Some surprising facts about the history of value within the mining industry
‘Value’ is a term used commonly within the resources sector. But few people are aware of the fascinating early history of the concept of value; even fewer are aware of the early application of this concept within the mining industry.
Following the emergence of ‘the Gilded Age’ of the United States at the turn of the 20th century, the value of capital became particularly relevant amongst capital intensive businesses. It is commonly assumed that financial valuation tools such as present value originated in this period being the early to mid-20th century and were developed by those in the finance sector. The definitive work on the foundations of financing and value is considered by many to be the 1907 book (and its updated 1930s edition) The Rate of Interest by Irving Fisher (Brealey 1988, Goetzmann 2005). The book cemented the professional discipline of finance as ‘owning’ the concept of valuation.
There are several versions of the origin of value. An early formulation is attributed to Leonardo de Pisa (1170-1240) in the Middle Ages who is now commonly known as Fibonacci (Goetzman 2005). The first mathematically correct concept of present value is attributed to a Dutch mathematician and political leader Johan de Witt (Ciecka 2008), who sold age-based annuities to finance hostilities against France and England in the second half of the 17th century (de Witt 1671).
Often overlooked, though, in the history of value is the pioneering use of present value by engineers, particularly in the mining industry during and from the Industrial Revolution in England. Around the time of the American Revolution and Captain Cook sailing along the east coast of Australia, the fundamental components of value were being sown back in England, often by those with a sound knowledge of the practicalities of mining – for example, several early practitioners of the present value technique hailed from the collieries of the north east.
The first reference found of using undiscounted valuation tools within the mining industry was in 1727 by Lady Jane Clavering. Lady Clavering did a sensitivity analysis of whether to lease her coal fields to the coalition of ‘Grand Allies’ who operated a cartel across the north east coalfields of England or manage the coalfields herself. Her decision was based by comparing the costs and profits from the two alternatives. It appears, with some inference from the documentation of the period, Lady Clavering decided to manage the coalfields herself. On the death of her husband, Lady Clavering held guardianship of the estate till her son James came of age. James went onto become a major coal operator of the period (Oldroyd 2007; Vesey 1815).
The first reference found of discounting of cash flows within the mining industry was in 1773 by Edward Smith, who valued the estate of one Mr Swinhoe using the present worth (a synonym used at the time for present value) of the future income stream from his estate, which was a coal operation (Smith 1970). It is believed the valuer was Edward Smith Jnr, not his father Edward Smith Snr, though both were viewers (ie mine managers) and mining engineers in the north of England. Edward Smith Jnr in turn had five sons who were also brought up as colliery viewers (Hiskey 1978).
In 1823, the Hetton Colliery in north east England developed ‘what if’ calculations to assess the values of alternative timings in the sinking of a new shaft adjusted for the differing present values of the future outlays. The ‘what if’ was whether the shaft was to be sunk after ten or twenty years (Fleischman 2002).
In 1844 Mathias Dunn, a mining engineer and colliery viewer from Newcastle upon Tyne, included a chapter on the ‘Mode of Valuing a Colliery Property’ in his book The Coal Trade of the North of England. The book also mentions present worth. Mathias Dunn’s conclusion for this chapter is interesting not only from the perspective of indicating the discount rates he used, but from his lament one could conclude nothing much has changed:
The rate of purchase value differs from 12 to 18 per cent, according to the degree of risk and uncertainty of the profits whether from mine accidents, or the fluctuations of trade; and so great and disastrous have been the fluctuations of this trade during the last 20 years, that with very few exceptions the valuations of collieries in existence, as well as the profits expected from the various coal adventures, have all turned out deceptive and over-rated, from the abovementioned causes (Dunn 1844).
In the mid-1850s, William Armstrong ran a valuation consultancy. Armstrong was a mining engineer, who in his early years ’did his time’ underground and was a colliery manager in the north east of England. He applied present value techniques using risk-adjusted rates of return for the valuation of coal mines (Pitts 2001). Armstrong completed some 42 reports for the Australian Agriculture Company from 1875 to 1885 for civil and structural engineering relating to mines. In 1889, a contemporary of William Armstrong named William Craig used a discounted future cash flow (DCF) analysis to determine the valuation of a merger between two coal companies in England (Edwards 1981). As Edwards (1981) states:
The basic model used by Craig for the purpose of computing the DCF value is, in essence, identical with the theoretical model recommended today. Craig forecasts future cash flows based on recent past results and his assessment of the various factors which might be expected to alter these results in the future and, second, estimates a suitable discount rate which, when applied to the cash flows, produces a figure for present value.
In 1877, Henry Hoskold authored a Practical Treatise on the Valuation of Collieries and other Mines Including Royalties, Leaseholds and Freeholds and Annuities from other Sources, with Rules, Formula and Examples. Hoskold was an English engineer who became the Director General of the Department of Mines and Geology of Argentina. He is credited with use of a two-rate formulae involving both present and deferred values with two different rates of interest. Hoskold included in his 450-page book some 250 pages of tables with calculations to 10 decimal places – one can only wonder at this when compared to the need now to do all calculations on a spreadsheet. Hoskold explained his objective as follows:
In past years when I was extensively engaged in valuing coal and other mines, the labour connected with the necessary and frequent calculations involving the use of rules derived from first principles became so tedious, that I determined once for all to prepare full and complete sets of Tables required, to be employed in valuation as labour savers (Hoskold 1877).
The mining discipline was not alone in its use of present value for capital investments. In the same year as Hoskold’s 1877 book, an American civil engineer Arthur Wellington authored a book titled The Economic Theory of the Location of Railways. In this book, discounted future values were used to calculate the optimal route for a new railway, comparing the capital and operating cost trade-off of deeper railway cuttings.
A common thread amongst these capital-intensive industries with high capital cost and long life operating models was to use present value techniques to make investment decisions. Some of the subsequent publications within the mining industry included:
i. In 1898, Fred Hellman, a young mining engineer, gave a presentation to the Institute of Mining & Metallurgy titled ‘The determination of the Present Value of a Mine on the Rand’ (Hellman 1898).
A Mr Blow gave his summary on the young Hellman’s presentation and the concepts presented by stating that:
His experience in mining extended not only to South Africa, but also to a great many other parts of the world, and he was of opinion that in the majority of those districts he had visited it would be well nigh impossible for any engineer, however well equipped he might be mathematically, to figure out by any given formula, the value and life of a mine.
A Mr Collins, a metallurgist who had previously worked at the Rio Tinto mine in Spain, expressed ‘alarm at the long string of formulae contained in Mr Hellman’s paper’. The President of the Institute, Walter McDermott, later Chairman of several companies including Anglo-American Corporation of South Africa Ltd, in his summation of Mr Hellman’s paper stated:
He considered that the danger of such formula was that the young proficient fresh from the mining School or college might lose sight of the uncertainty of his assumed facts in the accuracy of the calculation based upon them. It had been well said that the mathematical mill was very effective, but, as in the case of other mills, the resulting product depended mainly upon what was put into them, and in the present instance men who had sufficient skill and experience to choose and determine the proper factors would come to a fairly right conclusion, whether mathematical formula were used or not.
Hellman presented a gracious paper in 1923 on ‘How Can the Mine Manager and College Help the Graduate Engineer’, where Hellman states in the introduction:
Of Managers extending the helping hand, if they knew precisely how best this could be done.
ii. In 1904, The Gold Mines of Witwatersrand and the Determination of their Value by Leopold Kessler, a German mining engineer, included a specific chapter on calculating the present value of a mining area.
iii. In 1907, future US President Herbert Hoover – an original director of Zinc Corporation, now Rio Tinto Ltd – mentioned present value in his book The Economics of Mining. The book was co-authored with Tom Rickard, editor of the Engineering and Mining Journal. In Hoover’s 1909 book The Principles of Mining, a discount table is included.
iv. In 1912, the book Modern Mine Valuation, authored by Howard Burnham – a former Assistant Inspector of Mines for the Transvaal – discussed the concept of the present value of individual mining blocks. This book appears to be the forerunner to contemporary block modelling used in mine planning.
The above are examples taken from historical mining literature. It does not include engineering texts using present value for valuing public utilities, or textbooks used within engineering schools, or papers presented at professional civil engineering conferences. These historical books and documents all can now be found online.
The valuation field was also being developed in academia and came under the heading of economic engineering. Stanford University, for example, even had an ‘Associate Professor of Economic Engineering’ in the 1930s. Many texts were published in the field of engineering economics in the 1920s and the 1930s.
It was the Irving Fisher update of The Rate of Interest in 1930, which he called The Theory of Interest as Determined by Impatience to Spend Income and Opportunity to Invest It where the financial profession really began to march into the previously engineering-dominated valuation of capital intensive assets. By the close of the 1950s the financial discipline dominated all aspects of valuation, including resource valuation. But Fisher does say in his preface to his 1930 edition:
In economics it is difficult to prove originality; for the germ of every idea will surely be found over and over again in earlier writers.
More broadly, this article is a reminder that the fundamental concepts for assessing value in mineral projects and businesses owes its origins to clear-thinking, practical people with a good grasp of the essential detail, uncertainties, and realities of mines. Nearly 300 years later, we can, and should, now recognise the pioneering valuation work done by Lady Clavering and the contributions of all those that followed.
About the author
Stephen Munro is a mining engineer who graduated from the University of Melbourne. He also holds an MBA from Melbourne Business School, a Master of Applied Finance, a Graduate Certificate Mineral Resources and a CPA.
Thanks to the AusIMM Mining Society for encouraging this article and reviewing the work before publication.
Over the last few years universities, historical societies, and projects such as HaithiTrust, open.org and archive.org have been digitising an increasing amount of historical literature, placing it online and making these PDFs searchable. The above article previously could only have been sourced by visiting various institutions across the world and spending possibly weeks on an endless and likely fruitless search.
For the author’s career, he was taught that present value was a 20th century concept developed by the finance sector. A text book the author had used states ‘the present value rule really dates back to the work of the great American economist Irving Fisher, in 1930’ (Brealey 1988). It came as a revelation that the concepts of present value were used within the resources sector nearly some three hundred years ago.
The above note is a result of that search. It provides a brief flavour of what information is now available with more scanned documentation being continually placed online.
Brackenborough S, Mclean T & Oldroyd D, 2001, The Emergence of Discounted Cash Flow Analysis in the Tyneside Coal Industry c.1700–1820, The British accounting review, 33(2), pp.137–155.
Brealey R & Myers S, 1988, Principles of corporate finance 3rd ed., McGraw-Hill.
Burnham M, 1912, Modern mine valuation, England: C. Griffin and Company, limited, 1912.
Clavering J, 1835, The correspondence of Sir James Clavering, printed for the Society by Northumberland, Gateshead
Ciecka J, 2008, The first mathematically correct life annuity valuation formula, Journal of legal economics, 15(1), p.59.
De Witt J, 1671, Value of Life Annuities in Proportion to Redeemable Annuities, published in Dutch with an English translation in 1852.
Dunn M, 1844, An historical, geological, and descriptive view of the coal trade of the north of England ... to which are appended a concise notice of the peculiarities of certain coal fields in Great Britain and Ireland; and also a general description of the coal mines of Belgium, drawn up from actual inspection, England: Printed by Pattison and Ross, 1844.
Edwards J R & Warman A, 1981, Discounted Cash Flow and Business Valuation in a Nineteenth Century Merger, The Accounting historians journal, 8(2), pp.37–50.
Fisher I, 1907, Making of the Modern World, New York, The Macmillan Company.
Fisher I, 1930. The theory of interest as determined by impatience to spend income and opportunity to invest it, The Macmillan Company.
Fleischman R & Macve R, 2002, Coals from Newcastle: an evaluation of alternative frameworks for interpreting the development of cost and management accounting in Northeast coal mining during the British Industrial Revolution, Accounting and business research, 32(3), pp.133–152.
Goetzmann W & Rouwenhorst K 2005, The origins of value: the financial innovations that created modern capital markets, Oxford University Press.
Hellmann F, 1898, Determination of the present value of a mine on the Rand, Institution of Mining and Metallurgy, London:
Hellmann F, 1923, How can Mine Manager and College help the Graduate Engineer?, Mining and Metallurgy, May 1923 V 4, pp 239-242.
Hiskey C, 1978, John Buddle (1773 - 1843) agent and entrepreneur in the north-east coal trade, Durham theses, Durham University.
Hoskold H, 1877, Engineer's valuing assistant: being a practical treatise on the valuation of collieries and other mines including royalties, leaseholds and freeholds, and annuities from other sources, with rules, formulæ, and examples; also new sets of valuation tables, England: Longmans, Green, and Co., 1877.
Hoover H, 1909, Principles of mining, valuation, organization and administration: copper, gold, lead, silver, tin and zinc, New York; London: McGraw-Hill.
Kessler L, 1904, The Gold Mines of Witwatersrand and the Determination of their Value, Edward Stanford. London.
Oldroyd D, 1996, The costing records of George Bowes and the Grand Allies in the north-east coal trade in the eighteenth century: their type and significance, Accounting, business & financial history, 6(1), pp.1–22.
Oldroyd D, 2007, Estates, enterprise and investment at the dawn of the industrial revolution: estate management and accounting in the North-East of England, c.1700-1780, Aldershot, Hants, England; Burlington, VT: Ashgate Pub. Limited.
Pitts M, 2001, In praise of the “other” William Armstrong: a nineteenth century British engineer and early management consultant, Accounting history, 6(2), pp.33–58..
Rickard T (ed), 1905. The economics of mining, The Engineering and Mining journal, 1905.
Smith E, 1749, Diary of Edward Smith: A Pitman’s Notebook, transcribed by Robertson T, 1970, Newcastle/Tyne: Frank Graham.
Vesey F & Beames J, 1815, Reports of Cases Argued and Determined in the High Court of Chancery: From the Year 1789 to 1817, England: Reed and Hunter, 1813-15.
Wellington A, 1877, The economic theory of the location of railways, New York: The Railroad gazette.