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US Views on Valuation Methodology

Trevor R Ellis, MSc(MinEc), FAusIMM(CPGeo), CPG-AIPG, CMA-AIMA, CGA(CO)Minerals Valuer, Ellis International Services, Inc., Denver, Colorado, USA

2000-2002 President, American Institute of Minerals Appraisers

Presented at VALMIN ’01 , Sydney, Australia, 25-26 October 2001Published in VALMIN ’01 – Mineral Asset Valuation Issues 2001 ,

The Australasian Institute of Mining and Metallurgy, Melbourne, Australia, 2001, PS No 5/01, pp. 1-23 Als o published in The Professional Geologist , June-Aug 2002 as a 3-part series

BACKGROUND ON SPEAKER

Trevor Ellis was raised in a small coal mining town of Yallourn, Victoria, where he worked many schoolsumm er breaks at the mine. He completed his BSc Degree in Geology at The University of Melbournein 1970, and his MSc Degree in Mineral Economics at The Colorado School of Mines in 1978. In theearly portion of his career, he worked on minerals exploration and mine development throughout

Australia , Papua Ne w Guin ea and Indonesia in the em plo y of a number of major mining co mpa niesand as a contract geologist.

After completing his MSc , he concen tra ted on econom ic evalu ation s and marke t stud ies for miningprojects as an employee of a num ber of US co rporations. In 1983, during a mining industry downturn,Trevor set out on his own as an independent consultant, working through, Ellis International Services,Inc, based in Denver, Colorado (USA). He has performed geological and econom ic evaluations of awide variety of m ining and energy projects, and has worked on numerous environmen tal remediationprojects.

During the past decade, Trevor has specialised in the Market Valuation of mineral properties as aCertified Minerals Appraiser, and on a number of occasions has provided expert witness testimony.He has completed a program of Rural Real Estate valuation courses through a major US valuationsociety, and in 2001 received a Colorado State License as a Certified General Appraiser (Real Estatevaluer).

Trevor is the 2000-2002 President of the American Institute of Minerals Appraisers, for which he hasheld other officer posts and drafted its Code of Ethics. He has organised and ch aired valuationsessions as part of the Annual meeting of the Society of Mining, Metallurgy & Exploration (in 2000 and2001). He is working with international bodies on the possible developm ent of international valuationstandards for the extractive industries. In 2001, he was the US representative and leader of theInternational Valuation Standards Committee’s Task Force which developed the IVSC submission tothe International Accounting Standards Board regarding the proposed Extractive IndustriesInternational Accounting Standard (Issues Paper, November 2000).

Trevor has presented and published numerous professional papers on valuation and other miningrelated topics. He is a freque nt speaker at universities, professional society mee tings, and nationaland international conference s. In July 2000, Trevor received an Excellence Award from the threemajor US general valuation societies, for third best professional paper at “Valuation 2000,” aninternational convention in Las Vegas attended by almost 3,000 general valuation professionals.

ABSTRACT

This paper mainly addresses mineral asset Valuation from a US perspective. The structure andoperation of the primary US Valuation (‘Appraisal’ in USA) Standards and regulations are describedfrom the practitioner perspective of the mineral asset valuer (‘Appraiser’ in USA) working with them.

Attention is als o direc ted to areas of dif ference between the US Standards and their jurisdic tiona l

setting and the VALMIN Code and the Australian regulatory setting, both positive and negative.


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This paper outlines why the author believes it is now the right time to review and enhance The Australas ian Insti tute of Mining and Me tal lurgy’s (AusIMM’s) VAL MIN Co de (1998) for its use glo bally.For this to occur, he contends that the Code would need to undergo dramatic restructuring to abide bythe Generally Accepted Valuation Principles expressed in the International Valuation Standards (IVS)of the International Valuation Standards Committee (IVSC) and the US Uniform Standards of Professional Appraisal Practice (USPAP), especially since the US is the world’s biggest market

econom y. To achieve this aim, the author recom mend s that an international team of mineral valuationexperts be assembled by the IVSC, using the existing cooperative framework, to work on developing acomprehensive addition to the IVS for the Minerals (including petroleum) Industry, that recognises thespecial characteristics of mineral assets.

USPAP was introduced in 1987 as the US national set of Standards for Valuation of all types of prope rties and businesses, and is updated annually. Mineral property valuations for use by banks andthe Federal Government must comply with USPAP, despite it containing no instructions specific to theminerals industry. Valuations of mineral properties for use by companies in litigation must nowgenerally com ply with USPAP to be considered credible evidence. USPAP ’s main principles closelyma tch those expressed in IVS. It has separate Standards for the Valuation of Real Property (such asa mineral property), Business and Intangibles (such as a mining company and its financing), andPersonal Property (such as mining equipment). Its Real Property valuation Standards require that for

a Complete Appraisal all three valuation Approaches (Sales Com parison, Income and Cost) be usedwherever reasonably possible, then be reconciled. Market Value must be based on the Highest andBest Use of the property. A set of rules provides a framew ork for the process of the Valuationdevelopment, while a second set of rules provides the framework for the content of the ValuationReport.

When the Federal Government is acquiring or exchanging land, the Uniform Appraisal Standards for Federal Land Acquisitions (UASFLA) provides additional Real Property valuation guidelines to those of USP AP. Significant coverage of mineral properties is included. Lessons from Court rulings are thebasis of much of the document, and they are used to instruct the valuer on preparation of the report for Court and how to present expert opinions. Primary reliance on the Sales Com parison Approach isem phasised for use in Court. Nevertheless , Minerals Industry valuation practitioners often view theapplication of UASFLA guidelines as being unfair to the holders of minerals assets and interests in

them. Federal agencies that man age public land containing significant mineral and petroleum propertyspecify the qualifications of the responsible R eal Estate Appraiser (valuer).

The Securities and Exchange Commission (SEC) has valuation restrictions embedded in its miningindustry reporting rules, Industry Guide 7 . It generally limits the reporting of mineral deposit value tothe value of Rese rves only. Much of the docum ent is now out-of-step, in the author’s view, withinternationally accepted Reserve-Resource reporting Standards and valuation best practice.

It is difficult to discuss va luation m ethodology without discussing regulation of qualifications. States inthe US continue to increase the barriers to professionals attempting to work across state boundaries.This is in the guise of regulating professionals for the welfare of the public. All US States regulateengineers and Real Property valuers, and most regulate Geologists by State testing and licensing.Many US States have exemptions in their statutes for minerals or mining work. How ever, strict legal

interpretation can mak e those exemptions much narrower than they first appear. A significantpercentage of minerals industry professionals frequently ignore some of these restrictive rules,whe ther due to ignorance or perceived necessity. From the author’s observations, strict interpretationof regulations often leaves the contract bidding to those who are merely qualified by licensing (andoften of questionable competence), rather than to those with appropriate qualifications anddemonstrable experience in mineral asset valuation.

Conflicting state and international pressures are now at play in the U S. Licensing of professionals ingeneral at the State level is fundamentally incompatible with the internationalisation of standards of professional practice and international agreements on trade in professional services. States rightsadvocates and professionals who benefit from state level guild-like protection, continue to promote therestrictive practice of State licensing. Any rationalisation of the patchwork of standards andregulations confronting the US minerals valuation practitioner will only occur as part of larger, national

change, hopefully aimed at compliance with International standards and protocols.


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INTRODUCTION

The US does not have a valuation Standardspecifically designed for mineral properties or mineral businesses. The American Institute of 1

Minerals Appraisers (AIMA) set aside a 1999initiative to m odify The Australasian Institute of 2

Mining and Metallurgy’s (AusIMM’s) VALMINCode (VALMIN Code, 1998) to its needs, whilstthe author researched the content, applicationand interface of it with US and internationalvaluation standards. This research stimulatedthe author to write this and many other papers todocument his findings and valuation philosophy,(Ellis, 2000a-e, 2001a; Ellis and Abbott, 2000).

Through his interest in international valuationstandards and qualifications, the author

developed a relationship with the InternationalValuation Standards Com mittee (IVSC). Thisrelationship resulted in him leading the IVSC’sExtractive Industries Task Force whichdeveloped a submission to the International

Accoun ting Sta ndards Bo ard (IASB) in 2001addressing valuation issues involved in theproposed development of an International

Accoun ting Sta ndard for the Ex tractive Industr iesof mining and petroleum industries (IVSC, 2001;IASC, 2000).

An important conc lus ion of the author’s research

was that although the VALMIN Code is a verygood place to start if considering development of an internationally acceptable Minerals IndustryVa l u a t i o n S t a n d a r d , s o m e s i g n i f i c a n trestructuring is necessary if it is to be ready for the international arena and particularly the US(Ellis, 2000a, 2000c-d, 2000f, 2001a ). This isbecause of the need for mineral assets valuationto function smoothly within the larger universe of general Property and Business valuation.Mineral asset valuation is a tiny niche within theuniverse of Real Property and Business

valuation. One needs to learn how things are3

done elsewhere in that universe and then tomesh mineral asset valuation methods andreporting procedures into those that aregenerally accepted within the international

general valuation comm unity. The miningindustry cannot expect the universe of RealProperty and Business valuation to change itsways to accommodate ours.

The VALMIN Code was developed within the Australian mining title holding concept of Crow nownership of the minerals estate. This conceptgenerally prevails throughout much of the area of other British Commonwealth countries (eg,South Africa and Canada). The absence of theneed to provide for a significant extent privateownership of the minerals estate, such as is

common in the US, caused the Code to focusmuch more on valuation of mineral holdings froma mining Business perspective. Thus, the Codedoes not segregate the Property types for valuation, as is done in the US.

For the VALMIN Code to successfully migrate tothe international stage, it will be necessary that itbe restructured to abide by the Generally

Acce pte d Va lua tion Princ iples adop ted by theIVSC. These principles form the basis of theIVSC’s International Valuation Standards (IVS )and the national US standards, the Uniform

Standards of Professional Appraisal Practice(USPAP ) of the Appraisal Standards Board(IVSC, 2000, p. 16; US PAP, 2001). Inconducting such restructuring, the author recommends redesigning the VALMIN Code towork with IVS. This would also inherently allowit to work with USPAP for US use, despiteUSPAP being more stringent than IVS. Most of the valuation framework could be left to IVS, if sodesired, and incorporated by reference.

This paper mainly provides an overview of thestructure and operation of the various US

valuation standards and regulations from theperspective of the author as a practicingminerals asset valuer, and sets them within thepresent international context. Mineral valuationmethods and rules specific to the InternalRevenue Service (the collector of US Federaltaxes) and various State rating and taxationauthorities, are beyond the scope of this paper.While attempting to address a wide range of

In the US, the term appraisal is used for a valuation1assignment and a formal V aluation report. A valuationunder US usage is typically a less stringentundertaking than an appraisal , especially when RealProperty is involved. Similarly, a professional valuer or valuator is called an appraiser in the US. For the

Australasian audience, valuation and valuer aregenerally substituted for the US equivalent termsthroughout this paper.

Australasia in an economic and political context,2effectively encompasses Australia, New Zealand,

Papua New Guinea and nearby islands of the SouthPacific Ocean.

The concept of Real Property encompasses the3interests, benefits and rights inherent in Real Estateownership and holdings, including interests in the

minerals. Real Estate is the physical land andappurtenances attached to the land. (AppraisalInstitute, 1993).


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important items, the author focuses attention onthose aspects of the US Standards andregulations he feels those who are responsiblefor enhancing the VALMIN Code shouldconsider.

NATIONAL VALUATION STANDARDSAND STATE LICENSING

DEVELOPMENT HISTORY

In the late 1970s, the US Savings and Loanresidential and commercial building loanindustry, and some banks, began to collapseunder the weight of real estate loans in default.Primarily it was high interest rate loans madeduring the prevailing period of high inflation ratesthat had become delinquent. The crisis reachedits peak in the mid-1980s after inflation waswrung out of the US economy. The economywent into recession and residential andcommercial Real Estate values fell throughoutmuch of the US. The resulting workouts of thefailed and failing financial institutions requiredmore than US$100 billion in Federal bailoutfunds. The Resolution Trust Corpora tion wasformed by the Federal government with aprimary function of liquidating enormousquantities of foreclosed Real Estate.

Some of the blame for this stunning collapse of alarge portion of the US lending industry wasplaced on over-valued Real Estate and Businessvaluations. This led to the Federal governmentseeking more control of valuation and valuationstandards in place of self-regulation byappraisers. Congress authorised The AppraisalFoundation as “The Source of Appraisal Standards and Appraiser Qualifications.” In1986-87, The Appraisal Foundation developedits first edition of USP AP.

The Appraisal Foundation in 1989 formed its Apprais al Standards Board to continu e thedevelopment and amendment of USPAP. Sincethen, each year the Board has amended thedocument. The 2001 edition is 230 pages,containing Standards for Appraisal of RealProperty, Personal Property, Business andIntangible assets, and Standards for valuersproviding consulting services about RealProperty and Real Estate (USPAP 2001).

The major national valuation institutes of the USrequire their members to abide by USPAP. Asyet, the American Institute of Minerals

Apprais ers (AIMA), wh ich Cer tifies mine ralsvaluers, has not made U SPAP a requirement for its members, although it does recommend itsuse . All Federally Chartered Finan cial

Institutions (eg, interstate banks) and Federalagencies use USPAP as their minimumvaluation standard. In 1989, the FederalFinancial Institutions Reform, Recovery and Enforcement Act (FIRREA) was signed into lawas a critical element for the Federal bailout. This

required the 50 US States to set Real Estate Appraisa l (valu ation) standards , and to se tstandards for Licensing of Real Estate

Apprais ers (valu ers). By 1995, all 50 State s hadcomplied, and had adopted USPAP for their valuation standards and had set generallyuniform licensure rules and procedures.

The new State Licensure statutes in all 50 Stateseffectively removed the self-regulation byCertification for Real Estate valuers from their nationa l societies. In contrast, at the same timethe Australian States were abolishing much of

their State level professional licensing, in favor of national Chartering and self-regulation of theprofessions through national institutes.

MINERAL PROPERTY VALUATION

Minerals are an integral part of Real Estate, andMineral Rights are Real Property under US law(Footnote 3). Therefore, the valuation of mineraldeposits falls under Standards 1 and 2 of USPAP, the Real Property valuation Standards.However, if one is valuing a m ine as a Business,the Standards for valuation of a Business,

Standards 9 and 10, may be more appropriate.Business valuations do not fall under the

jurisdic tion of State Real Es tate Apprais alBoards. Howe ver, valuation of the Real Propertyholdings as a component of the Business valuecould fall under their jurisdiction. Also, Businessvaluations can fall under other State regulations.

The small percentage of minerals valuers whoabide by USPAP generally find that it forms abeneficial framew ork for their reports. Howeve r,many minerals valuers will argue that they do notneed to apply the USPAP Standards to their

work, and to a large extent they will be correct.Only occasionally are minerals valuerscontracted for valuations for use in loanapplications to Federally or State Charteredlending institutions. Howeve r, their valuationsare often for submission to Federal agencies,such as the National Park Service, ForestService, Bureau of Land Management, and theInternal Revenue Service, in which case theyshould abide by USPAP . Valuations for submission to State agencies should also abideby USPAP, and is increasingly specified.

FIRREA, in amendments since approximately1992, has exempted the valuation of Mineral


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Rights from its Real Estate valuation rules insome circumstances for transactions of Federaland State Chartered Financial Institutions, thesebeing banks and Savings and Loans. Theexemption is where the Mineral Rights are “....severable from the land when the transaction

does not involve the associated parcel or tract of land.” 4

As at any tim e with law, the re are iss ues withdefinitions which would be best interpreted by alawyer, such as what the meaning of “land”encompa sses. The exemption of the valuationof Mineral Rights may not necessarily exemptthe valuation of a mineral deposit, even if theminerals estate is clearly severed (by separateownersh ip) from the surface estate. For example, the Suprem e Court of, Colorado, has along history of awarding ownership of ‘Minerals’

a higher status than ownership of ‘MineralRights.’ The Union Pacific Railroad Compa ny inthe early part of the twentieth century, often soldland while retaining the Mineral Rights (theexclusive right to prospect for and to mine theMinerals). In the 1959 case, Radke v. UnionPacific Railroad Company , the Court ruled thatreservation of the Mineral Rights was notequivalent to severance of the Ownership of theMinerals estate from the Surface Estate. Itnullified the reservation of the Mineral Rights,awarding the Ownership of the Minerals and theMineral Rights to the landowner. 5

REAL PROPERTY VALUER LICENSURE

Few minerals valuers are State Licensed. Mostfind it necessary to work across a large number of States, making State licensing an impracticalconcep t. In Colorado , the valuation of MineralRights (not minerals) is specifically excludedfrom the jurisdiction of the State’s Board of RealEstate Appraisers. Howev er, such exclusions of

ju risdic tion are a Sta te-by-S tate matter. To theauthor’s knowledge, most States do not havesuch exclusions, thereby overriding the

abovementioned FIRREA exemption. The Am er ica n Ins titu te of Professional Geologis tsdeserves a good portion of the credit for lobbyingfor those exclusions that do exist. Despite thishelp, it is often necessary to include the value of the surface estate as part of a mineral propertyvaluation, even if its value is relativelyinsignificant. Som e States man date Statelicensing for all Real Estate valuations,inherently including mineral property valuations,although they might exempt property below

$250,000 in value. Othe rs only man date it for the Federally related transactions specified byFIRREA (Appraisal Institute, 1996, p 713).Valuation reports on mineral propertiesdeveloped under Federal government contractsgenerally must be signed by a State Licensed

(Certified General) Real Estate valuer as theresponsible valuer, even if the surface estate isexcluded.

MINERALS IN REAL ESTATE VALUATION

To understand how this arrangement arose, oneonly needs to briefly compare the general landownership structure of the US with Australia. In

Austral ia, the minerals (includ ing pe troleu m),have been reserved to the Crown since the late1800s, when reversion to the Crown also began.So the surface and subsurface are separate

estates when private ownership is involved.Even when mining or petroleum production isundertaken, the Crown does not relinquishownership, since the extraction right is through alease from the Crown.

Similar concepts are now applied for thedevelopment of natural resources on the vastFederal land tracts in the western US, with theFederal Government retaining the underlyingownership. But, such concepts have only beenapplied during the past few decades.

Throughout most of US history, land grants,whether they were for agriculture, timber, or mining, were made in fee . That is, theownership of the land was granted withoutlimitation of the rights, so there was nodifferentiation between surface and subsurfaceestates. The result is that, except in the westernstates, the surface and minerals (includingpetroleum ) are generally privately owned. Inareas with mineral deposits of economic interest,the ownership of the subsurface or the mineralsestate, or of a defined mineral such as coal or petroleum, has often been severed from the land

ownership by a sale. In areas of historicminerals or petroleum production, the ownershiprecords and maps for the subsurface can be verycomplicated.

Therefore, valuers of rural Real Estate are on aday-to-day basis valuing land that includes theminerals estate or from which a portion of theminerals estate has been severed. Gene rallythe minerals estate will have negligible value inthe context of the property being valued. W henthe minerals estate has conspicuous value, thevaluer must obtain and verify the specifics and

arrangement of ownership interests, possibly inthree dimensions, to assure that the correct

Code of Federal Regulations, 12CFR225.62 para.4

(h).Colorado Supreme Court decision citation: 334 P.2d5

1077.


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property interests are included in the basis of theValuation. This is a task generally overlooked bygeologists and mining engineers who attemptmineral property valuation without Real Estatevaluation training.

From this historical perspective of minerals as aninherent part of land ownership, regulators wouldobviously need to take proactive action toremove minerals valuation from the purview of Real Estate valuers. W here this has beenattempted at the State and Federal levels, it hasonly been partially successful.

CERTIFIED GENERAL REAL PROPERTYAPPRAISER STATE LICENSE

Under the provisions of Title XI of theabovementioned FIRREA (1989), the Appraiser

Qualifications Board (AQB), as a subsidiary of The Appraisal Foundation, establishes theminimum education, experience and exam inationrequirements for a Real Property valuer tobecome Certified . The 50 States retain theauthority to License valuers and to set thequalifications for licensing. A Certified License isrequired for valuations for Federally relatedtransactions. Howev er, the States find itbeneficial to adopt the AQB guidelines for thefour levels it has designated.

The AQB guidelines designate two Certified

levels of license. The Certified Res idential RealProperty Appraiser License is restricted to thevaluation of Residential Real Estate of up to four Residen tial (family) units. The Certified GeneralReal Property Appraiser license applies to thevaluation of all types of Real Property (Appraiser Qualifications Board, 1999).

To become State licensed at a level that willlegally allow one to value a mineral propertyunder the jurisdiction of a State Board of RealEstate Appraisal, is a very difficult task for aminerals valuer coming from a minerals industry

backgro und. It requires licensing as a CertifiedGeneral Real Property Appraiser, which mostStates call Certified General Appraiser (CGA).This is the highest of the four levels of Statelicenses for Real Estate valuers. A handful of geologists and mining engineers (probably lessthan ten throughout the US) beca me licensed asCGAs when the licensing laws were firstintroduced, at which time the requirements wereless onerous and some indicate were appliedmo re gene rously. Since then, maybe half thatnumber of minerals industry practitioners,including the author, have received the CGA

license.

To become a CGA requires passing 180 hours of Board approved Real Estate valuation courses,having 3,000 hours of demonstrated RealProperty valuation experience gained over atleast 2.5 years, and passing the nationalCertified General Appraiser exam. The 3,000

hours of experience must abide by USPAP, andat least 1,500 hours must be on non-residentialvaluation.

The necessary courses for residential andcommercial land and building valuation aretaught by a number of private and publiceducational bodies in each major city. The StateBoard provides the names of educational bodiesin that State with pre-approved courses basedon AQB specifications. To assure courseacceptance nationwide and a high level of relevance to mineral property Appraisal, the

author selected a program of nine courses (300+hours) focused on Rural Real Estate valuationfrom the highly regarded national Rural RealEstate valuation society, The American Societyof Farm Managers and Rural Appraisers(ASFMRA). Although, in 1998 when he madethe decision to undertake this learningadventure, just three years after the fullimplementation of State Certified licensing, theneed to obtain a CGA license in order to legallycontinue the valuation work the author had beendoing for many years, had not become clear.The main driving force for the author was the

desire to learn the valuable course content of the ASFM RA program, fo r conducting valua tions incomplex rural conditions, under the Standards of USPAP and the Uniform Standards for FederalLand Acquisitions (UASFLA ). No equivalenteducation for mineral or petroleum valuation wasavailable (nor is it now). He and a colleague of similar mining industry background took most of the courses together at locations across thenation over a two-year period. The author documented his experiences in taking thesecourses, in a series of articles on continuingeducation published at the time by the AIMA

(Ellis, 1999a-b, 2000g). Some comm ents madeto the author by minerals and petroleum industryvaluation practitioners expressed a sense of betrayal by his believing it to be beneficial tolearn valuation practice from the Real Estatevaluer comm unity.

The Certified General Appraiser exam is a four-hour exam covering a comprehensive range of Real Property valuation theory and principles.However, no questions in the exam taken by theauthor were directed specifically at minerals or petroleum.


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To verify the 3,000 hours of experience, and toassure that it was gained on USPAP valuationslegally, the rules specify that the valuer shouldgain his experience under the supervision of appropriately licensed valuers who (co-)sign thevaluation reports and signs a detailed experience

log. The Board reviews a selection of reportslisted in the experience log. To gain thenecessary validated experience, a few mineralsindustry practitioners are working as assistantvaluers with Real Estate valuation companies onthe valuation of residential and commercial RealEstate.

The author and his abovementioned colleaguewere fortunate to gain CGA licenses in 2001through the Colorado Board taking a favourableview of their applications due to their demonstration of experience, quality of reports

and reputation. The author doubts that suchfavourable treatment would be forthcoming inmany other States.

The AQB is presently conducting an in-depthreview towards s t rengthening l icensingrequireme nts. It has proposed substantiallyraising the education requirements for each levelof licensing.

Even if one obtains a CGA License in one State,the reality is that each minerals valuer generallyconducts his valuation work in a large number of

States. The niche of minerals valuation is sosmall that the number of mineral propertyvaluation projects that a minerals valuer canobtain in his home State is generally too low toprovide a living. Since licensing is by State, theCGA should go through the time consumingexercise of applying for a temporary CGA permitfor each assignment in each State in which heworks (or become licensed in those). Manyvaluation report deadlines for a mineral propertysale or financing will occur before the permit isissued. Although this interstate system nowworks much better for valuers than any other

State licensed profession, many States are slowin implementing it and many are hesitant torecognise qualifications from all States.

GEOLOGIST LICENSURE

To practice legally in some States, the mineralsvaluer also needs to Register temporarily, if allowed, with the State Board of ProfessionalGeologists or the State Board of ProfessionalEngineers, or may otherwise need to becomefully licensed in the State as a Geologist or Engineer. The jurisdictional boundary between

these Boards and the Board of Real Estate Apprais ers varie s by State, and is open to

interpretation. All 50 States have Engineer licensure and at the time of writing, 29 haveGeologist licensure, with more considering it.Such State regulation of professions continues tobe instituted based on the concept that it is “for the welfare of the public.”

Being a geologist, and not an engineer, theauthor’s experience is in the functioning of thelicensure of Geologists. Most State GeologistLicensure statutes exempt employees of miningcompanies, and many such statutes exemptconsultants working on minerals exploration.However, from the author’s experience inreceiving interpretations from various StateBoards of Geologists, essentially all StateBoards could interpret their statutes such thatminera ls valuers fall under their jurisdiction. Atleast one State Board interprets its statute so

strictly that its Executive Officer told the author that even if he did not set foot in the State, if heconducted any form of geological evaluation of the mineral property in question, he would bebreaching the statute.

At the tim e of writing, 17 of the 29 State s withGeologist licensure had some provision for temporary licensing for out-of-State licensedGeologists. Howev er, the author’s experiencewith the temporary system for Geologistlicensing is that it is essentially unworkable for the minerals valuer working on assignments

across many States. The author has beenlicensed as a Professional Geologist in two USStates for almost a decade. He has found littleavailable temporary reciprocity, because hislicenses were obtained without sitting a Statelicensing exam .

In recent years, the large majority of States withGeologist l icensure have insti tuted therequirement of passing the two levels of licensing exams of the National Association of State Boards of Geology (ASBOG) for newapplicants. Demonstration that one has passed

the ASBOG exams is now generally required for tempo rary licensing applications. Howe ver, evenso, many States with a temporary licenseprovision have recognized only a short list of licensing States.

Six or seven States now have licensing byspecialty. A review of the W ashington Statestatute passed in 2000, indicates that mineralvaluation work would be considered EngineeringGeology. This impress ion was tentativelyconfirmed by one of the founding Geo logy Boardmembers most knowledgeable of the wording of

the statute. Such classification of spec ialtiesadds a substantial barrier to developing workable


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reciprocity between States. In fact, theWashington State statute does not have aTemporary License provision, increasing theappearance and functioning to be that of State-sponsored guild protection.

In 2000 the author applied to Wyoming for licensing as a Professional Geologist in order totake the ASBOG exam s. Despite the fact that anumber of State Boards of ProfessionalGeologists have told the author that hisevaluation and valuation of mineral propertiesfalls under their jurisdiction as practice of Geology, his eleven mineral economics coursesfrom the Colorado School of Mines were rejectedby the W yoming Board as not being G eology.

The author sat the two ASBOG exams inWyoming in September 2001 during the period

of writing this paper. These exam s are best satwithin a few years of graduation from a geologydegree program, rather than three decades later as in the author’s case, by which time mostgeologists who are still practicing, have becomehighly specialised. By his estimate, less than10% of the 190 questions (no optional questions)were targeted at economic geology for theminerals and petroleum industry, and there werefew hardrock questions. The large majority of questions were mainly relevant to geologists withcareer paths in hydrogeology, environmentalgeology and engineering geology, these being

the areas of practice in which geologists seeklicensing and issues of public safety exist.

P R A C T I C E W I T H O U T A P P R O P R I AT ELICENSES

It is a moderately rare case in reality that aminerals valuer is taken to task for violating aState’s regulations, for being viewed as doingReal Property valuation without the pertinentState Real Estate valuer’s license. Howe ver, itdoes happen, and penalties can be imposed.Our time line of experience is still short, given

that the States only instituted their Real Estatevaluer licensing laws between 1989 and 1995.

In such cases, the argument will centre onwhether conducting a valuation of the mineralsestate or mineral rights is considered to beconduc ting Real Estate valuation. Techn ically,the settlement of the specific case may dependon whether the minerals estate has beensevered from the surface estate, or whether oneis appraising Mineral Rights rather than thephysical minerals estate. The author and hiscolleagues do not know of any case where a

State Board of Geologists has accused a RealEstate valuer of unlicensed practice of Geology

by conducting a mineral or petroleum propertyvaluation.

For the minerals valuer who does not hold theappropriate State licenses, the cautious strategywould appear to be to always take the costly

approach of contracting a Real Estate valuer with the appropriate State Certification to signthe minerals valuation report, and always abideby USPAP, particularly if the surface estate ispart of the packag e being appraised. In signingthe report, the Real Estate valuer legally takesfull responsibility and liability for the report, somost are unwilling to take the risk for just amod est fee. Similarly, it ma y be necessary tohire a geologist or engineer with the relevantState license. This is the way one mineralsvaluation firm conducts much of its work.

However, fundamental legal problems arebecoming apparent with this mode of operation.The author has also found that all of his clientsobject to having another individual takeresponsibility for his work and object to theadditional cost. In fact, none of his clients haveever agreed to this suggestion.

BARRIERS TO TRADE IN PROFESSIONALSERVICES

From the above discussion it is apparent thatState licensing in the US creates substantial

barriers to free trade of professional servicesacross State boundaries. It is because of theeconomic inefficiencies incurred by suchrestrictions to free trade in services that the

Aust ralian States abolish ed mos t of their Statelicensing of professionals during the 1990s (Ellis,2000f). Howeve r, the US States claim the rightto enforce educational requirements for professions. They also claim that effectiveenforcement of professional standards andqualifications must be through the force of law atthe State level.

These State level barriers to entry are such thatit is essentially impossible for a foreign valuer tocome to the U.S. and legally develop a Valuationof a Real Property holding for his client.However, US Real Property valuers and other professionals expect to be able to work relativelyfreely around the world wherever their client or company sends them, and until recent yearshave had little problem doing so. US geologists,Real Estate valuers, and other professionalscannot expect to continue to practice ontemporary assignments in other countries if USStates won't allow reasonable access for

similarly qualified, competent professionals to


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practice temporarily in and throughout the US(Lawrence, M, 1999).

The author in September 2001 provided a writtensubmission to the Appraiser Qualifications Boardon this topic for its consideration in developing

new qualification standards for Real Property Apprais ers (va lue rs) (E llis , 2001b). His inp utthough cannot be expected to have anysignificant influence on a process that setslicensure standards for hundreds of thousands of practitioners.

State licensure for professionals in general isbeginning to come under pressures internal andexternal to the US. During the past three years,rulings by the Supreme Courts of three Stateshave determined that the traditional mode inwhich lawyers practice across State boundaries,

through a lawyer licensed in the relevant State,is illegal. This has thrown muc h of the legalprofession into turmoil. State politicians,bureaucrats and national societies of lawyers,are arguing between themselves over tighteningthe enforcement of State licensing to benefitfrom the decisions, versus providing amechanism for licensed lawyers to practicefreely nationwide. State licensure requiremen tsare creating a variety of restrictive problems for medical professionals. A team of medicalspecialists recently refused to give a diagnosisthrough video conferencing for a critically ill

person in a rem ote part of Alaska, because theywere not licensed in Alaska. It is now almostroutine practice for people with difficult ailmentsto use the Internet to seek out a specialist inanother State and pay for his second opinion.However, it is illegal for the specialist to give hisopinion if he is not licensed where the personwith the ailment is located.

The author considers the US system of Statelevel licensing barriers to be in violation, at leastin spirit, of the 1992 North American Free Trade

Ag reem ent (NAFTA ) Artic le 1210 and Annex

1210 which deal with trade in professionalservices (NAF TA, 1992). He also considers it tobe in violation of the spirit of the 1994 WorldTrade Organisation's General Agreement onTrade in Services (GATS) (Ellis, 2000f; W TO,1994). For many professions, such as RealProperty valuation, State licensure forms anessentially insurmountable barrier to the entry of foreign professional services into the US.

Negotiations are taking place internationally todevelop and implement systems for mutualrecognition of professional qualifications by the

GAT S signatory countries. It is difficult toperceive how the US can be a viable participant

in these negotiations. Its system of Statelicensure would require that each agreement beadopted and implemented uniformly into law andregulations by 50 State Governments, whichtake pride in their level of independence.

MINERALS INDUSTRY ACCEPTANCE OFUSPAP

Acce pta nce and expecta tion of the us e of USPAP in minerals property valuations has beengrowing rapidly. Clients like it and man y dem andit be followed. USPAP ’s emph asis is on fulldisclosure, of everything. This includes allinformation that has been considered, actionsthat may have influenced, and any ground rulesused in the conduct of the valuation. Ethics andcompetency provisions are included up front.The valuation of mineral property, being Real

Property, falls under the Real Property valuationStandards, 1 and 2., which specify that for a“Complete Appraisal” the three categories of valuation methods, called Approaches, beconsidered. These are the Sales Comparison

Approach , the Cost Approach , and the Income Approach . USPAP ’s structure and requiremen tsare discussed below.

As a professiona l group, minerals value rs havelargely ignored USPAP, saying that it is notapplicable or appropriate for mineral propertyvaluations. This attitude, together with State

licensing, has allowed great inroads by RealEstate valuers into the field of mineral propertyvaluation. If these people have any mineralsindustry training, it is usually (at best) aweeklong course in natural resource valuationfrom a valuation institute. Generally, they limitthemselves to valuation of construction materialquarries and small industrial mineral properties.However, some under take much moresubstantial projects, particularly for governmentagencies. From the author’s contact with manyReal Estate valuers who have conductedminerals valuations, most appear to be acting

outside their area of competence (even if conducting sand and gravel property valuations).

LESSONS FROM THE US IMPLEMENTATIONOF NATIONAL STANDARDS AND STATELICENSURE

The experience of the US national valuationStandards (USPAP) and State Licensurediscussed above, provide us with a number of important lessons. These are summarized here.

USPAP, although not designed to provide any

instructions specific to mineral asset valuation, isgenerally liked by mineral valuation practitioners


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who are experienced with its use, and by clientswho work on a regular basis with valuationreports.

The Standards within USPAP are laid out inpairs by asset (Property) type – Real Property;

Persona l Property; Business and Intangible(financial) Property. The first Standard of thepair provides a useful framework to follow for conducting of the valuation research andanalysis, then the second provides a usefulframe work for writing the valuation report. Thoseresponsible for developing the next generation of the VALMIN Code should also consider separating the instructions into those relevant tothe valuation process, and those providingguidance for the content of the valuation report.To enhance the VALMIN Code, particularly if it isto be used internationally, instructions should be

considered for classification of assets into thefour asset (Property) types recognised byUSPAP and the International ValuationStandards.

Poorly designed regulation can preventcompetent practitioners from practicing their profession, replacing them with people who aretechnically qualified but not necessarilycom petent. The Australasian minerals industrymu st stay vigilant and proactive to prevent this.

Licensing or Certification requirements instituted

on a State/Provincial basis can be a barrier tofreedom of trade in professional services,preventing minerals industry and other professionals from working across borders. Theminerals valuer must have the freedom to go tothe deposit, since the deposit cannot move.Technically, most US minerals valuers, evenwith all of their credentials, have more legal rightto work in many foreign countries than to work inthe adjoining States to their hom e State. Thisexperience should be brought to the attention of any Australian professionals and politicians whoadvocate the reintroduction to Australia of State

licensing of professions.

Until recent decades, land grants in the USprovided private ownership of the surface andsubsurfac e, including minerals. In parallel withthis, Real Estate valuers have traditionallyvalued minera ls as part of the land. Regulatorsand government agencies have formalised thistradition, often requiring that mineral propertyvaluations be conducted by Real Propertyvaluers.

The author considers the system of State level

licensing as implemented in the US, to be inviolation of the spirit of important international

agreements on Trade in Services, to which theUS is a signatory. Any attempt by internationalminerals industry institutes to negotiateagreements on mutual recogni t ion for professional qualifications with US bodies for professions subject to State Licensure in the US,

with a view to allowing qualified foreignprofessionals access to practice temporarily inthe US, is highly likely to fail, since USimplementation will likely require regulatorychange in up to 50 States.

CONTENT AND APPLICATION OF THEUS N ATIONAL VALUATION STANDARDS

THE STRUCTURE OF USPAP

The Uniform Standards of Professional AppraisalPractice (USPAP) document is designed toprovide standards for valuations of all feasiblekinds. As previously stated, the Standardsgoverning valuations are provided within four divisions or types of assets (Property).Essentially the same divisions are used in theInternational Valuation Standards (IVS) (IVSC,2000a, p 61-80). The four asset types are:

Real Property, such as residential andcommercial buildings and land.

Personal Property, such as moveableequipment, jewellery and antiques.

Businesses and their component parts, suchas factories and distribution systems.

Intangible assets, such as company shares,contracts and patents. IVS uses the label,Financial Interests (IVSC, 2000a, p 74).

All four of the se asse t types can be relev ant tothe minerals valuer. The following are theprimary USPAP Standards for the four assettypes, and examples of their respectiveapplication to minerals industry asse t valuation:

Standards 1 and 2, the Real Propertyvaluation Standards, are the applicableStandards for valuation of a mineral property, theownership and partial interests in it, and the landsurface and buildings on the property (thesurface estate).

Standards 7 and 8, the Personal Propertyvaluation Standards, are those applicable to themining equipment such as trucks and shovels.

Standards 9 and 10 are for both Businessvaluation and Intangible Asset valuation. Theseprovide the instructions for valuation of the


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mining corporation and the mining operation as aBusiness, valuation of a long-term product salescontract and valuation of shares of the miningcompany.

As previous ly men tioned, the Standards for each

of these categories of valuations are in pairs.Within each pair of Standards, the first Standardcovers the development of the valuation,providing instructions on what must beconsidered and analysed in conducting thevaluation. The second Standard providesinstructions on the contents of the valuationreport.

ETHICS, COMPETENCY, TRANSPARENCYAND OTHER PR OVISIONS

USPAP also includes ethics, competency and

record keeping rules, and Standards for consulting assignments by Real Propertyvaluers. State Licensed valuers, and valuerswho are members of the major national generalvaluation institutes, must abide by all USPAPStandards and rules.

USPAP focuses on conducting the valuationindependently, impartially, ethically, objectivelyand competently. It also focuses on reporting thevaluation clearly, accurately, meaningfully,understandably and with full disclosure.

REAL PROPERTY VALUATION, STANDARDS1 AND 2

The following discussion is limited to the major features of Standards 1 and 2 for Real Propertyvaluation as they apply to Mineral Propertyvaluation, and in particular to valuations basedon Market value. Standa rd 1 provides rules for the development process of a valuation.Standard 2 gives instructions on the content of the valuation report. There are man y importantfeatures that are additional to those contained inthe Australasian VALMIN Code.

Purpose, Intended Use, Scope and Type

The Interest in the Property that is being valuedmust be determined and specified in the report.The Purpose of the valuation must be provided,including specifying and defining the type of value to be estimated, such as Market Value,Use Value, Insurance Value or Taxation Value.The Intended Use of the Valuation Report mustbe stated, thereby warning the reader that thevaluation may not be suitable for a different use.

The Scope of Work performed m ust be reported,including the level of inspection and identification

of the property, the degree of research of physical and economic characteristics, the extentof data research, and the type and extent of analysis applied. A reasonable level of verification of information relied upon is required.Disclosure of Assumptions and Limiting

Conditions is required.

Types of Valuations and Levels of Reports

USPAP provides for two types of Real Propertyvaluations and three levels of valuation reporting.

A Complete Appraisal requires abiding by all theRules and considerations in the two Standards.Departure from some rules is allowed, which if invoked, results in a Limited Appraisal .

For both of these types of valuations, the level of reporting being applied mus t be identified. A

Self-Contained Appraisal Report will containeverything that is relevant to the valuation incom prehensive detail. A Summary Appraisal Report will cover everything relevant to thevaluation, but at a written, summ ary level. ARestricted Use Appraisal Report is designed for use only by the client, is written at a levelappropriate for the client’s use, and may makeextensive reference to materials retained in thevaluer’s work-file. From the author’s experience,minerals valuers are almost always requested toconduct a Complete Appraisal and to provide aSelf-Contained or Summary Appraisal Report.

Effective Date and Exposure Time

Market Value is determined as at a specificEffective Date of the Valuation. USPAP requiresthat the Effective Date and the Date of theReport be reported together to avoid confusingthe reader. Typical practice is to state bothdates on the report cover sheet.

The value determination is generally based onthe assumption that the property will have hadadequate exposure to the market prior to the

specified Effective Date, for Market Value to beattained. An opinion of reasona ble ExposureTime must be expressed.

Highest and Best Use

The Market Value of a property is determined onits Highest and Best Use . In determining MarketValue, the first, and also possibly the lastconsideration, should be Highest and Best Use.Lack of adequate Highest and B est Use analysisis the source of the greatest number of complaints filed against the work of Real

Property valuers in the US. For Real Propertyvaluation, USPAP provides the following


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definition of Highest and Best Use for RealProperty valuation:

The reasonably probable and legal use of property that is physica lly poss ible, approp ria tely supported, and financially feasible, and that

results in the highest value. (USPAP, 2001, p198).

For an example of a common type of situation inthe US that is addressed by determination of theHighest and Best Use, assume the subjectproperty includes a mineral deposit under anorchard. To determine the Market Value of theproperty, the valuer needs to determine whether the value of the property as an orchard exceedsits value as a mineral property, or whether somecombination of the two uses is feasible tomaximise value. There may also be other uses

to consider, such as subdivision into housinglots, if the property adjoins an expanding urbanarea. For some mineral properties, in order tomaximise value, it might be relevant to consider leasing or selling excess water rights, andleasing or selling surface which would not beimpacted by underground mining. Whether or notthe current owner or a known buyer wouldundertake these actions is irrelevant.

If the subject property is held as US Federalunpatented mining claims or a Federal minerallease, then an alternative use to mineral

developm ent is not legally possible. The RealEstate ownership (which includes the minerals)has remained with the Federal Government, andthe agreement allowing a private party to occupythe property only allows a mineral use. This is asimilar arrangement to the typical mineralstenem ent in Australia. Even in these situations,the use which provides the maximum valueshould be selected. That may be throughsublease, with an advanced royalty followed byannual payments.

The Three Approaches to Estimation of

Market Value

The Methods for determining the Market Value of a property fall into three Approaches specified inUSPAP and the International ValuationStandards (IVSC, 2000, p 44-45). The SalesComparison Approach is often also called theMarket Approach or Market Method by Businessvaluers and non-US valuers. It is basedprimarily on the Principle of Substitution. TheCost Approach is based mainly on the Principleof Contribution to Value. The Income Approachis based on the Principle of Anticipation of

Benefits. IVS has labelled this third Approachthe Income Capitalisation Approach .

Note that USPAP and IVS specify the samethree Approaches throughout their Standards, for the four Property (asset) types and for all formsof value to be estimated, though the methods of analysis applied within the Approaches will alter,

and not all three Approaches are alwaysapplicable. Howe ver, the discussion here islimited to Market Value determination for RealProperty as applicable to minerals industryasset.

The three Approaches should not be viewed asbeing independent of each other. Generally,they overlap in their sources of data, but the dataare analysed using different methods. Theunderlying philosophy is that the three

Approaches sh ould substantiate the findin gs of each other.

USPAP requires that all three Approaches beconsidered in conducting a Complete Appraisal .If an Approach is then excluded, the reasoningfor its exc lusion must be explained. This is animportant area where IVS is not quite as strict asUSPAP in its wording, apparently due to

jurisdic tiona l is sues .

The author strongly recommends that a mineralsvaluer should attempt to base his determinationof value on as many indicators of Market Valueas can be reasonably obtained. This is

especially true if the Valuation is to be used inlitigation. All the available Methods of valueestimation are subject to a high level of uncertainty and are open to criticism. The moreMethods that can be applied, the more supportthat can be developed for the concluding opinionof Market Value of the valuation report.

Sales Analysis

Within the Real Estate valuer community, thereis little dispute that Market Value should beestimated by drawing as much as possible on

analysis of transactions for related properties.This philosophy applies in the application of eachof the three Approaches. Since the results fromanalysing sales and other transactions can beused in all three Approaches, the gathering,verification and analysis of transaction data isoften considered to be separate to the SalesComparison Approach.

However, within the minerals industry, in somecases, even acquiring a m odest amount of salesdata may require casting one’s net more broadlythan is generally considered. It may require

including sales from a number of differentmineral commodities to that of the subject, but


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with similar econom ic characteristics. For example, for a crushed stone quarry, one mayneed to consider analysis of other constructionmaterial property sales, such as sand andgravel. For a particular industrial mineral, onemay need to consider other industrial minerals

with som ewhat similar mark et characteristics. Indoing so, though, the valuer must ensure thatonly appropriate methods of value estimation areused.

For exploration stage properties, the advancedroyalty payment terms on a lease, or the farm-interms on a joint venture (JV; JV Terms Method),may also be analysed to develop indications of value which can help support one’s conclusions,s ince these are general ly arms- lengthtransactions (Appleyard, 1994).

Despite these options, it is well recognised thatfinding, data gathering and verification for eventwo or three somewhat useful sales or transactions can often be very time consumingand even expensive.

Sales Comparison Approach

The author promotes the view that one shouldalways attempt to use the Sales Comparison

Approach in a va lua tion. The value es tim ate(s)derived from it generally provides the bestindication of the Market Value of the property.

That is the view that carries sway amongauthorities that count in the US, particularly theCourts. Of the three Approache s, the SalesComparison Approach draws most directly onsales data, which are by definition, from theMarke t. At the least, a value estimate derived bythe Sales Comparison Approach should be usedas a validity or “sanity check” against anestimate derived by the Net Present ValueMethod (Grant, 1994).

The Sales Comparison Approach has to someextent received unjustified bad press within the

community of minerals valuers, in the author’sview. This is due to the extensive use of theterm “comparable sales” as commonly used inthe valuation of residential Real Estate (eg,Cartwright, 2001). “Com parable sales” in thatmeaning are generally not available for mineralproperty valuations, at least in the author’sexperience.

The Sales Comparison Approach can useanalysis methods that do not rely on“comparable sales” in any strict sense of theterm. Valuers of difficult to value Real Property,

such as farms, timber tracts and water rights,face somewhat similar problems to minerals

valuers, with scarce and non-comparable sales.They have long ago pushed the SalesComparison Approach down to working withcomm on units of measure. That is, theadjustment grid to bring the sales data to thesubject property can be worked through at the

level of $/unit, such as $/hectare, $/m , or $/kg3

(ASFM RA, 1995a, ch 6). Ratio analysis is usedextensively in this process.

Cost Approach

For a Complete Appraisal , USPAP requires thatthe Cost Approach be considered. However,use of the Cost Approach for determining MarketValue is generally rejected outright by mineralsvaluers in the US as not being applicable tomineral deposits. Some US Real Propertyvaluation experts claim that the Cost Approach

can only be applied to Improvements (egbuildings and infrastructure) and cannot beapplied to Land, of which a mineral deposit is acomponent by definition (Appraisal Institute,1993, p 197). The author disputes both of thesecontentions.

Some minerals valuers, such as Paschall, usethe Cost Approach only for valuing the plant andequipment on the property (Paschall, 1998, p 4).The concept of estimating the “replacement cost less accrued depreciation” for a unique mineraldeposit, or for improvements, such as a mill built

at the site of such a deposit, is generallyridiculed by US valuers. Evans of the Bureau of Land Management wrote, “A final, and almost always inappropriate approach, is the cost approach to value.” (Evans, 1998, p 16).

The writings of minerals valuers and others inthe US about the valuation of mineral propertiesshow that they believe that the Cost Approachcan be based only on depreciated replacement cost analysis and/or historic cost analysis for su r face improvements and exp lo ra t ionexpenditures (Gentry and O’Neil, 1984, pp 12-

13; Loucks, 1991, ch 11, pp 8, 17-18). TheDepreciated Replacement Cost Method isdesigned for valuation of buildings and plant, notfor Land and its components, such as a mineraldeposit.

The Historic Cost Method is based on HistoricCost accounting principles, this being theaccounting regime employed for public reportingin the US. Historic cost accounting is wellrecognised for causing a significant percentageof US public companies to report book values for assets that have little or no relationship to Market

Value. Adjustments for time and obsolescencethat are typically employed by Real Estate


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valuers, do little to rectify this problem whenapplied to Market Value estimation of a mineraldeposit. The positive or negative contribution bygeological knowledge to the value of the depositis often manyfold greater than cost of obtainingit.

However, in Canada and Australia, Cost Approach meth ods are commonly used for exploration properties. The metho ds aredesigned to provide adjustments to explorationexpenditures that reflect the operation of themarket for the properties in developing MarketValue. These methods reflect flexible thinking,6

not bound to traditional Cost Approach methods.

As ind icate d, the au tho r be lieves that thedenigration of the Cost Approach by US mineralsvaluers described here, is unfairly harsh,

particularly in light of advances of the past twodecades. The Cost Approach is based primarilyon the Principle of Contribution to Value, andonly secondarily on the Principle of Substitutionthat constrains som e writers. For difficult toappraise Real Estate properties, a broader interpretation is now being applied, based on theestimation of the contributory value of eachcomponent of the subject property.

Valuers of rural Real Estate in the US facesimilar issues to minerals valuers when valuingfarm and other land, water, and timbe r. Since

about 1990, the ASFMRA has been teaching inits Real Property valuation courses, a method for deriving from sales analysis the contributoryvalue to the subject property of various landclasses and the Improvements (ASFMRA,1995a, ch 12). The method is based on salesanalysis, but does not require the use of so-called ‘compa rable sales.’ The contribution of each component of the land mix of the propertyis determined using ratio analysis of land classeswithin sales.

Applica tion of a sim ilar co ntribution method tothe analysis of mineral property sales datashould provide similar contributory values for categories of mineralisation or other propertyattributes. In the US, the SEC’s restrictionlimiting the reporting of quantitative data to only

Reserves has made it difficult for theindependent valuer to obtain adequate data onthe categories of mineralisation at the subjectproperty, let alone at other properties that havebeen sold (SEC, 1992). Howev er, diligentresearch, aided by some recent liberalisation of the reporting restriction, could provide a veryuseful additional Approach for determining thevalue of a mineral property, particularly if thevaluation report is to be used in a litigationsituation.

If enough sales data are available to develop the

Sales Comparison Approach adjustment grid,there will likely be enough sales data to developa Cost Approach, since the same sales can beused in both analyses. Generally it is necessaryto utilise at least as many sales as there arecomponents being estimated from those sales.

What may be the most important differencebetween the Sales Comparison Approach andthe Cost Approach is the presentation of theresults of the analyses. Presentation of theSales Comparison Approach results focuses onthe adjustments necessary to get the average

dollar per unit bases of the selected sales to thatof the subject property. That is, a grid showingthe adjustments for each sale is presented, withthe resultant value estimate for the subjectproperty calculated from that sale.

The presentation of the results of the Cost Approach focuses on the contributory value of each component of the subject property. Nosales are shown in this table. The contributoryvalue for each component is calculated fromsales or other sources prior to entry in the table.The contributory values are then summed to

provide the property value. Exam plecomponents will be Reserves, Resources, other mineralisation and exploration potential, landsurface, roads, buildings, and water rights.

Income Approach

The Income Approach includes all methods of value estimation that are based on the incomegeneration potential of the property. US RealEstate valuers commonly call methods of estimating a property’s value based on itsi n c o m e g e n e r a t i o n c a p a b i l i t y I n c o m e

Capitalisation Methods.

The Multiple of Exploration Expenditure (MEE)6

Method promoted in Australia by M Lawrence (1994),is a method in the Cost Approach. This Method, asalso described by Onley (1994), “.... is applicable toexploration properties from the earliest stage of exploration to a moderately advanced stage, but, for which no resources have been delineated.” For thisMethod, a Prospective Enhancement Multiplier (basedupon a valuer’s assessment of the property’sprospectivity to date) is applied to the relevant andeffective past exploration expenditure on the property.

A related method in the Cost Approach is describedby Roscoe (2000). This Method, which he terms the

Appraised Value Method , applies an additionadjustment, instead of a multiplication adjustment to asimilarly derived basis of exploration expenditures.


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Minerals industry practitioners tend to rely veryheavily on the Net Present Value (NPV) Method,also comm only called the Discounted Cash Flow(DCF) Method, for estimating Market Value.This is particularly true for properties under developm ent and in production. In such

situations, their reliance on the NPV method isgenerally to the exclusion of all other methods of estimating value. Often the result of their valuation is an Investment Value or Use Valuerather than the desired estimate of Market Value(Ellis, 2000c). This method is also subject toabuse as M Lawrence (2000) outlined.

Many users of minerals valuation reports outsideof the minerals industry have difficultyunderstanding NPV-based valuations, and lookon them with great suspicion. They feel muc hmore comfortable with a Valuation which

includes an estimate from the Sales Comparison Approach . Th is is pa rticularly true of manyCourts within the US, with a considerablepercentage apparently rejecting NPV-basedminerals valuations (Paschall, 1999). Manyother Courts are only allowing the NPV Methodinto testimony with reluctance. These problemshave contributed to the inroads made by RealEstate valuers into the field of mineral propertyvaluation. Eaton of the US Departm ent of Justice writes that, the NPV Method is socomplex com pared to other methods of analysis,that neither the attorneys nor the Courts

understand it (Eaton, 1995, p 192). He goes onto state, “The courts have historically favored thesales comparison approach to value, often to theexclusion of the cost and income capitalizationapproaches, and preferred valuation opinionsthat can be supported by solid market data” (p193).

The UASFLA provides the following extract froma 1982 Court decision involving a sand andgravel deposit. The comme nt pertains to NPV-based valuation.

Great care must be taken, or such valuationscan reach wonderland proportions. It isnecessary to take into consideration manifold and varied factors like future supply and demand, economic conditions, estimates of mineral recoverability, the value of currency,c h a n g e s i n t h e m a r k e t p l a c e , a n d technological advances. Many of thesefactors are impossible to predict withreasonable accuracy. (UASFLA, 2000, p 97).7

Within the Income Approach, variants of NPVanalysis can be applied, including that discussed

below. There are also a few other income based

valuation methods available that are commonlyused by Rea l Property valuers. These includeratio analysis of selling price to gross incomeand net operating incom es. All metho ds withinthe Income Approach have their individual prosand cons, and all are subject to a high level of

criticism. Despite their well recognised individualproblems, this author recommends that whenpossible, a number of methods should beapplied. Doing so will aid the valuer indeveloping an understanding of the subjectproperty within the context of the market.

The NPV Method is in the category of valueestimation methods called yield ca pitalisation bythe US Real Estate valuer and financial analystcomm unities. In applying the NPV Method toestimate mineral property value, most MineralsIndustry practitioners use projected annual after

tax cash flows as the basis of their analysis.

On the other hand, US Real Estate valuersgenerally use annual net operating income asthe amount to be discounted to present value.Some minerals valuers, such as Paschall (1998,p. 6) do the same, especially those who havedone work for government agencies, or are StateLicensed. Net operating income (NO I) for thispurpose is generally applied as: net sales -operating costs - capital costs . NOI is usedbecause of the need to analyse sales on thesame basis as the subject property. Less

information needs to be obtained (or assumed)to calculate an NOI than to calculate after taxcash flows. It is also argued that assum ptionsabou t the f inanc ing and income t axarrangements that the potential buyer brings tothe subject property should not be made. Someargue that income taxes are levied against theowner and/or operator of the property, notagainst the property itself.

Most buyers of mineral properties, however, dotheir analyses of potential acquisitions on anafter tax cash flow basis, in the author’s

experience. In evaluating the mark et for thesubject property, it is important to attempt toanalyse the subject property and sales from thebuyer’s perspective. Therefore, the author oftenuses both the NOI and after tax cash flows asthe basis for discounting, in order to get a better understanding of the property’s value.

Valuation theory holds that the discount rateapplied must reflect the market for the property,and if at all possible, be determined from themark et. There is considerable controversy over how this should best be done. This controversy

occurs among Real Property valuers in general,and valuers of mineral properties in particular. A

U S v. 47.14 Acres of Land, 8 Circuit Court, 1982, p. 726.th7


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strong sector of Real Property valuers in the USholds that the discount rate should be derivedfrom analysis of sales within the same generalcategory of property as the subject, by use of Internal Rate of Return analysis.

The discount rate selected should reflect themarket for the property on the Effective Date of the valuation, rather than be an investment rate.The rate should also be appropriate for the NOIor cash flow being discounted, such as being abefore or after tax discount rate, with (nominalterms) or without inflation incorporated (realterms).

Reconciliation

In drawing a conclusion of value, USPAPrequires the valuer to reconcile the results of the

Approaches used , dis cuss ing the quality andquantity of data available, and the applicability or suitability of the Approache s. Leading RealProperty valuers in the US recommend that theresults of the Approaches be weighed, instead of selecting the result of one Approach to be theopinion of Market Value presented (UASFLA,2000, p 23).

Certification

The report must contain a Certification signed bythe responsible valuer. The Certification

addresses nine items, primarily verifying theindependence and impartiality of the valuer.

LESSONS FROM EXPERIENCE WITH USPAP

USPAP provides separate Standards for conducting Real Property valuation, PersonalProperty valuation, and Business and Intangibleasset valuation. The VALMIN Code does notseparate these out. Separation helps the valuer to develop a conclusion of value which correctlymatches with the purpose of the valuationassignment.

USPAP has been developed based oninternationally accepted principles of valuationdeveloped by the valuation community as awhole. IVS provides a similar implem entation of the sam e principles. W hen objectively and fullycarried out, the valuation process follows thescientific method, resulting in an objectiveconclusion of value:

Scientific Method Valuation Process

HypothesisGather information

Record the data Analyse the dataState a conclusion

Define the problemPlan the valuation

Collect the data Apply value approaches

Arrive at a value conclusion(American Society of Appraisers, 1997, Module V).

For Market valuation of mineral properties, allthree Approaches suffer from limitations in their application and are subject to severe criticism.More than one Approach should be used if possible, to provide validation. The conclusionas to Market Value should be derived byweighting the results from the Approaches used.

A Ma rket Value conc lus ion shou ld be based onthe Highest and Best Use of the mineral propertyor asset being appraised. This need not matchwith its use, or the use of some of itscom ponents, at the time of the valuation. In theUS, the Highest and Best Use of a mineralproperty is often not even a mineral use.

Developers of standards should be extremelycautious of barring any specific method of valueestim ation. The minerals valuator needs all themethods available that can be mustered todevelop indications of value, given the inherentdifficulty of his task in an environment sufferingfrom a severe shortage of good data. In anyevent, method selection must be the prerogativeof the expert valuer.

For example , some minera l s indus t ryprofessionals promote that the NPV methodshould never be applied to the valuation of amineral prospect at the exploration stage. Thisis strictly true if one considers the paucity of dataavailable about any likely mine on the property,but the author believes that it is quite appropriateto use the NPV method in particular circumstances. For example, to calculate theNPV of the income stream which might begenerated from leasing the prospect, or fromgrazing cattle on the surface, or from consideringa non-mineral Highest and Best Use of theproperty.

International rule makers should assure that thestandards are not so high or inflexible that theybecome relatively prohibitively costly or too timeconsuming for the minerals valuer to carry outmarket valuations of low value mineral assets.The author’s experience is that the application of USPAP or VALMIN to small minerals valuationassignments can be too onerous. For example,consider the common request to appraise afarmer’s interest in a small sand and gravelquarrying operation on his property.


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At lea st in Australia for such a situa tion, one ca nusually choose to forgo the cachet of providing aVALMIN-compliant Valuation Report if it appearstoo costly in the circumstanc es. In the US, Statelicensed valuers and members of the major

valuation societies are bound to abide byUSPAP. However, USPAP does provide someflexibility in allowing the development of a Scopeof Work that is appropriate, relative to the scaleof the assignm ent. This flexibility is largelybased on assuring that one conducts a level of research and analysis which at least matchesthe level that competitors and peers would do for the same or a similar assignment. USPAP’sallowance of the exercise of DepartureProvisions, with the client’s approval, resulting ina Limited Appraisal , could also prove beneficialunder certain circumstances, dependent on the

Intended Use of the valuation. The main pointhere is that the client cannot expect to enjoy thebenefit of a quality qualifier, without the work thatis usua lly entailed to be entitled to it. See Ellis(2000a) and (2000c).

FEDERAL LAND ACQUISITIONS

When a US Federal agency is buying or condemning (acquiring through forced sale) land,another document takes precedence. TheUniform Appraisal Standards for Federal Land

Acqu isi tions (UASFLA) was first released in

1971, and has since been updated four times,with the 2000 edition being 129 pages (UASFLA,2000).

UASFLA reads rather like a Court’s legaldecision. A significant percentage of government acquisitions of land in the US areconducted by Condemnation action, and for many of these the amount of compensation thegovernment must pay is settled by Courts.Therefore, case law forms an important basis for this document. In effect, UASFLA is a set of strongly recommended guidelines rather than

being a set of rules. These are directed toemployee and contract valuers working for Federal agencies, and to reviewers of their valuation reports. UASF LA instructs them onhow to best develop the Valuation so the valuer will be able to defend it in Court if necessary.

The UASFLA guidelines are effectivelysupplemental guidelines to USPAP’s Standards1 and 2 for conducting and writing Real PropertyValuations. UASFLA very strongly recommendsrelying primarily on the Sales Comparison

Approach over th e In com e and Cost

Approaches .

In Eminent Domain (Condem nation and Takings)situations in the US, the Federal agencies areonly required to compensate for the Taking of Real Property, not for the loss of any Businessvalue of profit. The history of Court decisionsbehind this is based on constitutional property

rights. So, UAS FLA cautions that it isparticularly important to exclude Business Value,which is often captured in Income Approachmethod s. For application of the NPV Method tomineral properties and mines, it restricts theforecast income stream used to only the royaltyincome that a private owner of the property couldobtain from leasing the mineral property or mineto a mining company.

Because of this restriction to royalty income,many minerals valuers view the UASFLA asunfair to the minerals industry. Howe ver, a

business that operates within a commercialbuildings that it owns will receive similar treatment to exclude Business Value from theValuation of the Real Estate being Taken . Other requirements for the valuer to follow often alsoresult in compensation to the minerals holder that is less than expectations. Howev er, thesefiner points of protocol are beyond the scope of this paper.

The important lesson to be learned here is thatUASFLA and the Courts in the US make theclear distinction between the Market Value of

Real Property and its Business Value. The AusIMM ’s VALM IN Co de ins truct ions appe ar toresult in the inclusion of Business Value inmining property valuations. In the author’sopinion, this results in the value obtained being aUse Value of the Real Property under its currentspecific use, rather than Market Value; or resultsin a Going Concern Value of the miningoperation as a Business valuation, instead of aReal Property valuation (Ellis, 2000a; Ellis,2000c; USPAP 2001; IVSC, 2000), AppraisalInstitute, 1993).

Such a value conclusion is probably desirableresult for use in securities filings. It will also bedesirable for the proposed sale of a miningoperation as a Going C oncern Business (Stagg,2001). Howeve r, the valuation assignm ents thatthe au thor r ece ives genera l ly r equ i redetermination of the Market Value of the RealProperty, such as for incom e tax filings, litigation,and Business decision-making. Therefore, onemust always be sure what type of value one is todetermine, and the Property basis from whichthat value is derived . The author ’srecommendation from this is that it is preferable

that any valuation Code or Standard designed


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for the valuation of minerals industry assets beconsistent with IVS.

US STATE AND FEDERAL COURTS

Court records provide an im portant framework to

guide minerals valuers. The Courts are wherework of minerals valuers is put to the test.

The expert testimony of a minerals industrypractitioner regarding the value of a mineralproperty is often opposed in Court by thetestimony of a State Licensed Certified GeneralReal Property valuer who has no mineralsindustry education or qualifications. The author has discussed such situations with colleagueswho study Court cases involving the value of mineral properties. These discussions and hisreview of the literature indicate that in those

situations the testimony of the Real Propertyvaluer generally prevails.

This poor to abysmal track record for mineralsindustry practitioners appears to be largely dueto them not following the ground rules of Generally Accepted Valuation Principles for RealProperty valuation, and not following the specificvaluation ground rules ap plicable in the particular

jurisdict ion . Many mine rals Valua tions areessentially thrown out of Court in EminentDomain (Condemnation or Takings) hearingsbecause the minerals valuer has not applied the

appropriate ground rules (Paschall, 1999).

Any expert’s mine ral property valua tion tha trelies solely on the Income Approach will have ahigh probability of losing to the opposing expert’svaluation when that includes simple SalesComparisons. The Courts in the US have ruledthat Market Value valuations should be based asmuch as possible on data derived from themark et. Sales are market data. Therefore,when developing a Market Value valuation, allmethods of value estimation should draw asmuch as possible from sales. As explained

earlier in this paper, the author does no t believethat this means that sales need to becomparable , such as we are familiar with seeingapplied in residential Real Estate valuation. AsUASFLA indicates, the Courts have a strongpreference to rely on the results of the SalesComparison Approach to the exclusion of theCost and Income Approaches. JD Eaton, aleader of the Appraisal Unit, US Department of Justice, authored the 2000 UASFLA revisions.In his 1995 book, Real Estate Valuation inLitigation , he states:

Most courts do not seem to understand that each of the three approaches to value is an

integral part of the valuation process. Many court rulings appear to be based on theassumption that the three approaches tovalue are totally independent of one another and that only the most applicable approach isused in the appraisal of a specific property.

(Eaton, 1995, p. 158).

In the context of the Cost Approach, Eaton goeson to explain that in the US “the appraiser has anethical and professional obligation” to developeach of the three Approaches to value“whenever the results of the approach will assist in estimating the value of the property.” Heencourages the valuer to then educate the Courtas to the role of each Approach in developing hisvalue conclusion.

The dismal lack of success of minerals industry

professionals testifying as valuation experts inthe Courts provides important lessons. Oneshould not expect to learn how to develop astrongly defensible valuation through only on the

job e xperience. Th ere is a lot one can le arn f romhow other Real Property valuers (such asvaluers of agricultural lands, timber tracts andunique office buildings) develop their valuations.They are confronted with the same issue of alack of directly com parable sales data. Thereare good reasons why a Certified General RealProperty valuer has to pass 180 hours of valuation courses, and has to maintain a

regimen of con tinuing education. Few if anyminerals valuers give serious consideration tothe three Approaches to value that Eatonemphasises as being “an integral part of thevaluation process.” Minerals valuation is a nichespeciality within the universe of Real Propertyvaluation and Business valuation. Reviewingexample valuation reports available from major valuation institutes can prove instructive (eg,

ASFM RA , 1995b).

US SECURITIES & EXCHANGECOMMISSION

The SEC rules which most directly impactminerals valuers were first issued in March 1981when the SEC introduced Form S-18 for reporting by mining com panies . In 1992, theSEC transferred the definitions and disclosurerequirements of Form S-18 to Industry Guide 7 ,which is still in force (SEC , 1992).

Industry Guide 7 is focused on investor protection, as are SEC rules in general. Itdefines proven and probab le Reserves using itsown definitions, not the internationally accepteddefinitions of the Council of Mining andMetallurgical Institutions (CMM I). It then


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prohibits the disclosure of quantitative estimates,such as tonnage and grade, for all mineralisationother than those two Reserve categories, exceptin rare circum stance s. Similarly, it restrictsdisclosure of value estimates to Reserves only(SEC, 1992; Abbott, 1985; Ellis and Abbott,

2000).

The policy is designed to prevent privateinvestors from confusing Resources and other mineralisation, with Reserves that can be minedeconom ically and legally (Abbott, 1997; Ellis,

Abbo tt and Sandri, 1999). It is als o intended toreduce the speculation associated with initial, insitu estimates of Resources, which are invariablygreater than the Reserves, if any are delineated(Noble, 1993). In only rare cases have other disclosure pressures allowed these rules to beoverridden. The dissatisfaction with these

Industry Guide 7 rules is quite widespread.

In March 1999, the US-based Society of Mining,Metallurgy and Exploration (SME) released anupdate of its 1991 guidelines for definitions to beused in reporting of Mineral Resources,Reserves and Exploration Information (SME,1999, 1991). These closely follow the 1997CMMI recommendations, which were in turnderived from the Australasian JORC initiatives.To date, the SEC has stuck by its antiquated1981 Reserve definitions and prohibitions. Thishas effectively barred public reporting in the US

under the SME and CMMI definitions (Ellis and Abbo tt, 2000).

Despite this regulation, in recent years anoccasional company listed on a US exchange,such as Newmont, has begun publishingestimates of tonnage and grade of non-Reservemineralisation, using terms such as “Measured and Indicated Mineralization.” The SEC has notacted to stop this apparent violation. In February2001, R Baer, an SEC Mining Engineer, gave apresentation explaining the SEC position

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