Valuation of stone, aggregate, and industrial mineral properties

Mineral property valuations are typically requested by
mining companies, property owners, banks, attorneys, and public
entities, and may involve federal, state, and county agencies.
Mineral valuations are also often required for stock assessments,
bank financing, damage claims, eminent domain condemnations,
tax audits, public offerings, and acquisitions and
mergers. Valuations of mineral properties require expertise in
geology, mining engineering, hydrology, hydrogeology, surveying,
financial analysis, and market research.
Stone includes building stone, landscaping rock, and
crushed stone, such as limestone, dolomite, granite and basalt.
Aggregate includes sand, gravel, and crushed stone. Common
industrial minerals include limestone, dolomite, gypsum, clay,
silica sand, quartz, barite, anhydrite, zeolites, diatomite,
feldspar, and asbestos.
In this hypothetical example, the mineral property is a
1000-acre tract that is underlain by limestone that can be
processed into crushed stone that meets Department of Transportation
(DOT) specifications for road and bridge construction.
The landowner is leasing the property to a limestone
producer who is currently mining the property at less than
potential capacity. The landowner desires to determine the fair
market value of the property on the open market.
The fair market value is the cash amount the mineral property
would be sold by a knowledgeable owner willing to sell to
a knowledgeable purchaser who desires to buy. Neither the
owner nor the purchaser is obligated to initiate and complete the
sale. There are three approaches to determining the fair market
value of mineral interests: market, income, and cost.
The market approach consists of the prior sales approach
and the comparable sales approach. The prior sales approach is
the best approach and considers previous sales of the mineral
interests in question, which seldom exists. The next best is the
comparable sales approach, which considers comparative sales
of similar mineral interests. These types of sales are rare
because mining operations are unique with respect to size, location,
market access, production rate, and operating costs.
The income approach is the next best approach and is
based on actual or assumed royalty income from the mineral
property over a specified time period, and the cash flows are
discounted at a specified percent rate of return over the time
period. During the mineral property valuation process, the percent
rate of return is used to determine the discount rate and
capitalization factor. These are applied to the royalty payments
to adjust for the time value of money. As the saying goes,
“A dollar today is worth more than a dollar tomorrow.”
The final approach to value is the cost approach, which is
almost always an inappropriate approach. The cost approach
assumes that the cost of all aspects necessary to explore for
and/or produce a mineral is the fair market value of the mineral
property, and this assumption is seldom true.