Conduct of Mining Operations
19.8. A brief look at the climate in which a mining project is initiated and carried on is necessary for an
appreciation of the form which over the years the legislation of Australia and other countries has taken. The search
over wide areas for minerals under the ground by means of the techniques of topographical, geological and geophysical
investigation is usually in itself an expensive and chancy enterprise meeting far more often with failure than
success. Each passing year makes the chances of a lucky discovery of worthwhile significance at no great cost more and
more remote. If the possibility of success is indicated, there must follow an intensive survey and testing of the site
and assaying of test samples of the product obtained by drilling in order to
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gauge the volume and grade of
the field. The likely profitability of the deposit, if it is to be opened up and worked, must be determined after
examination of the suitability of extraction methods, transportation and infrastructure requirements, the availability
of markets, and satisfactory financial accommodation. Contracts for the sale of the product must be obtained and, if
the product is to be exported overseas, negotiations may have to be conducted in other countries. The costs of
discovering and proving whether or not a prospective deposit will be a viable commercial mining proposition are
frequently immense.
19.9. If the results appear to justify mining on a full scale and negotiations and applications for mining tenures and royalty payments are consummated, further capital must be employed to engage the executive and technical staff and an adequate workforce, and to secure and install the necessary plant and machinery for the opening up of the mine. Where, as usually happens, the mine's site is at a great distance from populated centres, housing, medical care, educational facilities and other suitable amenities may need to be provided for the necessary personnel, their wives and children. Water, power and light may have to be provided. Roads, pipelines, railways, port facilities (including dredging of harbours and channel approaches) and heavy equipment are frequently essential for the transportation of both men and materials. These are some of the headings of expense incurred to initiate a major mining project. They require the availability of vast sums of money in an appropriate ratio of equity to borrowed capital.
19.10. Mining today on any effective scale requires the contribution of large amounts of funds in the shape of equity and loan capital and normally a lengthy period must elapse—on occasions up to ten years—before a cash-flow arises from the mining and sale of the product. Even if the stage of the discovery of what is considered to be a feasible project be reached, the risk factor does not disappear. Expectations based upon the volume and quality of the product to be won are not always fulfilled. In weighing up the prospects of a satisfactory profitability, continuous attention must be paid to the fluctuating demand for the product and the prices payable, the economic conditions governing the attitude of buyers, the possibility of competition from sellers mining in other locations in and beyond Australia, rises in production costs in excess of the original estimates and changing international monetary circumstances. All these factors are consequently reflected in the costs of borrowing money and the difficulties of raising capital when funds are required on a large scale. It is true that many of the factors in question apply to other industries, but the essential distinction lies in the extent to which they appear in the mining industry.
19.11. It would not be realistic to expect that the investment of large sums of money would be made in a business exhibiting these characteristics in the absence of the incentive of a rate of return upon the moneys invested commensurate with the size of the investment and the risks involved. When mining profits are remarked upon adversely, the critics are apt to ground their arguments on the results of a restricted number of established companies. It is not an uncommon error to judge the mining sector by its successful companies without reflecting upon its many failures. Because of the existence of the risk factor and the requirement of a vast contribution of capital, mining today is not an industry in which the small company has much chance of successfully entering except in association with a large enterprise. Borrowed capital in the amounts required is usually well beyond its reach. Because of the time that must elapse before the capital invested can produce a return, a new company at the exploration or early development stage does not attract small investors who can only afford to look for a reasonably immediate return upon their investments.
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19.12. The provisions of the Act that enable recoupment of capital employed in a mining venture are framed to some extent so as to give recognition to the fact that the expenditure has been incurred on a wasting asset, the value of which diminishes as mining operations continue. The extent of the recognition of this principle varies according to the nature of the capital expenditure that has to be recouped.