Mineral Valuation & Appraisal Flashcards
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Read the first 7 Mineral Valuation & Appraisal flashcards as text
Which discount rate component accounts for the probability that reserves may not be produced as projected?
Answer: Risk premium
The risk premium within a discount rate compensates for uncertainty that projected reserves may not be fully recovered as estimated.
When appraising mineral rights using the comparable sales approach, which factor most critically affects comparability?
Answer: Geologic similarity and reserve quality
Geologic similarity and reserve quality are the most critical factors because mineral value is fundamentally tied to the nature and quantity of recoverable resources.
A mineral property has proven reserves of 500,000 barrels and a projected decline rate of 15% per year. What method best models remaining production life?
Answer: Exponential decline
A constant percentage decline rate of 15% per year is the defining characteristic of exponential (constant percentage) decline analysis.
Under the income approach, which calculation correctly determines net revenue interest (NRI) from a 1/8 royalty lease?
Answer: NRI = 1 - 1/8 = 7/8
NRI equals the working interest share minus all royalties; with a standard 1/8 royalty and no overrides, NRI = 1 - 0.125 = 0.875.
Which economic indicator is most commonly used to determine whether a marginal well should be included in a mineral appraisal?
Answer: Economic limit (abandonment rate)
The economic limit is the minimum production rate at which revenues equal operating costs; wells producing below this rate have negative value and are excluded.
A property generates $400,000 annual net operating income and comparable properties trade at a 10% capitalization rate. What is the indicated value?
Answer: $4,000,000
Value = NOI ÷ Cap Rate = $400,000 ÷ 0.10 = $4,000,000 using direct capitalization.
Which reserve classification requires a minimum 90% probability of recovery under existing economic and operating conditions?
Answer: Proved developed producing (PDP)
Proved developed producing reserves carry a 90% or greater confidence level and are currently producing under existing conditions.
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