Ottawa clamps down on China’s critical-minerals foray, but not prospecting

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Lone wolf Mike Tremblay is one of Canada’s most successful mining prospectors.

In the 1980s, he discovered the Borden Lake gold deposit in northern Ontario, which was subsequently developed into a mine.

Over four decades, he’s headed into the Ontario bush on countless occasions, amassed about 10,000 mining claims and knows better than anyone there’s no guarantee of ever making a cent in the prospecting business.

About a dozen years ago, Mr. Tremblay woke to find a good chunk of his claims hemmed in on all sides by China Metallurgical Exploration Corp. (CME).

“They tied into every claim I owned. They were sticking up around all my projects,” he said. “They surrounded everything I had.”

CME is controlled by Zhengyuan International Mining Co. Ltd., a Chinese state-owned enterprise. With the huge coffers of China’s Communist government at its disposal, CME can afford to stake vast tracts of land in Ontario and sit on them indefinitely, paying just $400 a claim to the province annually to keep each one active.

“I don’t like the idea of foreign entities just walking in and buying whatever they want,” said Mr. Tremblay. “Particularly the Chinese, they don’t play fair. There should be more restrictions on them than there is, which is basically nothing.”

Last year, the federal government said that it would not allow any more Chinese acquisitions of Canadian critical minerals companies, except under extraordinary circumstances. Ottawa brought in the rules, after loose oversight in the past, in the face of deteriorating relations between Canada and China, and as fears over China’s domination of the global critical minerals supply chain reached a boiling point.

While there is now a virtual ban on acquisitions of Canadian critical minerals producers by state-owned Chinese companies, at the prospecting stage there are almost no restrictions at all. After filling out basic paperwork, passing a rudimentary knowledge test and paying nominal fees, foreign firms with ties to authoritarian regimes are allowed to buy claims across Canada.

Canada’s free-for-all prospecting system is regulated by the provinces and territories. Many of them have made the process of buying a claim almost as straightforward as buying a can of tennis balls on Amazon. Some even have easy-to-follow instructional videos on how to buy a claim online using your credit card.

As easy as it is to buy a claim in Canada, finding out who owns what is a labyrinth. Even for a professional such as Mr. Tremblay, following the money isn’t easy. The provincial systems make disguising financial backers simple for prospectors, potentially facilitating companies with ties to the Chinese state to drift in under the radar.

“A lot of times companies that are staking are just numbered companies. So, you have no idea what their background is,” said Mr. Tremblay.

Indigenous groups in British Columbia and Ontario have also raised concerns about Canada’s free entry system for prospecting and are calling for the provinces to at the very least consult with them before granting claims.

Wayne Moonias, a former chief of Neskantaga First Nation in Ontario, said that he’s seeing an explosion in invasive prospecting on Neskantaga’s traditional territories, with helicopters flying overhead mapping and drilling under way. Sometimes it’s impossible to know who is behind it.

“The system is so flawed,” he said.

Richard Fadden, the former director of the Canadian Security Intelligence Service and a former national-security adviser to prime ministers Stephen Harper and Justin Trudeau, says Ottawa should know who is prospecting, where they are prospecting, what they own and if they have any ties to state-owned enterprises.

“At an absolute minimum, we need almost perfect transparency when foreign countries come into this country and start prospecting,” said Mr. Fadden.

But the issue appears not to be even remotely on the radar screen of the federal government.

It took The Globe and Mail about a month of back-and-forth inquiries with Innovation, Science and Economic Development Canada and Natural Resources Canada to clarify whether Ottawa even had any jurisdiction to scrutinize, on national-security grounds, a mining claim filed at the provincial level.

Laurie Bouchard, a spokesperson for François-Philippe Champagne, the federal Minister of Innovation, Science and Industry, eventually wrote in an e-mail that mining claims could fall within the government’s auspices to police under the Investment Canada Act, because they could be classified as “an entity that has operations in Canada.”

But even if Ottawa has the power to scrutinize mining claims by a foreign entity, it appears to have no way of knowing about them. Foreign investors are under no obligation to disclose claims to Ottawa, and the provinces do not have to pass on any intelligence gathered.

In her decades of working in the field, Sandy Walker, co-chair of the Competition and Foreign Investment Review group at law firm Dentons, said she had never heard of the federal government scrutinizing a mining claim.

“I have not personally seen an instance where [federal] jurisdiction has been asserted over the acquisition of simply a mineral claim,” she said.

Provinces such as Ontario are showing little interest in cracking down on China. George Pirie, Ontario’s Minister of Mines, made it clear that his job is to stimulate mining investment, not drive it away.

When asked whether Ontario should take steps to prevent foreign state-owned firms from obtaining claims, he said, “that’s a federal government issue.”

Late last year, China Metallurgical gave up its claims in Ontario, much to the relief of Mr. Tremblay. Fleming Huang, who described himself as a “handyman” for China Metallurgical in Canada, said that it was a business decision and was in no way motivated by any scrutiny from Ottawa.

While Mr. Tremblay is resting easier these days, he’s worried about other holes in Canada’s prospecting system that leave the country vulnerable to Chinese investors gobbling up claims. He pointed to scores of TSX Venture-listed companies based in Canada that have mining claims and have strong ties to China.

Markham-based Golden Share Resources Corp., which has amassed about 400 minerals claims in northern Ontario is an example. China-born Nianqing Zeng, an early shareholder in Golden Share, who eventually took over as chief executive, said in an interview with the Investing News Network in 2018 that he had been retained to seek out resources globally by Chinese companies. “We focused on exploration in Ontario. We love Ontario,” he said in the interview.

His reach within China was impressive. At one point, he even attempted to broker a deal that would have seen a Chinese state-owned company build a railway into Ontario’s Ring of Fire minerals district in the province’s far north.

Mr. Zeng didn’t live to see his ambitions realized. He died last September, forcing Golden Share to put itself up for sale.

Golden Share CEO Wesley Roberts said that it is unfair to sound the alarm over Canadian junior mining companies with minerals claims that also have links to China, or that are run by Chinese Canadians. Many of the long-term resource bets taken by the Chinese never pay off, he said, including Mr. Zeng’s bet on Golden Share.

“We’ve lots of Chinese shareholders and they’ve taken a real beating. They’ve lost money, and a lot of our Canadian shareholders too,” he said. “There’s no secret agenda out there to take over Canada.”

(Golden Share recently agreed to a takeover by Lipari Diamond Mines Ltd., a B.C.-based diamond explorer.)

As welcoming to exploitation as Canada’s prospecting system is to companies with significant Chinese influence or ownership, China’s own system could hardly be more hostile to outsiders. China doesn’t allow foreign prospectors any access to certain minerals such as rare earths, radioactive minerals and certain critical minerals such as tungsten.

And while a foreigner can apply for a prospecting licence in China, applications are subject to an in-depth review by the Chinese state. The process is lengthy and “opaque” said mining lawyer Greg McNab in an interview last year when he was a partner at Baker & McKenzie LLP. Mr. McNab, who has since joined Dentons as a partner, said it’s not uncommon for foreign prospectors to be turned down by the Chinese state, with no explanation given.

Mining executive Glenn Mullan says Canada should move toward a reciprocal system on prospecting. That means for countries that already have heavy restrictions on Canadian prospectors, Canada should erect similar barriers in return. For prospectors working for China, that would mean far more restricted access to Canada’s mineral wealth.

“If we can’t work in China, then I don’t see why we should encourage them to be allowed to have unfettered access here,” he said.

In the depths of the great financial crisis of 2009, Mr. Mullan was forced to sell Canadian Royalties Inc., to Jilin Jien Nickel Industry Co. Ltd., a Chinese state-owned firm. Mr. Mullan, who was the founder, chairperson, CEO and the biggest shareholder of Canadian Royalties, resisted the hostile takeover to the end. Jilin Jien had to take Mr. Mullan to court to force him to tender his stake. The Chinese giant eventually built a massive copper and nickel mine in Nunavik, Que.

Mr. Mullan, a prospector by trade, staked the original claim on the mine. All these years later, he’s still gutted that the federal government allowed the deal to happen.

“I wish they didn’t have it,” he said. “I don’t hate the Chinese. I just resent that nobody else from Canada stood up and realized that a global paradigm shift was happening.”

Other resource-heavy jurisdictions such as Australia have tougher oversight and restrictions over foreign mining firms attempting to prospect.

John Mollard, a partner with Dentons in its Melbourne office, said that firms with more than 20-per-cent ownership by a foreign government need approval from Australia’s Foreign Investment Review Board before they can acquire an exploration licence.

The United States has also adopted a tougher stance than Canada. There, individual prospectors must be U.S. citizens, or be in the process of becoming a citizen, before staking claims.

Alex Christopher, former president of the Prospectors & Developers Association of Canada, is concerned about any rule that would limit prospecting in Canada for foreign entities, even companies owned by the Chinese government. He’s afraid of the knock-on impact that might have on Canadian exports of raw materials and minerals to China, or other possible trade retaliation.

“We worked hard here to attract direct foreign investment into Canada, and to foster a policy that allows Canadian companies to work abroad. We just have to be very careful, as a country, to ensure that we don’t take reactionary steps, and take protectionist measures,” he said. “We do more harm to the industry than good by singling out individual groups or companies to restrict access.”