Foreign investment in critical minerals
Key considerations for mining companies and investors
Canada has long been an attractive destination for foreign investment, thanks in part to its rich natural resources, including its vast reserves of minerals and metals. These minerals are viewed as essential to Canada’s long-term prosperity, and Canada is eager to both grow and protect its mining industry. However, as the global geopolitical landscape shifts, Canada’s stance on foreign investment in its mining sector has also evolved. This consideration came to the fore in November 2022 when the Canadian government announced the blocking of three investments in Canada’s critical minerals sector. Given the current political and legal landscape, Canadian mining companies and non-Canadian companies who own Canadian mining assets or who are looking to invest in Canadian mining assets need to understand the complex Canadian regulatory landscape that applies to minerals and mining, and how it applies to a subset of minerals termed “critical minerals.”
What is critical?
In its Critical Minerals Strategy, published in 2022, the Canadian government provides a comprehensive summary of those 31 minerals considered to be critical minerals. These minerals have few or no substitutes, are strategic and somewhat limited commodities, and are key materials needed for electric vehicle batteries and motors, semiconductors, batteries, and other technology and energy related areas. Of the 31 critical minerals identified in the strategy, six minerals (lithium, graphite, nickel, cobalt, copper and rare earth elements) are prioritized for their distinct potential to spur Canadian economic growth.
The strategy aims to position Canada as a trusted and reliable supply of responsibly sourced and sustainably produced minerals, while also recognizing the strategic value and importance of critical minerals to Canada’s own national security and the importance of bilateral cooperation with allied countries. The five core objectives of the strategy are (i) supporting economic growth, competitiveness, and job creation; (ii) promoting climate action and environmental protection; (iii) advancing reconciliation with Indigenous Peoples; (iv) fostering diverse and inclusive workforces and communities; and (v) enhancing global security and partnerships with allies.
The strategy addresses six areas of focus for meeting the objectives of the strategy, namely: (i) driving research, innovation, and exploration; (ii) accelerating project development; (iii) building sustainable infrastructure; (iv) advancing reconciliation with Indigenous Peoples; (v) growing a diverse workforce and prosperous communities; and (vi) strengthening global leadership and security. The strategy focusses predominantly on developing value chains (as compared to the traditional focus on supply chains), from exploration and extraction, to processing and manufacturing, to product use and recycling.
Investment Canada Act – national security reviews
The Canadian government has many tools to achieve its foreign policy objectives, including the Investment Canada Act (ICA), which is Canada’s primary legislation for overseeing foreign investment into Canada. The ICA’s stated purpose is to review significant investments in Canada by non-Canadians in a manner that encourages investment, economic growth, and employment opportunities in Canada, while also reviewing all investments into Canada that could be injurious to Canada’s national security. While the ICA assesses foreign investment in several ways (including reviewing significant investments into Canada that exceed high financial thresholds to confirm that they are of “net benefit” to Canada), for critical minerals, the key review regime now is the government’s ability to conduct national security reviews of foreign investments.
National security reviews are conducted at the government’s discretion and assess whether an investment could be, as mentioned above, “injurious to national security.” Governmental guidance indicates that all investments by state-owned and state-influenced enterprises (SOEs) will be subject to enhanced scrutiny, regardless of the size or value of the investment, and such SOE investments will be scrutinized even more if they involve investments in critical minerals or energy, with the government cautioning parties to identify any potential connections to “SOEs or entities linked to or subject to influence by hostile or non-likeminded regimes or states.”
Following in the footsteps of this guidance, in November 2022, the Government of Canada announced that it had conducted national security reviews of a “number of Canadian companies engaged in the critical minerals sector, including lithium” culminating in orders that three foreign investors, each based in China, divest their interests in the following three TSXV-listed Canadian lithium exploration companies:
1. Sinomine (Hong Kong) Rare Metals Resources (Sinomine) was ordered to divest its “past and ongoing investments,” including a 5.7% minority interest, in Power Metals Corp., a company with lithium and other mineral assets in Ontario. Sinomine also had an offtake agreement in connection with these assets. In December 2022, Power Metals announced that Winsome Resources agreed to acquire Sinomine’s voting shares in Power Metals and its interest in the offtake agreement, with a nominee director replacing Zhiwei (Frank) Wang, the vice-president of Sinomine.
2. Chengze Lithium International Limited was ordered to divest its “role and interest” (including 19.35% minority interest) in Lithium Chile Inc., a company advancing a lithium property portfolio in Chile and Argentina. Importantly, Lithium Chile does not have any mining operations in Canada.
3. Zangge Mining Investment (Chengdu) Co., Ltd. (Zangge) was ordered to divest its 14.17% minority interest in Ultra Lithium Inc. Ultra Lithium is an exploration and development company focused on acquiring and developing lithium, gold, and copper assets with interests in a brine lithium property in Argentina, hard rock spodumene type lithium properties at Georgia Lake-Forgan Lake, Ont. Zangge also had an agreement with Ultra Lithium which included US$50 million in payments and investments related to Ultra Lithium’s lithium exploration project in Argentina for a 65% stake in the subsidiary owning the Argentinian property. Ultra Lithium has since disclosed that Zangge and the company agreed to terminate this investment agreement.
The Canadian government provided no specific reasons for the divestiture orders, including not specifying any factual determinations made about the investments that influenced the government’s decision to make these orders, and the orders themselves were kept confidential. There is additional uncertainty as to what was considered in determining that Lithium Chile’s assets implicated Canadian national security, since the mineral properties are located outside of Canada.
Given the number of Canadian companies operating in foreign jurisdictions, as well as the mineral richness of areas such as the “Lithium Triangle” of Chile, Argentina, and Bolivia, it is of note that the Canadian government is willing to extend its reach into those jurisdictions through the nexus of Canadian public companies. Unsurprisingly, TMX Group Inc., the owner and operator of the Toronto Stock Exchange and TSX Venture Exchange, was critical of the government disrupting the flow of capital to exploration companies without providing some replacement for that funding.
How Bill C-34 further changes the foreign investment landscape
On Dec. 7, 2022, the Canadian government proposed several amendments to Canada’s national security regime through the introduction of Bill C-34: An Act to amend the Investment Canada Act, which will further strengthen the government’s ability to conduct national security reviews under the ICA.
The most notable change for the purpose of this article is an amendment requiring pre-closing filings for investments in Canadian businesses engaged in activities in prescribed business sectors if the investors will acquire control of a Canadian business or part of a Canadian business (such as through a director appointment right). The investment cannot be implemented until the government confirms (explicitly or implicitly) that there will not be a national security review, or the national security review is terminated. While the prescribed business sectors have not yet been identified, we expect that critical minerals will be subject to this new pre-closing filing requirement.
The requirement to file investments pre-closing, including minority investments, represents a significant change. Currently, pre-closing national security reviews arise in acquisitions of control of Canadian businesses that exceed certain financial thresholds and in investments where investors file voluntarily to obtain pre-closing certainty. The proposed amendments are broad, with the potential that minimal investments into Canadian companies or their subsidiaries may compel notification if
> the targets have critical mineral interests (or other interests identified by the government);
> the investors obtain access to or can direct the use of material non-public technical confidential information or assets; and
> the investments include any measure of control (e.g., director appointments).
Further regulatory guidance from the government is needed to clarify when this obligation will apply. In the interim, companies involved in critical minerals should be aware that the proposed legislation risks potential months-long pre-closing review processes for investments where no filings were previously required. Depending on the scope of the regulations and any accompanying guidance, these amendments risk adversely affecting the flow of foreign direct investment into Canadian mineral companies.
Conclusion
The Government of Canada has broad powers when it comes to assessing foreign investment into Canada, which will be strengthened under the proposed amendments to the ICA. Further, the government has demonstrated a willingness to use these powers in the context of intervening with foreign investments related to critical minerals. While mining companies are no strangers to dealing with regulatory requirements, companies operating in the critical minerals space soliciting foreign investment now must contend with new risks associated with potential Canadian national security reviews. Canadian critical mineral companies looking to obtain funding or investment and non-Canadian companies looking to invest in Canada’s critical minerals sector should seek expert advice in the early stages of any funding or investment process to identify and consider regulatory deal risks and strategic options.
SASA JARVIS is a partner, mining, capital markets, and securities, at McMillan LLP. BETH RILEY and JOSHUA CHAD are partners, competition, antitrust, and foreign Investment, at McMillan LLP. RAVIPAL S. BAINS is a partner, capital markets and securities, at McMillan LLP.
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A map showing the Marquez-Juan Tafoya uranium project (Image: enCore)