Cash-Hungry Canadian Miners Test Grey Area of Anti-China M&A Rules

Nearly two years after Canada moved to restrict foreign investment in the country’s mining sector, minerals explorers and developers are testing the limits of those rules.

The Canadian government cracked down on mining deals involving foreign state-owned entities in 2022 in a move widely seen as targeting China’s influence in the global critical minerals supply chain, but which threatens to deprive smaller miners and developers of a key source of financing. However, restrictions have stopped short of prescribing specific levels of foreign investment that will be allowed.

Mining firms are now pushing the boundaries in an attempt to establish where the limits lie. At least nine mining deals involving Chinese firms have been proposed since Canada’s new measures, and investment bankers and corporate development teams say they are closely watching how the government responds to some of these test deals, as a basis for future transactions.

The continued push to attract Chinese capital despite Canada’s scrutiny is a reflection of the challenges facing the world’s mineral explorers and mine-builders, many of which are headquartered in Canada. Junior miners struggle to draw domestic investors for expensive and risky projects that can take years, if not decades, to complete. Chinese firms, which can take a longer, strategic view on raw material investments, have long been an important funding source for the sector.

“Given how broadly the government is interpreting its mandate here, there’s certainly a lack of clarity around the edges in some specific circumstances,” said Braden Jebson, a partner and mergers and acquisitions lawyer at Torys LLP. “Even when the government is setting out what looks like a red line, they’re often leaving themselves discretion so that there aren’t hard-and-fast rules.”

Canada’s Innovation, Science and Economic Development department reviews takeovers and has broad discretion to approve or reject them.

Montage Gold Corp. is one recent deal that is being viewed as a potential test case. The company, which owns a gold deposit in Ivory Coast, accepted a C$57.3 million investment from China’s Zijin Mining Group for a 9.9% stake in mid-July. Montage said it believes the transaction, expected to close in August, won’t require government approval because Zijin would own just under 10% of the Vancouver-based company.

The investment comes two months after Solaris Resources Inc. scrapped a financing deal with Zijin that would have given the Chinese company a 15% stake and a seat on the board. Solaris called off the deal after facing a lengthy government review.

Montage’s arrangement with Zijin is unlikely to get the same heightened scrutiny in part because gold isn’t on Canada’s list of critical minerals and because the company’s assets are outside Canada, Chief Executive Officer Martino De Ciccio said in an interview.

“They don’t have any special shareholder rights agreement, they hold no board seats and they have no representation within the management team,” he said.

Other Canadian deals involving Chinese buyers are in the works, including Yintai Gold’s C$368 million takeover of Osino Resources Corp. The Vancouver-based company, which has a gold project in Namibia, said it doesn’t need a sign-off from the Canadian government. The companies are awaiting approvals from Namibian regulators.

Montreal-based SRG Mining Inc., which is developing a graphite mine in Guinea, went so far as to attempt to move outside Canada earlier this year in a bid to circumvent Canada’s scrutiny of Chinese investment before scrapping the idea.

Canada’s federal government has tightened rules even further since 2022, with measures announced in July that will only allow foreign takeovers of Canadian mining companies involved in critical minerals in “the most exceptional of circumstances.”

“While the government continues to welcome foreign direct investment, those in the critical minerals sectors receive enhanced scrutiny,” Canada’s Innovation Department said Friday in an emailed statement. “The government must examine each investment on a case-by-case basis, to ensure the merits of each investment and to ensure that Canada remains open to desirable foreign direct investment.”

Canada’s earliest moves under the foreign restriction rules were in November 2022, when it forced three Chinese firms to divest from a trio of Canadian junior lithium explorers whose assets were mostly in Latin America. Yet last year Saudi Arabia was allowed to purchase a 10% stake in Vale SA’s base metals unit, giving the Middle Eastern kingdom part ownership of nickel operations in Ontario.

Canada and its Western allies have become increasingly concerned about securing critical minerals needed for goods ranging from electric-vehicle batteries to electronics, prompting them to push to develop supply chains to loosen China’s global dominance over the industry. The Canadian government’s decision-making is predominantly guided by the strategic importance of the minerals involved, according to Torys’ Jebson.

“The general understanding is that the government’s not likely to approve an investment in critical minerals from a foreign state-owned entity that does not share similar interests and values as Canada,” he said. “Outside the critical minerals space, there’s probably more opportunity.”

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