Stephens Valuation and Consultancy Pty Ltd


                         Extracting Wealth for your Business
News & Updates


05-11-2015 
"Liability limited by a scheme approved under Professional Standards Legislation."

Celebrating our New Trade Mark
2012 
www.quarryvaluations.com has now been registered as a Trade Mark. We thank all the people who look at the website and who have given it its high profile reputation as without YOU we would not have achieved this status. Keep looking.

 

See our latest article on Quarry Capitalisation Rates.

 

Celebrating 25 years in Real Estate

 

We now have over 250 fully analysed quarry sales and lease transactions throughout Australia and New Zealand. We hold details of over 50 lease transactions, so if you need a lease renewal, then give us a call.


Keep coming back for more updates shortly.


See www.quarrysalesaustralia.com for quarries for sale and lease.


We were No 1 for Quarry Valuations worldwide on Google and Yahoo and many other search engines from 2009 to 2011 and hope to keep it that way for 2012. Thanks for looking and making us the most popular quarry related site worldwide.


We also do Expert Witness valuations so give us a call to see if we can assist.

Archive
06-12-2011 
Rod Stephens has produced two thesis reports namely The definition of the word Minerals in relation to the UK Extractive Industry and The Valuation of Long Term Interests  A case study of the acquisition of WMCs Olympic Dam Mine by BHP Billiton (Distinction). These reports can be made available on request for selected parties only. Terms and Conditions apply.

This website is Copyright reserved. Our itellectual property is not to be copied or used for commercial purposes or any other purpose without our express permission in writing. The opinions and research carried out is the original work of Stephens Valuation and Consultancy Pty Ltd and are not to be quoted or used for any purpose without our written permission. Please have respect for these conditions.

Anyone entering any other section of this website does so on the above understanding and is subject to those conditions.


Archive

 

 

 

 

Stephens Valuation and Consultancy Pty Ltd

 

Roderick Stephens BSc (Hons) MC AAPI (CPV)

Components of Going Concern or Business Valuations of Quarries

Introduction

Most market sales transactions for quarries are made on a Going Concern or Business Value basis. This is generally based on the profits / future maintainable earnings / cash flow of the business capitalised over the life of the operation or some other relevant period. Some assets that do not contribute to profits may have to be valued separately and added to the Going Concern value. The Going Concern value includes tangible assets such as land, buildings, plant, machinery, equipment and the mineral reserves and resources, but also intangible assets such as the development approval and licensing and the goodwill of the business. Further an appreciation of any contingent assets or liabilities, often involving the restoration which may involve landfill or other development benefits, or require rehabilitation back to the original landform, which may involve a liability. It also needs to be noted that some going concern sales include debt either on real estate or plant machinery and equipment, and this needs to be factored into the acquisition price which predominantly only involves the equity of the business.
 
 
 
 

It is recognised that quarry transport vehicles are often an integral part of a quarry business, but for the purpose of considering the going concern value of a quarry business in isolation, then we make the assumption that either the transport business would be valued separately, or that quarry transport vehicles only involve outside haulage contractors, and which do not contribute to the profits / future maintainable earnings / cash flow of the business. Consequently any income, costs and profits associated with the quarry transport vehicles should be treated separately where or if possible. However in reality this clearly depends on the individual circumstances of every particular subject quarry, the distance to the market and the information available and each case is often dealt with on its own merits.

 

This paper is not intended to provide a definitive guide encompassing all circumstances of a going concern value but to provide some broad guidelines on some of the issues involved.

The Main Going Concern Value Components

Quarry Reserves and Resources

 

The quarry extraction area land and adjoining buffer lands are included within the quarry reserves and resources, as they do not have a value other than for the purpose of quarrying. The quarry reserves and resources are assessed based on the royalty value of the particular mineral multiplied by the expected future output to form a derived income, which is then capitalised by an appropriate capitalisation rate to reflect the risks of the operation to produce a value. This method establishes the real estate interest or asset value of the quarry reserves and resources component itself and is not the going concern or business value but part of it. It is not uncommon for quarry operators to argue that all the profits from a quarry business are derived from the “quarry reserves and resources” component in isolation and that all the other components should then be added to the derived value for this. However this much depends on whether the other components contribute to either the costs of the operation or the profits, and as stated earlier, each case needs to be looked at on its own merits.  

 

Operational and Buffer Lands

 

These lands involve the remaining buffer lands, not included within the quarry reserves and resources, the processing plant and stocking areas and the administration area. It needs to be appreciated that all quarry assets include buffer lands which often contain future reserves, but also act as a sterilized area where no development can take place during the quarrying operations. Quite often the buffer lands can have a development value following cessation of quarrying, but not always whilst the quarry is active.

 

Other Surplus Lands

 

There are instances where other lands are included within the land ownership of a quarry business, which do not contain economic minerals, and would need to be valued separately based on their existing or future zoning, which forms part of their value. Quite often these include agricultural lands which have to be valued separately. There are some quarries that are located within urban areas, that have a higher value as a developable site, than as a quarry, and it is often the highest and best use that dominates the value. This is a crucial component in that these lands may not contribute to the overall profits of the operation, but have an asset value, that could be realised or sold off, and may need to be factored and added into the going concern value as an additional asset value.

 

Buildings

 

Some quarry site buildings can consist of relocatable structures which would be removed following completion of the extraction. These items are often considered as Plant, Machinery and Equipment (PME), as they are not permanent structures and are often linked to the life of the quarry or are limited by conditions within the development approval. If buildings cannot be utilised following completion of extraction then they can have quite high obsolescence allowances, which should be claimed throughout the life of the quarry operation.

 

Intangible Assets

 
T hese include assets such as the development approval, licensing and any mining or surface rights attached to the quarry business. For certain quarry products there may be patents involved which would also be included within this category. Generally these would form part of the quarry reserves and resources component, as without the proper consents to extract, then the reserves and resources, would have a much reduced value. It can be difficult to identify individual values for these, but often for accounting purposes, especially for impairment testing the values for intangible assets may need to be isolated.
 
Restoration Liabilities
 
There are often several sets of circumstances involving restoration liabilities. The first involves an annual contribution to a restoration bond, which would be assessed as part of the operational costs, and any profit would reflect this. The second involves a capital payment often to the Local Council prior to extraction taking place. The third involves no restoration bond payable, but the likelihood of the operator having to pay for restoration costs following cessation of the quarry. Where a bond is not payable then the future restoration costs have to be calculated in todays terms and then capitalised to determine a future value, which is then valued to the Present Value, which would be deducted from the overall quarry value or from the quarry reserves and resources. There are also circumstances where old development approvals do not include any provision for restoration. It is not uncommon for restoration bonds to involve millions, and this can have a significant impact on the value of a business, particularly where reserves are coming to an end.

 

Fixed Plant, Machinery and Equipment
 
The fixed PME needs to be analysed for both capital values and operational costs. The values for PME can be very complicated to attribute as they could include debt, but also they could be leased, or mortgaged and ownership needs to be fully established. There are many instances where a fixed plant at a quarry, is not suitable for purpose, or has over or under capacity as it was designed at a previous time when market output was very different. The value of the fixed plant in situ and the value to a potential purchaser may be very different in terms of their expectations. Also due to the high cost of removal then the second hand sales value is often quite low. There needs to be a strong understanding about the relationship of the product to the processing cost and sale price and hence the optimal capacity. Where the PME involves under capacity, then the operational costs per tonne can rise to a level that can erode the margins for particular products. The point being is that no purchaser is going to pay for over capacity, and so if a plant is capable of producing in excess of the market demand, then a penalty would be applied via obsolescence allowances.

 

Also included within fixed PME are site improvement assets to include site fencing, the quarry road access, other site infrastructure, and services, although these too could also be included within other components such as the land or even reserves and resources.

 

Mobile Plant, Machinery and Equipment

 

Similar to the fixed PME, then mobile PME needs to be analysed for both capital values and operational costs. These assets include the operational machinery such as excavators, draglines, dump trucks, loading shovels, water bowsers and other heavy machinery such as mobile crushers, screens, conveyors, tromells as well as other moveable items such as water tanks, fuel tanks, generators, weighbridges (which can be classed as fixed), and other items. These items can generally be easily removed from the site, and sold and can have a wide variety of uses for other markets. It is important to assess any debts involved for these items which may need to be subtracted from the overall going concern value. Mobile plant has liquidity benefits and can be easily financed and consequently some operators can utilise more of these assets than are necessary for the required capacity of the quarry business, (toys for boys) and this over capitalisation is not always rewarded by additional profits, and can in most circumstances create additional unit costs which actually erode the profits. Therefore any surplus mobile PME assets should be sold where they are not contributing to capacity or the profits of the operation, as if retained can have little or no value, in terms of the overall going concern value.

 

Management and Administration

 

Normally management and administration costs would be included within the operational costs of the overall business, however there are circumstances where individual quarries are managed from a centralised office and costs may need to be applied or apportioned for this. Also owner operator quarries may need to have a management cost factored in, so that any purchaser can determine a rate of return for their investment. Again it is not uncommon for an owner operator to provide their services for a nominal sum, which creates a higher profit, but this would be taken into account by any potential purchaser.
 
Debt
 
This aspect is always difficult to determine. The Going Concern value methodologies can strip out any interest on capital, so that debt should not be a factor. However where a mortgage occurs which is registered on the title, then a purchaser may wish to take over that mortgage, subject to approval, and pay a reduced sum for the quarry business. Other issues in relation to debt may include finance, leases or debts involved with the PME. These can be more complicated, but any purchaser would wish to know what they are buying and whether they involve liabilities which need to be accounted for. There may also be Directors or other internal loans, bad debts involved with the business, but also debtors and creditors whose assets and liabilities may also need to be assessed.
 
Goodwill
 
There are many arguments over the existence of goodwill and what it involves. One such analogy is that goodwill involves the difference in value between the asset value and the going concern value, as long as this is a positive relationship. Other views indicate that it involves future earnings of the business, the business name and reputation, and effectively the purchase of a well established income.  There are many grey areas involved with goodwill and some operators would suggest that the future values of the quarry reserves and resources should be included within the goodwill of the business.  

 

Stock at Value

 
There are always stockpiles of processed materials at quarries and it may be applicable to add these as a separate item to the going concern value. Where large surplus stockpiles of a particular product are involved, then if the current operator cannot sell those products, as there may be a limited market, then a purchaser would be in the same situation and perhaps offer very little for those stocks. Surplus stocks may also be sterilising future extraction areas which could involve a liability.

 

Summary

 

The above components can have both a positive (asset) value, or negative (liability) value that all need to be considered as part of an overall quarry business. We set out a summary of these below.

 

Component

Asset / Liability

Fixed Plant, Machinery & Equipment

Asset / Liability

Goodwill

Asset

Management & Administration

Liability

Mobile Plant, Machinery & Equipment

Asset / Liability

Intangible Assets - Mining Rights etc

Asset

Quarry Reserves and Resources

Asset

Operational and Buffer Lands

Asset

Other surplus Lands

Asset

Buildings

Asset

Restoration Liabilities

Liability

Debt

Liability

Stock at Value

Asset / Liability

 
The Going Concern Valuation
 

There are a number of valuation methodologies used by a variety of practitioners to perform going concern valuations. However suffice to say the principles should all be the same in that the profits / future maintainable earnings / cash flows, whether they be derived as an EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation), EBIT (Earnings Before Interest and Taxation) are multiplied by a multiplier or divided by a yield, or incorporated within a DCF to produce a capital value for the business. This calculation much depends on where the market evidence is derived for the particular type of asset class, and adjusted to the subject business, and the revenue and expenditure may have to be adjusted to fit the circumstances for the subject quarry business.

 

The capitalisation rate adopted is also important and again this depends of the available market evidence of similar comparable sales suitably adjusted to the subject quarry business. In the absence of actual local recent sales evidence, then consideration can also be given to the Capital Asset Pricing Model (CAPM) and Weighted Average Cost of Capital (WACC), Arbitrage Pricing Theory (APT), Summation Method, Price to Earning Ratios, Quarry industry multipliers, and even consideration of other traditional property investment yields and risk assessed to the subject business.

 
( Profits / FME / Cash Flow)   / Capitalisation Rate = Going Concern Value
 
 
Where Asset Valuations may be preferred
 

Purchasers are often interested in the future profits of a business, and sometimes less interested in the value of the assets. However the profits should be sufficient to support the asset values, and ideally both calculations should be carried out in order to determine the return on the assets. Asset based valuations are appropriate when companies are not profitable, not actively trading, or parts of the companies assets which are surplus to requirements and can be liquidated or where the future earnings when capitalised are insufficient to support the net tangible asset value. An assessment of the asset value provides a strong indication of the base value of an operating business utilising those assets, and based on application of appropriate similar industry returns, provide a strong indication whether there is a sufficient basis for making an investment or purchase of those assets.

 

Where less than 3 years of trading accounts are available, then the International Valuation Standards Committee (IVSC) recommends that asset based valuations are to be carried out instead.  

Conclusion

The assessment of going concern or business values of quarries involves many components. Ideally each quarry business would be dealt with on its own merits, as it would be rare for two quarries to share the same characteristics.

 

The opinions expressed in the above paper are the personal views of the author gained from experience and research within the extractive industries. No responsibilities can be held for any person or company who relies on information within this paper or who attempts to take any extracts from this paper. This paper is not to be used or quoted in part or as a whole for commercial use without the express written consent of the author.
 
 

Stephens Valuation and Consultancy Pty Ltd

 

By Roderick Stephens BSc (Hons) MC AAPI (CPV)

Certified Practising Valuer

Registered Valuer QLD & WA

PO Box 404

Emu Plains

NSW 2750

Tel No:  02 *4704 *8483         

E mail: rodstephens@optusnet.com.au

Mobile 0423 *383 *343

Website: www.quarryvaluations.com which is a Registered Trade Mark
quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases
 
quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases
 
quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases   
 
 
quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone leases