Cost of Mineral Rights
The acquisition of mineral rights can result it windfall profits if rich mineral deposits are discovered. Many costs are involved in obtaining mineral rights, however. Some of these costs are direct and some are indirect. Royalties and signing bonuses (or the purchase price if mineral rights are purchased), exploration, evaluation and legal assistance all factor into the total cost of obtaining mineral rights.
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Royalties and Signing Bonuses
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A mineral rights producer will generally offer one of two types of royalties--value-based or volume-based. If value-based royalties are agreed upon, the producer will pay royalties to the mineral rights owner according to an agreed-upon fraction of the total economic value of the minerals extracted. If volume-based royalties are agreed upon, royalties will be paid based on a fraction of the total volume of the minerals extracted regardless of the price they command on the market. In addition, many mineral rights producers offer upfront contract signing bonuses to landowners in exchange for lower royalty rates.
Exploration and Evaluation Costs
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Exploration and evaluation costs are indirect costs because mineral development companies usually prefer to lease for a short period, during which exploration is conducted, in order to estimate whether enough mineral deposits will be found to justify the cost of leasing or purchasing mineral rights. The cost of such exploration depends on the type of mineral deposits being searched for and the location of the deposits (how far underground they are, for example). Evaluation is the process of estimating the value of a given mineral deposit based on the quality of the minerals and projection of future market prices.
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Working Interests and Overrides
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It is possible to reduce the costs (and profits) of leasing mineral rights by purchasing fractional interests (known as "working interests") in the total production of a given mineral deposit. Overrides are fractions of working interests that are normally used to compensate engineers and other individuals associated with production.
Purchasing Mineral Rights
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Royalties can be avoided altogether by simply purchasing mineral rights. The purchase of mineral rights does not transfer rights to the surface, but it does give the mineral rights owner the right to enter the land and extract minerals (by drilling oil wells, for instance). Many landowners will refuse to sell mineral rights, preferring instead to receive long-term royalties.
Legal Costs
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Lawyers will be required to draft the mineral rights sale or lease agreement. Since these documents are often complex, and since state mineral laws differ in important respects, most mineral producers retain the services of lawyers specializing in the specific type of mineral they are seeking to extract.
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