Unearthing Mine Rights in the PRC

(i) PRC Mineral Resources Law;1

(ii) PRC Mineral Resources Law Implementing Rules;2

(iii) Administration of Registration of Mineral Resource Exploration Blocks Procedures (the Exploration Registration Procedures);3

(iv) Administration of Registration for Exploitation of Mineral Resources Procedures (the Mining Registration Procedures);4 and

(v) Administration of Assignment of Exploration Rights and Mining Rights Procedures Procedures.5

MINE RIGHTS DEFINED

The term of kuangyequan is not defined in the Tentative Provisions. This term can be translated as either "mine proprietary rights" or "mine industry rights". Mine exploration and mining rights are generally referred to as "mine rights" as stated in Article 3 of the Tentative Provisions. In order to prevent any confusion, a neutral term of "mine rights" will be used. In Article 6 of the PRC Mineral Resources Law Implementing Rules, the term "mine exploration rights" is defined as the right to explore mineral resources in the designated area as specified in the relevant exploration permit which is obtained according to law. The definition of "mining rights" is the right to mine and acquire mineral resources in the designated areas as specified in the relevant mining permit that is obtained in accordance with the law. These definitions should be treated as the basis for understanding the term mine rights (or kuangyequan).

Article 2 states that the Tentative Provisions shall apply to the grant and assignment of mine rights in the territory and territorial waters of the PRC. Therefore, any grant and assignment of the mine rights in the PRC shall be subject to the Tentative Provisions.

OWNERSHIP OF MINERAL RESOURCES

Article 2 of the PRC Mineral Resources Law Implementing Rules defines "mineral resources" as natural resources in solid state, liquid state or gas state which have been formed as the result of geological functions and are of application value.

There is a legal principle in the PRC that all mineral resources in the PRC belong to the State. This ownership will not be affected by circumstances in which the ownership of, or the right to use the relevant land to which the mineral resources are attached, is changed.6 For example, even if a leasehold of land is granted by the PRC land bureau to a land user for the purpose of general land development, and a mine is subsequently found by the land user, the land user will have no rights over the mine unless a mine right is granted by the relevant PRC authorities pursuant to, among others, the Tentative Provisions. Likewise, land ownership in rural areas by a collective (jiti) does not mean that the ownership of the mine lies with the collective.

GRANT OF MINE RIGHTS

The exploration and mining of mineral resources in the PRC shall be subject to the approval of, and registration with, the relevant PRC authorities.

In Article 15 of the Tentative Provisions, the grant of mine rights is defined as the act of the registration administrative authorities to grant the mine rights to an applicant in the manner of approving application, inviting for tenders or auction.

Pursuant to Article 4 of the Tentative Provisions, the grant of mine rights will be exercised by the departments in charge of geology and mineral resources at or over county government level within their respective authority as specified in the Exploration Registration Procedures, the Mining Registration Procedures and (where applicable) the relevant administrative procedures formulated by the local people's congress at provincial level.

The respective authorities specified in these procedures may be summarized as follows:

(a) MOLER

(i) mines under the category of State plan and mineral resources that are of important value to the national economy, and the area of the mineral resources covers more than one province, autonomous region or municipality directly under the central government;

(ii) mineral resources in the territorial waters of the PRC or in other water areas under the jurisdiction of the PRC;

(iii) mineral resources to be explored and/or exploited by (direct) foreign investment;

(iv) certain specified mineral resources;7 and

(v) where the exploration or mining rights are concerned with petroleum and natural gas, subject to consent of a department designated by the State Council.8

(b) The department in charge of geology and mineral resources at provincial government level

(i) mineral resources other than those identified above in (i) and (ii), and where the mine concerned is equal to or greater than medium size; and

(ii) mineral resources of which MOLR authorizes the department in charge of geology and mineral resources at provincial government level to examine and approve the exploration and mining.9

(c) The department in charge of geology and mineral resources at and above county government level but under provincial government level

It appears that this level of governmental department holds no power to grant any mine exploration rights as no such power is set out in the Exploration Registration Procedures.

With regard to the mining rights, this level of governmental department may grant the mining rights over the mineral resources other than those that are subject to the mining permits issued by MOLR and the relevant departments at provincial government level.

APPRAISAL

Pursuant to Article 5 of the Tentative Provisions, where the mine right to be granted concerns those mines of which the exploration was funded by the State and situation of the mine has been clarified due to the exploration, an appraisal entity confirmed by MOLR as having the mine rights appraisal qualification is needed to conduct the appraisal of such mine rights. The result of such an appraisal has to be confirmed by either MOLR or the appropriate department at provincial government level. In the event that both the central and the local governments funded the exploration, the appraisal result has to be confirmed by MOLR after the department at provincial government level gives its opinion on the result.10

MINE RIGHT PRICE

The PRC government carries out a policy of giving mine exploration rights and mining rights for consideration,11 although reduction or exemption of such fees is possible in certain circumstances.12

Under Article 17 of the Tentative Procedures, the results of appraisal concerning government spending on the mine exploration will be the mine right price to be paid for a grant, or as bottom line pricing if the grant is made through bidding or auction.
However, if the person to whom the mine exploration rights have been granted applies for the mining rights over the exploration area, no payment of the mine right price is required.13 It should be noted that the mine right price only constitutes a portion of the fees to be paid to the PRC authorities for engaging in mine business. Certain other mine related taxes and fees are also payable to the PRC authorities. These mainly include:

(a) resources tax;

(b) resources compensation fees;

(c) mine exploration rights use fees; and

(d) mining rights use fees.

TERM OF THE PERMITS

No provision is contained in the Tentative Provisions regarding the duration of the mine exploration rights and the mining rights to be granted by the relevant authorities. However, the answer can be found in the Exploration Registration Procedures and the Mining Registration Procedures.

According to Article 10 of the Exploration Registration Procedures, the term of a mine exploration permit shall be no more than three years. If the permit relates to petroleum or natural gas, the term can be up to 10 years. Both are renewable and each renewal can be up to two years.

The term of a mining permit will be subject to the size of the relevant mines. The term for mining a large, medium and small size mine can be up to 30 years, 20 years and 10 years respectively, subject to renewal.14

GRANT PROCEDURES

The Tentative Provisions do not expressly set forth the procedures and the time frame for the grant of mine rights. These issues have to be referred to the Exploration Registration Procedures and the Mining Registration Procedures.

Under these procedures, an applicant is required to submit various documents to the government department in charge of mineral resources. The government will make a decision on whether or not to grant the necessary registration. This will be granted on a first come first served basis within 40 days of the application. If the registration is granted, the applicant shall, within 30 days of its receipt of the notice, pay the mine exploration right use fees or the mining right use fees, and the mine right price (if applicable), and will complete the relevant registration. An exploration permit or a mining permit will be issued to the applicant accordingly.

ELIGIBILITY
In Article 3 of the Tentative Provisions, a mine right holder is defined as being a natural person, a legal person or another economic entity who obtains the mine rights according to law. Under Article 13 of the Tentative Provisions, a person acquiring the mine rights must have the appropriate qualifications.

ASSIGNMENT OF MINE RIGHTS

In the Tentative Provisions, the assignment of mine rights is given very wide coverage. This includes sales, capital contributions to another entity, cooperation with others and corporate restructuring.15 In short, if an act results in the transfer of the relevant mine rights from the registered mine rights holder to another, it will be regarded as an assignment, and the relevant legal requirements concerning assignment of the mine rights have to be met. If, however, no separate entity is established by the registered mine right holder with another for a cooperation on the exploration or mining of the relevant mines, it will not constitute an assignment. In such circumstances, a registration of the cooperation contract needs to be registered.16

Pursuant to Article 13 of the Assignment of Mine Exploration Rights and the Mining Rights Administrative Procedures, the valid term of the new exploration permit or mining permit shall be the remaining period of the original permit.

CONDITIONS FOR ASSIGNMENT

The mine rights are not freely transferable. The conditions to which an assignment of the mine rights are subject are set out in the Assignment of Mine Exploration Rights and Mining Rights Administrative Procedures.

For an assignment of the mine exploration rights, the following conditions have to be satisfied:

(a) after two full years of the issue of the exploration permit, or additional mineral resources can be explored or mined have been found in the relevant exploration area;

(b) upon making the minimum investment on the exploration as required by the relevant regulations;

(c) no dispute over the mine exploration right;

(d) the mine exploration right fees and the mining right price have been paid; and

(e) other conditions which may be imposed by MOLR.17

For an assignment of the mining rights, the following conditions have to be met:

(a) one full year has passed since the mine has started to be mined;

(b) no dispute over the mining rights;

(c) the mining right use fees, the mining price, the resources compensation fees and the resources tax have been paid; and

(d) other conditions which may be imposed by MOLR.18

It appears that the time limits in the conditions are only applicable to a straightforward transfer of the mine rights, such as sale of such rights. If the relevant mine rights holder is to form a joint venture company or to inject such rights to a listing vehicle for the purpose of corporate restructuring, the required time limit may be exempt. This point is supported by Article 44 of the Tentative Provisions which provides that where the mining right holder is to set up a new company with another person for the purpose of mining of the mine concerned, the new company may not be subject to the condition that one year has elapsed since the mine commenced operation.

It is worth noting that the approval and registration of the assignment will not constitute a new grant. Instead, all the rights and obligations of the mine right holders (as the assignor) will be transferred to the assignee.

ASSIGNMENT PROCEDURES

Pursuant to Article 46 of the Tentative Provisions, a contract concerning the assignment of the mine rights has to be signed by the relevant parties. This contract can be a sale and purchase contract, an equity joint venture assignment contract or a cooperative joint venture assignment contract, depending on the nature of the assignment.

The government department in charge will decide, within 40 days of its receipt of the application for an assignment, whether or not to approve the assignment.19

It should be noted that the relevant parties should complete the procedures concerning the change of registration within 60 days upon receipt of the approval notice of an assignment. Failure to do so will result in the government approval becoming invalid.20

LEASING OF MINE RIGHTS

The Tentative Provisions allow the mine rights to be leased to another party although no sub-lease is permitted.21 A lease is required to satisfy the conditions prescribed for an assignment of the mine rights.22 In other words, the relevant mine right holder is not permitted to lease the mine rights unless the various conditions for an assignment are met. In addition, the lessor shall continue to fulfil the legal obligations and bear the relevant legal liabilities as the mine right holder during the term of such lease.23 This requirement is apparently in a view to preventing the mine right holder from circumventing relevant obligations and liabilities, such as the payment of resources tax, through a lease.

Attention should also be drawn to Article 50 of the Tentative Provisions which provides that the mine rights under a lease are not allowed to be assigned, or they are to be used for the purposes of forming a joint venture, cooperation or listing. Furthermore, such rights cannot be mortgaged. It is therefore crucial to ascertain that no joint venture, cooperation or listing will be made during the term of any proposed lease, and there will be no necessity to use the mine rights as security in the same period. For a party who is interested in forming a joint venture, cooperation with the mine rights holder, acquiring the relevant mine rights for the purpose of listing, or it is offered the mine rights as security, it is important to ensure that the relevant mine rights are not under a lease.

A lease contract shall be signed by the lessor and the lessee and submitted, along with the other required documents, to the registration authorities. However, the Tentative Provisions fail to clarify whether or not the effectiveness of the lease contract will be conditional on the submission. If it is not subject to the submission, a third party may come across a situation where a lease contract comes into effect before the same is submitted to the relevant PRC authorities or not submitted at all. If the effectiveness of the lease contract is subject to submission of the same to the relevant PRC authorities, the Tentative Provisions should specify whether the date of submission to and registration with the relevant PRC authorities, or the execution date of the lease contract should be the effective date of the lease. It is hoped that these issues will be addressed when the Tentative Provisions are revised.

MORTGAGE

A mine rights holder may mortgage the mine rights held by it as security. In accordance with Article 57 of the Tentative Procedures, if a mortgage is to be created a mortgage contract has to be signed and then submitted, together with the relevant mine rights permit, to the governmental department that issues the permit for dealing with the filing procedures (beianshouxu). Again, the Tentative Provisions give no answer to the relevant effective date. In the circumstances, it should refer to the relevant provisions of the PRC, Security Law. According to Article 41 of the PRC, Security Law, the mortgages set out in Article 42 shall come into force once the required registration is made. Unfortunately, none of the circumstances set out in Article 42 is a mortgage over a mine right. This omission is due to the fact that no mortgage was permitted to be on the mine rights when the PRC, Security Law was formulated. For assets other than those identified in Article 42 of the PRC, Security Law, Article 43 provides a registration system whereby the relevant parties may register their mortgage arrangement with the notary public office where the mortgagor is located. The mortgage will come into effect when the mortgage contract is signed, as opposed to the date of registration of the mortgage.24 Accordingly, a mortgage over the mine rights will come into force when the relevant mortgage contract is signed. If no such registration is made, the relevant mortgage cannot be used as a defence against a third party.25

In the event that the relevant debts are not paid or not paid in full, the mortgagee may apply for the mortgage to be enforced. The proceeds from enforcement will be used to discharge the debt obligations of the relevant debtor.

CONCLUSION

The introduction of the Tentative Provisions can be seen as an instrument to supplement and implement the existing PRC laws and regulations concerning the administration and commercialization of the mine rights in the PRC. The Tentative Provisions detail the general requirements prescribed in other laws and regulations of the PRC concerning mine rights. The procedures also clarify a number of questions left unanswered in other laws and regulations that are closely connected with the grant and assignment of the mine rights. For example, leasing and mortgaging mine rights are expressly permitted by the Tentative Provisions. Although certain issues are yet to be clarified, the Tentative Provisions will undoubtedly be helpful for standardizing the administration of the mine rights in the PRC and will help to provide clearer guidance for mine investors.

ENDNOTES:

1 Adopted at the 15th Meeting of the 6th Session of the Standing Committee of the NPC on March 19 1986 and revised at the 21st Meeting of the 8th Session of the Standing Committee of the NPC on August 29 1996. The revised law came into force on January 1 1997.
2 Promulgated by the State Council on March 26 1994 and effective the same date.
3 Promulgated by the State Council on February 12 1998 and effective the same date.
4 Promulgated by the State Council on February 12 1998 and effective the same date.
5 Promulgated by the State Council on February 12 1998 and effective the same date.
6 See Article 3 of the PRC, Mineral Resources Law.
7 See the respective Appendix to the Exploration Registration Procedures and the Mining Registration Procedures both entitled the List of Minerals Subject to the Approval and Issuance of Certificates by the Governmental Department of the State Council in charge of Geology and Mineral Resources.
8 See Article 4 of the Exploration Registration Procedures and Article 3 of the Mining Registration Procedures.
9 Ibid.
10 See Article 5 and Aritcle 10 of the Tentative Provisions.
11 See Article 5 of the PRC, Mineral Resources Law.
12 For details, see Article 15 of the Exploration Registration Procedures and Article 12 of the Mining Registration Procedures.
13 See Article 12 of the Tentative Provisions.
14 See Article 7 of the Mining Registration Procedures.
15 See Article 36 of the Tentative Provisions.
16 See Article 44 of the Tentative Provisions
17 See Article 5 of the Assignment of Mine Exploration Rights and Mining Rights Administrative Procedures.
18 Ibid. Article 6.
19 Ibid. Article 10.
20 See Article 48 of the Tentative Provisions.
21 See Article 53 of the Tentative Provisions.
22 Ibid. Article 49.
23 Ibid.
24 See Article 43 of the PRC, Security Law.
25 Ibid.