CMM Mineral Valuation & Appraisal 2 — Questions and Answers
Question 1: Which discount rate component accounts for the probability that reserves may not be produced as projected?
- Inflation premium
- Risk premium (Correct answer)
- Liquidity premium
- Tax adjustment factor
Correct answer: Risk premium
The risk premium within a discount rate compensates for uncertainty that projected reserves may not be fully recovered as estimated.
Question 2: When appraising mineral rights using the comparable sales approach, which factor most critically affects comparability?
- Surface acreage of comparable parcels
- Geologic similarity and reserve quality (Correct answer)
- Date of the most recent title search
- Number of producing wells on surface
Correct 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.
Question 3: 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?
- Straight-line decline
- Exponential decline (Correct answer)
- Hyperbolic decline
- Harmonic decline
Correct answer: Exponential decline
A constant percentage decline rate of 15% per year is the defining characteristic of exponential (constant percentage) decline analysis.
Question 4: Under the income approach, which calculation correctly determines net revenue interest (NRI) from a 1/8 royalty lease?
- NRI = 1 - 1/8 = 7/8 (Correct answer)
- NRI = 1/8 = 0.125
- NRI = 1 - overriding royalty only
- NRI = working interest × 1/8
Correct 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.
Question 5: Which economic indicator is most commonly used to determine whether a marginal well should be included in a mineral appraisal?
- Payout period
- Rate of return threshold
- Economic limit (abandonment rate) (Correct answer)
- Payback multiple
Correct 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.
Question 6: A property generates $400,000 annual net operating income and comparable properties trade at a 10% capitalization rate. What is the indicated value?
- $40,000
- $4,000,000 (Correct answer)
- $400,000
- $3,600,000
Correct answer: $4,000,000
Value = NOI ÷ Cap Rate = $400,000 ÷ 0.10 = $4,000,000 using direct capitalization.
Question 7: Which reserve classification requires a minimum 90% probability of recovery under existing economic and operating conditions?
- Probable reserves (2P)
- Possible reserves (3P)
- Proved developed producing (PDP) (Correct answer)
- Proved undeveloped (PUD)
Correct answer: Proved developed producing (PDP)
Proved developed producing reserves carry a 90% or greater confidence level and are currently producing under existing conditions.
CMM Mineral Valuation & Appraisal 2
Which discount rate component accounts for the probability that reserves may not be produced as projected?