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The federal government is tightening the rules to make it considerably harder for foreign state-owned firms to invest in Canadian critical-minerals companies, after it faced harsh criticism earlier this year for allowing too much Chinese investment into domestic resource firms.

Effective immediately, transactions involving investments by state-owned firms into Canadian critical-minerals companies will only be approved on an “exceptional basis,” the government of Canada said in a release.

The rules will apply not just to outright takeovers of Canadian companies, but investments of any size, including smaller non-controlling stakes across every facet of the resource industry, from exploration and development to mining and refining.

Previously, the language around the approval process was less stern, and the rules were largely focused on outright takeovers. The last time Ottawa tightened the rules, in March, 2021, it said acquisitions of Canadian companies by state-owned firms would be subject to “enhanced scrutiny.” The government also said it would start looking at whether such transactions harm Canada’s supply of critical minerals.

“It is a significant change,” said Wesley Wark, senior fellow at the Centre for International Governance Innovation, and an attempt by Ottawa “to fend off further Chinese global control over the critical-minerals supply chain.”

Parliamentary hearing witnesses call for more scrutiny over China in Canadian critical minerals after state-owned Zijin Mining buys Canada’s Neo Lithium

He said the move is as significant as then Conservative prime minister Stephen Harper’s decision in 2012 to drastically limit any further acquisitions of Canadian oil sands companies by foreign state-owned firms, after he allowed China’s CNOOC Ltd. to acquire Canada’s Nexen Inc. for $15.1-billion.

Ward Elcock, a former director of the Canadian Security Intelligence Service (CSIS), said the new rules will discourage state-owned investors from even thinking about putting money in Canada.

“This in some sense makes the job easier because there are fewer companies who will bother to try,” he said. “It’s a stronger public signal.”

Canada is drawing a distinct line between investments from foreign jurisdictions it deems friendly to the country’s interests, such as the United States, Europe and Australia, and those from hostile regimes such as Russia and China.

Mr. Wark said Canada has no choice but to work with other foreign countries to build much needed critical-minerals infrastructure, because it’s clear it can’t be done only by domestically owned firms.

In fact, the federal and provincial governments this year have invested around half a billion dollars into critical-minerals mining projects in Canada, with most of the funds going to foreign firms.

Anglo-Australian miner Rio Tinto Group announced earlier this month it stands to receive up to $222-milion from the federal government to modernize a large Quebec metals processing plant that could see it become one of the first North American producers of the critical metal titanium.

South Korean electric-vehicle battery maker LG Energy Solution Ltd. and Dutch automaker Stellantis NV, which announced plans in March to build an EV battery plant in Windsor, Ont., received hundreds of millions from Ottawa and the Ontario government.

General Motors Co. and South Korea’s POSCO Chemical Co. Ltd. also received an undisclosed amount earlier this year for the the construction of a $400-million battery parts plant in Bécancour, Que.

China dominates the critical-minerals and rare-earths space, with a stranglehold on battery metals such as lithium and cobalt. Since the early 2000s, China has directed its state-owned companies to invest abroad to secure long-term supplies of critical minerals and it has invested billions in Canada as part of that program.

For the most part, Ottawa has taken a laissez-faire approach, allowing Chinese acquisitions of Canadian critical-minerals companies, permitting Chinese investors to take large stakes in critical-minerals mines and allowing Chinese companies to hoover up offtake agreements that allow them to control metals produced by Canadian companies.

While Ottawa has authority to block Chinese investments in Canadian critical-minerals assets if it feels there is a threat to national security, it hasn’t always followed through with action.

Earlier this year, Ottawa allowed the acquisition of Neo Lithium Corp., a Canadian lithium development firm, by Chinese-state controlled firm Zijin Mining Group Co. Ltd. without an in-depth security review. That takeover precipitated parliamentary hearings and put federal Industry Minister François-Philippe Champagne on the defensive.

In June, Jonathan Wilkinson, federal Natural Resources Minister, signalled in an interview with The Globe and Mail that Ottawa was getting ready to crack down on the deluge of Chinese investments into Canadian critical minerals.

Three years ago, the federal government allowed the acquisition of the Tanco mine in Manitoba by Sinomine Resource Group Co., a private Chinese company. At the time, Tanco was one of the world’s few sources of the critical mineral cesium, a key input in atomic clocks and radiation detectors. Earlier this year, Sinomine started produced lithium at the mine and shipping it back to China for use in its domestic EV industry.

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