Achi news desk-
Confusion over whether Chinese investment is welcome in Canada’s critical minerals sector is fueling investor uncertainty and jeopardizing this country’s position as a leading source of capital for the mining industry, executives and analysts say.
At the end of 2022, Ottawa said it would only allow investment from China under exceptional circumstances, but did not specify what those circumstances would be. In the absence of clarity about what is and isn’t allowed, Chinese investors have continued to seek deals with Canadian mining companies. Meanwhile, some transactions that Ottawa has allowed have baffled experts, as well as some that have been blocked.
At the end of last year, Shenghe Resources Holding Co. bought Ltd of China a 10 per cent stake in Vital Metals Ltd. of Australia, owns the only rare earth mine in Canada. Shenghe was also allowed to purchase Vital’s stockpile of rare earths mined in the Northwest Territories.
“It’s crazy that we’re selling our only rare earth stockpile developed in North America to the Chinese,” said Heather Exner-Pirot, senior fellow and director of natural resources, energy and the environment at the Macdonald Institute- Laurier.
“There are pretty good security reasons why we shouldn’t let it happen.”
Leblond: Has Canada gone too far in blocking mining investments by Chinese companies?
The Canadian government had made it a priority to boost domestic supplies of rare earths to insulate the country from market manipulation from China, and Vital Metals was supposed to have been a big part of the answer. Prime Minister Justin Trudeau, in a visit to the Vital Metals processing plant in Saskatchewan last year, praised his efforts to establish a Canadian supply chain in rare earth metals, especially given that China is “a challenging partner at the best of times.” China accounts for about 70 percent of rare earths mining and 90 percent of refining, according to the Oxford Institute for Energy Studies.
Vital Metals did not respond to a request for an interview.
Lithium Chile Inc. chief operating officer Michelle DeCecco is amazed that Ottawa has allowed the Vital Metals deal to go ahead, but has stopped Canadian mining companies with vital mineral assets overseas that are not part of the supply chain domestic from attracting Chinese investors as a matter of course.
Last month, SRG Mining Inc. of Montreal, which is developing a graphite project in Guinea, postponed a planned financing transaction with a Chinese investor after facing harsh criticism from Industry Minister François-Philippe Champagne.
“They get it completely back,” said Ms. DeCecco.
Citing confidentiality restrictions under the Investment Canada Act, Hans Parmar, a spokesman for Innovation, Science and Economic Development Canada (ISED), said the government could not comment on the Vital Metals or SRG Mining transactions.
Mr. Parmar added that the government “has not hesitated and will not hesitate to take action on transactions that would be detrimental to Canada’s national security.”
Amid the uncertainty over which Chinese investments will be allowed in critical minerals companies, Canada is at risk of losing mining capital in the future, said Christopher Ecclestone, chief mining strategist at Britain’s Hallgarten & Co.
About 40 percent of the world’s mining companies are currently listed on the Toronto Stock Exchange or the TSX Venture Exchange.
Mr. said Ecclestone that new critical minerals companies will be reluctant to locate themselves in Canada because of the government’s “disorganized thinking” regarding Chinese investment, and may instead locate themselves in London, Australia or Johannesburg.
“You’ll never even know,” he said. “The tree falls in the forest, who is there to hear it?”
Critics argue that Ottawa’s rules on foreign investment are not transparent by design.
Subrata Bhattacharjee, partner and national chair, competition and foreign investment review group with Borden Ladner Gervais LLP, said the national security review process has always been unclear and sometimes for good reason. The government cannot, for example, say it stopped a deal because it discovered specific national security issues with a Chinese buyer – which could inflame international relations.
“It is understandable that stakeholders do not think there is enough leadership,” said Mr Bhattacharjee. “But on the other hand, the very nature of these reviews means that the government will be reticent to explain it.”
That flexibility even extends to the very nature of what constitutes national security.
“If you look at the term national security as contained in the Investment Canada Act, there is no statutory definition of that, and that is done on purpose,” he said.
For a company going through the process, it can be maddening because the government essentially speaks in code and usually doesn’t answer specific questions.
“In a national review, when the government even communicates concerns, those are usually expressed in very vague ways and are not terribly granular,” Mr Bhattacharjee said. “And so if you’re an investor, responding to that process often means you’re doing a bit of shadowboxing.”
Ms. DeCecco is very familiar with that shadow-boxing. In 2022, Lithium Chile reached a financing agreement with Chengze Lithium International Ltd., and was subject to a national security review. He spoke to the government on several occasions about his concerns. The Chiles Lithium project is in Argentina, future lithium from the site has not been earmarked for the North American supply chain and only three of the company’s employees work in Canada.
However, on national security grounds, the government blocked the deal and ordered Chengze Lithium International to divest from Lithium Chile.
Ms. DeCecco says she understands the government’s mandate to protect Canada’s critical minerals industry, but she does not understand how foreign projects threaten Canada, and the government did not explain its thinking to her.
“Of course, we don’t want the Chinese to come and take all of Canada’s lithium or Canada’s gold, but that’s not what this discussion is about,” he said. “These are foreign assets, so it should be up to whichever country owns it. Our lithium is in Argentina, it should be up to the Argentine government if they want to try to stop it. “
Ottawa told her it doesn’t matter where the asset is, but didn’t say why that was the case.
“There’s just no clarity. There really isn’t,” he said.
SRG Mining seems to have gone through a similar experience to Lithium Chile. Last summer, SRG attracted a proposed investment from China’s Carbon ONE New Energy Group Co Ltd. A Canadian graphite company went through the early stages of a national security review, and apparently the government has concerns.
Late in the year, SRG said it planned to redo outside of Canada – a move it believed would avoid the need for a national security review. But that gambit blew up in his face when Mr. Champagne that SRG’s interpretation of the rules regarding rescheduling was incorrect. SRG promptly canceled its agreement with its Chinese investors.
SRG did not respond to a request for an interview.
SRG Mining delays financing deal with Chinese buyer after Champagne intervenes
Despite SRG’s failed attempt to reclassify to avoid a national security review, Mr. Bhattacharjee said that under certain circumstances, reclassification could still provide an exit ramp for Canadian critical minerals companies seeking Chinese investors.
“It all depends on the facts,” said Mr Bhattacharjee. “The structures can be very complex, and in some you may have a very good argument, and in some you may not.”
A source familiar with the situation said that if a company cut its ties with Canada entirely, including moving all its managers and employees out of the country, then Ottawa could no longer policing it for national security.
The Globe and Mail is not identifying the source because the person was not authorized to speak publicly.
Either way, Mr Champagne’s whipping of SRG will have wide-ranging implications for anyone considering a deal with a Chinese buyer, Mr Ecclestone said, and the No 1 rule is don’t try second guess the government.
“Companies have learned the lesson, which is to keep your mouth shut, carry a big stick and somehow do these things on the sly,” he said.
Among the covert moves he expects to see from companies looking for Chinese investors is to get secondary stock listings in foreign markets, and then “gradually ease themselves out.”
Another approach that could pave the way for Canadian critical mineral miners to make deals with Chinese buyers is to split a company in two, with one part allowed to have Chinese investors, even if the company is based in Canada. The litmus test for the government to have jurisdiction over a national security review appears to be whether the company has any meaningful presence in Canada.
For example, Vancouver-based Lithium Argentina said last month it had attracted a US$70 million investment from Ganfeng Lithium Co. Ltd. from China which would see it take a 15 percent stake in its Pastos Grandes project in Argentina. Ganfeng is already a joint venture partner in Argentina’s Cauchari-Olaroz Lithium project in the country. Aside from trading on the TSX, Lithium Argentina does not appear to have any other ties to Canada.
When Ottawa was asked if the investment from Ganfeng to Lithium Argentina was subject to a national security review, Ottawa said it may not be.
“A company listed in Canada may not have any operations, employees or assets in Canada,” wrote ISED spokeswoman Andréa Daigle in an email to The Globe last month. “If so, they would potentially be outside the jurisdiction of the Act.”
Lithium Argentina was spun off late last year from Lithium Americas Corp., also based in Vancouver. Unlike Lithium Argentina, Lithium Americas has no Chinese joint venture partners. Lithium Americas is building a new giant mine in Nevada called Thacker Pass that is wholly owned by the company.
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