Clients often approach Capital Corp Merchant Banking wanting to start a mining business or grow their already existing operations. In our capacity as a merchant banking group, we have really helped our clients grow and evolve.
The Mining Industry
What is mainly referred to as the mining industry is actually two sectors, one specializing in exploration for new resources, the other specializing in mining those resources. The exploration sector is typically made up of individuals and small mineral resource companies dependent on venture capital. The mining sector is typically large and multi-national companies sustained by mineral production from their mining operations. In addition to these two sectors, various other industries such as equipment manufacture, environmental testing and metallurgy analysis also rely on and support the mining industry throughout the world.
Mining operations can be grouped into five major categories in terms of their respective resources. These are:
1) oil and gas extraction,
2) coal mining,
3) metal ore mining,
4) nonmetallic mineral mining and quarrying, and
5) support activities for mining.
Leasing Mineral Rights
A mineral owner may develop his or her own mineral deposit. However, this is seldom feasible due to the high cost of exploration and development. More commonly, a mineral owner leases his or her mineral rights to a mineral development company. By executing a lease, the mineral owner (the lessor) grants the person or company who receives the lease (the lessee) the right to develop and produce minerals in the leased parcel.
A lease is a private contract between the two parties and can take a variety of forms. However, leases usually have certain common elements. The mineral owner is paid an amount of money (called a bonus) when the lease is signed. The lease generally provides for payment of a royalty to the mineral owner on any minerals produced from the parcel, and the manner in which royalty payments are to be made. It also generally contains a specific term or duration.
The Value of Mineral Rights
When determining the proper approach to put a value to mineral rights, one should first discern as to whether or not there is any active mining or production development occurring on the property.
In cases where there is no active development on the property, the value of the mineral right can be estimated to be the present value of the lease payments. It is important to determine whether or not there is active development on the land surrounding the subject property since the future potential of development could indicate a value higher than simply the present value of the lease payments.
On the other hand, should there be active development on the property, mineral rights are generally valued using the present value of the future cash flow approach. When using the present value of future cash flow approach, it is important to consider the current and future production of the property and the current and forecasted price of the mineral being extracted.
Given that the value of mineral rights can be a complicated process, it’s important to get the advice of an experienced professional valuator which will minimize the possible consequences of using the wrong value.
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