Focal points of legal due diligence in mining project acquisitions

Legal due diligence is without doubt an essential step in acquiring a mining project, and often determines the success of it. Given that direct asset acquisitions require the amendment of relevant licences and certificates, which can involve complex approval procedures loaded down with red tape, the equity acquisition method has become the preferred method in practice when acquiring a mining project. Here, in addition to the routine matters of investigating the establishment, history and assets of the target company, the pledging and placement under seal of its equity, its claims and debts, and security provided by it, etc., special attention needs to be paid to the following points when conducting due diligence.

Compliance of licence approvals. The carrying out of the procedures for the licences and certificates often has a close connection with the determination of the transaction amount. Mining usually requires securing possession of five certificates, namely the mining permit issued by the Ministry of Land and Resources, the work safety permit, the mine manager qualification certificate and mine manager work safety permit issued by the work safety supervision authority, and the exploitation permit issued by another relevant authority. Gold mine acquisition permits additionally require an approval certificate for the mining of gold minerals.

Due diligence requirements

In many circumstances the target mine is under construction and the five certificates have not all been obtained, so the lawyer is required in his due diligence to ascertain on the spot the progress in the procedures for obtaining the licences and certificates, visit the relevant authorities and establish whether the target mine satisfies the conditions for carrying out the procedures for the licences and certificates required for mining. Additionally, in respect of the already secured exploration rights certificate and mining rights certificate, the lawyer should verify the payment of the transfer price, the validity of the certificates, details of the annual inspections, and details of mortgages and placements under seal, and verify the local conditions, requirements and handling procedures for the renewal of the mining rights. These actions can to the greatest extent possible discover the legal risks in the target mine and assist in taking targeted preventive measures.

Land compliance. Mining land everywhere is in the majority of cases characterised by some form of non-compliance. In numerous mining acquisition projects in which the author has had a hand, the usual form of the land before the securing of the five certificates and satisfaction of the mining conditions was that its use was temporary. Under such a circumstance, the lawyer needs to verify the approval document for the temporary land – paying special attention to whether the approving authority has the appropriate authority – the payment of the fees for the temporary land, the term thereof and any extensions, and should make an effort to visit the land authority to verify this.

Other approvals

Where the target mine satisfies the mining conditions, it is also required to construct an ore dressing plant, tailing pond and living area. In this circumstance, it is usually necessary to apply for approval of the project proposal, project planning, land planning, land preliminary and final approval, and ultimately secure state-owned construction land use rights in accordance with the law.

If the lot used is collective land or state-owned agricultural land, the issue of changing the nature of the land also comes to the fore; and if the approval of the land authority cannot be secured for a grant by agreement, the required lot will require a grant by bid, auction or listing on a land exchange. It should be noted that mining land is usually located in relatively remote areas and many local governments have issued, on the basis of the guiding prices set by the state, incentive policies in respect of such land. If the lawyer can in the course of his due diligence provide to the client such commercial information, he can better manifest the value and significance of due diligence in realising the client’s commercial interests.

Turning point

Environmental compliance. With the intensification of environmental assessment law enforcement by the environmental protection authorities, the securing of an environmental impact assessment has become the turning point determining the life or death of numerous mining projects.

With respect to the environmental protection investigation, including whether the target mine’s environmental impact assessment report has passed the environmental protection review, whether the environmental protection facilities have passed the environmental protection acceptance check after completion, whether the target company is currently in violation of environmental protection regulations, whether the emission and discharge of waste gas and wastewater and the disposal of waste storage are lawful, whether a rectification and sanction notice has been received in respect of contamination of the land and water table by toxic and hazardous substances, whether the mine ecology environmental protection, treatment and restoration plan has been approved, and whether the environmental protection investments have been fully paid in, the lawyer carrying out due diligence should additionally visit the local environmental protection authority and residents living nearby to gain the best possible understanding of the target mine’s environmental protection matters.

Work safety compliance. The work safety permit is one of the preconditions for the approval of a mining project proposal. In his or her due diligence, the lawyer should verify whether the procedures for a work safety permit have been carried out in respect of the enterprise’s production, whether such a permit is currently valid and whether it has been seized or revoked.

Safety verifications

The lawyer should verify whether the enterprise has been ordered in accordance with the law to carry out safety rectification within a specified period of time, whether the safety technical requirements for construction, operation, closure and post-closure reuse of the tailing pond comply with the Tailing Pond Safety Technical Rules, whether a work safety permit for the tailing pond has been applied for and secured in accordance with relevant provisions of the Implementing Measures for Work Safety Permits for Non-coal Mining Enterprises, whether the full-time personnel operating the ore drawing, damming, flood discharge and drainage facilities of the tailing pond have operating qualification certificates for special operations personnel, whether the person in charge of the mining enterprise has secured a work safety qualification certificate and the special work personnel are licensed to do their work, and if civil explosives are legally used and/or stored, whether the procedures for a civil explosives use certificate have been carried out, etc. The lawyer must also observe specific work safety regulations issued by local governments.

Wang Jihong is the executive partner at Grandway Law Offices and Gao Lei also works for the firm