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Natural flake graphite concentrate prior to drying.Neal Rockwell/The Globe and Mail

Patrick Leblond is associate professor and holder of the CN-Paul M. Tellier Chair on Business and Public Policy in the graduate school of public and international affairs at the University of Ottawa. He is also a senior fellow with the Centre for International Governance Innovation.

SRG Mining announced this week that it was putting an end to Carbon One New Energy Group’s proposed $16.9-million investment in the Canadian miner. Although the company did not officially say so, the belief is that a national security review by the federal government was going to scupper the transaction between SRG and C-One of China.

Under the Investment Canada Act, the federal government has the right to review foreign investments in Canadian companies to protect our national security. One of the factors used by the government when assessing national security implications, as per the Guidelines on the National Security Review of Investments, is “the potential impact of the investment on critical minerals and critical mineral supply chains.”

In SRG’s case, the company’s sole activity at the present time is the development of a mine (known as the Lola graphite project) in Guinea. The deal would have given C-One a 19.4-per-cent stake. SRG’s goal, according to Tuesday’s press release, is to “develop a fully integrated source of battery anode material to supply the European lithium-ion and fuel cell markets.”

C-One’s investment and technical expertise in supplying anode materials was seen as strategic in achieving this goal.

This case raises a million-dollar question: Does the Chinese ownership of a fifth of a graphite mining operation in West Africa for the European battery market represent a threat to Canada’s national security?

The justification for including the supply of critical minerals in the factors that could affect Canada’s national security is the control that foreign governments, notably China, could exercise on the supply of such minerals.

Ultimately, the risk is that governments and companies in places such as Canada would become dependent on Chinese firms for products deemed crucial to the economy’s future, as well as to national defence.

So, governments in Canada, Europe, Japan and the United States, among others, are putting in place policy measures to reduce China’s dominance of critical mineral supply chains.

But is blocking a transaction like the one between SRG and C-One the best way to reduce critical mineral dependence on China? Will it ensure sending graphite to Europe or North America rather than China or China-controlled manufacturers?

With just a fifth of SRG, it is hard to see how C-One could unilaterally decide to send the graphite China’s way.

Financially, it makes more sense to process the graphite in Europe or Northern Africa than in China if the objective is to serve European and North American manufacturing clients. That’s why SRG and C-One were looking at developing an anode material facility in Morocco.

Now that SRG has given up on C-One’s financial and technical support, it needs to find it somewhere else. Given China’s dominance of the critical mineral supply chains, Chinese firms tend to be the ones that have the relevant expertise.

Finding this expertise outside China’s sphere of influence will likely make it more costly for SRG. It might have to give up more of its current ownership to secure the same financial and technical support than the 19.4-per-cent stake promised to C-One. This would potentially mean even less Canadian influence over the mining of a critical mineral. How is that helpful to Canada’s national security interests?

Perhaps a better way would have been to hold SRG and C-One to their word. The government of Canada could have agreed to the transaction but kept track of the business afterward to make sure that SRG’s graphite didn’t end up under China’s control. If it did, then the federal government could simply force C-One’s divestment from SRG. Why presume guilt before the fact?

As it stands, the SRG saga is sending the message to Canadian and foreign investors that they should not set up a company in Canada to do business in the critical minerals supply chain if they want to maintain maximum freedom of action in terms of financial and technical partners. That’s certainly how SRG’s recent decision to ”redomicile” the company to the United Arab Emirates was interpreted.

Again, how would such an outcome contribute to securing Canada’s access to critical minerals? Why not trust but verify instead?

A trust-but-verify approach to investment in critical minerals would be better for investors (higher returns), the Canadian economy (more investments) and the country’s national security (more access to critical minerals).

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