Confusion about whether Chinese investment is welcome in the Canadian critical minerals sector is fuelling investor uncertainty and jeopardizing this country’s position as a leading source of capital for the mining industry, executives and analysts say.
In late 2022, Ottawa said it would allow investment from China only under exceptional circumstances, but it didn’t specify what those circumstances would be. In the absence of clarity over what is and isn’t allowed, Chinese investors have continued to attempt deals with Canadian mining companies. Meanwhile, some transactions that Ottawa has permitted have baffled experts, as have some that were blocked.
Late last year, China-based Shenghe Resources Holding Co. Ltd. acquired a 10-per-cent stake in Australia-based Vital Metals Ltd., which owns Canada’s only operating rare earths mine. Shenghe was also allowed to purchase Vital’s stockpile of rare earths that were mined in the Northwest Territories.
“It’s crazy that we’re selling our only rare earths stockpile that was developed in North America to the Chinese,” said Heather Exner-Pirot, senior fellow and director of natural resources, energy and environment at the Macdonald-Laurier Institute.
“There’s pretty good security reasons why we shouldn’t let it happen.”
Leblond: Has Canada gone too far in blocking mining investments from Chinese companies?
The Canadian government had made it a priority to boost domestic supplies of rare earths to insulate the country against market manipulation from China, and Vital Metals was supposed to have been a big part of the solution. Prime Minister Justin Trudeau, in a visit to Vital Metals’ processing plant in Saskatchewan last year, praised its efforts to set up a Canadian supply chain in rare earth metals, especially considering that China is a “challenging partner at the best of times.” China accounts for roughly 70 per cent of rare earths mining and 90 per cent of refining, according to the Oxford Institute for Energy Studies.
Vital Metals did not respond to an interview request.
Lithium Chile Inc. chief operating officer Michelle DeCecco is mystified that Ottawa allowed the Vital Metals deal to proceed, but has routinely prevented Canadian mining companies with critical minerals assets abroad that are not part of the domestic supply chain from attracting Chinese investors.
Last month, Montreal-based SRG Mining Inc., which is developing a graphite project in Guinea, called off a proposed financing transaction with a Chinese investor after facing harsh criticism from Industry Minister François-Philippe Champagne.
“They have it completely backwards,” Ms. DeCecco said.
Citing confidentiality constraints under the Investment Canada Act, Hans Parmar, spokesperson for Innovation, Science and Economic Development Canada (ISED), said the government could not comment on either 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 injurious to Canada’s national security.”
Amid the uncertainty over what Chinese investments in critical minerals companies are permitted, Canada risks losing future mining capital, said Christopher Ecclestone, principal and mining strategist with Britain-based Hallgarten & Co.
About 40 per cent of the world’s mining companies are currently listed on the Toronto Stock Exchange or TSX Venture Exchange.
Mr. Ecclestone said that new critical minerals companies will be reluctant to base themselves in Canada because of the government’s “chaotic thinking” around Chinese investment, and may instead base themselves in London, Australia or Johannesburg.
“You’ll never even know,” he says. “The tree falls in the forest, who’s there to hear it?”
Critics argue that Ottawa’s rules around foreign investment are non-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 opaque and there’s sometimes good reason for that. The government can’t, for example, say it prevented a deal because it discovered specific national security issues with a Chinese buyer – that might inflame international relations.
“It’s understandable that stakeholders don’t think that there’s sufficient guidance,” said Mr. Bhattacharjee. “But on the other hand, the very nature of these reviews means the government is going to be reticent to spell it out.”
That flexibility even stretches 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 isn’t a statutory definition of that, and that’s done on purpose,” he said.
For a company going through the process, it can be maddening because the government essentially speaks in code and typically doesn’t answer specific questions.
“In a national review, when the government will even communicate concerns, those are typically expressed in very non-specific ways and are not terribly granular,” said Mr. Bhattacharjee. “And so if you’re an investor, responding to that process often means that you are doing a bit of shadowboxing.”
Ms. DeCecco is intimately familiar with that shadow-boxing. In 2022, Lithium Chile struck a financing deal with China’s Chengze Lithium International Ltd., and it was subject to a national security review. She talked with the government on several occasions about its concerns. Lithium Chiles’s project is in Argentina, future lithium from the site was not earmarked for the North American supply chain and only three employees of the company work in Canada.
Nevertheless, 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 the Canadian critical minerals industry, but she doesn’t understand how overseas projects threaten Canada, and the government never explained 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,” she said. “These are foreign assets, so it should be up to whatever country owns it. Our lithium is in Argentina, it should be up to the Argentina government if they want to try to prevent it.”
Ottawa told her that it doesn’t matter where the asset is, but did not say why that was the case.
“There’s just no clarity. There really isn’t,” she said.
SRG Mining appears to have gone through a similar experience to Lithium Chile. Last summer, SRG attracted a prospective investment from China’s Carbon ONE New Energy Group Co. Ltd. The Canadian graphite company went through the early stages of a national security review, and the government apparently had concerns.
Late in the year, SRG said it intended to redomicile outside of Canada – a move it believed would sidestep the need for a national security review. But that gambit blew up in its face when Mr. Champagne declared that SRG’s interpretation of the rules around redomiciling was incorrect. SRG promptly cancelled its deal with its Chinese investors.
SRG did not respond to an interview request.
SRG Mining calls off financing deal with China-based buyer after Champagne intervenes
Despite SRG’s failed attempt to redomicile to avoid a national security review, Mr. Bhattacharjee said that, under certain circumstances, redomiciling 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 might not.”
A source familiar with the situation said that if a company cuts its ties entirely with Canada, including moving all of its management and employees out of the country, then Ottawa could no longer police 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 cracking of the whip on SRG will have broad ramifications for anyone considering a deal with a China-based buyer, said Mr. Ecclestone, and rule No. 1 is don’t try to second-guess the government.
“Companies have learned the lesson, which is you keep your mouth shut, carry a big stick and do these things on the sly somehow,” he said.
Among the covert moves he expects to see by companies seeking Chinese investors is to obtain secondary stock listings in overseas markets, then “gradually easing themselves out the door.”
Another method that could pave the way for Canadian critical minerals miners to do deals with China-based 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 on a national security review appears to be whether the company has any meaningful presence in Canada.
For example, Vancouver-based Lithium Argentina last month said it had attracted a US$70-million investment from China-based Ganfeng Lithium Co. Ltd. which would see it take a 15-per-cent stake in its Pastos Grandes project in Argentina. Ganfeng is already a joint venture partner in Lithium Argentina’s Cauchari-Olaroz project in the country. Apart from trading on the TSX, Lithium Argentina doesn’t appear to have any other ties to Canada.
When queried about whether the investment from Ganfeng into Lithium Argentina is subject to a national security review, Ottawa said that it’s possible it won’t be.
“A company listed in Canada may have no operations, employees or assets in Canada,” Andréa Daigle, a spokesperson for ISED wrote in an e-mail to The Globe last month. “In which case it is possible they would be outside the jurisdiction of the Act.”
Lithium Argentina was spun off late last year from Lithium Americas Corp., which is also based in Vancouver. Unlike Lithium Argentina, Lithium Americas doesn’t have any Chinese joint venture partners. Lithium Americas is building a massive new mine in Nevada called Thacker Pass that is wholly owned by the company.