Shares in Neo Lithium closed at $6.25 a share on Tuesday, 25 cents below the takeover price, suggesting some investor uncertainty over whether the deal will close.Adrian Wyld/The Canadian Press
Canada’s Neo Lithium Corp. has agreed to a $960-million acquisition by Chinese state-owned Zijin Mining Group Co. Ltd., a deal one security expert predicts will trigger an in-depth national security review by Ottawa.
Toronto-based Neo Lithium is developing a lithium mine in Argentina and hopes to eventually supply the silvery white metal to the electric vehicle industry. A 2019 prefeasibility study predicts the company’s 3Q mine could generate a 50-per-cent return on investment after it goes into production.
A key component in electric vehicle batteries, demand for lithium has exploded over the past decade with the increasing adoption of zero-emission vehicles and government commitments to reduce carbon emissions even more. Earlier this year, the Canadian government designated lithium as a critical mineral, meaning it is essential to the economy.
Late Friday, Neo Lithium agreed to be acquired in an all-cash transaction at $6.50 a share, an 18-per-cent premium to its closing price on the TSX Venture Exchange.
The proposed takeover of Neo Lithium is the second acquisition of a Canadian lithium development company in the past month by a Chinese mining company. In late September, Vancouver-based Millennial Lithium Corp. agreed to a $376-million acquisition by Contemporary Amperex Technology Co. Ltd.
All foreign takeovers of Canadian companies are subject to an initial security screening by Ottawa. If the federal government suspects the transaction could be a threat to national security, the deal undergoes a more thorough review under Section 25.3 of the Investment Canada Act (ICA).
Wesley Wark, senior fellow at the Centre for International Governance Innovation in Waterloo, Ont., said the Neo Lithium and Millennial Lithium acquisitions will likely both get formal reviews under ICA, with particular focus on the potential loss of intellectual property to China. “I would expect some consultation with the U.S. as well,” he added.
Last year, Ottawa and Washington finalized a joint action plan on critical minerals, with commitments by both governments to build secure domestic supplies of battery minerals, as fears of a growing stranglehold by China on supplies intensify. At the moment, Canada is a bit player in two battery minerals, lithium and cobalt, although there are pockets of development in the country that point to the eventual emergence of a small domestic supply chain.
Junior development company First Cobalt Corp. hopes to revive a cobalt refinery in Ontario that would feed refined metal to the electric vehicle industry. Nemaska Lithium Inc. plans to build a lithium mine in Quebec, despite several expensive setbacks. In 2019, the company, which was backed by the Quebec government, was forced into creditor protection, wiping out public shareholders. Nemaska eventually restructured and is now privately held.
Shares in Neo Lithium closed at $6.25 a share on Tuesday, 25 cents below the takeover price, suggesting some investor uncertainty over whether the deal will close.
Neo Lithium declined an interview with The Globe and Mail.
Canada has rejected several takeover deals on national security concerns over the past decade. Late last year, Ottawa kyboshed the proposed acquisition of junior gold miner TMAC Resources Inc. by China’s Shandong Gold Mining Co. Ltd. because TMAC’s Doris mine is located on strategically sensitive land. The mine is only about 100 kilometres from a NORAD North Warning System radar station in Nunavut. The system is part of a chain of installations across the North that gather military information.
In a note to clients about the Neo Lithium acquisition, Puneet Singh, an analyst with Industrial Alliance Securities Inc., wrote that the risk of the Canadian government ultimately blocking the deal is low, given that the 3Q project is located overseas. “The TMAC issue was different, since the Nunavut project area was strategic to Canada,” Mr. Singh said.
The mining industry will also be looking for any clues Canada is taking a tougher stance against China following the recent release of Michael Kovrig and Michael Spavor.
The two Michaels returned home after spending nearly three years in jail in China. They were imprisoned and accused of spying in apparent Chinese retaliation after Canada detained Huawei Technologies Co. Ltd. chief financial officer Meng Wanzhou in 2018 on a U.S. extradition request related to accusations of bank and wire fraud. The release of the Michaels came after Washington and Beijing cut a deal that allowed Ms. Meng to return to China as part of a U.S. deferred prosecution agreement.
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