In some great mines
In some great mines where large ore reserves, sufficient for many years' working, have been proved up, the shares become a business proposition, and their value can be safely estimated according to the worth of the ore in sight and the cost of mining and milling it; but for ordinary mines the tables above will be found serviceable in estimating stock values.
If the values of mining shares are calculated at compound interest the results will be much more favorable to the investment, but as there is always a risk that the mine may fail, compound interest valuations cannot be considered equitable, excepting that a deduction is made to allow for this risk, this deduction bringing the computation to about the basis of simple interest; therefore a compound interest calculation should be considered only as an interesting tabulation of values to be obtained if the mine continues paying for a long term of years.
The table below shows the returns from mining shares paying 20 per cent per annum (dividends reinvested in the same mine at the same rate annually) as compared with money at 6 per cent, compound interest on good security. Amount invested in each case is $100.
From these tables, calculating the value of mining shares, one at simple, the other at compound, interest, it is evident that a mine paying 20 per cent. annually for ten years and then failing would have returned at simple interest an amount equal to 4 per cent, per annum profit above the return from a secured investment paying 6 per cent. A simple interest investment account is one where the income is used and produces nothing more for the person receiving it. Where the dividends are reinvested (which unfortunately is not frequent), the investment account can be considered on a compound interest basis, and at the end of the tenth year will have shown earnings equal to 34.01 per cent, per annum above the highest ordinary rate of 6 per cent, per annum. This calculation is theoretical, for if at the end of ten years, or at any previous time, the mine became exhausted, all the money invested would be lost, though the investor had received an amount equal to 34 per cent, more than the 6 per cent, rate per annum. Here the act of investment, not the calculation, would be at fault.
This condition emphasizes the importance of the question, How far is it safe, or speculatively desirable, to invest in the shares of an old mine which has paid dividends for any considerable period?
As an average proposition to invest on the basis of a cash price equal to five years' dividends seems reasonable, the probabilities of receiving one's money again are fair and it is also likely that at the end of five years the stock will still be worth something, perhaps nearly as much as the original investment, thus making mining investments attractive to those who understand them. As a matter of fact, however, the mine in which an investment has been made must at some time become exhausted, suggesting that mining stocks should never be considered as permanent investments. It is for this reason that conditions relating to the future of a mining property should be carefully studied.
