Mining rights | China Business Law Journal

THE PROCESS OF MINING MINERALS and using minerals to produce commodities 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 steel production, sourcing a large amount of iron ore from countries such as 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 mining rights and its relevance. It then considers the issues that arise when security is taken over mining rights. Finally, it outlines the position in mainland China, Mongolia and Indonesia in terms of the nature of mining rights and whether security can be taken over them.

THE LEGAL NATURE OF MINING RIGHTS

The legal nature of mining rights is a fundamental issue as the legal nature of mining rights determines whether they can be dealt with as a type of property and related issues such as whether they can be assigned and made the subject of a security. The question of whether security can be taken over mining rights is particularly important to creditors who finance mining projects. If security over mining rights is possible, creditors need to know what rights they enjoy in the event that the project defaults in its debt payments to them. For example, can they enforce the security by taking control over the mining rights or by selling them to another operator?

If a mining right can be made the subject of a security, two questions become relevant. First, what type of security is possible? This is relevant, as the type of security will have an impact on the rights of the creditor and how they can enforce their rights. Second, what registration and enforcement procedures will apply? This is particularly relevant in circumstances where government approval is required to transfer the mining rights or otherwise enforce the security.

In most countries, a distinction is recognised between the right to prospect or explore for mineral deposits and the right to extract or mine for mineral deposits.

A range of English terminology is used to describe mining rights. These include the terms “mining licence”, “mining tenement” and “mining concession”. The English terminology can be confusing. The key question is whether the relevant rights constitute a property right and can therefore be dealt with as a type of property.

In Australia, for example, a mining licence is usually treated as a personal right rather than a property right. On the other hand, a mining tenement or concession generally constitutes a property right and can be dealt with accordingly.

The question as to whether a mining right constitutes a property right is often related to the nature of property rights or title that the law recognises in respect of land generally. For example, in some states in the US such as Texas, the ownership of the land extends to ownership of minerals in the land, and the ownership of minerals can be sold separately from the land.

In other jurisdictions, including Australia, ownership of minerals in the land is vested in the state, and the state therefore has the power to grant rights to explore and extract minerals and also to limit the rights to specified minerals.

In China, article 3 of the Mineral Resources Law provides that mineral resources belong to the state and the rights of state ownership in respect of mineral resources are exercised by the State Council.

TAKING SECURITY OVER MINING RIGHTS

If the rights are a type of property, it is relevant to consider whether the mining assets are treated as movable property or immovable property. The reason why 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 property or immovable property. For example, if the mining rights are treated as immovable property, the applicable type of security is likely to be a mortgage. On the other hand, if the mining rights are treated as movable property, the applicable type of security is likely to be a pledge.

In many civil law jurisdictions, mining assets are considered to be movable property and the relevant type of security is a pledge. In these jurisdictions, the type of pledge is a pledge over movable assets without dispossession. 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 to be immovable property until they are extracted from the land. As a result, the type of security that is taken over 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 that are available and also the applicable registration requirements.

In most jurisdictions, the registration system is more advanced in the case of immovable property – i.e. land and land use rights – than in the case of movable property. As a result, it is often easier to register the mining assets if they are treated as a type of immovable property and are registered at the registration authority that is responsible for land registration.

The question of whether the mining asset can be transferred to a third party is a key issue to 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 be applicable to a transfer of the mining asset to a third party.

Another key issue is whether it is possible for creditors to take a floating form of security over the minerals after they have been extracted from the land. Such security allows the security provider to deal with the minerals by selling or processing the minerals in the ordinary course of business. The security only imposes restrictions on dealings with the minerals in the event of a default under the financing agreements.

In jurisdictions that allow security to be taken over mining rights, several issues will be relevant. These include 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 question is whether security can be granted in favour of foreign creditors.
• Second, is approval of the government or the mining agency required to create and enforce a security and what registration procedures apply? An important issue in this regard is the effect of a failure to register the security – does this make the security invalid for all purposes, or will it be valid as against the holder of the licence but not against third parties such as a lessee of the mining assets? In many civil law jurisdictions, it is registration that brings the security into effect. As a result, a failure to register the security will make the security ineffective against all parties, including the holder of the licence. By comparison, the position in common law jurisdictions is that a failure to register means that the security is effective as against the holder of the licence but not against third parties who deal with the assets in good faith without knowledge of the security interest.
• Third, does the secured creditor have an opportunity to step in and resolve any problems before the mining right is terminated or revoked, and is it possible for secured creditors to enter into advance agreements or arrangements with the government or the mining agency for this purpose?

MAINLAND CHINA

Mainland China has specific laws that govern mining rights. Under Chinese law, mining rights include exploration rights, and are treated as an immovable property right. They can be transferred to another party, subject to the approval of the agency that issued the rights. However, a valuation process is usually required and is tightly regulated, particularly in circumstances where the interests of the state are involved.

Mining rights can also be mortgaged. The mortgage agreement must be registered with the agency that issued the rights in order to be effective.

MONGOLIA

In Mongolia, the Minerals Law allows holders of mineral exploration and mining licences to pledge their licences, but only to banks and non-banking financial institutions. Pledge agreements over mineral licences must be registered with the mining agency in order to be effective.

The Minerals Law does not specify whether banks and non-banking financial institutions need to be Mongolian entities. In practice, Mongolian entities often grant security over their mineral licences in favour of foreign banks, and the mining agency registers such pledges.

INDONESIA

Like mainland China and Mongolia, Indonesian law vests ownership of minerals in the state. In addition, the law recognises different mining rights. Unlike mainland China and Mongolia, however, Indonesian law does not permit a holder of a mining right to transfer the right to another party. In addition, security cannot be created over the mining interest, although security can be taken over the other assets, including land and the shares in a mining company.

ENVIRONMENTAL AND OTHER CONSIDERATIONS

In recent years, considerations such as the impact of mining on the environment, and also the cultural and other rights of indigenous people, have become increasingly important in jurisdictions around the world, including Australia. These considerations have resulted in changes to laws and applicable requirements, including in respect of 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 that the author and partners from Linklaters delivered to a World Bank workshop on taking security over mining assets in May 2022.

Andrew Godwin previously practised 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 Principal Fellow (Honorary) at the Asian Law Centre, Melbourne Law School, and a consultant to various organisations, including Linklaters, the Australian Law Reform Commission and the World Bank.