Chapter 6.
1
MINE VALUATION*
D ONALD W. G ENTRY
As noted in the introduction to this section, the term mine
valuation implies the assigning of a dollar or other currency
value to the worth of a mine or mining project and provides a
measure of the desirability of ownership of that property. As
such, several types of value may be encountered in performing
a mine valuation study. These are
1. Market value.
2. Full cash value.
3. Salvage value.
4. Replacement value.
5. Capitalized value.
6. Book value.
7. Assessed value.
8. Insured value.
Each of these has a specific meaning that can be applied to
determine a monetary amount in a specific situation.
Of interest in this chapter is the broader question of “what
is the value of the mine?,” or “what is the mine worth?” In this
context the value of interest is the market value of the property.
Market value is the value (price) established in a public market
by exchange between a willing buyer and a willing seller when
neither is under duress to complete the transaction. Thus the
term market suggests the idea of barter.
The term market value is often used synonymously with the
term fair market value. The courts have come to accept the legal
definition of fair market value as the amount in cash, or in terms
reasonably equivalent to cash, for which in all probability the
property would be sold by a knowledgeable owner willing but
not obligated to sell to a knowledgeable purchaser who desired
but is not obligated to buy. Therefore, the determination of
market value of a specific mining property can only be made by
the market through an actual sales transaction, in accordance
with the foregoing caveats pertaining to the absence of duress
on the part of either the seller or the buyer.
Typically, mineral economists, appraisers, and government
tax officials, among others, are concerned with the estimation of
market value for mineral properties. This estimated market value
must be based on the time and conditions existing as of a specified
date. Consequently, market value is a dynamic property that
constantly changes as market conditions and expectations
change. Following is a discussion of the approaches most often
utilized to estimate the market value of mining properties. The
specific recommended methodology for estimating the value of
a mining project is provided in Chapter 6.2.
6.1.1 APPROACHES TO MINE VALUATION
To estimate the market value of any asset, most appraisers
initially consider three generally accepted approaches to value
estimation. All three approaches are based on the very important
appraisal principle of substitution. A closer look at each of these
* This chapter is compiled exclusively from materials contained in
Chapters 1 and 2 of Mine Investment Analysis by D.W. Gentry and T.J.
O’Neil (1984) and from the article “Minerals Project Evaluation — An
Overview” by D.W. Gentry (1988).
AND T HOMAS J. O’N EIL
approaches and its applicability to mining or mineral properties
is provided in the following discussion.
6.1.1.1 Cost Approach
The cost approach to mine valuation attempts to determine
the depreciated replacement cost for the asset in question. That
is, what would it cost to reproduce an asset of identical quality
and state of repair? The fundamental concept with this approach
is that a purchaser would not be justified in paying more for a
property than it would cost him to acquire land and construct
improvements that had comparable utility with no undue delay.
The cost approach is rarely applicable in mining because
the correlation between construction costs and the value of the
property is very imperfect. For example, if one were to build
mines with production capacities of 100 tpd (90 t/day) each, one
on a very rich ore deposit and one on an economically marginal
deposit, construction costs might be very similar, but fair market
values of the two mines would, clearly, be substantially different.
Another problem arises when the cost approach is applied
to newly discovered mineral properties that have no surface
improvements or equipment of any kind. The very nature of
mineral exploration and mining dictates that the discovery value
of an ore deposit is generally greater than the cost incurred in
making that discovery. If this were not true in the aggregate,
investment could not be justified for exploration. Furthermore,
the notion of estimating the cost of acquiring a comparable asset
(ore body) is not very useful. This cost could, for example, be
infinite if nature failed to provide a duplicate for explorationists
to find.
The cost approach is not only the least applicable method in
the valuation of mining properties, but it generally is the least
reliable also.
6.1.1.2 Market (Comparable Sales) Approach
This approach is considered by most appraisers and the
courts to provide the best indicator of fair market value, since it
reflects the balance of supply and demand in the marketplace.
The market approach assumes that a purchaser would not be
justified in paying more for a property than it would cost him
to acquire an equally desirable substitute property. The concept
of market value also presumes conditions of an open market,
exposure for a reasonable time, knowledgeable buyers and sell-
ers, absence of pressure on either the seller to sell or the buyer
to buy, and a sufficient number of transactions to create a stable
market.
The market approach encounters serious practical problems
when applied to mining transactions. This is mainly due to two
facts: first, there are very few sales of mining properties, and
therefore few comparative data are available; and, second, since
each mineral deposit is unique in quality, size, geographical
location, degree of development, and many other parameters,
any market data are of modest value at best. To be applicable,
the market data must not only relate to similar assets but must
also be for a similar point in time.
390
 MINE VALUATION
Experience in the area of mineral property transactions sug-
gests that the open-market, unpressurized dealing and other as-
sumptions previously mentioned in association with this ap-
proach are seldom reflected in reality. When such criteria and
assumptions are met, it is often extremely difficult to ascertain
the actual or true value of the sale because of stipulations per-
taining to production commitments, deferred payments, ex-
changes of stock, production payments, and other subtle factors
that can affect the value significantly.
6.1.1.3 Income (Earnings) Approach
With the income approach, the value of an asset or invest-
ment-type property is estimated by calculating future annual net
earnings generated from the producing property or asset and
then discounting this earnings stream to the present time by the
use of an appropriate discount rate. The approach assumes that
a purchaser would not be justified in paying more to acquire
income-producing property than the present value of the income
stream to be derived from the property. Because of the calcula-
tion procedure utilized, many analysts refer to this as the capital-
ized income approach.
In essence, the income approach is one step removed from
the market (comparable sales) approach. If comparable sales
data are unavailable or if one is estimating the value of a mineral
commodity in situ, it is possible to arrive at a value estimate by
combining the selling price of the commodity produced with the
associated costs of producing it from the property in question.
By proper incorporation of these data into a discounted cash
flow analysis, it is possible to arrive at an estimate of property
value even in the absence of actual production. It is important
to remember, however, that the estimate thus obtained is not a
direct estimate of the market value of a commodity in place, but
rather an estimate of potential income generated from mining
and selling the commodity.
Capitalized future income is a unit valuation method. That
is, a single value is assigned to the ore deposit, to surface and
subsurface improvements, and to all real and personal property
used in the production process. To a considerable degree, real
property at mines has value only because of the presence of ore,
and unit valuation is therefore appropriate.
Because mines have limited operating horizons, and because
there are well-established markets for most mineral commodi-
ties, the income approach is widely used in valuing mineral
properties. The approach is commonly used by the mining indus-
try in the assessment of investment rates of return and to deter-
mine appropriate purchase prices for mines or mineral prospects.
From a practical standpoint, the income approach has the added
capability of incorporating more obtainable, realistic data for
analysis and therefore is the preferred approach to mine valua-
tion. In addition, the income approach is consistent with the
generally accepted definition of the value of a mineral property.
That is, the value of a mining or mineral property at a specific
point of time is simply the present value of all the future net
annual proceeds that are expected to accrue from ownership.
The basic element in the income approach to mine valuation is
the pro forma income statement, which is discussed in more
detail in Chapter 6.2.
6.1.1.4 Other Types of Value
As mentioned at the beginning of this chapter, there are
several types of value that may be encountered when performing
mine evaluation studies. Following are brief descriptions of some
of them.
391
Salvage Value: Salvage is the net sum, over and above the
cost of removal and sale, realized for a property or asset when
it is retired from service. Salvage value and scrap value are
synonymous when the property or asset retired from service is
scrapped for the value of its materials.
Replacement Value: Replacement value refers to the existing
value of a property or asset as determined on the basis of what
it would cost to replace the property or its service with at least
equally satisfactory and comparable property and service. The
concept of replacement value is fundamental to the cost ap-
proach utilized by appraisers.
Book Value: Book value is the original investment in the
property or asset as carried on the organization’s books less any
cumulative allowance for depreciation or amortization entered
on the books.
Assessed Value: The assessed value of a property is the value
entered on the official assessor’s records as the value of the
property applicable in determining the amount of ad valorem
taxes to be paid by the property owner.
Insured Value: The insured value of a property refers to that
value at which the property has been insured against loss or
disaster. This value is generally associated with replacement
value for tangible assets and earning capacity for property such
as mines (ore deposits).
Capitalized Value: The capitalized value of a property is the
sum of discounted future annual net earnings generated by the
property. The capitalized value concept is synonymous with the
income approach to value estimation for mining properties.
6.1.2 PURPOSE OF MINE VALUATION STUDIES
There are many reasons for conducting studies on estimating
the value of a mining property. Regardless of the specific purpose
for estimating the value of a mining property, the ultimate objec-
tive of the study is to arrive at a monetary value or worth for
the property in question. A specific value, or range in values, for
a specific property is often required for one or more of the
following purposes.
6.1.2.1 Acquisition
The acquisition of mineral properties may transpire at any
point in time between a raw prospect and an actual operating
mine. Obviously, the actual amount of data available on a prop-
erty will depend upon where it lies within this spectrum. De-
pending upon the state of development of the property, the
purchaser is acquiring assets with varying levels of risk. As such,
the estimated value of the property must reflect not only the
potential of the mineral deposit but also the relative risks associ-
ated with these assets. Certainly the distribution of value esti-
mates for an existing operating mine would be expected to have
a rather low variance as contrasted to that for a raw prospect.
6.1.2.2 Taxation
Mineral properties must also be valued for taxation purposes.
Perhaps the classic example here is with ad valorem property
taxes, levied by most state and local governments. The difficulty
with value estimation of a mineral property for taxation purposes
is that a single value is required for property worth.
Most states have enacted tax provisions that attempt to ap-
proximate the value of a mineral property through a formula or
other mechanism that rarely serves as an adequate measure of
property value for an actual sale. These mechanisms are seldom
392 MINING ENGINEERING HANDBOOK
based on strong economic foundations and only serve as a conve-
nient proxy for mineral property values. As a result, significant
discrepancies can occur between the appraised value of a prop-
erty for tax purposes and the value as perceived in the market-
place.
6.1.2.3 Financing
The mode, mechanism, and magnitude of financing new
mining properties or ventures are functions of the estimated
property or project value. Certainly, the risk of default must also
be considered in mining and must be assessed in regard to the
perceived intrinsic value of the property. This aspect is becoming
increasingly important in view of the popularity of international
joint ventures as a means of dispersing project risks.
The fundamental concern of lending institutions is not
whether a specific rate of return is achieved by the project owner,
but rather that the project will generate adequate cash flows to
service the acquired debt. Thus lenders approach mine valuation
studies from a different perspective.
6.1.2.4 Regulatory Requirements
Even the federal government has found it necessary to wres-
tle with the problems associated with estimating the value of
federally controlled mineral lands. This results from the fact that
the leasing of federal lands for some mineral commodities is
through the competitive bidding process, and the government is
obligated by law to accept no bid that is less than the fair market
value of the mineral occurrence. As a result, the federal govern-
ment is often required to estimate the value of certain leases
prior to competitive bidding in order to assure that bonus bids
and royalty provisions represent fair market value and are there-
fore acceptable. The federal government is faced with a similar
valuation problem when determining or negotiating royalty pro-
visions on other leased minerals.
Gentry, D.W., 1988, “Minerals Project Evaluation—An Overview.”
Transactions, Institution of Mining and Metallurgy, Vol. 97, pp.
A25-A35
Gentry, D. W., and O’Neil, T.J., 1984, Mining Investment Analysis, SME-
AIME, New York, pp. 1-34.