China's increasing focus on mineral exploration to further fuel energy sector

The requirements set forth by the measures on the establishment and operation of foreign-invested mineral exploration enterprises and its possible influences can best be summarised as follows.

Qualification

Rather than specifying minimum requirements on qualification of foreign investors, the measures say that foreign investors need experience in mineral exploration or financing capability or new technologies in mining and exploration. This may be interpreted to be that foreign investors which have no experience, financing capability or new technologies may encounter problems when applying to the relevant authorities for approval of their investment. This also confirms the policy that has been adopted by the Chinese government for a long period of time for transferring its industries to a higher level insofar as technologies are concerned.

The measures also make it clear that any Chinese geological exploration entity which is allowed to conduct business can be allowed to be a partner to a Sino-foreign mineral exploration enterprise. The message delivered by this provision may be that the Chinese government wants the geological exploration entities to make proper use of the geological exploration results they achieved so as to generate more economic profits.

Application procedure

According to the Measures, the establishment of any foreign-invested mineral exploration enterprise is subject to approval by the Ministry of Commerce or its relevant local counterparts, depending on which category the proposed investment falls under the Catalogue. In case the application is subject to approval by the Ministry of Commerce, the application shall still be submitted to local authorities for approval, which will preliminarily review the application documents and then forward the same to the Ministry of Commerce for final review and approval.

The application documents required for setting up a foreign-invested mineral exploration enterprise are very similar to those required for establishing a general foreign-invested enterprise. Such documents include an application letter, feasibility study report, joint venture contract (no joint venture contract is required in the case of a wholly-owned foreign enterprise ) and articles of association, list of board members and corresponding appointment letters, notice issued by relevant company registry on company name reservation, company registration documents, bank reference letter and so on.

It should be noted that the Measures stipulate some special requirements on the feasibility study report for setting up a foreign-invested mineral exploration enterprise. Such requirements are that in addition to a general description on the proposed project which is required for a general foreign investment, the feasibility study report for establishing a foreign-invested mineral exploration enterprise shall cover in detail the technologies to be used, the economic profits, the resource utilisation, the environmental protection, the safety security and the utilisation of human resources relating to the proposed project.

In addition to the requirements on application documents, the Measures have also set forth clear requirements on the time limit for relevant government authorities to finish their reviewing of the application documents and issue their decisions on whether or not the application is granted, or give their reasons in case the application is rejected. It will take not more than 50 working days if the case is reviewed by local approving authorities or 72 working days if the case is reviewed by the Ministry of Commerce before it can be confirmed whether the application has been approved or not. Such provisions are supposed to give the government authorities appropriate pressure to work efficiently and timely, while the foreign investors are given the chance to control their time and costs.

Issue of exploration permit

In general investment, a company is allowed to conduct business operations after obtaining its business licence issued by the relevant company registry. The measures stipulate one more condition before a foreign-invested mineral enterprise is allowed to start its business operation and that condition is that an exploration permit shall be obtained from the Ministry of Land and Resources.

Share of profits

In case a foreign-invested mineral exploration enterprise is established in the form of co-operative joint venture, an agreement shall be reached between/among the shareholders on their respective profits proportion and the proportion can be agreed on a project-by-project basis where the enterprise has more than two exploration projects. The measures do not stipulate on which basis the profits proportion shall be negotiated and agreed, and it therefore may be left for the shareholders to decide by themselves. Disregarding the uncertainties in this regard, such a provision is quite different from that of a foreign investment in general industries, and may be deemed as the Chinese government's gesture to show more respect towards the market economy.

Increase of registered capital

According to the measures, a foreign-invested mineral exploration enterprise is allowed to increase its registered capital and/or total investment if the developments of its exploration operation have the need. For increasing its registered capital and/or total investment, a foreign-invested mineral exploration enterprise shall submit relevant application documents to its approving authority. In particular, the Measures stipulate that it shall be explained in the application letter the purpose for increasing registered capital and/or total investment, source of funds, exploration operation developments and payment of relevant fees.

In case the exploration plan is changed after the capital increase, the foreign-invested mineral exploration enterprise shall obtain approval on the new plan from the authority which issued the exploration permit – the Ministry of Land and Resources.

Such provisions are very general in nature but also allow the government more space to maneuver in case it deems it necessary to control the size and volume of foreign investment in mineral exploration industries.

Lifting of restriction on operation location

It has been very difficult, if not impossible, in practice in the past for a foreign-invested exploration enterprise registered at one place to conduct exploration business in other places. It is encouraging to see that the measures have lifted such an impediment.

It is expressly stipulated in the measures that a foreign-invested mineral exploration enterprise may apply for exploration permits, depending on the needs of its exploration business, and the application for exploration permits shall not be restricted to the location where the enterprise is registered. To apply for an exploration permit outside its location, a foreign-invested mineral exploration enterprise shall apply to set up a branch office at the place where the permit was applied for.

No doubt, such provisions under the measures give the foreign-invested mineral exploration enterprises more flexibility and allow them the possibility to minimise their operating costs by avoiding the necessity to establish more companies for exploration projects locating in different areas.

Restriction on mining

Under Chinese law, a mineral exploration enterprise is not allowed to conduct mining operations. The same principle applies to foreign-invested mineral exploration enterprises. But that is not to say that a foreign-invested enterprise, which was initially established for mineral exploration, will never be allowed to mine the mineral it discovered. It can be allowed to mine the mineral it discovered under the measures, subject to (i) the main mineral it discovered is not prohibited from mining by foreign investment rules; (ii) it obtains the necessary mining permit; and (iii) it obtains necessary approval and then properly amends its business scope to cover the mining business.

Of course, a foreign-invested mineral exploration enterprise, after discovering the minerals, can choose to apply to set up a foreign-invested enterprise with a mining business scope and transfer the rights. Needless to say, the establishment of a new enterprise shall be subject to relevant laws and regulations.

Supervision

Given the crucial importance of mineral resources to the economy and even national security of a country, it will not be a surprise for the measures being found to contain some provisions with the effect of supervising foreign investment in the mineral exploration industry.

Different from general investment, foreign-invested mineral exploration enterprises are required to report to their respective approving authorities before March each year. They need to make clear the developments concerning their exploration operation, payment of taxes, environmental protection, utilisation of land and annual review by relevant company registry.

It is also required by the Measures that if a foreign investor to a foreign-invested mineral exploration enterprise intends to go public with its achievement of mineral exploration in China, it shall file the listing with the Ministry of Commerce and the Ministry of Land and Resources.

Further, the measures stipulate that opinion/approval shall be sought from military authorities in case Chinese investors propose to contribute their right to mining into a Sino-foreign enterprise.