CHAPTER 10 THE VALUATION OF OPERATING MINERAL PROPERTIES FOR PROPERTY TAX PURPOSES

• Jurisdiction: United States

Mineral Taxation
(Mar-Apr 1977)
CHAPTER 10
THE VALUATION OF OPERATING MINERAL PROPERTIES FOR PROPERTY TAX PURPOSES
Harold C. Ballard
Governmental Relations Director Climax Molybdenum Company Western Operations
Golden, Colorado

It has been necessary to limit the scope of this paper to a discussion of the statutory provisions governing the assessment of operating mineral properties for property tax purposes in the Rocky Mountain states of Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah and Wyoming. A complete explanation of precisely how such assessments are made in each of the States would be much too lengthy for this occasion, and has been beyond the author's research capability during the limited time available to him. The statutes provide merely a general framework, with detailed implementation of the statutory provisions designed to recognize varied stituations being supplied by administrative interpretation, regulations, formal and informal, custom, and the discretion of the individual assessing official. Within any state the implementation can vary significantly from jurisdiction to jurisdiction and from one mineral property to another.

All of the states have recognized that operating mineral properties are different than most other types of property and have, therefore, provided by statute special methods of valuing them, particularly with reference to the valuation of the mineral interest and the developed mine, pit or well which is necessary for the extraction of the mineral. The associated improvements machinery and equipment, and other property, including mills and smelters which may be operated in conjunction with the mines, are usually valued in the same manner as other property in a particular state. Viewing property taxes as a cost of operations, total property taxes on all of the operating property must be considered. However, in this paper, the greater amount of space will be devoted to the provisions for valuing the operating mine, with passing reference to the valuation of the associated property.

In all of the Rocky Mountain states the valuation of property in general is based on value defined variously as full cash value, market value, true value, actual value, fair value, and so forth. Provision is made that assessments shall be at a uniform percentage of such value for all property, with exceptions, ranging from as low as twenty per cent in one state to as high as thirty-five per cent in another, or at various rates for various classes of property, notably in Arizona and Montana. The basic value is usually determined by use of normal appraisal techniques, including market value of comparable property, replacement cost new less depreciation, or capitalization of earnings, or a combination of two or more of the three methods. While buildings, machinery and equipment are readily appraisable with the use of these standard methods, the methods are found to be inadequate for the appraisal of the basic mineral property—the mineral interest and the developed mine.

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Therefore, in all of the states, special methods have been provided for by statute for the valuation of mineral properties, similar in many respects, but significantly different in others. More commonly, valuations are based on either the net proceeds or the gross proceeds from the property of the year preceding the year of assessment, or an average of the net or gross proceeds for a specified number of preceding years. There are significant differences in the methods of determining net or gross proceeds. Varying fractions or multiples of proceeds are used as the assessed valuation. Some states provide the same method for assessing all types of mineral production, while other states provide different methods for different types of production. There is also variation in the provisions as to what property is included under the proceeds valuation and, therefore, not subject to separate assessment. The similarities and variations in these methods can best be explained by a discussion of the statutory provisions of each state, to which discussion the bulk of this paper is devoted.

Arizona

The statutes of the State of Arizona (Arizona Revised Statutes 1956) direct the Arizona Tax Commission to assess all patented and unpatented producing mines, the personal property used thereon, the improvements thereto and the mills and smelters operated in conjunction therewith at sixty per cent of the full cash value thereof (42-124 and 42-136) by the use of standard appraisal methods (42-201). This provision applies to all mines except those producing oil and gas and those producing clay, sand, gravel, building stone or any mineral or mineral substance normally processed into artificial stone (42-201).

The Arizona Tax Commission has developed a modification of what is known as the Hoskold Formula for mine evaluation, commonly used for evaluating potential mineral deposits for investment purposes. This formula is too complex to explain in detail in this paper. Basically it is a method of estimating the present value of future earnings from a mineral property. Calculations are based on an estimate of the economic metal content of the proven ore reserve, a weighted average of metal prices for the most recent five-year period, and operating costs for the most recent year. The potential net yield from the ore body over a 28-year period is estimated from these data. The total net yield is then discounted to determine the present worth of the potential earnings. The...