The most recent government move restricting foreign investment into Canada’s critical mineral companies has the potential to be the most harmful yet, writes Loui Anastasopoulos.Fred Lum/The Globe and Mail
Loui Anastasopoulos is chief executive of the Toronto Stock Exchange and global head of capital formation of TMX Group.
It’s an unfortunate truth: Canada is facing economic challenges, including weak growth and productivity, stemming from declining investment in our key industries. The investment shortfall is particularly acute in the mining sector, where Canada’s proud and prominent legacy of global leadership is under serious threat.
In addition to stifling macroeconomic factors and high interest rates, sudden shifts in government policy have created uncertainty around capital raising for mining companies. And the most recent federal policy directive on foreign investment into Canada’s critical mineral companies has the potential to be the most harmful yet.
Over the past few years, the government has, under the Investment Canada Act (ICA), placed increasingly stringent restrictions on investment from foreign state-owned entities into Canadian critical minerals companies. While the purpose of these restrictions is to protect Canada’s national security interests – an important consideration and not one we are debating – the fact is they have created serious financing challenges for mining companies by limiting access to large sources of global capital.
As Canadian metals and minerals companies look for financing and sources are ruled off-limits, this has resulted in a “capital gap.” Now, the most recent policy directive compounds existing challenges and the gap is set to increase.
On July 4, François-Philippe Champagne, Minister of Innovation, Science and Industry, issued a Ministerial Statement to provide more clarity around how Net Benefit reviews under ICA will be conducted when it comes to foreign acquisitions of Canadian critical minerals companies that exceed the net benefit value thresholds.
We appreciate that the government’s goal was to make its guidance clearer – clarity is crucial to companies and investors seeking to understand their options with regards to financing, and mergers and acquisitions (M&A). Unfortunately, this announcement has had the opposite effect: leaving much undefined and open to interpretation.
The minister stated the restrictions will apply to “important Canadian mining companies” that are “engaged in significant critical minerals operations.” But what are the criteria for defining a “significant” investment or an “important” company?
If a company is not “important” now, but then it grows – in fact, half the mining companies listed on the Toronto Stock Exchange are graduates from the Venture Exchange, which lists emerging players – how might that affect their financing options later on?
Could investments made at an earlier stage, when a company is beneath a certain size threshold, become locked-in if the company grows and can no longer be sold outside of Canada?
Furthermore, what does it mean to be “engaged in” critical minerals operations? Must a company have ownership control, or does this definition also capture a minority stake or a joint venture?
If these questions are left unanswered, the impacts on the industry could be profound – and in the long term, even existential.
Canada is a nation rich in natural resources. We also have a proven track record for growing small companies into global success stories. Toronto Stock Exchange and TSX Venture Exchange list more mining companies than any other exchange in the world – more than 1,100 of them – and approximately half the projects owned by these companies are located outside of Canada.
Today, much of the economic activity related to Canada’s extractive industries reaches beyond our borders. Mining is a global industry, and the country has maintained a leadership position not only because of the minerals here but also because we have built an ecosystem of entrepreneurs, investors, lawyers, bankers and other sector experts that enable mining companies to grow and succeed globally.
This is important for policy makers to consider because these companies can leave – taking jobs and economic output with them. It also means that new companies, instead of incorporating and listing in Canada, long known as the leader for financing junior exploration projects, will choose another jurisdiction.
Government actions like this latest policy direction highlight the importance of consulting with the affected industry to avoid unintended consequences – particularly when the industry in question is highly complex, globally interconnected and of central importance to our country’s economy and place in the world.
The industry’s future in Canada – as well as our capacity to extract the critical minerals needed to transition our energy supply – depends on closing the capital gap. An important step toward doing that is providing clarity: a clear understanding of the defining traits of permitted operations, projects and M&A opportunities for Canadian mining companies, both those operating within and outside of our borders.
We hope to see our policy makers act as partners to industry and help create the capital-raising environment that mining companies need to thrive.