James Ralph Finlay Michigan. Board of State Tax Commissioners.

Appraisal of mining properties of Michigan by the State board of tax ... online

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shrinks to 2 feet and 6 inches.

We may therefore summarize the conditions which at present are nec-
essary to constitute a workable tract of coal land.

1. The coal-bed must have an average thickness of not less than 3
feet.

2. Marginal areas showing a thickness of less; than 2 feet 6 inches
must be excluded.

3. These thicknesses must be of coal, and not of coal and slate part-
ings combined.

■ 4. The quality must be fairly comparable to that produced by other
mines of the district.

5. The coal' must have a fairly good roof and sufficient rock cover.

6. Other mining conditions must be fairly comparable to those of
other mines in the district, so that coal can be mined at a cost not
greatly exceeding the cost per ton of other mines in the same district.

YIELD PEH ACRE.

Owing to poor roof, irregular thickness, risks involved in robbing out
pillars and the irregular shapes or conformation of the workable
areas, the yield per acre, per foot in thickness, is relatively small. From
1,200 to 1,350 tons per acre per foot in thickness are average yields ob-
tained in other mining districts, but in this coalfield a yield of about
1,000 tons per acre for each foot in thickness will probably represent
average results, and this figure has been adopted and used in making all
computations of tonnage as given in this report.

VALUE OF UNPROVBN TERRITORY.

As the coal-beds lie deeply buried beneath the surface, thorough pros-
pecting by drilling is necessary to prove the existence of workable coal
in any locality and to define the size and shape of the workable area.
We cannot learn that lands within the limits of this coalfield, which have
not been explored for coal by drilling, are considered more valuable by
reason of the possibility that workable coal may underlie the surface,
nor can we learn that the mineral rights, or rights to mine coal from such
lands is marketable at any price. The possible existence of workable
coal in undrilled territory is regarded as so vague and uncertain that



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APPRAISAL OF MINING PROPERTIES. 71

investors have not in the past, and are not now, willing to purchase the
inining right or mineral right to such lands.

In view of these facts and conditions it seems reasonable to conclude
that neither the coal mining rights nor the coal existing in unproven
territory- in the Michigan coalfield has at present any definable money
value ; that is, they have no present value.

VALUE OF PROVEN TERRITORY.

The finding in a single drill hole of a bed of coal of workable thickness
does not prove the existence of a workable area, but merely ^indicates
the possible existence of such an area, and to prove such area a suffi-
cient number of holes must be drilled to show that such thickness exists
over an area large enough to justify an expenditure necessary for its
development.

FACTORS AFFECTING VALUES.

The quality of the coal has an important bearing upon its value, and
the quality and prices of those coals from other districts with which it is
in competition are equally important factors in determining values.
The thickness and mining conditions of any coal-bed and the cost of
mining labor in the district, fix the cost of mining. Profitable operation
is possible only when the coal is sold at a fair margin above the cost of
production, and this selling price in turn depends upon the quality of
the coal as compared with the quality of the coal from other competitive
districts and upon the prices at which such competitive coals are sold.
While it may be beyond the province of this report to go into all these
matters in detail, and while it is impossible in the time available for this
purpose to collect complete data covering jevery phase of the matter, it is
nevertheless necessary to recognize the important bearing of these feat-
ures of the business as affecting the probable average profit per ton, for
all values ultimatel}^ must be based upon the average profits of the busi-
ness.

Without attempting to go into a discussion of minor details it will be
sufficient to summarize these conditions as follows :'

The thickness of coal now being worked in the Michigan mines is less
than that of competitive coals of the Ohio and West Virginia coalfields
and the mining conditions present in this state are unfavorable to cheap
mining as compared with those of the Ohio and West Virginia coalfields.
The principal adverse physical conditions are :

1. All coal must be mined through shaft.

2. Quantity of water to be pumped is relatively large.

3. Irregularity in the thickness of the coal.

4. Smaller average size of the coal-beds.

5. i^mall size of the workable areas.

6. Troublesome roof, requiring expensive timbering.

7. Small demand for coal during the summer months.

LABOR COST AND MINING SCALE.

The mining scale in Michigan is higher than in the competitive Ohio
and West Virginia districts, the wage scale generally is higher and the



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72 . STATE BOARD OF TAX COMMISSIONERS.

extra allowances received by the Michigan miners for narrow work, rock,
etc., are usually computed by more liberal methods than is customary in
other coalfields. These conditions naturally tend to increase the cost
per ton.

The cost of dead-work under this scale and for a 3 foot bed of coal
normally should not exceed 25 or 28 cents per ton, but in practice it is
seldom less than 30 cents and often reaches 40 cents or more. The cost
of materials and supplies is generally exceseive, and instead of a charge
of 8 to 15 cents for these items, this cost usually ranges around 30 cents
per ton. Miscellaneous labor inside and outside show costs of about 25
to 30 cents, and this is increased by the smaller output during summer ;
overhead charges of 10 to 15 cents added to the mine scale (fl.Ol per
ton for screened coal) price on run-of-mine basis explains why the cost
is about $1.60 per ton.

QUALITY OF MICHIGAN COAL AND COMPETITIVE FUELS.

In quality the Michigan coal is distinctly inferior to the Ohio and
West Virginia coals which are shipped into Michigan. These foreign
coals usually contain less moisture, less sulphur and less ash and are
therefore of correspondingly higher value, and this difference is soon
discovered when the price is based upon the thermal value as measured
by the number of British Thermal Units (B. T. U.) generated in actual
combustion tests. It must not, however, be understood that the Michi-
gan coals are not fairly good steam fuels or that they are not satis-
factory fuels for domestic use. The difference in quality represents a
difference in value averaging from 20 to 40 cents per ton, — ^that is, some
of the Michigan coals are worth from 20 to 40 cents less per ton than
average Ohio and West Virginia coals.

COST OF MINING.

The disadvantages under which these Michigan coal mines are operated
increase the cost of mining as compared with the average cost in Ohio,
by about 60 to 80 ceuts per ton, and by about 75 to 90 cents per ton as
compared with the average cost in West Virginia. A large part of this
increased cost is due to the losses in maintaining the mines throughout
the summer, when nearly all of them are worked at a loss, or are main-
tained in working condition at a cost that must be charged up to the
cost of mining when mining is resumed in the autumn.

ADVANTAGES OF THE MICHIGAN COAL.

The operator in the Michigan coalfield has for a natural market all
that portion of the lower peninsular of Michigan lying north of Lansing
and Grand Eapids and especially that section immediately suiTounding
Saginaw and Bay City, and lying north, west and northwest of those
two cities.

In the above described region the Michigan coal has a natural pro-
tection, which the freight rates on the Ohio and West Virginia coals
interpose, amounting to from |1.40 to $1.60 and more per ton from the
Ohio districts and about 25 cents per ton additional on coal from the
West Virginia districts. Hence it is apparent that the Michigan coal



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APPRAISAL OF MINING PROPERTIES. 73

mines should control the market and furnish the greater portion of both
steam and domestic fuels consumed in this district, and that this busi-
ness should be conducted at a fair margin of profit.

This conclusion may appear to be at variance with the facts, for the
past history of this coalfield presents many instances of unsuccessful
operations and of the failure of a considerable number of attempts to
mine coal in different parts of the field. In all of these cases I believe,
however, that the cause of failure can be traced to, inadequate drilling
to determine the thickness, quality and extent of workable coal, to in-
experience in the business, to increasing the output until- i:he production
was in excess of the local market demand, to attempting to market coal
beyond the natural limits of the district or to destructive competition
with other mines of the same district. I believe that by c<mfining the
sales of this coal to the markets to which natural conditions tend to re-
strict it the operators ultimately should succeed in placing the industry
upon a stable and satisfactory business basis.

For these reasons I believe that the same principles commonly applied
in appraising values elsewhere should be used in determining values in
this coalfield, and that the method suggested above as applied to this
district will fix values which are rational and which will harmonize with
those established in other coal mining districts.

UNIT OF VALUE.

in suggesting ten cents (10 cts.) per ton as a unit of value I have as-
sumed that the industry can and will be so conducted as to produce a
net profit (after deducting from the selling price of the coal, all costs
incident to carrying on the business, including depreciation, sinking
fund, and amortization of investment) sufficient to justify an average
minimum value of ten cents per ton. If the industry were more firmly
established upon a profitable basis this unit of value would naturally be
larger, and a slight improvement in trade conditions only would be nec-
essary to justify an increase in this unit to 18 or 20 cents. Tlie principal
additions to or deductions from this basic unit of value have already
been discussed, but in some cases other allowances or adjustments may
be required to represent variations in value caused by vaiwing thick-
nej^ses of the coal and by marked differences in quality or in mining con-
ditions.

LEASE-HOLDS AND ROYALTIES.

Most of the coal territory controlled by present operators is held
under leases, the terms of which give to the lessee the exclusive right to
mine and remove all of the coal. The royalties paid under these leases
have commonly ranged from five (5) to ten (10) cents per ton, but in
exceptional cases, and especially at quite small mines, higher royalties
have been paid. Many of the leases originally made at or about 10 cents
per ton have from time to time been re-adjusted to a lower basis, and the
average royalty now paid is probably little more than five cents per ton,
and we understand some leases have been made at less than 5 cents
per ton. Most of the leases require a certain minimum payment per
year, and in the case of certain undeveloped properties this payment is
usually based upon the number of acres leased, a common price being



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74 STATE BOABD OF TAX COMMISSIONERS.

from $1.00 to $2.00 per acre per annum, but this annual payment is in
many cases also re-adjusted to a lower basis. By the terms of these
leases the money so paid is usually defined as an advance payment of
royalty upon coal to be mined after mining operations are commenced.
Within the past six or eight years large areas have at times been leased
aind held by operators and by others for speculative purposes, but most
of the leases so held have been allowed to lapse by non-payment of the
annual "advance royalty," and with few exceptions the present policy
of individuals and corporations engaged in mining and in prospecting
coal land is to retain control only of territory which by drilling has been
proven to contain coal of workable thickness and quality.

STABILITY OF VALUES.

With increasing population and still more rapidly increasing demand
for fuel, coal land and coal mining rights are steadily growing in value
in almost every coalfield in the United States, and it is reasonable to
anticipate a like increase in value in the Michigan coalfield. The con-
sumption of coal in the United States has about doubled every ten years
for the last sixty years, and coal land values have generally kept pace
with this rate of increase. In some localities coal land has increased in
value four-fold and six-fold in the past ten years, but these are extreme
examples of abnormally rapid increase in market vajue. I believe that
the proven areas of workable coal in this coalfield will surely increase in
value proportionately with the increase in population and in the con-
sumption of coal. Conditions that would tend to decrease the Value of
these lands would be the discovery, in Michigan, of larger areas of better
and thicker coal, or radical reductions in freight rates such as would
enable the operators of competing districts to deliver coal at a price less
than the cost of mining in the district.

VALUE OF PLANT AND EQUIPMENT.

While the value of the plant and improvements at any coUieri' after
the coal is exhausted, if restricted to the value of the machinery and
equipment at second-hand or at junk prices, is relatively small and un-
important, jet to reach an appraisal which shall represent such value as
a purchaser might be justified in paying for a property, it becomes nec-
essary to add to the coal land appraisal as determined by. this unit sys-
tem, a sum to represent what may be termed a salvage value of the plant.
This salvage value is greater to operators who may be able to use the
machinery at other mines than to those who having no use for it must
dispose of it at the best price that can be obtained at the open market,
but such method of reasoning is not justified, because an operator de-
siring or willing to use second-hand machinery can usually buy it at
current second-hand prices, and it therefore seems proper that the sal-
vage value at which the mining plant, that is the movable machinery
and equipment, is appraised should be based upon current second-hand
prices for machinery of this type.

This salvage value at collieries that are fairly well equipped will range
from $3,000 or $4,000, up to perhaps $20,000 or $25,000 depending upon
the class and type of machinery and equipment, and upon its length of
service and state of repair.



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APPRAISAL OF MINING PROPERTIES.



75



It will be understood that the word "plant" is used to include boiler,
machinery, buildings, tipple, and other permanently installed improve-
ments; that the word "equipment" is used to include mine cars, mules,
track, electric wiring, electric locomotives, mining machines, com-
pressors, tools, piping, supplies on hand and other movable personal
property; and that the word "improvements" is used to include the
shafts, air shafts, pumps, bore holes, entries, cross-cuts, railroad road
bed construction, reservoirs, and all mine and shaft timbering, but that
the term "plant" is often used to include "plant," and "equipment" as
above defined.

One of the advantages of establishing a system of appraisal based upon
unit values, such as has been above outlined, is that such system lends
itself to re-adjustments which may be required at any time by changes
in the financial condition of the industry. Under normal or prosperous
trade conditions these units might be increased by 100 or even 200 per
cent without exaggerating the value of the properties.

PROVEN COAL IN MICHIGAN.



County.


Acres.


Tons.


Appraised
value.


Bay


4,607

3,297

343

10

260

936










14,946.746

9,666.683

1,029,000

36,000

780.000

2,836,333


$484,709


Saginaw


350.924


Midland


12,862


Tuscola


3,500


Shiawassee


9,760


Genesee




Ingham




Eaton




Clinton




Jackson








Total


9,453


29,182.662


$861,746







Average value per acre of appraised land $101.18.



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76 STATE BOARD OF TAX COMMISSIONERS.



SALT, GYP8UM, CEMENT AND BRICK CLAY.

The conclusion arrived at with reference to these properties is that
they are not mines at all, and cannot logically be appraised on a mining
basis. This conclusion is based on the fact that none of these materials
is inherently valuable in the ground, its value depending entirely upon
the labor that is put upon it, or on its commercial situation.

The reasons for this conclusion are dwelt upon to some extent in pre-
ceding portions of this report. The immediate cause of our arriving
at it was that companies engaged in producing or manufacturing these
various materials objected, in many cases, to being classed as raining
concerns. The following letter gives the position of some of these com-
panies very clearly:

Manistee, Mich., June 23, 1911.

J. R. Finlay, Appraiser of Mines, Houghton, Mich.:

Dear Sir: — Your favor of the 12th inst., enclosing blanks for state-
ment, is received.

We assume that you call on us for these statements because we are
engaged in the manufacture of salt. Permit us to say that we are not
mining salt, never have mind it and never can do so. The situation is
that we pump to the surface brine for a distance of about two thousand
feet and evaporate this brine into salt. That is the only way in which
we can manufacture salt.

You should also understand that the evaporation of salt is an adjunct
to and incidental to our lumber business. We have a great deal of
waste, such as saw dust, small edgings, etc., etc., which we use to make
steam for the evaporation of salt. This waste material makes a great
deal more steam than can be utilized in running our mills, and the sur-
plus is used for the evaporation of brine. We could not manufacture
salt for a single day were it not for the utilization of this refuse. The
history of the manufacture of salt at Manistee is that it has been done
entirely in connection with the lumber business in the way we have
stated, and as soon as a mill has stopped making lumber, the evapora-
tion of salt in connection with the business has ceased. One company
here undertook to evaporate the brine by the use of coal, but they found
that they could not pay expenses and soon stopped it.

We are organized under the Manufacturing Act, and not under the
Mining Act. One of our stockholders induced the Attorney General to
start a suit against us a little more than a year ago to stop our making
salt, his contention being that it was a mining process and that being
organized under the Manufacturing Act, we had no right to make salt
under our charter. The state was beaten in the circuit court and ap-
pealed to the supreme court, which sustained our contention and held
that we could continue to make salt in the way we are making it imder



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APPRAISAL OF MINING PROPERTIES. 77

the Manufacturing Company Act. Yon will find this case reported in
Vol. 17 of the Detroit Legal News, page 1218.

We are obliged to make reports to the State Salt Inspector of our
salt business, which we do regularly, and these reports are published
annually by the State Salt Inspector.

We may add that we have submitted this matter to our counsel, Wil-
son, Wilson & Rice, of Grand Rapids, and they have written us that
they have examined the Act under which you are asking for these state-
ments, and that in their opinion, our salt business does not come within
the purview of that Act, and we trust that with this explanation of
the method of the manufacture of salt by us, you will agree with them.
If we can give you any further information, please advise us.
Yours truly,

(Signed) The Buckley & Douglas Lumber Co.
By T. J. Elton^ Secretary.

The definiteness with which this position was stated in the above let-
ter impressed me tliat it would be necessary to submit the matter to
your Board to determine whether it was desirable to force the companies
taking such a position to furnish reports to the Appraiser of Mines
and in a report to your Board of July 1st, in a letter addressed to Mr.
Shields, I quoted the letter from Buckley & Douglas Lumber Com-
pany and stated that, as far as I could see, they were right. I quote
one or two paragraphs from my report of that date:

"I submit these considerations in order that your Board may decide
rather an important question about the conduct of my work. Many of
the companies of lower Michigan expressed so much surprise at being
classed as mining companies that they answered our circulars simply
by stating that they were not doing any mining. If we are to compel
them to turn in satisfactory reports, it will be. necessary to go after
them energetically. In the case of coal, I think it is plain that we
should do this. In the other cases mentioned, it is far from plain.

The line of action I am disposed to recommend is simply to continue
what we are doing, namely, get what information we can about these
various enterprises. Wherever we succeed in getting satisfactory infor-
mation about a salt or cement company that is so much to the good.
Our report so far as can be judged at present will probably be that
such concerns should be appraised on a manufacturing basis. I take it
that a report of this kind will cover the requirements of the act."

So far as I know no steps were taken by your Board to indicate any
dissent from the position outlined at that date, and as time went on
it became more and more evident that the position was a correct one.

I asked Dr. Chance and Professor Cook to report to me their con-
clusions on the same subject, when they had finished their investigation
and I append the reports of both these gentlemen.

The following is a summary report by Mr. C. W. Cook:



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78 STATE BOARD OF TAX COMMISSIONERS.



"July 31, 1911.

Mr. J. B. Finlaj, Appraiser of Mines, Hougliton, Michigan :

My Dear Sir: — My investigation of the salt, cement and limestone
properties of the State has led to the following conclusion regarding
the appraisal of the same.

1. That the presence of salt gives no additional value to lands be

cause :

(a) The supply is practically unlimited (see preliminary re-

port.)

(b) The method of obtaining the salt (except in the case of the

shaft at Oakwood) that is by the formation of an artifi-
cial brine, does not permit the determination of whether
the salt comes from the company's lands or adjoining
lands.

fc) It is the plant which gives the value to the salt.

(d) It is only under exceptionally favorable conditions (such as
the utilization of exhaust steam) that common salt (in counter distinc-
tion to table salt) can be produced at a profit.

2. That no valuation can be placed upon cement materials because;

(a) There is no basis for appraisal inasmuch as there is- no

market for the lands.

(b) The possible available reserves are far in excess of any possi-

ble demand.

(c) Any increased value which the lands may possess must be

due to the presence of a mill to utilize the materials. As
shown by the reports on the various plants, practically
none of the companies have been able to pay interest on
investment in equipment in the last three years and, there-
fore, little if any, value can be placed upon the raw ma-
terials. *That these conditions are quite certain to con
tinue follows from tlie fact that the market which the
Michigan mills can ser>^e is extremely limited, while
their production is far in excess of the demand. In addi-
tion to which, they must suffer competition with mills in
adjacent states.

3. That the presence of limestone gives no additional value to land.

In Alpena county thousands of limestone lands can be purchased


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Online LibraryJames Ralph Finlay Michigan. Board of State Tax CommissionersAppraisal of mining properties of Michigan by the State board of tax ... → online text (page 8 of 9)