(Photo: Marshall Eidinger, Navin Joneja, John Wilkin)
The federal government views critical minerals as the building blocks of a sustainable future economy and is angling to position Canada as a global leader in their production.
From aluminum, copper, lithium, and magnesium to nickel, potash, titanium, tungsten, and zinc, Canada’s critical minerals list identifies 31 metals and minerals it considers essential for Canada and its trading partners. Twenty-one of them are already produced in Canada, but there is potential for further development. The federal government developed the list in consultation with provinces, territories, and the exploration, mining, and manufacturing industries.
Last October, Innovation Science and Economic Development Canada (ISED) released its new “Policy Regarding Foreign Investments from State-Owned Enterprises in Critical Minerals under the Investment Canada Act.” This policy details Canada’s review of investments under the Investment Canada Act involving foreign state-owned enterprises and investors under the influence of foreign governments.
In line with the strategy to bolster domestic capabilities, ISED recently ordered three Chinese firms to pull their investments out of three Canadian lithium companies.
François-Phillipe Champagne, minister of innovation, science, and industry, says that while Canada welcomes foreign direct investment, it will “act decisively” when it threatens “national security and our critical minerals supply chains, both at home and abroad.”
But Canada’s protectionist measures might be unwelcome for Canadian mining companies dealing in critical minerals, says Marshall Eidinger, a partner at Bennett Jones LLP, who advises clients on matters relating to corporate finance, M&A, private equity, and venture capital.
“First and foremost, right away, the pool of potential capital available to them has been significantly reduced,” says Eidinger. “Any ability to finance now will require them to go to a shallower or smaller pool of potential parties, which also means that how they finance their projects may change.”
Instead of a straight equity investment with associated governance rights, issuers may have to use unique securities or royalty financing, he says. Or, rather than a financing transaction, they may seek out an M&A transaction, so they are better capitalized as a combined entity than alone.
Under the Investment Canada Act, ISED reviews proposed acquisitions from foreign investors above a defined threshold. There is a “net benefit” evaluation, which examines the likeliness that a foreign state will exercise “direct operational and strategic control,” the level of competition in the sector and the transaction’s potential to concentrate foreign ownership, and the corporate governance and reporting structure of the foreign state-owned firm. ISED will also evaluate where the products will end up, whether its operations involve Canadians, the investment’s impact on Canadian “productivity and industrial efficiency,” support for innovation and research and development, and the capital required to maintain the business as globally competitive.
The national security reviews under the act assess several factors, including the “nature and strategic value to Canada of the mineral assets or the supply chain involved” and “the current geopolitical circumstances and potential impact on allied relations.” The ISED minister, in consultation with the minister of public safety and emergency preparedness, refers investments that could be problematic from a national security perspective to the governor in council, which has the power to order a review. The governor in council can authorize the investment with conditions, disallow the investment, or require the investor to divest from a Canadian business or entity.
Because of the risks associated with investments from foreign state-owned enterprises and entities susceptible to influence by foreign governments, ISED says that under its new policy, acquisitions by a foreign state-owned enterprise for control of a Canadian business involved in critical minerals “will only be approved on an exceptional basis.”
Davies Ward Phillips & Vineberg LLP partner Mark Katz says that the net benefit review process typically catches only a few investments because the thresholds are so high. “It’s almost automatic that they would be approved. There’s a negotiation. There’s the provision of undertakings, and so on. But it’s very rare for transactions or investments to be turned down on the basis of net benefit.
“But this is basically flipping things to say that, in this particular situation, it’ll be difficult to get approval,” he says.
In Canada and around the world, Chinese entities have been aggressively investing in critical minerals in the last several years, says Katz, whose practice is focused on competition, antitrust, investigations and white-collar defence, advertising, marketing, distribution, and retail. Ottawa’s policy will theoretically curb that source of funding for Canadian firms. He says that time will tell the degree to which this will be applied in practice.
“On the positive side, it creates an incentive; it creates opportunities to look for other sources of investment,” he says. “That could happen as well. But in terms of the types of investments and the types of M&A that we’ve seen in the sector, to date, it’s going to potentially have an important change on how all that will play out.”
In December, Champagne introduced the national security review of investments modernization act, bill C-34. The proposed amendments include new pre-investment filing requirements in “prescribed sectors” and ministerial authority to extend national security reviews, impose conditions during reviews, and accept undertakings to mitigate national security risk.
Navin Joneja, co-chair of the competition, antitrust, and foreign investment group at Blake Cassels and Graydon LLP, says bill C-34 will impact how the government looks at critical minerals in two significant ways. The first is the pre-investment filing requirements, and the second is the minister’s ability to accept undertakings in a national security review.
Currently, investors can engage with the government on the transaction pre- or post-closing, but Ottawa is indicating that, in “sensitive areas,” it wants those discussions up front, says Joneja. “Those areas have not actually been prescribed yet. That’ll come when the legislation gets enacted. But the common thinking is that some aspect of critical minerals will be part of that discussion,” he says.
The proposed amendment allowing the minister to accept undertakings in a national security context shows that the government would prefer to avoid being required to make a binary decision on a transaction with either a full clearance or firm block, says Joneja.
“The proposed amendments make it clearer that the concept of undertakings and commitments that parties are willing to make – perhaps modifications to their transaction to be able to address national security concerns – is a tool that I think the government wants to make use of more frequently down the road.”
He says regulatory approval can be streamlined with undertakings in other analogous situations, such as net-benefit reviews. He also cites the antitrust context, where consent agreements and remedies are available to deal with areas of concern for the government.
“Any Canadian companies that have projects, either in Canada or globally, that involve critical minerals will need to consider getting good advice early in the process – whether it’s a strategic review or a financing – to understand the scope of their options with respect to financing partners or potential parties to an M&A contract,” says John Wilkin, a partner at Blakes, with a practice focusing on domestic and cross-border M&A and corporate finance transactions. He says that regulatory lawyers and government relations advisors will need to be engaged with the board to frame a strategy earlier in the process.
The federal government’s critical minerals strategy rests on five objectives: to support economic growth and competitiveness, to boost climate action and environmental protection, to further Indigenous reconciliation, to support “diverse and inclusive workplaces and communities”, and to strengthen “global security and partnerships with allies.”
Through its consultation on the critical minerals strategy discussion paper, ISED said it heard from First Nations, Inuit, and Metis groups. These groups stressed the importance of Canada’s growth in critical mineral supply being matched with respect for treaty and inherent Indigenous rights and bolstering Indigenous-led environmental protection and economic activity. According to stakeholders, Canada also needs enhanced geoscience for identifying and assessing critical minerals deposits and “improved coordination and cooperation” in Canada’s regulatory environment.
Federal budget items (2022) for Critical Minerals Strategy
$3.8 billion total commitment
$1.5 billion for infrastructure development
$1.5 billion to invest in new projects
$144 million for research and development
$103.4 million to advance economic reconciliation with Indigenous peoples
$70 million in global partnerships to promote Canadian mining leadership