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Valuer-General Victoria and Municipal Group of Valuers

Specialist Property Guidelinesfor Quarries

August 2011

For more information about DSE visit www.dse.vic.gov.au or contact the DSE Customer Service Centre on 136 186 For information about the Municipal Group of Valuers visit www.mgv.com.au Published by the Victorian Government Department of Sustainability and Environment, Melbourne, August 2011.

© This publication is copyright. No part may be reproduced by any process except in accordance with the provision of the Copyright Act 1968.

Disclaimer: This publication may be of assistance to you but the State of Victoria and its employees do not guarantee that the publication is without flaw of any kind or is wholly appropriate for your particular purposes and therefore disclaims all liability for any error, loss or other consequence which may arise from you relying on any information in this publication.

Victorian Statutory Revaluation

Guidelines on Valuation Methodology for Quarries and Landfill Sites – August 2011 Page 1 of 21

Valuer-General Victoria and Municipal Group of Valuers

Guidelines on Valuation Methodology for Quarries and Landfill Sites

Introduction These guidelines are to be used when valuing Quarries and Landfill Sites for rating and taxation purposes. The guidelines need to be used in conjunction with the General Provisions for Specialist Guidelines, which refer to the general requirements, legislation and procedures relating to all statutory valuations. Background The extractive industries sector in Victoria operates quarries that produce a range of hard rock, clay, sand and gravel products to support the building and construction industry. From 1 January 2010 Victoria’s extractive industries have been regulated under the Mineral Resources (Sustainable Development) Act 1990 (MR(SD)A). The legislation provides for:

the mineral exploration and mining industry including gold, coal, and mineral sands; and

extractive industries (quarries) for the extraction of stone resources including gravel, sand, soil, building stone and clay (but does not include fine clay, kaolin or salt) – this in combination with land use controls under the Planning and Environment Act 1987.

The MR(SD)A addresses licensing and approvals, as well as compensation, rehabilitation and royalties for extractive industries, mineral exploration and development activities1.

1 www.new.dpi.vic.gov.au/earth-resources/about-earth-resources/legislation-and-regulation

http://www.new.dpi.vic.gov.au/earth-resources/about-earth-resources/legislation-and-regulation



New work plan requirements The following is an extract from Part 2 of the Extractive Industry Work Plan Guideline, September 2010 –

Operators of quarries on land covering an area of one hectare or greater, and or at a depth of two metres or deeper, must hold a work authority under the Act.2 A work authority can be obtained by application to the Department of Primary Industries (DPI).

If the proposed quarry is less than one hectare in area and less than two metres in depth, a work authority, and therefore a work plan is not required. If a work authority is required, a work plan may need to be prepared and approved before the work authority can be granted. A work plan is not required if the proposed extractive industry:

is on land that has an area of less than five hectares; has a depth less than five metres; does not require blasting; and does not require clearing of native vegetation.

If a work plan is not required, the site must comply with the Code of Practice for Small Quarries.

A complete copy of the guideline can be obtained from: www.new.dpi.vic.gov.au/earth-resources/whats-new/workplan-guide A copy of the Code of Practice for Small Quarries can be obtained from: www.new.dpi.vic.gov.au/earth-resources/whats-new/code-practice-small-quarries Environmental Protection Authority (EPA) has revised guidance for landfills The EPA has published a revised landfill BPEM* (‘Siting, design, operation and rehabilitation standards of landfills’). Standards for buffer distances, landfill design, construction, gas management, rehabilitation and community engagement have been updated. The EPA is currently developing guidance on landfill gas monitoring for release in 2011 and continues to work with wider Victorian government on buffer issues.3 *The Best Practice Environmental Management – Siting, Design, Operation and Rehabilitation of Landfills (Landfill BPEM) is used by the EPA, industry and others in relation to works approval applications and compliance activity. Applicants for a works approval or licence for a landfill must meet the objectives and required outcomes set out in the Landfill BPEM.4 A works approval must be obtained before a landfill can be constructed except for municipal landfills serving a population of fewer than 500 people. A licence under the Environment Protection Act 1970 is required for all landfills apart from municipal landfills serving a population of fewer than 5000 people. The licence sets the performance objectives of the operating landfill, defines operating parameters and requires monitoring to check on environmental performance.5

2 There are a number of other exemptions that apply. These are all listed in the most recent Victoria Government Gazette. 3 State Government Victoria, Environmental Protect Authority, www.epa.vic.gov.au/waste/landfill.asp viewed August 2011 4 Ibid 5 Ibid

http://new.dpi.vic.gov.au/earth-resources/whats-new/workplan-guide

http://new.dpi.vic.gov.au/earth-resources/whats-new/code-practice-small-quarries

http://www.epa.vic.gov.au/waste/landfill.asp



Definition The following definitions are contained in Section 4 of the Mineral Resources (Sustainable Development) Act 1990. Extractive industry means the extraction or removal of stone from land if a primary purpose of the extraction or removal is the sale or commercial use of the stone or the use of the stone in construction, building, road or manufacturing works and includes: the treatment of stone or the manufacture of bricks, tiles, pottery or cement products on or adjacent to land from which the stone is extracted; and any place, operation or class of operation involving the extraction or removal of stone from land, declared by the Minister, by notice published in the Government Gazette, to be an extractive industry for the purposes of this Act; Extractive industry work authority means a work authority relating to an extractive industry granted under Section 77I. Quarry means

(a) a pit or excavation made in land below the natural surface for the purpose of extracting or removing stone if a primary purpose of the extraction or removal is the sale or commercial use of the stone or the use of the stone in construction, building, road or manufacturing works; or

(b) any place or operation involving the removal of stone from land,declared by the Minister by notice published in the Government Gazette to be a quarry- and includes access ways on private land and the works, machinery, plant, equipment, buildings and structures above or below ground used for or in connection with

(c) making, enlarging or deepening the pit or excavation; or (d) carrying on the operation; or (e) the extraction or removal of stone from the pit or excavation; or (f) the treatment on or adjacent to the land in which the pit or excavation is made

of stone extracted or removed from the land or the manufacture on or adjacent to that land of bricks, tiles, pottery or cement products substantially from stone so extracted or removed.

Work authority means an authority granted under Section 42 to the holder of a mining licence. Landfill – landfills have served a key role in the management of solid wastes and are likely to continue to be an important component of the waste management system. The implementation of the waste management hierarchy of waste avoidance, reuse, recycling, recovery of energy, treatment, containment and finally waste disposal has resulted in significant diversion of waste from landfill.6 The four types of landfill are as follows:

Clean fill – rock and soil Solid Inert Waste – building materials such as timber, concrete etc. Putrescible – Household waste Category C Prescribed Industrial Waste – Contaminated soils and some other low-

hazard prescribed industrial wastes. Note: A landfill must be licensed by the EPA to receive Category C wastes; there are current approximately 25 landfill sites in Victoria that hold this licence. The Environment Protection (Industrial Waste Resource) Regulations 2009 contain the definitions for Category A, B and C wastes in Schedule 2.

6 EPA - The Best Practice Environmental Management –Siting, Design, Operation and Rehabilitation of Landfills



The following industry terminology is in alphabetical order: Annual return – extractive industry – Every quarry that has a work authority has to report annually by 31 July the prescribed information in accordance with Schedule 2 of the Mineral Resources (Sustainable Development) (Extractive Industries) Regulations 2010. The information required, under a statutory declaration, is the type of rock and quantity produced as well as the value of total sales at gate. It would be reasonable to verify the annual extraction rate quoted by the owner against the amounts reported in the annual return. Buffer land – a strip or area of land maintained in permanent vegetation that helps to control pollution such as air, soil, noise, quality of water and other environmental problems primarily on the land used for extraction. Different levels of extraction will have different requirement for buffer land.

Practical note: Buffer land is effectively quarantined land around the extraction zone A buffer zone can be required for blasting purposes and/or mandatory town planning distances from surrounding land uses. Buffer land is distinct from ‘reserves bearing land’, that is reserved for future quarrying purposes or other surplus land not required under the permit provisions. Buffer land may add little or no value over and above the quarry operation; however, the valuer needs to consider the reversionary value the land might have at the end of the quarry life. Where there is surplus land that is occupied separately e.g. for farming or grazing the valuer should determine if a separate assessment is required.

Environment effects statement – In accordance with Section 77T of the Mineral Resources (Sustainable Development) Act 1990:

‘If under a planning scheme a permit is required to be obtained for carrying out an extractive industry on the land covered by an extractive industry work authority in accordance with that work authority, the holder of the work authority is not required to obtain a permit if—

(a) an Environment Effects Statement has been prepared under the Environment Effects Act 1978 on the work proposed to be done under the work authority; and

(b) an assessment of that Statement by the Minister administering the Environment Effects Act 1978 has been submitted to the Minister; and

(c) the work authority was granted by the Minister following the Minister's consideration of that assessment.’

Environment Protection and Biodiversity Conservation Act 1999 (EPBCA) – The EPBCA is the Australian Government’s central piece of environmental legislation. The EPBCA provides a legal framework to protect and manage nationally and internationally important flora, fauna, ecological communities and heritage places — defined in the Act as matters of national environmental significance.7

Practical Note: Extraction permitted under an existing work authority can differ from what may be possible under a new or extended quarry having regard to Native vegetation and/or indigenous heritage considerations. Geological survey – An exploratory programme directed to the examination of rock sediments obtained via boring or drilling by inspection of surface out croppings. Geological surveys of Victoria are available on the following website: www.new.dpi.vic.gov.au/earth-resources/geology 7 Environment Protection and Biodiversity Conservation Act 1999 (EPBC Act) – Fact Sheet

http://new.dpi.vic.gov.au/earth-resources/geology



Licence – Issued pursuant to Section 20 of the Environment Protection Act 1970 and grants, subject to approval by the relevant Authority, the ability to discharge waste, emit noise and/or treat/store any prescribed industrial waste from/at the scheduled premises and commission any works subject to works approval. Overburden – Surface material such as earth, sand and boulders, covering the winnable resources. Rehabilitation plan – Section 78A of the Mineral Resources (Sustainable Development) Act 1990 (MRSDA) requires all land affected by extractive industry to be rehabilitated in accordance with the rehabilitation plan approved by the Department of Primary Industries, the conditions of the work authority and any requirements of the relevant planning scheme, any planning permit and any Section 173 Agreement. ‘A rehabilitation plan must:

(a) take into account (i) any special characteristics of the land; and (ii) the surrounding environment; and (iii) the need to stabilise the land; and (iv) the desirability or otherwise of returning agricultural land to a state that

is as close as is reasonably possible to its state before the mining licence or extractive industry work authority was granted; and

(v) any potential long term degradation of the environment.’8 Rehabilitation Bonds – A rehabilitation bond is a financial security that must be provided by an operator prior to work commencing to ensure that rehabilitation can be undertaken by the department should the operator be unable to meet their rehabilitation obligations. Section 80 of the MRSD Act requires a licensee or an applicant for an extractive industry work authority to enter into a rehabilitation bond for an amount determined by the Minister. The condition of a rehabilitation bond is that the authority holder rehabilitates the land as required by section 78 or 78A of the MRSD Act. The Minister may use the bond to fund necessary rehabilitation works not satisfactorily completed by the work authority holder.

Practical note: The former Extractive Industry Licences (EIL), which were the predecessors to Work Authorities, sometimes have negligible rehabilitation liability while the more recent rehabilitation plans are focused on progressive rehabilitation. Quarries that don’t have progressive rehabilitation may substantially decline in value in the last years of the life of the quarry if there are onerous rehabilitation requirements. There is a possibility that at some point the cost of rehabilitation may exceed the remaining value of the stone reserves. When assessing the accrued cost of rehabilitation, it is important to distinguish between rehabilitation liabilities that have already accrued and liabilities that will accrue through future quarrying; i.e. guard against double counting between annual costs and capital costs. Rehabilitation cost vary according to the proposed end use; for example, residential, rural, industrial or parkland - the proposed end use concepts are specified in the Work Plan, but need to be assessed on a case-by-case basis.

Reserves – The amount of a mineral resource remaining that can be mined profitably. Resource – The calculated amount of material in a mineral deposit, classified as measured, indicated, or inferred, based on the density of drill hole information used.

8 Mineral Resources (Sustainable Development) Act 1990, Section 78A



Royalties (Crown) – The holder of a work authority relating to an extractive industry to be carried out on Crown land ‘...must pay royalties (to the Crown) in accordance with the rate or method of assessment and at the times –

(a) specified in the work authority; or (b) prescribed, if not specified in the work authority – (c) unless the Minister decides to waive or vary the royalties under subsection (4).’9

Practical note: When a quarry extracts from adjoining Crown land; either adjacent or land below the title (most titles show if there is a minimum depth, which is usually 50 feet) an extractive industries lease is taken out to use the Crown land, the Crown land then forms part of the rateable property.

The Mineral Resources (Sustainable Development) (Extractive Industries) Regulations 2010 describes the definitions and the current royalty for stone as follows: Schedule 3 – Rate of Royalties (Crown) - Regulation 20 1. Definitions

M3 means a cubic metre of material in the form that is the loose measurement of the material sold, removed or extracted; tonne means a tonne of material in the form that is the loose measurement of the material sold, removed or extracted.

2. Rates Type of stone Rate per m3 Rate per tonne

All stone (except dimension stone and marble) $1.43 $0.87

Dimension stone and marble $8.07 $3.23 Royalty – A form of rent paid by a company operating a quarry to the actual owner of the mineral rights (usually the owner of the land). The amount payable may be based on so much per tonne produced or by a percentage of revenue or profits.

Practical note: Leasehold quarries are rare; most are owner operated. A lease usually includes a land rent (or ‘Base Rent’), or a minimum annual royalty, plus a royalty on the material extracted. The Crown royalty is a flat amount set by the regulations and covers all materials and all locations; it doesn’t necessarily equal the, market royalty. Where a land title is limited in depth to 50 feet, then above 50 feet the royalties go to the land owner and below 50 feet, the specified or prescribed Crown royalty is payable to the Crown.

Stone means –

sandstone, freestone or other building stone; or basalt, granite, limestone or rock of any kind ordinarily used for building,

manufacturing, road making or construction purposes; or quartz (other than quartz crystals); or slate or gravel; or clay (other than fine clay, bentonite or kaolin); or peat; or sand, earth or soil; or other similar materials.10

Waste management facility includes a landfill, a transfer station, a composting facility, a facility to store or contain solid waste and a material recovery facility;11

9 Ibid Section 12 10 Mineral Resources (Sustainable Development) Act 1990 – Definitions 11 Environmental Protection Act 1970 – Definitions



Waste includes – (a) any matter whether solid, liquid, gaseous or radio-active which is discharged,

emitted or deposited in the environment in such volume, constituency or manner as to cause an alteration in the environment;

(b) any discarded, rejected, unwanted, surplus or abandoned matter; (c) any otherwise discarded, rejected, abandoned, unwanted or surplus matter

intended for – (d) recycling, reprocessing, recovery or purification by a separate operation from

that which produced the matter; or (e) sale; and (f) any matter prescribed to be waste.12

Work authority – Under Section 77I of the Mineral Resources (Sustainable Development) Act 1990 a person who proposes to carry out an extractive industry may apply to the Minister for a work authority.

Practical note: While a work authority is issued to a person it is specific to a work plan and related to a particular parcel of land. You can have one work authority only on a parcel at any one time. A work authority only relates to one property and cannot be transferred to other properties. In these respects they are similar to a Planning Permit. A copy of the work authority can be obtained from the owner.

Work plan – In accordance with Section 77G of the Mineral Resources (Sustainable Development) Act 1990: 1. A person who proposes to apply for an extractive industry work authority to carry

out an extractive industry must lodge a work plan with the Department Head.

2. Subsection (1) does not apply to a person who proposes to apply for an extractive industry work authority to carry out an extractive industry –

(a) on land that has an area of less than 5 hectares and a depth of less than 5 metres; and

(b) that does not require blasting or the clearing of native vegetation unless the Minister declares, in writing, that the applicant must lodge a work plan.

3. A work plan must –

(a) contain the prescribed information contained in Schedule 1 of the Mineral Resources (Sustainable Development) (Extractive Industries) Regulations 2010.; and if the extractive industry work authority relates to a declared quarry, in addition to the prescribed information referred to in paragraph (a), prescribed quarry stability information; and

(b) include a rehabilitation plan for the land proposed to be covered by the work authority; and

(c) in relation to extractive industry activities proposed to be carried out under the work authority, include a plan for consulting with the community prepared in accordance with the regulations and any guidelines issued by the Minister relating to such plans (a community engagement plan).

Practical note: the work plan is part of the work authority. Some of the older work authorities originally issued as an Extractive Industry Licence (EIL) often have less onerous requirements, and can therefore be considered more favourably in the market place because the level of constraints and costs of rehabilitation is less.

Works approval – required pursuant to Section 19A of the Environment Protection Act 1970 for works at scheduled premises which will or is likely to alter or increase the discharge of wastes or emission of noise to the environment, or be used for the treatment/storage of prescribed industrial wastes.

12 Environmental Protection Act 1970 – Definitions



A works approval must be obtained prior to commencing works, or use that will make the premises or any alteration in plant regardless of use or impact on discharge at a scheduled premises. The following are other definitions that apply in this guideline: Benches – a level cut or tiers along the quarry face. Bund wall – earth mound usually around the perimeter of the quarry. Conversions

Volumes Bank cubic metres (volume in the ground)

Loose cubic metres (volume after extraction)

Tonnes

Conversion Basalt 1 bank metre = 2.4T 1 loose metre = 1.6T

Conversion Sand 1 loose metre=1.5T Royalties (Crown) $1.43M3 or $0.87 T Sand Fine

Medium Coarse

Practical notes:

Royalties (Crown) are for all stone materials in all locations on Crown Land. Reserves sometimes quoted in ‘bank metres’ (length x width x depth) Loose metre is the stone material after extraction that is broken up as opposed to a

bank metre which is compressed in the ground. A loose metre will vary for different materials and different coarseness and density of material.

As a guide for sand for example – 1 m3 metre = 1.5 tonnes Reserves are usually quoted in m3. Income and extraction rates are usually quoted in tonnes.

Ex-bin price – the price of extracted material at the gate. Slimes – the fine clay washed out of extracted sand. Stock piles – stock pile of extracted and treated material. Terminal face – the final extracted face of the quarry.


Additional Victorian legislation and cases applicable to quarries and landfill The following Acts are also relevant to this topic:

Mineral Resources (Sustainable Development) Act 1990 Mineral Resources Development Regulations 2002 Mineral Resources (Sustainable Development) (Extractive Industries) Regulations

2010 Planning and Environment Act 1987 Commonwealth Native Title Act 1993 (Commonwealth) Environment Protection and Biodiversity Conservation Act 1999 Environment Protection and Biodiversity Conservation Regulations 2000 Environmental Protection Act 1970 Environment Protection (Industrial Waste Resource) Regulations 2009

Court cases: The following court cases are applicable to extractive industry. Each case has the catchwords sourced from the cited case. Shannon Beach Pty Ltd v Commissioner of State Revenue (Taxation) [2005] VCAT

Taxation List; Stamp Duty; Sale of land conditional upon approval of transfer and transfer of Work Authority under Extractive Industries Development Act 1995; Whether duty paid by reference to entire consideration shown on contract and transfers or upon a lesser sum reduced by a value attributed to work authority

Burdett Enterprises Pty Ltd V Frankston City Council [1998] VCAT

Valuation of Land Act 1960 – proper basis for assessing Site Value, Capital Improved Value and Net Annual Value – Work Authority Issued Under Extractive Industries Development Act 1995.

Roads Corporation v Love [2010] VSC 32 (23 February 2010)

LAND VALUATION AND COMPENSATION - Compulsory acquisition of part of land utilised for agricultural and quarry purposes - Highest and best use of land - Claim for loss of landfill potential - Uncertainty of access not affecting prospects of land use approval - Low prospect of land use approvals for landfill use – Uncertainty of access not affecting market value at date of acquisition or thereafter - Market value reflecting future industrial value of land - Hypothetical development calculations rejected - Discounted cash flow analyses rejected - No special value in landfill potential - No severance claim reflecting landfill potential - No disturbance claim reflecting landfill potential - Special value of trees, residence and access tracks - Disturbance claims – Solatium - Environment Protection Act 1970, ss 4, 16, 38, 40, 44, 50E, 50F, 50G, 50H, 50R, 50RE - Extractive Industries Development Act 1995 - Land Acquisition and Compensation Act 1986, ss 30, 40, 41, 43, 44, 90, Part IV - Planning and Environment Act 1987, ss 4, 7, 149, Part 1A - Valuation of Land Act 1960, s 5A.



Identification of properties To appropriately categorise extractive industry in a municipality, refer to the Australian Valuation Property Classification Codes (AVPCC) available at www.dse.vic.gov.au/valuation. There are 36 AVPCC that relate to extractive industry under the following secondary codes:

40 – Extractive industry site with permit or reserve 41 – Quarry 42 – Mine (open cut) 43 – Mine (deep shaft) 44 – Tailings Dumps 45 – Well/Bore 46 – Salt Pan (evaporative) 47 – Dredging operations 48 – Other Unspecified

For valuation purposes for quarries, the following classification codes are applicable:

Quarry Sand – AVPCC 410 Gravel/Stone – AVPCC 411 Manufacturing Materials – AVPCC 412 Soil – AVPCC 413

There is only one categorisation for landfill as the methodology is very similar for all classification codes.

Sanitary Land Fill - AVPCC 632 Note: The four main types of landfill are all to be classified as AVPCC 632


http://www.dse.vic.gov.au/property-titles-and-maps/valuation-home-page/the-valuation-profession/resources-for-valuers/valuation-property-classification-codes


Rental questionnaire – specific requirements applicable to quarries and landfill In additional to the general requirements for rental information, the following is a guide to the specific information required for quarries. Property data

1. Size of quarry/landfill i.e. Land area attributed to the sandpit/quarry.

2. Does the property have a current work authority? 3. Land area subject to the work authority or licence -

Please provide the land area that the work authority relates to.

4. Improvements – What improvements are on the property i.e. buildings, sheds, weighbridge

Yes No

Years

Extraction

1. Estimated life of the quarry 2. Estimated level of reserves: Please specify the type

and quality of reserves for example, gravel, basalt, coarse of fine grade of sand.

3. Estimate annual rate of extraction? Tonnes 4. Average charge (Ex GST) for extracted ex-bin

material. $ per Tonne

5. Revenue - Gross revenue for past three financial years (Ex GST)

6. Expenses - Gross operating costs for past three financial years (Ex GST)

7. Break-up of operating costs a. Depreciation b. Interest/loan c. Managements costs d. Asset schedule e. Depreciation schedule f. Other

8. P&L – Last 3 years profit and loss statements 9. P&E - Book value for plant and equipment $ 10. Rehabilitation – Is there any known rehabilitation

obligations and if so the order of costs. Yes No $

11. Royalties - Are royalties paid on any material extracted, if so how much?

Yes No $

Landfill

1. Type of landfill accepted? Clean fill Inert Putrescible Category C

2. Estimated airspace reserves? ___________ Tonnes

3. Estimated annual filing rate? ___________Tonne per annum

4. Estimated life of airspace? ___________years

5. What is your gate price? ___________ per m3

6. What are your EPA levies ___________per m3

7. Revenue – Gross revenue for past three financial years (Ex GST)

8. Expenses – Gross operating costs for past three financial years (Ex GST)

9. Break-up of operating costs Depreciation Interest/loan Managements costs Asset schedule Depreciation schedule Other

10. P&L – Last 3 years profit and loss statements

11. P&E - Book value for plant and equipment $

12. Rehabilitation – Is there any known rehabilitation obligations and if so the order of costs.

Yes No $




Lease particulars

1. Is there an extractive industries Lease applicable to this property?

Yes No

2. Is there any other lease applicable to this property? Yes No


Property inspection – specific requirements applicable to quarries and landfill 1. Investigate documents to be sighted:

Approved work authority, works approval or licence. Work plan (view the work plan with the owner/operator as this is usually a very

bulky set of plans and specifications. Planning permit Certificate of Title Crown lease (if applicable) Section173 Agreement (if applicable)

2. Inspect property and determine components of the property such as:

quarry hole weighbridge plant and equipment landfill site

Note: Must make an appointment to carry out an inspection as the owner/operator will accompany the valuer on the inspection. The quarry/landfill manager is the most appropriate person to call to make an inspection and to send the request for rental information. 3. Clarify any data if required with manager/owner. Essential information will include:

size of reserves annual extraction rate sale price of extracted material (at the gate) e.g. Ex-bin or gate price. operating costs rehabilitation plans, on-going costs and end-of-life costs (if any).



Methodology Site value

The General Provisions for Specialist Guideline outlines the procedure and considerations when determining site value. The following are more specific factors that relate to quarry and landfill/tip sites that may be relevant in determining the site value.

Methodology

The primary valuation methodology is the analysis of comparable sales. Comparable sales provide the best evidence to determine land value. Sales should be analysed on an appropriate unit of comparison and applied to the subject accordingly. A secondary approach is the capitalisation of market royalties. If you have a quarry that has an actual lease and royalties payable then this approach is appropriate; however, the following should be considered:

The royalty rate being paid is at a market rate and is not historic. Identify who is the responsible landlord or tenant for the cost of rehabilitation. If it is

the tenant, the royalty rate will already reflect the rehabilitation costs, so it is not appropriate to make a rehabilitation deduction from the site value calculation.

Capitalisation of royalty income may also be a useful method when you do not have comparable sales, but there is comparable royalty evidence. The following is an example of this approach:

Average annual extraction rate 210,000 Tonne Market royalty (assuming a ‘net’ lease) $1.10/Tonne Equals $231,000 p.a. PV quarry life say 20yrs at cap rate 10% 8.51356 Years Purchase* Quarry use land value $231,000 * 8.51356 Equals $1,966,632 Plus - reversion/ end use value. PV due 20yrs@5%

$ 320,356

Less rehabilitation liability* $ 0 Site value $2,286,988 SV rounded $2,275,000

* This method assumes that the tenant/occupier is doing all (normal) rehabilitation. If this is not the case then the PV of the rehabilitation needs to be deducted.

Practical notes: The calculation of site value has regard to the fact that the land has a work authority

(circumstances affecting the land). In current times these are often difficult to obtain given the environmental constraints etc. and associated costs that involve expensive consultancies and can take several years to get approvals.

In some cases the quarry use may not be the highest and best use of the site. An alternate permitted use under the actual zoning may have a higher market value. Under this scenario the alternate use of the hole in the ground needs to be considered.

A greenfield parcel with known reserves and work authority may not be geologically unique to an area. They may even be quite common, in which case the presence of reserves, alone, might not show much premium above alternative use land value. Good reserves however are often land banked.




It is unusual for a quarry with significant high quality reserves and current economic viability to be dormant and not be worked. If it is in that circumstance, then the valuer needs to ascertain why and question whether the quarry potential adds value.

Ascribing a separate value to a work authority is very difficult. In most cases the quarry will sell with the work authority because they are interdependent.

All discount rates should be applied on an annual basis. Capital Improved Value

Quarries

Methodology

The primary valuation methodology is the summation approach. Comparable sales provide the best evidence to determine the value of each component. Sales should be analysed on an appropriate unit of comparison and applied to the subject accordingly. Alternatively, in the absence of sales the contractor’s method (cost less depreciation ) can be adopted. Refer to Specialist Property Guidelines for Plant and Equipment.

An example is as follows: Site value (previous example) $2,275,000 Plus Structural improvements $ 150,000 Plus Plant and equipment $ 1,200,000 Equals Capital improved value (CIV) $3,625,000

A secondary approach is the capitalisation of earnings method. This method is complex and usually only adopted when detailed financial information can be ascertained. In the following example an extraction rate of 300,000 tonnes per annum and a gate price of $15.00 per tonne are assumed. Total reserves 4,500,000 tonnes. Example Revenue *

$4,500,000 (Ex GST) ^

Less Annual operating costs (including allowance for depreciation or/leasing of plant and equipment, but not the costs of rehabilitation work)

$9.00 per tonne

Equals EBIT13

$1,800,000 p.a. ($6.00 per tonne* 300,000 tonnes)

PV of $1,800,000 p.a. for 15 years~ @ 22% (Years purchase 4.315215 = value excluding Plant & Equipment)

= $7,767,000

Note: it is important to exclude all elements of the operation including business and goodwill, except the land. Hence the discount rate adopted is higher than that expected for a return on the investment. Having capitalised that income stream to reach the value of the land any fixed improvements can be added back to get the CIV. Alternatively a market rate can be adopted and the value of the individual components including business and goodwill derived from the audited accounts can be deducted. In this case there is no need to add back fixed improvements.

13 In this example rehabilitation is done at the end of the quarry life. If rehabilitation is undertaken progressively it will be included in the operating costs and therefore will not be deducted as a one off item.


Less PV of cost of rehabilitation liabilities at

end of life (if ANY) (e.g. $8.35 mill due in 15 years @ 10% deferral rate.

$ 1,998,924

Plus PV of reversionary use (if any) For example – hobby block $1,500,000 PV in 15years at 5%

+ $721,525

Plus Plant & Equipment Structural improvements

$250,000 $150,000

Equals CIV $6,889,601 CIV (rounded)

$ 6, 890,000

EBIT = Earnings before Interest and Tax PV = Present Value Rate of Extraction = Average amount of material extracted per annum. * Revenue and costs should use last three years as benchmarks. ^ Be sure to remove from revenue the value of any transport services supplied to customers (i.e. the revenue needs to be at an ex-bin price). ~ Life of the quarry equals the estimated reserves divided by the average annual extraction rate.

Practical notes: ‘Ex bin’ costs (i.e. the price ‘at the gate’) can be sometimes sourced from the internet or

other industry sources but are best to be provided from the owner. Transport costs can vary significantly over a short distance, so it is important to ‘strip’ all transport related costs/revenues from your calculations if the quarry provides delivered products.

Operating costs need to include an adequate allowance for management wages.

Potential after quarry use needs to be determined as this can have a big effect on the

rehabilitation costs. The valuer should refer to the rehabilitation plan as it is required to include plans that address the concepts for the end utilisation of the site.

Confirm if EBIT takes into consideration ongoing rehabilitation costs. If it doesn’t, and

rehabilitation will happen entirely at the end, then an allowance needs to be made.

Ensure that the operating costs DO NOT include allowances for ‘write-off’/amortisation of the quarry reserves. As with any other type of property, any such allowances need to be stripped out before capitalising the net income.

When using the capitalisation of earnings valuation method it is important to ensure your calculation does not also capture elements of business goodwill (if there are any). This is a complex topic but the key issues to look for in identifying any operator’s goodwill are:

Exceptional management, which is artificially increasing the profitability of the quarry.

The correct test is good, average management. The presence of supply contracts, which unusually have beneficial terms (e.g.

exceptionally high prices). The presence of ‘internal demand’ (from related companies), which would clearly be

lost if the quarry were sold.



In the final analysis, the capitalisation rate you apply to the sustainable EBIT is derived from comparing the sale prices of quarry lands, with their EBIT for the quarry. So this method inherently excludes any elements of separate goodwill that might have passed between the parties. (There is of course some debate about the appropriate capitalisation rate on EBIT because sales of operating quarries are a rarity).

One factor that affects a quarry’s viability is transport costs. If a site is too far away

from the customer, high transport costs can result in a unviable site. Other methodology

Dual rate capitalisation The purpose of using a dual rate capitalisation approach is because a quarry is a wasting asset (i.e. the reserves won’t last forever), and a dual rate capitalisation recognises that there is a difference between the return OF capital (i.e. recapturing your investment) and the return on the investment (i.e. the ‘profit’ above getting your money back). Dual rate calculations are useful when there are no sales (e.g. of quarries) and it is necessary to derive market rates of return from ‘normal’ properties that are viable in perpetuity. Dual rate calculations are theoretically sound however they are difficult to explain (and justify) to non-experts. A similar result can be achieved using a single rate capitalisation calculation but the rate adopted needs to be high enough to recognise that the investment is being exhausted over time. For statutory purposes, unless extremely detailed financial information is available on the subject property and the available sales the dual rate approach is not recommended.

After use of quarry The after-use value may vary depending on the potential use. Approval for a landfill site is usually a complex and expensive process regulated by the Environmental Protection Authority (EPA). Proposed end use concepts included in the Work Plan are useful but need to be assessed on a case-by-case basis. Quarries in urban areas can have high value for residential or commercial after-use, particularly any unquarried areas of the holding such as any buffer or surplus land. The actual hole itself can be utilised for aesthetic purposes such as a lake. A work authority (or Section 173 Agreement) that states the designated after use as parklands or reserve would usually have a nominal end value. Where land is zoned rural any further development would most likely be marginal.

Landfill The three methodologies for valuing landfill are:

1. Direct comparison with sales 2. Summation method 3. Capitalisation of profits (attributable to the land)

Direct comparison of sales Comparison is performed on a $/m3 of useable air space. Comparison factors are:

1. Fully approved versus prospective versus remotely speculative. 2. Type of landfill permitted (e.g. Inert, Category C etc.). 3. Location to target market. 4. Proven profitable operation versus start up. 5. Size – large landfill voids have considerable lower $/m3 airspace than small

voids. This is due to steep discounts prevalent in this industry. 6. Environmental risks (such as approval barriers/costs and aftercare costs).




Summation method

The site value can be derived via the capitalisation of inferred air space royalties although it will take in-depth knowledge of the business parameters (or comparable royalty examples – very rare) to be accurate. An example is as follows:

Site value (previous example) $2,275,000 Plus Structural improvements^ $ 250,000 Plus Fixed plant and equipment# $ 1,500,000 Equals Capital improved value (CIV) $4,025,000 CIV (rounded) $ 4,000,000

Capitalisation of profits (attributable to the land) This method only applies to operating landfill sites.

Strip out from profit all elements not related to the land e.g. plant and equipment, goodwill, management, overheads, EPA levies, constructed cells.

This will enable the valuer to arrive at an income attributable to the land. Then capitalise the land attributable income to arrive at the site value.

Practical Notes: Due to the risks capitalisation rates for these properties are higher (circa 18 to 25%)

than for other types of properties. Approvals for landfill sites are rigidly rationed by the EPA and each location will have

a priority list. Environmental requirements means that it takes a long time (many years) and large

costs (multiple consultancies) to obtain the necessary planning permit and EPA licence. Tipping rates for clean fill are significantly lower than other approved fill types.

Approval for clean fill should not be automatically treated as having significant levels of value, as demand is sporadic and tipping rates are frequently commercially not viable. Enquiry is required on each site to determine if the cleanfill activity/potential is commercially viable in the foreseeable future.

There will be a substantial rehabilitation liability in terms of costs and risks which need to be taken into consideration.

All discount rates should be applied on an annual basis. For landfills that used to be a sand quarry, be aware there may need to be a

requirement to manage slimes, IF, the sand quarry operator didn’t rehabilitate the slimes dams. As slimes are typically stored in dams and build up over the life of a sand quarry, this situation is unique to a sand quarry.

Net Annual Value (NAV)

Refer to The General Provisions for Specialist Guidelines. For NAV purposes the EAV would normally be expected to be in the range of 12 to 20 per cent of the CIV.


Industry information Department of Primary Industries (DPI) The Earth Resources Division (ERD) (formerly Minerals and Petroleum Division) is responsible for the promotion and regulation of the extractive, oil and gas, pipelines, geothermal energy, minerals exploration and mining industries in Victoria. Geological maps of mineral, ore and other resources can be sourced from this site. On 2 February 2009 the Minerals and Petroleum Division of DPI was renamed the Earth Resources Division. The division was renamed to reflect its enhanced role in respect of geothermal and carbon storage (geosequestration) activities. These activities appear likely to become key aspects of Victoria's resource future. This information has been sourced from the following website: www.new.dpi.vic.gov.au >earth resources. Institute of Quarrying Australia (IQA) A professional body and advocate for standards and legislation: www.quarry.com.au. Australian Institute of Mining and Metallurgy (AusIMM) The AusIMM represents all professionals in the minerals sector and promotes the value of the minerals industry to the wider community: www.ausimm.com.au. Australasian Joint Ore Reserves Committee (JORC) JORC is sponsored by the Australian mining industry and its professional organisations. The Code for Reporting of Mineral Resources and Ore Reserves (the JORC Code) is widely accepted as a standard for professional reporting purposes. It was first published in 1989, with the latest revised version being published late in 2004. Since 1989 and 1992 respectively, it has been incorporated in the Listing Rules of the Australian and New Zealand Stock Exchanges, making it mandatory to list public companies in Australia and New Zealand: www.jorc.org. The Internet is a valuable resource and the following sites may be useful:

Department of Primary Industries – www.dpi.vic.gov.au >earth resources Australian Institute of Mining and Metallurgy – www.ausimm.com.au Environmental Protection Authority (EPA) Victoria – www.epa.vic.gov.au

The following guidelines are applicable to these guidelines:

Extractive Industry Work Plan Guideline – www.new.dpi.vic.gov.au/earth-resources/whats-new/workplan-guide

Code of Practice for Small Quarries – www.new.dpi.vic.gov.au/earth-resources/industries/extractive/extractive-industry-requirements

Guidelines for Environmental Management in Exploration and Mining –www.new.dpi.vic.gov.au/earth-resources/industries/extractive/guidelines

Native Vegetation Guide for Mines and Quarries – www.new.dpi.vic.gov.au/earth-resources/industries/minerals/guidelines/native-vegetation-guide-for-mines-and-quarries

Aboriginal Heritage Act 2006/Heritage Act 1995 Guidance Notes – www.new.dpi.vic.gov.au/earth-resources/industries/extractive/extractive-industry-requirements

Industrial Waste Guidelines – www.epa.vic.gov.au/waste/industrial-waste-guidelines.asp

Siting, Design, Operation and Rehabilitation of Landfills – www.epa.vic.gov.au/waste/landfill.asp


www.new.dpi.vic.gov.au%20

http://www.quarry.com.au/

http://www.ausimm.com.au/

http://www.jorc.org/

http://www.dpi.vic.gov.au/

http://www.ausimm.com.au/

http://www.epa.vic.gov.au/

www.new.dpi.vic.gov.au/earth-resources/whats-new/workplan-guide

www.new.dpi.vic.gov.au/earth-resources/whats-new/workplan-guide

www.new.dpi.vic.gov.au/earth-resources/industries/extractive/extractive-industry-requirements


www.new.dpi.vic.gov.au/earth-resources/industries/extractive/guidelines

www.new.dpi.vic.gov.au/earth-resources/industries/minerals/guidelines/native-vegetation-guide-for-mines-and-quarries

www.new.dpi.vic.gov.au/earth-resources/industries/minerals/guidelines/native-vegetation-guide-for-mines-and-quarries



http://www.epa.vic.gov.au/waste/industrial-waste-guidelines.asp

http://www.epa.vic.gov.au/waste/landfill.asp


The following are industry terms from the Joint Ore Reserves Committee Code 2004 Edition Modifying Factors – The framework for classifying tonnage and grade estimates to reflect different levels of geological confidence and different degrees of technical and economic evaluation. Mineral Resources can be estimated mainly by a geologist on the basis of geoscientific information with some input from other disciplines. Ore Reserves, which are a modified sub-set of the Indicated and Measured Mineral Resources require consideration of the Modifying Factors affecting extraction, and should in most instances be estimated with input from a range of disciplines. Measured Mineral Resources may convert to either Proved Ore Reserves or Probable Ore Reserves. The Competent Person may convert Measured Mineral Resources to Probable Ore Reserves because of uncertainties associated with some or all of the Modifying Factors which are taken into account in the conversion from Mineral Resources to Ore Reserves. Mineral Resource – A ‘Mineral Resource’ is a concentration or occurrence of material of intrinsic economic interest in or on the Earth’s crust in such form, quality and quantity that there are reasonable prospects for eventual economic extraction. The location, quantity, grade, geological characteristics and continuity of a Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledge. Mineral Resources are sub-divided, in order of increasing geological confidence, into Inferred, Indicated and Measured categories. Inferred Resource – An ‘Inferred Mineral Resource’ is that part of a Mineral Resource for which tonnage, grade and mineral content can be estimated with a low level of confidence. It is inferred from geological evidence and assumed but not verified geological and/or grade continuity. It is based on information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes which may be limited or of uncertain quality and reliability. An Inferred Mineral Resource has a lower level of confidence than that applying to an Indicated Mineral Resource. Indicated Mineral Resource – An ‘Indicated Mineral Resource’ is that part of a Mineral Resource for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a reasonable level of confidence. It is based on exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes. The locations are too widely or inappropriately spaced to confirm geological and/or grade continuity but are spaced closely enough for continuity to be assumed. An Indicated Mineral Resource has a lower level of confidence than that applying to a Measured Mineral Resource, but has a higher level of confidence than that applying to an Inferred Mineral Resource. Mineralisation may be classified as an Indicated Mineral Resource when the nature, quality, amount and distribution of data are such as to allow confident interpretation of the geological framework and to assume continuity of mineralisation. Confidence in the estimate is sufficient to allow the application of technical and economic parameters, and to enable an evaluation of economic viability. Measured Mineral Resource – A ‘Measured Mineral Resource’ is that part of a Mineral Resource for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a high level of confidence. It is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes. The locations are spaced closely enough to confirm geological and grade continuity. Mineralisation may be classified as a Measured Mineral Resource when the nature, quality, amount and distribution of data are such as to leave no reasonable doubt, in the opinion of the Competent Person determining the Mineral Resource, that the tonnage and grade of the mineralisation can be estimated to within close limits, and that any variation from the estimate would be unlikely to significantly affect potential economic viability. This category requires a high level of confidence in, and understanding of, the geology and controls of the mineral deposit.




Ore Reserve – An ‘Ore Reserve’ is the economically mineable part of a Measured and/or Indicated Mineral Resource. It includes diluting materials and allowances for losses, which may occur when the material is mined. Appropriate assessments and studies have been carried out, and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors. These assessments demonstrate at the time of reporting that extraction could reasonably be justified. Ore Reserves are sub-divided in order of increasing confidence into Probable Ore Reserves and Proved Ore Reserves. Probable Ore Reserve – A ‘Probable Ore Reserve’ is the economically mineable part of an Indicated, and in some circumstances, a Measured Mineral Resource. It includes diluting materials and allowances for losses which may occur when the material is mined. Appropriate assessments and studies have been carried out, and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors These assessments demonstrate at the time of reporting that extraction could reasonably be justified. A Probable Ore Reserve has a lower level of confidence than a Proved Ore Reserve but is of sufficient quality to serve as the basis for a decision on the development of the deposit. Proved Ore Reserve – A ‘Proved Ore Reserve’ is the economically mineable part of a Measured Mineral Resource. It includes diluting materials and allowances for losses which may occur when the material is mined. Appropriate assessments and studies have been carried out, and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors. These assessments demonstrate at the time of reporting that extraction could reasonably be justified. A Proved Ore Reserve represents the highest confidence category of reserve estimate. The style of mineralisation or other factors could mean that Proved Ore Reserves are not achievable in some deposits.

Practical note: Ore reserves may not be a dominant factor in the valuation once the life of the operation exceeds 20 years

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