Mineral Rights

Mineral Rights Valuation Mineral rights consist of the right to extract all minerals contained in or below the surface of a property. Mineral and surface rights can be separated creating a “mineral estate.” The mineral estate represents the dominate tenant in most states.

The owner of the mineral estate has the right to occupy the amount of surface area necessary to extract the minerals. However, the mineral rights holder must pay the surface owner any damages.

Minerals include: – sand and gravel –precious metals –building stone –gem stones –oil and gas Water rights are separate to mineral rights and are not included in the mineral estate

Valuations of minerals fall into two broad categories –Operating units with delineated reserves –Prospects Analysis of sales of similar properties is the most desirable method for valuing minerals; however, it is often difficult to perform because minerals are seldom sold apart from the surface. Appraisers typically estimate leased fee value or the contribution to the surface estate if the minerals are being leased.

Mineral Reserves Reserves are the volume of accessible mineral material of acceptable quality that will produce a return, after operating expenses, under present economic conditions. Reserves may be classified as: –Proven –Probable –Possible

Proven Reserves To value mineral properties several basic items are needed: –The amount and quality of the reserves –The extraction rate or production life –The net value per unit extracted –A discount rate based on investment rates

The income approach is a good method to value mineral-producing properties. The discounted cash flow – net present value technique is generally used.

Probable or Possible Reserves Non-operating reserves are more difficult to value. The sales comparison approach where properties with mineral interest have sold is useful in valuing probable or possible reserves.