CLNB 2025: How to Mitigate Risks of Investing in Lithium-Rich Sichuan

At the CLNB 2025 (10th) New Energy Industry Chain Expo - Battery Raw Materials Forum hosted by SMM Information & Technology Co., Ltd. (SMM), Fan Xiaoqiang, a senior partner and lawyer at Beijing Yuren Law Firm, and the director of the Mining Compliance Construction Promotion Center of Yuren, introduced the topic of "Risks and Risk Prevention Suggestions for Investing in Sichuan’s Spodumene Mines."

Basic Situation of Sichuan Spodumene Mine Development

(I) The Position of Sichuan Spodumene Mines in China

On January 8, 2025, the Ministry of Natural Resources' China Geological Survey disclosed that China has made significant breakthroughs in lithium ore exploration, with new resource additions of spodumene, salt lake, and lepidolite lithium ores all exceeding ten million mt. This has increased China's share of global lithium ore reserves from 6% to 16.5%, ranking it second globally, up from sixth.

(II) Basic Situation of Existing Spodumene Mining Rights in Sichuan

Aba Prefecture has 13 lithium-related mining rights, including 5 exploitation and 8 exploration; Ganzi Prefecture has 10 lithium-related mining rights, including 5 exploitation and 5 exploration;

(III) Two Cases of Sichuan Spodumene Mine Development

(IV) Characteristics of Sichuan Spodumene Mine Development

In general:

Sichuan spodumene mines have a high degree of exploration but relatively low development. Lithium ore resources are mainly distributed in Aba and Ganzi Prefectures, but the distribution and development are uneven. The production scale of lithium mines in Ganzi Prefecture is generally larger than in Aba Prefecture, and the development cost in Aba Prefecture is relatively higher than in Ganzi.

Advantages:

Sichuan spodumene resources are characterized by abundant reserves, large thickness, high grade, and easy mining. For example, the average lithium oxide grade of Murong Lithium Mine reaches 1.62%, far exceeding the 0.8% required for industrial mining. Sichuan lithium chemical enterprises have advantages in electricity prices and energy costs.

Disadvantages:

The areas where spodumene deposits are concentrated have high altitudes, complex terrain, and overlap with ecologically fragile zones and habitats of rare species, posing higher requirements for safe and environmentally friendly development. Additionally, factors such as poor water, electricity, and road access lead to longer infrastructure construction periods and substantial investment.

Major Legal Risks to Consider When Investing in Spodumene Mines

(I) Risk of High Premiums for Exploration Rights

The starting price for the exploration of Lijiagou North Lithium Mine was 570,000 yuan, and the final transaction price was 1.01 billion yuan, a premium of 1,771 times; the starting price for the exploration of Rongxukaka South Lithium Mine in Daofu County was 1.02 million yuan, and the final transaction price was 179 million yuan, a premium of 174 times, etc.

In reality, when an exploration right holder acquires the exploration right, they obtain the right to explore the mineral resources within the designated area. However, whether there are minerals, what kind of minerals, how much, and whether they have industrial value, are all unknown at the time of the exploration right transaction.

(II) Risk of Whether Exploration Can Be Smoothly Conducted Within the Specified Period

Specifically, this includes whether a feasible exploration plan can be successfully formulated and approved by the competent authority. Only after obtaining the exploration permit can the exploration be carried out. At the same time, whether agreements can be smoothly signed with the landowners to acquire temporary land use rights and obtain temporary land use permits. After meeting these two basic conditions, the exploration right holder can either conduct the exploration themselves or entrust a technically capable, well-equipped, and experienced exploration unit to carry out the exploration. Through a series of exploration methods, including geophysical, geochemical, remote sensing, and drilling, the exploration work is organized according to relevant standards, involving fieldwork, indoor data analysis, preparation of exploration summaries, reports, and content reviews, to gradually clarify the resource situation in the area.

(III) Risk of Converting Exploration Rights to Mining Rights

According to Article 25 of the Mineral Resources Law, unless otherwise stipulated by laws and administrative regulations, after the exploration right holder has identified exploitable mineral resources, they can apply to convert their exploration right into a mining right within the validity period of the exploration right. The original mineral rights transfer department should then sign a mining right transfer contract with the exploration right holder and establish the mining right.

In Case 1, it took nearly nine years for the Lijiagou spodumene mine to complete the conversion from exploration to mining; in Case 2, it took nearly four years for the Cuola spodumene mine to complete the conversion. The conversion process for the Dechenongba Lithium Mine in Yajiang County, Sichuan, was even more complicated. The exploration right was first established in March 2003 for silica stone, and in June 2013, the exploration type was changed to "lithium ore, quartzite." In July 2024, Snowway Company obtained the mining right for the Dechenongba Lithium Mine, taking over 21 years to complete the conversion.

(IV) Risk of Mining Right Reclamation

Article 26, Paragraph 1 of the new Mineral Resources Law stipulates that before the expiration of the mining right, if it is necessary for the public interest, the original mining right transfer department may legally reclaim the mining right. If the mining right is reclaimed, fair and reasonable compensation shall be provided. Public interest, as defined in Article 25 of the Draft Implementation Regulations of the Mineral Resources Law, includes national defense security, ecological and environmental protection, and changes in national industrial policies.

Given the macroscopic, variable, and diverse nature of national industrial policies, if this provision is formally implemented, the risk of mining right reclamation may increase.

(V) Risk of Mining Right Defects

Risks:

1. The mining right is subject to restrictions such as mortgages or seizures

2. The mining right transfer contract explicitly restricts the transfer, contribution, or mortgage of the mining right

3. The mining right holder transfers the exploration or mining area through leasing, contracting, or cooperative exploration and mining

(VI) Risk of Paying Additional Mining Right Transfer Fees, Capital Occupation Fees, and Late Payment Penalties

[Case 3] On June 22, 2023, the announcement "YOUNGY Co., Ltd. on the Payment of Additional Mining Right Transfer Fees" disclosed that the Sichuan Provincial Department of Natural Resources, on June 29, 2012, approved the payment of the exploration right fee for the Kangding Jiajika Lithium Spodumene Mine (Extension) of the wholly-owned subsidiary Ganzi Ronda Lithium Co., Ltd. (hereinafter referred to as "Ronda Lithium"). Ronda Lithium paid 47.79 million yuan for the exploration right fee. The Sichuan Provincial Department of Natural Resources processed the conversion of the exploration right to a mining right and issued the mining license.

The Sichuan Provincial Department of Natural Resources, based on the opinions of the relevant national departments, determined that the setting of this mining right should follow the mining right transfer method. The value of the mining right was reassessed at 555.1579 million yuan, which is 464.68 million yuan more than the previously paid exploration right fee. According to relevant regulations, Ronda Lithium should pay an additional 464.68 million yuan in mining right transfer fees and 202.14 million yuan in capital occupation fees during the delayed payment period, totaling 666.82 million yuan. Ronda Lithium will pay these amounts in five installments.

(VII) Environmental Compliance Risks

1. Whether the construction project can pass the environmental impact assessment; 2. The risk of stricter control and approval for tailings pond capacity and construction; 3. If prior mining rights are included in nature reserves, there is a risk of being required to exit; 4. After the operation of the mine, the production process may generate waste gas, slag, and wastewater, and improper handling could lead to environmental pollution and administrative penalties.

(VIII) Risk of Project Construction Not Meeting Expectations

[Case] Lijiagou 1.05 Million mt/year Lithium Spodumene Mining and Processing Project

On November 26, 2020, the "Supplementary Announcement of Sichuan New Energy Power Co., Ltd. on Cash Acquisition of 62.75% Equity of Sichuan Nengtou Lithium Co., Ltd. and Related Party Transactions" stated that the Lijiagou Lithium Spodumene Mine is currently under construction, with the construction period expected to last until the end of 2021.

On May 30, 2022, the "Announcement of Sichuan New Energy Power Co., Ltd. on Increasing Investment in the 1.05 Million t/a Lithium Spodumene Mining and Processing Project in Jinchuan County, Lijiagou" announced an optimization and adjustment of the 1.05 million t/a lithium spodumene mining and processing project in Jinchuan County, Lijiagou, increasing the total investment from 1.2523042 billion yuan to 1.6548523 billion yuan (an additional investment of 402.5481 million yuan). Due to the project's location in the high-altitude Tibetan region with a fragile ecological environment, high environmental and safety requirements, and the significant impact of winter snow and rainy seasons on surface construction, the overall progress of the mining and tailings projects has been delayed. This increase in investment is an optimization and adjustment of the original design, based on actual problems encountered during construction, and has undergone feasibility studies and expert reviews, with the project goals remaining unchanged.

(IX) Safety Compliance Risks

Key steps include pre-evaluation of safety, review of safety facility design, acceptance of safety facilities, project acceptance, and application for a safety license, each of which must be handled with caution.

Safety compliance risks are divided into three categories:

1. Criminal liability risk. Non-coal mine enterprises that violate safety production regulations and commit crimes will be held criminally liable. The severity of criminal penalties, from highest to lowest, can be categorized into four types: the first is imprisonment of more than five years, for the crime of forcing or organizing others to violate safety regulations; the second is imprisonment of five to ten years, for the crime of major engineering safety accidents; the third is imprisonment of three to seven years, covering five offenses, including major responsibility accident, major labor safety accident, hazardous material accident, fire safety accident, and failure to report or false reporting of safety accidents; the fourth is imprisonment of less than one year, detention, or probation, for the crime of dangerous operations.

2. Administrative liability risk. Non-coal mine enterprises that violate the relevant provisions of the Safety Production Law will face administrative legal liabilities. The responsible parties include both entities and individuals. Administrative penalties for entities mainly include fines, confiscation of illegal gains, suspension or revocation of licenses, restrictions on business activities, orders to cease production and operations, orders to stop construction, and orders to close down. Penalties for responsible individuals, primarily targeting the main person in charge, other responsible persons, and safety management personnel of non-coal mine enterprises, as well as individual investors and directly responsible supervisors and other directly responsible personnel, mainly include fines, suspension or revocation of safety qualifications, dismissal, restrictions on employment, and administrative detention.

3. Civil liability risk. Civil liabilities that may arise from non-compliance with safety regulations include: 1. Compensation for personal injury and property damage caused by mine safety accidents; 2. Compensation for personal injury or property damage caused by geological disasters triggered by illegal mining; 3. Joint and several liability for damages caused by production safety accidents resulting from subcontracting or leasing production projects, sites, or equipment to units or individuals without the necessary safety conditions or qualifications.

(10) Risk of Being Ordered to Close Due to Violation of Safety and Environmental Protection Laws

[Non-Coal Mine Safety] There are two laws and administrative regulations related to production safety that involve the closure of mines: Article 113 of the Production Safety Law stipulates four scenarios, namely (1) the existence of major accident hazards, with three administrative penalties imposed within 180 days or four within one year as prescribed by this law; (2) after suspension of production and business for rectification, still failing to meet the production safety conditions specified by laws, administrative regulations, and national or industry standards; (3) failure to meet the production safety conditions specified by laws, administrative regulations, and national or industry standards, leading to major or especially major production safety accidents; (4) refusal to comply with the decision of the department responsible for production safety supervision and management to suspend production and business for rectification. Articles 69, 72, 75, and 77 of the Occupational Disease Prevention and Control Law stipulate 26 scenarios for closure.

Environmental protection side, currently there are 16 environmental protection laws and State Council documents that stipulate the closure of enterprises, including 9 laws: Marine Environmental Protection Law, Noise Pollution Prevention and Control Law, Solid Waste Pollution Prevention and Control Law, Soil Pollution Prevention and Control Law, Air Pollution Prevention and Control Law, Water Pollution Prevention and Control Law, Environmental Protection Law, Yellow River Protection Law, and Yangtze River Protection Law; 3 administrative regulations and 4 State Council normative documents: Regulations on Nature Reserves, Regulations on the Management of Pollutant Discharge Permits, Regulations on the Environmental Protection Management of Construction Projects, Notice of the General Office of the State Council on Strengthening Environmental Supervision and Law Enforcement, Guiding Opinions on the Establishment of a Natural Protected Area System with National Parks as the Main Body issued by the General Office of the CPC Central Committee and the General Office of the State Council, and Notice of the State Council on Issuing the Action Plan for Continuous Improvement of Air Quality.

In addition to the above administrative penalties for closure, mines may be closed by local governments due to ecological environmental protection, planning adjustments, industrial policies, and other public interests, as well as their proximity to sensitive construction projects such as railways and military facilities.

(11) Risks of Changes in Mining-Related Laws and Policies

The new Mineral Resources Law will come into effect on July 1, 2025, changing the original "one license, two rights" to "separation of rights and licenses" or two licenses, one right, and one permit; major changes in exploration and mining plans require re-approval; the new Mineral Resources Law establishes a comprehensive and systematic ecological restoration system for mining areas, strengthens the acceptance management of ecological restoration in mining areas, and increases penalties for violations of mineral resources laws.

Mining rights fees - mining rights transfer income, Document No. 35 - Document No. 10

During the policy change process, for existing mining rights, even if the mining rights fees have been paid according to the then-current policy requirements, there is a risk of being required to pay additional transfer income when applying for expansion of the mining area, increase in production scale, change in mining methods, or addition of mineral types during the validity period.

Recommendations for Investing in Sichuan Spodumene Mining Rights

(1) Macro level, it is necessary to have a comprehensive understanding of the relevant plans of the country, Sichuan, Aba, and Ganzi, the characteristics of lithium resource development, and the local business environment

1. Follow the trend, anchor the goal, and remain steadfast

In February 2024, the State Council approved the Sichuan Provincial Territorial Spatial Plan (2021-2035), which has recently been approved by the State Council, clarifying Sichuan's new positioning as "a strategic hinterland for China's development and an important region supporting the implementation of national strategies such as the Western Development and the Yangtze River Economic Belt."

Sichuan's positioning of itself. By 2027, Sichuan will build a full life cycle industrial cluster and ecosystem of "lithium resource development - lithium battery materials - battery manufacturing - system integration - end-use applications - used battery cascade development and comprehensive recycling."

Sichuan's positioning of Ganzi and Aba. The two prefectures are national lithium resource bases, so in the long run, Ganzi and Aba's lithium resources have great potential.

2. It is necessary to have an objective, comprehensive, and in-depth understanding of the lithium resource environment, development and construction characteristics, and business environment of Aba and Ganzi

(2) Build strong alliances, establish a cooperative ecosystem, and build a harmonious community

1. Establish a cooperative ecosystem, be good at strong alliances

The investment of Yahua Group in the Lijiagou Lithium Mine is a model of cooperation. On September 11, 2017, Yahua Group issued the "Announcement of Sichuan Yahua Industrial Group Co., Ltd. on the Joint Acquisition of Sichuan State Lithium Materials Co., Ltd. with Sichuan Energy Investment Group Co., Ltd. and the Signing of the Equity Transfer Agreement and Cooperation Agreement," adopting a three-step approach to achieve a win-win effect. First, jointly acquire 62.75% of the equity of Sichuan State Lithium Materials Co., Ltd. held by other shareholders except Yahua Group; second, after the acquisition, spin off State Lithium Company into two independent legal entities, State Lithium Chemicals Company and State Lithium Mining Company; finally, conduct non-proportional capital increase and share expansion for State Lithium Chemicals Company and State Lithium Mining Company, ultimately achieving Yahua Group's controlling operation of State Lithium Chemicals Company and Sichuan Energy Investment's controlling operation of State Lithium Mining Company.

On July 17, 2024, Tianqi Lithium's subsidiary Shenghe Lithium, CATL's subsidiary Snowy Mining, and Chengxin Lithium's subsidiary Huirong Mining jointly established Sichuan Tiansheng Times New Energy Co., Ltd. to jointly invest in and operate power infrastructure; the registered capital is 300 million yuan, and the business scope includes power supply, power generation, power transmission, and power distribution.

2. Build good government-enterprise relations and promote sustainable common development of the community

Aba and Ganzi are both ethnic autonomous regions, relatively backward, but the relevant competent authorities should collect taxes and fees according to law, and should not illegally collect "dry shares"; on the other hand, lithium mining development companies and actual controllers should take the initiative to give back to the ethnic autonomous regions in an appropriate manner, support the long-term development of local communities, and build a harmonious community and good government-enterprise relations.

(3) Micro level, lithium mine investors need to choose the right investment model, entrust professional institutions to conduct due diligence, operate in compliance, and rationally protect their rights according to law

1. Compare and select the investment and acquisition model of spodumene mines

First, rationally participate in the primary market for the transfer of lithium mine exploration rights, cautiously bid at high prices, and prevent the gap between resource reserves and expectations due to impulsive bidding. For example, the exploration premium of the North Lijiagou Lithium Mine was 1,771 times, and the exploration premium of the Rongxuka South Lithium Mine in Daofu County was 174 times.

Second, when the opportunity is right, obtain lithium mine exploration rights or mining rights through the transfer of mining rights, for example, on February 11, 2025, the Sichuan Provincial Department of Natural Resources approved the transfer of the exploration rights of the Redamen Spodumene Mine in Jinchuan County from Sichuan Qingda Energy Co., Ltd. to Sichuan Fusheng Mining Co., Ltd.

Third, invest by acquiring equity or increasing capital to the mining rights holder.

Fourth, when the lithium mine mining rights holder is applied for bankruptcy, actively participate in the reorganization process to become a reorganization investor.

2. Select investment targets, conduct pre-investment due diligence on the proposed transaction targets, and grasp the timing of the transaction

Different investment models have different matters and focuses for pre-investment due diligence.

Especially in ethnic autonomous regions. For example, whether Sichuan Province or Ganzi and Aba Prefectures have formulated specific local regulations or administrative normative documents to implement the Qinghai-Tibet Plateau Ecological Protection Law and the Yangtze River Protection Law, and whether the local government has formulated local policies that designate local state-owned platform companies to hold dry shares of lithium mine mining rights holders, for example, the Aba Tibetan and Qiang Autonomous Prefecture Government issued the "Aba Tibetan and Qiang Autonomous Prefecture Resource Management Measures" on May 20, 2013, which will have a significant impact on investors, and Yahua Group's "Announcement on Investing in Sichuan State Lithium Materials Co., Ltd." issued on December 20, 2013 also involved this.

3. Pay attention to the key terms of the transaction agreement

(1) Pay attention to the relevant terms on rights restrictions in the exploration rights transfer contract, for example, whether the transfer department has made special requirements on the exploration work in the transfer contract, whether there are restrictions on the transfer, investment, and mortgage of mining rights, and whether there are special provisions on the subject of ecological restoration obligations in the mining area.

(2) Pay attention to setting up commitment, guarantee, and breach of contract terms

"Commitment and guarantee terms" can be customized based on the problems and risks encountered during the due diligence process

4. Operate in compliance with the law, and be good at protecting rights through multiple channels according to law

Operating in compliance with the law is the basic premise for the steady and long-term development of enterprises, avoiding administrative penalties due to land use, environmental protection, safety, and illegal mining; do not touch the red line of criminal responsibility, avoiding high-frequency crimes in the mining industry such as illegal land occupation and illegal mining.

In the face of civil disputes between partners, under the premise of fully clarifying the facts and preserving evidence, hire professional lawyers to provide consulting opinions and formulate relevant solutions.

If dissatisfied with administrative actions, be good at using means such as reconsideration, litigation, mediation, settlement, petition, normative document review, or separate normative document legality review suggestions, and organize expert arguments on key legal application issues to protect rights.

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