WALTER COSTELLO has worked on asset valuations in Ireland, Australia and elsewhere, and explains the details of his job, dealing with the mundane and the massive.
Plant and machinery asset valuation scenarios, in general terms, appear to be very complex matters to many people, other than some financial accounting and consulting professionals. Generally speaking, anything that can be legally owned can be classed as property. All property can be grouped into two main categories – real property and personal property. Real property relates to land and things attached to the land legally, whereas personal property is regarded as all other property not deemed real property or real estate. Personal property is further divided into subgroups known as fixtures, chattels and intangibles.
Fixtures are those items that have been attached to the land in such a way as to become part of the land. Chattels are those items that can be classified as personal property and may be distinguished from real property by the fact that they can be moved from one location to another. However, a packaged steam boiler in one location may be deemed a fixture if it is used to heat the building and is, as such, part and parcel of the land and buildings, whereas, if the building next door has an identical boiler but it is used in the production process, it would be deemed to be a plant and machinery business-related asset.
Personal property is commonly referred to as an asset; however, it is a generic term and may also be used in relation to the individual tangible and intangible assets of a business enterprise, which may include:
■ customer receivables; I inventories;
■ plant and equipment; I land; and,
From a valuation point of view, the term ‘asset’ is taken to mean the individual tangible and intangible assets combined as a business enterprise.
How valuers operate
The role of the machinery and business valuer is to ascertain the valuation requirement, the appropriate basis of value for the asset category. The main methodologies usually adopted include one or more of the following approaches:
■ market or sales comparison;
■ income approach (including discounted cash flow); and,
■ cost approach (depreciated replacement cost).
The many other factors involved can include depreciation methodology, obsolescence in various forms, useful lives and residual values.
Apart from standard machine tools and general run-of-the-mill equipment, most machinery and business assets are unique and specific to each organisation. Apparently identical models may have different company or corporation specifications and subsequent output may differ from the nameplate capacity for each, possibly affecting their value to the business. The majority of company mergers and acquisitions are completed as a packaged deal and the individual asset categories are not reported separately. The option the company or corporation has is to have specific valuation specialists report on each asset category at the final conclusion.
The International Valuation Standards Council said in 2007 that specialised property is defined as a property (or asset) “that is rarely, if ever, sold in the market except by way of a sale of the business or entity of which it is part, due to uniqueness arising from its specialised nature and design, its configuration, size, location, or otherwise”.
Discounted cash flow methods commonly used in the valuation of a business value, by default, all assets both tangible and intangible and as such, the individual values attributable to the property, plant and equipment are typically not disclosed to the marketplace.
When required to determine the value of the individual assets used to generate cash flows, the valuer will normally consider a market comparison approach, if available, or a depreciated replacement cost approach, as appropriate.
The value of the business enterprise may need to be segregated into the value of each of the individual assets used by that enterprise in the generation of its cash flows for a variety of purposes, including tax consolidation, capital gains tax and stamp duty-related matters.
When required to determine the value of the individual assets used to generate those cash flows, the valuer will normally consider a market comparison approach, if available, or a depreciated replacement cost approach, as appropriate. The valuations may be required for any or all of the following reasons:
■ mergers, takeovers and acquisitions;
■ purchase price allocation;
■ financial reporting;
■ tax purposes including depreciation/consolidation/capital gains; and,
Work at scale
I have been a machinery and business valuer now for over 50 years and have been based in Sydney, Australia, for the last 25 years. Some of the projects I have worked on recently include: Kalgoorlie Consolidated Gold Mines (KCGM), the largest open cut pit in the world; Mount Isa Mines (MIM) – six copper, zinc and lead mines with concentrating, smelting and refining facilities; Boddington Gold Mine (BGM) – a major open cut pit and township; and, Brunei Shell five train liquefied natural gas (LNG) plant and its related 130ha petroleum facilities.
In Ireland, my work included Kerry Group facilities in Charleville, Co. Cork, Shillelagh, Co. Wicklow, and Listowel, Co. Kerry. I also worked on Lakeland Dairies buildings and plants at Bailieborough and Killeshandra, Co. Cavan, Banbridge, Co. Down, and, Lough Egish, Co. Monaghan.
The scope and scale of work in Australia can be daunting to the uninitiated. A typical plant and machinery valuation of soft and hard rock mines would include: the mobile fleet of haul and service trucks; excavators; mining shovels; loaders; drills; draglines; dozers; light vehicles; hoppers; crushers; feeders; conveyors; screens; ball mills; conveyor systems; concentrators; smelters; refining equipment; roasting machines: buildings; and, campsites.
A 400t-haul truck costs approximately AU$6m, a face shovel about AU$20m, a dragline about AU$100m, and an underground coal mine longwall system around AU$100m.
The normal direct and indirect costs include: process piping; electrical services; controls and instrumentations; structures and civil works installation costs; engineering; supervision; design; and, contingencies.
Other elements quantified and included by the plant valuer are haul roads, ponds, dams, stockpile pads, tailings dams, underground travel roads, ventilation shafts, conveyor galleries, water and electrical reticulation systems, to mention but a few. A typical engineered tailings dam of 1sq km costs AU$100m, and with animal and bird net protection, add AU$250k. A typical six-metre diameter lined shaft, 1,000m deep, costs AU$10k per metre diameter by depth, or AU$60m: add the headframe, which would add another AU$20m. A typical single pit gold mine with processing could have a cost of approximately AU$4bn. An accompanying 1,500-person camp will cost AU$125m or more.
Walter Costello FRICS FSCSI
Valuation surveyor with Industrial Valuation Services, New South Wales, Australia