To the average person, the purport of the items and figures on the balance sheet of a mining company are hazy and the real financial condition of the company is cloaked in obscurity. It is also likely that the satisfaction of the stockholder in his investment, as well as the determination of the prospective investor, rests more on the reputation of the company, his confidence in the management, the stated earnings per share and the dividends paid, than on a comprehension of the information contained in the balance sheet.
The balance sheet of any company at best can only closely approximate the true financial condition as of a given date. Any item of asset, except cash, can probably be altered if another’s viewpoint is applied. It is difficult and expensive to drill and explore an orebody to determine the entire tonnage of ore therein. Those inherent difficulties render it practically impossible to prepare an absolutely correct balance sheet of a mining company.
It is possible, however, to present the facts of a mining company more intelligently and comprehensively than is usually done. With this in mind, a balance sheet of an imaginary mining company is submitted, with supporting schedules.
The same fundamental principles hold true whether we consider a large or a small company. Less complexity is involved in dealing with the affairs of a smaller company. Therefore, for this purpose, the assumed company operates but two mines and a smelting plant. It has been deemed advisable to introduce the features of the operation of a mine acquired prior to March 1, 1913 and one after that date. The presentation therefore is concerned in one mine with the appraisement as of March 1, 1913 and in the other with the appraisement by reason of discovery. A consequential factor pertains to dividends paid from depletion reserves and therefore free of surtax to the stockholders.
While supporting schedules, when necessary, give details of certain items on the balance sheet, it seems desirable to give further explanations with respect to some of them. This seems to be important because some mining companies do not treat the items as indicated on the statements submitted.
- Mining Properties.—These properties are shown in the Assets at their appraised values, less depletion sustained.
- Concentration and Smelting Plants.—These plants are shown in the Assets at their cost less depreciation.
- Unrealized Appreciation.—This item is frequently included by mining companies in the Surplus Account. In the writer’s opinion this treatment anticipates profits and is misleading.
While the scope of this paper does not contemplate the consideration of the mechanics of accounting, it may be of interest to state that the mine product is charged with the depletion based on the original cost and like credit given to the Depletion Reserve Account pertaining to the original cost. This reserve account, while carried separately on the books, is deducted from the original cost on the balance sheet. The depletion based on the appreciated value is charged to Profit and Loss Account and credited to Depletion Reserve Account pertaining to appreciated value. While a separate account for such depletion is kept on the books, the depletion reserve is deducted from the original appreciated value in preparing the balance sheet, as is indicated on Schedule Nos. 1 and 2.
The yearly amount of depletion on account of appreciated value is transferred from Unrealized Appreciation to Realized Appreciation.
It will be observed that the current earnings since March 1, 1913, have been distributed. Such earnings must first be distributed before dividends not subject to surtax can be declared out of Depletion Reserves or Surplus as of March 1, 1913.
We are dealing with a company that is not in the process of liquidation but one that intends to reinvest in new properties, its depletion recovered from the original cost of the properties now in operation. For this reason the depletion sustained on the original cost is carried in a Depletion Reserve Account, from which dividends are not intended to be paid.