According to the "Interim Measures for the Administration of the Granting and Transfer of Mineral Rights" issued by the Ministry of Natural Resources in 2000, both prospecting rights and mining rights are collectively referred to as mineral rights. For the first time, the mineral rights market was divided into a primary market and a secondary market: specifically, when the state grants mineral rights to enterprises, this constitutes the primary market; whereas when mineral rights holders transfer their mineral rights to other equal entities, this is classified as the secondary market.

In the process of investing in the exploration industry, investors can adopt different approaches depending on whether exploration rights have been established for the target block. If the target area is currently unexplored, investors can acquire exploration rights through primary market auctions and then proceed with subsequent exploration investments. If exploration rights have already been obtained, investors can achieve their exploration investment objectives by means of joint ventures, cooperation agreements, or transfers—depending on the status of the exploration rights held by the current rights holder and the specific goals of the investor. The author will now analyze these various investment pathways as follows:

I. Investing through the primary market

If an investor discovers a new blank area that, following preliminary investigation, is deemed to hold exploration potential and for which no mining rights have yet been established with the land and resources authorities, the investor may apply to establish new mining rights.

1. Establish the project company.

2. Apply to the land and resources department for a prospecting right in the name of the project company.

(1) The county government shall submit a request to the specific department of the Provincial Department of Natural Resources and Planning to include the target mining rights in the “Exploration Right Allocation Plan.”

(2) After soliciting opinions at the provincial department level, organize an expert review;

(3) After expert review, feedback will be submitted to the provincial department, which will then forward the assignment numbers to the Ministry of Natural Resources.

(4) After the Department of Land and Resources approves and assigns a number, the target mining rights will be incorporated into the proposed plan.

(5) The Department of Natural Resources has entrusted the trading center to carry out the bidding and auction procedures for the transfer of mining rights.

(6) The enterprise participates in the bidding and auction process and successfully wins the bid.

(7) Apply for the exploration license at the provincial department.

3. Seek out geological exploration teams to carry out follow-up exploration efforts.

II. Investing through the secondary market

1. Equity acquisition method

If the exploration rights that the investor intends to acquire have already been assigned to a certain company, and all investors holding exploration rights held by that company are willing to invest, then the acquisition of the company’s equity can be used to achieve this goal.

Before making an investment, the investor must clearly define the purpose of the investment to guide future efforts—whether it’s to enhance market competitiveness, extend the company’s industrial chain, or secure access to the company’s production raw materials and thereby reduce costs. It is essential to assemble a comprehensive M&A team with strong operational execution capabilities. The M&A team should include at least members from the investor’s management and staff, as well as financial advisors, legal counsel, and geological engineers.

Based on the financial, legal, and geological (technical) due diligence reports, we will design and negotiate arrangements for handling the target company’s debts and claims, taxation, rights and obligations of all parties, payment terms, whether there is any prior compensation, decision-making bodies, and future procedures for mineral rights exploration and investment decisions—taking into account the target company’s specific characteristics—and ultimately reach a transaction.

2. Joint venture approach

The so-called joint venture involving the contribution of exploration rights refers to the act whereby an exploration rights holder, in accordance with the law, values its exploration rights and contributes them as capital into an enterprise, thereby exercising corresponding rights and fulfilling corresponding obligations based on the amount of its investment. This approach requires a change in the exploration rights holder and the completion of approval procedures for the transfer of exploration rights. The basic procedure is as follows:

(1) The investor shall contribute capital in cash, while the prospecting rights holder shall contribute capital by valuing the prospecting rights it holds, and a letter of intent for cooperation shall be signed.

(2) Engage a third-party appraisal agency with qualifications for mineral rights valuation to appraise the proposed mineral exploration rights to be contributed and determine their value. If the value of the mineral rights exceeds the amount of the contribution, both parties shall agree on the handling method and accounting treatment.

(3) The investor and the mineral exploration rights holder shall sign a Shareholders’ Agreement or a formal Cooperation Agreement, clearly specifying details such as the rights and obligations of both parties.

(4) The two parties will establish a new company.

(5) The mining rights holder transfers its exploration rights to the name of a new company.

(6) All parties should make subsequent investments. If the funding budget is limited, they can seek suitable equity investors.

In practice, the order of transactions may vary depending on the game-theoretic interaction between the two parties and the specific circumstances of each project. The above applies when there is only one exploration right to be jointly developed; if there are multiple exploration rights, the following issues need to be taken into account:

(1) The quality of exploration rights will vary, and the cooperation objectives of the various parties will also differ. Investors often seek high profits, while exploration right holders may aim to control the resource reserves in the mining area and meet performance targets—leading to potential conflicts. Therefore, cooperation agreements must clearly specify the decision-making procedures for subsequent exploration investments in mineral rights, so as to better align the objectives of all parties and achieve a balance of interests.

(2) It is necessary to clarify the handling procedures in cases where no resources are discovered or the exploration lacks exploration value during the survey process.

(3) For projects whose exploration rights have matured and for which equity investors have already been identified, those requiring future partners may be spun off into separate project companies.

(4) When significant development potential is clearly identified, the investor shall have priority in development. If the parties agree to jointly develop the project, they may establish a separate project company specifically for the exploration rights to be developed. Each party shall make subsequent investments according to the newly agreed-upon proportions.

(5) If the mineral exploration right holder requests compensation for prior investments, the nature and method of obtaining such compensation must be clearly specified. In particular, for state-owned enterprises, the issue of compensation payments must be resolved through explicit, reasonable, and lawful channels.

3. Cooperation Method

Cooperative exploration refers to the practice in which a mineral exploration right holder brings in external funding, technology, management expertise, and other resources, and through signing a cooperation agreement that specifies the rights and obligations of each party, jointly explores mineral resources. Cooperative exploration does not alter the identity of the mineral exploration right holder and does not require any procedures for changing the mining rights; however, the cooperative exploration contract must be filed with the land and resources authority. The basic procedure is as follows:

(1) The investor shall conduct a survey of the basic information regarding the exploration rights and communicate on matters such as the cooperation model and profit-sharing ratio.

(2) Determine the final situation based on communication among all parties and sign the Cooperation Agreement.

(3) The parties shall carry out subsequent investments and mineral rights extensions in accordance with the provisions of the Cooperation Agreement.

The general division of labor is as follows: The investor provides funding to carry out advanced exploration of the prospecting right and complete the preliminary survey report, detailed survey report, and review process. The holder of the prospecting right retains ownership of the prospecting right and is responsible for its renewal and annual inspections. Once the relevant preliminary survey, detailed survey, and exploration work has been completed, the parties will share the revenues from the prospecting right according to the proportions agreed upon in the contract. At the same time, most agreements stipulate that during the transition from prospecting to mining or in subsequent cooperative efforts, the investor shall have priority rights.

(4) If the parties have completed their respective tasks as agreed in the Cooperation Agreement—for example, in the case of transfer of exploration rights—the parties shall share the proceeds according to the agreed-upon proportions.

If the holder of the prospecting right is a state-owned enterprise or institution, the future realization of profits will involve fulfilling procedures for the transfer of state-owned assets, thereby introducing additional uncertainties.

4. Asset Transfer Method

The so-called asset-transfer approach involves transferring the exploration rights as a separate asset to an investor, thereby changing the investor into the holder of the exploration rights. This approach is a typical form of exploration-rights transfer and requires completion of all approval procedures applicable to such transfers. The basic procedure is as follows:

(1) The investor shall conduct a survey of the basic information regarding the exploration rights and, based on the findings of the survey, determine whether to invest in or acquire these mining rights.

(2) For those with confirmed investments, the holder of the prospecting rights shall sign a “Prospecting Rights Transfer Agreement” with the investor.

(3) The prospecting rights holder and the investor shall jointly handle the procedures for changing the prospecting rights, transferring the prospecting rights to the investor or to a third party designated by the investor.

(4) Complete the closing tasks, such as making payment.

II. Risk Analysis

(1) Market Risk

The mining industry—including the geological exploration sector—exhibits cyclical patterns, with a basic cycle lasting between 7 and 10 years. Since the downturn in the mining sector began in 2012, both international and domestic mining conditions have remained sluggish. As a result, the exploration industry is facing new opportunities as well as challenges. On the one hand, the sluggish state of the exploration industry allows social capital to enter the mining sector at relatively low costs. On the other hand, this situation provides social capital entering the exploration sector with sufficient time to cultivate mineral rights and complete preliminary exploration work, thereby laying a solid foundation for realizing investment value appreciation during the upturn phase of the mining cycle. At the same time, however, there remains an inherent risk: it is difficult to predict whether the mining cycle has reached its bottom and, if so, when that bottom will be reached.

(2) Resource Risks

Mineral resources are stored underground and are influenced by geological structural conditions. It is impossible to determine whether a deposit exists—or even whether it meets industrial-grade standards—simply by examining surface outcrops or identifying superficial anomalies, nor can we readily assess whether the deposit holds exploration or development potential. Investing in unexplored areas carries the risk that, after committing resources, no valuable resources may be discovered.

Resources, as a key factor determining the success of exploration investments, are the primary focus of investors. However, due to information asymmetry between the parties involved, investors often find it difficult to gain a clear and accurate understanding of the true resource conditions. Typically, there are two main ways to obtain such information: on-site surveys and geological reports. In practice, the high-grade minerals that investors see are often pre-prepared by the cooperating party. Although these resources may appear abundant in quantity, they frequently contain significant amounts of harmful impurities, making them unsuitable for mining and difficult to transfer. Moreover, even when geological reports are available, they may be inaccurate, leading to erroneous assessments of resource reserves, substantial deviations in transaction prices, and, in many cases, the outright failure of the entire deal. Therefore, we recommend that investors, when entering into transactions, should engage geologists or appraisal agencies to conduct on-site verification, thereby avoiding critical oversights and mistakes.

(3) Technical Risks

The occurrence of mineral resources is characterized by complexity, which manifests itself in the intricate and variable nature of regional metallogenetic mechanisms, orebody morphology, occurrence patterns, mineral assemblages in ores, and ore grades. During exploration, geological experts often formulate corresponding hypotheses based on anomaly verification and previously identified phenomena, drawing upon relevant technical theories and principles, and then test these hypotheses through engineering methods. As a result, there are numerous mineral exploration conclusions, yet the probability of success remains low, posing significant technical risks in mineral exploration.

Investors are advised to seek out professional geological exploration agencies and engage independent third-party experts and technicians as consultants, so as to respect geological principles and adopt a step-by-step approach that helps mitigate risks. Before commencing exploration activities, the expert team will re-examine and reassess the technical and economic realities of the cooperative mining rights, and then make informed decisions regarding the exploration plan.

(4) Social Risks

Different regions have distinct personalities, customs, and habits among their residents. Some exploration rights are located in areas that local residents consider sacred mountains, holy sites, or ethnic minority concentration zones. These unique customs and beliefs may lead to the displacement of those conducting exploration and development activities in these areas, making it impossible for them to carry out their work normally. Although such exploration rights hold high-quality resources, they effectively remain unexplored and undeveloped—in some cases, turning substantial investment into mere empty promises.

(5) National and Local Policy Risks

As mineral resources are a key focus of national protection, the government frequently issues documents tailored to the specific characteristics of different periods, resulting in a lack of stability. Some local governments have already stopped issuing new exploration rights for certain minerals that are either in surplus or subject to special protection. Therefore, when making investments, it’s essential to clarify in advance whether such restrictions apply.

From the perspective of China’s legislative system, the central government issues guiding documents, while various departments or local governments at different levels formulate specific implementation rules or regulations to provide further details. However, the implementation rules issued by local governments vary. For instance, some localities consider changes in shareholders or actual controllers of mining companies as equivalent to transfers of mining rights and thus require that such changes undergo the prescribed approval procedures for mining right transfers. In other regions, different policies are in place regarding taxation, environmental protection, safety, and other related matters. Therefore, investors should thoroughly understand the actual conditions of the area where the exploration rights are located and, based on the specific characteristics of the project, determine an appropriate transaction structure and clearly define the rights and obligations of both parties involved in the transaction.

(6) Legal Risks

1. The issue of the legal entities involved in the cooperation

According to China’s laws and regulations: The transferor shall actually and legally hold the mining rights, and the mining rights held by the transferor must meet the transfer conditions stipulated by laws and regulations. Currently, most exploration rights are held by state-owned geological survey teams; the assets they hold are state-owned assets, and therefore, during the transfer process, they must comply with the procedures for transferring state-owned assets and are required to conduct transactions through a designated trading venue.

According to Article 7 of the “Administrative Measures for the Transfer of Prospecting Rights and Mining Rights,” the transferee of prospecting rights or mining rights shall meet the relevant requirements for applicants for prospecting rights or mining rights as stipulated in the “Administrative Measures for Mineral Resource Exploration Blocks” or the “Administrative Measures for Registration of Mineral Resource Exploitation.” However, when the transferee is a foreign investor, it shall comply with the relevant provisions of the “Catalogue of Industries for Foreign Investment,” such as the requirement that Chinese parties must hold a controlling interest in the exploration and exploitation of special and rare coal types, and that the exploration and exploitation of barite are restricted exclusively to joint ventures and cooperative enterprises.

2. Exploration rights, based on the issues encountered during acquisition (resource allocation and issues in the primary and secondary markets).

For investments made through the primary market, exploration rights with relatively favorable resource conditions may face malicious competition or bid-rigging during the bidding and auction process, thereby preventing investors from truly obtaining these rights—or forcing them to acquire them at significantly higher costs.

If an investor chooses to make an investment through the secondary market, failure to pay attention to any of the following factors—whether the exploration rights have been mortgaged, whether they have been seized, whether they comply with national policies, whether they fall within the scope of consolidation, whether they have undergone annual inspections as required by national regulations, whether the acquisition process was lawful, or whether there is any cooperation with other parties—could result in substantial losses for the investor. In recent years, in some regions, in order to attract investment, it has become common for projects to be paired with resource allocations. Exploration rights obtained through such arrangements often come with numerous ancillary obligations; if these obligations are not thoroughly understood beforehand, the investor could face the risk of having their exploration rights revoked by the government.

3. The issue of paying the mining rights fee.

During the investment process, it is necessary to verify whether the exploration rights holder has paid the exploration rights fee, the amount paid, and whether such payment complies with national or local regulations. If the full payment has not been made, there is a risk of having to make up the shortfall later—or even facing penalties.

If the investment in a joint exploration right includes funds from both the Central Geological Exploration Fund and the provincial geological exploration fund, based on the current legal framework, the primary exit mechanism for the Central Geological Exploration Fund is typically through capital contribution conversion—meaning the investor may become a shareholder. This could pose certain obstacles to future efforts to identify strategic partners (as some potential partners prefer that the Central Geological Exploration Fund not be involved).

4. Risk of falsifying geological reports

Having gone through a period of rapid growth in the geological exploration industry, some mineral exploration rights holders, in their quest for high profits, engaged in fraudulent geological practices. They fabricated geological data by purchasing core samples and other means without actually conducting any fieldwork, thereby artificially inflating the volume of geological work and the estimated resource reserves. As a result, geological reports were falsified, and the reported resource estimates became unreliable. During the investment process, these false documents were used as reference materials or decision-making bases, exposing investors to significant risks of financial loss.

5. Issues related to exploration rights, land, and associated obstacles