Mineral asset valuation, Comparable sales approach, POLVAL Michał DUDEK* ATTEMPT TO ESTIMATE THE VALUE OF SAND AND GRAVEL MINERAL RIGHTS USING THE TRANSACTION PRICES ANALYSIS OF MINERAL PROPERTIES IN WROCLAW COUNTY The Polish Mineral Asset Valuation Code, POLVAL, recommends using at least two different approaches in mineral asset valuation. If it is not possible the valuer should state that in the report. Comparable sales approach requires not only a very good knowledge of the transactions terms and conditions but also detailed information about the object of valuation to create appropriate valuation model. This paper is focused on the transaction prices analysis of sand and gravel mineral properties that belongs to the owner of the land as a part of real estate and then compared to transaction prices of agricultural and residential properties in Wroclaw County. 1. INTRODUCTION It needs to be clarified at the beginning that terms, such as, mineral rights refers to the legal right to exploit and enjoy the benefits of minerals located below the surface of a parcel of land. Term, mineral property refers to a property that contains a mineral deposit of such quantity and quality that it is profitable for extraction as highest and best land use [1]. Mineral asset valuation is believed to be a separate valuation activity that requires integrity, responsibility, ability and knowledge [7]. Valuations are usually preceded by reports of exploration results based on national codes (JORC Code, the PERC Code, the SAMREC Code, or other accepted in a foreign jurisdiction. These codes share general rules mentioned in The International Template for Reporting of Exploration * Wroclaw University of Technology, Wybrzeze Wyspianskiego 27, 50-370 Wroclaw, Poland. e-mail: dudsht@gmail.com
Results, Mineral Resources and Mineral Reserves). For Europe it is a Pan-European Code known as "The PERC Reporting Code It is believed that honest mineral assets valuation can be performed after stage two of mineral project, soon after valuer has information about mineral resources/reserves and other that are welcomed in valuation process [10]. There were many attempts to harmonize worldwide mineral asset valuation with different results because in some places these valuations can be very country specific due to local law. Global regulations were mentioned in International Valuation Standards, Guidance Note 14, but soon after 2007 there were disputes including cost approach methods for mineral property valuation and for what reason other methods of cost approach were not allowed for mineral property valuation [3]. For many years mineral assets valuation were the subject for National Codes such as CIMVAL, SAMVAL and other currently in development. In 2008 Piotr Saługa and others wrote the POLVAL, the Polish code for mineral assets valuation based on world s best practice from codes mentioned above. POLVAL recommends using at least two of three approaches (comparable sales approach, cost approach, income approach) to estimate fair market value but it does not force any particular methods giving the valuer ability to choose for him/her [8]. Mineral asset valuation is often a team effort. This paper focuses on sale prices analysis with understanding that fully applied sales comparison approach requires much more specific data such as listed in Trevor R. Ellis article [2]: Agreement/transaction date, Buyer/acquirer s name, Effective date of appraisal, paid per unit, (Average) product price at agreement/transaction date, Longterm product price expected at agreement date, (Long-term) product price at effective date of appraisal, Minority interest, Project development status, Deposit grade, Deposit/project size, Property control and security of tenure, Capital investment requirement, Operating cost/net operating income, Production loss/recovery/metallurgical complexity, Product quality, Product market stability, Discovery and expansion potential, Location and access, Infrastructure, Permitting issues, Reclamation, Country risk, Project risk, Taxes, royalties, levies 2. RESEARCH AREA Wroclaw County (Polish: powiat wrocławski) as a one of 379 Counties is a unit of territorial administration and local government in Lower Silesian Voivodeship, southwestern Poland. The total area covered by county is 1116 square kilometres. The area is considered to be in 63 % rural. The rest are urban-rural areas.
3. DATA COLLECTION AND METHODS OF ANALYSIS The numbers presented in this research are the official transaction data, collected from the County Cadastral Department based on notarial acts and appraisal reports in 2003 2011. Another source of information are the latest data available from the real estate turnover in 2010 published by Central Statistical Office of Poland in 2011 and Polish land value report from Polish Federation of Valuers' Associations. In Poland there is a continuous discussion about what is and what is not a part of real estate according to the land depth or height, partly solved with zoning (allowed land use)[4]. There was a modification to Polish Mining Law in 9 June 2011 and since the 1 January 2012 it is said that all minerals excluding listed in Act such as: coal, cooper, underground mineral water etc. are considered to be a part of real estate, but there is a still need for having concession which is usually awarded if there is no conflict with development project / scheme of regional planning (also ore should be open pit mine but it is not officially written rule and gives doubts whether it is right to decide if extraction is a good way to decide about ownership). With this Law change, now there is an obligation to include ore/bed/deposits in these development projects / planning within 2 years from formal written discovery point of ore to increase investment efficiency. Sand and gravel pits are not listed minerals so they are a part of real estate and have influence on its value. The research area has nearly full cover by schemes of regional planning and documentation of land registration. Data was extracted from County Cadastral Department and divided into four groups (free market transactions, ownership): 1) transactions of the same mineral properties in 2003 2011 (as letter K in documentation of land registration. This letter due to Polish Zoning Law is given only to specific land use as operating mines), 2) transactions of the mineral properties in 2003-2011, a) as letter K, b) mineral properties not marked as K land use but mentioned in zoning as future mining fields, 3) transactions of the agricultural lands nearby mineral properties for comparisons, 4) transactions of vacant lots prices for further residential use for comparisons. The next step was to update the transaction prices (from the 2003 2011 period) to the valuation date which is 1 may 2012 using linear regression model with one variable [9]: where: - updated unit price of i th estate, - unit transaction price of i th estate, (1)
- date of transaction of i th estate, - valuation date, - function estimated parameter in time, - function estimated parameter in valuation date. Extreme transaction prices were rejected using 2 standard deviation for mineral properties, agricultural and residential lands. 3 standard deviation was used only once for mineral properties to demonstrate the difference between 2 and 3 SD. After rejecting extreme transactions, average price per square meter was calculated from updated unit prices from the 2003 2011 period for each of 3 data sets: 2), 3) and 4). Table 1 include official transaction prices per square meter from the real estate turnover in 2010 published by Central Statistical Office of Poland in 2011. Compared to the vacant lots prices for further residential use in Wroclaw County [5] demonstrate the difference in prices between Wroclaw County and its Voivodship. The average price for vacant lots for further residential use in Wroclaw County in 2010 was 131 zl/m 2 (median 115 zl/m 2, volatility, based on 542 transactions). Specification: a total, b urban areas, c rural areas Tab. 1 Average measures for purchase/sale transactions of residential and agricultural land by Voivodships in 2010 [6] Average area sold in single transaction in m 2 Average value of single transaction in thous. zl Average transaction price in zl/m 2 residential agricultural residential agricultural residential agricultural a 1870,1 16268,9 93,0 63,7 49,74 3,92 Poland b 1564,9 4136,3 109,4 100,6 69,91 24,33 c 2054,3 18178,4 83,1 57,9 40,45 3,19 a 3043,2 17667,2 241,8 84,5 79,44 4,78 Lower Silesia b 2920,1 9717,4 274,1 118,6 93,87 12,20 c 3488,2 19181,4 124,8 78,0 35,77 4,06 4. RESULTS The data collected from County Cadastral Department was divided into four groups. Transactions of the same mineral properties are listed in separate table, other results (with sample figure) are shown below. Tab. 2. Transaction prices analysis of collected data from Wroclaw County 2003-2011 Transactions of the 56 transactions, mineral properties "K" land use and mentioned in zoning as a future mining fields, 3 SD function estimated parameter in time
, zl/m² Transactions of the mineral properties "K" land use and mentioned in zoning as a future mining fields, 2 SD function estimated parameter in time 50 transactions, Transactions of the residential lands, 2 SD function estimated parameter in time 34 transactions, Transactions of agricultural lands, 2 SD function estimated parameter in time 165 transactions, 80,00 60,00 40,00 20,00 0,00 0 5 10 15 t 20 25 30 35 Fig. 1. Trend - transactions of the mineral properties in 2003 2011 "K" land use and mentioned in zoning as a future mining fields, 3 SD (figure given as a sample result) Tab. 3. Transactions of the same mineral properties in 2003-2011 transaction pairs Area transaction dates transaction prices [zl] of the same [m 2 ] (previous / last) (previous / last) mineral property price [zl/m2] (previous / last) price increase [%] 1 7300 2003-05-13 / 2003-12-17 3914,00 / 10100,00 0,54 /1,38 156 2 1400 2009-10-29 / 2010-12-01 495000,00 / 751392,00 353,57 /536,71 52 3 12000 2006-03-14 / 2009-02-16 18000,00 / 1103689,60 1,50 / 91,97 6031 4 4200 2006-09-01 / 2008-11-14 16800,00 / 22000,00 4,00 / 5,24 31 5 7900 2007-05-24 / 2007-07-09 39500,00 / 39500,00 5,00 / 5,00 0 6 39900 2008-02-01 / 2009-02-16 531950,00 / 1103689,60 13,33 / 27,66 108 7 48500 2006-10-17 / 2009-02-16 250000,00 / 1103689,60 5,15 / 22,76 342 8 22400 2006-12-07 / 2009-02-16 112000,00 / 1103689,60 5,00 / 49,27 885 9 24200 2006-12-07 / 2009-02-16 220000,00 / 1103689,60 9,09 / 45,61 402 10 55100 2006-12-07 / 2009-02-16 408035,00 / 1103689,60 7,41 / 20,03 170 5. CONCLUSIONS The analysed data proved the unique status of mineral properties (sand and gravel) compared to the agricultural and residential lands. To calculate updated average price, extreme transaction prices were rejected. But it is important to notice that in mineral asset valuation in comparison sales approach there might be a need to compare valuated
mineral property with different mineral properties not necessarily similar to valuated one in real estate valuation sense because of small transaction database and the fact that each mineral deposit is unique [2]. A low value of coefficient of determination may be explained by a still changing and not as developed as in other countries real estate market (rural area located next to the Wroclaw city). Polish real estate market is free from 1990. As a final result of this paper, estimated value of sand and gravel mineral rights using the transaction prices analysis in Wroclaw County is given by a price 20,26zl/m 2 for 2 SD and 31,52zl/m 2 for 3 SD whereas residential lands are nearly 3 times more expensive (87,38 zl/m2). Similar result with the price difference between mineral properties 31,52zl/m 2 and agricultural lands 10,83zl/m 2. REFERENCES [1] CARTWRIGHT M., An Overview of Mineral Property Appraising, 1994, 1 16 [2] ELLIS T. R., Sales Comparison Valuation of Development and Operating Stage Mineral Properties, Mining Engineering, Vol. 63, No. 4, 2011, 89 104. [3] ELLIS, T. R., A Review of the Many Cost Approach Methods for Minerals Valuation, presented at SME/CMA/AIMA 2011 Annual Meeting, Denver, CO, 28.02 02.03 2011, SME Paper 151 156 [4] KALUS S., Legal aspects of determining vertical real estate borders, XX Polish Valuers Conference, Katowice, 2011, 35 44. [5] KRZEMPEK J., RĄCKA I., Polish land value report, Warsaw, Polish Federation of Valuers' Associations, 2011, 6. [6] Real Estate Turnover In 2010, Statistical Information and Elaborations, Warsaw, 2011, 162 164. [7] SAŁUGA P., On the way to mineral asset valuation standards in Poland, Scientific Research Of The Institute Of Mining Engineering Wroclaw University of Technology vol. 121, Wroclaw, 2008,143 151. [8] SAŁUGA P., POLVAL Polish code for mineral assets valuation, edition 2008, Krakow, 2008, 1 39. [9] SAWIŁOW E., The opinion of the comparable sales approach valuation algorithms, Journal Of The Polish Real Estate Scientific Society vol. 19 no. 3, Olsztyn, 2011, 20 32. [10] UBERMAN R., Uberman R., The basics of mineral asset valuation theory and practice, IGSMiE PAN Kraków, 2008, 19. STRESZCZENIE W polskim kodeksie wyceny złóż POLVAL uznaje się, że korzystne jest stosowanie co najmniej dwóch podejść do wyceny danego złoża, chyba że jest to niemożliwe. W takim przypadku powinno to zostać uwzględnione w raporcie z wyceny. Stosowanie podejścia porównawczego wymaga bardzo dobrej znajomości warunków transakcji i samego przedmiotu transakcji, aby zbudować odpowiedni model wyceny. W niniejszym artykule skupiono się na analizie cen transakcyjnych nieruchomości, w skład których wchodzą złoża kruszyw naturalnych piaskowo-żwirowych. Ceny transakcyjne nieruchomości ze złożami odniesiono do cen transakcyjnych nieruchomości rolnych i budownictwa jednorodzinnego właściwych dla badanego rynku, czyli powiatu wrocławskiego.