In general it may be considered that the lower the total annual return expected upon the capital invested on a gold mining project, the greater does the amount demanded for amortization become in proportion to this total income, and therefore the greater need of its introduction in calculations. Especially is this so where the cost of equipment is large proportionately to the annual return. Further, it may be believed that such calculations are of decreasing use with increasing proportion of speculative elements in the price of the gold mine. The risk of extension in depth, or the price of gold, may so outweigh the comparatively minor factors here introduced as to render them useless of attention.
In the practical conduct of gold mines or mining companies, sinking funds for amortization of capital are never established. In the vast majority of gold projects, the ultimate duration of life is estimated, and therefore there is a relative basis upon which to formulate such a definite financial policy even were it desired. If were possible to arrive at the annual sum to be set aside, the stockholders of the mining type would prefer to do their own reinvestment. The purpose of these calculations does not lie in the application of amortization to administrative finance. It is nevertheless one of the touchstones in the valuation of certain gold mines or mining investments. That is, by a sort of inversion such calculations can be made to serve as a means to expose the amount of risk, to furnish a yardstick for measuring the amount of risk in the very speculations of extension in depth and price of gold which attach to a project.
Basically, given the annual income being received, or expected, the problem can be formulated into the determination of how many years it must be continued in order to amortize the investment and pay a given rate of profit. A certain length of life is evident from the exploration program, which may be called the estimated life of mine. If the term of years required to recovery the capital and pay an interest upon it is greater than the life in sight, then this extended life must come from extension in depth, or gold mineralization from other direction, or increased gold price. If we then take the volume and profit on the ore as disclosed, it is possible to calculate the number of meters the deposit must extend in depth or additional tonnage that must be obtained of the same gold grade, or the different gold price that must be secured, in order to satisfy the demanded term of years. These demands in actual measure of ore or meters or higher price can then be weighed against the geological and industrial probabilities.
Some analysts are used to determine the amount of annual income or dividend and the term of years it will last must be known or estimated factors. It is then possible to determine the present value of this annual income after providing for amortization and interest on the investment at various rates given, by multiplying the annual income by a security factor. A simple illustration would be that of a gold mine earning a profit of $20,000,000 annually, and having a total of 1,000,000,000 tons, yielding a profit of $2 a ton, or a total profit in sight of $2,000,000,000 thus recoverable in ten years. On a basis of a 7% return on the investment and amortization of capital, the factor is 6.5 x $20,000,000 = $130,000,000 as the present value of the gross profits exposed. That is, this sum of $130,000,000 if paid for the project would be repaid out of the profit in sight, together with 7% interest if the annual payments into sinking fund earn 4%.