Abstract: At present, the mining economy continues to languish, and most mining enterprises are mired in a deep financial crisis, making it extremely difficult for them to operate and survive. Yet, at the moment, there are relatively few channels available for mining companies to secure financing, which only compounds their difficulties. As the lifeline and most critical asset of mining enterprises, mining rights represent an important avenue for securing financing through mortgage arrangements—a crucial short-term solution for addressing their financial needs. However, given the myriad practical challenges associated with mining-right mortgages, it is far from smooth for mining companies to obtain funding via this method. This article explores the legal complexities inherent in China’s mining-right mortgage system from the perspective of mining-right mortgages, aiming to help enterprises and other organizations and institutions gain a comprehensive understanding and awareness of this issue.

I. The Concept of Mineral Rights Pledge

A mining rights mortgage refers to the act by which a mining rights holder—who is also the debtor—provides a debt performance guarantee to a creditor by using the mining rights it holds, after completing the relevant legal procedures under a non-possessory pledge arrangement. The owner of the mining rights, as the debtor—or pledgor—provides funds to the creditor, who is the mortgagee, while the mining rights serving as collateral constitute the subject matter of the mortgage.

Mortgaging mineral rights is an inevitable outcome of the development of a market economy. China’s legal system has already endowed mineral rights mortgages with full legal significance. According to the “Provisional Regulations on the Granting and Transfer of Mineral Rights” issued by the Ministry of Natural Resources, these regulations clearly stipulate that the scope of application of mineral rights shall be governed by the laws and regulations pertaining to real estate. The owner of mineral rights enjoys the rights of possession, use, benefit, and disposal over the mineral rights they hold.

II. The Evolution of the Mineral Rights Pledge System

Both China’s 1986 Mineral Resources Law and the 1994 State Council Implementation Rules for the Mineral Resources Law explicitly prohibit the transfer, lease, or mortgage of mining rights. Under the planned economy system, the circulation channels for mining rights were effectively closed off to market entry. Later, due to the need for economic system reform and the development of a market economy, the state revised the Mineral Resources Law in 1996. The revised Mineral Resources Law relaxed restrictions on the transfer of mining rights to some extent. However, even this revision still failed to fully meet the demands of market development; the conditions it stipulated for the transfer of mining rights remained relatively stringent, and the vestiges of the planned economy continued to influence and dominate the development of the mining industry. In 1998, the State Council promulgated and implemented the “Administrative Measures for the Transfer of Prospecting Rights and Mining Rights.” Within the framework of the 1996 Mineral Resources Law, these administrative measures provided more explicit and detailed specifications regarding the conditions for the transfer of mining rights.

In the year 2000, two years after the previous regulation, the Ministry of Natural Resources issued and implemented the “Interim Provisions on the Granting and Transfer of Mining Rights.” For the first time, these provisions explicitly defined mining rights as falling within the scope of property rights and subjected them to the adjustment principles applicable to real estate laws and regulations. Most notably, these provisions not only broadened the methods for transferring mining rights but also relaxed the restrictions governing such transfers. According to the provisions, mining rights may be sold, leased, or mortgaged to external parties. The issuance of these provisions has, in essence, gone beyond the relevant regulations on mining rights transfer contained in the “Mineral Resources Law,” the “Implementation Regulations of the Mineral Resources Law,” and the “Administrative Measures for the Transfer of Prospecting and Mining Rights.” Under China’s current legal framework, these provisions do indeed have certain defects in terms of legal validity due to conflicts between superior and subordinate laws. Nevertheless, we must also acknowledge that the introduction of these provisions is of paramount importance for the development of the mining economy and represents a landmark exploration in promoting reform of the mining rights transfer system.

With the promulgation and implementation of China’s Property Law in 2007, mining rights were, for the first time at the level of basic civil law, established as usufructuary rights, thereby firmly establishing the property rights nature and status of mining rights. The implementation of the Property Law has brought about a fundamental and significant shift in the legal nature of mining rights, which undoubtedly holds immense significance for the development and prosperity of the mining market economy.

III. Conditions That Must Be Met for Establishing a Pledge of Mining Rights

According to Article 36 of the Provisional Regulations on the Granting and Transfer of Mining Rights, the mortgage of mining rights shall be carried out in compliance with the conditions and procedures applicable to the transfer of mining rights. Therefore, in accordance with the existing relevant legal provisions, when establishing a mortgage on mining rights, the mortgagor must simultaneously meet the following basic conditions.

1. The mining rights subject to a mortgage must be owned by the debtor himself, excluding cases where the mortgagor uses their own mining rights to provide security for third parties. In other words, only the person who genuinely holds the mining rights may establish a mortgage on the target mining rights due to their own debts.

2. The mining rights held by the mortgagor must not be in a state of having been lost. If the mining rights have been canceled due to the expiration of their term of use, or if they have been extinguished as a result of other circumstances—such as revocation—specified by national regulations, the mortgagor will face difficulties in establishing the mortgage. Furthermore, the mortgage contract serving as the basis for the mortgage of mining rights must also comply with the relevant provisions of national laws and regulations.

3. The conditions for the transfer of mining rights are met. According to Article 6 of the “Administrative Measures for the Transfer of Prospecting Rights and Mining Rights,” if a mining right is used as collateral, the following conditions must be satisfied: (1) The mining enterprise has been engaged in mining production for at least one year; (2) There are no disputes regarding the ownership of the mining right; (3) The mining right usage fee, the purchase price of the mining right, the compensation fee for mineral resources, and the resource tax have been paid in accordance with national regulations; (4) Other conditions stipulated by the State Council’s department of natural resources and land administration.

4. With regard to the creditor’s request for the valuation of the collateral, the mineral rights pledgor shall also commission an appraisal agency to conduct a value assessment of all its mineral rights.

IV. Legal Complications in Mineral Rights Pledges

The absence of clear legal institutional rules means that China’s current mineral rights mortgage system lacks a robust and comprehensive legal basis for support. In practical operation, it is plagued by various adverse factors, including ambiguous gray areas and conflicts between laws and regulations. It can be said that the legal complexities surrounding mineral rights mortgages are numerous and multifaceted.

1. The Game Between the Filing System and the Registration System for Mineral Rights Pledges

According to Article 2, Paragraph 2 of the “Interim Measures for the Assessment and Management of Prospecting Rights and Mining Rights” issued by the Ministry of Natural Resources (which became invalid in 2009), if the owner of a mining right establishes a mortgage over such right, the mortgage must be reviewed and registered by the registration authority. Meanwhile, Article 57 of the “Interim Provisions on the Transfer and Assignment of Mining Rights” stipulates that, for mining rights intended to be encumbered by a mortgage, the mortgagor must submit the signed mortgage contract for the mining right as well as the mining right certificate to the original issuing authority for filing procedures. Thus, prior to 2009, there was ongoing practical controversy in the legal practice of mining-right mortgages regarding whether to adopt a filing system or a registration system. Due to differing regulatory requirements, in actual operations, the competent authorities responsible for mining rights have adopted both the filing system and the registration system; indeed, some even employed both systems simultaneously. To some extent, this has caused certain difficulties and negative impacts on the administrative management of mining rights. After the “Interim Measures for the Assessment and Management of Prospecting Rights and Mining Rights” became invalid, only the filing system remains as an effective regulation governing mining-right mortgages. However, we should also note that even if the filing system is ultimately confirmed as the prevailing approach, it still conflicts with the relevant provisions of China’s “Property Law” concerning the registration of real property rights.

2. The Paradox of Mineral Exploration Rights That Cannot Be Pledged as Collateral

Article 57 of the Ministry of Natural Resources’ “Interim Provisions on the Grant and Transfer of Mining Rights” merely indicates the legislative intent that mining rights can be used as collateral; however, it does not explicitly specify whether only exploration rights or mining rights—or both—can be pledged as collateral. As a result, in practice, the competent authorities have adopted two distinctly different approaches: Some provinces accept only applications for pledging mining rights, while rejecting applications for pledging exploration rights altogether. Clearly, this practice will inevitably lead to disparities in the administrative management of mining rights among different provinces and regions.

As for the reasons given by certain provinces for refusing to accept mortgage applications on prospecting rights, the typical response is that, until the reserves of a prospecting right have been fully explored and confirmed, its value remains inherently uncertain. However, this generalization cannot be applied uniformly across the board. For instance, with respect to prospecting rights over mineral deposits discovered through state-funded exploration, the value of such rights can actually be relatively well-defined. Even if the state were to grant such a prospecting right, it would invariably require a valuation assessment—and the assessed value would serve as the basis for collecting the consideration from the transferee of the prospecting right. Therefore, if one were to use such a prospecting right as collateral, the aforementioned rationale offered by some mining authorities—namely, that they refuse to accept mortgage applications on prospecting rights—simply does not hold water. As for prospecting rights over areas that have never been explored by the state, or those over which the state has conducted exploration but no mineral deposits have been discovered, while it is true that the value of such rights cannot be precisely determined, relevant legal provisions do not prohibit the use of property rights whose values are uncertain as collateral. The significance of the magnitude of a prospecting right’s value ultimately lies in the commercial judgment made independently by the parties involved in the transfer of mining rights; it is not an area that administrative authorities should intrude upon or interfere with. Moreover, since prospecting rights have already been explicitly classified as usufructuary rights, the rights held by the owner of the mining right—including the rights to possess, use, and dispose of the right—naturally entail the prospecting right holder’s legitimate entitlement to mortgage the prospecting right itself.

3. The Conflict and Dilemma Between the Transfer and Pledge of Mining Rights and the Coexistence with Leasing Rights

Article 52, Paragraph 2 of the Ministry of Natural Resources’ “Interim Provisions on the Grant and Transfer of Mining Rights” stipulates: “A mining right that has been leased may not be sold, jointly invested in, cooperated on, listed on the stock market, or used as collateral.” From this provision, it appears that a mining right that has already been leased cannot be transferred or mortgaged. However, Article 229 of the Contract Law provides an opposite rule: “If the ownership of the leased property changes during the lease term, such change shall not affect the validity of the lease contract.” Given the conflict between these two provisions—where the higher-level law (the Contract Law) takes precedence over the lower-level law (the Interim Provisions)—in theory, a mining right that has been leased should also be transferable. Moreover, according to the legislative principle underlying the Property Law, multiple non-conflicting property rights may be established on the same piece of property. Since the property subject to a mortgage is often not actually possessed by the mortgagee, there is no inherent conflict between a mortgage right and a leasehold right. Furthermore, Article 190 of the Property Law explicitly states: “If the mortgaged property was already leased before the mortgage contract was concluded, the original lease relationship shall remain unaffected by the mortgage right. If the mortgaged property is leased after the mortgage right has been established, such lease relationship shall not prevail over the registered mortgage right.” Clearly, this provision legally establishes the legitimacy and reasonableness of the coexistence of mortgage rights and leasehold rights. Therefore, we should also grant mining right holders the rightful authority to transfer or mortgage their mining rights even if they have already been leased.

4. The Mortgagee Racing on the Edge of a Knife

After a mortgagee obtains a mortgage right over mining rights, according to the existing applicable regulations, once the debtor fails to perform the debt and the mortgagee seeks to enforce the mortgage right, at this stage, there is indeed a risk that the mortgagee’s rights may not be fully realized. For instance, Article 58 of the “Interim Provisions on the Granting and Transfer of Mining Rights” stipulates: “In the event of a mortgage on mining rights, if the debtor fails to perform the debt, the creditor has the right to apply for enforcement of the mortgage and to receive payment in accordance with the law from the proceeds of the disposal of the mining rights. The new applicant for mining rights must meet the qualification requirements prescribed by the state, and the parties concerned shall, in accordance with the law, complete the registration procedures for the transfer and amendment of mining rights. If the mining right holder’s license is revoked, the debtor shall bear all consequences arising therefrom.” In a sense, this provision has already conflated the usufructuary nature of mining rights with the administrative licensing requirements for market access to the mining industry. The implementation of such an approach will inevitably lead to a situation where, once the market access qualification for a mining license is revoked, the mining right holder’s usufructuary rights will also disappear accordingly—thus seriously prejudicing the interests of the mortgagee. Therefore, after a mining right holder’s license is revoked under certain prescribed circumstances, what the mortgagee faces is not merely the issue of being unable to obtain priority repayment rights; even more critically, the mortgagee may find itself unable to realize its claims altogether due to the loss of the mortgagor’s mining asset.

Although existing relevant regulations already provide a legal basis for mortgaging mineral rights, mineral right holders still face numerous banks that are reluctant to accept mineral rights as collateral for bank loans. Even when some banks do accept mineral rights as collateral, they often simultaneously require the mineral right holder to provide additional supplementary guarantees to mitigate the credit risk that might arise if the mineral rights mortgage cannot be enforced. Such practice inevitably weakens the ability and value of financing secured by mineral rights mortgages. Therefore, in future legislation or amendments, China’s relevant laws and regulations should clearly specify how, in the event that the mortgagor’s mineral rights license is revoked, appropriate remedies should be established to ensure the effective realization of the creditors’ security interests in the mineral rights. This will help fully and effectively harness the protective role of mineral rights mortgages.

5. Coordination between Judicial and Administrative Powers in the Enforcement of Mortgage Rights

According to the relevant regulations, mortgagees primarily enforce their mortgage rights through methods such as offsetting with discounted value, negotiated sale, court auction, and court rulings ordering debt-for-asset swaps. Given that China imposes strict restrictive conditions on the transfer of mineral rights and also sets specific eligibility requirements for those acquiring such rights, courts at all levels, when handling litigation or enforcement cases involving mineral rights mortgages, should promptly provide feedback and notify the administrative authority responsible for the relevant mineral rights about key case information, including details of the mineral rights involved and the parties concerned. Ideally, they should obtain a formal opinion letter from the competent authority overseeing the mineral rights, seeking clarification on issues such as whether the parties involved in the transfer and acquisition of the disputed mineral rights meet the requisite qualifications. Before issuing court rulings on debt-for-asset swaps, negotiating sales, or conducting court auctions involving disputed mineral rights, courts should, based on the actual circumstances, also seek approval from the competent authority over mineral rights, obtaining an official document consenting to the transfer of the disputed mineral rights. This step is crucial to prevent situations where legally effective court judgments cannot be enforced by the administrative authorities responsible for mineral rights, thus avoiding awkward predicaments. Ultimately, this approach will effectively coordinate the relationship between judicial and administrative powers, thereby safeguarding the authority of the judiciary.