A Canadian miner is proposing moving its headquarters outside of Canada in an attempt to skirt a national security review that would have allowed the federal government to block its financing deal with an opaque China-based critical minerals company.
Montreal-based SRG Mining Inc. in July announced a tentative deal worth $16.9-million to sell a 19.4-per-cent stake to Carbon ONE New Energy Group Co. Ltd. (C-ONE), even though Ottawa last year announced a virtual ban on the acquisition of Canadian mining companies by China-based enterprises, because of national security concerns over the superpower’s dominance in critical minerals.
At the time SRG announced its deal, it warned investors that the transaction was subject to approval by the federal government. But in a public filing last week, SRG laid out a workaround that it says will remove Canada’s power to police the transaction. The company will maintain its TSX Venture Exchange listing, but redomicile outside the country. Consequently, the C-ONE deal will no longer need Ottawa’s approval, SRG said.
Christopher Ecclestone, principal and mining strategist with London-based Hallgarten & Co., said SRG’s proposed workaround makes a “total mockery” out of Canada’s national security policy. If this transaction goes through, it will open up a “Pandora’s box”, he said, that will trigger a rush of companies redomiciling outside of Canada so they can avoid restrictions under the Investment Canada Act (ICA) and retain the option to raise money from, or sell to, a China-based buyer.
“Only the unsexy companies will remain in Canada,” he said. “The ones that nobody wants to buy.”
After the crackdown by Ottawa last year, experts predicted Canadian companies would no longer even try to seek capital from China, as they seemed likely to be turned down.
But SRG joins a growing list of Canadian critical minerals companies that continue to pursue mergers and acquisitions with China-based buyers, despite the federal government heavily dissuading such deals. And China-based companies, hungry to cement their dominance, have been more than willing to engage.
If the SRG transaction with C-ONE goes ahead, China’s position in graphite, an essential component in electric vehicle batteries, will become even stronger. SRG said the investment will put the company’s graphite project in West Africa on the fast track. China already produces 65 per cent of the world’s graphite, according to the U.S. Geological Survey.
SRG declined to comment, and did not respond to questions from The Globe and Mail.
There is almost no publicly available information about privately-held C-ONE, its management or its investors. According to SRG, C-ONE was founded last year by chairman Yue Min, the holder of more than 300 patents in the battery industry, and the co-founder of BTR New Material Group Co. Ltd., a major China-based producer of electric car battery materials.
C-ONE could not be reached for comment.
It is unclear whether the Canadian government could still intervene in the proposed transaction.
Alison Reilander, a spokesperson with Innovation, Science and Economic Development Canada wrote in an e-mail to The Globe that while the federal government is aware of SRG’s proposed transaction, the confidentiality provisions of the ICA preclude Ottawa from commenting.
“The government has not hesitated and will not hesitate to take action on transactions that would be injurious to Canada’s national security,” she said.
Late last year, federal Industry Minister François-Philippe Champagne said he would only allow proposed acquisitions of Canadian critical minerals companies by state-owned enterprises (SOEs) to occur under exceptional circumstances. Front and centre on the heavily restricted list are companies with ties to the authoritarian Chinese state. As part of this tougher mandate, Mr. Champagne ordered Canadian companies Power Metals Corp., Lithium Chile Inc., and Ultra Lithium Inc. to immediately divest themselves from Chinese investors.
The federal government took an aggressive stance against China in 2022 because the superpower has used its dominance in critical minerals to exert economic pain on the West. China dominates the supply chains for many critical minerals, including lithium, cobalt and graphite. In October, China announced restrictions on exports of graphite out of the country in a move aimed at Western automakers.
SRG isn’t the only small mining company to test the boundaries of Canadian government policy aimed at clamping down on investment from China.
When Vancouver-based lithium development company Alpha Lithium Corp. APHLF needed to raise capital this year, chief executive officer Brad Nichol knew that he’d have to scour the world, including seeking out China-based investors.
But he also knew that getting approval from Ottawa to sell to a Chinese buyer wasn’t a foregone conclusion, in light of Mr. Champagne’s recent moves. So, he decided to feel things out.
Mr. Nichol in an interview said that he told federal officials last fall that the company was conducting a global auction to sell its Tolillar project in Argentina, and he made it clear that Chinese companies would be among the potential buyers.
“China manufactures the majority of the world’s batteries and processes the majority of the world’s lithium,” Mr. Nichol said.
“It made sense that there were interested parties from China.”
One of the China-based companies that conducted due diligence on Tolillar was Contemporary Amperex Technology Co. Ltd. (CATL), the world’s biggest electric vehicle battery maker.
“CATL made initial contact with Alpha Lithium to explore a potential purchase,” Fred Zhang, a spokesperson with CATL, wrote in an e-mail to The Globe.
While Mr. Nichol didn’t receive a guarantee from Ottawa that a deal with a China-based buyer would not be blocked on national security grounds, his impression was “it was not something that would be cause for any concern.”
Behind the scenes, a rival bidder for Tolillar, Tecpetrol Investments SL, was aware that it was up against CATL and other Chinese buyers. Since Tecpetrol is based in Spain, an ally of Canada, the company was confident that a deal with Alpha would receive clearance from the federal government on national security grounds.
But Tecpetrol was worried that a China-based bidder would beat it to the punch. Concerned that Ottawa might allow a deal between Alpha and a Chinese buyer to proceed, Tecpetrol raised national security concerns directly with the government about its competition.
Two sources familiar with the situation said that a representative with Tecpetrol contacted Mr. Champagne’s office to warn him that CATL and Ganfeng Lithium Co., Ltd., another China-based giant, were doing on-the-ground diligence on Tolillar, and suggested he take action.
The Globe is not identifying the sources because they were not authorized to speak publicly.
Mr. Champagne’s office declined to comment, citing ICA confidentiality constraints.
Ganfeng Lithium did not respond to a request for comment.
Alpha’s CEO was well aware of what Tecpetrol was up to. “I know that they were lobbying quite hard in Ottawa,” Mr. Nichol said. “And there was a lot of, call it, anti-China rhetoric.”
He declined to answer whether the fuss Tecpetrol created around national security affected the sales process for Tolillar. But ultimately the potential China-based buyers walked, and Alpha agreed to sell the entire company to Tecpetrol for US$204-million.
Alexandre Meterissian, a spokesperson with Tecpetrol declined comment, other than saying “Tecpetrol is pleased to have acquired Alpha Lithium.”
Mr. Nichol, for his part, remains unapologetic about courting China for investment, despite Ottawa’s move to effectively block it. He says cutting off that giant pool of capital and China’s decades of intellectual capital expertise in battery metals is extremely damaging for the Canadian mining sector.
“How do you just shut off 70, 80, 90 per cent of a capital pool for a Canadian company?” he said. “And then tell them ‘Sorry, we just decided we’re closing the door on funding sources and expertise that’s going to help you develop that asset, but we don’t have an alternative for you.’”
Another reason why companies continue to court Chinese investment is because homegrown capital has become almost impossible to find, owing to lack of support from Canadian pension funds, a contraction in the broker-dealer network that services the junior mining sector and poor historical performance that has scarred many investors.
Vital Metals Ltd. is yet another small mining company that is looking to China for a financial lifeline.
In October, Vital announced it wanted to sell a stake of up to 18.1 per cent to a subsidiary of China-based Shenghe Resources Holding Co. Ltd. in a deal worth about $13.3-million.
Vital owns Canada’s only operating rare earths mine: the Nechalacho project in the Northwest Territories.
Even though Vital is based in Australia, Ottawa has jurisdiction under the ICA to review the proposed deal with Shenghe under national security grounds, and potentially reject it. That’s because Vital’s critical minerals assets are located in Canada.
Vital, in fact, has been widely feted by Ottawa as leading a vanguard of companies helping Canada reduce its dependence on China for critical minerals. And with a plan to mine and refine rare earths here, Vital earlier this year appeared well on its way to creating a much-needed Canadian supply chain in critical minerals. In January, the company attracted a visit from Prime Minister Justin Trudeau to its processing plant in Saskatchewan.
“What we’re seeing here is rare earth elements mined with an Indigenous partnership in the Northwest Territories, shipped down here to Vital Metals in Saskatoon,” Mr. Trudeau said, “where the processing and the value is added, so that we’re able to be a reliable supplier of rare earth elements.”
Such a supply chain is imperative, he stressed, because China is a “somewhat challenging partner at the best of times.”
But Mr. Trudeau’s vision would not come to pass. Owing to catastrophic cost overruns, and a steep fall in the price of rare earths, Vital in September pulled the plug on the plant, and announced it was putting the Canadian subsidiary running it into bankruptcy.
The proposed equity investment into Vital from Shenghe could guarantee the future of the Nechalacho mine, but it will also strengthen China’s iron grip on rare earths. According to the Oxford Institute for Energy Studies, China accounts for 70 per cent of rare earths extraction and 90 per cent of refining.
Mr. Ecclestone said that Ottawa has little choice but to reject the deal. Otherwise, he says, federal policy on national security starts to look like “the shower scene from Psycho – all over the place.”
Ms. Reilander declined to comment, again citing confidentiality restrictions under the ICA.
Vital did not respond to a request for comment.