OPTIONS IN STRUCTURING THE SALE OF MINERAL RIGHTS

By Skip Peel, Independent Landman

Minerals are classified generally as producing and non-producing.  Non-producing minerals may be leased or un-leased.  Depending on the particular combination of categories there are associated variables that are considered in a value calculation.  There are also varying business models employed by brokers and buyers of minerals to identify willing sellers.

The universe of buyers for non-producing, un-leased minerals is relatively small.  This is largely due to  geologic risk, high capital requirements and uncertainties regarding the time to realize a return on investment.  The buyers who have acquisition strategies targeting this class of mineral interest are often large, well capitalized companies that specialize in acquiring large acreage positions.  For that reason their strategy may not include modest to small acreage tracts and they rarely send mass mailings to mineral owners of record.  Some independent energy companies have business models where they develop a geologic prospect, acquire a core lease block and promote the prospect to operating companies. 

The universe of buyers for leased, non-producing minerals is larger and more diverse.  When leases or memorandums of lease begin to be recorded in the public record they become a readily available and somewhat vetted source of contact information.  Although a lease provides greater detail as to terms than a memorandum both contain the key information that can be used to build a mailing list.  All that is required is the name of the lessor, their mailing address and the legal description of the lands leased.  As mentioned earlier a land company will perform the research required to identify the individual mineral owners through conveyance instruments in the public record.  Although not a full title review that work is sufficient to give a degree of confidence that the lessor on the lease indeed holds some undefined ownership interest in the mineral tract.  There are other less accurate sources from which to source contact information such as Interested Party lists which are part of drilling unit applications and local tax records.

Once a company has the information required to make a mass mailing the question becomes how they choose to structure the offer.  Some use overly vague and purposely misleading language and send hundreds of thousands of letters with little seeming thought to the location and prospective nature of the mineral interest.  The bulk of mail offers are short on detail, especially an actual dollar amount per acre, and represent a fishing expedition for interested sellers.  A return response usually results in a negotiation that is intended to determine the lowest price acceptable to the seller.  It is not unusual that when a company making such an offer actually does some research on the specific location of the minerals they will decide to decline to make a specific dollar offer because the facts turn out to be less than acceptable based on the acquisition model.  There is nothing illegal or inherently unethical about making unsolicited offers to buy or broker minerals by mail. 

Websites are the new means to find interested mineral sellers.  Perform an Internet search and you will get an idea of just how many are currently active.  Obviously this avoids the need to do any research for contact purposes but it does create a huge challenge for the manpower and overhead to process large numbers of contacts not to mention the research that would be required to actually make a fair market offer through some reasonable level of due diligence on minerals scattered across the United States.  In my opinion both approaches are based on generating a large number of potential deals and making enough, off the few that actually result in a sale, that will cover overhead and generate a net profit.  For those reasons I have my doubts that Internet offers generally represent what most would consider to be a fair market offer. 

So how does an interested seller go about vetting mineral acquisition companies and generating multiple offers for comparison?  Those that have a trusted banker or attorney may be able to get referrals to local individuals or companies that broker or buy minerals.  In my opinion the odds of receiving a fair market offer are improved by dealing with those who are most likely to be familiar with the mineral history and any current relevant activity in the proximity of the mineral interest.  With a firm offer in hand it is possible to judge if one or more website mineral companies are willing to make a competitive offer or to counter an offer received by mail.  Sellers would do well to disregard claims by any broker or buyer that they always make the best offer.    

Those individuals or companies that acquire mineral interests are often characterized as either wholesale or retail buyers. Wholesale buyers generate their own prospects based on their acquisition strategy.  They negotiate the price and provide a purchase and sales agreement.  Although there is no middle man (broker) involved in a wholesale transaction there is no guarantee that the offer is the best available.  Retail buyers utilize brokers and expect to pay for the services they provide.  Brokers will use an option contract to define the specific terms of a sale.  The option has an effective period during which the seller can take no actions to burden or convey the mineral interest and is binding on the seller for a buyer who will fulfill the terms of the option within the effective period.  Option contracts serve to work out all the terms of a sale in advance and provide a reasonable period for a broker to perform title review, assemble a buyer preview to provide facts that bolster the option price,  contact multiple buyers, get a commitment and make closing arrangements.  Sellers, in this case called optionors, are not bound to accept any sale that does not conform to the terms of the option.  If the broker fails to find a buyer at the agreed upon price then the option will expire and the mineral owner is free to consider other offers.  It is not uncommon for a buyer to make a counter offer through the broker that the seller may choose to accept but is not compelled to do so.  Many buyers prefer to focus acquisitions on minerals offered for sale through an option contract because there is a greater level of certainty that if their due diligence results in a decision to buy they will be able to close the purchase without further negotiations or unrecovered costs.  Retail buyers avoid those mineral owners who are merely interested in knowing what someone thinks their minerals are worth, with no intention of selling, and those with no binding commitment to a sale at specific terms and maximize their time where they have an expectation of closing a sale.

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