Gravel Pit in MA

[JMRegan]

last one I did was in 1991 in a very poor market. looking for advice and suggestions on cash flow for depletion of 1.2 million tons of grade "A" material over five years w/ an "after value" for development of an apt complex of 150+/- units. The material will be mined at 240,000 tons annually w/ substantiated demand. The suggested retail price is $8/ton for minimum loads of 10,000 tons or more. Expenses are estimated at $3/ton. If you use the same cash flow, what if any difference would there be in the cap & discount rates? Any other suggestions would be helpful. Thanks.

 

[Howard]

Assuming you are to value the RE and not the RE and BV? Remember present worth of future benefits, which to the RE, are cash flow and reversion.

If RE value is your assignment, I suggest you forget the retail value of the product. What you need are mineral leases. The royalty rate indicated in a mineral lease is a good measure of income that accrues to the RE. The rest goes to the lessee who runs the business, even if it's the same entity. Last one I did with retail value of the gravel being around $8 per ton, the royalty to the gravel was in the 50 to 60 cent per ton range and sand more like 15 cents. That's RE's split of that $8 per ton number you mention. That's the payment to the RE for the mineral in place. That's sand and gravel. Limestone quarries are even less.

What proof do you have of reserves and what proof do you have of a 5 year extraction rate?

Most gravel extraction operations follow the gravel, but end up with a huge hole in the ground (most full of water) with only a narrow buffer margin between the pit and adjacent land. How will this be reclaimed to enable the whole thing to become apartment land? This is zoned for apartments?

Generally, a 5 year depletion of a wasting asset and reversion would point to a discounting solution. As a hint, the part that is gravel going in (if your 5 year extraction is correct), suggests you need to load the rate 1/5 or 20% for depreciation alone. Risk (substantial) and all the rest just pile on top of that. In short, expect a BIG number for your discount rate.

 

[JMRegan]

Howard,

thanks for responding. the owner had hired an engineer that estimated a 1.2 mm ton capacity. The extraction rate I will have to investigate...that is the suggested time table by the owner. He says he has committments for upwards of 125,000 tone per year. I will obviously investigate the level of demand in the market today. the owner plans to extract 1.2 MM tons and create a pond in the center of the site with plans to develop housing of some sort around it. I spoke to an owner of another sand & gravel operation who said the value of the S&G in the ground was $2-$3 per ton. This particular sand & gravel is high grade and the vast majority passes specs for Mass Highway. It will be difficult to find any leases or sales of gravel pits. My assignment is to value the sand & gravel business and then the land's redevelopment potential. According to plans there will be sufficient material left to regrade and reclaim the site for future development. I concur with a 20% discount of the 5 year extraction cash flow but how would you handle the redevelopment potential? in the same cash flow with the same rates? as a perspective value using current sales?

 

[Terrel L. Shields]

I would do a DCF on the basis of the engineering. I would place the burden of proof on the estimator. Then I would try to project the reversion value after the 5 yr (net after rehab). The question would be the discount rate. If I could find a few other gravel pits to estimate the IRR and see who they are doing. I wouldn't see this as a low risk operation...fuel costs, environmental issues, etc.

 

[Howard]

I once had a pit owner hand me a copy of his "contract" to sell X million tons per year of gravel for a wind farm project. It too was going to sell out in five years. I checked and no such contract existed. Hype was this liar's middle name. I'm now a creditor on the bancruptcy filing, as is another appraiser. Ya gotta check it all out.

I'm sure this goes without saying, but if BV is part of the scope of work and assignment, I would clearly say so in the report. All over the place. If the biz walks or never gets going in the first place, RE is all that is left standing. As for royalty rates, you might be surprised at how many leases are in place. Aggregate is heavy and doesn't travel far. 30 miles is about as far as it can be shipped. Meaning there are aggregate pits and quarries all over the place if you look. Pit operators would much prefer to not tie up money in owning minerals if they can lease them.

I get nervous when I see anyone using the retail value of cleaned/screened product. I once followed an appraiser's $15 million dollar value with one less than $1 million on the same thing. He had totaled the "net" after expenses retail value of the product, but had failed to discount it, or to mention the net was part of the BV and only a part of it earnings to the RE.

RE interest is entitled to only the royalty from the mineral lease, plus PV of the reversion. Everything else flows to the biz.

As to the reversion, figure out what the HBU would be today if vacant and available and that's as good a value as you will get. Normally, it's way out there in time (20 to 30 years), so PV of the reversion at anything approaching a double digit rate (comes from Sales, just as TS says) isn't much. In your case, it is.

 

[Scott Gerharter]

Three questions you must answer. First what is the market demand in your area? Where I live gravel sales have declined 50% since 2006. I too am skeptical about contracts.

Second, how long will it take to fill the hole in order to redevelop? The answer to this one is that you have no idea how long it will take to haul clean fill from various construction sites to fill that hole. With that degree of uncertainty, no way to reasonbly estimate redevelopment value. I posed that question to the owner of a gravel mine I did last year and he guessed 50 years.

Does the $8 per ton include delivery. When you are looking at the possiblity of fuel prices increasing again over the holding period....just another great unknown. My guy told me that 50% of the gravel rate was due to fuel.

 

[JMRegan]

Gravel Pits

Scott,

Thanks for responding. My owner will have material left over to fill in gaps; however, he also intends to dig a pond on site as well and build around it. The $8.00 price (minimum 10,000 tons) is FOB (does not include trucking). Any thoughts on cap/discount rates and how to build them?

 

[JMRegan]

gravel pits

Scott,
>
> Thanks for responding. My owner will have material left over to fill
> in gaps; however, he also intends to dig a pond on site as well and
> build around it. The $8.00 price (minimum 10,000 tons) is FOB (does
> not include trucking).
> Any thoughts on cap/discount rates and how to build/justify them?

 

[murray stroupe]

Re; Waterhole

Scott,
>
> Thanks for responding. My owner will have material left over to fill
> in gaps; however, he also intends to dig a pond on site as well and
> build around it.

The $8.00 price (minimum 10,000 tons) is FOB (does
> not include trucking).

====================
Pond/lake idea works well generaly, but dont know specifics on that site;
VA [old dominion state]gov agency in charge, wanted about 1 million $ in permits for a 100 acre lake.So it was not practical....................................................................

 

[Ken B]

Three questions you must answer. First what is the market demand in your area? Where I live gravel sales have declined 50% since 2006. I too am skeptical about contracts.

Shown are historical royalty payments to the property owner on a 400+ acre borrow pit I am studying. The land is leased with tenant paying all expenses, including remediation. Excavation of the site is about three-quarters complete. The remediation plan requires that the tenant backfill most excavation and, upon completion, the site is planned to be primarily a lake and marsh wetlands. The lease expires in 2012. There is no guarantee that the lease will be renewed.

We are leaning towards a conclusion that the HABU upon expiration of the lease is not to continue mining operations, but to develop for a residential use. Residential development is occurring within view of the southern boundary of the site, although market conditions have resulted in substantial decrease in development. There were recent efforts to rezone surrounding parcels for residential development, although market conditions have resulted in those efforts being canceled.

While, recent demand for mined material has been almost non-existent, what would be good indicators of future demand through the lease period?