Minerals lease (coal)

Does anyone know the fair value of a mineral lease and royalties for coal,gas and ore in Southern Illinois?

Lenzie,

Mining operations economics will rarely stand more than a 5% royalty FOB mine unless you are close to an operating mine. More important to the mineral owner are things such as exploration commitments, markets of operators, known geology and geometry of a potential ore body, potential for converting resources to reserves, subsidence or surface damage, and when a lessee will mine or release. Most leases are for at least 20 years so it is important to the owner to establish a value estimate up front and collect advance royalties and transaction costs in the early years. Dealing with an established operator is of extreme importance and mining leases or sales documents are highly complicated to protect the interests of both sides. Southern Illinois is a great area for coal mining. It is close to markets, the coal is usually of high energy value although high in sulfur content.

Mineral leases or deeds recorded in the county courthouses may be of value but are usually dated and don't tell the whole story.

Gary,

Thanks for your response. The company is already mining in the area and is an established company. The percentages they offer included penalty charges and transportation costs for the lessee. Are the royalty monies up for negotiation at the beginning of the lease?

Lenzie,

You can demand a royalty amount up front then adjust it for production levels and/or prices realized later as in a windfall situation. Mining companies don't often buy outright as it is too expensive and risky for them. You are better off in my opinion with a royalty that is lower and can be calculated from public information or third party documentation (production and prices) than to have your royalty subject to costs you can't control such as transportation and quality penalties. Sloppy mining practices can bring down your quality and since your coal or minerals are usually mixed with others at the plant, you could be unfairly penalized. Lower royalties may also entice the operator to maximize the exploitation of your minerals unlike the oil and gas business. There are no set rules to contract terms. They must just be hammered out through negotiations so a fair deal is had by both parties.


Lenzie Summers said:

Gary,

Thanks for your response. The company is already mining in the area and is an established company. The percentages they offer included penalty charges and transportation costs for the lessee. Are the royalty monies up for negotiation at the beginning of the lease?

It depends on the economics of mining & selling the coal. Coal that can be gotten at a low operating/capital cost, or sold at a high price, is worth more. Recent royalty rates have been 5% (4%-7%) for underground mining; and 7.5% (6%-9%) for surface mining. However, rates in Appalachia and the west are at least 8.33% for underground and 12.5% for surface, with big up-front bonus payments.

More coal is now being demanded from the Illinois basin (IB), so those economics could improve because of supply/demand. Some leases at these kinds of rates are already in effect in the IB. Some landowners formed coal associations in the 1970's for the purpose of obtaining high sales prices of old form leases for their minerals. Some were successful, and some were not. Those that were unsuccessful either took too long, or overvalued their lands.

Present market prices are $45.00/net ton FOB mine, and up, and seem poised to rise. Some commentators indicate prices above $90.00 would be in balance with Appalachian coal, whose production is declining due to depletion and regulatory reasons. Also, foreign buyers (China, India, et al) are demanding large quantities of all grades of coal, and domestic buyers of Appalachian coal are having to find other sources (of which IB is the most likely).

There are two general types of lease, old form (favorable to landowner) and short form (favorable to mine operator). The variables are minimum royalty, bonuses, covenants, remedies, allowable deductions from the actual price received before computing royalties, and audit/inspection rights, among others. These are all negotiable. Short form leases essentially allow the mine operator do do whatever it pleases. It takes more negotiating leverage to get improved terms (large land position, very favorable economics).

We have 40 acres. I know not much. In your opinion, would that be enough leverage to ask for a bonus and if so what dollar amont is resonable? We would like to get as much as possible up front.