Critical minerals: a new focus for foreign investment review

The Canadian government has recently signalled that it will use it national security powers to scrutinize foreign investments in businesses involved in critical mineral production and supply chains.

This is an important change, given the number of mining companies listed on Canadian stock exchanges, including many that have little nexus to Canada except for the listing.

Critical minerals

The Canadian government’s current views on the significance of critical minerals have been developed in two recent and important policy statements:

• A Critical Minerals List, released on March 11, which includes 31 minerals considered critical for the sustainable economic success of Canada and its allies¹. The list is largely consistent with a similar U.S. government list of 35 critical mineral resources.
• Updated guidelines on the national security review of foreign investments, which were released on March 24. The guidelines identify areas that could raise national security concerns, and now include acquisitions of Canadian businesses involved in producing critical minerals.

Critical minerals are viewed as those that are: essential to the economy of Canada and its allies; and whose supply may be at risk due to geological scarcity, geopolitical issues, trade policy or other factors². A key concern is with market dominance by suppliers that are state owned enterprises and the risk of politically motivated supply disruption. Canada is not alone in expressing concerns of this nature³.

Investment Canada Act reviews

Under the Investment Canada Act (ICA), the government has discretion to review virtually any foreign investment on the grounds it could be “injurious to Canada’s national security.” The review jurisdiction is broad and covers mining businesses with part of their operations in Canada, even if mines themselves are located overseas.

To date, national security reviews have tended to focus on Chinese investments involving sensitive technology, critical infrastructure or personal data. Mining has not been an area of significant concern under the ICA.

Acquisitions of Canadian-listed mining companies, even by Chinese investors, have generally been viewed as non-problematic. For example, Zijin Mining’s acquisition of Nevsun Resources, Continental Gold and Guyana Goldfields in 2018, 2019 and 2020 and Endeavour Mining’s acquisition of SEMAFO in 2020 were all approved under the ICA. Nevsun was involved in critical mineral, copper, although its acquisition pre-dates the identification of copper as a critical mineral in March 2021.

The only mining transaction blocked on national security grounds was Shangdong Gold’s proposed acquisition of TMAC in 2020. But that investment was likely blocked because of TMAC’s strategic location and other factors, not its gold mining operations. (Gold is not on the critical minerals list.)

Other mining-rich countries have also started to scrutinize more closely Chinese investments in the mining industry. Notably, the Australian government blocked two proposed investments by Chinese entities related to critical minerals in 2020⁴.

Practical implications

The vast majority of mining investments will continue to receive ordinary course approvals under the ICA. However, this new policy highlights that some investments are likely to face significant scrutiny.

The highest-risk investments will involve proposed Chinese acquisitions of Canadian mining companies involved in the production of critical minerals in Canada.

Lower-risk investments will involve proposed Chinese acquisitions of Canadian-listed mining companies not involved in critical minerals, where their assets are located outside Canada, and/or where target businesses are not material producers of critical minerals.

Non-Chinese investors should generally expect approvals to be processed in the ordinary course.  Indeed, an added consequence of a more restrictive policy on Chinese investments will likely be opportunities for non-Chinese investors and possibly in the development of new and existing mineral projects in Canada.

Finally, when considering potential investments where national security issues are expected to arise, investors and Canadian businesses alike should engage counsel and government relations advisors as early as possible in the transaction planning process given the complex and evolving nature of the national security review regime under the ICA.

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¹ The list comprises the following minerals: aluminum, antimony, bismuth, cesium, chromium, cobalt, copper, fluorspar, gallium, germanium, graphite, helium, indium, lithium, magnesium, manganese, molybdenum, nickel, niobium, platinum group metals, potash, rare earth elements, scandium, tantalum, tellurium, tin, titanium, tungsten, uranium, vanadium, zinc.

² A Canada-U.S. Joint Action Plan on Critical Minerals Collaboration, released in January 2020, which aims to facilitate development of secure supply chains for critical minerals that are key to strategic industries such as defence, aerospace and communications. Canada is considered to be well-placed to supply the U.S. with many of the critical minerals due to historically strong political and economic ties; a stable political, economic and regulatory environment; an extensive mineral endowment; and a robust metals and mining sector. Of the 35 critical metals identified by the U.S., Canada is a sizable supplier of 13 of such minerals, including being the largest supplier of potash, indium, aluminum and tellurium to the U.S. and the second-largest supplier of niobium, tungsten and magnesium. Canada also supplies approximately one quarter of the uranium needs of the U.S.

³ Most notably the U.S., European Union, Japan, South Korea and Australia.

⁴ These investments were: (1) Chinese state-owned steel producer, Baogang Group Investment’s proposed A$20m investment in Northern Minerals Limited; and (2) Chinese lithium chemical producer, Yibin Tianyi Lithium Industry Co Ltd.’s proposed A$14.1m investment in AVZ Minerals Limited.