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T 1287 AN EXAMINATION OP THE CAPITAL STRUCTURE OF THE AMERICAN MINING INDUSTRY WITH COMMENTS ON THE EFFECT OF DEPLETION FUNDS ARTHUR LAKES LIBRARY r©©LORADO SCHOOL OF MINES GOLDEN, COLORADO by Richard E. Hague ProQuest Number: 10781668 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a com plete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. uest ProQuest 10781668 Published by ProQuest LLC(2018). Copyright of the Dissertation is held by the Author. All rights reserved. This work is protected against unauthorized copying under Title 17, United States C ode Microform Edition © ProQuest LLC. ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106- 1346 T 1287 A Thesis submitted to the Faculty and the Board of Trustees of the Colorado School of Mines in partial ful fillment of the requirements for the degree of Master of Science. Signed: Richard E. Hague Golden, Colorado Date: *1/)W * 1970 ^ * ARTHUR LAKES LIBRARY '©©LOHADO SCHOOL OF MINES GOLDEN, COLORADO Approved: C. 0, Frush ^ Thesis Advisor Albert M. Keenan, Head of Department Golden, Colorado ii T 1287 K ABSTRACT '*4£>q It is the purpose of this thesis to examine the capital structure of the nonferrous metals, coal, and iron sectors of the American mining industry and to comment upon the role played by depletion funds in providing capital for expansion and improvement. The capital structure of the industry is that mixture of debt and equity which provides long-term funds to the industry. The major sources of long-term funds are bonds, common stock, preferred stock, leases, retained earnings, deprecia tion and amortization, and depletion. Bonds and leases represent debt funds, while common and preferred stock, retained earnings, depreciation and amortization, and deple tion represent equity, or ownership, funds. In general, debt financing should be used only when future earnings are assured so as to reduce risk to both borrower and lender. The cost of capital is somewhat dependent upon, and will determine in part, the mixture of debt and equity used in a capital structure. Ratio analysis is a useful tool with which to examine the capital struc ture of a company or industry and is used in this thesis. The capital structure of three sectors of the American mining industry is examined by tracing the following ratios over the period 1929-1968: iii T 1287 funded debt_________ total capitalization 2) preferred stock_____ total capitalization 0 ^ common stock and surplus total capitalization Internally generated funds have become relatively more important since 1900 and have always been significantly more important than have external funds. Depreciation and deple tion funds were 19 percent higher than retained earnings between 1900 and the mid-1950,s. Use of debt financing has increased significantly since 1900. A survey of the capital structures of 14 mining and 4 petroleum companies between 1929 and 1968 showed that the importance of debt financing has fluctuated greatly, but that its importance has increased in both sectors over time. The petroleum industry used more debt financing than did mining until the mid-1960fs when mining began using debt in amounts comparable to the petroleum industry. The use of preferred stock financing has declined significantly in importance since 1929 in the mining industry. The petroleum industry has never used more than negligible amounts of preferred stock. The proportion of common stock and surplus has declined in both mining and petroleum with the increased use of debt. The originally planned depletion study was made iv T 1287 impossible by the inadequacy of published data. Only three companies of the 18 surveyed provided adequate data. This information indicated that possibly as much as 30 to 40 percent of the mining industry’s total funds may be provided by depletion allowances. New trends in mine finance are found in debt use and in government participation in mining ventures. The ABC transaction and carved-out production payments will become important financing methods in the future. Government participation, especially in underdeveloped countries, may provide great assistance or may be very harmful and undesir able . v T 1287 TABLE OF CONTENTS Page INTRODUCTION ....................... 1 SOURCES OF LONG-TERM, EXTERNAL FINANCING ............. 5 Bonds • 5 Common Stock...................................... 10 Preferred Stock ....... 13 L e a s i n g ................. • . ’............... 16 SOURCES OF LONG-TERM, INTERNAL FINANCING ............. 19 Retained Earnings . 19 Depreciation and Amortization • 22 DEPLETION FUNDS AS A SOURCE OF INTERNAL FINANCING. 25 Depletion as a Concept. ................... 25 Historical Aspects of Depletion ................. 31 Computation of the Allowance..................... 39 Other Possible Depletion Concepts .......... .. • 44 CAPITAL FORMATION - THE HISTORICAL PERSPECTIVE .... 46 Basic Business Finance.......... 46 Ratio Analysis......................... 48 Limitations of Study......................... .. 49 Trends in Capital Formation............ • • • • 51 Internal Versus External Financing ........ 53 Retained Earnings....................... .. • 53 vi T 1287 Page Depletion and Depreciation................. 55 Debt Versus Equity Financing . ............. 56 Bonds......... ...... .................. 58 Summary. ....... ................ 60 Capital Structure Trends in Mining and Petroleum, 1929-1958........................... 61 Funded Debt - Nonferrous Metals Industry • . 61 Funded Debt - Coal and Iron Industries .. 65 Funded Debt - Petroleum Industry ........... 66 Preferred Stock - Nonferrous Metals I n d u s t r y................................. 6 7 Preferred Stock - Coal and Iron Industries . 70 Preferred Stock - Petroleum Industry .... 71 Common Stock and Surplus - Nonferrous Metals Industry. ................... 72 Common Stock and Surplus - Coal and Iron Industries. ..................... 73 Common Stock and Surplus - Petroleum Industry ............. ..... 77 Summary................................... 77 PRESENT CAPITAL STRUCTURE AND COMMENTS ON DEPLETION. 78 Capital Structure - 1959 to 1968............. 78 Funded Debt - Nonferrous Metals Industry • . 79 Funded Debt - Coal and Iron Industries . 81 Funded Debt - Petroleum Industry ........... 83 Preferred Stock - Mining Industry........... 84 Preferred Stock - Petroleum Industry .... 84 vii T 1287 Page Common Stock and Surplus - Nonferrous Metals Industry.............................. 86 Common Stock and Surplus - Coal and Iron Industries............................. 88 Common Stock and Surplus - Petroleum Industry •••••• ••••• 88 Summary. ••••• ......................... 89 Comments on the Depletion Allowance ....... 92 Problems Encountered ................... 93 Responses to the Survey. 98 Definition of Terms ................... 99 Results of the Study................... 101 Summary........................... 104 RECENT AND FUTURE TRENDS IN MINE FINANCE ....... 106 The ABC Transaction................................ 106 Carved-Out Production Payments............ 109 Conventional Financial Institution Loans. .... Ill Consortiums........................ H 3 Debt Financing of Large Ventures. ............. 114 Government Participation........................... 118 CONCLUSION . 125 Capital Structure . .............................. 125 D e p l e t i o n ...................................... • 128 BIBLIOGRAPHY.......................................... 131 viii T 1287 LIST OF ILLUSTRATIONS Exhibits Page 1. Percentage Depletion Rates for Mineral Products................... 37 2. Sample Depletion Allowance Calculation........ 40 3. Gross Revenues of Sample Companies............ 52 4* Recent Capital Structures in the Mining and Petroleum Industries, ....................... 90 5. Depletion as a Percentage of Total Funds and of Internal Funds for Three Companies ........... 102 Tables 1. Ratio of Funded Debt to Total Capitalization - Selected Mining and Petroleum Companies - 1929-1968 ........................................ 63 2. Ratio of Preferred Stock to Total Capitaliza tion - Selected Mining and Petroleum Companies - 1929-1968 ......................... 69 3. Ratio of Common Stock and Surplus to Total Capitalization - Selected Mining and. Petroleum Companies - 1929-1968 ............. • . 75 Graphs 1, Ratio of Funded Debt to Total Capitalization - Selected Mining and Petroleum Companies - 1930-1958 .............. 62 2, Ratio of Preferred Stock to Total Capitaliza tion - Selected Mining and Petroleum Companies - 1930-1958 ..................... • • • 68 3, Ratio of Common Stock and Surplus to Total Capitalization - Selected Mining and Petroleum Companies - 1930-1958 ........... 74 ix T 1287 Graphs Page 4. Ratio of Funded Debt to Total Capitalization - Selected Mining and Petroleum Companies - 1959-1968 ............................. 80 5. Ratio of Preferred Stock to Total Capitaliza tion - Selected Mining and Petroleum Companies - 1959-1968 . ................... 85 6. Ratio of Common Stock and Surplus to Total Capitalization - Selected Mining and Petroleum Companies - 1959-1968 ................. 87 x T 1287 ACKNOWLEDGMENTS The author wishes to thank the National Science Foundation without whose financial aid this thesis could not have been completed. The author also wishes to thank the members of his thesis committee,

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