Most of Timor-Leste’s mineral resources remain unexplored. According to the Atlas of Mineral Resources of the ESCAP Region published in 2003 by the United Nations Economic and Social Commission for Asia and the Pacific, the target minerals in the country are chromite, copper, copper-gold, gold and silver manganese, as well as some non-metallic minerals such as bentonite, limestone, marble and phosphate. The country also possesses battery mineral reserves such as chromium, cobalt and nickel.

Despite the huge potential of Timor-Leste's mineral resources, the mining industry (at an industrial scale) in Timor-Leste is still at an early phase of development.

The government is focused on attracting investment to the sector, which will certainly contribute to the creation of jobs, the improvement of the living conditions of the population, the increase of the country’s tax revenues and the diversification of the economy to reduce the dependency on the oil and gas industry.

Timor-Leste has a civil law legal system.

The main sources of mining legislation in Timor-Leste are the Timorese Constitution and the Mining Code (approved by Law 12/2021, of 30 June 2021).

The Mining Code is the main legal instrument in the sector, governing the award and exercise of mineral rights, from exploration to processing and marketing of all types of minerals, as well as the environmental licensing process and the tax regime applicable to the mining industry. The approval of the Regulations to the Mining Code (including rules for classification of minerals, management and use of mine closure reserve, health and safety in mining operations, administrative offences and investigation procedures in mining operations, amongst other matters) is expected in 2023.

In accordance with the Timorese Constitution and the Mining Code, the Timorese State is the owner of all mineral resources, with the terms and conditions for the award and exercise of exploration and mining rights to and by third parties being established in the Mining Code. Mineral rights may be granted to private entities as well as to the National Mining Company, recently incorporated through the approval of Decree-Law 43/2022, of 8 June 2022.

The Mining Code expressly states that the holder of mineral rights is the owner of all minerals extracted and produced in accordance with the Mining Code. Minerals unlawfully extracted shall remain the property of the State. If mineral resources are found in privately held areas, the State may acquire the area through direct negotiation with the owner or expropriation (where there is properly justified public interest and subject to the expropriation being carried out in accordance with the law in a non-discriminatory manner and subject to the payment of fair compensation).

As the original owner of all mineral resources existing in the Timor-Leste territory, the State acts as a grantor-regulator of mineral rights and is responsible for awarding mineral rights and overseeing the conduct of mineral activities.

The participation of the Timorese State in mining activities is expressly foreseen in the Mining Code, either acting on its own whenever this is deemed strategic by the Council of Ministers and following a recommendation issued by the National Authority of Petroleum and Minerals, or in co-operation with private parties, up to a maximum amount of 30% of participating interest.

The Timorese mineral regime may be described as a contractual system, with the operational and economic terms and conditions found under the mineral agreements/licences executed prior to and for the exercise of mineral rights.

The award of a mineral right provides an exclusive right to access and conduct mineral activities, with the holders of the mining rights being the owners of all minerals extracted and produced in accordance with the Mining Code.

The holders of mineral rights do not acquire property rights over the concession areas.

The award of mining rights in Timor-Leste is made by means of public tender or by direct award (on a first come, first served basis). The relevant awarding procedure and awarding entity will be determined based on the type of mineral and the industrial/artisanal nature of the operations.

On recommendation of the Regulatory Authority, the member of government responsible for the Mineral Resources sector may decide not to launch a public tender procedure and directly award the mineral rights in the following cases:

• where the area is considered as a new area delimitation with insufficient information and data;
• in case no bids were received in the public tender;
• health, safety and environmental risks associated with the mining area;
• with regard to strategic minerals;
• direct award to the National Mining Company; or
• ward of mineral passes (artisanal mining).

Mineral resources may be classified as strategic by the Council of Ministers on any of the following grounds:

• economic importance;
• energy security;
• balance of the country’s commercial trade;
• rarity;
• national defence and security; and
• growth support of the domestic manufacturing industries.

According to the Mining Code, the procedure for the award of mineral rights is as follows:

• the issuance of a reconnaissance authorisation must be requested to the National Authority of Petroleum and Minerals, which is the competent body for the issuance of the authorisation;
• to develop exploration and appraisal activities, a natural or legal person is required to apply for an exploration and appraisal licence, further to which an exploration and reconnaissance licence may be granted, provided that it has been previously approved by the Council of Ministers (or by the Ministry of Petroleum and Mineral Resources, as applicable);
• the award of a mining licence is granted through the execution of a mining agreement (previously approved by the Council of Ministers) between the third party and the National Authority of Petroleum and Minerals, where the operational and economic terms and conditions are defined, with the operation and mining licence being issued by the National Authority of Petroleum and Minerals (subject to previous authorisation by the Ministry of Petroleum and Mineral Resources);
• mineral permits for exploration and mining of construction materials or ornamental stones are awarded by the Ministry of Petroleum and Mineral Resources (upon proposal of the National Authority of Petroleum and Minerals), save where the applicant intends to export the produced construction materials, in which case the Council of Ministers must also be consulted;
• mineral permits for exploration and mining of transformation minerals are awarded by the Ministry of Petroleum and Mineral Resources upon consultation with the Council of Ministers.
• mineral passes for artisanal mining are issued by the Ministry of Petroleum and Mineral Resources and/or the National Authority of Petroleum and Minerals (with delegated powers); and
• marketing licences are issued by the National Authority of Petroleum and Minerals, following a request by the interested party who is not the holder of the mining licence.

Award of Mineral Rights and Progress from Exploration to Mining

Mineral rights can be awarded by means of public tender or by direct award.

According to the Mining Code, mineral activities are exercised in four stages:

• reconnaissance (optional phase);
• exploration and appraisal;
• mining; and
• marketing.

The rights and obligations of the holders of mining rights are set out by the Mining Code and further developed in the relevant mineral contracts (where applicable).

To develop exploration and appraisal activities, a natural or legal person is required to apply for an exploration and appraisal licence. While transiting to the mining stage, the relevant holder of exploration rights must obtain a mining licence further to the submission and approval of a mining plan (including a technical, economic and financial feasibility study). Only in cases of manifest technical and financial incapacity or by decision of the holder of exploration and appraisal rights are the mining rights are not awarded to the entity that carried out the exploration works.

Holders of mineral rights are entitled to sell minerals obtained as a result of mining activities developed in accordance with the relevant mineral contract or licence. Unprocessed minerals may only be exported if:

• the domestic industry is not capable of absorbing the unprocessed minerals;
• from a technical and economic point of view, the processing of the minerals in Timorese territory is not justifiable; and
• the exporting minerals are classified as strategical minerals (the exportation being subject to previous approval by the competent body).

The sale of minerals by a third party (namely, not the holder of the mining rights) is subject to the issuance of a marketing licence.

Duration of Mineral Rights and Extensions

An exploration and appraisal licence has a maximum duration of four years, but it may be extended by successive two-year periods up to a maximum of an additional six years. Mining rights can be awarded for a maximum of 25 years, which may be extended by successive five-year periods up to a maximum of an additional 25 years.

Different rules apply to artisanal mining and the exploration and mining of construction materials.

Transfer of Mining Rights and Change of Control

Assignment, sale or any type of transfer of a mining right are subject to written consent by the Ministry of Petroleum and Mineral Resources or by the National Authority of Petroleum and Minerals, as applicable. Transfer of a dominant interest or participation in a company that holds mining rights is also subject to written consent by the Ministry of Petroleum and Mineral Resources or by the National Authority of Petroleum and Minerals, as applicable, following a written notice sent by the interested shareholder to the National Authority of Petroleum and Mineral containing the identification details of the assignee or transferee and the terms and conditions of the transaction.

Termination

Mineral rights may be early terminated by the Timorese State when:

• a serious breach by the holder of mineral rights occurs of legal or contractual obligations arising from the mineral contract;
• the holder of mineral rights fails to comply with the statutory requirements related to the award of the relevant licence;
• a series of environmental damages as a result of mining activities occurs and such damages are attributable to intent or gross negligence by the holder of mineral rights;
• the holder of mineral rights fails to comply with the obligation of restoring an area impacted by mining activities in breach of the applicable environmental quality standards;
• there is proof of tax debts for two consecutive fiscal years during the mining phase;
• the holder of mineral rights intentionally provides false information to any government entity or the National Authority of Petroleum and Minerals;
• the holder of mineral rights fails to comply with the obligation of relocating or indemnifying local communities for damages caused by mining activities;
• an illegal transfer of the mineral right occurs;
• an illegal transfer of a dominating interest or participation occurs; and
• the mineral activities are suspended for 120 consecutive days, save if such suspension is previously approved by the National Authority of Petroleum and Minerals, if it was caused by any act or omission of the state or one of its representatives or if it is caused by a force majeure event.

The Mining Code contains specific provisions regarding prevention and minimisation of environmental and human damages and establishing the award of environmental mining licences.

Decree-Law 5/2011, of 9 February 2011, which established the environmental review and licensing procedure (the Environmental Licensing Regime), and Decree-Law 26/2012, of 4 July 2012, which approved the Framework Environmental Law, are also relevant in this respect as both foresee provisions regarding environmental protection and licensing of mining projects in Timor-Leste.

The main environmental authorities responsible for the administration and supervision of the compliance with the above-mentioned diplomas are the National Authority of Petroleum and Minerals and the Ministry of Petroleum and Mineral Resources.

The environmental review and licensing process are regulated by the Mining Code and by the Environmental Licensing Regime. The Mining Code foresees the possibility of approval of a specific diploma regarding the environmental review and licensing procedure of mining activities, which has not been enacted up until this moment.

The entity responsible for the review process and approval of the environmental licence is the Ministry of Petroleum and Mineral Resources, in co-ordination with the National Authority of Petroleum and Minerals.

According to the Environmental Licensing Regime, mining projects are subject to environmental impact assessments, which must be requested from competent bodies. Pursuant to the Environmental Licensing Regime, the completion of the review and licensing process may take up to 90 days.

Pursuant to the Mining Code, certain areas may be declared as excluded areas for mineral activities if and when justified by national interest, national security, the well-being of the nearby community, environmental, cultural or religious issues or when such mining activities are incompatible with activities projected or being carried out in the target area.

The creation of an excluded area must be declared by the Council of Ministers, under a proposal by the Ministry of Petroleum and Mineral Resources.

The Mining Code also establishes as protected areas those:

• reserved for graveyards;
• containing relevant archaeological and cultural heritage;
• where national monuments are located;
• containing religious sites;
• within 250 metres of dams or reservoirs;
• within 100 metres of state buildings;
• used for national defence or occupied by national defence entities, including a 100-metre surrounding area;
• within 100 metres of an airport;
• reserved for railway, aqueduct, oil or gas pipelines or construction projects;
• reserved for tree plantation or forestry projects;
• in or within 250 metres of villages, towns, municipalities or cities;
• on streets, roads, bridges and other public infrastructure, including a 100-metre surrounding zone on each side; and
• within national parks.

In this case, if the economic value or other benefits associated with the mineral activities clearly surpass the value and importance of the archaeological and cultural heritage, national monuments or religious sites or any other legally imposed off-limits areas, the development of mineral activities in such area may be approved by the Council of Ministers, if proposed by the Ministry of Petroleum and Mineral Resources, subject to consultation with the relevant municipal entities and governmental bodies.

Holders of mineral rights are required to recognise, observe and respect the rights, customs and traditions of local communities and promote and contribute to the development of the host and neighbouring communities of the concession area.

The Mining Code establishes that during the planning and development of mining activities the holders of mining rights and any third parties responsible for conducting mining activities must put in place adequate measures to consult local communities and accommodate their legitimate concerns.

For that purpose, the holders of mineral rights must appoint a Community Relations Officer, who must be a Timorese national, fluent in one of the official languages (Tétum and Portuguese). This officer will be responsible for co-ordination with the local communities, particularly with the local community leaders. During the planning of any exploration and evaluation, and mining and processing activities, the Community Relations Officer and the representative of the State shall consult with the local community leadership to discuss all relevant aspects of the performance of mineral activities in the concession area that may impact the local community, including but not limited to the following:

• creation of jobs and training for Timor-Leste nationals and local residents;
• development of local infrastructure;
• resettlement, if necessary;
• protection of the environment;
• protection and/or relocation of cultural and/or religious sites; and
• rights of access or easements for movement of populations and animals, as well as for the grazing of the latter or access to water or cultural and religious sites.

If the presence of local communities in the concession area is not compatible with the development of the mining activities, the holder of the mineral rights, together with the local and national authorities, must prepare and implement a relocation plan, which must be approved and monitored by the competent government entities. The relocated communities are entitled to be compensated by the mining rights holders for the loss of crops, livestock, forest products and other ceasing profits related to land usage.

There are also protective local content provisions in the Mining Code aimed at protecting local entrepreneurs and promoting local businesses, benefiting from a statutory preferential right in procurement procedures for the provision of goods and services to the mining industry.

The Mining Code foresees prior consultation of local communities in the following situations:

• the closure of a mining project (this consultation must be provided for in the corresponding mining closure plan, which is mandatory);
• the approval of the development of mining activities in protected areas; and
• the planning and development of mining activities and, if applicable, the relocation of the local communities impacted by mining activities.

There are no provisions addressing specially protected communities in mining projects.

Community development agreements for mining projects are not mandatory by law nor are they a common practice in Timor-Leste.

ESG policies are incorporated in various scattered legal statutes, but there are no express ESG regulations for the mining sector. Nevertheless, the Mining Code enshrines certain industry-specific ESG principles that must be complied with by the holders of mineral rights, such as the duties to conduct mineral activities under strict environment regulations, to comply with the applicable local content policies on recruitment and training of Timorese nationals, procurement of local goods and services, to ensure the involvement of local communities, to abide by local laws and regulations and to adopt the best business ethics practice. However, ESG provisions can also be found in mineral investment contracts (where applicable) which usually enclose guidelines and principles on environment protection/preservation, human resources and business ethics.

There is still no relevant precedent to cite.

It is, nevertheless, worth noting the effort of the National Authority of Petroleum and Minerals in assuring that the development of mineral activities in the country will not disturb nor negatively affect the rights of local communities and that the mineral activities will ultimately contribute to the sustainable development of the Timorese people.

Climate change is on the agenda of the Timor-Leste government but has not yet (directly) impacted the mining industry.

No climate change legislation related to the mining sector has been passed or is currently being discussed in Timor-Leste.

It is nevertheless worth noting that Timor-Leste is a party to the Paris Agreement and also approved in 2011 the National Adaptation Programme of Action on climate change, which considers the environmental sector as an essential and indispensable vector in the country’s sustainable development strategy and in the promotion of the quality of life of the Timorese citizens.

More recently, the Timorese government issued Government Resolution 8/2022, of 1 March, which approved the National Climate Change Policy, aimed at strengthening co-operation between the relevant Ministries and avoiding the duplication of measures and the implementation of outdated policies. The guiding principles of the policy, addressing the complex challenges created by climate change through mitigation and adaptation of its effects and compensation of the losses and damages, are the following:

• equity and social inclusion;
• inclusion of climate change in sectorial plans and policies;
• informed and active participation;
• commitment to sustainable development;
• long-term capacity building; and
• science and technology-based policy and action.

Although there is a growing sustainability concern emerging in Timor-Leste (with climate change under the spotlight), there are no relevant sustainable development initiatives for the mining industry.

There are no government or legislative initiatives related to the increasing demand for the so-called energy transition minerals.

The Mining Code sets out a special tax regime for holders of mineral rights (without prejudice to the general tax regime that applies to any entity in Timor-Leste, namely, corporate income tax). No distinction is made between taxing domestic and foreign parties.

Royalty

The rates applicable in connection with the mining royalty, which is calculated on the value of the mineral resources, are as follows:

• precious metals and minerals ‒ 8%, if unprocessed, 3.5%, if processed;

• common metals ‒ 7%, if unprocessed, 2.5%, if processed;

• gems ‒ 8%, if unprocessed, 3.5%, if processed;

• radioactive minerals ‒ 8%;

• rare earth minerals ‒ 15%; and

• ornamental stones ‒ USD10 per tonne, if unprocessed, USD1 per tonne if processed;

Surface Fee

Due by all natural and legal persons carrying out mining activities, the surface fee is levied on the concession area. The amount payable varies in accordance with the size of the concession area, the type of mineral under exploration, the type of mining activity and the operation year in question. It can range from USD25 to USD400 per square kilometre.

There are no industry-specific tax incentives for holders of mineral rights and tax stabilisation agreements are not expressly foreseen in the law.

Direct and indirect transfers or sales of mineral rights/mining assets (including by means of M&A operations in and/or outside the country) may trigger capital gains for purposes of assessment of corporate income tax.

The Mining Code contains several provisions regarding transparency and best international practices aimed at creating a safer environment for investment in the mining industry; these provisions include:

• the prohibition of any offers, benefits or gifts to any employee of the National Authority of Petroleum and Minerals or their family members; or
• the annual publication, by the Ministry of Petroleum and Natural Resources, of a report relating to State revenues and other direct and indirect benefits received by the State as a result of or in connection with mining activities (this report must be prepared in accordance with the best international transparency practices).

Other features that may be relevant for attracting investment are the following.

Dispute Resolution

The Mining Code foresees the judicial courts of Timor-Leste and arbitration courts as the proper mechanisms to resolve any disputes arising in connection with the mineral activities or disputes related to other issues regulated in the Mining Code, in accordance with the titles that granted the corresponding mining rights. It is also worth mentioning that, on 17 March 2021, Timor-Leste approved the accession of the country to the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (although it is not clear whether the deposit of the ratification instrument with the Secretary-General of the United Nations has already occurred) and, as such, international arbitral awards are recognised and enforceable in Timor-Leste, without prejudice to the reservation made by the Timorese State, which limit the applicability of the Convention to:

• the recognition and enforcement of arbitral awards handed down in another contracting state; and
• disputes arising from legal relationships, whether contractual or not, of commercial nature.

Timor-Leste’s National Parliament also recently approved Law No 6/2021 of 31 March 2021, which establishes the legal regime of voluntary arbitration and allows recognition and enforcement by Timor-Leste’s competent judicial courts of arbitration decisions.

Early Stage of Development of the Mining Industry

Since mining activities in Timor-Leste have been widely disregarded thus far, the country still possesses abundant mineral reserves to be explored and mined by potential investors.

There are no specific restrictions imposed on foreign investment related to exploration and mining activities.

There are also no special rules in respect of foreign ownership, except for artisanal mining and exploration and mining of construction materials, where access to mineral rights is restricted by local content provisions.

Timor-Leste is not a party to international treaties that favour or protect investment in exploration and mining.

The main sources of funding for private parties intending to carry out mining activities are privately-owned capital and international funding instruments.

Timor-Leste does not have a stock exchange market. Most of the funds invested in the mining sector are imported from overseas.

The creation of security interests over mining rights is subject to the prior approval of the National Authority of Petroleum and Minerals, save when securities are created for the financing of mining activities and the beneficiary entity agrees that any judicial sale related to the enforcement of the security interest is subject to consent by the Ministry of Petroleum and Mineral Resources.

To that effect, the holders of the mining rights must send a written notice to the National Authority of Petroleum and Minerals of their intention to create an encumbrance over a mineral right and must also include:

• all identity details in respect of the beneficiary of the encumbrance; and
• information regarding the underlying transaction under which the mining rights or assets are encumbered.

The Mining Code foresees that the creation, modification or extinction of charges or encumbrances over mining rights is subject to registration under the Mining Registry (still pending to be created) to be organised and managed by the National Authority of Petroleum and Minerals.

The creation of the National Mining Company, through the approval of Decree-Law 43/2022, of 8 June 2022 is a sign that the mining sector is ready to start operating at full capacity within a short period of time.

Also relevant is the Council Ministers November 2022 approval of:

• the opening of areas for the development of mining activities; and
• the terms of reference of the public tender procedures for the award of mineral rights, expected to be launched during the first semester of 2023.

Even though COVID-19 had a moderate impact on the Timorese economy and 2022’s GDP forecast is already expected to surpass the pre-pandemic indicators, Timor-Leste is still a country that depends heavily on the Petroleum Fund and the political class is aware of the urgent need to diversify the sources of funding of the national economy, particularly through the development of mining activities.

The instruments aimed at further developing the rules set out in the Mining Code are currently being drafted and are expected to be approved and published during the first semester of 2023.

The parliamentary elections scheduled to occur between May and July 2023 are, however, expected to slow the economic activity in Timor-Leste, including the mining sector.