extractive
industries - royalties and licences
David Hornby
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:
- The
Petroleum Act 1940
- Native
Vegetation Management Act 1985: Requires the consent of the
Native Vegetation Authority for the clearance of native vegetation in
the agricultural and pastoral regionsof SA. However, exemption is
allowed "...where clearance is incidental to exploratory or mining
operations authorised under the Mining Act 1971 or the Petroleum Act
1940.
- Heritage
Agreement Areas: Heritage Agreements do not affect the
exploration rights of petroleum and mineral exploration companies.
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.