The textbook definition of a 'mineral right' is a right to extract a mineral from the earth or to receive payment (generally in the form of a royalty) for the extraction of minerals.
The word “mineral” has different meanings depending on the context of the project. For instance, mineral can be any one or all of the following:
· Fossil Fuels - Oil, natural gas, and coal
· Metals and Metal-Bearing Ores - Gold, copper, and iron
· Non-metallic minerals and mineable rock products - Limestone, gypsum, building stones and salt
One of the most important factors in understanding Mineral Rights is to know who presently owns the rights to the land in which the mineral(s) may lie.
A mineral owner may develop his or her own mineral deposit. However, this is seldom feasible due to the high cost of exploration and development. More commonly, a mineral owner leases his or her mineral rights to a mineral development company. By executing a lease, the mineral owner (the lessor) grants the person or company who receives the lease (the lessee) the right to develop and produce minerals in the leased parcel.
A lease is a private contract between the two parties and can take a variety of forms. However, leases usually have certain common elements. The mineral owner is paid an amount of money (called a bonus) when the lease is signed. The lease generally provides for payment of a royalty to the mineral owner on any minerals produced from the parcel, and the manner in which royalty payments are to be made. It also generally contains a specific term or duration.
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A mineral right is part of property rights and may be sold, transferred, or leased in a similar manner as other property rights. An individual may own all of the mineral rights for a parcel or any fraction of the rights. Said person may also own rights to only one kind of mineral, such as oil and gas, or to only one formation or depth interval.
The ownership of the mineral rights in a parcel can usually be determined by examining the deed abstract for the property.
THE VALUE OF MINERAL RIGHTS
When determining the proper approach to put a value to mineral rights, one should first discern as to whether or not there is any active mining or production development occurring on the property.
In cases where there is no active development on the property, the value of the mineral right can be estimated to be the present value of the lease payments. It is important to determine whether or not there is active development on the land surrounding the subject property since the future potential of development could indicate a value higher than simply the present value of the lease payments.
On the other hand, should there be active development on the property, the value of mineral rights are generally valued using the present value of the future cash flow approach. When using the present value of future cash flow approach, it is important to consider the current and future production of the property and the current and forecasted price of the mineral being extracted.
Given that the value of mineral rights can be a complicated process, it’s important to get the advice of an experienced professional valuator which will minimize the possible consequences of using the wrong value.