Valuation

AND SUBCLASSIFICATION OF ACTIVE MINERAL RESERVES GENERALLY. (1) In most cases, the income approach constitutes the most appropriate method to value mineral reserves due to the inapplicability of the cost approach and the lack of sufficient market data to process a reliable sales comparison approach. In situations where sufficient market data exists, the Assessor should prepare both an income and sales comparison approach and correlate the indications of value in the same manner as when appraising non- mineral properties. (2) Typically, the discounted cash flow analysis (“DCF”) will be the preferred method when processing an income approach. Special considerations exist when using a DCF, or any other income approach technique, to value mineral reserves. Unlike other types of income- producing properties, minerals are a depleting asset. Additionally, the discount rate used to capitalize net income into an estimate of value may be higher than the discount rate used in other situations due to the higher degree of risk inherent in extracting minerals. Moreover, the reversionary value of a parcel with mineral reserves may be minimal or nonexistent due to the fact that the minerals have been depleted and only wasteland may remain, requiring additional costs for reclamation. Finally, the investor’s income stream is dependent upon factors that cannot be controlled as easily as in other settings. (3) The DCF measures the present worth of the right to receive a series of cash payments over a given period of time (economic life). The basic elements normally required for this type of appraisal method are the determination of: 1) net annual income based on production history, economic royalty rates and consideration of allowable expenses; (2) remaining economic life of the reserves; and (3) the rate at which the income is discounted to present worth (the discount rate). The projected net annual income is discounted over the remaining economic life to yield an estimate of the present net worth of the active reserve. APPRAISAL OF PARCELS WITH MINERAL RESERVES CHAPTER 0600-11 (4) In most cases, the land and buildings in the area permitted for the mining or drilling operations will be subclassified as industrial and commercial property. The remaining portion of the tract will typically be subclassified as farm property unless it is being used for another purpose. In that event, the use of the property will determine the proper subclassification.