Mining rights | Review of business law in China
THE MINERAL MINING PROCESS and the use of minerals to produce raw materials is an important industry in many countries. China is no exception – it is both an exporter and importer of minerals. For example, China is the world’s largest importer of iron ore for steelmaking, sourcing large quantities from countries like Australia and Brazil. It is also the world’s largest producer of rare earth minerals, which are used in a wide range of products such as mobile phones. Oil and gas exploration is also becoming increasingly important in China.
This column begins by examining the legal nature of mineral rights and its relevance. It then examines the problems that arise when taking security over mineral rights. Finally, it describes the position of mainland China, Mongolia and Indonesia in terms of the nature of mineral rights and the possibility of securing them.
THE LEGAL NATURE OF MINING RIGHTS
The legal nature of mineral rights is a fundamental issue because the legal nature of mineral rights determines whether they can be treated as a type of property and related issues such as whether they can be assigned and secured. . The question of whether security can be taken over mining rights is particularly important for creditors who finance mining projects. If the guarantee of mining rights is possible, the creditors must know what rights they enjoy in the event of default of payment of the project towards them. For example, can they enforce security by taking control of mining rights or selling them to another operator?
If a mining right is subject to security, two issues become relevant. First, what kind of security is possible? This is relevant, as the type of security will have an impact on the creditor’s rights and how they can enforce their rights. Second, what registration and enforcement procedures will apply? This is particularly relevant in cases where government approval is required to transfer mineral rights or otherwise enforce security.
In most countries, a distinction is recognized between the right to prospect or explore for mineral deposits and the right to extract or exploit mineral deposits.
A range of English terms are used to describe mineral rights. These include the terms “mining permit”, “mining concession” and “mining concession”. English terminology can be confusing. The key question is whether the rights concerned constitute a property right and can therefore be treated as a type of property.
In Australia, for example, a mining license is generally treated as a personal right rather than a property right. In contrast, a mining tenement or concession is generally a right of ownership and can be treated accordingly.
The question of whether a mining right constitutes a property right is often linked to the nature of the property rights or legal title to land in general. For example, in some states in the United States such as Texas, ownership of the land extends to ownership of the minerals on the land, and ownership of the minerals may be sold separately from the land.
In other jurisdictions, including Australia, ownership of minerals on land rests with the state, and the state therefore has the power to grant rights to explore and extract minerals and also to limit rights to specified minerals.
In China, Article 3 of the Mineral Resources Law provides that mineral resources belong to the state and that the state property rights over mineral resources are exercised by the State Council.
SECURE MINING RIGHTS
If rights are a type of property, it is relevant to consider whether mining assets are treated as movable or immovable property. The reason this is relevant is that the type of security that is taken over the asset – and the rights under the security – will often depend on whether the mining asset is treated as movable or immovable property. For example, if mineral rights are treated as real property, the applicable type of security will likely be a mortgage. On the other hand, if the mining rights are treated as movable assets, the type of security applicable is likely to be a pledge.
In many civil law jurisdictions mining assets are considered chattels and the relevant type of security is a pledge. In these jurisdictions, the type of pledge is a non-possessory pledge over chattels. In other words, the secured creditor does not take possession of the mining assets.
In common law jurisdictions, on the other hand, mining assets are considered real property until they are extracted from the land. Therefore, the type of security that is taken on mining assets before they are extracted from the land is a mortgage.
The question of the type of security is relevant as it is likely to determine the remedies available as well as the applicable registration requirements.
In most jurisdictions, the registration system is more advanced in the case of immovable property – that is, land and land use rights – than in the case of moveable property. Therefore, it is often easier to register mining assets if they are treated as a type of real estate property and are registered with the registration authority that is responsible for land registration.
Whether the mining asset can be transferred to a third party is a key issue for a secured creditor if it becomes necessary to enforce its security. An important question that arises in this context is what requirements and restrictions, such as government approval and registration, will apply to a transfer of the mining asset to a third party.
Another key question is whether it is possible for creditors to take a floating form of security over minerals after they have been extracted from the earth. Such collateral allows the collateral provider to process the minerals by selling or processing the minerals in the normal course of business. The guarantee imposes restrictions on transactions with the minerals only in the event of default under the financing agreements.
In jurisdictions that permit the creation of security interests in mineral rights, several issues will be relevant. These include in particular the following:
- First, who can take security over mining assets? In some jurisdictions, only banks and licensed credit institutions can take security over mining assets. A related issue is whether security can be created in favor of foreign creditors.
- Second, is government or mining agency approval required to create and enforce a security and what registration procedures apply? An important question in this regard is the effect of a failure to register the warranty – does this render the warranty invalid for all purposes, or will it be valid against the licensee but not against third parties? such as a lessee of mining assets? In many civil law jurisdictions, it is registration that gives effect to security. Accordingly, failure to register the warranty will render the warranty unenforceable against all parties, including the licensee. By comparison, the position in common law jurisdictions is that a failure to register means that the security right is enforceable against the licensee but not against third parties who manage the assets in good faith without knowledge of the security right.
- Third, does the secured creditor have the ability to step in and resolve any issues before the mining right is terminated or revoked, and is it possible for secured creditors to enter into prior agreements or arrangements with the government or mining agency for this purpose?
Mainland China has specific laws that govern mineral rights. Under Chinese law, mining rights include exploration rights and are treated as real property. They may be transferred to another party, subject to the approval of the agency that issued the rights. However, an assessment process is generally required and strictly regulated, especially in cases where the interests of the state are at stake.
Mining rights can also be mortgaged. The mortgage agreement must be registered with the agency that issued the rights to be effective.
In Mongolia, the Minerals Law allows holders of mining exploration and exploitation licenses to pledge their licenses, but only to banks and non-banking financial institutions. Pledge agreements on mining licenses must be registered with the mining agency to be effective.
The Minerals Law does not specify whether banks and non-banking financial institutions must be Mongolian entities. In practice, Mongolian entities often grant security over their mining licenses in favor of foreign banks, and the mining agency registers these pledges.
Like mainland China and Mongolia, Indonesian law vests ownership of minerals in the state. In addition, the law recognizes various mining rights. Unlike mainland China and Mongolia, however, Indonesian law does not allow the holder of a mineral right to transfer the right to another party. In addition, no security may be created over the mining interest, although security may be created over other assets, including land and shares of a mining company.
ENVIRONMENTAL AND OTHER CONSIDERATIONS
In recent years, considerations such as the impact of mining on the environment, as well as the cultural and other rights of indigenous peoples, have become increasingly important in jurisdictions around the world, including the Australia. These considerations have led to changes in applicable laws and requirements, particularly with respect to secured creditors. Mining, however, will continue to be an important industry in many countries for the foreseeable future.
This is an abridged version of a presentation the author and Linklaters partners gave at a World Bank workshop on taking security over mining assets in May 2022.
Andrew Godwin previously practiced as a foreign lawyer in Shanghai (1996-2006) before returning to his alma mater, Melbourne Law School in Australia, to teach and research law (2006-2021). Andrew is currently a Senior Fellow (Honorary) at the Asian Law Center at Melbourne Law School and a consultant to various organizations including Linklaters, the Australian Law Reform Commission and the World Bank.