Francois-Philippe Champagne, Minister of Innovation, Science and Industry of Canada, speaks to reporters in the foyer of the House of Commons on Nov. 24, 2023. Mr. Champagne tightened the rules for foreign acquisitions of Canadian mining companies engaged in critical minerals operations.Spencer Colby/The Canadian Press
BHP Group Ltd.’s BHPLF proposed acquisition of 50 per cent of Filo Corp. FIL-T is among the first deals to be scrutinized by Ottawa under new, tougher takeover rules aimed at protecting the domestic critical minerals industry from foreign incursion.
It’s a transaction that many in the mergers and acquisitions market are watching intently – one that will set an important precedent in the Canadian mining industry.
Melbourne-based BHP, the world’s biggest mining company, last week said it was teaming up with Canada’s Lundin Mining Corp. to jointly buy Vancouver-based copper development company Filo for $4.1-billion.
Filo owns the Filo del Sol (FDS) copper, gold and silver project, which straddles the high mountains of Argentina and Chile. As part of the transaction, BHP plans to take a 50-per-cent stake in Lundin’s nearby Josemaria project and create a joint venture that will hold both sites.
Federal Industry Minister François-Philippe Champagne last month tightened the rules for foreign acquisitions of “important Canadian mining companies engaged in significant critical minerals operations,” saying he would only allow such deals to pass a net benefit test under the most exceptional circumstances.
A net benefit test kicks in when the transaction’s enterprise value is worth at least $1.989-billion for a buyer from a country that has a trade deal with Canada.
“This high bar is reflective of the strategic importance of Canada’s critical minerals sector and how important it is that we take decisive action to protect it,” Mr. Champagne said.
He announced the new takeover restrictions at the same time he approved Glencore PLC’s GLNCY acquisition of Vancouver-based Teck Resources Ltd.’s TECK-B-T coal business. Switzerland’s Glencore had originally proposed buying all of Teck, including its critical minerals business, something that did not go down well with Ottawa at the time.
“The government of Canada expressed strong objections to the attempt last year by Glencore PLC to exercise a hostile takeover of Teck,” Mr. Champagne said in his statement.
The move to tighten the takeover rules in July broadened the bucket of countries that Ottawa has imposed restrictions on to encompass not only hostile nations but allies as well. In 2022 the government had already said it would only approve acquisitions in the Canadian critical minerals sector by Chinese and other state-owned enterprises (SOEs) under exceptional circumstances.
“Unlike national security, where the government’s been quite clear that it’s China and SOEs that are really the main focus, they are not restricting this to any particular jurisdiction or any particular type of investment,” said Subrata Bhattacharjee, partner and national chair of the competition and foreign investment review group with Borden Ladner Gervais LLP. “So in theory, the minister is saying any non-Canadian investor, so that can even include our allies – U.S., Australia, whatever – investments from there under the net benefit test, they’re not going to be having an easy time.”
If the government rules against the BHP deal, it will essentially be sending the message that large-scale foreign acquisitions of Canadian critical minerals companies are no longer welcome. And that could mean a whole host of other major Canadian mining companies are potentially off limits to foreign buyers, including Teck, Hudbay Minerals Inc. and Cameco Corp.
“It puts some sand in the cogs of the capitalist machine if a large chunk of buyers are fenced out,” said Lucas Pipes, managing director with B. Riley Securities.
But BHP has several factors in its favour as it makes its case for Ottawa to allow both the Filo deal and its 50-per-cent stake in the Lundin project to proceed. BHP isn’t taking over all of Filo; it will be partnering 50/50 with Lundin, a Canadian miner. BHP already has a big presence in Canada. It is building the multibillion-dollar Jansen potash mine in Saskatchewan, and Ottawa has committed to investing $100-million in the project. In its statement last month, the government also left the door open to allowing foreign acquisitions of early-stage mining projects in some cases.
“Canada welcomes foreign investment and recognizes how important it is, particularly for small Canadian firms to advance exploration and site development efforts,’ Mr. Champagne said in the release.
While Filo’s FDS project is early stage, the company’s valuation, at more than $4-billion, isn’t small.
Justin Simard, a spokesperson for Innovation, Science and Economic Development Canada, in an email to the Globe and Mail said the government is aware of the Filo transaction, but he declined further comment citing confidentiality provisions of the Investment Canada Act.
BHP declined to comment.
Heather Exner-Pirot, senior fellow and director of natural resources, energy and environment at the Macdonald-Laurier Institute, isn’t a fan of Ottawa’s increasing protectionist stand against foreign M&A in the mining industry.
She says the government’s strategy to stop a steady flow of foreign acquisition in the sector, which goes back decades and includes the selling of Inco Inc., Falconbridge Ltd., Alcan Inc. and, more recently Teck’s coal business, is coming from a place of weakness, not strength.
“Why aren’t mining companies listing on the TSX? Why is Australia eating our lunch? Why are we getting fewer headquarters, not more headquarters? I feel like the government should be curious about that,” she said.
“Instead, what they’re doing is they’re protecting what we have, instead of saying: How do we grow from here? And that’s my problem. That’s always the mindset – get smaller, instead of looking at how we can get bigger. It’s defeatist.”