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Industry uncertainty remains with Ottawa’s divestment orders dominating discussions in the mining world over the past year
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Canada shocked its mining sector a year ago with a policy that changed the way the industry viewed investment opportunities from foreign businesses.
The policy, released in October, made it more difficult for foreign businesses, either owned or influenced by “non-like-minded” nations, to own or take a stake in Canada’s critical minerals sector, saying that such a situation could be considered “injurious to national security” under the Investment Canada Act (ICA) and, therefore, trigger an extended government review.
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Canada considers 31 minerals, including lithium and copper, as critical due to the key roles they are expected to play in the gradual transition away from energy produced from fossil fuels.
A few days after the policy was released, Ottawa ordered three Chinese companies to divest their shares from three Canadian lithium companies. Back then, some analysts described the move as part of an overarching plan by the United States and Canada to redesign their supply chains to lessen their reliance on China, which dominates the global critical minerals sector.
The U.S. passed the Inflation Reduction Act last year, which includes several tax benefits for businesses such as a tax credit of up to US$7,000 for electric vehicles made primarily in North America or its allies.
Many bigwigs of the mining industry, though, didn’t appreciate the Canadian government’s order. For example, billionaire miner Robert Friedland and Mark Bristow, chief executive of Barrick Gold Corp, the world’s second-largest gold company, said the move would make it more difficult for miners to produce the metals needed for the energy transition.
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And Toronto-based TMX Group Inc., which runs the S&P/TSX composite index and TSX Venture Exchange, said Ottawa’s decision created “concern and uncertainty” among miners listed on the indexes.
One year on, the three Canadian lithium miners the government hit with a divestment order did find alternative buyers to take on the shares their Chinese investors were forced to get rid of, but industry uncertainty remains.
“For companies like ours, our ability to create value for our shareholders through Chinese investment has been relinquished under these new jurisdictions and restrictions that the government has put in place,” said Michelle DeCecco, vice-president and chief operating officer at Lithium Chile Inc., one of three miners affected by the government order.
DeCecco was a bit more surprised than executives at the other two miners when the government asked their Chinese investors to exit since Lithium Chile’s mining projects were based outside Canada, specifically Chile and Argentina.
But Jim Dinning, a partner at Davies Ward Phillips & Vineberg LLP, said the ICA gives the government a “fairly broad jurisdiction” over companies that have mines or properties located outside Canada.
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Our ability to create value for our shareholders through Chinese investment has been relinquished under these new jurisdictions and restrictions
Michelle DeCecco, vice-president and chief operating officer, Lithium Chile Inc.
“What (the government) might say is that these companies have benefited from the Canadian capital market in raising funds and without that nexus to Canada, they wouldn’t have that opportunity to grow,” he said.
As a result of the government order, “numerous” miners with foreign assets are not incorporating in Canada and those who already have are looking to relocate their headquarters, DeCecco said. But the TMX Group, one of the most popular exchanges for miners globally, said it didn’t have data to support that claim.
However, lawyers who have worked with mining companies said the policy and the government orders have dominated discussions in the mining world over the past year.
“I think these issues and how the government looks at transactions are becoming top of mind for our clients,” said Navin Joneja, a partner at law firm Blake, Cassels & Graydon LLP. “We do get a lot of questions about these laws and potential changes to the laws and so on.”
In terms of acquisitions and mergers, miners have to think about Canada’s regulatory issues and discuss them with potential buyers at an early stage.
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“Thinking about these regulatory issues from the beginning is important,” Joneja said.
There could be a few cases coming up for the Canadian government to understand just how far the powers the ICA gives it could go when a buyer is from a country that “could be injurious to national security.”
One of the potential cases might be linked to Brazilian miner Vale SA’s decision in July to sell 10 per cent of its base-metal unit to a company owned by the government of Saudi Arabia. This might include a portion of Vale’s operations in Canada.
In response to a query in July, a Vale spokesperson said the partnership would be for a minority, non-controlling interest of its base-metals company and that should the Canadian government seek any additional screening or request a formal review, the company would participate in the process. The deal is expected to close in the first quarter of 2024.
Going by the logic followed by the federal government regarding Lithium Chile, another case Ottawa might deal with is Sigma Lithium Corp., which runs its mine in Brazil, but also has an office in Vancouver.
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Earlier this month, Sigma said it received “strong strategic interest” in its businesses from industry leaders in the energy, auto, battery and lithium-refining industries. But it has not yet revealed the interested parties.
Despite the restrictions, Ottawa said its move was well-received by its partners and allies. In March, Industry Minister François-Philippe Champagne said there is more “intersection today than ever before between national security and economic prosperity,” and that most of the world realizes that.
Legal experts Dinning and Joneja agree.
“The change is really consistent with changes internationally,” Dinning said.
Order that China companies divest miner shares created uncertainty
Champagne rebuffs criticism anti-China stance hurts miners
Ottawa orders Chinese companies to exit 3 lithium miners
Joneja said Canada isn’t an outlier in this area and he expects countries to continue working on finding a balance between welcoming foreign investments and protecting local interests.
• Email: nkarim@postmedia.com
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