Exploration Rights in the PRC: The How To and Where To Guide

In a subsequent article we will discuss the crucial step from exploring to mining. Not surprisingly, foreign investors are uncomfortable with the current situation that allows a successful explorer a "priority right" to obtain permission to mine the deposit. This vague wording requires potential foreign investors to make a leap of faith that evidence to date suggests not many have been willing to do.

Entering the Maze: The Current Exploration Licence Approval Process

Investment Policy

As with any proposed investment in the PRC, foreign investors should review the Foreign Investment Industrial Guidance Catalogue³ (the Catalogue) to see which minerals are subject to restriction. The Catalogue lists various minerals as encouraged, restricted or prohibited and determines the investment vehicle permitted for exploration and exploitation. A mineral's categorization and the proposed size of the investment will also set the level of approval required. For example, restricted minerals, such as precious metals, should be approved at the central government level, or if the project size is below US$30 million, may be approved by the provincial government and registered with the central government.

Various policies to encourage investment in western China will also impact the proposed structure of an exploration vehicle. Projects based in central or western China (including Sichuan), though listed as restricted, may in fact be treated as encouraged. This means the project attracts preferential treatment such as a 15% income tax rate for three years after any other applicable tax holidays end, exemptions from duties and VAT on imported equipment, and potentially exemptions from various exploration rights use fees.

The differing classification of minerals creates problems, as different minerals are often found at the same site and could be profitably mined at the same location. Unfortunately, the exploration right granted will typically only be for a particular mineral in the exploration area, and not for all minerals.

Structure

Exploration licences can only be granted to qualified geological exploration work units registered in the PRC. Foreign investors will either need to obtain this qualification or cooperate with a party holding a valid exploration qualification. Subject to any restrictions set out in the Catalogue and the qualification requirements, a foreign investor registered in the PRC as a representative office, equity or cooperative joint venture (an EJV or CJV), including a non-legal person cooperative joint venture, or a wholly foreign-owned enterprise (WFOE) may apply for an exploration licence.

Approvals, Approvals, Approvals

Obtaining an exploration licence is a multi-level, multi-ministry, long and complex process. At present, the Geological Survey Department of MOLAR is responsible for reviewing and approving exploration applications. Provincial authorities are entitled to issue exploration rights, but they cannot issue them to foreign-invested enterprises (FIEs) or representative offices.

The approval process for risk exploration requires the foreign investor to:

(a) Coordinate the project proposal and feasibility study through the State Development and Reform Commission (SDRC) and the relevant government department responsible for the particular mineral⁴ to ensure it is consistent with infrastructure guidelines and plans. Projects valued at less than US$30 million may be submitted to the provincial level office of the SDRC. Those greater than US$100 million may require State Council approval. This creates a challenge for miners who generally invest in a staged process. It is possible that this approval process will need to be duplicated; first obtaining approval at the provincial level and then from the SDRC once the US$100 million threshold is reached. Approval of the project proposal means the project will be listed in the State Annual Working Plan. Once the feasibility study and Ministry of Commerce (MOC) approval is obtained, the project will be listed in the State Annual Foreign Investment Plan.

(b) Apply to the MOC for approval to establish a JV, WFOE or a representative office and to the State Administration of Industry and Commerce (SAIC) for registration. This generally takes from three to six months.

(c) Apply to MOLAR for the exploration licence. All foreign exploration licences must be approved at the state level except in Yunnan and Sichuan, where MOLAR has authorized the provincial level Bureau of Geology and Mineral Resources to conduct approval and registration of exploration rights on its behalf.

Once the required documents have been submitted to MOLAR, it will determine applications on a first come, first serve basis. MOLAR starts by considering the status of the proposed exploration area, as this will determine the total exploration fee. A set exploration rights use fee is based on a fixed amount per area over the life of the licence; however, additional compensation must be paid for areas where deposits have been discovered through exploration work previously conducted by the state. This amount is based on the appraisal of work done by the state, as determined by qualified appraisal organizations jointly appointed by the Department of Geology and the Department in Charge of State-owned Assets.⁵

There are policies that may reduce the amount of the fee. Exploration for minerals whose exploration is encouraged by the state or that is conducted in areas where exploration is encouraged may have a reduced or exempted exploration fee or reimbursement fee.

In determining whether to grant a licence, MOLAR requires applicants to have the following:

• an application and map of the applied blocks;
• plan for geological exploration or an exploration contract;
• implementation proposal for exploration;
• certificate for qualification of exploration unit;
• documents or proof showing the source of funds; and
• such other documents as may be required by MOLAR.

Public Bidding

Although the current Exploration Registration Regulations provide that exploration rights may be obtained through public bidding,⁶ generally MOLAR has examined and approved the grant of exploration licence and any auction that occurs has been conducted by MOLAR or its provincial equivalents. The draft Regulations on the Granting of Exploration and Mining Rights by Tender, Auction and Quotation are intended to radically change this process, just as regulations on bidding for the grant of land use rights has changed the method of granting property rights. There will undoubtedly be a period of uncertainty as all parties involved in the process adjust their practices to conform to a new regulatory environment.

Under the new system, MOLAR, representing the state as owner, may appoint a qualified agent to arrange the tender or auction and to be responsible for the examination and approval of the applicant's credentials. For example, the applicant must be a properly established entity, be qualified as a geological unit, have a suitable level of finance and employ appropriate personal.

Time Frames and Terms

The time frame to coordinate a project through the SDRC and establish an appropriate entity, possibly further requiring qualification as a geological unit may take months (or years) depending on the size of the project and the mineral in question. The actual MOLAR decision based on the applicant documents will be granted within 40 days of application. The successful applicant has 30 days within which to pay the exploration right use fee and the compensation fee if applicable. The actual permit will be issued shortly after that.

The duration of the exploration right is three years, with extensions of up to two years possible on each application for extension.

The China Mining Association

Currently the approval process allows MOLAR some discretion on whether to use various qualified non-government agents or not. The new draft regulations place a greater emphasis on these support organizations and stress the importance of moving the exercise of discretion involved in examining and approving exploration rights away from MOLAR to a more transparent auction and tender system. The stated aim is for MOLAR to act as market administrator, with other bodies being responsible for actually operation and control of the tender and auction process. The CMA is one such body poised to play a greater role once this policy is implemented.

The CMA, established in March 2000 from the former China mining association (Zhongguo Kuangye Xiehui) is a non-profit, non-government, member-based organization. It includes some foreign mining companies as its members. The CMA may carry out feasibility research work, appraise and examine mineral deposits, perform statistical surveys, data collection and provide information on mining issues.

As a qualified agent for the application and registration of exploration and mining licences, the CMA may currently assist clients to apply for these rights. MOLAR occasionally will ask the CMA to assist in the evaluation of a licence applicant's credentials but it is envisaged that after the new regulations are in force, agents will be required to screen the prospective bidders and assist with the registration of successful bidders after the tender or auction process.

Conclusion

When introduced, the new bidding regulations will provide an important supplement to existing laws. The new regulations will have a significant impact on the administration of exploration licences, including the all-important approval process. The draft bidding regulations will provide details for the conduct of tenders and auctions, clarifying this process and potentially reducing the degree of discretion that the State exercises in determination of exploration right awards. New support organizations, such as the China Mining Association and the China Mining LianFa Auction Company, are poised to capitalize on the expected workflow. In the meantime, they are a good source of information for foreign mining companies looking to explore in the PRC.

The authors gratefully acknowledge the assistance of Seamus Cornelius from their office, and Xu Bin of Gu & Gu Law Office, who both advised on various aspects of this article.

Endnotes

1 The important legislation is: the Administration of Registration of Mineral Resource Exploration Blocks Procedures (the Exploration Registration Procedures, promulgated by the State Council on February 12 1998 and effective on the same date); the Administration of Assignment of Exploration Rights and Mining Rights Procedures (the Assignment Procedures also promulgated by the State Council on February 12 1998 and effective the same date); and the Several Opinions Concerning Further Encouraging Foreign Investment in Non-oil and Gas Mineral Resource Exploration and Mining, which was jointly issued by MOLAR, the SDPC, the SETC, the Ministry of Finance, MOFTEC, and the SAIC and approved by the State Council on October 24 2000.

2 China Statistical Bureau, 2001.

3 Approved by the State Council March 4 2002 and effective April 1 2002.

4 Different ministries and government bodies manage different minerals. For example, gold is handled by the Gold Bureau of the former State Economic and Trade Commission (SETC), which is now part of the Ministry of Commerce (MOC). The China Coal Association and the SETC handle coal. Relevant state-owned oil and gas companies handle petroleum and gas.

5 Exploration Registration Procedures, Article 13.

6 Ibid, Article 16.