ment, it is reasonable to assume that the signal could be made to reach miners in remote parts of the mine at great distance from the transmitting antenna and serve to alert them to the existence of a mine fire.

References FMC Corp., 1975, Mine shaft fire and smoke prorection system, Vol. 1. Design and Demonstration, US Bureau of Mines open file report 24077, July, 407 pp.

Farstad, A. J., andKehraman, R.F., 1979. Electromagneticlocationsystems formetahonmetal mines(ContractJ01661M), WestinghouseElectric) USBureauol Minesopenfilereport. 11 7 pp.

Jordan. E.C., and Balmain, K.G., 1968. Electromagneric Waves and Radiating Systems. Prentice-Hall. EE series, Second Edition, 753 pp

Muldoon, T. L., Lewias, T.. and Gore, T.E., 1981, Upgradestench fire warningsysrem, system development proforype tesfs. (contract H0292002, Foster-Miller Assoc., Inc.). US Bureau of Mines open file report 136-81. 142 pp.; NTlS PB 82-122128.

Ontario Provincial Government, 1986, Improving groundcontrol andmine rescue: The report of the provincial inquiry into ground control and emergency preparedness in Ontario mnes, ISBNO-7729.1064-2, 108 pp.

Pomroy, W. H., and Muldoon. T.L.. 1985, Improvw' stench fire warning for underground mines, US Bureau of Mines IC 9016,33 pp.

Sacks, H. K..1977. Trapped miner location and communication system, in UndergroundMine Communicarion (in four parts), part 4. Section-to-place communication. US Bureau of Mines IC 8745, pp. 31 -43.

Stolarczyk, L. G., 1984, A medium frequency wireless communication system for under- groundm~nes, (contract H0308004,A.R.F. Products Inc.), US BureauotMinesopen filerepoe 115-85. 221 pp.; NTlS PB 86-134103.

Limestone mining: Reserves and valuation B.C. Lewis and R.P. Moran

Abstract - The objective of this article is to discuss the fundamentals for determining the value of a limestone reserve or operation. The general step-by-step procedure, while prudent, is subject to the various site-specific issues that influence the valuation calculation. The most common meth- ods for determining fair market value of mining lands are: comparable sales, operational analysis, and royalty analysis. An overview of typical eastern limestone mines (both quarries and underground) is presented. Specifically, properties in West Virginia and Alabama are reviewed and the sample methodologies and valuation calculations are presented.

Introduction

"Too often we enjoy the comfort of opinion without the discomfort of thought." John F. Kennedy.

When making this statement, John F. Kennedy was proba- bly not thinking about the valuation of limestone reserves. However, it is certainly applicable. The objective of this article is to demonstrate how the discomfort of thought (the analytical and methodical process performed by a reputable professional) builds the foundation for an opinion that pro- vides assurance as to the value of a property. In its final form, a valuation is nothing more than an opinion. The credence of that opinion is directly proportional to the knowledge of the appraiser and the efforts and judgment extended in develop- ing said opinion. Presented herein are the methodologies for formulating a defensible opinion.

Before detailing the valuation process, an overview of the limestone industry is presented along with some historical parameters relating to the industry. Secondly, the most widely used valuation methodologies and a brief discussion of each are presented. Two case studies are then presented that review actual valuation studies. The article concludes with how the

valuation process should be published in a report format that is defensible from a legal standpoint, bankable from a finan- cial standpoint, and decipherable from a layman's standpoint.

Limestone industry

Overview

Limestone is the most common carbonate rock and occurs extensively throughout the United States. Limestone and its derivative, lime, are used in a wide variety of manufacturing, construction, chemical, and agricultural industries. Most uses of limestone result from its common occurrence, physical properties, or chemical composition. The ability of lime and limestone to neutralize acidic wastes has recently made it desirable in a broad range of environmental applications .

The terms limestone, dolomite, and lime are often misused. Limestone and dolomite are the principal carbonate rocks used by industry. Limestone is a broad term encompassing various forms, types, and purities. In general, limestone is a sedimentary rock composed primarily of the mineral calcite (CaCO,) while dolomite and dolomitic limestones contain varying amounts of the double carbonate of calcium and magnesium (CaCO, MgCO,). High calcium limestones gen- erally are referred to as those containing more than 95% calcium carbonate.

Lime (quicklime) never occurs naturally. It is a manufac- tured product made from limestone by calcination in a kiln. The limestone (CaCO,) is heated to about 1093°C (2000°F), driving off carbon dioxide (CO,), leaving the highly reactive quicklime (CaO). Similarly, dolomite quicklime may be produced from dolomite. Addition of water to quicklime causes rapid hydration to calcium hydroxide (Ca(OH),), or hydrated lime.

Crushed limestone and dolomite sold or used by producers

B.C. Lewis and R.P. Moran, members SME, are assistant to the 1 Table 1 president and vice president, respectively, with John T. Boyd CO., Pittsburgh, PA. SME preprint 89-1 18. SME-AIME Annual Meeting, Quantlly (Mllllons) Value

Metrlc Vhbtrlc Las Vegas, NV., February-March 1989. Manuscript November 1988. Discussion of this paper must be submitted, in duplicate, prior to April 763.5 3.457 4.53

1985 716.4 650.3 2,752 4.23 30, 1990.

112 JANUARY 1990 MINING ENGINEERING

in the United States is summarized in Table 1 (Tepordei, 1987).

Markets

Construction related uses are the major markets for lime- stone and dolomite both on tonnage and value bases. The various markets andconsumption for 1987 are shown in Table 2 (Tepordei, 1987).

1 Table 2 1

Use Constructio+Aggregate. Road base, Riprap, etc. Cement Manufacture Agricultural Stone Lime manufacture' Flux Stone' Sulfur Oxide Removal' Other (includes unspecified uses)

'predominantly high-calcium stone

Mllllons per yaw Metrlc

Tons Tons

percent of Total

Production

50.6 10.4 2.7 1.6 0.7

100.0

The commercial viability of a particular deposit depends largely on its location relative to market. On average, there is very little price differentiation (fob mine) among market segments. Due to the relatively low fob mine price of lime- stone, it is not unusual for transportation to be the largest component in' the delivered cost. Because of this location dependency, limestone quarries (and, therefore, economic deposits) tend to be found wherever there are markets. In general, the industries are characterized by a large number of producers that are competitive among themselves and with other industries that produce substitute materials.

The highestprices are commanded by stone used in chemi- cal and specialty processes where purity of composition, color or consistency is required. This stone averages $9.92 to $14.33 It ($9 to$13 per st) but rangesas high as$33/t ($30per st). Most of the remaining stone averages $4.08 to $6.06/t ($3.70 to $5.50 per st), including high calcium and agricul- tural limestone. Typical price ranges in various market seg- ments are illustrated in Table 3 (Tepordei, 1987).

Table 3

Cumnt Prlce Range FOB Mlne Use Smon WMetrlc Ton

Road Base Stone 3.70 - 4.60 4.08 - 5.07 Agricultural Limestone (pulverized) 4.50 - 7.50 4.96 - 8.27 Concrete Aggregate 4.60 - 5.10 5.07 - 5.62 Stone for Lime Manufacture 4.50 - 5.50 4.96 - 6.06 Flux Stone 4.25 - 5.25 4.68 - 5.79 Coal Mine Dusting 7.00 -11.00 7.72 -12.13 Specially ProcessesWhiting 5.00 -30.00 5.51 -33.06

Limestone is a low cost commodity with many available substitutes in the largest demand areas. Supply and demand for limestone are generally in balance and there is commonly little inventory kept either by the producer or consumer. In most cases, limestone is a raw material or process component used in the manufacture of a more valuable end product (steel, cement, paper) or the general construction industry. For these reasons, demand for limestone is closely related to the market condition of the basic industries being served. Therefore, it is relatively inelastic in relation to price changes for limestone itself.

Valuation methodologies

The purpose of an appraisal is to determine the property's fair market value, defined as:

"The amount of cash, or on terms reasonably equivalent to cash, for which, in all probability, the property would be sold by a knowledgeable owner willing, but not obligated, to sell to a knowledgeable purchaser who desires, but is not obli- gated, to buy."

For the protection of buyers and sellers, valuations should be prepared by experienced independent professionals. Valu- ations are performed for specific time periods. Both historic and future market and operating conditions must be analyzed. The most common methods for determining fair market value of mining lands are comparable sales, operational analysis, and royalty analysis.

Comparable sales

The comparable sales method involves a comparison of resources under study with similar properties that have re- cently been sold. Recent sales are used as case studies to avoid the necessity of evaluating past market conditions and to eliminate the need to escalate or adjust the sales price due to changing market conditions. If possible, the comparable sales case studies should include the same formation, have similar geologic and quality characteristics, and be in the same general locality as the property being valued. This simplifies the analysis and allows a more direct comparison.

When such information is available, the comparable sales approach is the preferred method of appraisal, as the market for reserves is accurately reflected. Unfortunately, reserve property transactions are inherently complicated. Payments are seldom made in immediate cash terms, provisions of the sales are usually not publicized and, compared to other ex- changes of real property, relatively few transactions occur in a particular geographic area during any time period.

If comparable sales are not available, data from other sales can still be valuable to the appraiser. A subjective review provides valuable insight into current reserve markets, num- ber and nature of potential buyers and sellers, and level of market activity. This information is important in considering how a potential buyer would evaluate a property.

Operational analysis

Operational analysis is a valuation method based on the existing or planned mine facilities, production, and net in- come being generated by the mining enterprise. Such an analysis considers:

status of the mine and plant; remaining reserves; cost and sales escalation; and projected mine plans and alternatives.

The operational analysis method uses aprojection of future cash flow to determine the net present value of the operation. Net annual cash flow (i.e., operating after-tax cash flow, less annual capital investment) is estimated based on historical (or forecasted) sales and mining costs, applied to the future mining plan. Capital investment is projected for the assigned mine life based on condition of existing assets (plant and equipment), normal replacement requirements, and future production needs. The annual schedule of net cash flow is discounted by an appropriate rate to yield the present value amount a willing buyer could pay for the mining operation. Net reserve value is derived by deducting the appraised value of non-mineral assets (plant, equipment, surface land, over- riding value of existing mineral sales agreements, etc.) from the total value of the mining operation.

MINING ENGINEERING JANUARY 1990 113

Royalty analysis

The royalty method of valuation is based on the premise that a willing buyer purchases the lands under study then leases them to a mining enterprise, which develops the re- serves. This method involves assigning a realistic royalty rate to the reserves within the property being valued.

The royalty rate is assigned using current industry prac- tices and considering such factors as prevailing market condi- tions, requirements for future profitable mine development, and anticipated mineability and quality of the reserve. Annual production rates are assigned to the reserve area and are projected throughout the life of the reserves. Royalty revenues are estimated by applying the assigned royalty rates to the projected production schedule. Present value is then deter- mined by using established valuation practices and discount- ing the annual royalty monies at a fair and reasonable rate as associated with a lessor's risk in the planned mining operation.

Financial parameters

In choosing a discount rate, constant dollars versus current dollars and risk are two factors to consider.

Constant dollars versus current dollars: It is our com- pany policy to express all future years' cash flows (to which the discount rates are being applied in the analysis) in base year dollars before the discount rate is applied. Therefore, if an investment analysis is made between alternative projects, it is critical that both cash flow projections and associatedrisk rates are evaluated on the same terms (constant or current1 inflated dollar values).

For example, a cash flow expressed in current (inflated) dollar values would need to be initially discounted by a de- inflationary factor (now estimated at 5 to 5.5% per year for short-term financial forecasts) to develop the cashflow in equivalent constant dollar terms. A real (constant dollar) discount rate of 10% per year is equivalent to applying an annual rate of 15% to a current (inflated) dollar discounted cash flow analvsis (at 5% per annum inflation rate). . ,

Risk: In selecting a discount rate, the risk associated with the cash flows is considered. A higher degree of risk is attributed to the pro-iected cash flows from any mining project than would be assigned to the cash flows from an investment u

in treasury bills, long-term bonds, or a diversified portfolio of common stocks. As risk increases, a higher discount rate is required. With a given cash flow, discount rates and net

values ( ~ f i ) are inversely proportional (the higher the risk, the lower the NPV). Judgment of the appraiser is critical in assessing the proper risk rate to assign to mineral valuation. Factors such as market price sensitivity, reliability of reserve quantity and quality, established mining operation or new prospect development, uniformity in mining condi- tions, etc., must be carefully evaluated. In general, the risk assigned to aroyalty incomeanalysis is about 25 to 50% below that used in a comparable operational income discounted cash flow. This is due to the passive interest or limited financial risk incurred by a prospective lessor vs. a mine operator.

In July 1985, the Bureau of Land Management issued A Guide to Federal Coal Property Appraisal. Page 48 of the guide discusses discount rates used by the Department of the - Interior:

Discount rates: The Department of the Interior currently uses a 10% real post tax rate of return as the discount rate for mineral lease evaluation. The 10% post tax rate is derived from a 10% to 11% pretax real rate of return suggested by studies of the marginal rate of return on private capital, with canceling 2 or 3 percentile adjustments for taxes (-) and coal

development risk (+). The 10% rate is a return on total assets assuming some average debt-equity mix.

Case study - West Virginia

A 109-hm2 (270-acre) tract was subject to a series of long- term mining lease and sublease agreements dating back to the early 1900s. The lease provided for production royalty payments of 4.4 centslt (4 cents per st) of limestone removed and a minimum annual royalty of $2500.

Initially, a high-purity dolomite was quanied from the property for use as metallurgical flux. In the early 1970s, a sublease agreement was entered into with a new operator and the operation began quarrying stone for construction uses.

Annual production from the quarry for the last six years of operation fluctuated between 450 ktla and 1 Mtla (0.5 and 1.1 million stpy).

The operation had been idle for several years. The sublease provided for royalties to the sublessor of a minimum $20,000 per year, or 1 1 centslt (10 cents per st) with provisions for escalation. The primary lease was renewable for successive five-year periods indefinitely.

Specific geologic data from core drilling on the property was unavailable. However, regional information describes the formation to be about 305 m (1000 ft) thick. The unit is a light blue-gray to white, fine grained, medium bedded dolo- mite, weathering io dark brown. It has historically provided low silica stone whose composition approaches a theoreti- cally pure dolomite. A review of the property's geology and topographic features supported the ability to continue quarry operations.

Because adequate exploration data was not available for the quarry and due to the abundance of in situ limestone, no systematic estimate of the controlled or available reserves could be made.

In such situations involving a vast amount of available limestone, the US Bureau of Mines has in the past assessed the reserves of commercial stone by conservatively assuming the producer owns or controls reserves sufficient to last 25 years or more.

Similarly, using the average annual production of the last six years of operation as a benchmark, about 635 kt (700,000 st), an active reserve of about 15.9 Mt (17.5 million st) was assigned to this quarry. Note that in valuation analysis, the influenceof monies beyond 25 years in the future has minimal effect on present value calculations.

The valuation of this property was determined as follows: The operational analysis method could not be applied due to the absence of an ongoing operation and the lack of historical cost data. The comparable sales method, shown in Table 4, unveiled the recorded sales of limestone properties (surface and mineral) within the same county as the subject tract.

Sale No. 4 in Table 4 represented the most direct compari- son to the tract in question because of its proximity and geologic similarity.

Table 4

price No. Date Acreage hm' t(W) YAcre Yhm'

1 6/79 407.54 164.93 400 982 2.425 2 8/83 407.54 164.93 400 982 2,425 3 5/84 286.82 116.07 401 1,399 3.455 4 8/84 293.83 118.91 875 2.978 7.359

Royalty method: The assigned royalty rate is based on current k k e t practices concerning royalty and considering such factors as prevailing market conditions, modern require-

1 14 JANUARY I990 MINING ENGINEERING

ments for future profitable mine development, and anticipated minability and quality for the particular reserve under study.

Typical royalty rates for crushed stone range from 3% to 5% of selling price, or 1 1 to 28 centslt (10 to 25 cents per st).

The quarry property was encumbered by an existing, infinitely renewable lease signed long ago. The lease provided for a minimum annual royalty of $2500 and a production royalty of 4.4 centslt (4 cents per st).

The lease adversely affected the value of the mineral property by preventing realization of current royalty rates. The authors' analysis allows consideration of the lease by providing two values for the property, both using the royalty appraisal method.

Case A approximates the value of the mineral estate with the current lecise intact (indefinitely renewed). Case B pro- vides the authors' estimate of the mineral value free of the prior agreement (current fair market value).

The parameters listed in Table 5 were applied to the valuation.

Table 5

Caw A Case B Production Royalty (Won) 0.040 0.200

($/Metric Ton) 0.044 0.220 Minimum Royalty ($/Month) 208.34 1.000 Realization (Won) 5.00

($/Metric Ton) 5.51 D~scount Rate ("/a) 15 Annual Production (Tons) 700,000

(Metric Tons) 635,040 Lease Administration Expense (%) 5 Lessor Tax Rate (%) 40 ConstructionIStart-up period (years) 1.5

The current estimated values of the assigned limestone reserves (25-year production) on the 109-hm2 (270-acre) tract are shown in Table 6.

I Table 6 1 Tolal Mlnenl Value

S YAcm Ullectam? Case A (with existing lease) 93,000 344 850 Case 0 (wilhout existing lease) 467.000 1,730 4,275

It should be noted the valuation assumes the existing lessee, or future lessee, resumes royalty payments, does not default on the lease agreement, and exercises due diligence in developing the reserves. Average values for surface estate were reported to be approximately $3089/hm2 ($1250 per acre).

7be current fair market value of the limestone (Case B) appears reasonable when compared to sale No. 4 (after de- ducting the value of the surface estate from sale No. 4's total price).

Case study - Alabama reserve

The 121-hm2 (300-acre) tract under study lies in the northern portion of the larger Birmingham Valley of the Alabama Valley and Ridge section of the Appalachian Valley and Ridge Physiographic Province .

Outcropping strata (and commercially exploitable lime- stone) are within the Cambrian Age carbonate formations currently being quarried near the property. Crushed stone from this operation is marketed for construction and aggregate purposes, although the deposit has served the metallurgical market for flux stone due to its purity.

Specific geologic data from core drilling on the property was not available. However, regional information indicates the lower formation ranges from 335 to 579 m (1 100 to 1900 ft) thick and consists of limestone, shale, and dolomite in varying proportions. The limestone is dark gray to brownish

gray and medium to thin bedded. Olive to gray colored shales are interbedded with limestone and often occur as thick beds. The limestone has more magnesium in the upper horizons where it becomes distinctly dolomitic.

The overlying formation is 122 to 183 m (400 to 600 ft) thick and consists of a relatively pure, light brownish-gray to yellowish-gray crystalline, thick bedded dolomite.

Adequate exploration data was not available for this tract, and due to the abundance of in situ limestone (combined limestone and dolomite thickness of 457 and 762 m or 1500 to 2500 ft), no systematic estimate of the controlled or avail- able reserves was made. A review of the geology and topo- graphic features of the subject property indicated that devel- opment of a quany would be feasible.

Using a neighboring operation as a benchmark, with recent average annual production of 1.27 Mt (1.4 million st), an active reserve for 25 years of about 31.75 Mt (35 million st) was assigned to the tract.

The royalty methodof appraisal was used in this study due to the absence of an ongoing operation on the property and lack of well-documented previous sales of similar type prop- erties in the general area.

Typical royalty rates for crushed stone deposits in the south-central US are presently 3% to 3.5% of selling price, or 16 centsh (15 cents per st).

The parameters listed in Table 7 were applied to this evaluation:

1 Table 7 I Realization

Production Royalty

Minimum Royalty Discount Rate Annual Production from Property

Lease Administration Expense Lessor Tax Rate Construction/S!art-up Period

(Won) ($/Metric Ton) ($rron) ($/Metric Ton) ($/month) (%) (Million Tons) (Million Metric Tons) (%) ("/a) (Years)

The total estimated value of the assigned limestone and dolomite reserves (25 year production) on the 121-hm2 (30Cacre) tract, is $633,345 or $5217/hm2 ($2100 per acre).

Conclusion

As can be seen from the case studies presented, numerous assumptions and subjective judgments must be made in the valuation process. Accurate delineation and reserve estima- tion of a commercial size limestone deposit requires detailed investigation. This includes core drilling with bench sampling of the recovered cores.

However, there is a point of diminishing returns where perfect information becomes cost prohibitive. For example, in either of the cases presented, costs for detailed exploration would negate gains by the owners through sale of the property.

An experienced independent appraiser generally has a sense as to when this point of diminishing returns for perfect information is being reached. The obligation of the independ- ent appraiser to his client is to exhaustively research and review all pertinent data up to this point and then formulate his findings into areport that clearly and accurately represents his undertakings.

Because of the litigious society we now live in and the like- lihood that most independent valuation requests are the result of a legal disagreement, it is important to clarify the following before hiring an independent appraiser.

Is the appraiser truly independent and in no way has a

MINING ENGINEERING JANUARY 1990 115

vested interest in the outcome of the valuation? Does the appraiser possess the knowledge, skill, expe-

rience, training and education to do the job? Does the expert possess the ability to present his find-

ings in a professional manner that a layperson can understand without doing so in a condescending or demeaning manner?

It is also important to receive a written report from the independent appraiser outlining the methodologies used to arrive at the value of the reserve. The report format should include:

Executive summary: Brief summary of the work com- pleted and the bottom line values.

Introduction: Outlines the general location of the prop- erty, any site specific issues associated with the property, and historical and future projections of similar operations in the area .

General geology: The generalized description of the reserve substantiates the understanding of the geology in the

area. Valuation calculations: The three generally accepted

valuation calculations are each addressed. If it is not possible to perform any of them, the reasons are stated explicitly .

Exhibit: A map presenting the relative location of the property and any other pertinent data acquired during the appraisal process.

This article has sought to present a brief overview of the limestone industry and the methodology for performing a valuation of a limestone deposit. The necessity of hiring an en- gineering professional with a working knowledge of the limestone industry, limestone mining practices, and valuation procedures to perform the work is apparent. 0

Reference

Tepordei. V.V., 1987, 'Crushed Stone, "US Buraau of Mines Minerals Yearbook.

DISCUSSION

Innovative shaft lining method by R.N. Torbin and R.F. Kovar

Technical Papers, MINING ENGINEERING, Vol. 4 1 , No. 2 February 1989, pp. 114

C.J. Pritchard

I commend the authors on examining an interesting method of shaft lining and attempting to improve safety in a dangerous environment by remotely installing the shaft lining.

It is important, though, to not trade off shaft lining safety for long-term mine safety by lining an intake shaft with combustible material. In many operations, the mine utilities are installed next to the lining of the intake shaft, supplying a possible ignition source if damaged or overloaded. Although the polyurethane studied in the paper is of relatively high density, no mention is made of the flame retardency of the samples. When exposed to heat, small amounts of polyure- thane will melt and bum but are extinguished when the heat source is removed. If large surface areas of combustible polyurethane - a tunnel or mine shaft - are exposed to ignition heat sources that are not removed or extinguished early, an uncontrollable, fuel rich fire may result with high carbon monoxide levels, low oxygen concentrations, and greatly

R.E. Gundersen

I have to express my surprise and must send a note of warning concerning the use of polyurethane foam as de- scribed in by Torbin and Kovar.

In September 1989, 177 miners lost their lives when they were exposed to fumes downwind from a fire in a tunnel lined with polyurethane foam. While polyurethane exhibits reason- able fire retardent properties in small scale tests, mass use in a tubular configuration, exacerbated by the furnace effect of cross-radiation, can lead to a rapid, uncontrollable conflagra- tion.

increased burning rates that can have devastating effects on the ventilation system and miners' safety.

Although these heavy polyurethanes lend themselves to a "pouring" application around the annulus of the shaft liners and is a continuous process, past experience with atomizing and frothing polyurethane spray systems indicates a high degree of maintenance and operator attention to the nozzle1 delivery system. This may require more miner's time to be spent in the shaft maintaining the foam system, negating some of the safety advantages of the system.

If polyurethane foams are to be used in mines, they must be of the highest quality available in terms of flame spread, heat emitted while curing, and contaminants emitted while curing and spraying. In addition, employees must be given adequate training and be thoroughly informed in all aspects of polyure- thane foam safety procedures. As witnessed by our fellow miners in South Africa, we can accept no less.

I do not wish these comments to detract from the engineer- ing achievements of the authors but rather to sound a loud warning as to the application of the system. Any shaft de- signed for human access -be it for transport or shaft work - and any intake airway, shouldnot consider the use of polyurethane foam. It only needs a slip with a cutting torch or an electric fault to initiate a disaster. Many countries have banned or restricted the use of polyurethane foam in the workings of a mine and maybe alternative foams (e.g. phenolics) can be used or developed. 6

116 JANUARY I990 MINING ENGINEERING