Coal Resource Economic Evaluation
Authors: Pederson J.A. , Blair T.J. , Conners F.W. , Smith M.T. 
Published: January 2008

The U.S. Geological Survey Coal Resource Economic Evaluation Procedures were developed to estimate the economic value of publicly owned coal resources. These procedures are used to determine the value of competitive coal tracts, lease modifications, and land exchanges in addition to assessing commercial quantities for preference right lease applications. The methods currently used in performing tract evaluations are the comparable sales analysis considers recent transactions in the vicinity of those lands being evaluated. The income approach, or discounted cash flow (DCF), uses the annual costs and revenues resulting from the development and production of the coal resource on the tract being evaluated to determine net present value. The DCF model portrays the mine life cycle, which is divided into four phases: predevelopment, development, production, and post-production, with appropriate activities defined for each phase. The model is designed so that the duration of each phase can be varied independently. All outlays of funds over the life of the project, from predevelopment to post-production, are grouped into appropriate cost categories. Revenue is calculated using the price of coal applied to the production schedule. The annual cash flows are then discounted using an appropriate discount rate and summed to obtain net present value.

Introduction

The policy of obtaining value for the disposal of mineral resources on public lands is based on (1) passage in 1951 of 31 United States Code (Public Law 81-583) which stated that a fair price should be obtained for things of value, (2) Office of Management and Budget Circular A-25 (Maurice H. Stans, Director, 1963) stated that fair market value should be obtained for the sale of federally owned resources, and (3) the Federal Coal Leasing Amendment Act of 1976 (Public Law 94-377) which stated that 'No bid shall be accepted which is less than the fair market value, as determined by the Secretary, of the coal subject to the lease.' As input into this fair market value determination, the U.S. Geological Survey has developed a set of procedures to perform evaluations of coal resources for sale in a market dominated by private firms.

The procedures consist of step-by-step instructions, including forms, computer programs, and reports, developed for the purpose of estimating resource economic value of coal tracts. These procedures, which can be used to evaluate either surface or underground coal deposits, are used to accumulate, organize, and analyze data needed to estimate resource economic value for competitive leasing, lease modifications, and exchanges, or to determine commercial quantities for preference right lease applications.

These evaluations involve two methods:comparable sales anddiscounted cash flow analysis.

The comparable sales approach, which included the use of historical values as discussed at the Interagency Land Acquisition Conference1, has limited applicability where price levels and legal bases have changed or are changing. Therefore, primary emphasis is on the discounted cash flow approach.

Discounted Cash Flow Model

The DCF model, as developed by Dean2, was applied by McLean3 to petroleum projects. Weir and Clark's4adaptation of the DCF approach presented examples of both surface and underground coal mining operations. Rudawsky5 presented the concept of grouping the input data into three categories - physical attributes, revenue, and costs- in a manner similar to that shown in Figure 1.