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With Zijin’s acquisition of Neo Lithium Corp., China will further strengthen its already dominant position in the global lithium industry.Carla Gottgens/Bloomberg

Ottawa should mandate that state-owned firms that target Canadian companies are automatically subject to a full national security review, a security expert testified at a parliamentary hearing looking into the sale of a Canadian lithium company to a Chinese-government controlled firm.

The hearing was held on Wednesday, and called after The Globe and Mail reported the federal government gave the thumbs up to state-owned Zijin Mining’s $960-million acquisition of Canadian lithium development company Neo Lithium Corp. NLC-X without conducting a formal security review.

The deal was announced in October and subject to a 45-day security screening, a process that can involve the Canadian Security Intelligence Service, and consultation with the United States and other allies.

Toronto-based Neo Lithium plans to build a high-grade lithium mine in Argentina. The company’s 3Q project has enough reserves to produce battery-grade lithium for 50 years.

While acquisitions of Canadian companies by state-owned firms are subject to “enhanced scrutiny,” under recently updated guidelines of the Investment Canada Act, there is no requirement to conduct a full security review. The Liberal government did not conduct one in the case of Neo Lithium.

“State-controlled firms, particularly those from China, should automatically trigger national security reviews and certainly in this case one should have been conducted,” Jeffrey Kucharski, adjunct professor with Royal Roads University, said in the hearing of the industry and technology committee.

Such reviews under Section 25.3 of Investment Canada Act are undertaken when the government suspects a transaction could be a threat to national security. They typically take many months, and can result in a deal being blocked.

Prof. Kucharski said that in the past China has abused its dominant position in critical minerals to coerce and exert leverage over other countries. The superpower also has unfair advantages over Canadian firms, such as access to cheap capital and generous state subsidies, and Chinese firms can be routinely influenced by the government, which has its own agenda, he added.

“We have a specific concern with China’s behaviour,” he said.

With Zijin’s acquisition, China will further strengthen its already dominant position in the global lithium industry. It is among the biggest miners of the critical electric-vehicle battery mineral, and has a 60-per-cent share of global refining.

Several other witnesses at the hearing also raised concerns about China’s growing dominance in critical minerals.

Nikos Tsafos, the James R. Schlesinger chair for Energy and Geopolitics at the Center for Strategic and International Studies, said Western countries need to come up a much more comprehensive critical-mineral strategy that would involve closer co-operation between the U.S., Canada and the European Union.

“The most important objective that we have is to ensure the Western companies have access to the minerals needed for the green economy,” he said. “Supply chains without China are impossible but supply chains dominated by China are unacceptable.”

Last year, Canada followed the U.S. in designating lithium as a critical mineral, meaning it is essential to the economy. The move was made after Ottawa and Washington in 2020 finalized a joint action plan on critical minerals, with commitments by both governments to build secure North American supplies of battery minerals.

Ottawa also updated the Investment Canada Act last March to specify takeovers of Canadian firms must now be scrutinized through the lens of whether they threaten Canada’s supply chain of critical minerals.

Wesley Wark, senior fellow at the Centre for International Governance Innovation, who also testified at the hearing, said while the government has talked the talk, it is not following through with action.

The government, he said, addressed the acquisition of Neo Lithium in “too narrow a framework, misjudged its significance to Canadian national and economic security,” rushed the process and “failed to translate policy promises into action.”

Earlier this week, Industry Minister François-Philippe Champagne defended the process of reviewing the transaction in an interview, saying it was rigorous. “This transaction was absolutely reviewed to make sure there was no security risk,” he said.

Mr. Champagne added that since the company’s project is located in Argentina, any future lithium production is unlikely to make it into the Canadian supply chain.

Flavio Volpe, president of the Automotive Parts Manufacturers’ Association, backed that thesis on Thursday, saying while there are currently no lithium ion battery makers in Canada, proximity to a future source of supply is key.

“Canada’s auto industry and its supplier industry does not benefit from sourcing lithium from outside North America,” he said.

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