4.8.3. Valuation Approaches for Mineral Resources.Under federal law, the sales comparison approach is normally the most reliable approach to value for properties involving minerals.986

As a result, in federal acquisitions the appraiser cannot default to using an income approach or other valuation method that may be acceptable for typical industry purposes.987 Indeed, both federal courts and industry professionals have criticized valuations of mineral property for just compensation purposes that improperly disregard the sales comparison approach.988 An unsupported statement that comparable sales do not exist is insufficient.989 Moreover, in appraising property involving minerals, “[e]lements of sales of quite distant properties, even those with different mineral content, may be comparable in an economic or market sense when due allowance is made for variables.”990 Significant variables or elements for mineral properties may include location (relative to market demand, processing facilities, transportation options, etc.), certainty (e.g., proven or unproven deposits), mineral content or type, mineral quality, mineral quantity, and zoning or permitting status.991 The sales comparison approach and comparability generally are discussed in Section 4.4.2. 

Use of the sales comparison approach requires the appraiser to determine the appropriate unit of comparison (per acre, per square foot, etc.). The unit of comparison should generally reflect that used by market participants. Regardless of what unit of comparison is selected, however, “arriving at a valuation by multiplying an assumed quantity of mineral reserves by a unit price is almost universally disapproved by the courts.”992 

Under certain circumstances, it may be appropriate to apply the income capitalization approach to value mineral properties. As discussed in Section 4.4.4, the income approach involves capitalizing a property’s anticipated net income to derive an indication of its present market value. This approach cannot be used as a stand-alone approach to value if comparable sales are available.993 Even if comparable sales are lacking, however, federal courts have repeatedly held that the income approach can be used only with great caution for purposes of just compensation. As the Eighth Circuit warned: 

Great care must be taken, or such valuations can reach wonderland proportions. It is necessary to take into consideration manifold and varied factors, like future supply and demand, economic conditions, estimates of mineral recoverability, the value of currency, changes in the marketplace, and technological advances. Many of these factors are impossible to predict with reasonable accuracy.994 

Similarly, the Fourth Circuit observed, valuations of mineral property based on the income capitalization approach “almost always achieve chimerical magnitude, because, in the mythical business world of income capitalization, nothing ever goes wrong. There is always a demand; prices always go up; no competing material displaces the market.”995 As a result, the Fourth Circuit concluded, “to allow value to be proved in such a suspect manner, impeccably objective and convincing evidence is required.”996 Stated another way, “failure to anchor assumptions to information corroborated by demonstrable facts renders the computations mathematical exercises unrelated to reality.”997 

As discussed in Section 4.4.4, the income capitalization approach may include direct capitalization or yield capitalization techniques.998 When applicable to mineral properties, yield capitalization is generally the more appropriate of these two techniques, and typically involves a discounted cash-flow (DCF) analysis. 999 The income capitalization approach requires a distinction between income generated by the property itself (the royalty income in producing mining properties), which can be considered, and income generated by a business conducted on the property (i.e., a mining enterprise), which must be disregarded.1000 For this reason, the income capitalization approach is sometimes called the royalty income approach when applied to mineral properties. 

Every factor considered in an income capitalization approach must be properly supported.1001 In DCF analysis, one of the most critical factors is the selection of the discount rate, which should be derived from and supported by direct market data.1002 Because the market value measure of just compensation is intended “to duplicate marketplace calculations to the greatest possible extent[,]”1003 courts have rejected income capitalization without evidence that “rates are in fact fixed in the marketplace by a process which parallels [the expert’s] calculations.”1004