extractive industries - royalties and licences

As the mine/quarry involves a complex cash flow over a short period the best method of valuation is using a 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/m3

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/ m3
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



2As the mine/quarry involves a complex cash flow over a short period the best method of valuation is using a 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/m3

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/ m3
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



2As the mine/quarry involves a complex cash flow over a short period the best method of valuation is using a 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/m3

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/ m3
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




Mining leases and quarries under a mining act contain a condition that the lessee has to pay a royalty for any minerals mined. In general, non metallic minerals and coal attract royalty calculated as a rate per tonne whilst metallic minerals are rated either on a percentage of the value mined, or a percentage of profit before tax. Royalty collected on minerals not owned by the crown is passed onto the owner less 1/8th which is retained for administration costs (NSW).

EXAMPLE - MINERALS COVERED BY THE MINING ACT 1973 (NSW)

GROUP 1 - ELEMENTAL MINERALS (METALLICS)

Antimony, arsenic, arsenical pyrites, bismuth, cadmium, caesium, chromite, cinnabar, cobalt, columbium, copper, fluorspar, galena, garnet, germanium, gold, ilmenite, indium, iron, iron ore, ironstone, lead, lithium, manganese, mercury, molybdenite, monazite, nickel, osmiridium, oxide of iron, platinoid minerals, platinum, rare earth minerals, rubidium, rutile, scheelite, selenium, silver, sulphur, tantalum, thorium, tin, titanium, tungsten and its ores, vanadium, wolfram, wulfenite, zinc, zircon, zirconia.

GROUP 2 - ELEMENTAL MINERALS (NON METALLICS)

Alum, alumina, alunite, apatite, asbestos, barytes, bauxite, beryllium and its ores, borates, calcite, chert, chlorite, corundum, cryolite, diatomaceous earth, dolomite, emery, felspar, graphite, gypsum, halite (including solar salt), Iceland spar, laterite. limestone, magnesite, marble, mica, mineral pigments, mineral water, peat, perlite, phosphates, plumbago, pyrophyllite, quartzite, rock salt, reef quartz, shale ash, soapstone, steatite, talc, wollastonite, zeolites.

GROUP 3 - SEMI PRECIOUS STONES

Agate, chalcedony, jade, nephrite, quartz crystal, rhodonite, tourmaline, turquoise.

GROUP 4 - HARD ROCK MINERALS

Granite, marine aggregate, serpentine, slate, syenite.

GROUP 5 - CLAY MINERALS

Brick clay, bloating clay, clay shale, fire clay, fuller's earth, kaolin, pipeclay, pottery clay.

GROUP 6 - diamond

GROUP 7 - uranium and its ores.

EXAMPLE OF CONTROLLING LEGISLATION

SOUTH AUSTRALIA - MINING ACT 1971

MINERAL CLAIM

Only provides the right to prospect for minerals that is, to carry out operations that do not disturb land or water through the use of machinery or explosives. All other operations connected with exploration or mining require approval from the Department of Mines and Energy.

EXPLORATION PROPOSAL

Is required to explore the claim by carrying out further investigations to prove a deposit or to determine its suitability for mining.

MINING LEASE AND PROPOSAL

To mine, a Mining Lease must be obtained and a Mining Proposal must accompany the lease application.

Mining operations whether on a Mineral Claim or Lease must comply with the Mining Act. However, the applicant may also have to comply with other acts such as the Water Resources Act 1990

ENVIRONMENTAL CONTROL

To control and guide development (which includes building construction, changes in the use of land, road construction, land division and alteration to an item or area of state heritage) the state government and councils rely on the Planning Act 1982, Development Control Regulations and the SA Development Act.

THE SA DEVELOPMENT PLAN
Established by the Planning Act is a statewide document divided according to regions and then subdivided into council areas. It contains the conditions and policies to be considered when assessing the merits of a development proposal. Also included is a statement of objectives for land development, conservation and land management and principles of development control.

The principles of development control which relate to mining set out guidelines for the design of a mining and rehabilitation program and conditions against which the merits of proposals are to be assessed. The major objectives are to minimise the impact of mining operations on the environment, rehabilitate exhausted mines, pits and quarries and to minimise conflicts between different uses of land.

Other controls in SA include:
LEASE CONDITIONS

All new leases carry a condition which requires that the lessee conducts operations in accordance with a predetermined mining and rehabilitation plan. The plan is developed following consultation and assessment at the lease application stage.

EXAMPLE:

The lease may require the construction of an environmental bund wall or that indigenous vegetation be planted as part of the rehabilitation scheme. Where such activity is required by lease conditions on an extractive minerals lease it is unlikely that it will be funded by EARF.

NSW - MINING ACT 1973

PROSPECTING LICENCE

A prospecting licence is an annual right under the Act which allows the holder to prospect for minerals over a nominated area of land. Maximum area is 256ha and minimum area is 4ha.

MINING LEASE (ML)

A Mining Lease is designed to allow the holder to mine and carry out mining purposes. Maximum area is 256 ha and no minimum area. Maximum term is 21 years. A specified application procedure is required under the act covering area, plans and location, notices to the owners and occupiers, and the general public.

MINING PURPOSE LEASE (MPL)

Is designed to allow the holder to carry out prescribed mining purposes. These purposes comprise those works which a holder would need in association with his mining operations such as treatment plants, dams, electricity transmission lines, buildings, roads, pipelines etc and they would usually be situated within the vicinity of the mining operations. The MPL does not allow the holder to carry out any mining activity on the lease area.

EXPLORATION LICENCE

Exploration licenses are designed for those who wish to carry out regional exploration programs generally, with sophisticated exploration techniques. It is granted for one of the group of minerals listed above.

MINING CLAIM

An area of CROWN land lawfully occupied for the purposes of prospecting and mining under the Act. The area must be a square with sides no greater than 50 metres. The act covers the required procedure in making a claim including appropriate notices on the land, to the owners and public.