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EXAMINATION AND VALUATION

OF MINERAL PROPERTY

Roland D. Park, Examination and Valuation of Mineral Property.


Seymour Kaplan, Energy Economics.
R.K. Sinha and N.L Sharma, Mineral Economics.
Saml. Vanlandingham, Economic Evaluation of Mineral Property
Donald W. Gentry, Thomas J.ONeil, Mine Investment Analysis
Larry Thomas, Handbook of Practical Coal Geology
Brian W. Mackenzei, Economic Evaluation Techniques for Mineral Investment
Decisions.
Phillip F. Oswald,
Cost Estimating for Engineering and Management
R.N.P. Arogyaswamy, Courses in Mining Geology

CHAPTER 1

EXAMINATION OF MINERAL
PROPERY
A mine examination is careful scrutiny of a mineral property made
in order to form an opinion or judgment of its present worth or possibilities.
The term mine, in its strict sense, represents any artificial excavation made for the
purpose of winning mineral value. It therefore includes both open-pit and underground,
metal and coal workings, as well as quarries and oil, gas, salt, and sulphur wells, but
excludes borrow pits, railway, sewer, and water tunnels, and all diggings made for
commercial purposes other than the exploiting of minerals. Although gravels, rock
(coarse and crushed), sand, and clay are not ordinarily classed as minerals, they have
commercial value for construction and industrial1 purposes, and their examination,
estimation, and excavation do not differ, in most instances, from those of a true mineral
deposit. Such workings will be here included as mines.
The term also covers all plant equipment, machinery, etc., used either directly or
indirectly in working a mineral deposit. A survey of an entirely undeveloped region to
determine its mineral possibilities might be termed a mineral survey. Ore, as defined
by the U.S.G.S, 1 is a natural aggregation of one or more minerals from which useful
metals may be profitably extracted. It thus includes not only mineral in its natural place
in the earths crust but also mine dumps,
DEFINATIONS

United State Geological Survey.

tailing piles, etc, which can be reworked at a profit. A broader definition, in line with
common usage, would cover extraction of non metallic mineral products as well as
metals. The distinguishing point between ore and metal or mineral bearing material
is the grade above which extraction of the end product is profitable under a given set of
cost-price circumstances. Economic factor are important to this determination. Without
change of grade or location what is mineral bearing material at one time may become
ore at another through development of cheaper mining or extraction processes or
because of change in one or more of the factors entering into cost of production vs. sale
of product. Likewise, the mere transfer of a property at forced sale may so reduce the
capital charges to the new owner as to make the operation profitable.
PURPOSE ----------- Every

examination has a definite purpose, although its scope may be


limited or broad. It may deal solely with a single phase of the business or it may
encompass the entire operation. This condition is necessarily true because clients
circumstances differ and because each mine represents individual problem. No two
mineral deposits are a like, no two companies operate a like, no two localities are
favoured with the same economics conditions, and no two examiners are of the same
temperament. A mine may be in any stage of development from a mere prospect pit to a
fully equipped an operating plant; it may be in its extreme youth, in its prime years, or in
its declining old age:
Examination of mineral property is usually called for in the following
circumstances:
1. When change of ownership is considered, either by out right purchase or sale,
or through consolidation with other properties.
2. Appraisal for tax purposes
3. When fund are to be solicited trough sale of stock or bond or by bank loan.
4. When planning broad revision of operating methods or installation of
important, long-life equipment.
TYPE AND SCOPE OF EXAMINATION ----------- The

type of examination to be conducted


is dependent upon the clients reason for instituting the investigation, and its scope and
thoroughness are related to the other factors named above.
In general, all mine examinations may be grouped into two classes, preliminary
examination and formal examination.
Preliminary examination may be defined as rapid survey of a property covering only
the more essential featured touching lightly upon the others. In the case of a property up
for sale, the object of such as an examination may be merely to discover the reasons for
selling the mine. Preliminary examination usually includes some sampling (important
check points, etc), a brief geological survey, some mapping, a short study of methods, a
rough cost set up, and an estimation of management. The survey should be so planned
that the data taken and the results derived may be augmented without repetition if a
formal examination is warranted.
Formal examination is a detailed survey of a property to determine completely the fact
regarding the mine and its future prospects. It is an expensive and long process, usually
requiring from one to six months and often involving a large force of experts and
workmen. A formal examination should never be instituted until a preliminary
examination has shown that expense will be justified. Formal examinations are usually

conducted when consolidation of properties or the purchase of an operating mine under


consideration.
RESPONSIBILITY OF EXAMINING ENGINEER ----------- The

engineer is responsible to the


client for the examination and subsequent report stating his judgment and decisions.
Non of the factors involved in a mine examination is absolutely defined. It is engineers
problem to consider each of these items in its true aspect in regard to the investigation at
hand, to weigh each of the parts with respect to the whole, and to arrive at as close an
approximation to the true facts of the case as possible. The client expects no less of the
examiner when he retains him, and the engineer should fell that he owes the client a
conclusion based upon his best, unbiased judgment.
It is sound practice to be conservative, especially in mining enterprises, where
valuations must necessarily be based upon estimates of probabilities. Too decided a
leaning to the conservative, however, may mean the loss to the client of a good
proposition and, therefore, the engineer must guard against timidity as well as again over
optimism. His final decision should represent a true estimate of value qualified slightly
on the conservative side.
To obtain such as a result, the estimator will gather all his data, consider the
respective importance of each item, weigh them all in their true aspects, arrive at the
approximate total figure, and then, if circumstances warrant, apply a proper margin of
safety. As an example, suppose that there are ten items entering into a valuation as
multipliers of each other and that the whole proposition is slightly speculative, to the
extent of 10 %. If this 10 % factor is applied to each item before the items are combined,
the final result will be 100 x (9/10)10 or 0.35, an underestimate of 55%; whereas if each
item is entered into the whole at its full value the result will be 100 %. Then the factor of
10 % will produce a final figure of 90 %, thus giving the desired margin for speculative
value.
In the sale or purchase of a mine the examiner should report a valuation that
represents his judgment of the value of the property. Whether for buyer or seller, his
report should contain the same basic facts. To evaluate these basic facts without bias may
require courage, and always demands clear thinking and a lively regard for the good
name of the profession.
In the valuing of a mine for bond issue or loan it falls to the engineer to be especially
conservative. The same is true if the valuation is to be used to induce the sale of stock. In
this instance, the examiner should bear in mind the many problems that may occur
between the ore in the ground and the realization of profit from this ore.
An engineer is sometime retained by a client to examine a mineral property because
of his knowledge of the particular mine or district; more often he is retained because the
client has confidence in his ability, integrity, and judgment. If the engineer is not familiar
with the district and its particular problems, he may find it to the interest of his client to
employ technical assistants who are familiar with local conditions, or specialists in
certain phases of the problem. These assistants can usually be employed at a considerably
lower rate per diem than is paid the examining engineer. They are responsible only to him
and not to the client. The engineer takes full responsibility for their work and for opinions
resulting there from. A local attorney can examine abstracts and titles more quickly and
thoroughly than can the engineer. An assistant engineer working whit the engineer can

greatly expedite the field work, sampling, calculation, etc., and thus save money for the
client. If a crucial point in the estimation is the separation of a complex ore and this is not
the specialized field of the engineer, the employment of a technical expert is advisable.
QUALIFICATION OF EXAMINING ENGINEER ----------- the

essential qualifications of an

examining engineer are:


1. Sound reasoning, that is, the ability to properly weigh component parts and
deduce logical conclusions while still retaining a clear picture of accuracy of the facts
which he is dealing.
2. Honesty, integrity, and straightforwardness
3. A working knowledge of geologic principles and the ability to apply it to local
condition
4. An understanding of sampling theory and practice.
5. Knowledge of mining methods and their effect upon production cost
6. Knowledge of mineral dressing
7. Ability to compute production cost and estimate profit
8. Knowledge of economic principles and business conditions and their effect upon
the mining industry
9. An understanding of money values.
PROFESSIONAL ETHICS ----------To absolutely

unbiased in his opinion, examiner should


have no personal or monetary interest in the property which his is inspecting.
His relations with his client should be purely those of an impartial arbiter retained to
render an opinion. To guard against criticism, the engineer has a right to demand his fee
in money and should never accept payment in scrip dependent upon the feature earnings
of the property being examined. Before entering into any definite agreement whit his
client, he should also, as a precaution, assure himself of his clients integrity and ascertain
the true purpose of the examination to make sure that it is entirely aboveboard and that he
will not be furthering any scheme to the disadvantage of the entire organization involved.
F.W. Sperr1 expressed these ethical considerations as follow Every precaution should
be taken to avoid the influence of the question of compensation upon the engineers
judgment and opinion. If the parties are strangers to each other, it is best for both that
engineers compensation should be wholly or in large part paid in advance, or be well
secured for payment upon delivery of the report. The engineer should be entirely free
from the pressure of financial necessities which might possibly influence his judgment
or opinions. If there arises the remotest suspicion that the prospective client desires to
keep the engineer in line by considerations, the engineer must decline to undertake the
work if he hopes to maintain his good repute as an engineer
The subject of ethics and responsibility has been covered in a concise manner also by C .
Frank Allen1 in his text business law for engineers.
Engineering skill required. Where an engineer or architect is employed in a private
capacity, he undertakes to bring to his work the average skill of those engaged in a like
kind of work. If he makes a specialty of some class of engineering as structural or as

sanitary, he undertakes to use the average skill of others who make a similar specialty
such class of engineering. He does not in either case insure absolute accuracy, unless, by
custom, checks are possible and in regular use which will allow absolute accuracy to be
secured.
What service is guaranteed. The engineer does guarantee: 1. Reasonable learning,
skill, and experience. The use of the proper care and diligence. 3. The application of his
best judgement. 4. Absolute honesty. The burden of proof is on him who disputes the
engineers skill and other qualifications. The engineer is, of course, liable if negligence
on his part can be proved.
What an engineer may attempt. If an engineer of good training and experience is call
upon, as often happens, to carry out work not altogether within the line of previous
experience, and he enters upon his duties modestly and with earnest purpose to succeed,
it is probable that strong evidence would be necessary to hold him liable for faults in his
work if there seemed reasonable probability of success when he attempted the work.
An engineer who never attempts work which he has not already demonstrated his ability
to carry out, is of little use in the world. Where the result of failure is likely to prove
serious and the probability of success definitely doubtful, the engineer should decline the
service, unless the necessary seems imperative whit no better alternative apparently
available.