4. Different alternatives for granting mineral rights
Differentiation between “property rights” and “activity authorisations”
Countries that have been successful in reforming their mining sector over the past two decades (measured in terms of investment attractiveness) are those where the management of mineral rights is liberalised and conditions normally applied to other types of real-estate properties have been implemented.
The practical consequences of these innovations have been very positive during the two last decades in several countries, resulting in increased investment attractiveness. Primarily this is because liberalisation results in a decrease in risks. This is the case for the following reasons:
Titleholders that fulfil all their obligations during the validity period of an exploration licence have the automatic right to transform it into a mining licence.
The granting procedures should be the sole responsibility of the mineral rights cadastre, excepting signature by the granting authority.
When applying for the new mining licence, if titleholders must present their mining plans as well as their environmental and social impact assessment (ESIA) and environmental and social management plans, these plans will not be evaluated as part of the granting procedure. The initiation of operations should be dependent on approval of plans. However, rejection of such plans should not imply the loss of the mineral rights.
When plans are not approved, the holder will always have the right to revise them, or, if he or she estimates mining the resource would not be profitable under more stringent conditions, to recover their exploration investment by transferring the mineral property to another holder.
However, the practical implementation of these principles in some countries is not simple. For instance, the use of licences as guarantees for bank loans or mortgages requires the presence of a banking sector that is familiar with mining practices, and the development of a market for mineral properties. Such conditions are often only available in countries which have a long history of mining.
In addition, governments are normally reluctant to grant title without evaluating the mining operation’s plans. Certainly, any government must have the right to evaluate technical projects before authorising their implementation and the start of operations, to guarantee that the projects meet safety, health, and environmental standards.
The key question is whether this evaluation should be done before or after the licence is granted. It should be understood, based on the differentiation between “property rights” and “activity authorisations" that the granting of the mining licence does not necessarily give the right to initiate operations immediately. This must wait until evaluation of the operating plans and obtaining the corresponding authorisation.
First-come, first-served versus auctioning
There is little consensus on the relative merits of first come, first served licensing processes and auctioning (tender). As a rule, most petroleum licences are allocated using the “auctioning” or “competitive” approach, while mining licences are generally allocated on a first-come, first served basis. There are technical reasons which explain these different approaches, for example:
Geological differences between fluid hydrocarbons and solid minerals. The success rate for hydrocarbon exploration is approximately 20%, the success rate for base metals about 2%, whereas the success rate for precious metals is approximately 0.1%. In the mining sector, only one out of every 1,000 discoveries is likely to have economic potential. Out of these, about one in every 100 reaches the feasibility study stage, and fewer still turn into profitable operations. The majority of mining exploration projects do not conclude with the discovery of a profitable reserve. For this reason, oil and gas companies are ready to participate in auction processes, even if the available information is inconclusive, in contrast, mining companies are typically reluctant to participate in tender bids when the available information is not sufficient to assess the potential size and quality of a deposit. In consequence, governments find themselves in the dominant position when tendering for oil and gas, but not for mining projects.
Normally, cadastral activity in the petroleum sector (number of rights granted per year) is low. Often it comprises just a few dozen blocks and only a very small number of auctions per year are organised. In contrast, in the mining sector, licensing of mineral rights implies (even in medium size countries) the management of several hundred or even thousand applications per year and consequently it would be impossible to grant the entire mineral rights through a competitive tender process.
The first-come, first-served method, which has been prevalent in the granting of mineral rights for centuries, has both advantages and disadvantages. On the positive side, the removal of any discretion or subjectivity makes cadastral procedures transparent and impartial. Furthermore, rules are easily applicable and controllable, using only the priority registry book. For these reasons, this principle is widely accepted worldwide by both titleholders and applicants.
On the other hand, some governments feel that the application of this method can lead to the granting of licenses to “inadequate” applicants – for instance, those that may not have the technical or economic capacity to properly develop the mineral resource in question. In these cases, governments may prefer directed procedures that permit the selection of the “best” holder. But, depending on the rigour and transparency of the selection process, there may be significant risks for titleholders and applicants, affecting their security of tenure because discrimination and subjective evaluations may appear if some minimal required conditions are not fulfilled.
Based on the transparency and effectiveness of the auctioning process – as well as its success in the granting of oil concessions – some countries have decided to adopt it for the mining sector. As a result, the use of tender bids as an exclusive methodology for granting mineral rights has not generated the positive impacts expected; in fact, in some cases, it has posed an obstacle to effective mining sector development. Because governments using the tender bid methodology could only offer areas that have known geological potential, this process has a tendency to slow the exploration process, and some potentially interesting areas are completely ignored. Recent experiences of countries that established tender bids as standard method for licensing had quite negative consequences, resulting in deterred investment and hindering the explorations process.
In consequence, the “first-come, first-served” approach is considered best practice for the mining sector. Competitive tendering should be restricted to special cases with exceptional circumstances, when there are known mineral reserves.
The decision flowchart below presents the issues and parameters to be considered in making the decision to award mineral rights on "first come, first served" basis or via a tender process. In the majority of cases, in solid minerals, the available information is not enough for tendering, and for this reason "first come, first served" is adopted as the standard methodology for the granting of licences.