Written By Zirjan Derwa, Adam Kalbfleisch and Andrew Disipio
There have been significant recent developments related to the treatment of foreign investments in the critical minerals sector, particularly by foreign state-owned enterprises (SOEs) and foreign-influenced private investors.
- On October 28, 2022, the government released an updated SOE policy (Policy) stating that going forward, it will closely scrutinize investments by foreign SOEs and foreign-influenced private investors in Canada's critical minerals sectors, across all stages of the value chain. In particular, the government stated that significant transactions by foreign SOEs in Canada's critical minerals sectors will only be approved (on the basis that they result in a net benefit to Canada) on an exceptional basis. More generally, it was announced that all investments—irrespective of size—by foreign SOEs and foreign-influenced private investors involving a Canadian business or entity operating in the critical minerals sector in Canada are more likely to face scrutiny under the Investment Canada Act's (ICA) national security regime.
- On November 2, 2022, the government announced that it had ordered the divestiture of three investments by Chinese investors in Canadian critical mineral companies. The relatively small size of these investments, along with the fact that one of these investments concerned operational assets located exclusively outside of Canada, is a signal from the government that no investment in the Canadian critical minerals sector is too small to warrant further consideration. The fact that the government made this announcement is itself a further notable development, as historically, the government sought to limit the disclosure of information related to the outcome of specific national security reviews.
These developments represent a noteworthy shift in how the Canadian government will assess Chinese and potentially other foreign SOE and foreign-influenced private investment in Canada's critical mineral sector. In fact, prior to these divestiture orders, there had never been a foreign investment related to critical minerals blocked by the Canadian government on national security grounds.1 It remains to be seen whether these developments will have a chilling effect on investments in Canada's critical minerals sectors by foreign SOEs and foreign-influenced private investors, particularly from China, although this seems very likely. However, one outcome is certain—it is now more critical than ever that investors and Canadian businesses alike obtain legal and government relations advice as early as possible to assess and navigate these uncertainties.
Critical Minerals and Updated Policy
On March 11, 2021, Canada unveiled its critical minerals list. The list includes 31 minerals considered integral to the Canadian economy, all of which are available in Canada.2 Shortly, after the release of its critical minerals list, the Canadian government released updated Guidelines on the National Security Review of Investments under the ICA, explicitly including the impact that an investment will have on critical minerals and critical mineral supply chains to the list of factors it considers in assessing national security risk.
Under the ICA, the minster must approve proposed acquisitions of control from foreign investors, including SOEs, where the value of the Canadian business is above the defined threshold. The Policy states that applications for acquisitions of control of a Canadian business involving critical minerals by a foreign SOE will only be approved only on an exceptional basis.
All investments, regardless of whether they involve an acquisition of control, may be subject to a national security review. The Policy further states that all foreign SOE investments in the critical minerals sectors in Canada, regardless of value or if they represent a controlling interest, are subject to heightened scrutiny standards under the national security review provisions of the ICA. The Policy has enumerated factors that can be considered in assessing whether a particular transaction involving critical minerals would be injurious to national security:
- the size, scope and location of the Canadian business;
- the nature and strategic value to Canada of the mineral assets or supply chain involved;
- the degree of control or influence an SOE would likely exert on the Canadian business, the supply chain and the industry;
- the effect the transaction may have on the ability of Canadian supply chains to exploit the asset or access alternative sources (including domestic supply); and
- the current geopolitical circumstances and potential impact on allied relations.
Shortly after the publication of the Policy, the government announced that it had ordered the divestiture of the following investments by foreign investors in Canadian critical mineral companies:
- Sinomine (Hong Kong) Rare Metals Resources Co., Limited is required to divest itself of its investment in Power Metals Corp.
- Chengze Lithium International Limited is required to divest itself of its investment in Lithium Chile Inc.
- Zangge Mining Investment (Chengdu) Co., Ltd. is required to divest itself of its investment in Ultra Lithium Inc.
Notably, none of these investments appear as if they would have been subject to mandatory notification under the ICA. The investment by Chengze Lithium in Lithium Chile is particularly notable since Lithium Chile's exploration properties are located exclusively in Chile and Argentina and Chengze's investment accounted for less than 20 percent of Lithium Chile's common shares and did not equate to a controlling position.
Prior to these divestiture orders, there had been no divestiture of investments related to Canada's critical mineral sectors. It is only about a year ago that the government elected not to initiate a national security review in connection with Zijin Mining Group Co.'s $960 million dollar takeover of Neo Lithium. This decision was highly scrutinized and led to meetings before the Standing Committee on Industry and Technology (the INDU Committee). The Minister of Innovation, Science and Industry (the Minister), Francois-Philippe Champagney, cited that (1) the fact Neo's operations are in Argentina, and (2) "[e]lectric battery production in North America does not require or rely on imports" of the type of lithium that the project will produce impacted the decision not to initiate a national security review.
Accordingly, these recent divestiture orders can be viewed as a message by the Canadian government that (1) no investment is too small to warrant further consideration, (2) non-controlling interests are sufficient to warrant significant scrutiny, and (3) the operational assets of a Canadian company do not need to be located in Canada to be subject a divestiture order.
The Minister has also confirmed that going forward, it plans to release certain details related to the outcome of national security reviews subject to decisions—similar to what was published in relation to the three recent divestiture orders.
This practice aims to increase the transparency of government decision-making on foreign investment reviews and represents a stark deviation from the government’s former practice. In the past, the government provided nearly no information related to national security reviews other than what was provided, in anonymized form, in its annual reports. This change in practice seemingly aligns with the INDU Committee's recommendation for enhanced transparency regarding the national security review process.
This Policy and the recent divestiture orders came on the heels of the implementation of a voluntary regime for the notification of investments that may raise national security concerns under the ICA. Prior to this change, there was no formal mechanism to make voluntary filings for non-notifiable investments.
More importantly, the changes made at the time of implementation of the voluntary regime have also significantly increased the amount of time the government has to review any investment that has not been notified. In particular, any minority investments that are not formally notified can be reviewed on national security grounds for up to five years after the investment is completed (up from 45 days). This increased timing is in part meant to encourage investors to consult at least 45 days in advance of implementing any investment.
These developments represent a notable shift in how the Canadian government will assess "hostile or non-likeminded" SOEs and foreign-influenced private investment in Canada's critical mineral sector. In particular:
- Prior to these divestiture orders, there had been no divestitures of investments related to Canada's critical mineral sectors.
- Going forward, investments in Canadian critical minerals sectors across all stages of the development (e.g., exploration, development and production, resource processing and refining, etc.) will be subject to heightened scrutiny standards, irrespective of (1) the value of the investment, (2) whether direct or indirect, (3) whether controlling or non-controlling, and (4) whether the operational assets are located in Canada or abroad.
- It remains to be seen whether the government would use new investments as a toehold to try to unwind older investments which would otherwise not be subject to review under the ICA.
- It also remains to be seen whether these developments will have a chilling effect on investment in Canada's critical minerals sectors by foreign SOEs and foreign-influenced private investors, particularly from China, although this seems likely. If there is a class of investment that the government no longer views as desirable for projects in the Canadian critical mineral sectors, it is unclear what the plan will be to encourage investment from desirable investors to fill the potential investment gap.
- It is more important than ever that investors and Canadian businesses alike obtain legal and government relations advice as early as possible to assess and navigate these uncertainties.
If you have any questions about the treatment of foreign investments in the critical minerals sector, please contact the Bennett Jones Competition/Antitrust group.
1 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 by the Canadian government because of TMAC's strategic location and other factors, not necessarily its gold mining operations. Gold in any event, does not constitute a critical mineral in Canada.
2 For more information, please see our previous insight, Canada Announces the Critical Minerals List.