As
the mine/quarry involves a complex cash flow over a short period the
best method of valuation is discounted cash flow (DCF). The
example below is for a potential dolomite quarry:

VALUATION EXAMPLE - POTENTIAL DOLOMITE QUARRY

Area of site: | 2 hectares |

Area suitable for quarrying: after allowing for a support margin around the perimeter. | 1.8 ha |

Average depth of rock: | 18 m |

Therefore, "in situ" rock: | 324 000 m3 |

Growth factor: (the difference in volume "in situ" and after crushing) | 50% |

Therefore, the expected volume crushed: | 486 000 |

EXPECTED INCOME TO OWNER:

Dead rent: $10 000 pa

Term: 5 years

Royalty to owner on crushed rock: $1/m

Expected annual extraction rate:

Year 1 | 80 000 m3 |

Year 2 | 145 000 m3 |

Year 3 | 200 000 m3 |

Year 4 | 50 000 m3 |

Year 5 | 11 000 m3 |

OUTGOINGS:

Royalty to Crown: 25c/ m

The lessee pays all other outgoings including establishment costs.

Under the council and departmental approvals the site must be restored to its original condition upon the exhaustion of the quarry. This is expected to cost 100 000 /ha and the expected value on restoration as industrial land is 500 000/ ha.

The required internal rate of return (IRR) for the mine/quarry operations is 20%pa.

The value is determined using DCF. The use of DCF is justified in the case of mines and quarries because of their short life and the uneven and complex nature of the future income, returns and costs. The residual value is the NPV and equal to the land value. The DCF for the above example is shown below:

DISCOUNTED CASH FLOW VALUATION - DOLOMITE QUARRY

$' 000

YEAR: | 0 | 1 | 2 | 3 | 4 | 5 |

Legal/stamp duty: | (5) | |||||

Royalties to crown: | |
(20) | (36.25) | (50) | (12.5) | (2.75) |

Cost of renovation: | (180) | |||||

Dead rent: | |
10 | 10 | 10 | 10 | 10 |

Royalties to owner: | 80 | 145 | 200 | 50 | 11 | |

End market value: | 1000 | |||||

Legal/commission on sale: | (40) | |||||

TOTALS: | (5) | 70.00 | 118.75 | 160.00 | 47.50 | 798.25 |

Discount factors @
20%: |
1.0000 |
0.8333 |
0.6944 |
0.5787 |
0.4823 |
0.4019 |

NPVs: |
(5) |
58.33 |
82.46 |
92.59 |
22.91 |
320.82 |

NPV: |
572.11 |

MARKET VALUE: say 572 000