Geology Reference
In-Depth Information
ing the resource rent is the residual value method. It is estimated by deducting
user costs of produced assets from gross operating surplus after an adjustment
for any specific subsidies and taxes. The expected pattern of resource rents
is always a hypothesis of future returns and therefore it is based on assump-
tions. These depend on the amounts of resources extracted, unit extraction
costs and commodity prices. “It is recommended that estimates of expected
resource rent should be set based on current estimates of resource rent, thus
assuming no price changes beyond the general level of inflation, and a realistic
rate of resource extraction”.
(3) The estimation of the asset's life: Asset life estimates must be based on physi-
cal stock and assumed rates of extraction. Hence, the application of the NPV
approach requires specific considerations in the estimation of the resource rent.
First, the resource rent should be limited to the extraction process itself, exclud-
ing the refinement and processing of the extracted resource. Accordingly, the
extraction process includes typical mining activities like mineral exploration,
evaluation, mining and beneficiation. A mineral deposit typically contains sev-
eral types of resources. In this case, resource rent should be allocated by com-
modity. For example, an oil well containing gas or nickel sulphide deposits is
often found with copper ores where cobalt is obtained as a byproduct.
(4) The selection of a rate of return on produced assets: SEEA recommends
choosing a rate of return which takes into account industry specific returns,
that in turn implicitly take into account the risks of investing in particular ac-
tivities. While operating costs are quite foreseeable, an important consideration
in the valuation of mineral commodities is their frequent market price fluctua-
tion. Consequently, the resource rent may be composed of a relatively volatile
time series. Mineral exploration and evaluation costs are treated as a form
of gross fixed capital formation. Moreover, decommissioning costs reduce the
resource rent earned by the extractor over the operating life of the extraction
site.
The physical extraction rate, meanwhile, usually remains constant throughout
the life of the resource, if there are no reappraisals. However, as resources
approach depletion, there will be a decline in ore grade quality and the envi-
ronmental and energy costs associated with extraction will increase. This then
leads to a fluctuation in the quantity of resources extracted annually. The Cen-
tral Framework of SEEA also warns that there is no reason why the extraction
rate should remain constant. In practical terms an important physical fact is
ignored: the extinction of the mine is not constant throughout the extraction
period but instead follows the law of diminishing returns.
(5) The choice of discount rate: Finally, the choice of the discount rate requires ad-
ditional discussion. Discount rates convert the yearly expected resource rents
into a current overall value. Discount rates also imply a future without dis-
ruptions. These disruptions may come from innovations in the use of resources
Search WWH ::
Custom Search