u r e a u o f M i n e s I n f o r m a t i o n C i r c u l a r 8104, W a s h i n g t o n , U. S. G o v e r n ment P r i n t i n g O f f i c e , 1962.  been  97 5 W. C. S h a k e s p e a r e , "The T a x a t i o n o f M i n i n g Companies i n C a n a d a , " C.I.M. B u l l e t i n , J a n u a r y 1965, p p . 71-74. 6 J . E . M i l l a r d , I n d u s t r i a l D e v e l o p m e n t Bank, C o m m u n i c a t i o n , J a n u a r y 19, 1965. 7 L. C. Raymond, " I n v e s t m e n t C a p i t a l and M i n i n g E n g i n e e r i n g . A u g u s t 1964, p . 41. 8 J . E. Thompson, Newmont M i n i n g C o m m u n i c a t i o n , M a r c h 8, 1965.  Personal  Mineral  Corporation,  Development,"  Personal  9 V i c t o r E. R o c k h i l l , " S o u r c e s o f F i n a n c i n g and F i n a n c i a l A i d f o r M i n i n g i n L a t i n A m e r i c a , " M i n i n g C o n g r e s s J o u r n a l , December 1963, p . 64. 10 James F. M c D i v i t t , "The W o r l d Bank - I t s R o l e i n F o s t e r i n g M i n e r a l D e v e l o p m e n t , " M i n i n g E n g i n e e r i n g , May 1963, p . 59.  98  Chapter  9.  COST OF DEVELOPMENT CAPITAL  In an e x a m i n a t i o n o f t h e s u p p l y and  the sources o f f i n a n c i n g f o r mining e x p l o r a t i o n  ment, i t i s n e c e s s a r y t o c o n s i d e r by  o f development  tinuing costs  the i n i t i a l costs  costs  of using  and d e v e l o p -  t h e p r i c e t h a t must b e p a i d  t h e mining-company t o a t t r a c t s u f f i c i e n t  includes  o f securing  the funds.  funds.  the c a p i t a l  The i n i t i a l  This  mining  industry.  or flotation  projects  and t h e s p e c i a l c h a r a c t e r  The p r i c e p a i d  The  cost  of capital  considerations.  f o r any investment  risk  exposure.  interest political  A t any g i v e n  element  i n v o l v e s an  This  element—the  compensation f o r  time t h e magnitude o f t h e pure  market c o m p e t i t i o n factor i s considered  f o r funds,  to the industry.  policies,  and i n v e s t o r  t o be o u t s i d e  view o f the i n d i v i d u a l mining p r o j e c t — i n f a c t , external  required  i s d e p e n d e n t upon m o n e t a r y a n d f i s c a l  climate,  preference.  and a r i s k  of the  economic c o n d i t i o n s and  e l e m e n t o f p u r e i n t e r e s t — t h e amount o f c o m p e n s a t i o n to induce investment,  the sources  f o r t h e u s e o f money i n m i n i n g  i s d e p e n d e n t upon e x t e r n a l  i n t e r n a l p h y s i c a l and f i n a n c i a l  price  and t h e c o n -  are related to the size o f financing required,  from which i t i s o b t a i n e d ,  capital  the pur-  i t may e v e n b e  The s e c o n d e l e m e n t , t h a t o f r i s k  99 compensation, future the  is directly  r e t u r n t o be  s e c u r i t y o f the  d i s c u s s i o n of the should in  risk  be  r e l a t e d to the  obtained  from the  uncertainties of  mineral  invested c a p i t a l .  exposure,  development  I t i s fundamental  c o s t o f development f i n a n c i n g t h a t  a decrease i n cost correspondent subject  to the  the  with  the  and in  any  there reduction  i r r e d u c i b l e minimum o f  pure  interest.  There are  s e v e r a l f e a t u r e s o f the mining i n d u s t r y i n  general which c o n t r i b u t e t o the high ment c a p i t a l . assets,  Foremost i s the  each w i t h  a limited  w i l l wish to recover the mine.  grade o f the  the  r e v e n u e t o be  and  mineral  The  indefinite  ore  life,  deposit  are  and  the  develop-  wasting the  a t l e a s t w i t h i n the  investor life  ultimate  from the p r o p e r t y .  s o l d on  size  S i n c e most  element, b e i n g  a c t i o n as w e l l as  and  treatment costs,  The  rising  the m i n e r a l  product  l a b o r c o s t s , and  the  extant  cost of  of  the  rev-  input  politi-  mining supplies.  i n many m i n e r a l  c o n t r i b u t e d t o the  are  i s another  t h e more p r e d i c t a b l e e l e m e n t s o f  certainly  metals  control of  d e p e n d e n t upon t h e v a g a r i e s  t i d e o f n a t i o n a l i s m now  c o u n t r i e s has  of  i n t e r n a t i o n a l m a r k e t s and  f u r t h e r u n c e r t a i n t y i s added t o the p r o s p e c t i v e cost of producing  of  c o n t r i b u t e to the u n c e r t a i n t y  t o f l u c t u a t i o n s i n p r i c e s beyond the  cal  ducing  foreseeable  his capital  obtained  products  thus s u b j e c t  enue.  t h a t mines a r e  Geological uncertainty regarding  and  producer,  fact  costs of securing  pro-  uneasiness  of  investors  and  c a u s e d them t o s e e k g r e a t e r  investing  their  capital  In s e c u r i n g  f o r an  transfer of  importance t o the  funds  the  must p a y  new  property  the  The  original  usually lose a  the  the  interest w i l l  occur w i t h the  reorganization inite  and  of  capital.  i s properly  original  must be  assistance,  called  an  t h e n no  s a t i s f i e d with their  A more s p e c i f i c company o f  securing  defined  the  incurred differs and  as  and  cost  from the  sum  obtained  Exchange Commission  between the  item  cost  by  the  flotation  as  cost.  If  without  the  outside  This  This the  (SEC), w h i c h r e f e r s t o t h e and  the  they  developing  amount o f t h e  used by  indef-  equity.  t o the  company.  in a  e x i s t s , and  resources.  gross proceeds from i n v e s t o r s  or  owners i s  cost  share of  i s the  their  of  to the  adequate f i n a n c i a l  cost of  of  owners, a d i l u t i o n  opportunity final  and  to  opportunity  d i f f e r e n c e between the  the  owners  issue of a d d i t i o n a l stock This  prime  Even i f t i t l e  v e n d o r s were u n a b l e t o d e v e l o p t h e i r p r o p e r t y financial  Of  large part  f i n a n c i n g group.  i s r e t a i n e d by  and  associated  to operator.  e q u i t y p a r t i c i p a t i o n t o the property  promoters  l o s s o f management c o n t r o l  financing.  will  for  return.  c e r t a i n costs  from i n v e s t o r  promoter i s the  o f t e n accompanying the vendors of  uncertain  development c a p i t a l  vendors of a mining property w i t h the  compensation  the  may  be  liability definition  Securities difference net  proceeds  101 to  t h e company."'"  flotation will  F o r the purpose o f t h i s  study  i n c l u d e the u n d e r p r i c i n g o f debt  i s s u e d as w e l l as t h e c o s t o f u n d e r w r i t i n g i n c u r r e d b y t h e company i n s e c u r i n g t i o n s o n t h e management w i t h capital  a n d payment o f d i v i d e n d s  thus indeterminate. warrants or stock conversion  Similarly,  options  privilege  securities  and a l l expenses  capital.  respect  the cost o f  Certain  restric-  t o maintenance o f working  a r e non-cash c o s t s and a r e the cost of stock  issued with  purchase  debt s e c u r i t i e s  and t h e  o f convertible issues i s not d i r e c t l y  measurable.  I t must b e o b v i o u s t h a t t h e c o s t o f d e v e l o p m e n t tal  obtained  b y a m i n i n g company i s d i r e c t l y d e p e n d e n t upon  the p r o s p e c t i v e v a l u e  placed  on t h e p r o p e r t y b y i n v e s t o r s .  Terms o f f i n a n c i n g w i l l b e n e g o t i a t e d tive  will  of prospecting  be c o s t l y ,  a prospect the  ducted  stage  In the e a r l y  deposits  at a l l .  financing  As t h e v a l u e o f  becomes b e t t e r known and. t h e u n c e r t a i n t y  ultimate  final  and e x p l o r i n g m i n e r a l  i f i t c a n be o b t a i n e d  r e t u r n i s reduced,  duced and v e n t u r e  of  on t h e b a s i s o f t h e r e l a -  s t r e n g t h o f company a n d f i n a n c i n g g r o u p .  stages  capi-  capital will  of production  This  t h e c o s t o f funds w i l l become more p l e n t i f u l .  financing, negotiations w i l l  on t h e b a s i s o f s u r e  future value.  surrounding  knowledge and r e l i a b l e  l a t t e r phase o f mining  be r e For the be c o n -  estimates  finance  will  approximate for  the financing  the s p e c i f i c  characteristics previously  Normally, o f development  o f a manufacturing project,  debt c a p i t a l  f i n a n c i n g because  in the project  o f the uncertainties When  The l o w e r e x p e c t e d y i e l d  charges  f o r t a x purposes  most a t t r a c t i v e when a v a i l a b l e .  public permitted to participate. negotiated, developing  often at less firm w i l l  securities  provisions, particular  on t h e $6 m i l l i o n Irish  institu-  financing i s the cost t o the  conversion privileges,  Among security  items.  o f the c o s t o f debt c a p i t a l  t h i s manner i s t h e f i n a n c i n g E x p l o r a t i o n mentioned  Since this  issued by  f e a t u r e s d e s i g n e d t o compensate f o r  and expense  Illustrative  f o r the  i s the general  d e p e n d upon many c o n s i d e r a t i o n s .  and s p e c i a l risks  and o n l y r a r e l y  t h a n arm's l e n g t h ,  these w i l l be t a x advantages,  expendi-  type o f c a p i t a l  m i n i n g companies a r e p l a c e d p r i v a t e l y w i t h f i n a n c i a l t i o n s and s p o n s o r i n g companies,  later  and t h e d e d u c t i b i l i t y  make t h i s  Most d e b t  stages  of future  i t i s used  money i s t h e c h e a p e s t s o u r c e o f f u n d s  company.  of i n t e r e s t  i n the early  t o f i n a n c e c o n s t r u c t i o n and equipment  t u r e s , borrowed mining  mentioned.  i s not used  cash f l o w and r e t u r n o f t h e investment.  except  of Irish  earlier.  secured i n  Base M e t a l s b y N o r t h g a t e  The u n d e r p r i c i n g o f $0.9 m i l l i o n  f a c e v a l u e o f 6-1/2 p e r c e n t b o n d s i s s u e d b y  Base M e t a l s g i v e s a n a p p r o x i m a t e  yield  t o Northgate o f  8.6  percent.  6-1/2  In a d d i t i o n , t h e p r i v a t e i n v e s t o r s h o l d i n g  percent  Northgate  collateral  a bonus o f 40  Northgate  shares  amount o f d e b e n t u r e s . investment  debentures r e c e i v e d  f o r e a c h $1,000  It i s d i f f i c u l t  i n c e n t i v e without  market p r i c e s .  trust  guessing  principal  to evaluate this  received  public,  with  panies.  The  companies a r e  was  securities,  s o l d t o the  the e x c e p t i o n o f stock deals w i t h net p r i c e t o the  and  figure.  In c o n t r a s t t o p r i v a t e placement o f debt most e q u i t y i s s u e s o f m i n i n g  latter  at future dividends  However, t h e c o s t o f t h e c a p i t a l  c o n s i d e r a b l y above t h e nominal  the  general  sponsoring  t r e a s u r y i s u s u a l l y the  com-  firm  u n d e r w r i t i n g o r o p t i o n p r i c e w r i t t e n i n t o a f i n a n c i n g agreement, l e s s any by  accounting,  t h e company.  issued  legal,  is  paid  I n t h e U n i t e d S t a t e s , where common s t o c k i s  t o the p u b l i c a t a f i x e d p r i c e ,  forms t h e u n d e r w r i t e r ' s one  o r e n g i n e e r i n g e x p e n s e s t o be  q u a r t e r o f the  the u n d e r p r i c i n g which  compensation can  face value o f the  amount t o as much  stock.  greater for small issues, especially  the  This  as  compensation  speculative secur-  2 ities  i s s u e d u n d e r SEC  estimated  t h a t o f the  the primary 60 p e r c e n t and  total  funds  percent  of l i s t e d  securities,  c o s t s and  to the t r e a s u r y . securities  I n Canada i t h a s  s u b s c r i b e d by  distribution of unlisted goes t o d i s t r i b u t i o n  o n l y 40  tribution  R e g u l a t i o n A.  The  been  the p u b l i c i n on  the  underwriters'  average profit  cost of primary  i s somewhat l e s s ,  but  dis-  104 still  substantial.  Capital ities  secured  by m i n i n g companies p r o v i d e s  funds r e q u i r e d  for exploration  companies o b t a i n e d ities  through the issuance  during  only  1963.  t h a n $1 b i l l i o n  a small  of public  proportion  and development.  o f the  U. S. m i n i n g  $17 m i l l i o n b y t h e s a l e o f new  This  i s i n contrast  for exploration  secur-  secur-  t o e x p e n d i t u r e s o f more  and development and a n o t h e r 4  $2 b i l l i o n  f o r other  i s probably higher, lations  capital  outlay.  and t h e more a c t i v e m i n i n g m a r k e t , b u t t h e p e r c e n t a g e  explanation  or  proportion  due t o t h e l e s s s t r i n g e n t s e c u r i t i e s r e g u -  o f new f u n d s s u p p l i e d b y t h e p u b l i c  ing  The C a n a d i a n  for this  i s the cost  companies a r e a b l e sponsors,  of public  small.  A  financing.  t o s e c u r e funds from p a r e n t  partial Develop-  organizations  o r by the p r i v a t e placement o f s e c u r i t i e s , f a r  cheaper than they can by a p u b l i c The  is still  t a b l e s which  cost of f l o t a t i o n from t h e l a t e s t  issue.  follow present  some s t a t i s t i c s  o f s e c u r i t i e s b y m i n i n g companies  survey o f the subject  on t h e  gathered  b y t h e SEC i n t h e U n i t e d  5 States. Table  Detailed  I illustrates  offered  Canadian s t a t i s t i c s  the cost o f f l o t a t i o n  to the general  common s t o c k  are not a v a i l a b l e .  public,  of registered  f o r two d e b t i s s u e s ,  i s s u e s , a n d one r i g h t s i s s u e .  issues  fifty-five  C o s t s a r e compared  t o t h e m e d i a n a v e r a g e o f a l l i s s u e s b y U. S. i n d u s t r i e s .  TABLE I COST OF FLOTATION R e g i s t e r e d Issues Offered to the General P u b l i c M i n i n g Companies - 1951, 1953, & 1955 S i z e o f Issue $ Millions Bonds, Under 0.5 1.0 2.0 5.0 10.0 20.0 50.0 & Total  Notes and 0.5 0.9 1.9 4.9 9.9 19.9 49.9 over  Common Under 0.5 1.0 2.0 5.0 10.0 20.0 50.0 i Total  Stock 0.5 0.9 1.9 4.9 9.9 19.9 49.9 over  Rights 1.0 - 4.9  No. o f Issues  Compensation  %  Expenses %  Cost o f F l o t a t i o n Mining  % o f Proceeds A l l Industries  Debentures  3.04 1.88  1.36 0.77  4.40 2.64  2.46  1.06  3.52  11.49 8.17 3.78 1.83 1.52 1.33 1.19 1.49  8 18 14 12 1 1 1  25.50 26.52 18.96 15.23 10.38 11.11 15.00  7.92 6.34 3.22 2.47 1.95 0.38 0.62  33.42 32.96 22.18 17.71 12.33 11.50 15.63  27.15 21.76 13.58 9.97 6.17 4.66 5.37  55  16.67  3.85  20.00  10.28  5.92  1.81  7.74  1 1  S o u r c e : SEC, C o s t o f F l o t a t i o n o f C o r p o r a t e S e c u r i t i e s , 1951-1955, U. S. Government P r i n t i n g O f f i c e , 1957, T a b l e s 2 and 4.  5.22 Washington,  106  The  debt i s s u e s were by  rights  issue.  clined with very  For  t h e common s t o c k ,  l a r g e i s s u e w h i c h may  and  cheapest,  i n c r e a s i n g s i z e o f the  Table tion  f a r the  the  f o l l o w e d by flotation  i s s u e , except  have been d i f f i c u l t  I I g i v e s a breakdown o f the  expenses connected w i t h  t h e g e n e r a l p u b l i c , by  size of  the  to  cost  size  f e r e n t but because the underwriter's T h i s w o u l d seem t o i n d i c a t e t h e panies  desiring  handle.  cost of  compensa-  s i z e o f company.  Agent's  bentures  the  to negotiate  f e e s and  III.  number o f  for a l l industries.  T h i s may  the p u b l i c g i v e n  The  i n Table  final  t e r m s o f an  than  other  dif-  much  less.  two  comare  underwriting.  issues  placed  for public issues,  o f bonds, notes,  issues includes only those  compared w i t h  One  c o m p e n s a t i o n was  the  category  of  categories this  e x p e n s e s o f a common s t o c k  much s m a l l e r t h a n  be  o f i s s u e were any  expenses f o r c o r p o r a t e  In the  companies, whereas i n t h e  seen t o be  cheaply,  l a r g e r or b e t t e r connected  p r i v a t e l y were o b v i o u s l y much l e s s Table  The  development funds from the g e n e r a l p u b l i c  i n a stronger position  shown b y  one  common s t o c k o f f e r e d t o  i s s u e and  expenses o f a g i v e n  de-  f o r the  l a r g e c o m p a n i e s h a v e b e e n a b l e t o o b t a i n f u n d s more not because the  the  and  as de-  mining i s the issue  total are  f o r a debt or p r e f e r r e d i s s u e .  the  cost of issuing  common s t o c k  to  I.  comment on  the  c o s t o f development  capital  TABLE I I COMPENSATION AND  EXPENSES  Common S t o c k O f f e r e d t o t h e G e n e r a l P u b l i c M i n i n g Companies - 1951, 1953, a n d 1955 S i z e o f Issue ($ M i l l i o n s )  S i z e o f Company - A s s e t S i z e i n $ M i l l i o n s U n d e r 1.0 1.0 - 4.9 5.0 - 9.9 10.0 - 19.9  U n d e r 0.5  # C. E.  0.5 - 0.9  # 1 C. E.  1.0-1.9  # C. E.  2.0 - 4.9  # C. E.  5.0 - 9.9  # C. E.  10.0  - 19.9  # C. E.  20.0  - 49.9  # C. E.  20.0 - 49.9  8 25.50 7.92 5 28.80 6.70  3 16.55 5.29  9 21.38 3.23  3 18.79 3.02  1 10.00 4.00  1 6.70 3.12  20.81 2.64  3 11.34 2.42  1 10.00 2.57  1 6.10 1.85  6  N o t e : # - No. o f i s s u e s ;  1 14.28 2.44  1 10.38 1.95 1 11.11 0.38 1 15.00 0.62 C. - C o m p e n s a t i o n a s % o f P r o c e e d s ;  E. - Expenses as & o f  Proceeds r->  S o u r c e : SEC, C o s t o f F l o t a t i o n o f C o r p o r a t e S e c u r i t i e s , 1951-1955, W a s h i n g t o n , U. S. Government P r i n t i n g O f f i c e , 1957, T a b l e s 2 and 4.  o  TABLE I I I AGENT'S FEES AND EXPENSES Corporate Issues Placed P r i v a t e l y M i n i n g Companies - 1951, 1953, and 1955 S i z e o f Issue ($ M i l l i o n s )  No. o f Issues  A g e n t s Fee % A l l Industries Mining  Bonds, N o t e s and D e b e n t u r e s 3 Under 0.3 0.3 0.4 2 0.5 0.9 4 1.0 1.9 3 2.0 4.9 11 5.0 9.9 4 10.0 - 19.9 4 20.0 & o v e r 7 Total 38 Preferred Stock Under 0.5 0.5 0.9 1.0 1.9 2.0 4.9 5.0 9.9 Total  1  2.47 1.72 .89 .41  1.72 1.77 1.40 .63 .35 .20 .53 .40 .39  (AllIndustries) 8 10 16 16 21 71  Common S t o c k U n d e r 0.5 0.5 0.9 1.0 1.9 2.0 4.9 5.0 9.9 Total  (All Industries) 13 10 3 7 4 37  Source:  Cost of F l o t a t i o n  SEC,  .22 .65  1.86 1.60 1.31 .97 .69 .49 .31 .22 .83  Expenses % Mining A l l Indus 1.49 1.06 .83 .59 .43 .34 .32 .22 .43  1.36 .88 .64 .47 .37 .43  .25 .20 .47 .60 .11 .13 of Corporate S e c u r i t i e s ,  1951-1955,  Washington,  is  necessary.  critical initial high,  I n most s i t u a t i o n s t h e  f a c t o r i n the stages  but  so  the  cost of a c q u i r i n g venture  also w i l l  be  the prospect  to the  greater  t h e more d e f i n i t e  nature  of the  bility  that  of c a p i t a l  i s too great,  Conversely, financing  is critical  f u n d s may  once the  u n c e r t a i n t y has  Footnotes to Chapter  be  on,  return  I t i s the  a v a i l a b l e on  the  capital  i n mine f i n a n c i n g .  n o t be  i s generally readily  cost of  c e r t a i n t y of the investment.  Later  a  In  capital, w i l l  of gain.  f i n a n c i n g , the  l o w e r due  risk  be  funds i s not  d e c i s i o n to develop a property.  when c o n s i d e r i n g p r o d u c t i o n will  cost of  any  and  availaIf  the  terms.  b e e n r e d u c e d t o a minimum,  obtainable.  9:  1 S e c u r i t i e s and E x c h a n g e C o m m i s s i o n , C o s t o f F l o t a t i o n o f C o r p o r a t e S e c u r i t i e s , 1951-1955, W a s h i n g t o n , U. S. Government Printing Office, 1957. 2 W. F. B o e r i c k e and C. C. B a i l e y , "Mine F i n a n c i n g , " E c o n o m i c s o f t h e M i n e r a l I n d u s t r i e s , New Y o r k , AIME, 1959, p. 260. 3 E . K. C o r k , F i n a n c e Queen's P r i n t e r , 1962.  i n the Mining  Industry,  Ottawa,  4 A. P e t r i c k , M i n e F i n a n c i n g and P r o m o t i o n , a p a n e l s i o n s p o n s o r e d b y t h e C a n a d i a n I n s t i t u t e o f M i n i n g and l u r g y , V a n c o u v e r , B. C , O c t o b e r 28, 1964. 5  SEC,  op. c i t .  discusMetal-  110  C h a p t e r 10.  SUMMARY OF CURRENT FINANCING  When e x a m i n i n g t h e h i s t o r i c a l financing,  two s o u r c e s  Statistics  on t h e s i z e and r e l a t i v e p r o p o r t i o n s  assets  i s the stock  results  are generally available.  although  often i n over-consolidated  concept—an  o f previous  instantaneous  financing.  t i c s w h i c h measure t h e f l o w the a p p l i c a t i o n o f those  Then t h e r e  funds.  the parameters a f f e c t i n g  statistics  This  their  are usually limited  issue of public securities  form.  picture of the are various  statis-  o f new f u n d s i n t o t h e i n d u s t r y a n d type  much more u s e f u l i n d i s c u s s i n g t h e s o u r c e s and  of various  and l i a b i l i t i e s " o f m i n i n g companies as a group a r e  usually obtainable, This  o f data  r e c o r d o f mine  of information i s o f mining  finance  use, b u t u n f o r t u n a t e l y  these  t o funds r a i s e d through t h e  o r t o a g e n e r a l i z e d overview o f the  industry.  Also complicating  t h e s u b j e c t and o b s c u r i n g t h e  f i n a n c i n g o f e x p l o r a t i o n and development statistics  are given  i s the fact  t h a t most  f o r t h e o p e r a t i n g m i n i n g c o m p a n i e s a n d do  not  specifically  cover  new v e n t u r e  capital  The  e s t a b l i s h e d mining concerns a r e b u s i l y  entering the industry. engaged  u a t i n g themselves and have a l l t h e r e s o u r c e s  i n perpet-  normally  available  t o an o p e r a t i n g e n t e r p r i s e a t t h e i r not d i r e c t e d  toward  i n general, but cess used  i s meager  by  toward  i n the  illustrate  for financing  area the  develop-  s e c t i o n s represent a survey of previous  o f the Canadian of this  study.  t h e m a g n i t u d e and  the reasons  supplemented  Taxation S t a t i s t i c s The  results  relative  specifically  o f the  importance  survey  of the  flow  of  comprehensive  h e r e t o f o r e mentioned.  "Corporation Finance"  m i s s i o n on  Banking  study prepared  and  Finance,  a p p l i c a t i o n o f funds  w h o l e f o r t h e p e r i o d 1947 obtained  pro-  information available  f i n a n c i n g o f m i n e r a l development,  In a s t a f f  from  G.  i n 1963 D.  S u t t o n examined t h e  f o r the Canadian t o 1959."*"  f o r t h e R o y a l Com-  The  the Taxation S t a t i s t i c s ,  mining basic  and was  t h r e e s u b - p e r i o d s w h i c h seemed t o c h a r a c t e r i z e the i n d u s t r y . rising prices ials  the  from v a r i o u s s o u r c e s , b u t a r e not c o n s i d e r e d  SUTTON -  and  o f funds  In t h i s  following  f o r the purposes  for  sources  o f the decision-making  indeed.  an a n a l y s i s  funds  an a n a l y s i s  prospects.  The studies  This study i s  c o r p o r a t i o n f i n a n c e i n the mining i n d u s t r y  to select  ment o f new  disposal.  The  first  phase,  1947  t o 1951,  i n d u s t r y as  information  a  was  presented f o r the growth was  of  a period of  and w o r l d - w i d e s h o r t a g e o f i n d u s t r i a l  o c c a s i o n e d by  source  raw  mater-  the immediate post-war phase o f r e c o n s t r u c -  tion  and t h e subsequent scramble  e a r l y y e a r s o f t h e K o r e a n War. t o 1956, Canada's m i n i n g the uranium, p e t r o l e u m  for stockpiles During  t h e second  and i r o n  expanding  economy. annual  During  investment  i n d u s t r y d e c l i n e d and t h e g r o w t h t r e n d i n t h e  value of sales l e v e l l e d ienced by the r e s t iod,  1952  o r e developments, as w e l l as  t h e t h i r d p e r i o d , 1957 t o 1959, t h e a v e r a g e the mining  period,  i n d u s t r y boomed u n d e r t h e i m p e t u s o f  t h e s u s t a i n e d demand o f a r a p i d l y  in  during the  out c o i n c i d e n t with  o f the North  the recession  A m e r i c a n economy.  1960 t o 1962, was a d d e d b y t h e p r e s e n t a u t h o r  s t u d y up t o d a t e .  exper  A fourth per to b r i n g the  T h i s last.was. a p e r i o d o f c o n s o l i d a t i o n and  recovery preparatory to the present  Unfortunately,  industrial  expansion.  the study by Sutton presents  general view o f the mining  i n d u s t r y and i n c l u d e s c o a l  a very mines,  q u a r r i e s and o i l w e l l s , w h i c h a r e n o t c o n s i d e r e d r e l e v a n t t o the present cedures and  study.  In a d d i t i o n ,  i n vogue i n t h e i n d u s t r y p r e c l u d e a d e t a i l e d  analysis  o f t h e v a r i o u s s e c t o r s and s o u r c e s  d a t a g i v e n on e x p e n d i t u r e s erated reflect  funds  are definitely  the general trends  Table the  the v a r i e t y o f accounting  on f i x e d  Internal  comparison  o f funds.  The  a s s e t s and i n t e r n a l l y  gen-  suspect, but they  nevertheless  i n the industry.  IV on t h e f o l l o w i n g page p r e s e n t s  four periods.  pro-  sources  o f funds  the data f o r  a r e seen  t o have  113 TABLE I V NET SOURCE AND APPLICATION OF FUNDS M i n i n g , Q u a r r y i n g a n d O i l W e l l s I n Canada Average Annual Data ($ M i l l i o n s )  1947-51  1960-  1952-56  1957-59  76 30 22 128 316 122 116 682 18.7  41 2 14 57 262 7 109 435 13.1  44 5 34 83 306 5 -3 582 14.  23 41 64  97 125 222  174 85 259  146 136 282  3 23 25 51  29 29 5 66 129  2 -5 -6 133 124  64 -20 4 252 300  12 26 38  109 222 331  -1 52 51  -26 -165 -191  153  682  434  582  32.5 18.9 48.5 32.9  59.5 28.5 11.7  APPLICATIONS Liquid Assets Accounts Receivable Inventory Total Current Fixed Assets Investment i n S u b s i d i a r i e s Other TOTAL APPLICATIONS Current % Total  25 11 18 54 53 46  -  153 35.2  SOURCES Internal D e p r e c i a t i o n and D e p l e t i o n Surplus Total Internal E x t e r n a l - S h o r t Term Bank L o a n s Accounts Payable Taxes Payable Other T o t a l S h o r t Term  -  E x t e r n a l - L o n g Term Debt Stock T o t a l Long Term TOTAL SOURCES Internal % Total E x t e r n a l S h o r t Term E x t e r n a l L o n g Term Debt % E x t e r n a l L o n g Term  Source: G. D. S u t t o n , P r i n t e r , 1962.  41.8 .33.3 24.8 31.5  Corporate  Finance,. Ottawa, Queen' s  48. 51. -32.!  been important  i n a l l p e r i o d s except the years  when t h e y w e r e o v e r s h a d o w e d b y The  l a t t e r was  and p e t r o l e u m term  particularly  external  the r e s u l t  developments mentioned  b a n k l o a n s and the t o t a l  other l i a b i l i t i e s  the t h i r d  final  short-  period,  with of  period  due  i n fixed important  mining  to the r a p i d w r i t e - o f f o f the heavy i n -  a s s e t s d u r i n g the second s o u r c e o f new  capital  period.  Earnings  i n the second declining  period  i n the  ratio  i n a lower  The  o f t h e i n c r e a s e d volume o f p r o d u c t i o n .  f i n a n c i n g new  than t h a t  for a l l industries  surplus available  fluctuations  e v i d e n c e d by  combined,  diviwhich  f o r investment.  i n t h e volume o f bank l o a n s f o r  development r e f l e c t  a l s o v a r y i n g requirements  obligations.  third  r e c o v e r i n g i n the  industry c h a r a c t e r i s t i c a l l y maintains a higher  dend p a y o u t  as  i s s e e n t r e n d i n g upward, r e a c h i n g a p e a k i n  f o u r t h p e r i o d as a r e s u l t  and  External  d e p l e t i o n allowances  p e r i o d w i t h t h e slow-down o f t h e economy and  results  uranium  accounting f o r over h a l f  under the i n f l u e n c e o f h i g h metal p r i c e s ,  The  1956,  sources.  o f the i r o n ,  i n the  u s e o f d e p r e c i a t i o n and  a source o f funds  were an  to  flow.  The  vestment  long-term  earlier.  s o u r c e s assumed m a j o r i m p o r t a n c e  1952  changes i n monetary  policy  f o r loans to repay maturing  Monetary s t r i n g e n c y reached t h e low p r o p o r t i o n o f new  i t s p e a k i n 1959,  bank l o a n s .  The  debt as  increase  in  'Other L i a b i l i t i e s '  s o u r c e s o f new c a p i t a l are mainly accrued other  than taxes,  subsidiaries. panies,  this  h a s b e e n one o f t h e most  productive  throughout the post-war p e r i o d .  liabilities  t o employees and t o governments  and advances by p a r e n t  With t h e growth i n s i z e source o f funds w i l l  companies t o t h e i r  o f the large mining  assume e v e n g r e a t e r  Debt i s s u e s were o f m a j o r s i g n i f i c a n c e o n l y the  second p e r i o d ,  property  as t h e uranium companies  d e v e l o p m e n t and c o n s t r u c t i o n w i t h  i s s u e o f $268 m i l l i o n in  equity  by  the r a p i d increase  o f debt  financing during  securities.  financed  companies.  The l a r g e  t h i s p e r i o d was a c c o u n t e d  i n o i l and g a s e x p l o r a t i o n ,  In the t h i r d  and commenced  tions.  i n external  This  reduction  importance.  during their  increase f o r mainly  as w e l l as t h e  i n small  p e r i o d many o f t h e s e  began t o be p r o d u c t i v e  com-  the unprecedented  i r o n o r e d e v e l o p m e n t s i n L a b r a d o r a n d t h e boom ation  These  t o repay t h e i r  explor-  developments debt o b l i g a -  long-term sources o f funds  was c l i m a x e d  i n t h e f o u r t h p e r i o d b y t h e c o n s o l i d a t i o n and r e -  organization  o f many o f t h e u r a n i u m m i n i n g c o m p a n i e s , a n d b y  the ment  reduction  i n t h e number o f s m a l l  e x p l o r a t i o n and d e v e l o p -  companies.  With respect increase  i n fixed  expenditure  t o the a p p l i c a t i o n o f these  assets  accounted  i n a l l periods.  funds, the  f o r a major p o r t i o n o f t h e  The s e c o n d p e r i o d was a l s o a t i m e  116 o f heavy investment  i n s u b s i d i a r i e s as m i n i n g and o i l f i r m s  sought t o broaden t h e i r other  assets  flects  during  increases  italized  resource  bases.  The l a r g e i n c r e a s e i n  t h e second and t h i r d  periods  i n d e f e r r e d d e v e l o p m e n t , a s new p r o d u c e r s  t h e e x p l o r a t i o n and development e x p e n d i t u r e s  in bringing their properties to production. investment  i n s u b s i d i a r i e s and o t h e r  efforts  indicative virtual  on i n v e s t m e n t  cap-  incurred  The f a c t  that  both  a s s e t s have d e c l i n e d i n  i m p o r t a n c e may i n d i c a t e t h a t e x i s t i n g their  probably r e -  firms are concentrating  i n p l a n t and equipment.  of the consolidation of e x i s t i n g  a b s e n c e o f new c o m p a n i e s d u r i n g  I t i s also  companies and t h e  the fourth period.  BUCK - " S o u r c e o f C a p i t a l F u n d s " In a b r i e f on  submitted  Canada's Economic P r o s p e c t s ,  i n 1956 t o t h e R o y a l  Commission  W. K e i t h Buck o f t h e M i n e r a l  R e s o u r c e s D i v i s i o n i n Ottawa d i s c u s s e d  t h e f i n a n c i n g o f new  2 developments i n t h e m i n e r a l wide c i r c u l a t i o n  industry.  This b r i e f  a s a n a p p e n d i x t o one o f t h e C o m m i s s i o n  umes b y J o h n D a v i s ,  and has been r e p e a t e d l y 3 d i c a t i o n o f t h e t r e n d i n mine f i n a n c i n g . Each o f t h e g e n e r a l l y accepted the  i n d u s t r y was e x a m i n e d w i t h  was u s e d a n d why o t h e r s public  equity  received vol-  quoted as an i n -  sources  o f funds f o r  a v i e w t o d i s c o v e r i n g why i t  were e x c l u d e d .  financing, private capital  This  survey  sources,  included  government  117 financing, The  e s t a b l i s h e d mining concerns,  main import o f t h e b r i e f  and debt  i s contained  financing.  i n the f o l l o w i n g  quotation: A l t h o u g h an important p a r t o f t h e c a p i t a l funds r e q u i r e d by the mineral i n d u s t r y i s s t i l l s u p p l i e d by e q u i t y c a p i t a l r a i s e d t h r o u g h s a l e t o t h e p u b l i c o f s h a r e s i n m i n i n g companies, t h e r e has been i n c r e a s i n g r e s o r t t o debt f i n a n c i n g w i t h p u b l i c and i n s t i t u t i o n a l funds, t o f i n a n c i a l a s s i s t a n c e by e s t a b l i s h e d m i n i n g companies, and t o government f i n a n c i a l a i d a n d p a r t i c i p a t i o n . Nowadays, e q u i t y c a p i t a l i s l a r g e l y confined t o f i n a n c i n g the search f o r and e x p l o r a t i o n o f m i n e r a l d e p o s i t s . Once t h e d e c i s i o n i s made t o p r o c e e d w i t h d e v e l o p m e n t , r e s o r t i s made, more f r e q u e n t l y t h a n n o t , t o o t h e r l e s s t r a d i t i o n a l methods o f f i n a n c i n g m i n i n g e n t e r p r i s e s .  I n a s u r v e y o f t h e methods b y w h i c h 72 m i n i n g ies  r a i s e d t h e funds needed t o f i n a n c e  major e x p a n s i o n programs d u r i n g found t h a t  the t o t a l  manner p r e s e n t e d  for  f u l l y h a l f o f t h e new  i n T a b l e V.  t h e uranium,  of the industry.  i r o n ore, gold, Retained  p a n i e s were s i g n i f i c a n t asbestos,  1945 t o 1956, i t was secured i n  Bonds and d e b e n t u r e s  accounted  supplemented by  D e b t was o f m a j o r  importance  and c o p p e r - g o l d - s i l v e r  earnings reinvested  loans  sectors  b y m i n i n g com-  sources o f funds f o r the  nickel-copper,  and s i l v e r - l e a d - z i n c s e c t o r s .  The the  the period  funds r e q u i r e d ,  from banks and p a r e n t companies. in  new d e v e l o p m e n t a n d  amount o f $1,330 m i l l i o n was  the  compan-  amount shown a s r a i s e d b y t h e s a l e o f s t o c k t o  p u b l i c i s acknowledged as b e i n g  p o s s i b l y low, b u t t h e o r d e r  118 TABLE V SOURCE OF FUNDS FOR MINE DEVELOPMENT AND EXPANSION I N CANADA 1945 - 1956 Statistics  f o r 72 M i n i n g  Companies  FUNDS REQUIRED BY SECTORS Industry I r o n Ore Nickel-Copper Uranium Silver-Lead-Zinc Copper-Gold-Silver A s b e s t o s and o t h e r Copper-Zinc Gold TOTAL REQUIRED  Total ($ M i l l i o n ) 375 318 240 143 140 52 37 27 1,330  Percent 28.2 23.9 18.0 10.7 10.5 3.9 2.8 2.0 100.0  FINANCING METHOD Bonds a n d D e b e n t u r e s Bonds Debentures Loans Parent o r Sponsor Bank Retained Earnings Stock Sales M a j o r M i n i n g Companies Shareholders General Public Unclassified Miscellaneous Sources  Total 50.0% 36.0% 14.0 9.0 6.0 3.0 27.0 13.0 9.0 1.0 1.0 2.0 1.0 100.0%  S o u r c e : W. K e i t h Buck, S o u r c e s o f C a p i t a l Funds f o r t h e M i n i n g I n d u s t r y , Ottawa, D e p t . o f M i n e s a n d T e c h n i c a l S u r v e y s , J u l y 1956.  of  magnitude i s c o r r e c t .  capital  requirements  working  capital  This survey covers only the  o f new  d e v e l o p m e n t s and  f i n a n c e d by  fixed  thus excludes  the v a r i o u s sources of s h o r t  the  term  funds.  It  i s d i f f i c u l t t o say a t t h i s  r e p r e s e n t e d by t h i s spect to future  s u r v e y w i l l be  financing  time  i f the  considered unusual with r e -  o f m i n e r a l development, but  c e r t a i n l y a t v a r i a n c e w i t h the p e r i o d s immediately and  following.  subscriptions subsidiaries  P r i o r t o World from  War  o f e s t a b l i s h e d mines.  1960's, i n t e r n a l l y - g e n e r a t e d  and  In the l a t e  f u n d s and  1950's and  early  short-term external  funds  as we  t h a t debt  c o n t i n u e t o p l a y an  this  source w i l l  CORK -  another  s i o n on B a n k i n g Noranda Mines,  and  but  staff  likely  important p a r t  i t i s improbable  in that  Industry"  study prepared  F i n a n c e , E . K.  Cork,  f o r the Royal the t r e a s u r e r  Ltd., d i s c u s s e d the p a r t i c u l a r  i n d u s t r y which a f f e c t e d  It i s  dominant.  "Finance i n the Mining In  have a l r e a d y seen.  development c a p i t a l , be a s  preceding  as d i r e c t o p e r a t i n g  assumed m a j o r i m p o r t a n c e ,  t h e s u p p l y o f new  is is  I I , m i n e s were f i n a n c e d b y  the g e n e r a l p u b l i c  securities will  period  t h e f l o w o f new  funds  Commisof  features of  the  i n t o mining  ven-  5 tures.  The  c o v e r a g e was  broader  included  s u c h t o p i c s as t h e d e g r e e  than the present study of foreign c a p i t a l  in  and  120 Canadian mining,  the e f f e c t  r a t e s on m i n e r a l  exports,  integration  of foreign tariffs  and  and t h e p e r v a s i v e n e s s  freight  of vertical  i n the industry.  Many o f t h e f a c t s a n d c o n c l u s i o n s i n c o r p o r a t e d b y Mr. C o r k i n h i s s t u d y h a v e b e e n r e f e r r e d here  i s an i l l u s t r a t i o n  panies  through  the  underwritings  distribution.  capital  of publicly  percent  less  than  capital  raised  exhaustive  relative  40  The c o s t  on a s t o c k e x c h a n g e i s substantial.  a summary  companies  of the  i n Canada f o r  T h i s t a b u l a t i o n was n o t i n t e n d e d t o  nor a l l - i n c l u s i v e ,  disposition  with only  company, b u t i t i s s t i l l  from t h e p u b l i c f o r mining  t h e p e r i o d 1953 t o 1960.  distribution  i t s way t o t h e t r e a s u r y .  f o r a company l i s t e d  f o r an u n l i s t e d  that of the t o t a l  profit,  Table VI which f o l l o w s p r e s e n t s funds  t o the flow  on t h e a v e r a g e i s absorbed  c o s t s and u n d e r w r i t e r ' s  eventually finding  of r a i s i n g  be  a l s o b e made o f  i n the primary  s t o c k , p e r h a p s 60 p e r c e n t  distribution  funds  t o new m i n i n g p r o j e c t s .  r e c e i v e d by the b r o k e r - d e a l e r  of unlisted by  subscribed  B r i e f mention w i l l  M e n t i o n h a s b e e n made o f t h e f a c t funds  com-  and o p t i o n s on t r e a s u r y s t o c k , and  i m p o r t a n c e o f an adequate r e t u r n on i n v e s t m e n t  of venture  sufficient  o f t h e amounts r a i s e d b y m i n i n g  a d i s c u s s i o n of the d i s p o s i t i o n a f t e r primary  to earlier;  but only i l l u s t r a t i v e  o f t r e a s u r y funds  by mining  o f the  companies.  TABLE V I FUNDS RAISED FROM THE PUBLIC FOR CANADIAN MINING COMPANIES 1953 t o 1960 (Amounts i n m i l l i o n s T o t a l Cash R a i s e d by Mining Cos. on T . S . E .  Net f o r Exploration  of dollars)  Raised through Broker-Dealers l e s s 25% f o r O i l  Total Raised for Mining Exploration  D.B.S. Cost o f Prospecting  1953 4 5 6 7 8 9 1960  $ 35.0 22.7 102.4 84.2 53.1 14.4 19.8 7.1  $ 30.4 15.0 78.6 50.0 45.0 12.4 12.3 2.9  $ 7.4 10.6 12.8 18.9 6.8 11.6 14.7 11.4  $37.8 25.6 91.4 68.9 51.9 24.0 26.9 14.3  $17.8 26.8 26.9 48.4 54.4 32.5 43.6 44.3  Total  $338.6  $246.7  $94.2  $340.9  $294.8  Source:  E . K. C o r k , F i n a n c e  i n the Mining  Industry,  Ottawa, Queen's P r i n t e r , 1962.  From t h e lic  total  offerings  (equivalent  subscription), p l o r a t i o n has the by  cost the  by  t o 40  of prospecting  m i n i n g companies from pub50  by  net  percent  of  a t t r i b u t a b l e to the funds from the  junior exploration  total  the  gross  than mining  i s compared  m e t a l m i n i n g c o m p a n i e s as  Dominion Bureau o f S t a t i s t i c s .  exploration  the  or  This  c r e p a n c y b e t w e e n money r e c e i v e d by  the  money r a i s e d f o r p u r p o s e s o t h e r been deducted.  l e a s t h a l f was raise  cash r e c e i v e d  Of  senior  public. and  this  with  reported  total  cost  at  c o m p a n i e s w h i c h do The  not  resulting dis-  money s p e n t on  the  is startling.  No  companies  ex-  ground  j  I  more t h a n / i  $150  m i l l i o n was  $340 m i l l i o n  apparently  raised for this  Part  o f the  necessary overhead of may  be  after be  spent  may  exploration  found i n investments o u t s i d e the  still  o r i g i n a l property  out  be  accounted  companies.  Another  treasuries.  p r o m o t e r s and o f the  insiders rather  However, t h e  may  dis-  significant  f o r the  benefit benefit  shareholders.  In c o n s i d e r i n g vestment  than used  part  Some  funds might have been d i v e r t e d t o the other  the  undertaken  uneconomic.  c r e p a n c y i s l a r g e enough t o c a u s e c o n c e r n w h e t h e r a the  the  f o r by  of prospecting,  p r o v e d t o be  r e s t i n g i n corporate  portion of  of  purpose.  discrepancy the  for exploration  i n mining,  the  the  rate of p r o f i t  generally  requisite for i n -  a c c e p t e d minimum r e t u r n  is  of  10  percent  after  taxes.  investment p a r t i a l l y much h i g h e r , applied of  Where t h e  or  entirely,  i f capital  to the  financing.  vestors  will  capital  e x c e p t where t h e  The their the  c a p i t a l may  not  to  acceptable years.  virtue  be  of  return.  length  enterprises  property an  MEISELMAN -  " C o r p o r a t e S o u r c e s and  In t h i s Research, uses of to SEC  1955.  D.  t o advance long  study f o r the  M e i s e l m a n and  f u n d s by Their  U.  S.  length  no  greater For  more t h a n two  Uses o f  b a s e d on  than  uncertain  future, or  life  equity  by will  capital.  Funds"  Bureau o f  f o r the  Economic sources  period  information  I n t e r n a l Revenue S e r v i c e  some  investors  term debt or  m i n i n g companies  recoup  of payout  f a c i n g an  National  in-  a mine d e v e l o p m e n t  E . S h a p i r o examine t h e  r e s u l t s are  w o r k s h e e t s and  to  importance  a s s u r e d market,  willing  method  high.  i s assured of a long  p r o b a b l y be  be  speculative  for investors  be  the  is  individual  from a base metal p r o p e r t y .  o f a l a r g e o r e b o d y and  i  rate  to the  i s very  Normally,  o f p a y o u t may  Where t h e  losing  advance  even g r e a t e r  accept a prospective  f i v e years  This  regard  not  return  of time r e q u i r e d  t h e more s p e c u l a t i v e  three  possible  of  expected w i l l  r e t u r n demanded b y  some s o u r c e s may  percentage rate of  than three  the  length  initial  company w i l l  of  and  return  a whole w i t h o u t  rate of  vary,  the  i s great  i s available at a l l .  p r o j e c t as The  risk  drawn  tabulations,  and  1950 from and  consequently  the mining  i n d u s t r y as d e f i n e d embraces  a n t h r a c i t e and  bituminous  T a b l e s V I I and  V I I I on  and of  uses o f funds by funds  into  this  before tax,  charges.  The  liability  items  expenditures  the mining  liabilities  outside  used  Thus b o t h  then put  f o r new  and  i s c l a s s e d as a u s e  and  liquidating  dividends.  Table  IX r e l a t e s  o f funds,  source.  Dividends  selected  items  and  equipment  items  e q u i p m e n t assumed as the sources  coming staying in  uses o f  funds  Payment o f  since p r o f i t  tax before  p a i d exclude  t o the t o t a l  stock  flow  i n o r d e r t o show t h e g e n e r a l o r d e r o f m a g n i t u d e o f F l u c t u a t i o n s i n s h o r t term  been e x c l u d e d  a s s e t s and  back  amortization  P l a n t and  t h e amount r e c i r c u l a t e d .  i s shown a s a g r o s s  funds  the  i n the v a r i o u s a s s e t  as g i v e n i n T a b l e V I I I a r e  tax  sources  D e p l e t i o n i s sub-  b e f o r e t a x and  i s shown i n T a b l e V I I .  a r e u n d e r s t a t e d by  item.  profits.  increase or decrease  industry.  The  flow of  a l o n g w i t h d e p r e c i a t i o n and  the s e c t o r only, with  sources  the s t a r t i n g p o i n t i s the  d i v i d e n d s r e c e i v e d from  to o b t a i n the net p r o f i t o f cash,  the  excluding intercorporate dividends  unconsolidated branch  as a s o u r c e  funds  non-metallics.  f o l l o w i n g pages r e l a t e  s e c t o r o f t h e economy, t h u s  s e c t o r and  into  and  the i n d u s t r y f o r t h i s p e r i o d .  i n c l u d i n g domestic  tracted  petroleum,  h a v e b e e n c o n s t r u c t e d t o show t h e g r o s s  corporate p r o f i t but  the  coal,  metals,  liabilities  because they are r e v e r s i n g sources.  Net  of  each have  profit  TABLE V I I SOURCES OF FUNDS - U. S. MINING CORPORATIONS 1950-1955, Annually (Millions o f Dollars)  Transaction  1950  1951  1952  1953  1954  1955  C o r p o r a t e P r o f i t b e f o r e Tax Add: Inventory Valuation A d j . Domestic D i v i d e n d s Rec. F o r e i g n D i v i d e n d s a f t e r Tax Branch P r o f i t a f t e r Tax Less: A u d i t P r o f i t s , Mining Depletion Net P r o f i t b e f o r e Tax  1374  1418  1249  1226  915  1225  - 49 97 2 148  - 9 94 4 196  - 11 87 5 214  - 37 99 2 218  0 62 1 218  - 42 78 1 260  12 607 953  11 703 983  12 70S 824  9 754 745  4 653 539  2 741 779  363 5  412 708 5  450 708 10  462 754 15  499 653 15  528 741 10  37 11  47 6  49 6  45 8  50 5  58 3  S h o r t Term Bank Debt U. S. Govt. Advances Other Notes & A c c t s . P a y a b l e  - 31 0 238  24 4 93  29  2 49  - 5 - 4 - 52  - 22 2 27  102 0 87  Long Term Bank Debt New Bond I s s u e s Mortgages Debt t o Government  - 2 43 6 0  - 9 63 6 0  4 88 6 3  - 7 115 7 l  38 311 11 - 9  101 180 12 - 1  27  44  53  54  125  125  Discrepancy  -192  -200  -502  -226  -161  -275  TOTAL SOURCES  2070  2186  1779  1910  2083  2450  D e p r e c i a t i o n and A m o r t i z a t i o n Depletion Other I n t e r n a l Charges Insurance B e n e f i t s Tax Refunds  New Stock  Issues  607  -  S o u r c e : D. Meiselman and E . S h a p i r o , The Measurement o f C o r p o r a t e Sources and Uses o f Funds, New York, N a t i o n a l Bureau o f Economic Research, 1964, T e c h n i c a l Paper 18, T a b l e s 5 and 6.  TABLE V I I I USES OF FUNDS - U. S. MINING CORPORATIONS 1950-1955, A n n u a l l y (Millions of Dollars)  Transaction P l a n t and Equipment Security Flotation  Exp.  F e d e r a l Income Tax S t a t e Income Tax D i v i d e n d s and Branch P r o f i t s C u r r e n c y and D e p o s i t s U. S. Govt. O b l i g a t i o n s S t a t e & L o c a l Govt. O b l i g . Notes & A c c t s . Rec. Change i n I n v e n t o r y Inventory V a l u a t i o n A d j . Corp. S e c u r i t i e s Bad Debt Charges Retirement o f Bonds Retirement o f Stock  TOTAL USES  1950 1951 1952 1953 1954 1955 579 775 833 839 832 824 24 10 11 15 13 25 240 362 395 304 220 126 15 17 16 9 4 13 553 601 614 649 741 966 162 1 - 51 - 65 177 13 2 13 0 133 -199 147 14 160 -159 51 22 25 428 105 24 - u 119 156 58 - 52 -102 - 39 75 113 0 - 42 - 49 - 9 - 11 - 37 (Not e s t i m a t e d )  5 28 8  5 23  9  10 29 6  15  50 11  15 123  101  10 86 150  2070 2186 1779 1910 2083 2450  Source: D. Meiselman and E . S h a p i r o , The Measurement o f C o r p o r a t e Sources and Uses o f Funds, New York, N a t i o n a l . B u r e a u o f Economic R e s e a r c h , 1964, T e c h n i c a l Paper 18, T a b l e s 5 and 6.  TABLE IX SOURCES AMD USES OF FUNDS S e l e c t e d Items, a s Percent o f T o t a l Flow U. S. M i n i n g C o r p o r a t i o n s - 1950-1955, A n n u a l l y  ITEM  1950  1951  1952  1953  1954  1955  Percent C o r p o r a t e P r o f i t b e f o r e Tax  66.4  64.9  70.2  64.2  43.9  50.0  Net P r o f i t b e f o r e Tax Depreciation & Amortization Depletion  46.0 17.5 29.3  45.0 18.8 32.4  46.3 25.3 39.8  39.0 24.2 39.4  25.8 23.9 31.3  31.8 21.5 30.2  Gross Cash Flow  93.0  96.5  112.0  103.5  84.2  84.0  New Bond I s s u e s Retirement o f Bonds  2.3 1.4  2.9 1.0  4.9 1.6  6.0 2.6  14.9 5.9  7.4 3.5  New Stock I s s u e s Retirement o f Stock  1.3 0.4  2.0 0.4  3.0 0.3  2.8 0.6  6.0 4.8  5.1 6.1  P l a n t and Equipment  28.0  35.4  46.8  44.0  39.9  Income Tax  12.3  17.3  23.1  16.6  11.0  Dividends  26.7  27.4  34.5  34.0  35.6  39.4  FUND FLOW ( m i l l i o n s o f d o l l a r s )  2070  2186  1779  1910  2083  2450  Fund Flow a s P e r c e n t o f : Total Assets  18.9  L8.5  14.4  15.7  16.8  18.1  28.1  27.8  21.9  23.3  25.1  28.4  Net Worth  33.6 5.3  S o u r c e : D. Jfeiselman and E . S h a p i r o , The Measurement o f C o r p o r a t e S o u r c e s and Uses o f Funds, New York, N a t i o n a l Bureau o f Economic Research, 1964, T e c h n i c a l Paper 18, T a b l e s 5 and 6.  128 b e f o r e t a x i s seen  t o b e t h e most i m p o r t a n t  although the net p r o f i t l u t e l y and i n r e l a t i o n  declined t o fund  source o f funds,  during the p e r i o d both  f l o w and t o t a l  was  t h e next major source o f funds,  and  amortization charges.  assets.  absoDepletion  followed by d e p r e c i a t i o n  In comparison,  new s t o c k a n d b o n d  i s s u e s were q u i t e s m a l l , r e a c h i n g m a j o r s i g n i f i c a n c e o n l y i n 1954. year,  Net p r o f i t s  and d e p l e t i o n a l l o w a n c e s  were l o w e r  i n that  due p r o b a b l y t o t h e m i n o r r e c e s s i o n a n d s l a c k e n i n g i n  demand f o r m e t a l s .  P l a n t and equipment e x p e n d i t u r e s largest  use o f funds.  account  Income t a x e s p a y a b l e  the p e r i o d b o t h a b s o l u t e l y and r e l a t i v e l y ,  f o r the  declined  during  indicative of the  c e s s a t i o n o f t h e K o r e a n War a n d a w e a k e n i n g g r o w t h r a t e economy.  D i v i d e n d s p a i d by t h e mining  tained a t a high level. funds, whereas p l a n t  Note t h a t  expenditures  made o u t o f n e t f l o w a f t e r of t o t a l  c o r p o r a t i o n s were m a i n -  this  i s the gross  flow o f  a n d d i v i d e n d payments a r e  taxes.  Fund  flows as a  a s s e t s and o f n e t worth remained  throughout  i n the  fairly  percentage  constant  the period.  CREAMER - " C a p i t a l This  i n Manufacturing  and M i n i n g "  s t u d y b y D. Creamer, S. P. D o b r o v o l s k y , a n d  I . B o r e n s t e i n , p u b l i s h e d i n 1960, e x a m i n e s t r e n d s i n f i n a n c i n g o f a l l U. S. m a n u f a c t u r i n g  . . and mining  . 7 corporations.  It is  129 part of a general sector,  examination of c a p i t a l - o u t p u t r a t i o s  i n which the  ume  of  the  average c a p i t a l  put.  internal  Also  f i n a n c i n g t o the  term f i n a n c e  The  cause o f the i n the  gross  70 p e r c e n t  nal  This  a consequent  additional  short  rather  that  short  funds  the  on  even w i t h  term a s s e t s  supplied  long  U.  S.  while  term  Liquidity  ratios  than short  by  supplied  trade  increased working c a p i t a l ,  h a v e grown f a s t e r  the  assets  financed  extended  inter-  This  These have been and  profits  approxi-  equipment.  term a s s e t s ,  income t a x a c c r u a l s  to  short  of retained  growth o f  funds.  out-  supplied.  sum  p l a n t and  in short  term e x t e r n a l  in  increasing percentage of  t h a n bank b o r r o w i n g s .  been m a i n t a i n e d  increase  remained constant  d e c l i n e i n the  increase  through increased credit  an  and  financing  f i n a n c i n g r e q u i r e d by  r a t i o has  f o r expenditures  indicates a relative and  total  vol-  to produce a g i v e n  d e p l e t i o n c h a r g e s , has  s o u r c e s have c o n t r i b u t e d  funds needed  being  the  this  of retained p r o f i t s  disproportionate  cash flow,  of the  mining companies.  to relate  structure of external  t o t a l of external  d e p r e c i a t i o n and  mately  level  investment r e q u i r e d  examined i s the  determine the  plus  a u t h o r s have attempted  for  have indicating  term  lia-  bilities .  Table the  X  following i s a f a i r l y  f i n a n c i n g o f U.  S.  m a n u f a c t u r i n g and  general mining  overview  of  corporations  130 TABLE  X  GROWTH OF CORPORATE ASSETS AND RELATIVE IMPORTANCE OF INTERNAL AND EXTERNAL FINANCING A l l U.S. M a n u f a c t u r i n g and M i n i n g C o r p o r a t i o n s S e l e c t e d Y e a r s , 1919-1953  ITEM  ($ B i l l i o n )  1948  1953  $52.3  $109.9  $155.5  -11.0  +57.6  +45.6  25.3  13.6  47.7  50.1  5.6 20.6 26.2  -10.6 15.9 5.3  30.8 32.9 63.7  22.0 32.0 54.0  External Financing: Net C a p i t a l S t o c k Net Bonded D e b t  7.0 2.1  1.5 -1.8  4.0 3.0  3.4 6.8  Net  9.1  -0.3  7.0  10.2  Total Assets Change  from  1919  1929  $41.9  $63.2 +21.3  P r i o r Year  E x p e n d i t u r e s on New & Equipment  Plant  Internal Financing: Retained Earnings Depreciation & Depletion Total Internal  Security  Annual Rate o f A s s e t  Growth  A s P e r c e n t a g e o f A s s e t Change: Retained Earnings Depreciation & Depletion Net C a p i t a l S t o c k Net Bonded Debt  * N.C.  1937  +4.2%  -2.4%  +7.0%  26% 96 33 10  N.C.*  53% 57 7 5  +7.1%  48% 70 7 15  - not c a l c u l a t e d  S o u r c e : Creamer, D o b r o v o l s k y & B o r e n s t e i n , C a p i t a l i n M a n u f a c t u r i n g and M i n i n g , P r i n c e t o n , U n i v e r s i t y P r e s s , 1960.  for  t h e p e r i o d 1919 t o 1953.  specifically be  t o sources  some $11 b i l l i o n  i t does n o t r e f e r  o f mine d e v e l o p m e n t c a p i t a l .  seen from t h e f i g u r e s ,  fell  As s u c h ,  total  during  assets rose  f r o m 1919 t o 1929,  the Depression,  and t h e n  s t e e p l y d u r i n g W o r l d War I I a n d t h e p o s t - w a r boom. on  new p l a n t a n d e q u i p m e n t k e p t  pace w i t h  this  ment, b u t i n t h r e e o u t o f t h e f o u r p e r i o d s gross  change i n t o t a l  Internal source  assets.  1930's a s t h e s e external  earnings  they  companies o p e r a t e d  and w i t h  important  the exception of  at a loss.  f i n a n c i n g through s e c u r i t y  adjustments,  move-  exceeded t h e  on f i x e d  were drawn down d u r i n g  the e a r l y  In contrast,  i s s u e s s u p p l i e d a much  even b e i n g  f u n d s a s b o n d s were r e p a i d d u r i n g  pletely  cyclical  exceeded t h e expenditures  s m a l l e r p r o p o r t i o n o f funds,  internal  Expenditures  f i n a n c i n g i s s e e n t o h a v e b e e n an  period,  Retained  rose  assets.  o f funds d u r i n g a l l p e r i o d s ,  the Depression  As may  a net application of  the second p e r i o d .  the increase i n t o t a l  assets  Due t o  i s n o t com-  i n d i c a t i v e of the financing required.  U.S.B.M. - " M i n e r a l s  Y e a r b o o k - 1963"  Data g i v e n h e r e c o n c e r n i n g ments o f t h e U n i t e d  States  the d i r e c t p r i v a t e invest-  i n f o r e i g n m i n i n g and s m e l t i n g  i n d u s t r i e s h a s b e e n drawn f r o m i n f o r m a t i o n p r e s e n t e d  by the  8 U. S. B u r e a u o f M i n e s i n t h e M i n e r a l s Y e a r b o o k f o r 1963.  These  statistics  have been c o n s o l i d a t e d  o n l y t h e main groups for  o f investments.  U. S. i n v e s t m e n t  s m e l t i n g o f $1,482 m i l l i o n  e a r n i n g s was tributed leaving  $91 m i l l i o n .  Deducted  cent—not  a very a t t r a c t i v e  foreign  This  i n Canadian  i n interest  return  o f 3.6 p e r -  from so l a r g e an  investment.  shows t h e m a j o r s o u r c e s o f f u n d s  for direct  subsidiaries  This  and d i v i d e n d s  a t hand i s  a n d i n v e s t m e n t s o f U. S. m i n i n g funds  from t h e American  abroad.  mining  to a yield  latter  companies.  from t h e f o r e i g n o p e r a t i o n s s u p p l y  greater portion of the necessary c a p i t a l ,  funds  mining.  t o the purpose  I n t e r n a l l y generated the  i n Canadian  a m o u n t i n g t o $37 m i l l i o n ,  i s equivalent  More d i r e c t l y p e r t i n e n t Table XI.  interest  f r o m t h i s was t h e u n d i s -  a n e t income t o t h e i n v e s t o r s This  list  i n 1962, t h e U. S. s h a r e o f n e t  earnings of the s u b s i d i a r i e s  o n l y $54 m i l l i o n .  to  o f e a r n i n g s and  f o r t h e U. S. i n v e s t m e n t  From t h e t o t a l  of  Of p a r t i c u l a r  the present study i s the d i s p o s i t i o n  sources o f c a p i t a l  and  f o r convenience  supplemented  p a r e n t and b y e x t e r n a l  category includes domestic  increase o f accrued l i a b i l i t i e s ,  by  funds o b t a i n e d borrowing,  and o t h e r m i s c e l l a n e o u s  sources.  The  m i n i n g o p e r a t i o n s o f U. S. s u b s i d i a r i e s  be more p r o f i t a b l e  i n L a t i n America  the  a net return to the subsidiary of  former y i e l d e d  t h a n i n Canada.  appear t o I n 1962  TABLE X I SOURCES OF FUNDS FOR DIRECT FOREIGN INVESTMENTS OF U. S. MINING 1961 - 1962 (Millions of Dollars)  Country  Net Income  Depreciation & Depletion  Funds from U.S.  Funds Obtained Abroad  Total Sources  INDUSTRIES  Plant & Equipment Expend.  Y e a r 1961: $140 -10 - 2 -15  $390 291 8 124  $165  $ 16  $113  $813  $312  $ 95 80 1 26  $ 95 -28 1 26  $-25 31 1 40  $328 329 8 156  $193  $202  $94  $ 47  $821  $371  Canada L a t i n America Europe Other Areas  $161 219 8 88  $ 80 102 2 24  9 •20 0 27  Total  $476  $208  L a t i n America Europe Other Areas  $163 246 5 64  Total  $478  N.A.*  Y e a r 1962: Canada  *N.A.  - Not A v a i l a b l e  S o u r c e : U. S. B u r e a u o f M i n e s , M i n e r a l s Y e a r b o o k U. S. Government P r i n t i n g O f f i c e , 1964.  - 1963,  Washington,  N.A.  22.4  p e r c e n t on an  11.0  p e r c e n t on  investment  o f $1,099 m i l l i o n  $1,482 m i l l i o n  i n Canada.  D e p r e c i a t i o n and  d e p l e t i o n a l l o w a n c e s were a l s o a more l u c r a t i v e funds  i n L a t i n America,  subsidiaries their is  on A m e r i c a n  influx of c a p i t a l  exceed able  after  i n mid-1962.  the expenditures  of  funds,  U.  risk.  Canada  having r e c e i v e d a heavy  t h e r e v e r s a l o f the exchange r a t e The  total  on p l a n t  S.  repatriating  p o s s i b l y because o f the p o l i t i c a l  relying  ferential  source  the s m a l l e r investment.  i n t h e s e c o u n t r i e s a p p e a r t o be  capital,  still  e v e n on  as a g a i n s t  sources o f funds and  equipment by  dif-  are seen  to  a consider-  margin.  D.N.R. -  "Canadian  Taxation  Statistics"  In the T a x a t i o n S t a t i s t i c s  p u b l i s h e d a n n u a l l y by  the  D e p a r t m e n t o f N a t i o n a l Revenue i n Ottawa, t h e m i n i n g i n d u s t r y is  grouped  under the h e a d i n g  "Mining,  Quarrying,  and  Table 4 of the c o r p o r a t i o n s e c t i o n o f the s t a t i s t i c s a breakdown o f t h e b a l a n c e  s h e e t s and  all  the  fully-tabulated  The  few  companies e x c l u d e d a r e  This table mation ly  on  O i l Wells. provides  income s t a t e m e n t s  c o m p a n i e s s u b m i t t i n g income t a x r e t u r n s inactive  or otherwise  exempt.  i s p r o b a b l y t h e most c o m p r e h e n s i v e s o u r c e o f c o r p o r a t e fund  f o r the mining  The  flows a v a i l a b l e  industry i s divided  infor-  i n Canada,  particular-  into  sub-  sector.  mining  for  eight  industries,  which are f u r t h e r  companies.  For the purposes  quarries, tinent  of this  divisions  a r e Gold Mining, Other Mining U n c l a s s i f i e d ,  Contract D r i l l i n g . fluctuates  e n t r y and e x i t  coal  loss  mines,  Metal Mining,  The number o f f i r m s i n c l u d e d  of firms,  ably constant over the l a s t  five  A reclassification  i n each  cate-  of reclassification,  and o t h e r f a c t o r s ,  i n the mining  Other  a n d P r o s p e c t i n g and  from y e a r t o y e a r because  number o f c o m p a n i e s  the  study,  and  and o i l and n a t u r a l gas have been e x c l u d e d ; t h e p e r -  Non-Metal Mines,  gory  subdivided into p r o f i t  but the t o t a l  s e c t o r has remained  reason-  years.  o f t h e p r o s p e c t i n g companies i n  1960 t a x a t i o n y e a r r e s u l t e d  i n a large  increase i n that r  division gas  and a c o r r e s p o n d i n g d e c r e a s e  firms.  interests  Since i t i s impossible to separate t h i s o f t h e companies  than j u s t mining  f o r Canadian  i n the d i v i s i o n  a r e somewhat  mining  o f s o u r c e s and a p p l i c a t i o n s  companies, a f i v e - y e a r p e r i o d  1957 t o December 31, 1962 was c h o s e n  covers a phase o f t h e i n d u s t r y c y c l e o f t h e 1957 r e c e s s i o n minerals.  group,  the  broader  exploration.  For the a n a l y s i s  31,  i n t h e number o f o i l a n d  by t h i s  from  o f funds December  author.  This  from t h e c o n s o l i d a t i o n  t o t h e j p r e s e n t e x p a n s i o n o f demand f o r  A s h o r t e r p e r i o d w o u l d n o t be s u f f i c i e n t - t o  i n a t e minor f l u c t u a t i o n s , w h i l e f o r a l o n g e r p e r i o d  elim-  the data  136 are  not  consistent.  A p p r o x i m a t e l y 800 analysis. ies  only,  The  first  while  the  opment, and in  assets  three  and  divisions  latter  miscellaneous  companies a r e  two  Table  XII  and  f o r the p e r i o d under c o n s i d e r a t i o n .  cates  increase  t r a t e d h e a v i l y i n the  Metal Mines.  requirements v a r i e d considerably g o l d m i n e s b e c o m i n g more l i q u i d pecting only  companies r e d u c i n g  $1.3  million  of  f o r the  total  This  $1,253.9 m i l l i o n ,  indi-  concen-  However, w o r k i n g  the  devel-  increase  the  between d i v i s i o n s , and  compan-  shows t h e  f o r these d i v i s i o n s  i n assets  the  exploration,  mining sector a total  in  include operating  i n c l u d e the  firms.  liabilities  covered  capital with  m e t a l m i n e s and  their  liquidity.  mining  s e c t o r was  A  net  the pros-  increase  recorded  for  of  the  period.  Total lion, for  mainly  since  h e a v i l y reduced. increased sources of  and  long  by  m e t a l m i n e s and  The  increase  prospecting  capital  in liabilities  operating  mostly  depletion stock  and by  reserves,  e a c h were  reflects  c o m p a n i e s on  i n current  companies  equipment  provided  d e p r e c i a t i o n and  Such a s h i f t  funds.  T h i s was  t e r m d e b t and  dependence o f the  c a p i t a l w e r e $943.6 m i l -  on b u i l d i n g s and  in affiliates.  to surplus  particularly  f o r new  f o r expenditures  investment  additions  requirements  the  internal  liabilities  of  the  indicates increased  use  TABLE X I I INCREASE IN ASSETS AND LIABILITIES A l l Canadian M i n i n g Companies, 1957 t o (Millions of Dollars)  Mining Unclass.  1962  Prospecting & Drilling  Mining Total  $-13.1  $155.4  $1,253.9  19.3  - 2.1  22.9  311.6  250.1  14.9  -23.4  60.2  310.3  83.0  -70.1  4.4  21.3  -37.3  1.3  Fixed Assets Land Bldgs.St Equipment Inv.in A f f i l i a t e s  13.1 -33.5 28.1 18.5  733.6 81.2 617.7 34.7  95.4 -12.5 85.0 22.9  -11.8 - 5.6 - 4.5 - 1.7  127.3 8.0 106.4 12.9  957.6 37.6 832.7 87.3  Intangibles Deferred  - 7.2  -22.4  8.2  0.4  5.1  -15.9  $ 88.7  $641.2  $108.2  $ 10.3  $ 95.2  $943.6  - 7.6  -172.8  - 6.3  .9.0  12.9  -164.8  Stock & Surplus  55.5  368.3  68.6  1.4  17.8  511.6  C a p i t a l Stock Surplus  -46.9 102.4  - 86.0 454.3  -10.0 78.6  9-.6 -8.2  -19.6 37.4  -152.9 664.5  40.6  445.6  45.7  -0.2  64.5  596.2  Item  Gold Mines  Metal Mines  Non-Mstal Mines  $ 97.2  $891.3  $123.1  91.5  180.0  8.5  INCREASE IN TOTAL ASSETS Current A s s e t s Current  Liabilities  Working C a p i t a l  &  TOTAL CAPITAL REQUIRED Supplied  by:  Long Term Debt  Depreciation & Depletion  S o u r c e : Canadian T a x a t i o n S t a t i s t i c s ,  Ottawa, Queens P r i n t e r , y e a r s  1959-1964  o f s h o r t term capital  f i n a n c i n g , w h i l e the o v e r - a l l  f o r t h e s e two  e x p l o r a t i o n and  groups  decrease  coincides with the expansion  development a c t i v i t y .  o f t h e g o l d m i n e s i s p r i m a r i l y due  The  to the i n c r e a s e d p r o s p e r i t y  from the i n c r e a s e i n the p r i c e o f g o l d  dollars.  The  vestment their  major o p e r a t i n g groups  in  decreased  Canadian their i n -  i n d e f e r r e d development e x p e n d i t u r e s w h i l e  investment  in affiliates,  g r e a t e r p a r t i c i p a t i o n by  in  increased l i q u i d i t y  resulting  two  i n working  highlighting  increasing  the t r e n d  toward  the p a r e n t companies i n s u b s i d i a r y  developments.  Table X I I I which of  funds  f o r a l l Canadian  particularly  emphasizing  Compare t h e i n t e r n a l total  new  capital  vious table.  follows mining  their  cash  g r o s s l y exceed  o f $943.6 m i l l i o n  ments .  from  sources.  i n new  plant  a l s o because  f i g u r e d e r i v e d from  this  funds,  and d e f e r r e d  Note t h a t d i v i d e n d s  f o r income t a x p u r p o s e s . reflects  the  the p r e -  t h e n e t income f r o m o p e r a t i o n s , p a r t l y  Income and A d j u s t m e n t s "  a composite  period,  shows t h e d i s p o s i t i o n o f t h e s e  t h e payment o f d i v i d e n d s .  a c c o u n t i n g method u s e d  sources  d e p e n d e n c e upon i n t e r n a l  o f t h e i n c l u s i o n o f l o s s c o m p a n i e s and  "Other  the  companies d u r i n g the  t h e main a p p l i c a t i o n s b e i n g investment d e v e l o p m e n t , and  illustrates  f l o w o f $1,815.0 m i l l i o n w i t h  requirements  T a b l e XIV  next  The  because  of  the  large  difficulty,  t h e c o n s o l i d a t e d income  item  being state-  139 TABLE  Xin  SOURCE OF FUNDS A l l Canadian M i n i n g Companies, 1957 t o 1962 (Millions of Dollars)  Item  Gold Mines  Taxable O p e r a t i n g Income  Mstal Mines  $ 36.4 $ 466.9  Mining Un c l a s s .  Prospecting & D r i l l i ng  $118.8  $-0.8  $ 17.3  Non-Metal Mines  Mining Total  $ 638.6  L e s s Income Tax  17.4  209.4  49.3  0.1  10.2  286.4  Net Income from Operations  19.0  257.5  69.5  -0.9  7.1  352.2  C a p i t a l Cost Allowance  41.8  671.4  86.0  0.1  48.1  847.4  Depletion  74.7  225.0  54.0  0.2  0.4  354.3  W r i t e - o f f Mine Development  19.0  224.9  14.7  0.2  2.3  261.1  TOTAL INTERNAL CASH FLOW  154.5  1,378.8  224.2  -0.4  57.9  1,815.0  Other Income & A d j .  124.3  428.2  - 6.2  -8.1  52.4  590.6  I n c r . L o n g Term Debt  9.0  12.9  21.9  Incr.Capital  9.6  9.6  Decrease  Stock  Land  Decr.Bldg.& E q u i p .  33.5  12.5  5.6  51.6  6.4  22.5  12.9  41.8  1.7  1.7  Decrease Investment in A f f i l i a t e s  70.1  Deer.Working C a p i t a l TOTAL SOURCES  Percent  Internal  S o u r c e : Canadian  $318.7 $1,877.1 48.5  73.5  Taxation S t a t i s t i c s ,  . 37.3 $253.0 88.6  $30.3  107.4  $160.5  $2,639.6  36.0  68.8  Ottawa, Queens P r i n t e r , y e a r s  1959-1964.  140 TABLE XIV APPLICATION OF FUNDS A l l Canadian M i n i n g Companies, 1957  to  1962  (Millions of Dollars)  Item  Gold Mines  Increase Bldgs. & Equipment Increase  Metal Mines  $ 34.5 $  Non-Metal Mines  617.7 $107.5  Mining Unclass.  $  8.4  81.2  Land  Prospecting & Drilling  $106.4  Mining Total  $  874.5  8.0  89.2  12.9  89.0  7.4  245.2  Increase Invest, in Affiliates  IS.5  34.7  22.9  I n c r . D e f e r r e d Dev.  11.8  202.5  22.9  I n c r . L o n g Term Debt  7.6  172.8  6.3  46.9  86.0  10.0  19.6  162.5  116.4  682.2  79.0  6.2  8B3.B  Deer.Capital  Stock  Payment o f D i v . I n c r . Working Capital TOTAL APPLICATIONS  Percent C a p i t a l Expenditure  83.0  0.6  186.7  4.4  21.3  $318.7 $1,877.1 $253.0  $ 30.3  14.5  42.8  S o u r c e : Canadian T a x a t i o n S t a t i s t i c s ,  51.5  29.7  108.7 $160.5  $2,639.6  35.0  39.6  Ottawa, Queens P r i n t e r , y e a r s  1959-1964  141 The tant  source  capital  o f funds  the p r o s p e c t i n g  cost allowance  i s seen t o be an impor-  f o r the operating  companies.  Depletion  companies and a l s o f o r and w r i t e - o f f s o f mine  development expenditures  a r e important  firms.  m i n i n g companies as a group  at  The u n c l a s s i f i e d  and t h e s a l e o f a s s e t s  same t i m e t h e s e  companies  larger  than the r e d u c t i o n  The ternal  operating  liabilities  f o r development  increased  through the reduction o f short  long  term l i a b i l i t i e s ,  companies r e d u c e d t h e i r the period,  result  The r e d u c t i o n  i n capital  long  term ex-  o f t h e uranium  i n t h e use o f t h i s  stock  outstanding  source  i sthe  foregoing  groups.  t a b l e s a r e hampered b y t h e f a c t  same c o m p a n i e s a r e n o t a l w a y s r e p r e s e n t e d  groups and a r t i f i c i a l an attempt  source  on a s c a l e  o f mergers and c o n s o l i d a t i o n s i n s e v e r a l o f t h e l a r g e  The  is  capital  The' l a r g e d e c r e a s e i n  the successful operation  m i n i n g i n v e s t m e n t and d e v e l o p m e n t  the  At the  adding further t o t h e i r  i r o n o r e mines, t h e c h i e f p i o n e e r s funds.  capital  i n assets.  during  term debt r e f l e c t s  operated  funds.  t h e i r working  independence o f the c a p i t a l markets.  of  t o the operating  a l o s s and were h e a v i l y d e p e n d e n t upon e x t e r n a l  sources  and  only  fund  flows  to eliminate this  i n t h e same  may be i n d i c a t e d . effect,  that  Table  XV  f o r i tpresents the  a n d a p p l i c a t i o n o f f u n d s f o r 48 m i n i n g c o m p a n i e s  fora  142 single year. the  These a r e p r o f i t  accounting  increase  complexities  i n assets  l i o n but the t o t a l to  the reduction  was a c c o u n t e d ticularly  for this  group d u r i n g  $102.7  liabilities.  operating p r o f i t  54 p e r c e n t  o f the t o t a l  fixed  assets  crease  Most o f t h i s  par-  t h a n government bonds.  t a b l e i s not the  figures. sources  from t h e  N e t income i s s e e n o f funds.  the internal  sources  r e c e i v e d and t h e s a l e o f s t o c k ,  assets  due  increase  i n current assets,  also contribute to current  i n other  mil-  $123.7 m i l l i o n  shown i n t h i s  cost  non-cash charges b r i n g s  Canadian dividends  other  total  f o r t a x purposes, but i s derived  s a l e s revenue and o p e r a t i n g supply  1962 was  r e q u i r e d was  f o r by a l a r g e increase  same a s t h a t d e c l a r e d  other  The  new c a p i t a l  i n current  t h u s some o f  are also eliminated.  marketable s e c u r i t i e s  The  to  companies o n l y ,  Adding i n t o 75  l a n d , and  financing.  includes the reduction  percent.  The d e -  i n d e f e r r e d de-  velopment p r e v i o u s l y mentioned.  Capital tant  i n relation  12 p e r c e n t item  o f $80.4 m i l l i o n ,  t o the increase  i n assets,  o f the a p p l i c a t i o n s o f funds.  reflects  the inadequacies  dends r e p r e s e n t e d increase  expenditures  30 p e r c e n t  i n working c a p i t a l  Table  accounting  XV i s n o t p r e s e n t e d  accounted  imporf o r only  The " O t h e r  o f the data.  o f the t o t a l  while  Expense"  Payment o f d i v i -  fund  flow,  f o r another  with the  20  percent.  as an i n d i c a t i o n o f t h e  143 TABLE XV SOURCE AND APPLICATION OF FUNDS 48 M e t a l M i n i n g Companies P r o f i t Companies O n l y - E x c l u d i n g G o l d F o r t h e Y e a r 1962 (Millions of Dollars)  Amount Operating P r o f i t L e s s : T o t a l Tax D e c l a r e d  Percent  $405.9 50.2  62.2  Net Income f r o m O p e r a t i o n s Add: C a p i t a l C o s t A l l o w a n c e Depletion W r i t e - o f f Mine Development  355.7 59.7 47.2 28.6  54.5  Total  491.2  75.4  Canadian Dividends Received O t h e r N o n - T a x a b l e Income  22.5 8.1  3.4  Add:  46.2 11.2 20.3 53.8  7.1  I n t e r n a l Cash Flow  Sale o f Stock S a l e o f Land S a l e o f B l d g s . & Equipment Decrease i n Other A s s e t s  TOTAL SOURCES AND APPLICATIONS Capital  Expenditures  Other Expenses Increase  $653.3  & Adjustments  Investments  D e c r e a s e Long  80.4  inAffiliates  Payment o f D i v i d e n d s Capital  Source: Canadian T a x a t i o n S t a t i s t i c s , P r i n t e r , 1964.  100.0% 12.3  197.6  Term Debt  Increase i n Working  •  Ottawa,  29.5  4.5  22.4  3.4  194.8  29.8  $128.6  19.7  Queens  relative as  an  and  importance of v a r i o u s  illustration  of the  s u c c e s s f u l groups  sources  and  f i n a n c i n g o f one  o f t h e most a c t i v e  industry.  These  most o f t h e b i g m e t a l m i n i n g o p e r a t o r s  i n the  s u c h may  reflect  the  i n the  a p p l i c a t i o n s but  trend  i n corporate  firms  include  country,  financial  and  as  management.  Summary Generalizations, u s u a l l y wrong. evident  unless  they  are very  However, c e r t a i n b r o a d  i n the mining  industry.  the  increased,  greater  increasing  t e c h n o l o g i c a l e f f i c i e n c y has  capital cash  requirement per  flow  i n an  increase  new  has  expenditures i n short  c o n t i n u a l l y growing p o o l finance  of c a p i t a l  u n i t of mineral  from p r o d u c t i o n  funds t o f i n a n c e ing  resources  As  trends  ventures  are  becoming  are  required,  tended output.  The  on  equipment, the  f u n d s has  the  internal  than the  p l a n t and  though  to lower  been g r e a t e r  of l i q u i d  are  scale of projects i s  term a s s e t s by  distinct  general,  demand  for  result-  operator.  been used  This  to  from the c a p i t a l - g e n e r a t i n g  source.  Coincident with has  come i n c r e a s e d  been reduced,  are  rare.  trend  dependence by  s h o r t term l i a b i l i t i e s has  this  and  as  These e n t i t i e s  operating  a source  capital  toward g r e a t e r  stock  of  companies  funds.  i s s u e s by  liquidity upon  Long term  debt  operating  firms  h a v e become s e l f - p e r p e t u a t i n g ,  145 progressing assets  from v e r y  until  the  illiquid  funds can  be  p o s i t i o n s to r e l a t i v e l y p r o f i t a b l y placed  in  liquid  new  enterprises.  In a d d i t i o n t o s u p p l y i n g new  venture,  spectability the  e s t a b l i s h e d mining concerns lend  an  to p r o j e c t s which they sponsor.  T h i s has  p o i n t where f i n a n c i a l  advance l a r g e because the  institutions  sums o f r i s k  p r o j e c t was  ful  this  companies a t  finance equity  t o be and  Equity still  important  development, but duction  type of  mineral  term  as  to  aura of  re-  reached  have been w i l l i n g very  favorable  a major mining  a  to  terms  just  house.  purchase agreements have However, f o r t h e  success-  term debt i s a t r a n s i t o r y form  q u i c k l y as p o s s i b l e b y  of  shareholders'  liabilities.  capital i n the  on  financing.  l e a s t , long  replaced  short  capital  approved by  Government g u a r a n t e e s and facilitated  development c a p i t a l  s u p p l i e d by  initial  the  general  public  is  s t a g e s o f " e x p l o r a t i o n and  j  mine  j  i t i s becoming i n c r e a s i n g l y obvious t h a t p r o -  financing w i l l  expensive sources.  be  supplied  Much o f t h e  by  more a c c e s s i b l e and  i  less  lj  p u b l i c ' s money i s d i v e r t e d  i from p r o d u c t i v e e x p e n s e s , and the  ground.  risks,  but  employment  only  i n t o p r o m o t i o n a l and  about o n e - s i x t h  Occasionally more o f t e n  of  1  j  i t a c t u a l l y goes i n t o  t h i s money i s w e l l  i t produces only  administrative  rewarded  for i t s  a series of claim  posts  1  or a h o l e i n the ground.  T h i s has  capital,"  t o an  and  we  t u r n now  w h i c h i n f l u e n c e r i s k and  Footnotes  t o Chapter  w e l l been c a l l e d  examination  of the  the c o s t o f development  "risk factors  capital.  10:  1 G. D. S u t t o n , C o r p o r a t e F i n a n c e , a s t a f f s t u d y p r e p a r e d f o r t h e R o y a l C o m m i s s i o n on B a n k i n g and F i n a n c e , Ottawa, Queen's P r i n t e r , O c t o b e r 1962. 2 W. K e i t h Buck, S o u r c e s o f C a p i t a l Funds f o r t h e M i n e r a l I n d u s t r y , Ottawa, D e p t . o f M i n e s and T e c h n i c a l S u r v e y s , July 1956. 3 J o h n D a v i s , M i n i n g and M i n e r a l P r o c e s s i n g i n Canada, Ottawa, Queen's P r i n t e r , 1959, A p p e n d i x B. 4  Buck, op. c i t .  5 E . K. C o r k , F i n a n c e i n t h e M i n i n g I n d u s t r y , a s t a f f s t u d y p r e p a r e d f o r t h e R o y a l C o m m i s s i o n on B a n k i n g and F i n a n c e , Ottawa, Queen's P r i n t e r , November 1962. 6 D. M e i s e l m a n and E . S h a p i r o , The Measurement o f C o r p o r a t e S o u r c e s and U s e s o f F u n d s , New Y o r k , N a t i o n a l B u r e a u o f Economic Research, 1964. 7 D. Creamer, S. P. D o b r o v o l s k y , and I . B o r e n s t e i n , C a p i t a l i n M a n u f a c t u r i n g and M i n i n g , P r i n c e t o n , U n i v e r s i t y P r e s s , 1960 8 ton,  U. S. U. S.  B u r e a u o f M i n e s , M i n e r a l s Y e a r b o o k - 1963, W a s h i n g Government P r i n t i n g O f f i c e , 1964, P a r t I, p p . 37-40  9 D e p a r t m e n t o f N a t i o n a l Revenue, C a n a d i a n t i c s , Ottawa, Queen's P r i n t e r , f o r y e a r s 1959  Taxation t o 1964.  Statis-  147  PART  TWO DEVELOPMENT OF A MINING PROPERTY  Chapter  11.  DECISIONS UNDER UNCERTAINTY  The  s e a r c h f o r a m i n e r a l p r o s p e c t and i t s l a t e r  development i n t o a p r o d u c i n g  mine c o n s t i t u t e a p r i m e  example  o f t h e m u l t i - s t a g e d e c i s i o n process- under c o n d i t i o n s o f uncertainty. producing  The p r i z e  sought—a  a n income s t r e a m  mineral deposit capable o f  sufficient  to justify  the cost o f  its  d e v e l o p m e n t — m a y a t t h e o u t s e t be o n l y v a g u e l y  The  c o n n e c t i o n between t h e funds  u l t i m a t e r e t u r n from only after tion,  spent  defined.  o n e x p l o r a t i o n and t h e  t h e p r o s p e c t may b e v e r y t e n u o u s .  It is  s e v e r a l successive stages o f prospecting, explora-  d e v e l o p m e n t , and c o n s t r u c t i o n t h a t t h e w o r t h o f t h e  m i n e r a l d e p o s i t i s e s t a b l i s h e d and i t i s capable a profit  of returning  t o i t s owners.  This part of the thesis decision process—the  procedure  profitable mineral producers.  i s concerned  used  with  to identify  A t each stage  d e c i s i o n s must b e made b e t w e e n m u t u a l l y  this  and d e v e l o p  o f development  exclusive alternatives,  148 t h e outcome o f w h i c h a r e u n c e r t a i n . to  relate  posed  of risk  t o which venture  t o t h e terms on which i t i s o b t a i n e d .  presented guide  t h e degree  An a t t e m p t  i n the f i r s t  to the p o s s i b l e  the r i s k p r e f e r e n c e s o f t h e s u p p l i e r s , obtaining those  funds.  But f i r s t ,  b e made  capital  i s ex-  The m a t e r i a l  part of the thesis w i l l sources o f funds  will  s e r v e as a  available  a t each  and t h e l i k e l y  stage,  cost of  a word a b o u t d e c i s i o n s  under u n c e r t a i n t y .  In defines  t h e terms o f t h e economist,  the mathematical  quantities  deterministic. glass,  i n t o a p r o d u c t i o n p r o c e s s and t h e  coming o u t .  r e q u i r e d t o produce  s e v e r a l types o f s p e c i a l i z e d determined  Often t h i s  relationship i s  F o r example, t h e q u a n t i t y o f m e t a l ,  and f a b r i c  function  r e l a t i o n s h i p between t h e p h y s i c a l  o f inputs going  q u a n t i t i e s o f outputs  a production  rubber,  one a u t o m o b i l e ,  l a b o r and machines,  i n t h e d e s i g n o f a new m o d e l .  many c a s e s where t h e r e l a t i o n s h i p c a n n o t  plus  i s minutely  However, t h e r e a r e be determined  j  directly ; i  but  i s stochastic.  That  I  i s , the output o f the production  f u n c t i o n may assume a r a n g e  o f v a l u e s , each w i t h a g i v e n  ability  t h a t t h e outcome may b e d e s c r i b e d  o f occurrence,  such  by a p r o b a b i l i t y d i s t r i b u t i o n . t r i b u t i o n a r e determined  The p a r a m e t e r s  dis-  p a r t i a l l y by the nature o f the pro-  duction  f u n c t i o n and p a r t i a l l y b y t h e i n p u t s .  duction  function  i s said  of this  prob-  t o be s t o c h a s t i c  Thus t h e p r o -  a n d i t s outcome  probabilistic.  I n t h e e x p l o r a t i o n and d e v e l o p m e n t o f a m i n i n g perty  several stochastic production  First,  o f course,  tematic  i s the search  p e c t s whose v a l u e s curve.  are distributed  (The l o g a r i t h m s  r a t h e r than describes expected  the values  the size  functions are involved.  f o r a l i k e l y prospect.  search o f a given area w i l l  A  sys-  d i s c l o s e a number o f p r o s according to a  of the values themselves.)  of the deposits.  w i t h i n the area  pro-  lognormal  are normally T h i s same t y p e  distributed o f curve  The number o f d e p o s i t s  c a n be a p p r o x i m a t e d b y a P o i s s o n  dis-  tribution.  Examples o f P r o b a b i l i t y Figure a  lognormal  Distributions  1 o f the s e t o f four which  d i s t r i b u t i o n with  deviation  o f 2.  The f a m i l i a r  when t h i s  distribution  follows  a mean o f 10 a n d a normal curve  i s readily  scale  2 t h e same d i s t r i b u t i o n  i s plotted  t o show i t s c h a r a c t e r i s t i c  shape.  apparent  paper.  ranges o f the standard  d e v i a t i o n a p p e a r on a n a r i t h m e t i c s c a l e i n t h i s Figure  standard  i s drawn on s e m i - l o g a r i t h m i c  N o t e t h a t - t h e one-, two-, a n d t h r e e - s i g m a  illustrates  figure.  In  on an a r i t h m e t i c The s t a n d a r d d e v i a t i o n  a b o u t t h e mean now a p p e a r s on a l o g a r i t h m i c s c a l e .  S i n c e t h e p r o b a b i l i t y o f g e t t i n g a v a l u e b e t w e e n two numbers i n a n o r m a l d i s t r i b u t i o n  i s given by the corresponding  Figure  150  1  LOGNORMAL DISTRIBUTION Logarithmic  Scale  152  Figure 3 LOG-NORMAL DISTRIBUTION P r o b a b i l i t y o f Finding a Mineral D e p o s i t w i t h Present Value o f a t L e a s t V i iiiii iiii i n  iii i ii iiii 1 1  1  1  1  •'  1  i  1  1  i  "i  o  i — ' — • i i • i 1-31  1  —  153 Figure 4 POISSON DISTRIBUTION  154 area under the curve, a s p e c i f i e d value origin  and t h e p r o b a b i l i t y  i s g i v e n by the cumulative  up t o t h a t number, t h e l o g n o r m a l  used t o estimate Figure  the success  3 illustrates  applied  to the present value o f mineral  finding  specified finding  o f a mining  t h e above l o g n o r m a l  search of a p a r t i c u l a r of  of getting at least  area.  The c u r v e  area  d i s t r i b u t i o n c a n be e x p l o r a t i o n program. d i s t r i b u t i o n when d e p o s i t s expected  Note t h a t t h e r e  in a  gives the p r o b a b i l i t y  a d e p o s i t whose v a l u e V i s a t l e a s t amount.  from t h e  equal  i s a 50 p e r c e n t  to a  chance o f  a $10 m i l l i o n d e p o s i t , w h i c h i s t h e mean o f t h e d i s -  tribution,  and a 5 p e r c e n t  chance o f f i n d i n g  a $30 m i l l i o n d e -  posit.  The  P o i s s o n d i s t r i b u t i o n c a n be u s e d  manner t o e s t i m a t e in  a mean o f 3 d e p o s i t s .  ity of finding curve  just  a specified  Thus, w h i l e  at least  found  gives the p r o b a b i l -  number o f d e p o s i t s N, a n d t h e l o w e r probability  a 10 p e r c e n t  5 deposits i n the search,  finding  be  F i g u r e 4 shows a d i s t r i b u t i o n  The u p p e r f i g u r e  i n d i c a t e s the cumulative  N deposits.  of  t h e number o f d e p o s i t s w h i c h w i l l  the search of a given area.  with  i n t h e same  there  of finding  chance e x i s t s  at least  of finding  i s a n 18 p e r c e n t  chance  5. d e p o s i t s .  I t must b e n o t e d represent approximations  that these  t o observed  theoretical  distributions  exploration data.  The  155 p a r a m e t e r s o f e a c h , t h e mean and s t a n d a r d lognormal sampling tions  and t h e mean o f t h e P o i s s o n , may b e e s t i m a t e d o r by comparison w i t h  thus  generated  be  similar areas.  of classical  statistics.  data  I f the  i s good, t h e h y p o t h e s e s r e g a r d i n g t h e a b o v e p a r a m e t e r s c a n accepted.  For purposes o f determining the c a l c u l a t i o n essentially a estimate  o f expected  r e t u r n s and c a p i t a l v a l u e s i s  'more-than' e s t i m a t e .  the actual p h y s i c a l  exploration strategy,  " I t i s not necessary to  amount o r d o l l a r v a l u e o f m i n e r a l s  t o be d i s c o v e r e d ; i t i s o n l y n e c e s s a r y erals  having  obtained.  a v a l u e o f more t h a n  justify  to estimate  a certain  be  Or, more a c c u r a t e l y , t h a t t h e p r o b a b i l i t y  of  a value of at least  the r e q u i r e d  Once h a v i n g  a certain  accepted  a lognormal  d e v i a t i o n as b e i n g  has o n l y t o r e f e r  to  F i g u r e 3.  of  t h e o p e r a t o r t o meet p a r t i c u l a r program.  is sufficient  d i s t r i b u t i o n with  t i v e o f t h e s i t u a t i o n a t hand, t h e o p e r a t o r estimate o f p r o b a b i l i t y  sum  finding  expenditure."  a p a r t i c u l a r mean a n d s t a n d a r d  tion  t h a t min-  sum w i l l  minerals having to  by  The d i s t r i b u -  c a n be t e s t e d a g a i n s t t h e o b s e r v e d  using the 'chi-square t e s t ' fit  deviation of the  representa-  s e e k i n g an  t o a curve  similar  This i s a d i r e c t expression o f the confidence objectives i n h i s explora-  156 Allais, ing  i n a s s e s s i n g the  e x p l o r a t i o n i n a one  the A l g e r i a n Sahara, v a l u e b e t w e e n 1 and 1 and was  1000  million  expected  t o be  concluded 1000  square  4 to 5 b i l l i o n  deposits  i n the  minin  t h a t perhaps twenty d e p o s i t s  of  billion  2 billion  of  mile kilometer area  francs  d o l l a r s ) w o u l d be  w o u l d be  the  million  economic p r o s p e c t s  (yearly output  found.  The  francs, although  francs.  Thus,  t o t a l v a l u e o f the area, w i t h  median  t h e mean  25 p e r c e n t  s t a t e d r a n g e w o u l d c o n t a i n 60  between  of  value value  the  t o 85  percent  t h e most v a l u a b l e  deposit  of  3 w o r t h as much a s  35  t o 40  Probabilistic penditures  on  of v e r t i c a l disclose  percent  results  of the  total.  are a l s o a s s o c i a t e d with  the development o f a p r o s p e c t .  and  lateral  the presence  A certain  d e v e l o p m e n t work may  be  o f a g i v e n amount o f o r e  g e o l o g i c environment but  of which are determined  by  method o f d e v e l o p m e n t .  Similarly,  required but  the geology  factors. likely  However, t h e v a r i a t i o n  t o be  grams due  in a be  the  much l e s s  than  be  to  particular expected  construction  be  estimated  at this  stage  i n e x p l o r a t i o n or development  t o g r e a t e r ex a n t e k n o w l e d g e and  the  expenditures  dependent, upon a number  in results  to  parameters  o f t h e d e p o s i t and  t o c o m p l e t e a g i v e n amount o f p l a n t may  the a c t u a l performance w i l l  amount  expected  t h e a c t u a l r e s u l t s may  vary according to a p r o b a b i l i t y d i s t r i b u t i o n ,  ex-  better  control.  of is pro-  Determination  of  At t h i s and  Probabilities point readers  d e v e l o p m e n t may  o u t c o m e s m i g h t be  be w o n d e r i n g how  determined.  i n view o f the c l a s s i c a l tive  frequency  trials.  experience. drilling  i s here  forecasting  similar  ring  trials  f u t u r e , based such  location,  of  upon p a s t as  the  o b j e c t i v e prob-  that subjective probabilities  (i.e.,  are  circumstances  and  (finding  the estimate,  and  as  and  fam-  drilling  are able ore)  These s u b j e c t i v e p r o b a b i l i t i e s  summation o f t h e k n o w l e d g e , e x p e r i e n c e , performing  of  u s u a l l y h a v e some k n o w l e d g e o f t h e  in related  trial.  useful  Those  the g e o l o g i s t i n charge  the p r o b a b i l i t y of a given event  in this  person  rela-  the o b j e c t i v e prob-  t h e outcome o f a d e c i s i o n o r t r i a l .  with the t r i a l  estimate  the  a g r e a t number  i s unique,  in a specific  confusing  a r e n o t o f much a s s i s t a n c e .  the above t e s t h o l e ) of  over  i s known a s  However, where a t r i a l  It  iliar  event  o c c u r r i n g i n the  of a test hole  abilities  in  d e f i n i t i o n of p r o b a b i l i t y :  o f an o b s e r v e d  o f the event  the p r o b a b i l i t y o f v a r i o u s  This i s p a r t i c u l a r l y  This type of behavior  ability  f a m i l i a r with mining e x p l o r a t i o n  results to occur-  are  the  judgment o f  the  such w i l l  v a r y between  4 individuals. techniques, ful  P r o b a b i l i t i e s may  a l s o be  as an a d j u n c t t o p e r s o n a l e x p e r i e n c e ,  i n a s s e s s i n g the chances o f success  occurring  developed  decision.  of a  by s i m u l a t i o n and  uniquely-  are  use-  158 Risk  and  Uncertainty So  uncertainty ion.  The  f a r we  have not  i n attempting  usual basis  to  d i s t i n g u i s h e d between r i s k f o r e c a s t the  r e s u l t s of a  f o r such a d i s t i n c t i o n  and decis-  i s whether  the  5 probability distribution  i s known o r unknown.  cases o f mining e x p l o r a t i o n the is  known and  ities  attached  conditions the  we  to c e r t a i n events,  consciously  maximize t h e i r with  the  anticipated u t i l i t i e s  theory  This  not  be  thesis.  Conditions  sense,  risk  Where t h e  v a r i a t i o n s are  degree of r i s k .  can  be  measured by  the  standard  ing  likely  be  requires  dealing  the  i n t e r e s t i n g , i s beyond therefore  likely Applied  risk  t o be  expected  large there  a statistical  i s said to  t o s o m e t h i n g more c o n c r e t e ,  i s the probable extent  from t h e i r  of  outcomes.  of  expected or planned values. measure o f d i s p e r s i o n , s u c h  What i s more u s e f u l i s t o d i v i d e  be such  departures  d e v i a t i o n of the p r o b a b i l i t y d i s t r i b u t i o n  results.  more  i s the p o s s i b i l i t y  o f a c t u a l r e s u l t s from t h e i r  of f u t u r e cash flows  will  to  further.  general  a mining venture,  under  seeking  of uncertainty  variation  as  operating  outcome depends upon  t h a t we  o f games, w h i c h , w h i l e  discussed  In the  a high  subjective probabil-  s h a l l be  type of behavior  i n most  distribution  chosen s t r a t e g i e s o f competitors  scope of t h i s  will  we  I t i s o n l y where t h e  uncertainty.  elaborate  form o r type o f  h a v e some k n o w l e d g e o f t h e  of r i s k .  Since  It as  describthe  159 standard flow  d e v i a t i o n by  to give  the  expected value  a measure o f  the  relative  of the  future  cash  r i s k of a given  pro-  7 ;ject.  This  f a c t o r may  j e c t s which are  c o m p l e m e n t a r y and  From t h e as  point  short  flows.  t e r m and  cash  risks,  both because they are  long  term.  long  firm,  risk.  r i s k s may  term i n t h e i r  be  e f f e c t upon  i s given  to short  term  more amenable t o measurement i t has  and  a chance  to  However, i t i s v a r i a t i o n s f r o m  the  f i r m or  rate  i n d u s t r y which i n f l u e n c e  run.  diverse  r e s u l t i n reduced  Most c o n s i d e r a t i o n  expected growth r a t e o f the the  long  s i m i l a r pro-  alternately,  f i r m must c o p e w i t h them b e f o r e  worry about the  of  or  o f view of the  future  because the  used to evaluate  mutually exclusive,  a c t i o n s which are  classified  t h e n be  the  from the health  a c t u a l growth  of  the  firm in  Where a f i r m i s u n a b l e t o g e n e r a t e p r o j e c t s  e n t l y p r o f i t a b l e t o achieve the  desired  growth r a t e  the  suffici-  i t is  ex-  posed to a c o n s i d e r a b l e  degree of r i s k which might r e s u l t i n  its  and  eventual  stagnation  Returning to the have a l r e a d y  demise.  analysis of  been s u b d i v i d e d  I n m i n i n g e x p l o r a t i o n and  categories  i n t e r n a l r i s k are  cial.  Foremost are  the  for promising mineral  term r i s k s ,  i n t o i n t e r n a l and  (Chapter 2). of  short  development the  t e c h n i c a l , business,  technical risks  deposits  external  and  the  involved  and  i n the  these factors main finansearch  development o f these  into  160 p r o f i t a b l e producers.  Particularly  i n the remote r e g i o n s o f  t h e w o r l d w h e r e t h e c o s t o f e x p l o r a t i o n i s h i g h and information ably  from  bilities  i s meager, t h e r e s u l t s  the expected  outcome.  Business  w i t h w h i c h l a b o r and  capital  process, while  financial  curred  i n borrowing  on  firm.  External e c o n o m i c and  and  on  t h e n a t i o n a l and  in  economic a c t i v i t y ,  prices in  and  s u p p l y and metal  stem from  risks  to the  the  liabilities  scene.  Cyclical  give rise  of the mining from  at the p r i c e p r o j e c t e d f o r that p r o j e c t . governmental  repressive taxation,  from a mining  venture.  are  interference, or the t h r e a t  events  fluctuations on  to  metal  variations  venture.  the expected  in-  obligations  effects  course  c o m p l e t e l y o b v i a t e t h e need  introduce uncertainties  efficiency  i t s control  w i t h t h e i r consequent  trends which depart  encount-  a s s o c i a t e d w i t h t r e n d s and  international  demand may  risks  proba-  i n the p r o d u c t i o n  f i r m and b e y o n d  c o s t o f development c a p i t a l ,  instability, tion,  relate  a r e employed  the l o n g term p r o f i t a b i l i t y  l o n g term  financial  l e a s i n g , w h i c h impose f i x e d  to the  financial  risks  risks  to vary consider-  Compounded w i t h t h e s e  a r e t h e n o r m a l b u s i n e s s and  e r e d b y most f i r m s .  the  are l i k e l y  geological  for a  Indeed, of specific  Political  restriction  or  prohibi-  of expropriation a l l  regarding the cash  f l o w t o be r e c e i v e d  The  enterprise  velopment o f m i n e r a l ure in  to r i s k  engaged i n t h e  prospects  i n a number o f ways.  less risky activities,  commodities  like  locations.  Or  ticular the  s a n d and  i t may  v e n t u r e by  gravel  of  project.  the  The  r i s k but  risk  several other the  of  of  f i r m may  to  into projects  variability  the  in  in  With the  exception  of p r o j e c t s which e x h i b i t  which reduce o v e r - a l l r i s k nitude the  return  risks will  o f the  to the  undertaken. be  slightly  investor  exposure i s l i k e l y  above the  return.  finance  risk  the  to  charac-  i n ventures  lower the  In a c o m p e t i t i v e  i s minimal,  sufficient  the capital  a project at a rate of return  p r e v a i l i n g "pure i n t e r e s t " r a t e .  mag-  economy  i s u s u a l l y commensurate w i t h  Where t h e  available to  seek  groups.  c o r r e l a t i o n , investment  total possible  an  guarantees from  labor  risk  earnings  i t may  u n i t s and  of negative  limit  having  relevant p o l i t i c a l  teristics  par-  individually.)  o b l i g a t i o n s , and obtaining  i n urban  engage i n  a l s o employ l e s s l e v e r a g e  t o e n s u r e i t s e c o n o m i c s a f e t y by  standard  c o r r e l a t i o n to  case the  to minimize i t s external  engage  loss in a  firms  i s l e s s t h a n e i t h e r one  m i n i n g e n t e r p r i s e may  de-  i n d u s t r i a l minerals  or d i v e r s i f y  latter  combined v e n t u r e s  attempt  or  showing n e g a t i v e  (In t h e  i t may  the p r o d u c t i o n  Conversely,  countercyclical activities even g r e a t e r  of a l l ,  seek to spread the  joining with  and  seek t o minimize i t s exposFirst  s u c h as  i n d i v i d u a l exposure.  first  may  exploration  only  Conversely,  162 no  rational  investor w i l l  prospective return native  investment  Now  we  i s less offering  undertake  the r i s k  t h a n t h a t o b t a i n a b l e f r o m an less  exposure  t u r n t o an e x a m i n a t i o n  to  i n h e r e n t a t each  funds a v a i l a b l e expected by  Footnotes  alter-  the r e l a t i o n  debetween  stage of the process, the sources  for financing  the s u p p l i e r s o f  t o Chapter  the  risk.  o f the normative  velopment o f a m i n e r a l p r o s p e c t t o observe the r i s k  o f l o s s where  this  d e v e l o p m e n t , and  the  of  return  capital.  11:  1 G. D a v i d Q u i r i n and A. D. Hunt, A Method o f E v a l u a t i n g Investment O p p o r t u n i t i e s i n W i l d c a t Acreage, a paper p r e s e n t e d t o t h e S i x t h W o r l d P e t r o l e u m C o n g r e s s , F r a n k f u r t , J u n e 1963. 2 L e e E . P r e s t o n , E x p l o r a t i o n f o r N o n - F e r r o u s M e t a l s , Washi n g t o n , R e s o u r c e s f o r t h e F u t u r e , I n c . , 1960, p . 59. 3 M. A l l a i s , " E c o n o m i c P r o s p e c t s o f M i n i n g E x p l o r a t i o n A l g e r i a n S a h a r a C a s e S t u d y , " Management S c i e n c e , V o l . 3, No. J u l y 1957, pp. 285-347.  4,  4 C. J a c k s o n G r a y s o n , D e c i s i o n s Under U n c e r t a i n t y , B o s t o n , H a r v a r d B u s i n e s s S c h o o l , 1960, p . 254. 5  F. H.  Knight,  R i s k , U n c e r t a i n t y and  Profit,  Boston,  1923.  6 G. D a v i d Q u i r i n , R i s k and U n c e r t a i n t y i n t h e D e c i s i o n P r o c e s s , C h a p t e r 10 o f an u n p u b l i s h e d m a n u s c r i p t . 7  Ibid.,  Chapter  10.  163  Chapter  12.  THE  First development? "Prospecting  of a l l ,  PROSPECT  what c o n s t i t u t e s e x p l o r a t i o n a n d  The U. S. B u r e a u o f M i n e s i s the search  tion  and v a l u e o f an orebody.  Development  any m i n e r a l w h i c h c a n be r e c o v e r e d  the  means t h a t any e f f o r t  final  ever,  i s the  be d e f i n e d as  at a p r o f i t .  expended  prepara-  This  essen-  a s s e s s m e n t o f i t s e c o n o m i c w o r t h must be r e g a r d e d  as  sense t o i n d i c a t e  i t be on t h e s u r f a c e o r u n d e r g r o u n d .  It  t h e p r o g r e s s i v e improvement  i s worth.  realization  content  i n value  of a  i s more c l e a r l y  defined  i n the development  o f min-  to recovery.  i s a fundamental axiom  e r a l prospects  How-  i s u s u a l l y u s e d i n t h e more g e n e r i c  d e p o s i t as i t s m i n e r a l  and b r o u g h t c l o s e r  t h a t no more s h o u l d be That i s , the l i m i t  of the present value  o f s e c u r i n g a mine w h i c h w i l l profits  Ore may  shape,  to  t h e term development  mineral  that  upon a p r o p e r t y p r i o r  e x p l o r a t i o n , whether  it  of the s i z e ,  o f a mine f o r o r e e x t r a c t i o n . " ^ -  tially  the dictum  f o r o r e , and e x p l o r a t i o n i s t h e  work i n v o l v e d i n g a i n i n g a k n o w l e d g e position  offers  spent  on a p r o p e r t y  of expenditure o f the orebody.  i s the  than  probable  I f the  odds  u l t i m a t e l y p r o d u c e $10 m i l l i o n i n  a r e 1 i n 20, a n d t h e p r e s e n t v a l u e o f t h e f u t u r e  profits  after  deducting  t h a n $100,000 disprove  (.05 x $2,000,000) s h o u l d  the existence  Organization The ducted  t h e c o s t o f p l a n t i s $2 m i l l i o n ,  f o r Prospecting search  f o r promising  mineral  partnerships,  his  interest  paid  appear p r o m i s i n g  be  willing  t o forego  less  interest  a search  the opportunity  with  price  This  type  searching  the i n t r i n s i c  h a n d , an o p e r a t i n g i t s ore reserves,  of a mineral  revenue. attempt t o hedge  i n return for a of activity i s acquisition.  company s e e k i n g  to  or the prospective  f o r a viable deposit, w i l l value  the partner-  a s h o r t term g a i n and  of future  a lower cash  be  t h a n t o make i t  Similarly,  f o r ore than a s p e c u l a t i v e land  replenish or increase  likely  interest w i l l  other  or syndicate w i l l  i n the property.  On t h e o t h e r  operator  content  may be s a t i s f i e d w i t h  p o s i t i o n by a c c e p t i n g  carried  Little  and t h e r e f o r e s a l a b l e .  Occasionally the i n d i v i d u a l its  concern.  of the mineral  ship or syndicate  of purposes.  t o i t , and t h e n q u i c k l y d i s p o s i n g o f  t o an o p e r a t i n g  to the value  groups o f  seek h i s f o r t u n e by d i s c o v e r i n g a  securing t i t l e  con-  I t may b e p u r s u e d on a  o r c o n t i n u i n g b a s i s , and f o r a v a r i e t y  i n d i v i d u a l may  showing,  d e p o s i t s may be  corporations,  c o r p o r a t i o n s , o r government a g e n c i e s .  The  t o prove or  o f such an orebody.  by i n d i v i d u a l s ,  sporadic  be s p e n t  t h e n no more  be more  discovery.  This  concerned will  lead  to exploration of i t s physical characteristics  t h e r e v a l u a t i o n o f i t s economic worth. pect w i l l  e i t h e r be d e v e l o p e d  prospecting a c t i v i t i e s  deposits, national erals,  but t h e i r  concern  self-sufficiency  or with  cussion w i l l  E v e n t u a l l y the pros-  Government  agencies  i n search of viable  and s t r a t e g i c  needs  as  also  mineral  i s usually with questions  the promotion o f i n d u s t r i a l  be l i m i t e d  fur-  f o r p r o d u c t i o n o r abandoned  unworthy o f f u r t h e r c o n s i d e r a t i o n . conduct  and a  of  for certain  growth.  This  mindis-  t o t h e s e a r c h by p r i v a t e i n t e r e s t s f o r  mineral deposits capable  of being  developed  into  profitable  producers.  S i n c e most  of the c i v i l i z e d p o r t i o n s of the world  h a v e b e e n more o r l e s s  thoroughly  surface,  and t h e more o b v i o u s ,  deposits  l o c a t e d , the search  difficult ducted  and e x p e n s i v e .  examined,  high-grade,  f o r new  locations,  risen accordingly.  or both,  However, t h e s e areas  the u n i t still  and e q u i p m e n t o r i n  operations  and i n t r o d u c e  result  i n a more  Whereas t h e a b s o l u t e  c o s t of d i s c o v e r i e s i s c o n s i d e r a b l y reduced. the i n d i v i d u a l  has  significant  i n p r o s p e c t i n g has been r a i s e d by t h e s e  does n o t p r e c l u d e  con-  and t h e c o s t o f t h e e f f o r t  economies o f s c a l e i n t o t h e p r o c e s s . engaging  h a s become more  P r o s p e c t i n g o p e r a t i o n s must b e  thorough search o f l a r g e r  of  on t h e  readily-accessible  prospects  w i t h more s o p h i s t i c a t e d t e c h n i q u e s  more r e m o t e  at least  cost  techniques, This  f r o m d i s c o v e r i n g an  166 important but  mineral  deposit i n h i s backyard  the p r o b a b i l i t y  of such  In a s s e s s i n g the f r e q u e n t l y been claimed a t i o n must be  s u c c e s s f u l mines. it  may  must be within  be  evaluated  historical  expenditures  as p a r t o f t h e  i n order  i s not  on  explor-  cost of acquiring process  t h a t some a v e r a g e number o f  i n which  indicators  t o r e v e a l each h i g h - v a l u e d  a given geographical area.  of the process  somewhat r e m o t e .  c o s t o f m i n e r a l d i s c o v e r i e s , i t has  P r o s p e c t i n g i s a sampling  estimated  t h e weekend,  d i s c o v e r y i s today  that a l l past  considered  over  However, t h i s  a justification  f o r the  deposit  conception  inclusion  of a l l  costs. The f a i l u r e s due t o i m p e r f e c t k n o w l e d g e and f o r e s i g h t must be d i s t i n g u i s h e d f r o m t h o s e due t o a v o i d a b l e b a d management and, v e r y i m p o r t a n t l y , f r o m t h o s e due to p r o s p e c t i n g f o r f i n a n c i a l promotion r a t h e r than minerals production. Although the s e p a r a t i o n of e s s e n t i a l from n o n - e s s e n t i a l c o s t items throughout t h e h i s t o r y o f A m e r i c a n m i n i n g w o u l d b e c l e a r l y imp o s s i b l e , there i s every i n d i c a t i o n that greater t h a n minimum e x p e n d i t u r e s h a v e b e e n made i n t h e exami n a t i o n o f i n d i c a t o r s w h i c h p r o v e d t o be w o r t h l e s s . ^  For  individual  d e p o s i t s t h e m a r k e t mechanism  a b a s i s f o r d i s c r i m i n a t i o n between r e a l expenditures. produce the  Only  those  f u t u r e stream  s e n s e t h a t t h e y w o u l d be property. prices  factor  I f through  are depressed,  c o s t s and  unproductive  inputs which are necessary  o f income a r e c a p i t a l i z e d  i m p e r f e c t i o n s i n the serves  capital  to  i n the  i n c l u d e d i n the purchase p r i c e  this  provides  for a  market  t o emphasize t h a t g r e a t e r  resources case,  The  are required  (in this  the prospect).  S e a r c h f o r Ore Prospecting  random b a s i s — t h e centrated as  t o produce a s a l a b l e product  around  favorable  f o r m e r l y was c o n d u c t e d on a p u r e l y  "bonanza" a p p r o a c h . surface  A l l activity  was c o n -  i n d i c a t i o n s o f m i n e r a l i z a t i o n , such  structure, float,  or a successful d r i l l  hole.  Once t h e d e c i s i o n h a d b e e n made t o f o l l o w t h e r u m o r s o f p r o m i s ing  mineral  d i s c o v e r i e s , the s e l e c t i o n o f the area  was  determined  f o r the prospecting  unit.  I n c o n t r a s t t o ..the w i l d c a t a p p r o a c h , method o f p r o s p e c t i n g an  area  of  finding ore.  to  the present  the  o f search  the systematic  i n v o l v e s t h e s e l e c t i o n and e v a l u a t i o n o f  on t h e b a s i s o f a r a t i o n a l a p p r a i s a l o f t h e e x p e c t a t i o n s The m a t h e m a t i c a l p r o b a b i l i t y value  of the deposit places  outcome o f t h e s e a r c h .  probability  o f success  while  An a t t e m p t  o f success  applied  a m o n e t a r y v a l u e on  i s made t o m a x i m i z e t h e  optimizing the cost of prospect-  4 ing. the  The a r e a  o f i n v e s t i g a t i o n must b e s u f f i c i e n t l y  s e a r c h method s y s t e m a t i c  enough t o p e r m i t  p r o c e d u r e s and t h e r e s u l t s o f p r e v i o u s study  by A l l a i s  use o f s t a t i s t i c a l (e.g.,  the case  on t h e e x p l o r a t i o n o f t h e S a h a r a ) .  In p r a c t i c e , p r o s p e c t i n g philosophies  studies  l a r g e and  t o d a y combines t h e s e  i n varying proportions,  d e p e n d i n g upon t h e  two  168 resources areas  of the prospector  o f the world  ticular  minerals,  there  such  as t h e copper p r o v i n c e  i s a tendency  dimensional.  areas  f o r a l l large orebodies  S i n c e a s m a l l number o f m i n e r a l  area,  the search process  values  of par-  o f the American  o f the Canadian  t a i n a large proportion of the t o t a l an  Certain  a r e known t o b e f a v o r a b l e s o u r c e s  Southwest o r t h e greenstone Also,  and t h e t a r g e t sought.  Shield. t o be e q u i -  deposits w i l l  t o be found  must b e d e s i g n e d  con-  within  so t h a t i t a t l e a s t  5 identifies  these  ma^or d e p o s i t s .  This raises the  search?"  deposit  t h e q u e s t i o n o f "What i s t h e o b j e c t o f  Some p r o d u c i n g  similar  t o t h e orebody they  c o n t a i n s t h e same m i n e r a l s . but  place a limit  exploited. will  search  Still  Others  be l o o k i n g f o r a  a r e now w o r k i n g and w h i c h will  o n t h e minimum s i z e  c o n s i d e r any m i n e r a l  of deposit that w i l l  others, p a r t i c u l a r l y  j u n i o r mining  f o r an orebody c o n t a i n i n g a m i n e r a l  s t r o n g demand. mineral  companies w i l l  Metal  prices certainly  affect  the value o f a  7  producer  may v a l u e  i n the evaluation.  companies,  currently i n  d e p o s i t , and t h e f u t u r e t r e n d o f p r i c e s a n d  c o s t s must b e c o n s i d e r e d  be  mining  . . The i n t e g r a t e d  a g i v e n p r o s p e c t more h i g h l y t h a n t h e  independent operator because o f t h e p o s s i b i l i t i e s  of price  m a i n t e n a n c e o r m a r k e t d o m i n a n c e , and t h e g r e a t e r c e r t a i n t y o f o the u l t i m a t e r e t u r n .  Whatever c r i t e r i o n  p e c t i n g u n i t must d e f i n e i t s t a r g e t p r i o r  i s used,  the pros-  t o the search i n  169 order  t o know when s u c c e s s  " Once t h e either  i t i s subject  l o c a t e most o f t h e from a simple geophysical represents  achieved.  prospected  to a  low-cost  suitable mineral  search  or geochemical program. a compromise b e t w e e n t h e  the c o s t o f such a s e a r c h .  c a n be  i t i s not  of  to  T h i s might to a  major  Modern p r o s p e c t i n g thoroughness o f a  decline very The  usually  search  the p r o b a b i l i t y o f  distribution  occur-  area  (see F i g u r e 4  on  t h a t the p r o b a b i l -  r a p i d l y as search  range  the  number  for a greater  of number  r e q u i r e a more i n t e n s i v e i n v e s t i g a t i o n , t h e  cost of which w i l l ability  skimming p r o c e s s  literature  Since  a Poisson  sought i s i n c r e a s e d .  of deposits w i l l  its political  d i f f i c u l t to v i s u a l i z e  of discovery w i l l  deposits  or  been s e l e c t e d ,  number o f d e p o s i t s w i t h i n a g i v e n  approximated by  p a g e 153),  has  deposits.  o f the p u b l i s h e d  rence of a s p e c i f i e d  ity  t o be  been  for i t s geological possibilities  stability,  and  area  has  not m a t e r i a l l y improve the  cumulative  prob-  success.  The  exploration process  has  been l i k e n e d t o the  se9  quential  sampling procedures used  In g e n e r a l , tion,  and  evaluation process  prospecting, iously.  t h i s would a p p l y  but  not  Sequential  t o the sampling  in industrial applications.  t o the whole p r o s p e c t i n g , and  explora-  a l s o t o the bonanza type  systematic  approach o u t l i n e d  i s designed  t o t e s t whether  of preva  parameter of a given fied  limits.  random, and population  The  statistical  samples a r e  after  in total.  the b a s i s o f t h i s  This  prospecting  serious  drawn f r o m t h e p o p u l a t i o n  is similar  area  before  f u r t h e r examinations.  Any  attempt  the  analyzed  greater  the  on the sysarea  probability  been completed w i l l  indicators of mineral  and  evaluated  Obviously,  i s the  number o f  t h e r e f o r e the  greater  deposits w i l l  be  the  i n the  lead  to  less  d e p o s i t s , which  selective  i n d i c a t o r s t o be  However, t h e  correspondingly  preferable to s t r a t i f y  anomalies which g i v e the  the  c a m p a i g n i s one  i s the analyzed,  and  that a l l existing  c o s t o f the  succeeding  g r e a t e r . I t will sample and  select  greatest expectation  gener-  only of  return  a t some s l i g h t  tional  thus optimize  i n the p r o s p e c t i n g  cost of success  stage,  f o r the whole program.  and  the  skimming,  (value times p r o b a b i l i t y o f r e a l i z a t i o n ) , cost  or  can  e x p l o r a t i o n phase o f  i s the p r o b a b i l i t y  found.  e x p l o r a t i o n w i l l be  those  and  error.  f o r ore.  a l l y be  first,  ex-  However, a  to re-estimate  t h e program has  more " a n o m a l i e s " o r  search  the  a random s a m p l i n g o f t h e  What i s d e s i r e d f r o m a p r o s p e c t i n g  t h e n be  at  to the p r a c t i c e o f  i n d i c a t o r i n an  program i s not  under examination. of success  within speci-  e x a m i n a t i o n d e c i d i n g w h e t h e r t o abandon  or to proceed w i t h  tematic  falls  e a c h i s drawn a d e c i s i o n i s made a b o u t  a m i n i n g t h e most p r o m i s i n g  area  population  addithe  171 Compared w i t h will  later  s a r i l y be be  the  d e t a i l e d study  r e c e i v e , the p r e l i m i n a r y examination w i l l hasty  b a s e d on  and  superficial  incomplete  and  evidence.  always a r i s k  of r e j e c t i n g  must be  candidly, balancing  take  that selected  faced  against  the  For  ground  expense o f  the  reason  that contains the  neces-  selection will  this  areas  have  there  ore.  to  is  This  danger o f making a  risk  mis-  insuring against i t .  A s e r i e s of d e c i s i v e t e s t s , each t e s t p r o v i n g or d i s proving a s t r u c t u r a l hypothesis i n a d i f f e r e n t prosp e c t , i s more l i k e l y t o f i n d o r e t h a n a l o n g - d r a w n o u t b l i n d s e a r c h f o r o r e on a s i n g l e p r o p e r t y , even one w h i c h seemed a t f i r s t t o o f f e r more e n c o u r a g e m e n t t h a n any o f t h e l o n g - s h o t b e t s . 1 1  Financing  the  Search  The  financing of prospecting  much upon t h e strength  type  of the  of search  is still  but  large-scale systematic  financed  carried  out by  group w i l l i n g  participation  to  i n a greater  W h i l e a few selves  the  forego  requires a  immediate g a i n s  number o f  or t h e i r  own  or  The  l a r g e amounts o f c a p i t a l  very  relative prospectsyndicates,  stronglyin return  for  finance  them-  deposits.  may  resources,  most  j u n i o r e x p l o r a t i o n companies o r  e s t a b l i s h e d mining concerns. subscribe  the  independent operators prospecting  depends  Bonanza-type  independent prospectors  through syndicates  associated with  p r o c e d u r e u s e d and  organization involved.  ing  activities  public is s t i l l f o r the  are  with  willing  nebulous chance  to of  striking  i trich,  t h i s process,  and e v e n w i t h  the a t t r i t i o n  a c o n s i d e r a b l e volume o f f u n d s  into the t r e a s u r i e s o f the ever-hopeful However, b e c a u s e o f t h e i r  limited  experienced i n finds  i t s way  exploration firms.  resources,  the small  t o r s must c o n f i n e t h e m s e l v e s t o w i l d c a t p r o s p e c t i n g . will  use i t s b e s t  judgment i n s e l e c t i n g  areas  Success  be a c h i e v e d  at this  stage  before  t h e funds  t h a t c a n be s o l d  or optioned  although  o c c a s i o n a l l y the property  i n t h e hope t h a t  are exhausted.  f o r the small o u t f i t  prospect  Each  of favorable  m i n e r a l i z a t i o n a n d i n f o l l o w i n g up i n d i c a t o r s success w i l l  opera-  u s u a l l y means a  to a larger  operator,  i s r e t a i n e d through  to pro-  duction.  The  situation  f a c e d by t h e s m a l l o p e r a t o r  to the p r o b a b i l i t y o f f i n a n c i a l  loss  expressed  i s similar  b y t h e "law o f  12 gambler's r u i n . " states  This  formula,  o f t e n used  that the p r o b a b i l i t y of loss  i n games o f c h a n c  P i s equal t o :  „ -mx P = e where x i s t h e c a p i t a l logarithms, As  expenditure,  and m i s a p a r a m e t e r s p e c i f i c  the scale o f expenditure  sustaining This  fact  greatest  e. i s t h e b a s e o f n a t u r a l to the s i t u a t i o n .  i s increased, the p r o b a b i l i t y of  l o s s on t h e t o t a l p r o g r a m i s g r e a t l y  decreased.  i s w e l l known t o most p o k e r p l a y e r s ; t h o s e w i t h t h e s t a y i n g power most f r e q u e n t l y g e t t h e p o t .  number o f d e f u n c t  and r e o r g a n i z e d m i n i n g  companies  The l a r g e  reflects  173 the  incidence  of  failure  among s m a l l  operators.  Most e s t a b l i s h e d p r o d u c e r s engage i n p r o s p e c t i n g a more o r selves.  l e s s constant Some r e l y on  basis  as  a means o f p e r p e t u a t i n g  independent prospectors  on  them-  to b r i n g  pros0  pects ties  to t h e i r of t h e i r  l i m i t e d by t o raw  own.  the  The  as  times conduct w i l d c a t  of these operations  i n t e r n a l funds t h a t  d e t e r m i n e d by  O n l y o c c a s i o n a l l y do  examinations of  at  extent  amount o f  prospecting  tions. atic  a t t e n t i o n , and  the  other  large  large areas,  can  is usually  be  corporate  firms  although  allocated considera-  engage i n  i t has  activi-  system-  often  been  13 argued  that  t h i s procedure  i s the  most e f f e c t i v e use  of  their  funds. The  success of  b a s e d upon t h e w h i l e the slight, positive it  "law  the  great  results.  skimming o f t h e  s u c c e s s on  number o f  that  i n the area  the  be  greater  approach. using  one  i t i s stated  e x a m i n a t i o n may  true  to a l i m i t e d  success of  exposure t o the  local  While the  are  i s low proven  located  cost per  that be  produce extent,  firms  s i t u a t i o n and  p e r s o n n e l and  major d e p o s i t s  m i n o r o n e s as w e l l .  large  What i s r e q u i r e d  skilled  such t h a t a l l o f the  most o f t h e  any  i s supposedly  examinations performed w i l l  W h i l e t h i s may  from g r e a t e r  sophistication  niques,  l a r g e numbers," w h e r e i n  p r o b a b i l i t y of  i s more l i k e l y  results  of  l a r g e m i n i n g companies  greater cost techand  indicator  174 identified all  i n t h e p r o s p e c t i n g s t a g e may  c o s t of a proven orebody w i l l  with  less  larger paign  s e l e c t i v e methods.  companies h e r e extending  to a t t r a c t  over  qualified  t h e most e f f e c t i v e  Footnotes  t o Chapter  are  The  their  be  be  major advantages o f  ability  and  the  over-  c o n s i d e r a b l y lower  than  the  t o mount a m a j o r cam-  a l o n g p e r i o d o f time personnel  high,  organize  and  their  their  ability  efforts  in  way.  12;  1 U. S. N a t i o n a l S e c u r i t i e s R e s o u r c e s B o a r d , M a t e r i a l s S u r v e y - C o p p e r , W a s h i n g t o n , U. S. Government P r i n t i n g O f f i c e , 1952, p . I I - l . 2 The r a t i o o f e x a m i n a t i o n s t o d i s c o v e r i e s i n g e o p h y s i c a l p r o s p e c t i n g f o r p e t r o l e u m a p p e a r s t o a v e r a g e a b o u t f o u r t o one; due t o p r o b l e m s o f g r a d e o f o r e and r e f r a c t o r i n e s s , t h e r a t i o i n m e t a l m i n i n g i s l i k e l y t o be g r e a t e r . 3 Lee E. P r e s t o n , E x p l o r a t i o n f o r N o n - F e r r o u s M e t a l s , i n g t o n , R e s o u r c e s f o r t h e F u t u r e , I n c . , 1960, p . 36.  Wash-  4 The d i s t i n c t i o n b e t w e e n t h e s e two p h i l o s o p h i e s o f p r o s p e c t i n g was f i r s t r a i s e d b y P r o f e s s o r L. G. R. C r o u c h o f t h e M i n e r a l E n g i n e e r i n g Department o f the U n i v e r s i t y o f B r i t i s h Columbia, i n a d i s c u s s i o n o f the economics o f the m i n e r a l industries. 5 L. B. S l i c h t e r , "The ing, " Mining Engineering,  Need o f a New J u n e 1960, p .  Philosophy 570.  of  Prospect-  6 The c a s h f l o w f r o m a d e p o s i t must be a d e q u a t e t o c o v e r t h e i n d i r e c t c o s t s o f f i n d i n g and d e v e l o p i n g a mine, and t h e s e a r e n o t a l w a y s m e a s u r a b l e ( e . g . , e x e c u t i v e and s t a f f t i m e u s e d i n the e v a l u a t i o n , or the o p p o r t u n i t y c o s t o f investments foregone). C y p r u s M i n e s C o r p o r a t i o n has a p o l i c y t h a t t o be  175 a c c e p t a b l e , a mine must r e t u r n a minimum o f a m i l l i o n d o l l a r s cash flow a year. ( J . C. Keenan, P e r s o n a l C o m m u n i c a t i o n . ) 7 R e f l e c t i n g an e x p e c t a t i o n o f c o n t i n u e d i n f l a t i o n , m i n i n g c o m p a n i e s t o d a y s e e k o r e b o d i e s t h a t c a n be mined b y c a p i t a l i n t e n s i v e methods. By t h i s means t h e y hope t o r e d u c e t h e i r e x p o s u r e t o wage c o s t e s c a l a t i o n w h i c h n o r m a l l y r i s e s f a s t e r than machinery replacement c o s t s . 8  Preston,  9  Ibid.,  op.  p.  cit.,  p.  49.  63.  10 I b i d . , p . 68. T h i s i s a summary o f A l l a i s ' o b s e r v a t i o n s on t h e e f f i c a c y o f p r o s p e c t i n g o v e r l a r g e a r e a s . (M. A l l a i s , "Method o f A p p r a i s i n g E c o n o m i c P r o s p e c t s o f M i n i n g E x p l o r a t i o n o v e r L a r g e T e r r i t o r i e s : A l g e r i a n S a h a r a C a s e S t u d y , " Management S c i e n c e , J u l y 1957, pp. 285-347.) 11 Hall,  Hugh E. M c K i n s t r y , 1948, p . 451.  Mining  12  Preston,  p.  13  Slichter,  op.  cit.,  Allais,  G e o l o g y , New  68.  Preston,  et a l .  York, P r e n t i c e -  1 7 6  Chapter  13.  SURFACE EXPLORATION  Once a s u i t a b l e p r o s p e c t h a s b e e n i d e n t i f i e d , ity  on t h e p r o p e r t y  shifts  t o t h e e x p l o r a t i o n phase o f t h e  development p r o c e s s .  Now t h e o b j e c t i v e i s t o r e f i n e  estimate  of the mineral deposit before  o f the value  upon t h e u l t i m a t e d i s p o s i t i o n may employ a v a r i e t y  of the property.  o f g e o l o g i c a l techniques  be a r r a n g e d  i n a series  which the operator atory process  t h e rough deciding  The o p e r a t o r t o improve h i s  knowledge o f v a r i o u s parameters o f t h e d e p o s i t . will  activ-  Normally  o f sequential steps, a f t e r  must d e c i d e w h e t h e r t o c o n t i n u e  o r t o drop the prospect  as b e i n g  these  each o f  the explor-  o f no f u r t h e r  interest.  "Mining tickets lions the case  exploration i s i n fact  c o s t hundreds o f m i l l i o n s  c a n b e won." ' 1  search  f o r mineral wealth.  before  t h e more t i c k e t s  aptly  made t o s e c u r e ,  one p u r c h a s e s  bil-  summarizes  The p r i c e o f t h e t i c k e t test,  and develop  l e a r n i n g i f a p r i z e h a s b e e n won.  p r o b a b i l i t y o f success. prospects  ( o f f r a n c s ) a n d where  This statement by A l l a i s  i s the expenditure  prospect,  a l o t t e r y where t h e  i n a lottery,  Similarly,  i n this a  Obviously,  the greater i s the  i n e x p l o r a t i o n , t h e more  t h a t a r e examined and e v a l u a t e d ,  t h e more l i k e l y i t  177 is  t h a t a p r o f i t a b l e mine w i l l  Courses of  direct  property  o f whether a m i n e r a l  prospecting holder  o r t h r o u g h an  reduce the  property,  The  of the mineral  t o more c l o s e l y deposit.  sequent i n c r e a s e  i n value  specified may  of a mineral  reduction  firms  in a  joint  opportunity  may  venture  for gain.  a t o r y work b e f o r e  to spread  may  proceeding  do  is the  i n the  terms  geologi-  the an  information  i n u n c e r t a i n t y and  uncertainty  e v a l u a t o r ) , the  risk  other  holder  persons  as w e l l as  operator  who  is  mine  or  the fairly  o n l y a m i n i m a l amount o f  with  con-  provided.  seek to i n t e r e s t  Conversely,  c e r t a i n of h i s estimate  of  purchase  c o s t of such  of the prospect  i n t h e mind o f t h e  property  a  d e f i n e the p h y s i c a l parameters  D e p e n d i n g upon t h e m a g n i t u d e o f t h e (which e x i s t s o n l y  the  stage  o f the value  operator  However, t h e the  acquired  faces  His primary purpose at t h i s  prospective  weighed a g a i n s t  is  o p t i o n to purchase,  u s u a l l y w i t h i n a time i n t e r v a l  information  must be  prospect  uncertainty of h i s estimate  of a c q u i s i t i o n . cal  2  seriously interested i n production  number o f a l t e r n a t i v e s . to  secured;  Action Regardless  by  be  explor-  development.  W h i l e d e t a i l e d k n o w l e d g e o f e x p l o r a t i o n methods i s not  a p r e r e q u i s i t e t o an  mine d e v e l o p m e n t , an  understanding  of the  financing of  awareness o f the major t e c h n i q u e s  is  useful  to  f o l l o w the  progression  step  i n the  exploration  ping  of  surface  the  of  of a mineral  rock outcrops,  p i t t i n g where r e q u i r e d  events.  Normally the  deposit  aided  by  i s g e o l o g i c a l maptrenching  t o expose f r e s h m a t e r i a l .  t o e s t a b l i s h r o c k t y p e s and  structure.  physical  surveys are  f o r b o t h r e g i o n a l and  ation  indicate concentrations  to  metal values properties  by  by  useful  g e o c h e m i s t r y and  geophysics.  drilling tained  equipment t o o b t a i n  f r o m diamond d r i l l i n g  s t r u c t u r e of the  Not  be  and  This  various the  m a g n e t i c and  anomalies r e s u l t i n g  t e s t e d with c o r i n g or  samples  for analysis.  further assist  Cores  in defining  a l l p o s s i b l e methods a r e  i t s cost. i n improving  operator  must d e c i d e w h e t h e r  C e r t a i n methods w i l l be the  range of p o s s i b l e v a l u e s  e x h i b i t e d by  any  most l i k e l y v a l u e .  The  The  p a r a m e t e r may the  mean o f  be  which  objective of a l l explor-  more c l e a r l y - d e f i n e d mean.  As  greater  the  original  from the  will  parameter.  dispersion of values  shift  the  than  a t i o n methods i s t o r e d u c e t h e  mean may  every  more u s e f u l  estimate of a given  a probability distribution,  the  ob-  the  used o r needed i n  employing a p a r t i c u l a r technique  represents  other  deposit.  g a i n e d by  by  explor-  electric  information  described  geo-  local  The  others  helps  G e o c h e m i c a l and  e x p l o r a t i o n program.  justify  test-  of p a r t i c u l a r parameters:  Finally,  f r o m t h e s e i n v e s t i g a t i o n s may  first  about  knowledge i s  estimate but  a  obtained,  greater  179 confidence  can be p l a c e d i n i t .  The  u n c e r t a i n t y r e g a r d i n g the value of a p r o s p e c t i s  the cumulative  product  o f the u n c e r t a i n t i e s  p a r a m e t e r s w h i c h a r e combined t o f o r m (size,  metal  etc.).  As  content,  exploration progresses,  estimates  the o v e r - a l l  of  estimate of  c o s t o f development,  the worth o f the p r o p e r t y w i l l better  an  new  about each o f  be  f i n a n c i a l projections of  be made t o i n c o r p o r a t e t h e  reduced  with  The  variability  improved  until  the p o i n t of d i m i n i s h i n g returns i s reached.  point  the c o s t of a d d i t i o n a l  i n f o r m a t i o n can  ified  by  o f t h e r e t u r n , and  increased certainty  must d e c i d e w h e t h e r t o p r o c e e d abandon t h e  value  operating cost,  i n d i v i d u a l parameters.  estimate w i l l  the  no  knowledge Beyond  l o n g e r be the  of  this just-  operator  w i t h mine d e v e l o p m e n t o r  to  prospect.  An  example o f t h e b e n e f i t s t o be  g a i n e d by  the  pur-  3 chase o f i n f o r m a t i o n w i l l than  an  illustrate  e x p l o r a t i o n company h a s  t h i s procedure.  l o c a t e d an  p h y s i c a l methods i n an a r e a where s i m i l a r duced v i a b l e mines. available  indicates  $2.25 m i l l i o n facilities. i n g s t o be  An  of the  anomalies  by  geo-  have  pro-  information presently probably  require  f o r production, exclusive of plant  p r e s e n t v a l u e of the  generated  anomaly by  a l a r g e orebody which w i l l  to develop The  analysis  Suppose  stream  of future earn-  developing the prospect  is a  continuous  180 distribution The of  represented by a lognormal  probability at least  Figure  3  curve  (see Chapter 1 1 ) .  o f d e v e l o p i n g an orebody w i t h a p r e s e n t  V c o u l d be d e t e r m i n e d  from  a curve  (page 152) i f t h e mean a n d s t a n d a r d  value  similar to  deviation  of the  d i s t r i b u t i o n were known.  As  noted p r e v i o u s l y ,  can be e s t i m a t e d by sampling areas. $10  o r by comparison w i t h  Suppose t h a t a l o g n o r m a l  million  and s t a n d a r d  the p r o b a b i l i t y is  t h e mean and s t a n d a r d  d i s t r i b u t i o n w i t h a mean o f  of the venture.  The p r o b a b i l i t y  bodies with present values  ranging  infinitely  thus  negative, the curve  the p r o b a b i l i t y  etically  expected  the product  its  occurrence.  sum  o f these  of ore-  $0 t o $40 m i l l i o n i s  does n o t r e a c h t h e o r i g i n a n d  o f then  finding  an orebody  high.)  w o r t h o f d e v e l o p i n g any p o s s i b l e  o f i t s p r e s e n t v a l u e times The t o t a l e x p e c t e d  individual  theor-  However, t h e mean o f t h e d i s t r i b u t i o n  w i t h a p r e s e n t v a l u e o f $0.01 c o u l d b e v e r y  is  distribution  (Since the logarithm o f 0  $0 and t h e p r o b a b i l i t y  The  describe  o f a n o r e b o d y o f $0 p r e s e n t v a l u e  does n o t e x i s t .  can approach  This  o f occurrence  from  g i v e n b y t h e a r e a under t h e c u r v e . is  similar  d e v i a t i o n o f $2 m i l l i o n w i l l  o f success  shown i n F i g u r e 5.  deviation  the p r o b a b i l i t y  worth o f the venture  products o r : oo ^ EW = ^ V - p v=o  v  orebody of i s the  181 Figure 5 EXAMPLE OF EXPLORATION DECISION Expected Value o f Mineral Deposit before D r i l l i n g  For  simplicity,  have been c l a s s i f i e d range w i l l  the values o f the p o s s i b l e orebodies  into  five  represent i t s present value.  must b e s p e n t of each type  t o develop  the prospect,  Poor Fair Good Excellent Bonanza  million value  o f development i s  Net P r e s e n t Value  $ million)  0-2.5 2.5-10 10-22.5 22.5-40 +40  -  1.0 4.0 14.0 29.0 49.0  p r o b a b i l i t y o f g e t t i n g one o f t h e s e o r e b o d i e s  developing the prospect  by  i s g i v e n by t h e area under t h e curve  range. Type o f Orebody  Probability o f Occurrence  Poor Fair Good Excellent Bonanza  The  S i n c e $2.25  Range o f Present Value (in  each  o f each  as f o l l o w s :  Type o f Orebody  The  The m i d p o i n t  the net present  o f o r e b o d y upon c o m p l e t i o n  a c c o r d i n g l y reduced  in  ranges.  total  expected  (The c a l c u l a t i o n s  worth o f the venture  i s thus  a r e shown i n t h e A p p e n d i x . )  t o b e an a t t r a c t i v e to process  .023 .477 .375 .102 .023 1.000 $11.18  million.  T h i s would  appear  opportunity i f the cost of erecting a p l a n t  the ore i s less  than  ( s a y ) $8  million.  However, b e c a u s e o f t h e r a n g e o f p o s s i b l e outcomes of  development o f t h e p r o s p e c t ,  drilling  program t o t e s t  t h e company i s c o n s i d e r i n g a  t h e a n o m a l y and f u r t h e r  define i t s  parameters.  Again,  be  each w i t h a d i s c r e t e p r o b a b i l i t y o f o c c u r r e n c e .  obtained,  Incorporating  a g r e a t number o f p o s s i b l e r e s u l t s  several d r i l l i n g  make t h e c a l c u l a t i o n s the p r i n c i p l e . drilling  results  could  i n t h e example w o u l d  more l e n g t h y , b u t w o u l d n o t e l a b o r a t e on  T h e r e f o r e , o n l y two p o s s i b l e outcomes o f t h e  program a r e c o n s i d e r e d : Drilling  Result  Probability  Strong Massive Sulphides Weakly D i s s e m i n a t e d S u l p h i d e s  0.50 0.50 1.00  The  probability of either  ive  judgment b a s e d  a simple  assumption  result  o c c u r r i n g c o u l d be a s u b j e c t -  on p a s t e x p e r i e n c e w i t h that either  event  s i m i l a r programs o r  could occur with  equal  probability.  From e x p e r i e n c e w i t h  t h e development o f s i m i l a r  p e c t s , a f t e r having  obtained these  engineers  that the p r o b a b i l i t y of developing a p a r t i c  ular tions  estimate  drilling  results  pros  t h e company  type o f orebody i s r e p r e s e n t e d by t h e lognormal illustrated  i n F i g u r e 6.  distribu-  With an i n d i c a t i o n o f s t r o n g  s u l p h i d e m i n e r a l i z a t i o n t h e mean o f t h e d i s t r i b u t i o n h a s b e e n shifted with  upward t o $20 m i l l i o n .  The d e v i a t i o n h a s d e c r e a s e d  t h e g r e a t e r i n f o r m a t i o n t o $1.5 m i l l i o n ,  indicating  that  Figure 6 EXAMPLE OF EXPLORATION DECISION Expected Value of Mineral Deposit a f t e r D r i l l i n g Lognormal D i s t r i b u t i o n  184  185 greater confidence Similarly, ized and  result  deviation  As  has  i n the  been s h i f t e d  first  g e t t i n g a given type  is  g i v e n by  p a r t of the  mineral-  million  the  developing  probability  the  T h e s e a r e now  result  i s obtained  prospect conditional  the p r o b a b i l -  follows: Drilling Strong Sulphides  Poor Fair Good Excellent Bonanza  The  only  .045 .910 .045 .000 .000  1.000  1.000  by  i s $20.28 m i l l i o n ,  $4.23 m i l l i o n .  a c c o r d i n g to the p r o b a b i l i t y worth of the venture  $12.35 m i l l i o n .  This  result  of reducing  (i.e.,  to develop  Result Weak Sulphides  .000 .045 .565 .345 .045  t o t a l worth expected  sulphide prospect  expected  example,  o f orebody by  i f the d r i l l i n g  Type o f Orebody  deposit  obtained.  f o r the weakly  downward t o $5  the a r e a under the c u r v e .  probabilities: i s as  i n the p r o b a b i l i t i e s  decreased.  of  ity  placed  t h e mean o f t h e d i s t r i b u t i o n  drilling the  c a n be  and  o f each d r i l l i n g i f-drilling  the  strong  f r o m t h e weak s u l p h i d e  Combining these  improvement  the hazard  developing  expectations result,  the  total  i s undertaken i s  i n expected  worth i s a  o f m a k i n g a wrong d e c i s i o n  t h e weak s u l p h i d e d e p o s i t ) .  direct  186 In t h i s drilling  example t h e p u r c h a s e o f i n f o r m a t i o n ( t h e  p r o g r a m ) b y t h e e x p l o r a t i o n company i n c r e a s e s t h e  e x p e c t e d g a i n b y $1.17 m i l l i o n . ducted could out  the cost of the information. s p e n d up t o $1.17 m i l l i o n  reducing  be  with  on d r i l l i n g  different.  frequencies,  A 40 p e r c e n t  phide orebody by d r i l l i n g  by  i fd r i l l i n g  evaluation of a l l possible results  first,  principle the  This  (and e x p e n d i n g more  i fthe prospect  drilled  itself.  were u n d e r t a k e n ,  ful  and  before  purchasing  result  will  i s developed,  regardless  further  o f orebody w i l l  be  obtained,  o f w h e t h e r i t was be found.  here i s that the purchase o f information  may  The improve  u s u a l l y improve t h e  However, i t may w e l l b e t h a t t h i s  made now w i t h o u t  f o r care-  funds).  o n l y one d r i l l i n g  o n l y one t y p e  i n addition to  o f t h e d e c i s i o n l a t e r made on t h e d i s p o s i t i o n  prospect.  sul-  decreased  emphasizes t h e need  e x p e c t e d worth o f a p r o j e c t , and w i l l  quality  a strong  outcome w o u l d b e  cost of d r i l l i n g  course,  outcomes were l i k e l y t o  t h e t o t a l expected worth would  the  Of  with-  would g i v e an expected worth o f o n l y  Thus t h e e x p e c t e d  information  the prospect  chance o f o u t l i n i n g  $10.64 m i l l i o n . $0.54 m i l l i o n  t h e company  o f $11.18 m i l l i o n .  t h e two p o s s i b l e d r i l l i n g  different  amount must b e d e -  Obviously,  i t s minimum e x p e c t a t i o n  If occur  From t h i s  of the  d e c i s i o n should  the purchase o f a d d i t i o n a l information.  be  This  187 example i l l u s t r a t e s point  how t h e d e c i s i o n p r o c e s s  of diminishing returns  The  i f sound  d e c i s i o n process  judgment  discussed  example i s shown g r a p h i c a l l y i n F i g u r e  worth a t each d e c i s i o n p o i n t .  7.  The f i n a n c i a l  This  exploration decisions i s useful to c l a r i f y available each.  t o the operator  In t h i s  and t o a s s e s s  i s not exercised.  i n the preceding  sequences o f each p o s s i b l e event a r e g i v e n , pected  can reach the  along with type  c a n be e v a l u a t e d  t h e ex-  o f approach to  the a l t e r n a t i v e s  the consequences o f  manner t h e c o n t r i b u t i o n o f g e o l o g i c a l  to the d e c i s i o n process  con-  and u t i l i z e d  information according  to i t s value.  The useful can  i n securing  be o b t a i n e d  of success ing  formal  statement o f p r o b a b i l i t i e s w i l l  funds  f o r e x p l o r a t o r y work, s i n c e  more r e a d i l y  and a t lower c o s t  a r e a t l e a s t made e x p l i c i t .  f u t u r e c o s t s and r e t u r n s w i l l  w i l l b e more w i l l i n g  to risk  capital  i f the chances  The u n c e r t a i n t y  still  their  a l s o be  regard-  remain, b u t i n v e s t o r s  capital  i f t h e odds a r e  known.  Financing  Exploration The  increased  s o p h i s t i c a t i o n of the search  has  raised the cost o f exploration.  the  independent prospector  can r a r e l y  With h i s l i m i t e d  f o rore resources  c o n d u c t more t h a n a  liminary geological investigation before  t u r n i n g over h i s  pre-  Figure 7 EXAMPLE OF EXPLORATION DECISION Graphic Representation o f Decision Process (Results i n $ M i l l i o n s )  $11.13 Develop Property-  Drilling Decision  Cost o f Drilling  Strong Sulphides  $12.35 Weak Sulphides  $4.23 Develop Don»t Develop  property  t o an  exploration  C o n s e q u e n t l y , he pects,  the  company o r an  i s encouraged to  p o t e n t i a l o f which can  c i a l backers,  and  established  seek the be  more o b v i o u s  grasped  thus secure a quick  producer. pros-  r e a d i l y by  turnover  of h i s  finan-  invest-  ment.  Even the raising  sufficient  programs. supplied  junior exploration capital  Most o f t h e by  the  specifically  t o c a r r y out  p u b l i c through the  than of  the  If speculative  the  only  o f t e n be  of A p r i l  little  i n the  the  stock  precautions transactions,  chance to a s s e s s the  of a mining venture. by  the  The  risks  the  the  to sink  their  issued of  public  a s p i r i n g oper-  equity  markets.  individual capital  markets d u r i n g  find. the  into a (Recall  Timmins  considerable  taken to ensure adequate the and  general  exploration  public  p r o b a b i l i t y of  i n d i v i d u a l must r e l y  funds to p a r t i c u l a r p r o j e c t s . ed  by  are  19641)  of corporate  exercised  of  supply  remotely connected with a promising  Despite closure  willing  evaluation  stock  enthusiasm i s p a r t i c u l a r l y high,  feverish activity  rush  The  faced  p r e v a i l i n g character  "investors" w i l l prospect  purchase of  risk  difficulty  t h e s e companies  for a p a r t i c u l a r prospect. the  have  extensive  funds expended by  funds i s l e s s a f u n c t i o n o f ator  firms  on  is  dis-  given  success  the d i s c r e t i o n  companies i n t h e i r a l l o c a t i o n o f Most o f  responsibility in their  these  f i r m s have e x h i b i t -  stewardship,  realistic-  190 ally  appraising  t h e i r prospects  and d i s c a r d i n g  t o be t o o r i s k y o r which have been p r o v e d  In h i s s t u d y o f t h e m i n i n g gested  that  those that  appear  worthless.  industry,  Cork has sug-  a t l e a s t h a l f o f t h e e x p e n d i t u r e s on e x p l o r a t i o n  a r e made b y o p e r a t i n g  c o m p a n i e s w h i c h do n o t r a i s e f u n d s  from  4 the  public.  The f u n d s a v a i l a b l e t o t h e s e e x p l o r a t i o n  are  often determined by corporate  the  attractiveness o f the i n d i v i d u a l prospect.  l e v e l o f e a r n i n g s and t h e l i f e will  considerations  unrelated to The c u r r e n t  e x p e c t a n c y o f t h e p r o d u c i n g mine  c e r t a i n l y i n f l u e n c e t h e a l l o c a t i o n o f funds, as w i l l t h e  management's e s t i m a t e o f f u t u r e m i n e r a l The sophisticated  i n their  Considerable  and  t o evaluate  and  because o f t h e i r  companies w i l l  profitability.  likely  exploration  great  u s e i s made o f computer from f i e l d  Except  overhead the large than the  i s potentially highly  r i s k y , s e v e r a l o f t h e l a r g e p r o d u c e r s may  form a j o i n t v e n t u r e t o spread t h e r i s k Peru Copper  sources,  f o r larger deposits  I f a prospect  tech-  investigations  Due t o t h e i r h i g h e r  access t o c a p i t a l  be l o o k i n g  firms.  profitable but quite  g e n e r a l l y b e more  a p p r o a c h t o t h e assessment o f r i s k s and  niques t o reduce t h e data obtained  junior  prices.  major m i n i n g companies w i l l  probable returns.  ern  groups  exposure  (e.g.,  South-  Corporation).  f o rthe current  loans  made t o e x p l o r a t i o n  companies p e n d i n g is  used  sources  at this  stage  very  little  i n the search f o r ore.  supply a limited  participation through  market f i n a n c i n g ,  amount o f c a p i t a l  bank  financing  Government  directly  through  i n e x p l o r a t i o n programs f o r s p e c i f i c m i n e r a l s  i n c e n t i v e s f o r area development. tax deductions  and  Greater assistance i s  provided  through  f o r e x p l o r a t i o n expenses,  although  these are u s u a l l y only o f value to the  producing  companies.  Footnotes  t o Chapter  13;  1 M. A l l a i s , "Economic P r o s p e c t s o f M i n i n g E x p l o r a t i o n A l g e r i a n S a h a r a C a s e S t u d y , " Management S c i e n c e , V o l . 3, No. J u l y 1957, p p . 285-347.  4,  2 Preston i n h i s d i s c u s s i o n of the r e l a t i v e p r o d u c t i v i t y of e x p l o r a t i o n e x p e n d i t u r e s b y l a r g e and s m a l l o p e r a t o r s makes t h e i n t e r e s t i n g o b s e r v a t i o n t h a t c o n s i d e r a b l e doubt e x i s t s whether the l o w - p r i c e d t i c k e t s a r e even p l a c e d i n the b a r r e l from w h i c h t h e w i n n i n g numbers a r e drawn. Lee E . P r e s t o n , E x p l o r a t i o n f o r Non-Ferrous M e t a l s , Washington, Resources f o r the F u t u r e , Inc., 1960, p . 74. 3 T h i s example i s p a r t i a l l y b a s e d on m a t e r i a l p r e s e n t e d i n C h a p t e r s 9 and 11 o f t h e book b y C. J a c k s o n G r a y s o n , D e c i s i o n s Under U n c e r t a i n t y , B o s t o n , H a r v a r d U n i v e r s i t y , 1960. 4 E. K. C o r k , F i n a n c e Queen's P r i n t e r , 1962.  i n the Mining  Industry,  Ottawa,  C h a p t e r 14.  SHAFT SINKING AND UNDERGROUND EXPLORATION  If stages  a prospect  of surface  still  looks  exploration,  attractive after several  the operator  underground t o t e s t h i s hypotheses r e g a r d i n g and  value  o f the mineral  deposit.  expensive stage i n the process decision.  regarding  Not committed  development c o s t s  will  If  the deposit  a n d most production  to further r e -  returns.  underground p r i o r  I f the deposit  i s close to the surface,  contemplated.  by d r i l l i n g , (The K i d d  the deposit  i s very  e s p e c i a l l y i f open p i t m i n i n g i s  Creek d e p o s i t  o f Texas G u l f  able the  sure  deter  most o p e r a t o r s  o f t h e p r i z e t o b e won.  indication of continuing attempt  Sulphur Conversely,  deep, t h e c o s t o f s h a f t s i n k i n g a n d  underground development w i l l are very  secured.  i t c a n o f t e n be ade-  Company f o r t u n a t e l y c o m b i n e s t h e s e two a t t r i b u t e s . ) if  t o being  i sespecially rich,  be obvious t h a t an a t t r a c t i v e r e t u r n c a n be  explored  shape,  and t h e s u p p l i e r s o f cap-  and f u t u r e  a l l mines a r e e x p l o r e d  f o r production.  it  quately  i s the last  leading t o the f i n a l  o f the operator  t o go  the size,  Underground e x p l o r a t i o n i s d e s i g n e d  duce t h e u n c e r t a i n t y ital  This  may d e c i d e  until  they  Indeed, w i t h o u t a f a v o r -  structure, i t i s unlikely that  t o f u r t h e r reduce the u n c e r t a i n t y w i l l  b e made  193 at a l l .  The a notable  development o f the  example o f t h e  s t r u c t u r e and Mississauga  mineral  induced  selves to c a p i t a l  values.  expenditures  strength of a half-dozen  drive for  production.  u s u a l l y be  t o commit  $30  million  t o $40 drill  procedure  obtain b e t t e r estimates decision important greater  phase o f the  supply  of c a p i t a l  i n the  Financing  Shaft In  most mine  out  then  sufficient and/or  bulk  d e v e l o p m e n t work  development p r o c e s s .  ultimate value  of the  ore  grade of m i n e r a l .  r e q u i r e d , but  the  the  u n d e r g r o u n d e x p l o r a t i o n marks  new  certainty  on  f o l l o w e d by  in this  the  them-  r e q u i r e d d e p t h and  o f t o n n a g e and  to proceed with  of  holes.  Core d r i l l i n g  included  is  reefs of  developers  widely-spaced  general  field  similarity  gold-bearing  enough u n d e r g r o u n d o p e n i n g s t o b l o c k  several years'  Not  a higher  to The  an  only  degree  is a  of  deposit  is  implied.  f o r m e r t i m e s s h a f t s were c o l l a r e d  on  the  Sinking  o f a v e i n a t the was  of  uranium  upon c o n t i n u i t y o f  striking  i s to s i n k a s h a f t to the  sampling w i l l  it  The  some o f t h e  However, t h e  River  reliance placed  conglomerate beds t o the  Witwatersrand  developers  Blind  exhausted.  s u r f a c e and This  o f g i v i n g i m m e d i a t e and  type  followed  t h e v e i n downwards  o f d e v e l o p m e n t had  continuous  outcrop  information  the on  until  advantage  the  nature  of  194 the  deposit  nificant  and  often  the  p o r t i o n of the  s h a f t s were i r r e g u l a r little  value  c a p a c i t y and  capital  and  their  minerals  contributed  requirements.  However,  more e x p e n s i v e t o s i n k ,  for later production  due  location within  In c o n t r a s t today are  recovered  to t h e i r  the  ore  and  a  these  were  distance  of  limited hoisting  t o be  extracted.  t o t h e s e s e l f - f i n a n c i n g m i n e s , most  sunk a c o n s i d e r a b l e  sig-  shafts  from the p r o b a b l e orebody  / j  and  are  designed with  intervals will  be  levels  are  future production established  d r i v e n upon c o m p l e t i o n  i n mind.  At  from which l a t e r a l  of sinking.  convenient openings  This procedure re-  I I  quires  greater  returns,  confidence  s i n c e no  new  b e e n c o m p l e t e d and Before o p e r must s e c u r e  the  size  tainty  initial  information  i s obtained  sizable capital  of  until  expenditures  adequate s u p p l i e s The  of c a p i t a l  availability  of these  o f p r o g r a m embarked upon and  regarding  estimate  future sinking  i t s outcome.  Usually  the  the  the  to complete funds w i l l degree of  financing is re-  c a p i t a l because debt c a p i t a l  from the  financial  i n s t i t u t i o n s without adequate s e c u r i t y ,  stances  can  does n o t d e b t be  exist  at t h i s  used t o  o n l y because p r o d u c t i o n  stage.  finance  is virtually  the  cer-  to equity  just  devel-  depend  stricted  which  has  h a v e b e e n made.  commencing s h a f t s i n k i n g o p e r a t i o n s ,  underground t e s t . on  i n the  i s not  Only i n r a r e  s h a f t s i n k i n g , and assured.  available  circumthen  195 The  equity capital  issue o f shares cash  may be s e c u r e d  through  a public  i n t h e d e v e l o p m e n t company o r f r o m t h e i n t e r n a l  flow o f a producing  mine.  I f through  an u n d e r w r i t i n g , t h e  f a c i l i t y with which i t i s obtained w i l l  depend more upon t h e  merits  Investors are given a  o f the p r o j e c t than p r e v i o u s l y .  much g r e a t e r o p p o r t u n i t y a t t h i s i n which t h e i r bility share  funds  of realizing and p e r c e n t  reflect  will  stage  be employed and t o a s s e s s  a profit  on t h e i n v e s t m e n t .  participation  in total  t h e manner the proba-  The p r i c e p e r  capitalization  will  the degree o f c o n f i d e n c e p l a c e d i n the p r o s p e c t .  If  an e s t a b l i s h e d mining  n e e d e d t o e x p l o r e a new p r o s p e c t ,  company p r o v i d e s it" w i l l  ment c o n t r o l .  I t may a c q u i r e s h a r e s  or  down s t o c k  i t may  take  ating vehicle.  debt,  the c a p i t a l  u s u a l l y seek  manage-  i n t h e development  company  i n a new company f o r m e d a s t h e o p e r -  Occasionally, the c a p i t a l  form o f unsecured is  to evaluate  evidenced  by notes  i s advanced  i n the  or debentures,  which  t o be r e p a i d o u t o f a l a r g e p o r t i o n o f any f u t u r e revenue.  Debt c a p i t a l ferred but  advanced a t t h i s  s t o c k i n t h a t i t has a p r e f e r r e d p o s i t i o n  pre-  i n earnings  r e a l l y h a s no g u a r a n t e e o f r e p a y m e n t .  Several other less  s t a g e more n e a r l y r e s e m b l e s  commonly e m p l o y e d  ation.  Custom s m e l t e r s  sources  o f development  financing are  i n s h a f t s i n k i n g and underground seeking  t o ensure f u t u r e sources  exploro f raw  196 m a t e r i a l s may  provide  capital  on  a l o a n b a s i s , t o be  out  of the proceeds of p r o d u c t i o n .  may  form a  j o i n t venture  development w h i l e  the  Government s o u r c e s  one  partner  o t h e r s h o l d o n l y an  c a n be  a p p e a r s f a v o r a b l e and  with  Several mining  an  utilized  amortized  companies  a c t i n g as manager investment  i f the p r o s p e c t  position.  of  adequate guarantee i s g i v e n .  term debt o b v i o u s l y i s not p r a c t i c a l  at t h i s  stage  of  of  success Long develop-  ment.  Boericke  and  B a i l e y h a v e a p p r o p r i a t e l y summarized  the problems o f f i n a n c i n g mining development  i n the  following  terms: From t h e s t a n d p o i n t o f t h e p r o j e c t , i t i s o b v i o u s that the f u r t h e r along these three stages (prospecti n g , e x p l o r a t i o n and d e v e l o p m e n t ) h a v e b e e n c a r r i e d when o u t s i d e f i n a n c i n g i s s o u g h t , t h e l e s s t h e r i s k assumed b y t h e new c a p i t a l . From t h e investment standpoint, i t i s axiomatic t h a t the g r e a t e r the r i s k t h e h i g h e r t h e c o s t o f f i n a n c i n g w i l l be, (1) i n terms o f p e r c e n t a g e o f e q u i t y or e x t e n t o f l i e n s , and (2) i n e x p e n s e o f f i n a n c i n g . 1  Footnote  to Chapter  14:  1 W. F. B o e r i c k e and C. C . B a i l e y , "Mine F i n a n c i n g , " E c o n o m i c s o f t h e M i n e r a l I n d u s t r i e s , New Y o r k , AIME, 1959, p. 240.  197  Chapter  15.  THE PRODUCTION  DECISION  In t h e development o f a m i n e r a l p r o s p e c t must e v e n t u a l l y d e c i d e what t o do w i t h certain  the property.  p o i n t the purchase o f information w i l l  expected  Beyond a  not increase the  worth o f the deposit i n p r o p o r t i o n t o i t s c o s t .  certainty secured,  the operator  will  still  exist  but i tw i l l  mensurate w i t h  r e g a r d i n g t h e u l t i m a t e r e t u r n t o be  have been reduced  the value  Un-  t o the lowest  of the deposit.  d e c i d e whether t h e p r o p e r t y  level  The d e v e l o p e r  s h o u l d be c o m m i t t e d  com-  must  f o r production  o r s h o u l d be e l i m i n a t e d from f u r t h e r c o n s i d e r a t i o n .  Before into  production  earnings w i l l  undertaking the developer  at least  cover  ment a n d p l a n t c o n s t r u c t i o n . visualized Previous  i n order  viewed w i l l  the c a p i t a l  c o s t s o f mine  develop-  I n a d d i t i o n , some p r o f i t must b e and r i s k  exposure.  o n e x p l o r a t i o n a r e sunk c o s t s and a r e n o t  certainty  w i t h w h i c h t h e f u t u r e r e t u r n c a n be  depend upon i n d i v i d u a l  acceptable  deposit.*  wish t o ensure t h a t f u t u r e  i n the production d e c i s i o n .  The  mum  will  t o j u s t i f y the investment  expenditures  considered  the r i s k of bringing a property  r i s k preferences,  l e v e l o f p r o f i t , and t h e e s t i m a t e d  Some o p e r a t o r s  the mini-  value  of the  attempt t o compensate f o r u n c e r t a i n t y  198 by  establishing  number o f y e a r s  arbitrary  standards  to payout c a p i t a l ,  T h e s e r i s k premium methods a r e ment o f t h e p r o b a b i l i t y value  (future earnings  capital).  inferior  discounted  requirements  to a rational  latter  levels  assess-  of  present  a t t h e company's c o s t  T h e s e a r e c o m b i n e d t o f o r m an The  specified  o r a minimum r a t e o f r e t u r n .  of securing various  worth of the prospect. tal  of valuation: a  estimate  i s then  of  of  expected  compared w i t h  t o determine the a c c e p t a b i l i t y  of  capi-  the  property.  F a c t o r s t o be  Considered  Concurrent pect  the developer  h i s product variables  and  with  will  the g e o l o g i c a l e x p l o r a t i o n of a  have c o n s i d e r e d  the  f u t u r e market  t h e c o s t s o f d e v e l o p m e n t and  a r e combined  pros-  operation.  i n the v a l u a t i o n of m i n e r a l  for Many  property,  all  of which e x h i b i t v a r y i n g degrees of u n c e r t a i n t y .  Usually  one  element w i l l  ore  reserves,  the  predominate,  level  of mining  o f the market t o absorb any  content  as  or treatment  t h a t i t c a n be  t i o n and  e c o n o m i c and  political  labor shortages  c o s t s , or the  developed  will  into  size  a viable  and mine.  c o n s i d e r e d w i t h i n the  environment. rapidly  ability  P r e r e q u i s i t e to  orebody o f s u f f i c i e n t  P r o p e r t y v a l u a t i o n must be vailing  the adequacy o f  additional production.  s u c c e s s f u l p r o j e c t i s an  mineral  such  Obviously,  pre-  infla-  escalate production  costs  199 and  reduce the competitiveness  kets.  So a l s o w i l l  repressive mineral and  restrictive  taxation.  property  will  consideration uncertainty future  r a i s e the hazards  o f mineral  fear o f depressing  period,  tenure o f  faced by the developer  i s a strong deposits:  profit  Countering t h i s  Greater  w h i c h may o f f s e t t h e s m a l l e r value.  In g e n e r a l ,  a shortened period  for a  influence are the and t h e  o u t p u t may r e s u l t i n  margin p e r u n i t b u t a g r e a t e r  o f present  output  expense p e r p e r i o d  market p r i c e s .  calculation  of discounting  argument f o r t h e r a p i d e x -  maximum p e r i o d  amortization  adequate  Because o f t h e  o f f u t u r e markets and t h e n e c e s s i t y  necessarily greater  smaller  future  i s t h e optimum r a t e o f o u t p u t .  there  mar-  return.  minimum number o f p e r i o d s .  a  regarding  f a c t o r which u s u a l l y does n o t r e c e i v e  revenues,  ploitation  i n world  government r e g u l a t i o n s and  Uncertainty  reduce the expected  One  o f the product  revenue p e r  number o f p e r i o d s  i n the  Some optimum r a t e must e x i s t . o f e x p l o i t a t i o n reduces the r i s k  exposure o f t h e e n t e r p r i s e ; other  things  being  equal,  this i s  2  usually considered  t o be a f a v o r a b l e  development.  Of p a r t i c u l a r i m p o r t a n c e t o t h i s t o r s which a f f e c t the cost  and s u p p l y  o f development  In a d d i t i o n t o t h e economic and p o l i t i c a l cussed,  this  flow  o f funds w i l l  study a r e the f a c -  environment  capital. just  dis-  be i n f l u e n c e d by t h e s t r e n g t h  o f the  s e c u r i t y m a r k e t s and  Most d e v e l o p i n g tal  and  are  nations  the  s u c h as  resources,  will  cost of c a p i t a l  imports  fear of  the  the p r o d u c t i o n  the  s e c u r i t y o f the  the  capital  reasonably  investment.  foreseeable.  amounts o f c a p i t a l b u t  ject.  be  increased  first  call  on  Sources of  may  prospective  the  struction  flow  or  over increase  venture.  o f development f i n a n c i n g  expected  r e t u r n from  life  Earnings  adequate to  an  attractive  the  o f t h e mine,  and  amortize  r e t u r n must  be  large project requiring greater  offering  a quick  will  r e t u r n and  than a s i m i l a r  possibly sacrifice  salvageable  outlook  operator  committing  ments w i l l  A  return, but  the  sovereignty  this  capi-  risk  smaller  some s e c u r i t y i n  demand t h a t t h e y  assets  less  i n the  be  event of  profavor  given failure.  Funds If  before  pay  nation  Political  expected  easier to finance  Investors  o f an  the  r a t e and  i n v e s t m e n t and  e x p o s u r e may  funds.  lost  availability  of the  short of venture  of  often restrict  d e p e n d i n l a r g e m e a s u r e on  project,  resources  to a f o r e i g n mining  Naturally, will  the  capital  desperately  f o r c e d t o r e l y on  considerations, natural  are  the  will  the  i n c l u d e the of treatment  f o r the p r o j e c t i s f a v o r a b l e , attempt  property  to secure  adequate f i n a n c i n g  for production.  Capital require  c o s t o f mine d e v e l o p m e n t and facilities,  and  the  the  initial  the  con-  working  201 capital  r e q u i r e d t o pay  ceived.  P r o p e r t y payments may  If company,  a prospect  f i n a n c i n g may  necessary own  funds  On  be  The  i s f a v o r a b l y known and  ious ventures,  he w i l l  amounts o f f u n d s .  to interest has  mining  concerns  has  be  these  through  C a p i t a l may  • when p r o d u c t i o n  few  are o f t e n the  and  a  unless  substantial in  o n l y means o f  venture.  t o new  ventures  s u p p l i e d as  offerings  institu-  c a r r y a great d e a l of weight  p r e f e r r e d stock or debt  Very  suppliers,  by e s t a b l i s h e d 5.  u s u a l l y seek c o n t r o l — i f  be  from i t s  must p r e s e n t  obtaining  s t o c k i n t e r e s t — b u t o c c a s i o n a l l y i t may position.  the  f o r c e d t o seek a  been d e s c r i b e d i n Chapter  o p e r a t i n g company w i l l  borrow  from f i n a n c i a l  have d i f f i c u l t y  o f funds  operating  a good r e c o r d o f f i n a n c i n g p r e v -  Reputations  supply  will  stage.  e x p l o r a t i o n company  independent developer  t h e r i s k o f an unknown  The  f i r m may  an  requirements  capital  n e g o t i a t i o n s , s i n c e they  assessing  The  the c a p i t a l  o f i t s own  very a t t r a c t i v e proposal  these  obvious.  partner or to r a i s e  t i o n s or the p u b l i c .  he  required at this  t h e o t h e r hand, a j u n i o r  adequate funds  sponsoring  a l s o be  income i s r e -  i s owned o r c o n t r o l l e d b y  or supply  resources.  without  operating costs before  take  As not  noted, the  o n l y an  straight  equity  an  majority  investment or  obligations.  a r e made t o t h e g e n e r a l p u b l i c  financing i s being  sought.  A  s m a l l number  of  202 debt  issues, usually with  s t o c k bonuses o r warrants  h a v e b e e n f l o a t e d when c o n d i t i o n s were f a v o r a b l e . straight  s t o c k i s s u e s have u s u a l l y been r i g h t s  the present right the  shareholders,  to participate  cheapest  source  The i n Chapters ital,  attached, The few  offerings to  p o s s i b l y because o f a pre-emptive  i n a n y new o f f e r i n g s  o r b e c a u s e i t was  available.  many s o u r c e s  6 t o 8.  o f debt  f i n a n c i n g have been  Banks a r e w i l l i n g  and i n some c i r c u m s t a n c e s  covered  t o provide working  may e x t e n d  term l o a n s .  cap-  Private  p l a c e m e n t s o f l o n g t e r m b o n d s o r d e b e n t u r e s may b e s e c u r e d i f the p r o p e r t y  i s particularly  attractive.  g o v e r n m e n t a s s i s t a n c e may b e a v a i l a b l e , trial  Corporation w i l l  to p r o j e c t s unable prospective and  often provide  operator  should  f i r m s have a prime i n t e r e s t  The popular  l o a n s and e q u i t y  use o f debt  t h e custom  o f funds,  since  fixed  these  i n p r o m o t i n g new p r o d u c t i o n .  i n f i n a n c i n g new m i n e s h a s become a  o f leverage brings with  associated with  The  smelters  method o f i n c r e a s i n g t h e r e t u r n t o t h e e q u i t y .  introduction  capital  accommodation.  not overlook as s o u r c e s  t h e Indus-  The I n t e r n a t i o n a l  t o obtain reasonable  equipment manufacturers  ment.  especially  D e v e l o p m e n t Bank o r t h e Eximbank.  Finance  S e v e r a l forms o f  i t the f i n a n c i a l  obligations of interest  As l o n g a s t h e v e n t u r e  i s healthy this  The risk  and c a p i t a l risk  appears  repay-  203 minimal, but do  i t can  c a u s e e m b a r r a s s m e n t and  n o t meet e x p e c t a t i o n s .  of the h i g h  exposure to  The  t h a t the  marginal  project.  r e t u r n i s an  feasibility  c o s t of funds w i l l The  i f revenues indication  risk.  In c o n s i d e r i n g the unlikely  high  loss  of production,  d e f e r any  cost of c a p i t a l  but  to mining  the  i t is most  ventures,  w h e t h e r s u p p l i e d t h r o u g h d e b t o r e q u i t y , d e p e n d s upon t h e rent  level  risk.  of i n t e r e s t  r a t e s and  Most c a p i t a l  The  be  be  after  d e c i s i o n now future.  may  developer,  vary widely  for production  This i n e f f e c t . i s a t some i n d e f i n i t e  propis a  from  wish t o d e f e r the p r o d u c t i o n  u s u a l l y because the poorer but  pros-  the  the de-  making  the  time i n  the  O n l y o c c a s i o n a l l y a r e p r o p e r t i e s abandoned a t  earlier,  will  investment.  However, i f t h e r e  t h a t a c t u a l r e s u l t s may  c o n d i t i o n s improve. but  of the  for production.  the developer  until  and  a c o n s i d e r a t i o n of a l l v a r i a b l e s the  developed  fair probability forecast,  available at a l l .  Decision  p e c t meets t h e minimum e x p e c t a t i o n s e r t y may  risk  r i s k preferences,  some r e t u r n t o o b t a i n a more s e c u r e  If  stage,  a very high  that capital w i l l  s u p p l i e r s have s i m i l a r  Investment  cision  compensation r e q u i r e d f o r  I f the p r o j e c t appears t o j u s t i f y  premium, i t i s u n l i k e l y  forego  the  cur-  this  ones h a v e b e e n e l i m i n a t e d  sometimes b e c a u s e o f t h e  unwillingness  of  their  promoters t o accept  If will  secure  the  defeat.  investment  definite  decision  is positive,  commitments o f c a p i t a l  mine d e v e l o p m e n t and  plant construction.  down as r e q u i r e d , s u b j e c t t o a commitment may  be  employed p e n d i n g  Equity capital w i l l assurance  t o the  security  f o r debt  I n an H e r t z has It  completion  u s u a l l y be  article  until  Funds may  drawn  f e e , o r bank  loans  financing. both  because of the  as  an  lack- o f  c o n s t r u c t i o n i s w e l l i n hand.  a new  Business concept  Review,  of r i s k  d e c i s i o n s , and  is ideally  computer t e c h n i q u e s .  The  method i s i t s a b i l i t y  to p o r t r a y the  suited  most i m p o r t a n t  David  analysis.  i n c o r p o r a t e s t h e p r o b a b i l i t y o f v a r i o u s outcomes o f  investment  with  be  supplied f i r s t ,  i n the Harvard  o u t l i n e d most l u c i d l y  developer  proceed  o f permanent  s e n i o r l e n d e r s and capital  and  the  capital  f o r s i m u l a t i o n by  contribution  sensitivity  of  of h i s  financial  3 results  to fluctuations  i n input variables.  become f a m i l i a r w i t h t h i s placed events.  upon r e f i n i n g  the  More r a t i o n a l  pected worth w i l l  technique, estimates  Once  operators  g r e a t e r emphasis can  of p r o b a b i l i t y  of future  a s s e s s m e n t s o f p r e s e n t v a l u e and  ex-  h e l p p r o s p e c t i v e mine-owners t o i m p r o v e  investment d e c i s i o n s .  be  their  205 Footnotes  t o Chapter  15:  1 G r e a t e r v a r i a b i l i t y i n e a r n i n g s c o u l d be a c c e p t e d from a prospect estimated t o y i e l d a high return, since i t i s l i k e l y t h a t c o s t s w i l l s t i l l b e c o v e r e d b y t h e minimum e x p e c t e d r e turn. I n o t h e r words, i t i s t h e r e l a t i v e r i s k t h a t i s import a n t i n a s s e s s i n g minimum v a l u a t i o n r a t h e r t h a n t h e a b s o l u t e r i s k o f poor e s t i m a t i o n . 2 Lee E. P r e s t o n , E x p l o r a t i o n f o r Non-Ferrous M e t a l s , W a s h i n g t o n , R e s o u r c e s f o r t h e F u t u r e , I n c . , 1960, p . 4 6 . 3 D a v i d B. H e r t z , " R i s k A n a l y s i s i n C a p i t a l I n v e s t m e n t s , " H a r v a r d B u s i n e s s Review, B o s t o n , H a r v a r d C o l l e g e , J a n u a r y F e b r u a r y 1964.  206  Chapter  16.  CONCLUSION  The requires risks  f i n a n c i n g o f m i n i n g e x p l o r a t i o n and development  sources  o f venture  i n the expectation  stages  of the search  limited  gradually  of greater  willing  t o assume u n u s u a l  returns.  In the e a r l y  f o r ore, supplies of c a p i t a l  due t o t h e g r e a t  progressive  capital  are severely  uncertainty of the return.  development o f a p r o s p e c t ,  r e d u c e d a s more i n f o r m a t i o n  this  With the  uncertainty i s  i s gathered  about the  d e p o s i t and i t s u l t i m a t e w o r t h .  As t h e r i s k e x p o s u r e o f t h e  investor  of capital  and  i s r e d u c e d , new s o u r c e s  a t lower c o s t t o t h e venture.  The of c a p i t a l the  first  vided  the flow  penditures  has examined t h e  sources  i n mine f i n a n c i n g t o d e t e r m i n e  of various  s u p p l i e r s and t h e f a c t o r s w h i c h This  information  pro-  f o r t h e a n a l y s i s o f t h e mine development  The s t o c h a s t i c n a t u r e  illustrated  study  o f d e v e l o p m e n t -funds.  the background  process.  part of this  p r e s e n t l y employed  r i s k preferences  restrict  of this production  f u n c t i o n was  by the u n c e r t a i n t y o f the r e t u r n expected on e x p l o r a t i o n .  Developers o f mineral  attempt t o minimize the c o s t o f s e c u r i n g by  become a v a i l a b l e  employing a m u l t i - s t a g e  prospects  a profitable  decision process.  from ex-  producer  Expectations  of  success on  an  are  continuously  appraised,  i n d i v i d u a l prospect  From t h e financing, upon t h e capital  s u c h t h a t no more i s  than i t i s worth.  examination o f the  i t i s obvious that greater  internal is still  prospecting  and  resources  s u p p l i e d by  Because t h e i r  s u p p l i e d by  the  capital liquid  more a c c e s s i b l e and f l o w has  reinvestment, and  are  able  f i r m s can  but  to provide  Their  sponsorship  has  ful,  the  this  long  shareholders'  type  term debt  sources.  than t h e i r  needs  for  mineral  ventures.  development c a p i t a l ,  on  oper-  administrative services.  influenced financial  of  initial  financing w i l l  expensive  f u n d s t o new  v a n c e l a r g e sums o f d e b t c a p i t a l  facilitated  Equity  c o m p a n i e s h a v e become more  t e c h n i c a l and  Government g u a r a n t e e s and  placed  i t i s becoming i n c r e a s -  production  been g r e a t e r  operating  provide  reliance i s being  less  In a d d i t i o n t o s u p p l y i n g ating  s t a t u s o f mine  g e n e r a l p u b l i c i n the  exploration stages,  cash  current  of established producers.  i n g l y a p p a r e n t t h a t d e v e l o p m e n t and be  spent  very  institutions  favorable  to  ad-  terms.  p u r c h a s e agreements have  financing.  I f the venture  i s q u i c k l y amortized  and  is  success-  replaced  by  equity.  In the  search  f o r a v i a b l e mine t h e p r o s p e c t i v e  pro-  d u c e r must e x p e c t t o examine many i n d i c a t i o n s o f m i n e r a l i z a t i o n before  finding a promising  prospect.  Additionally, several  208 prospects w i l l lineated. tation,  be d i s c a r d e d b e f o r e  Even then,  a p r o f i t a b l e mine i s d e -  o r e r e s e r v e s may n o t s t a n d up t o e x p e c -  c o s t s may e x c e e d e s t i m a t e s ,  may d e c l i n e u n d e r t h e i m p a c t r i s k s must b e f a c e d b e f o r e  o r m a r k e t demand a n d p r i c e  of increased production.  a profit  i s returned  Many  to the i n v e s t -  ors .  In order expectations  to limit  development e x p e n d i t u r e s  o f r e a l i z a b l e w o r t h , p r o s p e c t i n g methods a r e em-  ployed which q u i c k l y i d e n t i f y consideration. be  available  those p r o s p e c t s worthy o f f u r t h e r  Because o f t h e r i s k  only  These s o u r c e s tation  t o the  will  at this  stage,  capital  will  from t h e p u b l i c o r e s t a b l i s h e d p r o d u c e r s . be c o s t l y  t o the developer,  c o m m i s s i o n s and e x p e n s e s o r i n d i l u t e d  either  in flo-  equity i nthe  prospect.  Exploration efforts  on a p r o m i s i n g  property w i l l  be  a i m e d a t s e c u r i n g a s much i n f o r m a t i o n on t h e p h y s i c a l n a t u r e of  the mineral  worth.  This w i l l  purchased earnings.  sources  i n v o l v e secondary  i t s expected  d e c i s i o n s on t h e v a l u e o f  knowledge and c o n t i n u a l r e - e v a l u a t i o n s o f f u t u r e As t h e u n c e r t a i n t y o f t h e r e t u r n i s r e d u c e d ,  becomes l e s s smelters  d e p o s i t as i s c o n s i s t e n t w i t h  expensive  and may p o s s i b l y b e o b t a i n e d  o r government a g e n c i e s just  mentioned.  from  capital custom  i n a d d i t i o n t o the t r a d i t i o n a l  .209 At  some p o i n t  i n the  purchase of  further information  worth.  developer  The  property  The  prices  and  or  s e c u r i t y o f the  investment.  capital will  secured  stitutions, the  often  p u b l i c be  on w h i c h c a p i t a l risk  e n v i s a g e d by  The prospect supply the  and  construction the  and  I f the  decision is  sponsor or  will  o f no  d e p e n d on  financing.  es-  market the  favorable,  from f i n a n c i a l  Only o c c a s i o n a l l y stage.  depend upon t h e  The  degree  inwill  terms of  investors.  improvement i n t h e  consequent r e d u c t i o n  Uncertainty t o be  his  costs,  valuation of a  in risk  Uncertainty  can  encourage  be  reduced  a p p l i c a t i o n o f a d v a n c e d d e c i s i o n t e c h n i q u e s and  mines i s not  the  further  outlook for  to p a r t i c i p a t e at t h i s  of venture c a p i t a l .  evaluation. new  the  i t s expected  being  costs,  from the  i s obtained  gradual the  i t as  through secured debt.  allowed  increase  decision w i l l  d e v e l o p m e n t and  demand, o p e r a t i n g  be  not  to reject  outcome o f t h i s  timate of required  will  the  i s faced with a d e c i s i o n : to develop  for production  interest.  development of a p r o s p e c t ,  must be  retarded  reduced by  the  i f the  lack of  mineral the through  thorough  development adequate  of  BIBLIOGRAPHY  Government  Publications  Canada, D e p a r t m e n t o f N a t i o n a l Revenue. C a n a d i a n T a x a t i o n S t a t i s t i c s . Ottawa, Queen's P r i n t e r , 1959 t o 1964. Canada, P a r l i a m e n t . Companies P r i n t e r , R.S., 1952.  A c t , 1934.  Ottawa,  Queen's  D a l e , V. B. M i n i n g , M i l l i n g , and S m e l t e r Methods, San M a n u e l C o p p e r C o r p . , P i n a l C o u n t y , A r i z o n a . W a s h i n g t o n , U. S. Government P r i n t i n g O f f i c e , 1962. (U. S. B u r e a u o f M i n e s I n f o r m a t i o n C i r c u l a r 8104.) P o r t e r , R. M. R e p o r t o f t h e R o y a l C o m m i s s i o n F i n a n c e . Ottawa, Queen's P r i n t e r * 1964.  on B a n k i n g and  S e c u r i t i e s and E x c h a n g e C o m m i s s i o n . C o s t o f F l o t a t i o n o f C o r p o r a t e S e c u r i t i e s , 1951 - 1955. W a s h i n g t o n , U. S. G o v e r n ment P r i n t i n g O f f i c e , 1957. U. S. B u r e a u o f M i n e s . M i n e r a l s Y e a r b o o k - 1963. U. S. Government P r i n t i n g O f f i c e , 1964.  Washington,  U. S. N a t i o n a l S e c u r i t i e s R e s o u r c e s B o a r d . M a t e r i a l s S u r v e y C o p p e r . W a s h i n g t o n , U. S. Government P r i n t i n g O f f i c e , 1952  G e n e r a l Works A g r i c o l a , G e o r g i u s . De Re M e t a l l i c a . T r a n s . H. C. H o o v e r L. C. H o o v e r . New Y o r k , D o v e r , 1950.  and  Andrews, V i c t o r L. I n v e s t m e n t P r a c t i c e s o f C o r p o r a t e I n v e s t ment F u n d s . C a m b r i d g e , Mass. I n s t i t u t e o f T e c h n o l o g y , 1958 A s h l e y , C. A. and Smyth, J . E . C o r p o r a t i o n F i n a n c e T o r o n t o , M a c m i l l a n , 1956. B o e r i c k e , W. F . and B a i l e y , C. C. "Mine F i n a n c i n g . " o f t h e M i n e r a l I n d u s t r i e s . E d . E . H. R o b i e . New AIME, p p . 239-268. C h i l d s , J o h n F. L o n g Term Prentice-Hall, 1961.  F i n a n c i n g . Englewood  i n Canada.  Economics York,  Cliffs,  211 Creamer, D., D o b r o v o l s k y , S. P. and B o r e n s t e i n , I . C a p i t a l i n M a n u f a c t u r i n g and M i n i n g . P r i n c e t o n , U n i v e r s i t y P r e s s , 1960. Dean, J o e l . " M e a s u r i n g t h e P r o d u c t i v i t y o f C a p i t a l . " I n v e s t m e n t D e c i s i o n s . B o s t o n , H a r v a r d , 1964, p p . D u e s e n b e r r y , J . S. B u s i n e s s C y c l e s and Y o r k , M c G r a w - H i l l , 1958.  Economic  Capital 21-31.  G r o w t h.  New  Durand, D a v i d . " C o s t s o f Debt and E q u i t y Funds f o r B u s i n e s s . " The Management o f C o r p o r a t e C a p i t a l . E d . E z r a S o l o m o n . New Y o r k , F r e e P r e s s o f G l e n c o e , 1959. F r e u n d , J o h n E . and W i l l i a m s , F r a n k J . Modern B u s i n e s s t i c s . Englewood C l i f f s , P r e n t i c e - H a l l , 1958. F u l l e r t o n , D o u g l a s H. C a r s w e l l , 1962.  The  Bond M a r k e t  Statis-  i n Canada. T o r o n t o ,  G o l d s m i t h , Raymond W. F i n a n c i a l I n t e r m e d i a r i e s i n t h e A m e r i c a n Economy S i n c e 1900. P r i n c e t o n , U n i v e r s i t y P r e s s , 1958. Graham, B e n j a m i n , Dodd, D. L. and C o t t l e , 4 t h e d . New Y o r k , M c G r a w - H i l l , 1962. G r a y s o n , C. J a c k s o n J r . D e c i s i o n s H a r v a r d , 1960.  S. S e c u r i t y  Under U n c e r t a i n t y .  Analysis.  Boston,  H e r t z , D a v i d B. " R i s k A n a l y s i s i n C a p i t a l I n v e s t m e n t . " C a p i t a l I n v e s t m e n t D e c i s i o n s . B o s t o n , H a r v a r d , 1964, p p . 175-186. Hoffman, A r n o l d . F r e e G o l d - The S t o r y o f C a n a d i a n M i n i n g . Y o r k , A s s o c i a t e d Book S e r v i c e , 1947. Hunt, P e a r s o n , W i l l i a m s , C. M. and D o n a l d s o n , F i n a n c e . Rev. e d . Homewood, I r w i n , 1961. L e f f l e r , G e o r g e L . and F a r w e l l , New Y o r k , R o n a l d , 1963.  L . C.  The  G.  Basic  Stock Market.  L e n e s s , G. J . , M a r t i n , G. K. and G i l m a r t i n , B u s i n e s s . New Y o r k , M c G r a w - H i l l , 1956.  R.T.  New  New  Business  3rd  ed.  Money f o r  L i n t n e r , J . V. "The F i n a n c i n g o f C o r p o r a t i o n s . " The C o r p o r a t i o n i n Modern S o c i e t y . E d . E . S. Mason. C a m b r i d g e , Massachusetts I n s t i t u t e of Technology, 1959.  212 L i t t l e , A. J . and M a c D o n a l d , W. Toronto, Canadian I n s t i t u t e (1960). M c K i n s t r y , H.  E. M i n i n g G e o l o g y .  L. M i n i n g A c c o u n t i n g i n C a n a d a . of Chartered Accountants,  New  York,  Prentice-Hall,  1948.  McLean, J o h n G. "How t o E v a l u a t e New C a p i t a l Investments." C a p i t a l I n v e s t m e n t D e c i s i o n s , B o s t o n , H a r v a r d , 1964, p p . 42.  32-  M e i s e l m a n , D. and S h a p i r o , E . The Measurement o f C o r p o r a t e S o u r c e s and U s e s o f F u n d s . New Y o r k , N a t i o n a l B u r e a u o f Economic Research, 1964. P i l c h e r , C. James. R a i s i n g C a p i t a l w i t h C o n v e r t i b l e S e c u r i t i e s . Ann A r b o r , U n i v e r s i t y o f M i c h i g a n , 1955. P r e s t o n , Lee E. E x p l o r a t i o n f o r Non-Ferrous R e s o u r c e s f o r t h e F u t u r e , I n c . , 1960.  M e t a l s . Washington,  Raymond, L. D. " V a l u a t i o n o f M i n e r a l P r o p e r t y . " E c o n o m i c s o f t h e M i n e r a l I n d u s t r i e s . E d . E . H. R o b i e . New Y o r k , AIME, 1959, p p . 131-162. Reuber, G. L. and W e n n a c o t t , R. J . C o s t o f C a p i t a l i n C a n a d a . W a s h i n g t o n , R e s o u r c e s f o r t h e F u t u r e , I n c . , 1961. Sauvain, H a r r y . Investment Prentice-Hall, 1959.  Management. 2nd  ed. Englewood  Cliffs,  Solomon, E z r a . " M e a s u r i n g a Company's C o s t o f C a p i t a l . " The Management o f C o r p o r a t e C a p i t a l . E d . E . S o l o m o n . New Y o r k , Free Press o f Glencoe, 1959. W i l l c o x , F r a n k . M i n e A c c o u n t i n g and T o r o n t o , Pitman, 1949.  Financial Administration.  W i l l i a m s o n , J . P e t e r . S e c u r i t i e s R e g u l a t i o n i n Canada. U n i v e r s i t y of Toronto, 1960.  Toronto,  Periodicals A l l a i s , M. "Economic A s p e c t s o f M i n i n g E x p l o r a t i o n - A l g e r i a n S a h a r a C a s e S t u d y . " Management S c i e n c e , v o l . 3, no. 4 ( J u l y 1957), pp. 285-347.  F i n a n c i a l Post. Survey Hunter, 1965.  o f M i n e s - 1965.  Toronto,  Maclean-  F i n a n c i a l Post C o r p o r a t i o n S e r v i c e . Record Toronto, Maclean-Hunter, 1962-63.  o f New  I n d u s t r i a l D e v e l o p m e n t Bank. A n n u a l Queen's P r i n t e r , 1964.  - 1964.  "Insider Trading C r i t i c i z e d . " M a r c h 29, 1965.  The  Report  Province  Issues.  Ottawa,  (Vancouver),  M c D i v i t t , James F. "The W o r l d Bank - I t s R o l e i n F o s t e r i n g M i n e r a l D e v e l o p m e n t . " M i n i n g E n g i n e e r i n g , May 1963, p .  59.  "Program t o S t i m u l a t e M i n i n g i n N o r t h S a s k a t c h e w a n . " C.I.M. B u l l e t i n , December 1964, p . 1306. Raymond, L. C. " I n v e s t m e n t C a p i t a l and M i n e r a l D e v e l o p m e n t . " M i n i n g E n g i n e e r i n g , A u g u s t 1964, p . 39. R o c k h i l l , V i c t o r E . " S o u r c e s o f F i n a n c i n g and F i n a n c i a l A i d f o r Mining i n L a t i n America." Mining Congress J o u r n a l , December 1963, p . 64. S h a k e s p e a r e , W. C. "The T a x a t i o n o f M i n i n g Companies i n Canada C.I.M. B u l l e t i n , J a n u a r y 1965, p . 71-74. S l i c h t e r , L. B. "The Need f o r a New P h i l o s o p h y o f P r o s p e c t i n g . M i n i n g E n g i n e e r i n g , J u n e 1960, p . 570. Toronto S t o c k Exchange. Monthly  Review, v a r i o u s  issues.  Wansbrough, V. C. " F i n a n c i n g M i n i n g V e n t u r e s - a C a n a d i a n V i e w . " M i n i n g C o n g r e s s J o u r n a l , November 1963, p . 36. W r i g h t , M. H. " F i n a n c i n g D o m e s t i c M i n i n g V e n t u r e s . " C o n g r e s s J o u r n a l , F e b r u a r y 1964, p . 58.  Special  Mining  Studies  B r a y , H. S. " S e c u r i t i e s A d m i n i s t r a t i o n i n O n t a r i o . " The Commerce J o u r n a l - 1964. T o r o n t o , Commerce C l u b - U n i v e r s i t y of Toronto, 1964. B r i l l , D a n i e l H. " F i n a n c i n g o f C a p i t a l F o r m a t i o n . " P r o b l e m s i n C a p i t a l F o r m a t i o n . P r i n c e t o n , U n i v e r s i t y P r e s s , 1957. ( S t u d i e s i n Income and W e a l t h , v o l . XIX.)  s  214 Buck, W. K e i t h . S o u r c e s o f C a p i t a l Funds f o r t h e M i n e r a l I n d u s t r y . Ottawa, D e p t . o f M i n e s and T e c h n i c a l S u r v e y s , J u l y 1956. C a n a d i a n B a n k e r s A s s o c i a t i o n . S u b m i s s i o n t o t h e R o y a l Commiss i o n on B a n k i n g and F i n a n c e . T o r o n t o , C.B.A., 1963. Canadian Metal Mining A s s o c i a t i o n . Submission t o the Royal C o m m i s s i o n on B a n k i n g and F i n a n c e . T o r o n t o , C.M.M.A., May 1962. C o r k , E . K. F i n a n c e i n t h e M i n i n g I n d u s t r y . Ottawa, Queen's P r i n t e r , November 1962. D a l e , W. B. and B a l e , R. N. P r i v a t e U. S. V e n t u r e C a p i t a l f o r I n v e s t m e n t i n Newly D e v e l o p i n g C o u n t r i e s . M e n l o P a r k , C a l i f o r n i a , S.R.I. ( 1 9 5 8 ) . ( I n t e r n a t i o n a l I n v e s t m e n t S e r i e s - no. 2.) D a v i s , J o h n . M i n i n g and M i n e r a l P r o c e s s i n g Queen's P r i n t e r , 1958. Hood, W i l l i a m C. F i n a n c i n g o f E c o n o m i c Ottawa, Queen's P r i n t e r , 1959. I r w i n , W. S. M i n e F i n a n c i n g and 28, 1964. I r w i n , W. S. S e c u r i t i e s M a r c h 4, 1965.  and  Activity  i n Canada.  Promotion. Vancouver,  R e g u l a t i o n and  P e t r i c k , A. M i n e F i n a n c i n g 28, 1964.  i n C a n a d a . Ottawa,  the Investor.  Promotion. Vancouver,  Q u i r i n , G. D a v i d . A Method o f E v a l u a t i n g i t i e s i n Wildcat Acreage. Frankfurt, C o n g r e s s , J u n e 1963.  October  Vancouver,  October  Investment OpportunS i x t h World Petroleum  Redrupp, R. J . An A n a l y s i s o f Bank F i n a n c i n g I n d u s t r y . T o r o n t o , M a r c h 28, 1963.  i n the Mining  S u t t o n , G. D. C o r p o r a t e F i n a n c e . Ottawa, Queen's O c t o b e r 1962.  Printer,  Toombs, R. B., Andrews, P. W. and Buck, W. K e i t h . M i n e r a l s and t h e i r M a r k e t s . Ottawa, D e p t . o f M i n e s and T e c h n i c a l S u r v e y s , J a n u a r y 1965.  T o r o n t o S t o c k E x c h a n g e . B r i e f t o t h e A t t o r n e y G e n e r a l ' s Comm i t t e e on S e c u r i t i e s L e g i s l a t i o n . T o r o n t o , May 1964. Van L u v e n , J . A. The V a n c o u v e r S t o c k E x c h a n g e and F i n a n c i n g . V a n c o u v e r , M a r c h 9, 1965.  Mine  216  APPENDIX  EXAMPLE OF EXPLORATION DECISION C a l c u l a t i o n o f Expected F i n a n c i a l R e s u l t (Millions of Dollars)  Development W i t h o u t  Drilling  Net Present Value  Probability of Occurrence  Type o f Orebody  Range o f Present Value  Midpoint o f Range  Poor  0 - 2.5  1.25  -1.0  .023  -.02  Fair  2.5 - 10  6.25  4.0  .477  1.91  Good  10 - 22.5  16.25  14.0  .375  5.25  Excellent  22.5-40  31.25  29.0  .102  2.91  +40  51.25  49.0  .023  1.13  Bonanza  Expected Worth  1.000  TOTAL EXPECTED WORTH OF DEVELOPMENT  $11.18  Development With  Drilling D r i l l i n g Result Strong Sulphides Weak S u l p h i d e s ProbabilProbabili t y of Expected i t y of Expected Occurrence Worth Occurrence Worth  Type o f Orebody  Net Present Value  Poor  - 1.0  .000  Fair  4.0  Good  -  .00  .045  .045  .18  .910  3.64  14.0  .565  7.90  .045  .63  Excellent  29.0  .345  10.00  .000  .00  Bonanza  49.0  .045  2.20  .000  .00  1.000 T o t a l Worth  of Result  Probability of D r i l l i n g E x p e c t e d Worth o f R e s u l t  Total  -  .04  1.000 $20.28  $4.23  .50  .50  10.14  2.21  Result  E x p e c t e d Worth o f Development  $12.35  

Cite

Citation Scheme:

        

Citations by CSL (citeproc-js)

Usage Statistics

Share

Embed

Customize your widget with the following options, then copy and paste the code below into the HTML of your page to embed this item in your website.
                        
                            <div id="ubcOpenCollectionsWidgetDisplay">
                            <script id="ubcOpenCollectionsWidget"
                            src="{[{embed.src}]}"
                            data-item="{[{embed.item}]}"
                            data-collection="{[{embed.collection}]}"
                            data-metadata="{[{embed.showMetadata}]}"
                            data-width="{[{embed.width}]}"
                            async >
                            </script>
                            </div>
                        
                    
IIIF logo Our image viewer uses the IIIF 2.0 standard. To load this item in other compatible viewers, use this url:
http://iiif.library.ubc.ca/presentation/dsp.831.1-0102365/manifest

Comment

Related Items