Defining the risks for PE investment in energy and mineral resource projects

Q: What does the general procedure for private equity (PE) investment in energy and mineral resource projects involve?

A: All different PE organisations have their own particular investment methods and means, however, in our legal service experience, the great majority of PE investments in energy and mineral resource projects take the form of equity investments, and the general procedure is illustrated at the bottom of this page.

If, in the course of the investment process, the inspection or investigation results at the preliminary screening, basic inspection of the project or due diligence stages are unsatisfactory, investment in the project may be foregone.

Q: What are the legal risks involved in PE investments in energy and mineral resource projects?

A: The legal risks attending a PE investment in an energy or mineral resource project come from different quarters, and depending on the specific circumstances of different projects, the legal risks may also be different. However, generally speaking, there are six main kinds of legal risk:

1. Target enterprise consolidation policy risks. At present, governmental authorities have, in respect of energy and mineral resource enterprises, and particularly mining enterprises, formulated consolidation policies based on the actual distribution of mineral resources. In areas where resource consolidation plans have been determined, the government will publicly announce entities that have been merged and restructured, mines that exist independently and mining enterprises that have been designated for consolidation, or separately release merger and restructuring qualification documents. Such a list of documents, or qualification documents, is the basis determining whether a mining enterprise can continue to exist independently. PE has to pay particular attention to such document lists or qualification documents, as the lawful continuation of a project is the fundamental precondition for an investment to be successful.

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   Zheng Xilin and Chen Bin are partners at AnJie Law Firm in Beijing

   

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