[4] Exploration Rights and Mining Rights

Some geological exploration units hold prospecting rights and mining rights—assets that rank second only to human talent among those held by such units. In the eyes of certain potential partners who tend to prioritize material assets over human capital, these prospecting and mining rights may even be more attractive. However, when considering the contribution of geological exploration units’ prospecting or mining rights, there are still many issues that require careful attention.

1. Can exploration rights and mining rights be contributed as capital?

If one holds full ownership of exploration rights or mining rights, there is no legal obstacle to a geological survey unit using such exploration or mining rights as capital contribution.

(1) Article 123 of the “Third Section on Usufructuary Rights” of the Property Law stipulates: “Exploration rights, mining rights, water withdrawal rights—obtained in accordance with the law—are protected by law”; and Article 117 of the same section provides: “The usufructuary has, in accordance with the law, the rights to possess, use, and derive benefits from movable or immovable property owned by others.” These provisions clearly establish the private-property nature of exploration rights and mining rights.

(2) Article 27, Paragraph 1 of the Company Law stipulates: “Shareholders… may also contribute capital by means of non-monetary assets—such as physical objects, intellectual property rights, land use rights—that can be valued in monetary terms and legally transferred…” The flexible provisions regarding the types of contributions—“that can be valued in monetary terms” and “that can be legally transferred”—already provide a legal basis for contributing exploration and mining rights.

First, exploration rights and mining rights are assessable and their value can be determined. Second, since the 1996 Mineral Resources Law established the principle of “paid acquisition of resources” and the 1998 Measures for the Administration of the Transfer of Exploration Rights and Mining Rights were introduced, China has been continuously refining its market-oriented allocation system for exploration and mining rights. There is now no longer any doubt that exploration and mining rights “can be transferred in accordance with the law.”

(3) On November 11, 1999, the Ministry of Finance issued the “Notice on Printing and Distributing the Accounting Treatment Regulations for Prospecting Rights and Mining Rights of Enterprises and Geological Exploration Units” (Cai Hui Zi [1999] No. 40), specifically Article 4 of “Appendix II: Accounting Treatment Regulations for Prospecting Rights and Mining Rights of Geological Exploration Units,” which stipulates: “When a geological exploration unit, with approval, transfers its prospecting rights or uses its prospecting rights as an investment abroad, it shall handle such transactions in accordance with the provisions of the current ‘Accounting System for Geological Exploration Units’ concerning the transfer of geological findings.” This regulation has delved deeply into the financial details of valuing and contributing prospecting rights and mining rights as equity investments. This clearly demonstrates that the issue of whether prospecting rights and mining rights could be contributed as capital was no longer a qualitative question—whether “it’s permissible or not”—worth debating as far back as eleven years ago.

(4) Article 6 of the “Interim Provisions on the Grant and Transfer of Mining Rights” (Guotu Zifa [2000] No. 309), dated October 31, 2000, explicitly stipulates: “Mining right holders may, in accordance with the provisions of these Measures, transfer mining rights legally by means of… valuation-based capital contribution…”

2. Status of holding exploration rights and mining rights: four types under two categories, comprising four sub-categories.

From the current practical perspective, the exploration rights and mining rights held by geological survey units fall into two major categories, comprising four sub-categories.

Category 1: Mining rights that are wholly owned.

These mining rights held by geological exploration units can further be categorized into two types based on their source of entitlement:

(1) Mining rights obtained in exchange for payment of the mining rights fee;

(2) On the secondary market for mining rights, mining rights obtained in exchange for payment of agreed consideration.

Category 2: Mining rights held in trust

Article 5 of the “Administrative Measures for the Registration of Mineral Resource Exploration Blocks” (State Council Order No. [1998] No. 240), dated February 12, 1998, stipulates: “...In cases where exploration is funded by the state, the entity entrusted by the state to carry out the exploration shall be the applicant for the prospecting rights.” It is precisely because of this provision that the practice of geological survey units acting as “nominee holders” of prospecting rights has emerged across the country: when applying for a prospecting license, although the funder of the exploration is the state, the “exploration license” lists a specific geological survey unit as the registered right holder; and when the prospecting rights are converted into mining rights, the geological survey unit then becomes the nominee holder of the mining rights as well.

Based on whether the mining rights held in trust involve subsequent “non-state investment,” the trust-held mining rights can be further categorized into two types:

(1) Holding mining rights through nominee arrangements involving “non-state investment” factors.

Although, at the time of obtaining the “exploration license,” there was no factor of “non-state investment,” after the license was issued, a “non-state investment” factor emerged—either the licensed geological exploration entity itself invested, or the licensed geological exploration entity invited other entities to join the exploration activities through cooperative investment.

From the perspective of “non-state investment” sources, this mining right can be further divided into two sub-categories:

① There is a “licensed entity investment” factor involving nominee holding of mining rights;

② There is the factor of “unlicensed investment” involving nominee holding of mining rights.

(2) No nominee holding of mining rights due to “non-state investment” factors.

In terms of actual investment, this mining right held in nominee does not involve any “non-state investment” factors.

As of October 25, 2006, whether the nominee is named on the mining rights certificate—such mining rights can be further divided into two sub-categories:

① Mining rights held in trust, already registered as of October 25, 2006, and free of any “non-state investment” factors;

② Before October 25, 2006, nominee mining rights without any “non-state investment” factors and held in trust.

3. Which exploration rights and mining rights can be contributed as capital?

To determine which mining rights held by geological exploration units can be contributed as capital and which cannot, it is essential to clearly distinguish among the aforementioned “two major categories, four types, and four sub-categories” of mining rights holdings before arriving at the correct answer.

(1) For the two scenarios under Category 1, geological exploration units may make independent decisions to contribute mining rights as capital.

According to Article 4 of “Appendix II: Accounting Treatment Regulations for Prospecting and Mining Rights of Geological Exploration Units,” as stipulated in the “Notice of the Ministry of Finance on Issuing the Accounting Treatment Regulations for Prospecting and Mining Rights of Enterprises and Geological Exploration Units” (Cai Hui Zi [1999] No. 40), and in accordance with the provisions of the “Accounting System for Geological Exploration Units”—specifically, “Account No. 141: Long-term Investments,” “Account No. 137: Geological Achievements,” and “Account No. 311: Geological Exploration Development Fund”—the following points apply: First, valuation is mandatory; second, Account No. 137 shall be recorded at the assessed value; third, Account No. 311 allows geological exploration units to independently adjust their book values based on the difference between the assessed value and the negotiated value.

(2) For the different scenarios under Category Two, determine the appropriate handling method based on species and genus.

[1] An extremely misguided attitude toward “nominee holding”

Some local governments, influenced by short-term financial interests, disregard the interests of non-fiscal investors in exploration activities and fail to support the growth and development of geological survey institutions in accordance with established policies. Instead, they seek to emulate the “land finance” model by expanding “mineral rights finance” revenues. They selectively and mechanically apply the provisions of Article 28 of the Interim Measures for the Management of State-owned Assets in Public Institutions (Ministry of Finance Order No. 36 [2006)—which stipulates that “when public institutions dispose of state-owned assets—particularly when selling, leasing, transferring, or auctioning off large quantities or high-value assets—they shall publicly dispose of such assets through market-based competitive bidding methods such as auctions”—as well as the provision in Article 12 of the State Council’s Decision on Strengthening Geological Work (Guofa [2006] No. 4), which calls for “establishing a virtuous cycle mechanism for investment in mineral resource exploration.” Specifically, whenever they encounter situations involving “trustee holding,” they uniformly oppose geological survey institutions’ use of such arrangements to contribute equity, immediately demanding that these institutions surrender their mineral rights so that the local governments themselves can directly engage in bidding and auction processes to reap fiscal gains.

This “killing the goose that lays the golden eggs” approach first misinterprets Article 28 of Ministry of Finance Order No. [2006] No. 36.

First, Article 28 applies specifically to “state-owned assets in public institutions.” If, in cases where “non-state investment” factors are involved in the “nominee holding” of mining rights, the nature of these mining rights has already shifted from being purely “state-owned assets” to “mixed-ownership assets.” In such circumstances, forcibly auctioning these mining rights would infringe upon the rights of non-governmental entities. Second, even if no “non-state investment” factors are involved in the nominee-held mining rights, Article 28 still only targets actions that result in the “complete loss of rights over state-owned assets”—in other words, actions that amount to “exchanging assets for gold coins.” Thus, this article is not applicable to practices involving equity investments—where “asset rights are exchanged for equity,” representing a transformation of “rights forms.”

This “killing the goose that lays the golden eggs” attitude misinterprets Article 12 of Document No. 4 [2006] issued by the State Council.

First, those holding this view do not fully understand the proper positioning of the “Geological Exploration Fund” or the meaning of “state funding” in geological exploration activities. Article 1 of the Supplementary Notice issued on November 11, 1999, by the Ministry of Finance and the Ministry of Natural Resources (Cai Zong Zi [1999] No. 183), titled “Administrative Measures for the Management of Fees and Prices for Prospecting and Mining Rights,” clearly states: “The term ‘state funding’ as used in these Measures refers to funds allocated by the central and local governments from geological exploration fees, mineral resource compensation fees, mining rights usage fees and prices, and various funds specifically earmarked for the exploration and development of mineral resources; when the central government, local governments, and enterprises and institutions jointly fund mineral resource exploration and development, each party shall enjoy funding rights according to its respective investment ratio.” In other words, financial inputs designated under such headings as “subsidies,” intended to leverage investments of other types rather than fully financing exploration activities themselves, do not constitute “state funding” in the sense defined by national regulations. Similarly, Article 12 of Document Guofa [2006] No. 4, which states that “the state shall establish a Geological Exploration Fund (circulating capital) primarily for early-stage exploration of key mineral types and key mineralization belts,” and Article 13, which notes that “for energy and other important mineral resources with high exploration risks, the government shall appropriately intensify early-stage exploration efforts to stimulate commercial mineral exploration investments,” convey precisely the same idea—the “Geological Exploration Fund” serves as a “guiding and pioneering angel” for geological exploration agencies, but it is by no means their “future killer.”

Second, those holding this view deliberately overlook the eight characters “except as otherwise provided by the state” contained in Article 12 itself. In fact, less than ten months after the issuance of Document No. 4 [2006] of the State Council, the “Notice from the Ministry of Finance and the Ministry of Natural Resources on Further Deepening the Reform of the Paid Acquisition System for Prospecting and Mining Rights” (Cai Jian [2006] No. 694) was already released. The overarching spirit of Document Cai Jian [2006] No. 694 is to provide all nominees of mining rights with an opportunity to “legitimize their status”—that is, to exchange the mining rights payment for full ownership rights and transform their nominee status into outright ownership. Moreover, Article 9 of this document specifically offers geological exploration units a flexible option—either “converting to equity” or “legitimizing their status”—as a special consideration.

[2] Handling of mineral rights held in nominee status due to “non-state investment” factors

① Handling of mining rights held in trust under the “investment by licensed entities” factor

From the perspective of “who invests, who benefits,” there are actually two rightful parties to this small-scale mining right: one is the state, and the other is the licensed entity. From a theoretical standpoint, there are two main ways to safeguard the state’s interests: one is to convert the initial investment into shares, thereby making the state and the licensed entity joint fractional holders of the mining rights; the other is to recover the initial investment costs and, if necessary, charge some interest. Analyzing this in light of Article 13 of the “Decision of the State Council on Strengthening Geological Work” (Guofa [2006] No. 4)—which states, “For commercial geological exploration projects that can be funded by enterprises, the government will, in principle, no longer provide direct funding, instead relying primarily on policy adjustments to improve the market environment and play a guiding and promotional role”—we find that the approach of the government investing and then converting its investment into shares is not advisable.

Article 6 of the “Interim Provisions on the Granting and Transfer of Mining Rights” (Guotu Zifa [2000] No. 309), dated October 31, 2000, stipulates: “Mining right holders may, in accordance with these Provisions, transfer mining rights legally by means such as... valuation-based capital contribution...”; Article 39, paragraph 2, further provides: “The proceeds from the transfer of mining rights formed through state-funded exploration by state-owned geological exploration units shall be transferred to the State Fund based on the actual investment made at the time of exploration, with any remaining portion included in the unit’s main business revenue.” These two provisions offer important guidance for handling the mining rights of this small subsidiary: The geological exploration unit can first complete the formalities for “transferring the government’s actual investment into state-owned capital,” and then proceed with the entire mining right transfer process by contributing it as its own mining rights under the established procedures for equity investment.

Based on Article 8 and Article 9 of the “Notice from the Ministry of Finance and the Ministry of Natural Resources on Deepening the Reform of the Paid Acquisition System for Prospecting Rights and Mining Rights” (Cai Jian [2006] No. 694), Article 7 of the “Measures for Converting the Payment for Prospecting and Mining Rights into State Capital” dated August 17, 2004 (Cai Jian [2004] No. 262), as well as the provisions of the “Accounting System for Geological Exploration Units”—specifically, “Account No. 301: National Fund,” “Account No. 141: Long-term Investments,” “Account No. 137: Geological Achievements,” and “Account No. 311: Geological Exploration Development Fund”—the contribution of mineral rights as equity investment requires the following steps: The certificate holder submits an application for “conversion into state capital” to the financial authorities, simultaneously sending a copy of the application to the natural resources authorities; the financial authorities approve the application; Account No. 301 is adjusted; an assessment is conducted; an equity contribution agreement is signed; Accounts No. 137 and No. 141 are updated; and finally, Account No. 311 is adjusted.

② Handling of mining rights held in nominee status due to “investment by unlicensed entities”

The handling of mining rights for this small entity can be divided into two stages. In the first stage, “unlicensed entities” and “licensed entities” will be treated as a single unit, and the procedure for converting the government’s actual investment into state-owned capital will be carried out first. In the second stage, the investment and equity participation process will be completed according to the procedures for contributing the mining rights owned by geological exploration units.

The equity-investment procedures for this small entity are identical to those for equity investments involving mining rights held in nominee status under the “licensed entity investment” arrangement; the only differences lie in four areas: A. the content of the capital contribution agreement, B. the value recorded under account 137, C. the value recorded under account 141, and D. the adjustment value recorded under account 311.

[3] Handling of mineral rights held in nominee status without the involvement of “non-state investment” factors

① Mining rights held in nominee status, registered before October 25, 2006, and free of any “non-state investment” factors.

Article 7 of the “Notice from the Ministry of Finance and the Ministry of Natural Resources on Issues Relating to Deepening the Reform of the Paid Acquisition System for Prospecting Rights and Mining Rights” (Cai Jian [2006] No. 694) stipulates: “Where, with the approval of the Ministry of Finance and the Ministry of Natural Resources or the provincial-level financial authorities and natural resources administration departments, part or all of the consideration paid for prospecting rights and mining rights has been converted into state capital, the holders of such rights shall first make up the unpaid consideration in cash to the state. If it is genuinely difficult to make up the unpaid consideration in cash, the holders of prospecting rights and mining rights may voluntarily choose to pay the already converted state capital in the form of shares.” Article 9 further provides: “State-owned geological exploration units may continue to implement the policy of converting the consideration paid for prospecting rights and mining rights—acquired prior to the issuance of this notice and registered under their name—that were formed through state-funded exploration activities, into state capital.”

According to the two provisions mentioned above, regarding the future ownership of mining rights for this small subsidiary, the nominee holder has two options:

A. At the cost of “converting to state-owned capital,” without paying the mining rights fee and continuing to hold the rights on behalf of others;

B. Transfer the mining rights to your own ownership in exchange for paying the outstanding mining rights fee.

In the scenario where the nominee holds the mining rights under option A—that is, continuing to hold them on behalf of others—the mining rights of this sub-entity could still be contributed as equity investment. However, given that these rights remain “state-owned assets,” such contribution must undergo an approval process. According to Article 21 of the Provisional Measures for the Management of State-Owned Assets in Public Institutions (Ministry of Finance Order No. 36 [2006]), which stipulates that “Public institutions engaging in foreign investments using state-owned assets... shall conduct necessary feasibility studies and submit an application. After review and approval by the competent authority, the application shall be submitted to the financial department at the same level for approval,” as well as the Accounting System for Geological Exploration Units—specifically, Accounts No. 301 (“National Funds”), No. 141 (“Long-term Investments”), and No. 137 (“Geological Achievements”)—the steps involved in contributing the nominee-held mining rights as equity investment are as follows: Feasibility study → Submission of application to the construction authority → Transfer of the application to the financial department for approval upon approval by the construction authority → Approval by the financial department → Recording of values in Accounts No. 141 and No. 137 based on the approval outcome → Adjustment of Account No. 301 according to the approval outcome.

In the event that the nominee makes a B choice—i.e., transfers the mining rights to its own ownership—the mining rights of this subsidiary can fully be contributed as equity in accordance with the procedures outlined for Category 1 mining rights described earlier.

② Mining rights held in nominee status without any “non-state investment” factors and issued before October 25, 2006.

The mining rights of this small entity fall squarely within the scope of those that should be reclaimed through tendering, auction, and listing as stipulated in Article 28, Paragraph 2 of the “Interim Measures for the Management of State-owned Assets in Public Institutions” (Ministry of Finance Order No. 36 [2006]) and Article 12 of the “Decision of the State Council on Strengthening Geological Work” (Guofa [2006] No. 4). There is absolutely no possibility of using these rights as equity contributions.

[5] Know-how and Talent

These two types of assets held by geological exploration units—namely, know-how that cannot complete the property rights transfer procedures to the company, and human resources whose value cannot be reliably quantified in monetary terms—do not meet the requirements of Article 27, Paragraph 1 of the current Company Law and therefore cannot be contributed as capital to the company.

However, know-how and human capital can still help geological exploration units secure a proportionate share of equity in the new company, as Article 35 of the current Company Law introduces flexible modifications to the rigid rule found in traditional corporate law—that “the ratio of monetary contributions determines the ratio of profit distribution.” This Article 35 stipulates: “Shareholders shall distribute dividends in proportion to their actual paid-up capital contributions; when the company raises additional capital, shareholders shall have the right to subscribe for the new capital contributions in priority according to their respective actual paid-up capital contribution ratios. However, this does not apply if all shareholders agree otherwise and choose not to distribute dividends or subscribe for new capital contributions in proportion to their contributions.” By fully leveraging the “but” clause in this article, it is entirely possible to effectively highlight the value of know-how and human capital within geological exploration units.

(3) How much does it cost?

How much will it cost to transform into a limited liability company? This is a question that many geological exploration units are quite concerned about.

Assuming the geological exploration unit has no outstanding payments, taxes, or fees owed to government agencies; assuming that no external professionals are hired to assist with the restructuring process; and further assuming that the restructuring receives strong support from all relevant parties and does not require additional expenses to deal with unforeseen complications—then the cost of the restructuring would equal the fees and taxes incurred during the capital contribution process plus the fees for company establishment registration and certificate issuance.

[1] Fees and Taxes During the Capital Contribution Process