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People walk past the R&D centre of Contemporary Amperex Technology Ltd. in Ningde, Fujian province, China, on Dec. 16, 2016.Jake Spring/Reuters

A top security expert predicts that a planned Chinese takeover of a Canadian critical minerals development company will trigger a full security review under the Investment Canada Act as tensions between the two countries remain elevated following China’s release of Canadians Michael Kovrig and Michael Spavor this past weekend.

China’s Contemporary Amperex Technology Co. Ltd. wants to acquire junior Canadian battery metals exploration company Millennial Lithium Corp. for $376-million. But before the deal can close, it must pass a security screening by Ottawa.

Vancouver-based Millennial Lithium is developing a project to mine the metal in Argentina. Lithium is one of a select list of critical battery metals that has seen its demand explode over the past decade with the increasing popularity of electric vehicles and government commitments to reduce carbon emissions.

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The mining industry will be paying close attention to any clues Canada is taking a tougher stance against China following the release of the two Michaels. Ottawa’s decision on the takeover will set a precedent that could either encourage more Chinese acquisitions of Canadian companies or bring deal activity to a halt.

The two Michaels returned home after spending nearly three years in jail in China. They were imprisoned and accused of spying in apparent Chinese retaliation after Canada detained Huawei Technologies Co. Ltd. chief financial officer Meng Wanzhou in 2018 on a U.S. extradition request related to accusations of bank and wire fraud.

Last weekend’s release of the Canadians came after Washington and Beijing cut a deal that allowed Ms. Meng to return to China as part of a U.S. deferred prosecution agreement.

All foreign takeovers of Canadian companies are subject to an initial security screening by Ottawa. If the government suspects the transaction could be a threat to national security, the deal undergoes a more thorough review under Section 25.3 of the Investment Canada Act.

“The Canadian government, irrespective of the release of the Michaels, would look very negatively on a Chinese acquisition of a critical minerals developer or supplier,” said Wesley Wark, senior fellow at the Centre for International Governance Innovation in Waterloo, Ont. “I would imagine that this would go to [a formal security review] because it’s an early test case with the new strategy that the government is developing on critical minerals.”

Last year, Ottawa and Washington finalized a joint action plan on critical minerals. Both governments have made it clear they plan to co-operate in building secure domestic supplies of the minerals, such as lithium and cobalt, as fears of the growing stranglehold of China on supplies intensify.

Canada has rejected takeover deals on national security concerns in the recent past.

Late last year, the federal government rejected a planned takeover of junior gold miner TMAC Resources Inc. by China’s state-controlled Shandong Gold Mining Co. Ltd. In that instance, the location of TMAC’s gold mine in the Arctic raised concerns. The mine site is a little more than 100 kilometres from a NORAD North Warning System radar station in Cambridge Bay, Nunavut; part of a chain of installations across the North that gather military information.

Matthew O’Keefe, an analyst with the U.S.-owned investment firm Cantor Fitzgerald in Toronto, says the Millennial Lithium acquisition doesn’t present nearly the same level of security risk because its main project is in Argentina, not a strategic Canadian location.

“There’s no reason to block it,” Mr. O’Keefe said.

But Prof. Wark disagrees.

“The fact that this is a Canadian company, based in Vancouver, with presumably a fair amount of intellectual property that would be lost to a Chinese buyer. That would be the principle concern,” he said.

Graham Harris, chair of Millennial Lithium, declined to comment for this story.

At the moment, Canada is a bit player in battery metals. There are currently no lithium mines operating in the country. Canada is a major producer of nickel, also used in batteries, but output of the metal is sent to domestic refineries for use in the steel industry.

And while Canada ranks in the top 10 around the world for cobalt production, it is sent abroad for processing, as there is no Canadian supply chain for electric vehicles.

There are pockets of development in the country that point to the eventual emergence of a small domestic supply chain. Junior development company First Cobalt Corp. hopes to build a refinery in Ontario that would supply the electric-car industry.

Quebec-based Nemaska Lithium Inc. is forging ahead on its plans to develop a mine in the province. The company was forced into creditor protection in 2019, wiping out public shareholders. The Quebec government has funnelled hundreds of millions of dollars into Nemaska over the past few years.

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