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From page 59... ...
The current treatment of these resources leads to major anomalies and inaccuracies in the accounts. For example, both exploration and research and development generate new subsoil mineral assets just as investment creates new produced capital assets.

From page 60... ...
The major difficulty for the national accounts has been the lack of adequate data on the quantities and transaction prices of mineral resources. Unlike new capital goods such as houses or computers, additions to mineral reserves are not generally reflected in market transactions, but are determined from internal and often proprietary data on mineral resources.

From page 61... ...
The second section describes BEA's approach to valuation, including the five different methods it uses to value subsoil mineral assets. The third section highlights the specific strengths and weaknesses of BEA's approach, while the fourth considers other possible approaches.

From page 63... ...
Figure 32 reflects the heterogenous nature of mineral resources by separating the reserves and other known resources for a particular mineral commodity according to their exploitation costs.2 The lowestcost reserves are in class A; their quantity is indicated in the figure as OA and their exploitation costs as ACE. The next least costly reserves are found in class B

From page 64... ...
In this case, mineral producers, like other competitive firms, will have an incentive to produce up to the point where the current production costs of the next unit of output, inclusive of rents, just equals the market price. When Hotelling rents exist, they are the same for all classes of reserves for a particular mineral commodity market.

From page 65... ...
Techniques for Valuing Mineral Assets As noted in the last section, the major challenge in extending the national accounts to include subsoil minerals is to broaden the treatment of mineral assets to include additions and depletions and to incorporate depletion in the production accounts. This task involves estimating the value of the subsoil assets.

From page 66... ...
Invested capital includes physical structures such as roads and shafts, as well as capitalized exploration and drilling expenses. The total value of the subsoil assets equals the sum of the value of the mineral and the value of the associated capital (see Figure 33~.

From page 67... ...
, taxes, royalty obligations, and environmental liabilities. Because the transaction usually includes not only the mineral resources, but also associated capital, the value of the capital must be subtracted to obtain the mineral value.

From page 68... ...
After adjusting for royalties, this yields a social asset value for the above property of $3.4 million. The final adjustment is for associated capital, which is assumed to have a value of $0.8 million.

From page 69... ...
Because of cost differences, using class M to value classes A through L would yield an underestimate of the value of these reserves. Net Present Value A third valuation technique, the net present value or NPV method, entails forecasting the stream of future net revenues a mineral resource would generate if exploited optimally, and then discounting this revenue stream using an appropriate cost of capital.5 Under certain conditionssuch as no taxes the sum of the discounted revenue values from each time period will equal the market value of the resource.

From page 70... ...
Under the Hotelling valuation principle, the price of the gold reserves would be $15 per ounce, and the total value of the gold assets would be calculated as $1.5 billion. Note that it would still be necessary to deduct the value of capital from the $1.5 billion to obtain the value of the mineral reserve.

From page 71... ...
ACCOUNTING FOR SUBSOIL MINERAL RESOURCES 71 BEA's Five Basic Valuation Methods Current Rent Method I Current rent methods I and II are NPV methods based on the Hotelling valuation principle. The attraction of the Hotelling valuation principle is the ease with which the calculation can be performed, avoiding the need to forecast mineral prices and to assume an explicit discount

From page 72... ...
Current rent methods I and II are quite similar in construction. They differ primarily in the method of adjusting for the value of associated capital.

From page 73... ...
The only difference is in the method of adjusting for associated capital. The value of the associated capital is subtracted from the total value of the mineral asset to obtain mineralreserve values in current rent method II.

From page 74... ...
.6 These assumptions lead to a tractable set of calculations. The present discounted value of the mineral stock as calculated using this present value method is simply the stock and flow values calculated with current rent method II, multiplied by a "discount factor" of between 0.86 and 0.89 for the 3 percent discount rate and between 0.63 and 0.70 for the 10 percent discount rate.7 The calculated values are, then, lower than the values derived using current rent method II, with the difference depending on the discount rate employed.

From page 75... ...
The reason for the discount is straightforward. Under current rent method II, which relies on the Hotelling valuation principle, it is assumed that net revenues rise at the discount rate.

From page 76... ...
BEA does not give the barrel factor used in its calculations, which should vary by deposit and depend on the rate at which future cash flows are discounted, but we estimate that it averages approximately 0.375. The value of the asset calculated with current rent method II using the Hotelling valuation principle is then multiplied by the barrel factor.

From page 77... ...
The result was then adjusted for associated capital using the same method as in current rent method II. The transaction price method is shown in Box 37.

From page 78... ...
Standard rateofreturn measures include profits on mineral assets in the numerator, but exclude the value of mineral reserves in the denominator. Gross rates of return for all private capital decline from 16 percent per year if mineral reserves are excluded to 1415 percent if mineral reserves are included.

From page 79... ...
Given the algebra of the different valuation techniques, it is not surprising that the replacement cost method yields lower values than the current rent methods for gas since the replacement cost method is really current rent method II multiplied by 0.375. One important question concerns the impact of including subsoil minerals in the overall national accounts.

From page 80... ...
naturalresource accounting effort, along with the sparsity of observable market prices with which to value mineral additions, depletions, and stocks, the progress made by BEA to date is remarkable. Furthermore, the task was completed by a group of eight BEA officials working part time on this assignment while continuing with their regular duties.

From page 81... ...
BEA, on the other hand, treats mineral assets on the same basis as fixed capital. For example, according to BEA calculations, booking the exceptional Alaskan oil finds in 1970 augmented the existing stock of U.S.

From page 82... ...
mineral reserves is changing over time. One of the important findings from the BEA data is that the index of the total constantprice stock of mineral assets has been approximately constant from 1957 to 1991.

From page 83... ...
Heterogeneity of Reserves A major problem with most accounting approaches is that they assume all reserves are homogeneous in terms of grade and costs. For example, under the Hotelling valuation principle, average extraction cost should be calculated as the average cost of extraction from all reserve classes.

From page 84... ...
A further difficulty is that the tendency is to observe the value of the total bundle of assets and liabilities (reserves, associated capital, environmental liabilities, royalty and tax obligations, and so on) , so that even if the transaction price were observed, the price of the mineral reserve could not readily be determined.

From page 85... ...
Hence, BEA's asset account includes a blank row for measures of stocks and of additions to and depletions from unproved subsoil assets. Yet these nonreserve resources are likely to have some positive market value because of their option value.

From page 86... ...
in mineral resources. The failure to consider nonreserve resources means that additions to, as well as depletions from, different categories of nonreserve mineral assets are ignored.

From page 87... ...
Because the value of the asset is likely to be overestimated through use of the Hotelling valuation principle, current rent method II will nevertheless tend to overvalue the stock of mineral reserves. Setting aside issues of heterogeneity and assuming that appropriate corrections are made for associated assets and liabilities, the transaction price method is the only method that in principle can provide unbiased estimates of the mineral value.

From page 88... ...
In the case of the metals category, however, current rent method I gives negative values for the stock of metal reserves in the 1980s, which are clearly biased downward. It appears, then, that with current rent method I, the upward bias in measurement of total asset value due to use of the Hotelling valuation principle is outweighed by an excessive deduction for associated capital.

From page 89... ...
Production Constraints and the Hotelling Assumptions As noted earlier, current rent methods I and II calculate total asset values based on the Hotelling valuation principle, which assumes that producers face no production constraints and that the net price rises at the rate of interest. In general, producers do face production constraints, and net prices rise at less than the rate of interest.

From page 90... ...
It appears that royalty and severance taxes are included in the unit costs used to calculate net rent in valuation methods other than the transaction method for oil and gas. This treatment is inconsistent with that under BEA's transaction price method, whereby no adjustment is made for the present value of taxes and royalties.

From page 91... ...
ShortRun Volatility in Price Where the value of a mineral asset is a function of the current extracted mineral price, as in current rent methods I and II, the NPV method, and the replacement cost method, shortrun volatility in mineral commodity prices makes the value of the stock of mineral assets itself a volatile series. To the extent that price movements are temporary excursions from longrun levels, these changes in stock value will show up as revaluations.

From page 92... ...
In quantity terms, increasing scarcity might be reflected in a declining constantdollar stock of mineral resources or of some component of mineral resources. On this front, BEA is developing a constant1987price series for mineral stocks, shown in Figure 34, that is equivalent to a physical quantity series, aggregated across different mineral types on the basis of 1987 mineral prices.

From page 93... ...
FIGURE 34 Stocks and Changes in the Stocks of Subsoil Assets in Constant 1987 Dollars for the United States, 1958 to 1991. Source: Bureau of Economic Analysis (1994b:Chart 2~.

From page 94... ...
\' ^\ J l ll l l l ll ll l ll l l l ll l lll lll lll ll l l l 1958 1965 1970 1975 1980 1985 1990 FIGURE 35 Stocks and Changes in the Stocks of Subsoil Assets in Current Dollars for the United States, 1958 to 1991. Source: Bureau of Economic Analysis (1994b:Chart 1~.

From page 95... ...
All NPV techniques, which include both current rent methods and the replacement cost method, omit asset value that is created by managerial flexibility (see Davis, 1996~. With mineral assets, the ability to alter extraction as prices move up or down can create significant option value, especially for marginal deposits.

From page 96... ...
The current rent and discounted present value valuation approaches used by BEA to calculate resource stock and flow values are similar to those employed in other countries, with current rent method I being used most widely. The shortcomings of this approach were discussed earlier.

From page 97... ...
The starting point is physical data on the stock and annual use of the minerals. As noted early in this chapter, the simplest valuation techniques are current rent methods I and II, which derive a resource rent for the current period as the difference between the extraction costs and the wellhead or surface price of the mineral.

From page 98... ...
Current rent method I sometimes produces negative values for mineral reserves. Because Canada is concerned with regional depletion issues, it produces monetary and physical accounts for each province.

From page 99... ...
have found that multiplying the total asset value as calculated using current rent method II by a fixed fraction can eliminate the upward bias in total reserve value and produce estimates that are closely aligned with the observed market values of mineral assets. The fraction used, which lies between zero and one, varies by commodity.

From page 100... ...
. To estimate the value of the mineral reserves, the value of associated capital must still be deducted from the total asset value.

From page 101... ...
He thus advocates deducting an amount from the conventionally measured NDP during the extraction period to create an adjusted sustainable NDP.14 It may be noted that the production of satellite ac 14The deduction proposed by E1 Serafy is R/~1 + r) n+l, where R is the current depletion, r is an appropriate discount rate, and n is the number of years of mineral reserves remaining assuming a constant extraction path.

From page 102... ...
At very limited cost, BEA has produced useful and welldocumented estimates of the value of mineral reserves. These efforts reflect a serious and professional attempt to value subsoil mineral assets and assess their contribution to the U.S.

From page 103... ...
the distortions resulting from the constraints imposed on mineral production by associated capital and other factors, (4) the volatility in the value of mineral assets introduced by shortrun price fluctuations, and (5)

From page 104... ...
The mineral accounts as currently constructed are of limited value in determining the threat to sustainable economic growth posed by mineral depletion. The value of subsoil mineral assets in the United States could fall because much cheaper sources of supply are available abroad.

From page 105... ...
The United States has historically played a leading role in developing sound accounting techniques, exploring different methodologies, and introducing new approaches. A significant investment in this area would help improve such accounts in the broader world economy.

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