Cap Rate for appraisal of mines (Quarry)

[Anderico]

Thanks for the response Calvin.

I agree that the cap rate shall be higher than the typical one. This is a property that is operated by owner. I have the assignment of doing both the real estate and the going concern.

 

[jimmyfrank]

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.

Anderico, I agree, however we have not yet "supported" a high or low cap rate...have we? Just remember, if it was easy everybody would be appraising. Good luck to you,Sir. JF

 

[Calvin the Airedale]

If you're looking for comps of gravel pits, you might try calling around various state departments of natural resources, or whatever state agencies license these enterprises to inquire as to changes or transfers in the operating licenses.

Also, state departments of transportation, and large concrete manufactures are large users of gravel. The people in charge of buying gravel almost always know what quarries have sold and when.

 

[Calvin the Airedale]

Better yet, google the phrase "gravel pit sales" and start making phone calls. There look to be some good leads from this search.

 

[Terrel L. Shields]

I am not a quarry kinda guy, but I think quarries where the volume and sales are known typically rely upon WACC (weighted average cost of capital) to determine discount rates. Some (especially with known volumes produced and in reserve) would apply the Internal rate of return as a proxy for the discount rate. You could build your cap rate from that.

The estimation of risk is problematic and in O & G, usually in a scenario analysis, the minimum of the SEC mandated 10% up to 20% or more would be risk rated as Low, Medium, and High. In buying oil and gas reserves (which are much trickier to estimate), buyers vary from GIM s of 2.5 to 5 with 3 being typical. This reflects very high risk rates, much higher typically than one would have with a quarry. I was just contacted today by a lady wanting to sell her mineral rights and there is a new well just drilled on the property... She was offered $750 to $2,500 per acre by 3 different individual royalty buyers on an on line mineral auction site. The later sounds 'right' to me just from my experience in the region. These cap rates are very sensitive to individual investor's sentiments and phobias and relying on a constructed cap rate should be explained fully in th report as to their "value".

Alternatively, you might try an archaic method called "Hosklod Formula" which is used in various states and countries to estimate property taxes. Just see what it is suggesting in regards to a cap rate. for the cynical among us...
Choosing the Discount Rate: A Fairy Talehttp://www.rri.wvu.edu/pdffiles/torriesfairytale.pdf (also at http://www.mineralsappraisers.org/TorriesDiscountRateSME00.pdf )
more info
http://media.wiley.com/product_data/excerpt/11/04713485/0471348511.pdf
Or try the Book "Evaluating Mineral Projects:Applications and Misconceptions by Thomas Torries. It contains a number of methods for developing discount rates and has the Hoskold Formula in it.

Real Options (option pricing a. k.a. Black-Scholes) is another method of valuing minerals. Black-Scholes is what tanked LTCM in the late 1990s and much of the crash in mortgage securites was based on option pricing strategies...fyi.

 

[Pittsburgh Pete]

Hoskold pemise is suitable for valuing wasting assets as it addresses when the value is reduced to zero; "thus funds have to be set aside to invest in a new mine once the minerals are totally depleted." Addressed in the Appraisal of Real Estate and other books addressing cap techniques: Ro = Yo + 1/Sn.

 

[97user]

"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'd talk to local consulting geologists, call the nearest university and see if any of the faculty do consulting work. I've never seen a quarry/mine where the owner didn't swear on his grandmother's grave that extraction rates in the future weren't going to be multiples of historical rates. Going by the owner's estimate, despite shielding yourself w/ extraordinary assumptions, is a ticket to trouble. I grow up in the mineral side of the appraisal business, and still believe that you'd better partner with a geologist or mining engineer familiar with the local/regional/national market to really have competency. There is market data somewhere, and you need to charge enough to find it.

 

[Terrel L. Shields]

There is market data somewhere, and you need to charge enough to find it.

that is a serious problem in resource appraisal all over.

 

[Dennis J. Black ASA IFAS]

My understanding is that DCF were first used in real property appraising by 3M to value just such properties as they are a wasting asset.

 

[DWiley]

I suggest consulting Trevor Ellis out of Denver. He is internationally recognized as an expert in the appraisal of extractive industries properties.

While I was on the Standards Board of the IVSC, we issued a Guidance Note for extractive industry appraisal. Mr. Ellis served as the primary expert in drafting.