State Tax Commission v. Eagle Picher Mining & Smelting Co. , 73 Ariz. 372 ( 1952 )

LA PRADE, Justice.

This is an appeal from the judgment of the Superior Court of Pima County, Arizona, adjudging the full cash value of the mines, plant and equipment of the appellee corporation to he the sum of $306,386.03 for the purpose of taxation for the tax year of 1949. The judgment is challenged on the ground that it is contrary to the evidence and law applicable.

The • proceedings in the superior court originated as an appeal from the appraisal and assessment fixed by the state tax commission sitting as the state board of equalization on the San Xavier group of producing mines situate in the Pima mining district, Pima County, Arizona, owned and operated by the appellee Eagle Picher Mining & Smelting Company, hereinafter referred to as the company. The amount of the assessment, as fixed and reviewed by the commission, on the mines only was $1,000,000. The amount of assessment on the plant and equipment, as fixed by the •county assessor of Pima County was the sum of $146,405, making the total amount ■of assessment for the mines, plant and ■equipment in the sum of $1,146,405.

The trial court found that the foregoing •assessment was excessive and further found the full cash value of the mine, plant and •equipment to be the sum of $306,386.03 and iound the full cash value of the mine only, after deducting the assessed value of the plant and equipment from the overall valuation, to be the sum of $159,981.03. The company, prior to prosecuting its appeal to the superior court, paid under protest to the county treasurer the full amount o-f taxes levied and assessed against its property on the valuation of $1,146,405, following the provisions of Section 73-110, A.C. A. 1939. The protest was to the effect that the assessment was excessive in the sum of $986,423.97.

At the hearing before the superior court, the company called and examined two witnesses, Mi-, L. A. Walker and Mr. Herbert M. Fay, mining engineers, both of whom qualified as experts on mine valuations. The state offered no evidence. These witnesses testified in details as to the value of the property and how they arrived at such value. Each of the witnesses testified that he was of the opinion that the full cash value of appellee’s mines and equipment, including railroad spur, mill, office building and other buildings at the mine, was $306,-386.03; and that in arriving at this value they assessed the mine and plant as a unit for the asserted reason that the plant, mill and personal property were of no value, except for salvage purposes, without the mine and likewise that the mine was of no value without the plant, mill and personal property.

The court, in order to find the' full cash value of the mine as distinct from the plant and surface • properties for taxation purposes, subtracted the amount fixed by the county assessor, to wit, $146,405, as the assessed valuation of the plant, mill and personal property, from the estimates of the engineers.

The following tabulation, submitted by counsel for appellee, contains, we believe,, an accurate analysis and summarizes the engineering testimony as to the valuation

Mined Reserve

46,308 Tons 46,980 Tons

Estimated Value Ore Reserves........ $1,613,531.64 $1,349,735.40

Less Cost of Production and Marketing .......................... 1,377,663.00 1,304,634.60

Estimated Profit on Ore Reserves.... $ 235,868.64 $ 45,100.80

Total Profit Ore Reserves........................ $ 280,969.44

Discount future profits to cash value using Hoskold Table with 8% risk rate and 4% redemption. Life of mine one year. Factor 0.92593 ............’.................. 260,158.03

Scrap value of plant estimated at $50,000 with 4% discount for two years to reduce to cash value. Factor 0.92456 ................'.................. 46,228.00

Total Cash Value Mine and Equipment............ $ 306,386.03

Less assessed value of personal property......... 146,405.00

Value of Mining Property................ $ 159,981.03

It is the position of the state that the judgment is erroneous in that the evidence shows the entire holdings to be valued- for tax purposes before discounts at $427,374.-44. This sum is arrived at by the following tabulation:

Total Profit (value of ore).... $280,949.44 plus Assessed Value of Personal Property made by the County Assessor........... 146,405.00

Total cash value of Mine and Equipment................ $427,374.44

Total cash value of Mine and -Equipment after discounts.. $405,000.92

It is the-position of the state that the assessment made by the county assessor of the plant, equipment and personal property was final and could not be changed or lowered in the trial court since there had. been no appeal from this assessment. In this behalf it is contended that the trial court should not have considered the valuation placed on said personal property by the appellee’s witnesses, and that the trial court in accepting the evidence as to the salvage value of the personal property indirectly reduced the value of the personal-property as theretofore fixed by the county assessor. These contentions are without merit since the precise point has heretofore been decided and we see no occasion to depart from the holdings in previous cases setting forth the formula to be adopted in arriving at the full cash value of a producing mine. The rules are clearly set forth in State Tax Commission v. United Verde Extension Mining Co., 39 Ariz. 136, 4 P.2d 395, rehearing denied 39 Ariz. 331, 6 P.2d 889; State Tax Commission v. Magna Copper Co., 41 Ariz. 97, 15 P.2d 961; and State Tax Commission v. Phelps Dodge Corp., 62 Ariz. 320, 157 P.2d 693. The identical contentions set forth here were made in the Phelps Dodge case, supra, wherein it was pointed out and the reasons disclosed why the court should deduct the value of the property assessed by the county assessor from the value of the mine and plant considered as a unit, and it was pointed out and demonstrated why present worth of the salvage value of the personal property should be added to the present worth of the future profits to be taken from the mine for the tax year in question in arriving at the full cash value of a producing mine for taxation purposes. From the only evidence that was produced the trial court was left with no alternative but to find that the full cash value of the mine and plant together, considered as a unit, was the sum of $306,386.03, which under the judgment is the ad valorem value upon which the company paid taxes.

The correctness of the judgment is also challenged upon the ground that the court was in error in allowing the sum of $129,664.80 to be charged as a cost of production where said sum was proposed to be expended for development work, and only crediting new ore as an asset for taxation purposes of the value of $16,970. The state, relying on the rule set forth in State Tax Commission v. Magma Copper Co., supra, and State Tax Comm. v. Eagle-Picher Mining & Smelting Co., 71 Ariz. 290, 226 P.2d 555, insists that in fixing the value of a producing mine for tax valuation purposes where a deduction from the value of the existing ore of the mine for development of future ore has been allowed, there must be an allowance for such future ore at least equal to the cost of such development work.

The valuation engineers and the trial court estimated the ore reserves as of August 1, 1949 consisted of 46,980 tons of commercial ore with a sale value of $1,-349,735.40 This ore was classified as “positive ore” and “probable ore” depending upon whether it had been cut and was measurable on three sides, in the case of the positive ore or only on two sides in the case of probable ore, of the block or cube in the process of the development work "which had already been performed. The 46,980 tons of ore in reserve was said to consist of 30,010 tons of positive ore and 16,970 tons of probable ore. Briefly, it is the state’s position that it is unreasonable and contrary to the rules heretofore established for the court to allow an expenditure of approximately $130,000 for development and charge the same against the cost of production of ore and allow a credit against this charge of only 16,970 tons of probable ore with a net value of approximately $16,-000. The foregoing contention has its origin in the following fact situation: The evidence before the court disclosed that the ore bodies in this mine are not found in compact masses such as in veins or lodes but rather are found as replacements in limestone formations scattered irregularly like “raisins in a pudding”. “There didn’t seem to be much rhyme or reason to the disposition of these ore bodies.” The evidence was that this condition required extensive and expensive development necessitating an unusual amount of drifts and sub-drifts, raises and winzes. The principal production was coming from the 420, 500; and 580-foot levels with some minor production on the 340-foot level.

The trial court following the testimony of the engineers found the sale value of the 46,980 tons of ore to be $28.73 per dry ton to he produced at a cost of $27.77 per dry ton leaving a net profit of 96‡ per dry ton. Included in the dry ton cost of $27.77 per ton was an item of 41 $ per ton for exploration and an additional item of $2.76 per ton for development. The development cost claimed and allowed was made up of the following three items: Diamond drilling 36^; raises 89^; drifts and crosscuts $1.51. With reference to this claimed charge of $2.76 for 'development, one of the engineers was interrogated as follows:

“Q. Did I understand you to mean by ‘development’ work done for the purpose of developing new ore? A. It is for the development of new ore and for ingress or egress toward the .ore bodies.

“Q. In other words, it is working facilities to the ore bodies ? A. Yes.

“Q. Working facilities to the ore bodies or prospective ore bodies ? A. Both.”

Further examination of the witness led to the following statement: “The term ‘development’ is the dead work necessary to open up ore or ore bodies for extraction by lateral, vertical or any other means of opening to get into the ore body so it can be mined out.”

It appears to us that the state is confusing the terms “exploration” and “development” and in adding the 41^ per ton exploration cost to the $2.76 per ton development cost to reach a combined figure of $3.17 per ton and assuming. $148,926.80 for “exploratory work” to discover 16,970 tons of probable ore worth approximately $16,000. We make this observation in view of the testimony of the engineer, Mr. Walker, to this, effect: “A. Mr. Ling, maybe we are talking about different ores. We spoke about the positive ore and the probable ore and put it all in the ore estimate of 46,980 tons ; that being the case, this amount of money that is being spent on the 46,980 tons rather than segregating out the 16,000 tons.”

Apparently the trial court was satisfied' with this explanation. It is also made to-appear from the evidence that during the-first seven months of the year there was mined 46,308 tons and that the ore reserves as of August 6, 1949 exceeded those of January 1st. The engineers also estimated that the ore reserves as of August 6, 1949, would be completely exhausted by the end of the year (1949) unless there was a continuing process of development which had continued through the first seven months and which the engineers testified was necessary in order to keep an ore reserve ahead of the actual extraction. This appears to be reasonably necessary when it is taken into consideration that the operators expected and hoped to be in production after the then known ore reserves had been extracted.

It is our understanding that the terms “development” and “exploration”, although sometimes confused in common speech, are not synonymous. We have gathered from the evidence in this case that “exploration” refers solely to an effort to find additional tonnage and consists almost exclusively of diamond drilling and sampling; whereas, “development” refers to the steps necessarily .taken to reach the ore in a mine so that it can be mined and consists of running drifts, crosscuts and raises through the ore zone with some diamond drilling. It is also made to appear that development work as herein defined is not synonymous with “extraction”. The engineers in this case allowed for extraction $9.89 a ton and the items allowed for development were in addition to the extraction costs.

In our case of State Tax Commission v. Magma Copper Co., supra, it was pointed out that in order to determine the value of a mine, it was essential to discover the cost of production which was properly charge-, able against the gross value of the product. In this case the court referred to the cost of extraction, reduction and selling of the product without differentiating between “development” costs and “extraction” costs but recognizing that all the factors of cost had to be considered before the net value of the product could be determined and then conceding that the net profit must first be reduced to its present worth. In that case a charge was made for development work. In referring thereto, the court said: “If, however, by ‘development’ costs is meant in reality the work reasonably necessary in order to extract the ore, either proved or probable, for which allowance has already been made in estimating the gross value of the mine, such work is a legitimate charge, against such gross valuation.” [41 Ariz. 97, 15 P.2d 963.]

In the Magma case the state contended that the trial court had allowed a charge of some $4,000,000 for exploration costs against ore proved and probable without allowing for the ore which might reasonably be expected to be developed by such work on the contention that all the ore calculated by the experts as representing the gross value of the mine was located above the 3,000-foot level while much, if not most, of the allowed charge was for development work to be done below that level and was not necessary to extract the ore credited as the gross value of the mine. In view of the fact that the evidence was not sufficiently clear on this point, the judgment was reversed and the case remanded with instructions to retry the issue as to the proper amount to be charged against the gross value of the mine “for exploration or development costs”. The court pointed out that it must affirmatively appear that the allowed charge of $4,100,000 for development costs was necessary for the extraction and reduction of the ore credited on the gross value of the mines' and that no portion of said $4,100,000 was used for purely exploration work when no allowance was made for the reasonable prospect of finding future ore of a value in a like or greater amount. In the instant case, the engineers testified that the allowance made for development work was absolutely necessary to get at the ores, positive and probable, before they could be extracted. It also affirmatively appears in the judgment that these ores, positive and probable, for which the development allowance was made had been considered and allowance made for them in estimating the gross value of the mine.

The judgment is affirmed.

UDALL, C. J., and STANFORD, J., concur.