What Are Mineral Rights Worth?
If you’re a mineral rights owner, you can earn a steady royalties passive income. In fact, you’re probably already bombarded with unsolicited offers. But how to determine which offer provides the best value for your asset?
Whether you own mineral rights to hydrocarbons or hardrock minerals, you should know their worth if you’re planning to sell. Unlike real estate, where property prices are publicly stated, mineral rights prices are undeclared.
That leaves mineral owners needing clarification when thinking about getting a good deal. While you can seek professional assistance, the discussion below might help clear your perspective regarding the subject.
Can I Earn Royalties Passive Income By Selling My Mineral Rights?
Yes, you can earn royalties passive income by selling your mineral rights to an operating company. This company will further work to extract and sell the minerals on your property. Thus, providing a steady income stream for you.
However, for this process to work smoothly, you’ll have to determine the correct value of your mineral rights. A well-known way is to use the ‘rule of thumb.’ While this isn’t a standardized approach, it calculates the yearly income produced by your assets and multiplies it by three or five times.
For example, if the minerals on your property would help a company earn $1000 a year, the selling price should be either $3000 or $5000, depending on the negotiable amount.
But it’s not that easy. With many factors in valuing mineral rights and every business and property being entirely different, you simply can’t go by a single rule.
Below, we’ve discussed the factors involved while evaluating your mineral rights’ worth to give you further insight.
How Much Are Mineral Rights Worth Per Acre?
When calculating the worth of mineral rights, most people need to compare their prices to other owners. That’s why there can’t be a mandated price for the mineral rights per acre. No two mineral rights to two different properties can be entirely the same.
The factors that differentiate them include the diverse lease agreement terms, the royalty percentage in the lease agreement, and your type of ownership.
So, how to calculate the worth of your mineral rights per acre? Understanding these terms might help you out.
Gross Acres and Net Acres
Believe it or not, most mineral rights owners don’t understand the difference between gross and net acres. This creates confusion while evaluating their mineral rights.
Mainly, the gross acres define your entire ownership location. Typically, your lease agreement and mineral deed will denote this number. These are usually clean, rounded numbers, so you will probably know the exact amount of mineral property you own.
However, you must make calculations based on net mineral acres when selling your mineral rights. This amount is usually mentioned on the check or pay order you used to pay for your lease.
Mineral Acres and Royalty Acres
Mineral buyers use mineral acres and royalty acres to compare two properties. For example, if you have leased one mineral acre at 12.5%, it will be counted as one net royalty acre.
However, if you have leased the same mineral acre at 25%, buyers will count it as two net royalty acres. So, according to your lease amount, the number of royalty acres you own increases the value of your mineral rights.
Factors That Determine The Value of Mineral Rights
Even if you correctly calculate the correct value of your mineral rights per acre, various other factors influence the final price. When determining your mineral rights’ worth, these are the factors you should consider.
Producing or Non-Producing?
You might own the property on a surface level, but do you own the rights to produce? Whether your mineral rights are producing or non-producing is essential in determining their value.
That’s because producing rights can provide a steady income stream for the seller in the future, while non-producing rights cannot.
Previous Mineral Production
If there has been any previous mineral production in the area around your property, the price of your mineral rights will automatically increase.
Return On Investment
Naturally, the person willing to buy your mineral rights wants to make additional money by extracting valuable minerals from your property. That’s why the potential return on investment plays a vital role in mineral rights value.
For example, if yours are non-producing mineral rights, they might not have any immediate investment potential. That’s why the buyer will probably invest in them for any potential benefit in the future, which will lower their current price.
This is the most critical factor influencing the worth of your mineral rights. The location does not refer to the city or country your property is in, but instead, to how rich the location is in mineral resources.
For instance, if you own mineral rights to a property with known mineral extractions, your rights will become more valuable. Besides, the more ongoing extraction activities in your area, the more your mineral rights will be worth.
Remember, mineral deposits are scattered unevenly across the earth’s surface. So even if the mineral rights of your neighboring owner are worth millions, yours might not be worth much after thorough geological assessments.
Selling Your Mineral Rights
Apart from determining the area, you own and the factors associated with evaluating your property, selling your rights will also influence their worth.
For example, if you make a temporary lease, you will receive a smaller amount than an outright sale. But, you will retain limited rights to the property. Similarly, whether you receive a single hefty payment or monthly royalties passive income will also determine the overall value of your rights.
Remember, there are four types of mineral rights ownership. So, whether you own mineral interest, royalty interest, working interest, or overriding royalty interest also dictates the value of your rights.
Each of these ownership comes with its pros and cons. For instance, if you sell your working interests, you will receive a passive income and remain prone to losses. On the other hand, selling a royalty interest will shield you from losses but will limit your overall financial gain.
Contemplating the worth of your mineral rights is not a piece of cake. Make one mistake, and you can lose hundreds or even millions in the long run.
So, if you’re planning to sell your mineral rights, you should compare your current offers and conduct thorough due diligence regarding the nature of your property. If you assess a potential for long-term passive income, hiring a professional consultant is the ideal option.
While professional consultants may charge a hefty amount, a clear perspective may save you from making questionable decisions regarding your property.