Cap Rate for appraisal of mines (Quarry)

[Anderico]

Hello!

I'm doing an appraisal of a quarry (stone, gravel and sand). Does anyone knows what should be the Capitalization Rate to be used in the income approach? I've heard that is should be around 18% to 20%. Any information source to sustain that percentage in the report?

Thanks,

Anderico

 

[jimmyfrank]

Hello!

I'm doing an appraisal of a quarry (stone, gravel and sand). Does anyone knows what should be the Capitalization Rate to be used in the income approach? I've heard that is should be around 18% to 20%. Any information source to sustain that percentage in the report?

Thanks,

Anderico

Anderico, I appraised a simular gravel and sand quary about 2 years ago and had the same problem. I used the band of investment tecnique, using current interest rates with a 15 year holding period. The problem I had was determining the investor return. As it turned out, most investors are willing to accept a lower rate than other investments. Their reasoning is "product sales." My best source for this info came from an engineer who was experienced in the field. Is this an on going operation? What are the Quanities and "work out" time frame? In my part of the country (Alabama) the rate of 18% to 20% seems excessive.
Are there any sales/leases available to you which would aid you in extracting the rate from the market? To the best of my memeory my rate turned out to be 12%...due mainley to product sales of the minerals. Hope this help a little. JF

 

[Calvin the Airedale]

i've never appraised a gravel pit but is seems the rate would need to be high enough to account for both the return on the capital plus recapture of the capital over the depletion period (the economic life of its highest and best use as a mine). The end of life for any mine, whether surface or not can be fraught with peril. Large holes in the ground are subject to regulation over their life by state departments of natural resources, the EPA, local watershed districts and etc.

Few states like to see the land left as a hole. Engineering studies should be available that spell out what will happen to the mine once its gravel deposit has been depleted. The cost of any remediation must be considered in the valuation.

Also, are you appraising the real estate, or the quarry as a going concern?

My guess is that Terrel Shield will have the best response for this post given his background in recoverable natural resources.

 

[jimmyfrank]

i've never appraised a gravel pit but is seems the rate would need to be high enough to account for both the return on the capital plus recapture of the capital over the depletion period (the economic life of its highest and best use as a mine). The end of life for any mine, whether surface or not can be fraught with peril. Large holes in the ground are subject to regulation over their life by state departments of natural resources, the EPA, local watershed districts and etc.

Few states like to see the land left as a hole. Engineering studies should be available that spell out what will happen to the mine once its gravel deposit has been depleted. The cost of any remediation must be considered in the valuation.

Also, are you appraising the real estate, or the quarry as a going concern?

My guess is that Terrel Shield will have the best response for this post given his background in recoverable natural resources.

Calvin, you raise some good points. Are we appraising "leased fee" or fee simple? We must analyse the lease/agreement - or it might be an owner/operation. In my state the operator/leesee is required to post a bond for reclaiming the pit at certain interventals of the mining operation....that cost is accounted for. May be different in other states, but the feds make most of the rules.

 

[Pittsburgh Pete]

You are valuing a wasting asset--direct cap may not be the most appropriate approach to the appraisal problem.

 

[Pittsburgh Pete]

But then again there are formula for accounting for a wasting asset in developing a cap rate. Good luck with that!

 

[Calvin the Airedale]

But then again there are formula for accounting for a wasting asset in developing a cap rate. Good luck with that!

That may be why cap rates, when they are known, appear so astronomical.

 

[jimmyfrank]

You are valuing a wasting asset--direct cap may not be the most appropriate approach to the appraisal problem.

Right Pete, you are appraising mineral which could be considered "personal property", once severed. The problem is: what's it's value "in place." Quanities and quality is very important and untill we know that we cannot be of much help to the man! JF

 

[Anderico]

Hi jimmyfrank!

This is a stone quarry. It has a Natural Resources Permit to extract 1,500 CM per day. It is an ongoing operation and it has capacity to extract 6.8MM of cubic meters. According to permit, I estimate about 15 to 18 years of operation. Client has being selling aggregates ant he expects to increase those sales for next couple of years. Unfortunately I don't have enough data from the market. I'm planning to use his projections, but you know, with whatever the extraordinary assumptions it take... I believe the Cap Rate shall be higher because of the risks of this business type.

 

[Pittsburgh Pete]

Risk and the valuation of a wasting asset. Reversionary value would have to be somewhat speculative.