CMM Mineral Valuation & Appraisal 2

Question 1

Which discount rate component accounts for the probability that reserves may not be produced as projected?

Accepted Answer

Risk premium

Answer

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?

Accepted Answer

Geologic similarity and reserve quality

Answer

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?

Accepted Answer

Exponential decline

Answer

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?

Accepted Answer

NRI = 1 - 1/8 = 7/8

Answer

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?

Accepted Answer

Economic limit (abandonment rate)

Answer

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.

(CMM) Certified Mineral Manager Practice Test

(CMM) Certified Mineral Manager Practice Test

CMM Mineral Valuation & Appraisal 2