Aggregates Manager Digital Magazine
Issue link: http://read.dmtmag.com/i/708006
AGGREGATES MANAGER / July 2016 27 I f you are in the market to expand your company via an acquisition, you may wonder whether the property advertised in the illustration at left is a good buy. Should you call and inquire? Is the indicated sales price too high? How would you react to this ad? Perhaps you are a loan officer at a bank and a quarry owner asks for a $5 million loan based upon the fact that a similar- ly sized quarry producing 1 million tons sold for $25 million. Should the loan officer react favorably? After all, the collateral is apparently worth five times the requested amount of the loan? I assume your reaction to these questions, is "I do not know." Based upon discussions with many owners over the years, my observation is that most owners formulate their opinion regarding fair market value based upon what they hear with respect to the sales price a competitor received. This practice may stem from the use of comps in real estate where it seems to work fairly reliably. However, using comps to estimate the fair market value of a quarry or mine based upon its annual sales volume is not a reliable method, even in those instances where a similar mineral is being mined and sold. Perhaps you are skeptical. Would you not expect the pur- chase prices (aka fair market value) of three limestone quarries each producing and selling approximately one million tons of construction aggregates to be similar? The actual results may surprise you. The individual quarry values shown in Figure 1 ranged from a high of $24.89 per ton sold to a low of $7.82 per ton sold. Figure 1: Fair Market Value Comparison of 1 Million Ton Quarries Just in case you are still skeptical, let's look at the actual results of three quarries producing and selling approximately 600,000 tons annually. As Figure 2 illustrates, the range was from a high of $20.32 per ton sold to a low of $13.26 per ton sold. Again, these examples are based upon actual results. Figure 2: Fair Market Value Comparison of 600,000 Ton Quarries So, how is the fair market value of a quarry or mine de- termined? The remainder of this article will provide guidance beginning with the definition of fair market value. What is fair market value? Fair market value is defined as "the most probable price that a property (quarry) should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and the price is not affected by undue stimulus." The last part of the definition states: "The price represents the normal consideration for the property sold, unaffected by special or creative financing or sales conces- sions granted to anyone associated with the sale." How is fair market value determined? There are three primary methods used to determine a mine's fair market value. They are the asset-based approach, market-based approach, and the income approach. Each will be briefly described, but, in its mergers and acquisitions practice (M&A), Mid-America typically finds that the fair market value estimate determined by means of the income approach has the best cor- relation to a quarry's actual sales price. Asset-based approach: The basis for this methodology is that a business is a bundle of assets. Accordingly, the value of the business is the sum of the current fair market value of the mobile equipment fleet, plant, real estate (typically any owned surface or mineral), stockpiled materials, and good- will. The structure of the transaction, whether an asset sale or stock transaction, determines how working capital (payables, receivables, cash, etc.) and long-term debt is considered in the calculations. We find that using the asset-based approach to estimate fair market value results in a materially lower value $0.00 $6.50 $13.00 $19.50 $26.00 $32.50 Quarry A Quarry B Quarry C Fair Market Value Per Ton of Annual Sales $15.75 $21.00 $26.25 Fair Market Value Per Ton of Annual Sales $0.00 $6.50 $13.00 $19.50 Quarry A Quarry B Quarry C $0.00 $5.25 $10.50 $15.75 $21.00 $26.25 Quarry D Quarry E Quarry F Fair Market Value Per Ton of Annual Sales