Lake Superior Iron Ore Exploration As an Illustration
To illustrate the application of some of the methods of exploration of the kinds described in this chapter, the writer selects an example from his own experience in the Lake Superior iron fields.[40]
In this region, consideration of the economic aspects of the problem may eliminate from the best explorable field certain Canadian portions which are far from water transportation, because the conditions in these sections would prevent the use of anything but an exceptionally large and rich deposit. Economic conditions determine in advance also that it is not worth while looking for ores of certain grades, either because they are not usable on account of deleterious constituents or low content of iron, or because these particular grades have already been developed in excess of requirements. Having determined what ore is desired, whether Bessemer or non-Bessemer, whether open-hearth or foundry, further elimination of area is possible on the basis of past experience.
Coming to the geologic phases of the problem, the first step is to eliminate great areas of rock which are known never to contain iron ore, like the granite areas and the quartzite and limestone areas. Within the remaining areas, by examination of the surface outcrops and with the aid of magnetic surveys, iron formations are found which are the mother rock of the ores. In Michigan, it has been possible to use certain percentage expectations in the areal location of iron formations within certain series of rocks extending over wide areas. Such percentage coefficients have been useful, not only in exploration, but also in the valuation of lands which are so covered with drift that no one knows whether they carry an iron formation or not.
Examination of the iron formations results in elimination of large parts of them, because their metamorphic condition is not favorable to ore concentration. In the remaining areas more intensive methods are followed. It is scarcely possible to summarize briefly all of the structural and stratigraphic methods used in locating the ore bodies. These have often been described in print.[41] Comparatively recent advances in this phase of exploration work have been in the more detailed application of stratigraphic methods to the iron formation. The group characteristics of the iron formation are fairly uniform and distinctive as compared with all other rocks; yet within the iron formation there are so many different kinds of layers represented that it is possible to use these variations with great effectiveness, in correlating favorable horizons for ore deposition, in interpreting drill records, and in other ways. Another method of approach, employed chiefly on the Mesabi Range, relates to the slumping of the ore layers which results from the leaching of silica during the concentration of the ore. This slumping can be measured quantitatively, and has been used to much advantage in exploration, in correlation of ore horizons, in preparation of sections and ore estimates, etc.
Early geologic explorations in the Lake Superior country were based on the assumption that the ores were concentrated by waters working down from the present erosion surface; but recognition of the fact that the waters which did the work were related to a far older and different erosion surface, under conditions which allowed of a far deeper penetration, has modified exploration plans for certain of the districts like the Marquette and Gogebic.
Notwithstanding the complexity of the geologic factors involved, their net result has been to concentrate iron ores in a surprisingly uniform ratio to the mass of the formation in different parts of the region,—with the result that on an average it may be predicted for any district, in an exploration of sufficient magnitude, how much ore is likely to be cut in either vertical or horizontal dimension. Thirteen per cent of the productive area of the Mesabi iron formation is iron ore. For the remainder of the Lake Superior region five or six per cent is the factor. These figures mean that, if a person could explore a broad enough area of iron formation, any miscellaneous group of drill holes or underground openings would tend to yield these percentage results. Such percentages are amply sufficient to pay a large profit on the exploration. The question may be raised why the application of geology is required, if such average results can be secured from miscellaneous undirected work. The answer is that seldom is it possible to conduct an exploration on a sufficiently large scale to be sure of approximating this average, and that geologic study has made it possible in many cases to secure a better percentage result. If the geologist is able to raise the percentage ever so little, the expenditure is amply justified. He is not expected to have 100 per cent success; but he is expected to better the average returns, and in this on the whole he has not failed.
Applying this method specifically to the Gogebic Range, it appears that up to January 1, 1918, exploration and development had covered 3,650 acres of iron formation, measured along the dip in the plane of the footwall, within the limits of the area in which the formation is in such condition as to allow concentration of the ore. The total area of the footwall to a depth of 3,000 feet is approximately 9,650 acres. The range, therefore, was 38 per cent developed to this depth. In the developed area, 160,000,000 tons of ore had been found, or approximately one ton per square foot of footwall area, or 43,800 per acre of footwall explored. The total area of ore measured on the footwall was 785 acres. The ratio of ore area to total explored area, measured in the plane of the footwall, was 21-½ per cent. This may be taken in a rough way to indicate the average exploring possibilities in new ground, where local conditions to the contrary do not exist. This means that over the whole range about one drill hole or cross-cut in five will strike ore on an average. Or, looked at in another way, about 200 feet of drifting in every 1,000 on the footwall will be in ore. Applying this factor to the unexplored area, amounting to 6,000 acres, the range had an expectation on January 1, 1918, to a depth of 3,000 feet, over and above ores already discovered, of approximately 262,800,000 tons. This was sufficient to extend the life of the range by about forty-four years. Knowing the average cost of development of ore per foot in the past, and knowing the annual output and its rate of acceleration, it is possible to figure with some accuracy how much expenditure should be planned for annually in the future in order to maintain a safe margin of reserves against output.
Such quantitative considerations in the Lake Superior region serve not only to guide the general conduct of the exploration and development work, but in some cases as a basis for valuation both for commercial and taxation purposes.
Development and Exploitation of Mineral Deposits
The search for new ore bodies is closely related to the development, extension, and mining of ore bodies already found. In this field the geologist finds wide application of his science. Here he may not be so much concerned with the economic factors or with the broader methods of geologic elimination; his study is more likely to be based mainly on the local geologic conditions.
Some of the larger and more successful mining companies, perhaps the greater number of them these days, have geologists whose business it is to follow closely the underground operations, with a view to advising on the conduct of the development work. This requires the most precise and intensive study. For instance, the Anaconda Copper Mining Company has a staff of several geologists, who follow the underground work in the utmost detail and whose approval must be obtained by the operating department in the formulation of any development plan. The complexity and fault relations of the veins in this company's mines are such that the application of these methods has abundantly justified itself on the cost sheet.
Too often mining companies leave the planning and execution of the underground development work to the local management, commonly to the underground mining captain, without geologic consultation. This procedure does not eliminate the economic geologist; for when the development fails at any point, or new and unexpected conditions are met, the geologist is likely to be called in. In such cases the practice of a geologist is like that of the ordinary medical practitioner; he is called in only when his patients are in trouble. The use of adequate geologic advice in the planning stages is about as little advanced in some localities as the practice of preventive medicine.
The work of the economic geologist may not be ended by the finding and development of the ore; for the moment this is accomplished, he should again consider the economic phases of the problem—the grade of his ore, its probable amount, and other features, in relation to the general economic setting. In his enthusiasm for physical results, he may be carried into expenditures not justified by the economic factors in the problem. Some one else may and usually does look out for the economic elements, but the prudent geologist will at least see to it that someone is on the job.
FOOTNOTES:
[37] Smith, George Otis, and others, The classification of the public lands: Bull. 537, U.S. Geol. Survey, 1913.
[38] Schlumberger, C., Study of underground electrical prospecting: Translated from the French by Sherwin F. Kelly, Paris, 1920.
Bergstrom, Gunnar, and Bergholm, Carl, "Teknisk Tidskrift, Kemi och Bergvetenskap," 1918, Book 12.
[39] Hoover, Herbert C., Principles of mining: McGraw-Hill Book Co., New York, 1909, p. 32.
[40] Leith, C. K., Use of geology in iron ore exploration: Econ. Geol., vol. 7, 1912, pp. 662-675.
[41] Van Hise, C. R., and Leith, C. K., Geology of the Lake Superior region: Mon. 52, U.S. Geol. Survey, 1911.
CHAPTER XV
VALUATION AND TAXATION OF MINERAL RESOURCES
POPULAR CONCEPTION OF MINERAL VALUATION
The total returns from mining may not in the aggregate be far above the expenditure for exploration, development, and extraction; yet the total mineral wealth of the United States, on the basis of earning power and aside from the industries based on it, cannot be far from sixty billions of dollars, and this wealth has virtually come into existence since the 1849 gold rush to California. The mining industry supports a large population. These facts are the solid basis for the widespread popular interest in mineral investment—and mineral speculation. But there are other reasons for this interest,—the gambler's chance for quick returns, the "lure of gold," the possibility of "getting something for nothing," the mushroom nature of certain branches of the industry, the element of mystery related to nature's secrets, and the conception of minerals as bonanzas with ready-made value, merely awaiting discovery and requiring no effort to make them valuable. In the United States a factor contributing to the popular interest is the large freedom allowed by the laws to discover and acquire minerals on the public domain. Perhaps no other field of industry comes so near being common ground for all classes of people. The mineral industry is a field in which it is easy to capitalize not only honest and skillful endeavor, but hopes, guesses, and greed. It is not to be wondered at, therefore, that in the popular mind the valuation of a mineral resource is little more than a guess, and sometimes not even an honest one.
Nevertheless, the mineral industry has become second only to agriculture in its capital value and in its earning capacity. In this industry it is hardly possible to arrive at valuations as securely based as in many other industries, but the elements of hazard are not so hopeless of measurement as might be supposed. The great mineral and financial organizations do not depend on mere guesses, but use well-tried methods. If the general investor were to give more attention to these methods he would doubtless save himself money, and the mineral industry would be rid of a great incumbrance of parasites who live on the credulity of the public. To anyone familiar with the mineral field, it is often surprising to see the rashness with which a conservative business man, who would not think of entering another industrial field without close study of all the factors in the situation, will invest in minerals without using ordinary methods of analysis of values.
In the following account of valuation of minerals in the ground, and the closely related subject, taxation of such minerals, the attempt is made to state some of the principles briefly and simply with a view to making them intelligible to the layman. Values beyond the mine are concerned with so many factors of a non-geologic nature that they are not here discussed.
VALUATION AND TAXATION OF MINES
Intrinsic and Extrinsic Factors in Valuation
It is essential to recognize at the outset that the value of a mineral deposit, like the value of any other commercial material, comprises two main elements; an intrinsic element based on the qualities of the material itself, and an extrinsic element based on its availability and the nature of the demands for it. The two elements may not be sharply separated, and neither exists without the other. A mineral deposit in easy reach of a populous community, which has sufficiently advanced methods and requirements to use it, may have high value; an exactly similar deposit, if far removed from points of consumption, handicapped by transportation, or available only to people without developed methods for its use, may have little or no value. Intrinsically the deposits are alike; but extrinsically they are far different, and their values are correspondingly unlike. Even two adjacent properties, differently managed and controlled, and with different relations to markets, may have somewhat different values depending on the use made of them. The value of a deposit may vary from year to year with changes in demand for its output, or with changes in metallurgical and other processes which make its use possible. Minerals of small bulk and high value, as for instance gold, platinum, and diamonds, have a nearly standard value related to their intrinsic properties, because they can be transported so easily to any part of the world. On the other hand, materials of large bulk and low unit value, such as coal, iron ore, and clay, may have highly varying values independently of their physical characteristics, because of their relative immobility. But the values even of gold and precious stones represent a combination of intrinsic qualities and of demand. A diamond is made of carbon but is more valuable than coal or graphite because it appeals to the esthetic taste. It is only because man introduces an element of demand that the diamond takes on value. In short, man is the multiplier and the mineral substance is the multiplicand in the product known as value.
Recognition of the two elements of value is vital to a clear understanding of the methods and problems of valuation of minerals. It is too often assumed that the physical properties constitute the sole factor.
Looked at in a large way, the returns from the mineral industry are commensurate with the effort put into discovery and development of mineral resources, even though the returns to lucky individuals have been excessive. In respect to the importance of the human energy element, the mining of minerals is not unlike the cropping of soils. Some interesting economic studies have been made of mining districts to ascertain whether the total return has been equal to the total investments by both successful and unsuccessful participants. The results show that, even in some of the most successful districts, there is not a large "social surplus,"—that is, a surplus of receipts over total expenditures. It is difficult to generalize from such studies with any degree of accuracy; but it seems likely that if we could measure the vast amount of fruitless effort which has been expended in non-productive territories, the result would tend to bear out the general conclusion that the social surplus for the mineral industry as a whole is a modest one, if it exists at all. Of course, it is to be remembered that the total benefits from mineral resources are not to be measured in terms of gain to the producers,—but that their measurement must take into account the satisfying of all the complex demands of modern civilization.
Values of Mineral Deposits Not Often Established By Market Transfers
While minerals as extracted and used may have standard market values, mineral deposits in the ground are not bought and sold on the open market with sufficient frequency to establish standard market values. A sale may establish a criterion of value for the particular deposit, but not for the class of deposits,—for no two mineral deposits are exactly alike. Stock quotations may establish a certain kind of market value, but these are often vitiated by extraneous considerations. For these reasons the valuation of a mineral deposit is in each case a special problem.
The Ad Valorem Method of Valuation
The ordinary commercial method of valuing mineral deposits recognizes the two main elements of value above discussed. This method is sometimes called the rational or ad valorem method. The profit per ton (or per other unit) of the product is established, on the basis either of past performance of the property or of experience with other similar properties. This profit is multiplied by the total tonnage estimated in the deposit, the estimate including known reserves, probable reserves, and in some cases possible and prospective reserves. The product of the profit per ton and the total tonnage gives the total net amount which will be received; it does not, however, give the present value, because the commodity cannot all be taken out and sold at once, but must be mined and absorbed by the market through a considerable period of years. The returns receivable some years in the future have obviously a lower proportionate present worth than amounts to be received at once. The interest rate comes into play, making it necessary to discount each annual payment for the number of years which will elapse before it is received. It is evident, therefore, that an estimate of the life of the property is necessary, involving not only knowledge of the reserves, but also a forecast of the annual extraction or rate of depletion.
As a simple case of ad valorem valuation for illustrative purposes, a deposit containing 1,000,000 tons in reserve has an estimated output of 100,000 tons a year for ten years, on which the profit per ton has in the past averaged $1 and is expected to average $1 in the future. Ten annual instalments or dividends of $100,000 are to be received. The present value of the total of these instalments is figured by an annuity method. It is the value upon which the series of dividends will pay interest at a predetermined rate, in addition to paying to a sinking fund annual instalments which, safely invested each year at a low rate of interest (usually 4%), will repay the present value at the end of the ten years. In our hypothetical case, if an interest rate of 8% be taken, the present value of $1,000,000, to be received through ten years in ten equal instalments, is $612,000. In other words, the sum of $612,000 will be replaced by the sinking fund at the end of ten years, and will pay 8% interest during this period,—this requiring total receipts of $1,000,000 in ten equal annual instalments. If the deposit here cited as an illustration were to be worked out in three years, thus yielding three annual instalments of $333,000, its value would be $833,000.
Each of the factors entering into this method of valuation covers a wide range of variables, any one of which may be difficult to determine.
The profit per ton for a given deposit may have been extremely variable in the past, making it difficult to determine whether the highest or lowest figure should be projected into the future or whether some average should be taken; and if an average, whether the time covered by the average should be long or short. For a small, short-lived deposit obviously the most recent conditions would be taken into account in estimating future profits. For a long-lived property there would be more tendency to consider the long-time average vicissitudes, as reflected in the average profits of the past. For some mineral commodities there are cycles of prices, costs, and profits, of more or less definite length, established during the long past history of the industry; and in such cases it is desirable in calculating averages to use a period covering one or more of these cycles, rather than some shorter or longer period. For many minerals, however, these cycles have been too irregular to afford a sound basis for future estimates. If the experience of the property itself is too short to afford a sufficient foundation for forecasting profits, or if there has been no previous work on the property, then it is necessary to use averages based on other properties or other districts; or if there are none strictly comparable, to build up a hypothetical figure from various estimated costs of labor, supplies, and transportation, selling prices, etc. In the estimate of the profit factor, the geologist is not primarily concerned.
In estimating the total reserves in a mine, geological considerations nearly always play a large part. An ore body may in some few cases be completely blocked out by underground work or drilling, eliminating the necessity for inferring conditions beyond those actually seen; but in the huge majority of mineral deposits the reserves are not so definitely known, and it becomes necessary for the geologist, through knowledge of similar occurrences, through study of the structural features of the deposit, its origin, and its history, to arrive at some sort of an estimate of reserves.
In estimating the life of a mineral deposit it is necessary to start with the figure of total reserves, and from a study of conditions of mining and of markets to estimate the number of years necessary to exhaust the deposit. This is a more nearly commercial phase of the problem, in which the geologist takes only part of the responsibility. Perhaps more estimates of value have gone wrong because of misjudgment of this factor than for any other cause. If the physical conditions are satisfactory, it is easy to assume a rate of extraction and life based on hope, which experience will not substantiate.
The choice of the interest rate to be used in discounting future receipts to present worth likewise is a financial and not a geologic matter. Again, however, the geologist must give consideration to this factor, in view of the fact that the interest rate must be varied to cover the different degrees of hazard and doubt in the geologic factors. For instance, to the extent to which the estimate of ore reserves is doubtful, it is necessary to use a high rate of interest to allow for this hazard. In a large, well-developed mineral deposit, with the geological factors all well known and the demand and market well established, it is reasonable to use a lower rate of interest. In general, the mineral industry is regarded in financial circles as being more hazardous than many other industrial lines; and money is put into the industry with the expectation of a high rate of interest, no matter how safe the investment may be. In actual practice interest rates used in making valuations vary from 6 to 15 or 20 per cent.
It is clear that, where a property has long life, the interest will very materially reduce the present value of the ores to be mined far in the future. Reserves to be mined more than thirty years hence have relatively little or no present value. Beyond a certain point, therefore, the acquirement and holding of reserves for future use by private companies has little commercial justification. This is a matter which is too often not sufficiently well considered. Man's natural acquisitiveness often leads him into investments which, because of the time and interest factor, have little chance of successful outcome. Of course a large corporation, anticipating an indefinitely long life, or perhaps aiming at monopoly, may afford to hold reserves as a matter of general insurance longer than a small company,—even though, because of the interest rate, these reserves have no present value on their books. It is likewise true that governments, looking forward to the future of the nation, and without the necessity of paying so much attention to interest and taxes, are not so limited by this consideration.
An illustration of the limiting effect of the interest rate on the acquirement of long-lived coal deposits by private interests is discussed in Chapter XVII on Conservation. Investments made many years ago have so augmented, even at low interest rates, as to make it practically impossible to count on a return of capital and interest; or if the return were to be exacted from the public it would mean excessive charges, which are not possible in competition with other mines not so burdened.
In the commercial valuation of oil wells and pools, much the same method is used as has been described for mineral resources in the solid form, but the estimate of reserves or life is based on consideration of curves of production of the sort mentioned on pages 134-136.
The essence of the ad valorem method of valuation above described is income-producing capacity. This method recognizes the fact that the value of the mineral deposit depends, not only on its physical constitution, but also on what performance can be expected from it.
Stock quotations on mineral properties in the standard markets are based substantially on estimates of income capacity, more or less on the ad valorem basis. However, the quotations also reflect the hopes and fears of the public, often resulting in valuations quite different from those based on studies of the objective conditions.
The war introduced new considerations into the problems of ad valorem valuation. Under peace conditions there is a tendency toward the establishment of normal costs, selling prices, and markets, which can be taken more or less for granted by anyone attempting to value mineral deposits. Under war and post-war conditions, few of these elements can be taken for granted; it becomes necessary to consider the entire world situation in regard to a mineral commodity, the effects of the Peace Treaty (which greatly concerns minerals), future international relations, tariffs, and other matters of a similar sort. If a person were today valuing a manganese deposit according to the method above outlined, and were to confine himself solely to a narrow consideration of past markets and profits on individual properties, he would be very likely to go wrong,—for the world manganese situation has an immediate and practical bearing on each local problem (see pp. 173-176).
Other Methods of Mineral Valuation and Taxation
We have discussed the ad valorem method of valuation at some length because it is the one in widest commercial use, and also because the principles involved underlie practically all other methods of mineral valuation. The ad valorem method is used in appraisals for taxation in some districts and for some commodities, as, for instance, the iron mines of Michigan and Wisconsin. Its application, however, requires skill and judgment if equitable results are to be secured. For taxation purposes, therefore, it is not uncommon to adopt purely arbitrary or empirical methods which eliminate the element of judgment, and which often result in valuations quite different from those used commercially.
The state of Minnesota divides its iron ore deposits into a series of classes, on each of which a more or less arbitrary flat value per ton is placed, based on the spread between cost and selling price. The adjustments of flat values on the several classes through a series of years, however, as well as the assigning of specific ores to the different classes, have been based on the same factors as are used in ad valorem valuations.
The state of Wisconsin uses a so-called "equated income" method of valuation and taxation for the lead and zinc deposits of the southwestern part of the state. Under this method the state puts such a tax on the mine incomes for the preceding year as will yield approximately the same total return as under the ad valorem method,—the whole being based on the assumption that each deposit has about the average life figured for the mines of the entire district. So far as individual ore deposits vary from this average life, the value fixed departs from the true or ad valorem value.
Several states impose specific taxes based on the operations of the mines for the preceding year or for some combination of preceding years, as expressed in tonnage output or net profits or net proceeds, regardless of life or reserves. So far as output or net proceeds for a year are proportional to the real value of the property, a rough approximation to equitable taxation as between mines is accomplished. Often, however, the valuation thus obtained has little relation to the true value, because it does not take into account the great differences between properties in reserves, in life, and in capacity for future profit.
Income taxes, national and state, are of course based on the profits of the preceding year; but in the collection of these taxes from mineral operations, it is recognized that mineral deposits are wasting assets, and therefore a considerable part of the income may under the law be regarded as a distribution of capital assets, and be deducted from taxable income. The amount to be deducted obviously depends on the size of the reserves and the life,—with the result that progressive adjustment of income tax valuations tends to take into consideration exactly the same factors as are used in the ad valorem method. It is obviously unjust, for instance, to collect the same proportion of tax from the annual income of a mine which has a life of only two years as from a mine which has a life of fifty years. Under the federal income tax a capital value is placed on the mineral deposit as of March 1, 1913, which total capital value may be increased with subsequent discoveries. As the ore is taken out of the ground and sold, income tax is paid only on the difference between the assigned capital value per unit and the selling profit. If, for instance, the capital value as of March 1, 1913, is placed at 50c. per ton of mineral in the ground, and ten years later a ton is sold for a profit of $1, income tax is paid on 50c. The figure of 50c. per ton as value in the ground is actually obtained by estimating a profit, when the ore is ultimately mined and sold, of $1 per ton, and discounting this dollar to present worth as of March 1, 1913. Therefore the total amounts on which taxes are paid during the life of the mine should represent approximately the total accruals of interest from March 1, 1913. In this manner the proportion of annual income to be taxed becomes larger with the length of the life period. With a deposit having a life of thirty years the net result is that about half of the aggregate income is taxed, though this figure of course varies somewhat with the interest rate used.
In the collection of income taxes from coal mines in England, and in the collection of certain state income taxes in the United States, a considerably smaller allowance is made for the retirement of capital value (or for depletion, as this is commonly called). In these cases the deduction allowed is a small fixed percentage of the capital value, regardless of the actual life of the property.
The treatment of mineral resources as wasting assets in the United States income tax law meets one considerable practical difficulty—namely, that the law really requires physical or ad valorem valuation of every mineral property by the government, as a check on the claims for depletion allowance. This immense and expensive task is too much for the tax collection agencies as now organized, and it may be questionable whether it will ever be desirable to expand these agencies to the extent required for such a purpose. This is the principal argument for the use of arbitrary depletion factors such as those sometimes used abroad.
There are many advocates of the straight tonnage tax on mineral deposits, on the ground that it is simple, definite, and easily applied. The present tendency is to extend the application of this form of tax. It is clear, however, that to assume the same value per ton for taxing purposes on a property making a large profit, and on another property which, because of physical conditions, is barely able to operate at a profit, imposes a relative injustice. To meet this difficulty, it is sometimes proposed that the tonnage tax should be graded in such a manner as to allow for differences in physical conditions and in profit at different mines. When one attempts to apply a graded tonnage tax, however, it soon becomes apparent that, in order to make such a valuation equitable as between properties, it is necessary to use all of the factors of the ad valorem method for each of the properties. The wide appeal of arguments for a flat tonnage tax is based partly on popular misconception of the complexity of elements entering into mineral valuations.
There are many forms of more or less indirect tax which are substituted in different parts of the world for direct taxes. For instance, certain states in South America do not tax ores in the ground, but collect the revenue in the form of mining licenses or export taxes.
GENERAL COMMENTS ON TAXATION OF MINERAL RESOURCES
There has been a noticeable tendency in recent years to regard mineral resources as a heritage of the people, to be held in trust, rather than as property to be acquired and managed solely for private interest. This tendency has been indicated by the adoption in various parts of the world of laws affecting rights to explore and acquire minerals on the public domain; laws relating to the right of eminent domain over minerals already alienated from the government; laws regulating the exploitation of minerals in the interests of conservation; laws relating to tariffs and other restrictions on the export of mineral commodities; and laws relating to taxation.
The feeling that mineral resources really do not belong in private hands has undoubtedly been an underlying factor in the imposition of heavy taxes. Contributing to this action also are the popular belief in the intrinsic bonanza values in mineral resources, the failure to recognize the large element of value which is put into such resources by human efforts, and the failure to realize that the social surplus in the aggregate is small. To some tax officials an ore is an ore, more or less regardless of situation, of conditions of mining, of the demand for the product, and of the time when the demand will allow the ore to be mined,—in short, more or less regardless of what the ore may be made to yield as a going business. In this way heavy taxes are sometimes imposed on mineral reserves, which are based on unwarrantably high appraisals of future possibilities, and which cannot be paid out of earnings.
Ultimately, a tax must be adjusted to the capacity of the mine to pay out of its earnings, and this capacity in turn is determined both by the physical characters of the ore and by the success with which it may be made available for consumption. This view of valuation for taxing purposes is sometimes opposed by mining men on the grounds that it taxes brains, skill, and initiative, and that it puts a premium on shiftless management. The same argument might be applied to the valuing of any business or profession. To the writer the argument is not sound, in that it fails to recognize the element of human energy in resource values. If value were to be confined solely to the intrinsic character of the ore itself, there would be required an almost impossible degree of discrimination on the part of taxing officials to dissociate this value from other considerations; and there would be required further the differentiation between efficient and inefficient management, which involves so many considerations that the conclusion would be worthless.
In the application of income taxes to mining operations, there is sometimes another tendency toward over-taxation in that the income is regarded as more or less permanent, and insufficient allowance is made for exhaustion of the mineral deposit. Under the United States income tax, mineral deposits are definitely recognized as wasting assets and this factor is allowed for; but in state income taxes and in England and other parts of the world, allowances for this purpose are small.
There is wide belief that heavy taxation of mineral resources, particularly on the ad valorem basis, retards exploration and prevents the development of the reserves which are necessary to stabilize the mineral industry. High taxes have undoubtedly had this effect in some cases, especially where taxes have been imposed on resources long prior to development; but, in the writer's view, this tendency in general has not yet passed the danger point, and is not likely to do so until taxes become positively confiscatory of the industry. To argue that increase of taxes may even have certain beneficial results on the mineral industry may lead to suspicion of one's mental soundness; but it is hard to escape the conclusion that the incidence of high taxes has led to a much more careful study of the question of reserves, has eliminated in some cases the expenditure of money for development of excessive reserves to be used far in the future, and has tended to prevent over-production.
Where mineral reserves are developed too far ahead of demand, the interest on the investment piles up an economic loss to be charged against the industry. It may be assumed that the urge for exploration will continue as long as there is demand for mineral resources; and that, to keep the industry on a sound basis, a certain amount should be set aside and charged to cost for the purpose of keeping up reserves in a proper ratio to production. Much remains to be learned about the most desirable ratio between reserves and production. In many camps, before the incidence of high taxes, this ratio was not properly determined; and there was a tendency, due to natural acquisitiveness and in the absence of anything to hinder it, to build up reserves indefinitely. The first effect of high taxes in such camps has frequently been the curtailment of exploration and development. Later, as production has begun to approach the end of the reserves, exploration has been resumed, but only on a scale necessary to insure production for a limited period in advance.
The argument that high taxes inhibit exploration is good only beyond the point where the industry itself becomes no longer profitable. If there is sufficient demand for the resource, it is obvious that such a condition cannot long continue; for, as production and the development of reserves fall off, the resulting increase in the price received for the product is likely to offset any effect of taxes, and to restimulate production and exploration.
Nevertheless, in this period of high taxes following the war, there is much discouragement in the matter of exploration, suggesting that the danger point is being approached. Some relief has been afforded by recent special provisions of the federal income tax law, recognizing mineral resources as wasting assets, allowing recent discoveries to be included with total assets for depletion purposes, and recognizing special and peculiar circumstances with reference to each mine. Also a certain amount of exploration goes on through the momentum gained from past conditions, without sufficiently full recognition of the effect of present high taxes. This is not surprising when it is remembered that the people actively engaged in field exploration often do not think sufficiently fully of the tax situation, until after a discovery or development has brought them face to face with it.
Because of the vital importance of the reserve factor in mineral valuation, geologic aid and advice are extensively sought by both public and private organizations. Mining geologists are playing an important part in the application of the national income tax. A larger number are acting for private companies in appraisals required by this tax. Many geologists are used in making valuations for state taxes, and in two cases the state geological surveys have complete charge of appraisals. These appraisals include not only examinations of specific properties, but general surveys of large regions, to ascertain possible values of undeveloped lands and to establish broad principles of valuation based on a consideration of all the physical factors in the situation.
CHAPTER XVI
LAWS RELATING TO MINERAL RESOURCES
This heading is likely to suggest mining law and the vast literature devoted to it. Mining law has mainly to do with questions of the ownership and leasing of mineral deposits. In addition, there are laws relating to the extraction of mineral products, including those having to do with methods of mining and with safety and welfare measures. There are laws affecting the distribution of mineral products, such as those relating to tariffs, duties, international trade agreements, and many other matters. There are laws relating to underground water, to shore lines, and to various geologic engineering fields.
In the formulation of these laws, as well as in the litigation growing out of their infraction, basic geologic principles are involved; and thus it is that the geologist finds much practice in the application of his science to legal questions. It will be convenient to consider some of the laws relating to mineral resources under three headings: first, ownership and control; second, extraction; and third, distribution.