Focal points of legal due diligence in mining project acquisitions

Legal due diligence is without doubt an essential step in acquiring a mining project, and often determines the success of it. Given that direct asset acquisitions require the amendment of relevant licences and certificates, which can involve complex approval procedures loaded down with red tape, the equity acquisition method has become the preferred method in practice when acquiring a mining project. Here, in addition to the routine matters of investigating the establishment, history and assets of the target company, the pledging and placement under seal of its equity, its claims and debts, and security provided by it, etc., special attention needs to be paid to the following points when conducting due diligence.

Compliance of licence approvals. The carrying out of the procedures for the licences and certificates often has a close connection with the determination of the transaction amount. Mining usually requires securing possession of five certificates, namely the mining permit issued by the Ministry of Land and Resources, the work safety permit, the mine manager qualification certificate and mine manager work safety permit issued by the work safety supervision authority, and the exploitation permit issued by another relevant authority. Gold mine acquisition permits additionally require an approval certificate for the mining of gold minerals.

Due diligence requirements

In many circumstances the target mine is under construction and the five certificates have not all been obtained, so the lawyer is required in his due diligence to ascertain on the spot the progress in the procedures for obtaining the licences and certificates, visit the relevant authorities and establish whether the target mine satisfies the conditions for carrying out the procedures for the licences and certificates required for mining. Additionally, in respect of the already secured exploration rights certificate and mining rights certificate, the lawyer should verify the payment of the transfer price, the validity of the certificates, details of the annual inspections, and details of mortgages and placements under seal, and verify the local conditions, requirements and handling procedures for the renewal of the mining rights. These actions can to the greatest extent possible discover the legal risks in the target mine and assist in taking targeted preventive measures.

Wang Jihong is the executive partner at Grandway Law Offices and Gao Lei also works for the firm