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Chasing Mineral Rights Value

by Administrator on Aug 6, 2016 General Appraisal 873 Views

One of the most difficult values that you may ever seek as a real property appraiser is a mineral-rights value.   Mineral rights are one of the "sticks" in the bundle of rights that make up a fee simple interest.  In some it appears obvious that a property has little mineral value while for others minerals may appear to have a substantial value.  It's hard to argue that a property's highest and best use is not for mineral extraction when it has no infrastructure and its minerals have been valued by a Geologist at millions, but it's usually not as simple as that.

Why is it complicated to value mineral rights?  Many real property owners think that they purchased a fee estate interest when in fact the mineral rights were excluded by the government or someone else many years before they bought their property.  If you live in an area where there is mining activity you are likely more aware than most of mineral reservations.

When you are living on the surface of a property you think, and many appraisers may attest, that the highest and best use of the property is its single family residential use, but that can change in a day if the underlying mineral rights owner figures out that the property has a much higher value if they start an open pit mine there.  Appraisers are not cognizant of the underlying and often fractionalized mineral value.  Typically, a company that decides it's coming close to time to mine a property, usually years in advance of having to use it, negotiates and buys the surface rights.

Mineral rights are complex to value.  Properties often have multiple ores so in them, it's not just gold that has value but silver, copper and / or other metal like iron ore.  Tests can be inconclusive and at times wildly exaggerated.  No one knows about the uniformity of a vein of gold, it can run for a few feet or for a few miles.  It's one of the reasons that it's almost impossible to find a Geologist who will make a determination about the volume and quality of ores.  If you get a report as an appraiser from likely biased Geologist, usually it's supplied by one of the parties, you immediately question its credibility.  If you can't independently verify the information you really shouldn't be appraising the property.

In Nevada there are thousands of individuals and companies who have unpatented mining “claims” on public land.  The Bureau of Land Management (BLM) tracks these rights in each of the states.  Unpatented mining claims owners have not been deeded to the owner and thus the rights can evaporate if not the BLM rules are not strictly adhered to.  There are Lode claims, typically veins that can be identified and Placer claims which typically include nonmetallic deposits of minerals like gypsum.

In some areas, like Goldfield, NV, the landscape is littered with small mining operations, and you can see that many of them have failed.  What miners understand is that to really succeed in mining you have to take advantage of economies of scale. 

Maybe a property has a million ounces of gold in it, say the volume and quality is guaranteed in writing by someone like Lloyds of London, so what will it cost to get it out of the ground?  Many sources suggest that the true cost or "all-inclusive" cost of gold removal is likely near $ 1,000 per ounce.  Sure there are many variables and it's not a number that will apply to every circumstance, but think about it.  $ 1,000 per ounce X 1,000,000 ounces is 1 Billion dollars and even with that investment you have to risk it all to make the profits.

The cash outlays required to seriously mine a property are significant.  Do some make money in small-scale mining?  Yes of course some do but they fight the constant battle of trying extract the highest grade ore while trying to repair their equipment and keep their labor costs to a minimum.  Most can't sustain the dance for long.

Many mining properties have a surface value that is nominal even if it’s owned or patented.  No infrastructure is close, many are many miles from power and municipal services so you have to drill your own well and bring a generator.  As I discussed figuring out what is in the ground is not easy.  Drilling and testing can sink many who are unprepared for those costs and how many test results are so compelling that its worth investing every dollar you can get your hands on to begin a mining operation?

Valuing mineral rights is not an assignment type that most appraisers want to take on.  Most are immediately uncomfortable with mining reports and are unfamiliar with the tests and with the terms that Geologist and miners use. It's like appraising any new property type, except that there are relatively few assignments and the learning curve is steep.

For more appraisal information contact Glenn J. Rigdon MA, MRICS, ASA is a Las Vegas / Henderson Nevada based appraiser who can be contacted via email or via his business website known as Appraiser Las Vegas  (http://www.appraiserlasvegas.com), or you can also click on “Contact Us” on the home page of this website or visit my public profile at LinkedIn at http://www.linkedin.com/pub/glenn-rigdon-ma-mrics-asa/1a/30b/879/

Article source: http://www.appraisalarticles.com/General-Appraisal-Articles/4627-Chasing-Mineral-Rights-Value.html

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