A Simplified Outline of the Mineral Property Appraisal/Valuation Process

I. Introduction

Grossly simplified overview of the appraisal problem in relation to a mineral property.

Follows basic real property appraisal process as illustrated in the Mineral Appraisal/Valuation Process Flow Sheet with additional data, analysis and explanation of mineral specific items, such as:

Regional & Local Geology
Mineral Deposit Geologic Controls
Mineral Resource & Reserves
Mineral Product Market(s)

II. What is a mineral property?

Highest & Best Use is still the basic determinant

A mineral property is more valuable for what it contains than for what can be built upon it.

Not just that is has some interesting, or even economic, mineral content, but that the extraction of this mineral and its sale will provide the highest and best use of the land.

Contrary to much opinion minerals are not usually an "increment to value" since the mineral operation may very well preclude other land uses during the time of active mining.

Also contrary to much opinion a mine is not a business carried out on the property. Instead it is the incremental sale of the real estate itself.

Physically Possible - A valuable economically mineable mineral must be present, not just suspected to exist.

Legally Permissible - A mineral right does not necessarily confer upon the owner a right to mine the mineral. Mining is basically a zoning decision and many permits are required in addition to a reclamation plan.

Financially Feasible - The owner, or lessee, must be capable of financing the relatively large capital expense required to develop and operate the mineral property. Lenders for mineral property development are few and far between.

Maximally Productive - Operation as a mineral property must provide at least equal risk adjusted returns as alternative property uses.

Basic Types of Mineral Properties:

Precious Metals - Gold, Silver, Platinum
Base Metals - Copper, Lead, Zinc
Energy Minerals - Coal, Uranium, Petroleum, Geothermal
Construction Materials - Sand, Gravel, Crushed Stone
Industrial Minerals and Rocks - Rocks and minerals valuable for specific chemical and physical properties and applications: Talc, Asbestos, Trona, Limestone, Diamonds
Gemstones - Diamonds, Rubies, Emeralds, Semi Precious Stones

Mining methods: Open pit (aka surface or quarry), underground, in-situ leaching

Processing methods - Placer (mechanical), roast, autoclave, chemical leach, smelt, refine.

Depletion - a form of physical depreciation of land value

III. Minerals Appraisal/Valuation Under FIRREA

OCC statement in Federal Register, v57, No 69, p 12199, 9 April 1992

"... if the transaction only involves the severable interest rather than the parcel or tract of land. Where mineral rights, timber rights, or growing crops, and the associated parcel or tract of land, are the subject of a real-estate related financial transaction, the services of an appraiser would be required ..."

At a minimum, a possessory interest in the parcel or tract of land is required in order to extract the valuable mineral - the physical land itself must be taken in order to extract the mineral.

Any appraiser must be a Certified General Appraiser - raw land and nonresidential

Federal Level Competency:

USPAP Competency Provision - If one is not competent to deal with mineral reserve estimation, development of mining plans, marketing of the mineral product(s) and their associated economics it means the appraiser would be leaving the guts of the appraisal to some outside expert while accepting full responsibility for the work product.

Securities and Exchange Commission and U S Government Condemnation Authority- Appropriately qualified minerals industry professional - geologist and/or mining-metallurgical engineer

Individual State Requirements

FRT v Mandatory state

Registration as a Geologist, Mining Engineer or Metallurgical Engineer, state required competency provisions above and beyond licensing as an appraiser

IV. Surface and Subsurface Ownership Issues

Jurisdictional dependence on where the dividing line between surface and subsurface is located in depth

Jurisdictional dependence on whether or not sand and gravel are part of the surface or subsurface (mineral) estate)

Mineral right is only one of the bundle of rights inherent in fee simple and mineral right is a separable interest from the surface and in respect to type of mineral and depth and/or geological formation and/or the mineral in question

Fee simple v Privately Leased v Unpatented Mining Claims v Federal-State Lease

Royalties, Working and Nonworking Interests - are they real and tangible or are they personal and intangible?

Status of property as a mineral producer:
Prospect, Exploration, Development, Extraction, Post Production or Speculative, Exploration, Resource, Reserve, Development, Production, Reclamation

V. Mineral Resources and Reserves

SEC Requirements - defined physical and economic conditions

SME Requirements - defined physical and economic conditions

USPAP Requirements - current physical and economic conditions or hypothetical

Under USPAP certain cases of "defined physical and economic conditions" of the SEC and SME may well be considered to be hypothetical

Resource - a term not recognized by the SEC but usually interpreted to mean the physical quantity of some specified quality of mineral in the ground

Reserve - A term used to describe the physically present, mineable, processable, recoverable and salable mineral quantity that is economically justified to be mined and is legally able to be extracted.

Any appraiser that would take the property owner’s word for the reserve has not met any reasonable requirement for exercising independent third party judgment. At the very least the appraiser must be verify (not necessarily a complete audit or certification) the reserve or hire a competent person to do it.

VI. Mineral Property and Product Markets

If a market is considered to exist, it may be entirely local or it may be international in scope

All real mineral markets, property or product, are characterized by a relatively small number of highly specialized and generally sophisticated sellers and buyers.

The table called Mineral Product Market-Based Mineral Property Categorization illustrates one possible way to envision different mineral products and their market types as global, regional or local.

VII. Approaches to Value

Cost - Reproduction v Replacement, only really applies to property improvements and fixed and mobile plant, machinery and equipment

Mineral Occurrence v Property Improvements

Mineral occurrence and concentration in the ground is a natural occurrence and is not replaceable nor reproducible by the actions of man

What constitutes an improvement to a mineral property?

Samples, geological mapping, drill holes, benches, shafts, etc. Often treated as such within the industry. Similar to improvements to developed land.

Direct Sales Comparison

Whole property v mineral right v some royalty or other interest?

The mineral itself, its product and the place and time

Was it truly an arms-length sale?

Was it even a sale?

Adjustments - physical and chemical properties of the mineral

commodities v specialized products

natural mineral characteristic/quality v specialized processing

amount and quality of reserves

cap on royalty or mineral interest amount

Is any royalty a fixed amount per unit or a percentage of some price

Should payment-in-kind, forward contracts, hedging and/or commodity loans be considered as a return to property or a return to management?

Income Approach

Whole property v mineral right v royalty or some other interest

What income or earnings to use (defined by purpose of appraisal)

How to treat depletion

Reversion value – may be far removed in time and limited or nonexistent due to location

Holding period - some fixed length or until exhaustion of reserves

Discount rate selection - if no open market exists?

Contract terms v "market" terms - if no open market exists?

Include - payment-in-kind, forward contracts, hedging, commodity loans?

Is a royalty actually ground rent?

When valuing a mineral property is there really such a thing as "relief from royalty"?

VIII. Choosing a Mineral Property Appraiser

Ask the minerals appraiser three questions:

1) What percentage of his time is devoted to minerals appraisal? (It should be greater than 50%)

2) Does he belong to and participate in the American Institute of Minerals Appraisers (AIMA) and/or the American Society of Appraisers - Mines and Quarries discipline? State licensure as a Registered/Professional Geologist or as a Professional Engineer-Mining

3) Check his library to see if he has a good selection of geology, mining, processing, mining law, and appraisal books.

Understanding, by education and experience, of normal practices in the mineral industry in general and with certain minerals and their markets

Discuss your mineral property appraisal or mining business valuation concerns with
Mineral Business Appraisal, Michael R. Cartwright  michael@minval.com
Five Claret Court, Reno, NV  89512-4744
Tel/Fax: 775-322-9028

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