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05-11-2015 
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2012 
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See our latest article on Quarry Capitalisation Rates.

 

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06-12-2011 
Rod Stephens has produced two thesis reports namely The definition of the word Minerals in relation to the UK Extractive Industry and The Valuation of Long Term Interests  A case study of the acquisition of WMCs Olympic Dam Mine by BHP Billiton (Distinction). These reports can be made available on request for selected parties only. Terms and Conditions apply.

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Landfill Valuations

 

The waste management industry has been consolidating over recent years and coupled with more stringent legislation, such as Landfill levies and Carbon Tax is rapidly changing. Expertise is required to keep pace with the changes but also to have an appreciation as to how this market will unfold in the future, with the introduction of AWTs, increased recycling, improved education, higher costs and tighter regulations.

 

Landfill sites are valued by assessing the void space of the site and then applying a royalty to assess the income for the life of the operation. In reality the process is not as simple as it sounds. There are significant complications involved within landfill valuations. It is recognised that landfill sites are highly regulated and often involve extensive environmental impact assessment reports, stringent planning consents, EPA licences and other environmental legislation. It is essential to have a strong understanding of all of the issues involved at landfills and how these issues impact on the valuation.

 

It is also appreciated that older landfills with less stringent regulations and less environmental capital costs can often undercut a modern fully lined landfill pricing structure and in effect become more valuable than its modern equivalent. Unfortunately there are no government incentives to equalise this scenario and quite often the poorly managed landfills can be more successful than their modern rivals. To fully reflect this scenario, higher risks need to be adopted due to the potential for future legislation to correct this anomaly.

 

Other difficulties involved with landfill valuations involve the increase in both AWTs and increased recycling, whereby input levels at the landfill are often trending downwards. Again the reality of this scenario is that as volumes decrease, the void space life is increased and unit costs increase and this in turn should reflect in an increased royalty. Difficulties occur as there is often little or no market evidence to support increases in royalties and a great amount of reliance is placed on the valuer to use their expertise and apply the equivalent royalty rate.

 

It also needs to be appreciated that many Local Government Authorities (LGAs) that operate landfills quite often do not allow neighbouring LGAs to use their facility. However it is usual to carry out a valuation based upon the potential of a hypothetical purchaser rather than the actual operator. If a restricted market policy were changed then it would obviously have a positive impact on any valuation and this factor needs to be given careful consideration.

 

Valuations of waste recycling operations, waste transfer stations, AWTs, landfill gas installations and other fixed waste management assets are often based on the land value plus plant, machinery and equipment. However it needs to be recognised that the planning consent for these specialist operations are often of significant value and generally adds a premium to the land value.

 

Roderick Stephens is a Member of the Waste Management Association of Australia.

 

 

Valuation Basis

   

The Australian Property Institute do not have any guidelines on landfill valuations.

 

There has been some conflicting case law on the subject throughout Australia, and much confusion between the application of Business Valuations for landfills (often the Hypothetical Tenants interest), and Asset Values of landfills (the Hypothetical Landlords interest), which are invariably very different. However the Business value always has to be higher than the Asset Values, in order that the pricing structure of the business is sufficient to support the expected returns of the assets over the life of the landfill, but also to ensure that there are sufficient finance / costs to enable the landfill to be properly restored, and / or capped and restored, which was an issue that appeared to be overlooked in previous case law on the subject. But also there are additional ongoing liabilities involved with landfills for landfill gas and leachate management and after care of the restored lands long after the landfill has closed, and these costs also have to be factored into the valuation, and quite often appear to be completely ignored. There is also confusion about the difference between a headline royalty rate for void space, which in essence is the purchase price divided by the total void space, and this royalty is very different to the "real royalty" derived from analyses of market transactions, which takes account of the life of the landfill and expected input levels, and can provide a starkly different outcome. 
 
Past case law on landfill valuations has involved both RTA v Collex 2009 NSWCA 101 and Collex v RTA 2006 NSWLEC 579, as well as the more recent cases of Roads Corporation v Love 2010 VSC 32. All of these cases highlight the dangers of Courts relying too heavily on expert opinions, which were criticised by the Courts, as the experts predominantly failed to provide any market evidence in support of their contentions. Further that the capitalisation rates adopted were also not based on local market evidence and created unrealistic values.
 
The ever changing carbon tax legislation for landfills is also creating a great deal of uncertainty in the market. But also the recent scrapping of landfill levies in Queensland has further confused the direction of the waste management industry in that State, and these issues confirm the ever changing landscape of the landfill and waste management industry.
 

Some Key Factors required to perform a Landfill Valuation

 

Geology

  • Understanding of Geology, faults, fissures, overthrows, nature of deposit etc
  • Interpretation of boreholes, trenches, material testing, and product structure
  • Extent of Overburden and costs of removal and storage
  • An assessment of whether the geology will prevent egress of leachates, landfill gases and contaminants from the site, or whether the landfill needs to be lined
  • Whether the site already contains methane gases from past coal workings in the area.

Hydrology and Hydrogeology

  • Understanding of the local surface and underground water regime

Services

  • Provision and availability of services to the site
  • Sterilisation or restriction of void space by the provision of services

  Legal

  • Ownership of the surface land for access to the void space (Tangible Assets)
  • Ownership of the void space (Intangible Assets)
  • Planning Consent to landfill, Zoning and other Local Government constraints
  • Environmental Impact Assessment and EPA licensing.  Pollution Control
  • Easements, restrictions, covenants, wayleaves, and other legal constraints
  • Native Title issues
  • Restoration, Rehabilitation, After Care. Liabilities, costs or benefits
  • Royalties, minimum or certain rents, site rents

 

Economic Factors

  • Overview of the Australian waste management markets
  • Overview of State waste management markets and landfill levies
  • Relationship to population changes
  • State of the national, regional and local economy
  • Nature and number of competition within a given area.  Market share
  • Size of the market and pricing policy.  Market Capacity
  • Niche products that operate in a regionalised or national market

 

Processing Operation

  • Method of landfill - types of plant, machinery and equipment
  • Market input, capacity, constraints to expansion, product mix
  • The market input will derive the Life of Landfill
  • Use of recycling operation in conjunction with landfill
  • Landfill gas extraction and generation facilities, flare stacks

 

Risk Management

  • Capital Asset Pricing Model.  CAPM
  • Weighted Average Cost of Capital.  WACC
  • Strengths, Weaknesses, Opportunities, Threats.  SWOT
  • Monte Carlo Simulation

Valuation Methodology

  • Sales comparison. Sales can be rare and often requires valuer judgement
  • Income Approach. If property is leased then this can provide good evidence
  • Cost Approach. Can provide evidence of value
  • Capitalisation of royalties, Discounted cash flow, Summation method
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