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Introduction

In the realm of investment, the goal is to optimize returns while minimizing risks and complexities. A common dilemma faced by individuals with small mineral interests is whether to retain these assets or liquidate them for more flexible investment opportunities. Here, we explore the benefits of liquidating a small mineral interest, worth about $350, and reinvesting the proceeds into an S&P 500 index fund, particularly over a 20-year period.

Understanding the Mineral Interest Scenario

Let’s consider a mineral interest generating $75 annually. However, this interest depletes at a rate of 5% per year and is subject to significant price volatility, with potential fluctuations of ±15%. Such volatility not only affects the reliability of income but also adds uncertainty to long-term financial planning.

Case for Liquidation and Investment in an Index Fund

The allure of investing in an S&P 500 index fund lies in its simplicity, potential for growth, and ease of transfer upon the owner’s death. By liquidating the mineral interest for $350 and investing in an index fund, one can tap into the historical average returns of the S&P 500, which have been around 10% annually.

20-Year Growth Projection

Let’s project the growth of the initial $350 investment in an S&P 500 index fund over 20 years. Assuming an average annual return of 10%, the investment’s future value can be calculated using the formula for compound interest.

Comparing with Retaining Mineral Interest

In contrast, retaining the mineral interest with its decreasing value and income fluctuations presents a less attractive scenario. Over 20 years, the decreasing returns and the impact of volatility make it a less stable investment. Moreover, at the end of this period, one must consider the costs associated with estate planning and legal fees, which can be substantial. A conservative estimate of $2,000 in attorney fees for transferring the mineral interest via a probate estate significantly eats into the overall returns.

Simplicity and Transferability

A key advantage of the index fund investment is its simplicity in terms of estate planning. Unlike mineral interests, which often require a detailed probate process or other legal services, index funds can be easily transferred to beneficiaries via a simple designation form. This not only saves substantial legal fees but also ensures a smoother transition of assets.

Calculations and Projections

To illustrate these points, let’s calculate the projected outcomes for both scenarios over 20 years.

Projection 1: Retaining Mineral Interest

Initial Yearly Income: $75
Depletion Rate: 5% per year
Volatility: ±30%
20-Year Total Income (accounting for depletion and volatility)
Deduction of $2,000 Attorney Fee for Estate Planning

Projection 2: Investing in S&P 500 Index Fund

Initial Investment: $350
Average Annual Return: 10%
20-Year Future Value Calculation

Hanging on to Your Minerals				Selling Now and Investing in the S&P
Year	Income Less 5% Depletion	Price Volatility	Net Income	Year	Principal	10% Return
1	$ 75.00	-11.2%	$ 66.56	1	$ 350.00	$ 35.00
2	$ 71.25	8.8%	$ 77.50	2	$ 385.00	$ 38.50
3	$ 67.69	-5.7%	$ 63.86	3	$ 423.50	$ 42.35
4	$ 64.30	5.3%	$ 67.71	4	$ 465.85	$ 46.59
5	$ 61.09	1.8%	$ 62.18	5	$ 512.44	$ 51.24
6	$ 58.03	-12.7%	$ 50.69	6	$ 563.68	$ 56.37
7	$ 55.13	-5.8%	$ 51.94	7	$ 620.05	$ 62.00
8	$ 52.38	6.4%	$ 55.70	8	$ 682.05	$ 68.21
9	$ 49.76	-12.5%	$ 43.53	9	$ 750.26	$ 75.03
10	$ 47.27	-0.4%	$ 47.06	10	$ 825.28	$ 82.53
11	$ 44.91	-5.4%	$ 42.49	11	$ 907.81	$ 90.78
12	$ 42.66	1.4%	$ 43.26	12	$ 998.59	$ 99.86
13	$ 40.53	-0.1%	$ 40.50	13	$ 1,098.45	$ 109.84
14	$ 38.50	-8.2%	$ 35.35	14	$ 1,208.29	$ 120.83
15	$ 36.58	13.1%	$ 41.37	15	$ 1,329.12	$ 132.91
16	$ 34.75	-12.9%	$ 30.28	16	$ 1,462.04	$ 146.20
17	$ 33.01	0.9%	$ 33.30	17	$ 1,608.24	$ 160.82
18	$ 31.36	13.9%	$ 35.71	18	$ 1,769.06	$ 176.91
19	$ 29.79	14.2%	$ 34.01	19	$ 1,945.97	$ 194.60
20	$ 28.30	5.1%	$ 29.75	20	$ 2,140.57	$ 214.06

	20 Year Return:		$ 952.76		20 Year Return:	$ 2,140.57
	Estate Fees:		$ (2,000.00)		Estate Fees:	$ –
	Net Return:		$ (1,047.24)		Net Return:	$ 2,140.57

Conclusion

The comparison between holding onto a small mineral interest and reinvesting in an S&P 500 index fund over a 20-year period is striking. While the mineral interest offers a fluctuating and depleting income, investing in an index fund provides substantial growth potential, simplicity in management, and ease of transferability upon death. This case study underscores the importance of considering long-term growth, risks, and estate planning implications in making investment decisions.

Let’s now calculate the specific figures for a clearer understanding of the financial implications in each scenario.

Financial Implications: A Comparative Analysis

Scenario 1: Retaining the Mineral Interest

Over 20 years, considering depletion, volatility, and attorney fees for estate planning, the net income from the mineral interest results in a negative value of approximately -$1047.24. This does not include the 20 years of state tax returns if you do not live in the state where the mineral interest is located and the land taxes, if required by the state. Also, the mineral royalty income is taxable each year. The analysis does not include the impact of income taxes (state and federal). This outcome highlights the diminishing returns and the significant impact of legal fees on the overall profitability of retaining the mineral interest.

Scenario 2: Investing in an S&P 500 Index Fund

In contrast, the initial investment of $350 in an S&P 500 index fund, assuming an average annual return of 10%, grows to approximately $2,140.57 over 20 years. This projection demonstrates the power of compound interest and the growth potential of a well-established index fund. Also, there were no income tax returns to file in multiple states, no present income (other than small dividends) to tax, and no property tax. Finally, there is no attorney or probate fee to pass the index fund on to the next generation.

Insights

The comparison between the two scenarios starkly illustrates the advantages of liquidating a small, volatile mineral interest and reinvesting in a more stable and growth-oriented asset like an S&P 500 index fund. Not only does the index fund provide a significantly higher return over 20 years, but it also offers ease of management and transferability, saving substantial costs and complexities associated with estate planning.

This analysis strongly supports the strategy of liquidating small, less profitable mineral interests in favor of more robust and efficient investment vehicles like index funds. It’s a move that not only optimizes financial growth over the long term but also simplifies wealth management and inheritance processes.

Why Do You Want to Buy My Mineral Interests If Me Keeping Them is Such a Bad Deal?

A fair and thoughtful question! Our interest in purchasing your mineral rights stems from a different set of investment objectives and resources compared to an individual investor. Here’s why this transaction can be beneficial to Petro Creek Royalty:

Demand for Passive Income: There’s a growing segment of investors actively seeking opportunities to convert their earned income into passive income.
Tax Advantages: Mineral royalties offer certain tax benefits. For instance, a portion of income from mineral rights can often be classified as depletion, which can reduce the taxable income. This aspect makes mineral rights an attractive option for investors looking to optimize their tax situation.
Creating Investment Opportunities: By purchasing your mineral interests, we can bundle them into larger, more attractive investment packages. These packages are then offered to investors seeking stable, passive income streams. This approach meets the demand of investors who may not have the expertise or desire to manage individual mineral rights but are eager to include such assets in their portfolios for the tax and income benefits.
Long-term Stability: Investors in these bundled mineral rights enjoy the benefit of a more stable and diversified asset. This approach reduces the volatility and management burden that individual mineral rights owners might face.
Unique Data Insights: As a mineral rights owner across various regions, we gather extensive data on commodity market trends, pricing, demand fluctuations, and more. This data is far more granular and specific than what’s typically available in public domain sources.
Data as a Commodity: In today’s information-driven economy, the data we collect from royalty statements when done at a large scale is a valuable commodity itself. There is a substantial market for hyper-focused, accurate commodity market information, especially data that can predict trends or provide deep insights into specific markets.
Selling Market Intelligence: Our position allows us to package and sell this high-value information to various stakeholders in the commodity market – from traders and investors to other mineral rights owners and industry analysts. This creates an additional revenue stream, diversifying our business model beyond just the management of mineral rights.

Conclusion

Your decision to sell your mineral interests and invest in something more stable and straightforward like an index fund is about aligning your investment with your personal financial goals, risk tolerance, and desire for simplicity. On the other hand, our interest in purchasing your mineral rights aligns with our specialized capabilities and long-term investment strategies. It’s a classic scenario where both parties can benefit, driven by different objectives and resources.

Petro Creek Royalty is actively seeking to purchase mineral rights, oil and gas rights, oil and gas royalties, and royalty interests in Union County Arkansas, Columbia County Arkansas, Lafayette County Arkansas, Miller County Arkansas, Nevada County Arkansas, Jackson County Arkansas, White County Arkansas, Independence County Arkansas, Cleburne County Arkansas, Van Buren County Arkansas, Faulkner County Arkansas, Conway County Arkansas, Pope County Arkansas, Sebastian County Arkansas, Crawford County Arkansas, Yell County Arkansas. Your county not listed? Please inquire.