CMA CMA Due Diligence & Risk Assessment 1 — Questions and Answers
Question 1: Which category of risk specifically refers to the possibility that actual production from a mineral property falls short of reserve estimates?
- Reservoir risk (Correct answer)
- Commodity price risk
- Regulatory risk
- Title risk
Correct answer: Reservoir risk
Reservoir risk encompasses geological uncertainty about whether the reserves exist in sufficient quantity and quality and whether they can be economically produced as estimated.
Question 2: During due diligence on a mineral acquisition, what is the primary purpose of reviewing a 'chain of title'?
- To confirm the seller has clear, unencumbered ownership of the mineral interest being conveyed (Correct answer)
- To verify production history matches operator-reported volumes
- To ensure environmental permits are current
- To confirm the lease bonus was properly paid at execution
Correct answer: To confirm the seller has clear, unencumbered ownership of the mineral interest being conveyed
A chain of title review traces all historical conveyances of the mineral interest from the original patent to present ownership to ensure the seller holds valid, marketable title.
Question 3: What does a 'title opinion' from an attorney provide in a mineral acquisition due diligence process?
- A legal professional's assessment of ownership validity and identification of any title defects or encumbrances (Correct answer)
- A financial opinion on the fair market value of the mineral interest
- A geological opinion on the quality of the mineral deposit
- An environmental assessment of contamination risk
Correct answer: A legal professional's assessment of ownership validity and identification of any title defects or encumbrances
A title opinion is a legal document prepared by an attorney after examining public records, opining on whether title is good and marketable and identifying any liens, gaps, or defects.
Question 4: In mineral due diligence, what is the significance of a 'lis pendens' filing on a property?
- It indicates active litigation involving the property that could affect title or ownership (Correct answer)
- It signifies that a lien has been placed by a creditor on mineral production
- It confirms the property has been certified as productive by a state agency
- It shows the property is subject to a pending lease renewal
Correct answer: It indicates active litigation involving the property that could affect title or ownership
A lis pendens is a notice recorded in public records that warns of pending litigation affecting the property, signaling title risk to potential buyers.
Question 5: Which type of insurance is commonly obtained in mineral acquisitions to protect the buyer against pre-existing but undiscovered title defects?
- Title insurance (Correct answer)
- Production insurance
- Environmental liability insurance
- Errors and omissions insurance
Correct answer: Title insurance
Title insurance protects the mineral interest buyer against financial losses arising from pre-existing title defects, liens, or encumbrances not discovered during the due diligence process.
Question 6: When assessing commodity price risk during mineral appraisal, which analytical tool best helps quantify the impact of price volatility on value?
- Sensitivity analysis or Monte Carlo simulation (Correct answer)
- Comparable sales regression analysis
- Historical cost recovery analysis
- Net present value at a single price scenario
Correct answer: Sensitivity analysis or Monte Carlo simulation
Sensitivity analysis tests how value changes across a range of price assumptions, while Monte Carlo simulation probabilistically models value distributions given commodity price uncertainty.
CMA CMA Due Diligence & Risk Assessment 1
Which category of risk specifically refers to the possibility that actual production from a mineral property falls short of reserve estimates?