Obstacles to the foreign acquisition of Chinese mines

By Xu Bin, Concord & Partners
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In recent years, the enthusiasm of foreign investors for acquisitions in the mining sector in the PRC has cooled, due to the international financial crisis and the fact that the relevant laws are outdated.

Xu Bin, Concord & Partners
Xu Bin
Partner
Concord & Partners

Due to restrictions on the transfer of exploration rights and mining rights, most foreign investments in Chinese enterprises engaged in mineral exploration and exploitation take the form of equity acquisitions.

When a foreign investor wishes to acquire a mining company, the approvals and registrations required include approval from the National Development and Reform Commission and the Ministry of Commerce; confirmation from the military authorities that the area in question is not a restricted military area; approval from the land and resources authority; approval from the Ministry of Industry and Information Technology (required for gold mining); approval of the environmental protection authorities; approval of the work safety authorities; registration with the State Administration for Industry and Commerce; and foreign exchange registration with the State Administration of Foreign Exchange. There is also a complex division of authority between different approval levels. All these plus the security review of foreign acquisitions, introduced by the Ministry of Commerce this year, make the approval process one long reel of red tape.

One acquisition, one project

China’s laws on foreign investment enterprises were formulated with manufacturing enterprises in mind. They do not take account of the feature that most characterizes risk exploration enterprises: their low success rate.

This causes great inconvenience in practice. For example, in the course of an acquisition by a foreign investor, the particulars to be reported for approval include the specific project in which the investment is to be made, the total amount of the investment, the registered capital and the ratio between these. If any of these items change after completion of the acquisition, a new application for approval must be made. If an exploration project fails to find exploitable mineral resources, the company involved will seek new exploration projects and must go through all the approval procedures anew. If it fails to do so, the renminbi funds derived from the conversion of its capital may not be used for investment in equity in a Chinese company.

Restrictions on equity transfers

Regulations provide that to transfer exploration rights, certain conditions must be specified, such as two years having elapsed from the date of issuance of the exploration permit. To transfer mining rights, conditions include that one year must have elapsed since the mining enterprise started production.

In recent years, speculation has been rife in the mining rights market but actual investment insufficient. The result has been that the land and resources authorities have sought to limit such speculation by putting strict restrictions on the transfer of mining rights.

In an effort to circumvent such restrictions, investors have invested in the equity of companies that own mining rights. In response, in certain provinces, efforts have been made to restrict changes to the equity ownership of companies that hold mining rights by requiring that the name of the enterprise’s legal representative be indicated on the mining rights certificate.

Complicating the model

The mining rights contractual cooperation model, which is used internationally, is simple and efficient. The approval process in most jurisdictions is simple. The model takes full account of the low success rate of risk exploration. At the risk exploration stage, the complicated procedures required to establish a company are avoided by the simple execution of a contract to collaborate.

China also permits so-called contractual cooperative exploration, but requires submission of the cooperation contract to the Ministry of Land and Resources and the Ministry of Commerce for approval. In practice, a foreign enterprise is also required to apply for a business licence and must use that licence to apply for a foreign exchange account, without which the Chinese party is unable to receive and convert foreign exchange. This prevents simple and efficient contractual cooperation in China. However, because foreign investors can easily mistake the process for the internationally accepted contractual cooperation model, they will often start cooperation without having sought approval, increasing legal risk.

Gold mining approval certificate

The mining of gold is subject to specific state protection. For historical reasons, it seems that both the Ministry of Industry and Information Technology (MIIT) and the Ministry of Land and Resources see themselves as the authority in charge of gold mines. In practice, many gold mining enterprises have successfully obtained a mining permit but have overlooked the need to gain approval from the MIIT.

However, the MIIT has stressed that the mining of gold by an enterprise without a gold mining approval certificate is illegal. Some foreign investors have acquired gold mining enterprises which lack any such approval certificate, thus calling their lawfulness into question.

Geological information

The Geological Information Administrative Regulations specify that geological information can be accorded a period of protection of 10 years following an application. However, these Administrative Regulations and their implementing measures are both silent on the criteria for securing this period of protection.

Furthermore, the Administrative Regulations specify that “geological information may be used for consideration during the period of protection, and the specific method used shall be determined through consultations between the user and the collector of the geological data”. This way of doing things is not conducive to the full and free use of the results of exploration carried out by previous parties.

Numerous foreign investors have, through the Chinese mining companies they have acquired, ascertained the geological and resource situation of many exploration blocks, leaving behind them valuable reference material. The outdated legal system and the legal obstacles have taken the shine off the market, depriving China of the opportunity for international investment and technical exchange in the mining sector.

Xu Bin is a partner at Concord & Partners in Beijing

Suite 1930, Beijing Sunflower Tower,

37Maizidian Street

Chaoyang District

Beijing, 100026

Tel: +86 10 85276468

Fax: +86 10 85275038

E-mail:

dorothyxing@concord-lawyers.com

na.tang@concord-lawyers.com

www.concord-lawyers.com

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