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Federal Industry Minister François-Philippe Champagne is challenging the legitimacy of a Canadian mining company’s plan to relocate to the Middle East, a move it has said will allow it to skirt a national security review related to a proposed financing deal with a Chinese buyer.

The company, Montreal-based SRG Mining Inc., announced last summer that China-based Carbon One New Energy Group Co. Ltd. had made a proposal to buy a 19.4-per-cent stake in SRG’s Lola graphite project, in West Africa. For the first few months after the deal was announced, SRG told its investors that the deal was subject to a national security review by the Canadian federal government.

But late last year, the company announced in a regulatory disclosure that it was planning on redomiciling outside of Canada, a legal manoeuvre it said would negate the requirement for that national security review. SRG announced last month that it had picked the United Arab Emirates as its new home base.

Speaking at the Prospectors and Developers Association of Canada mining conference in Toronto on Monday, Mr. Champagne signalled that SRG has erred in its interpretation of the rules.

“I would say to anyone watching or reading that it’s never smart to try to circumvent the rules,” Mr. Champagne said. The Canadian government will “use every tool at our disposal to make sure that Canadian law is respected, and that Canadian regulation is adhered to,” he added.

Asked about SRG’s claim that moving outside of Canada would exempt it from a national security review, Mr. Champagne said, “Would you rather listen to them, or the government of Canada?”

SRG did not respond to a request for comment.

The critical minerals sector is watching the SRG situation closely, because it offers a potential loophole for executives to use in raising money from China and other jurisdictions Ottawa has deemed national security threats.

If the SRG deal with Carbon One closes, analysts predict that it will result in many more small Canadian critical minerals companies fleeing the country in order to avoid potential financing restrictions under the Investment Canada Act, which gives the government the ability to review and possibly block foreign investments.

SRG’s potential move to the Middle East comes with financial incentives. The UAE has a taxation and investment treaty in place with Guinea, where the company’s graphite project is located.

There is almost no publicly available information about Carbon One. The company is privately held.

Ottawa has come down hard on Chinese investment in critical minerals both because of Canada’s weak positioning in the sector globally, and because of the Asian superpower’s growing dominance. According to the U.S. Geological Survey, China produces 65 per cent of the world’s graphite, a key input in electric car batteries.

Mr. Champagne said in late 2022 that he would not allow investments in Canadian critical minerals miners by entities tied to state-owned enterprises, except under exceptional circumstances. He ordered three China-based companies with ties to the Chinese government to divest themselves immediately of their stakes in three Canadian critical minerals companies.

Although China-based resource giants stayed away from the Canadian critical minerals sector in the immediate aftermath of the 2022 crackdown, they are once again wading in.

Earlier this year, Vancouver-based Solaris Resources Inc. SLS-T said a Chinese company, Zijin Mining Group Co. Ltd., plans to acquire a 15-per-cent stake in its business, worth $130-million. The deal is subject to a security review by Ottawa. If the transaction goes ahead, Solaris plans to use the funds raised from Zijin to advance its Warintza copper project in Ecuador. Zijin is already deeply embedded in the Canadian mining sector, with joint ventures in place with Ivanhoe Mines Ltd.

Canada, the United States, Australia and Europe are attempting to build up their own critical minerals industries to reduce their dependence on China. After building a dominant position in car battery metals, such as lithium, cobalt and graphite, China is now concentrating on crushing its global competition in nickel.

Over the past few months, scores of Western mining companies – such as Canada’s First Quantum Minerals Ltd. FM-T, Switzerland’s Glencore PLC GLNCY and Australia’s BHP Group Ltd. BHPLF – have been forced either to close mines or incur heavy writedowns in the face of a global glut of China-controlled nickel coming out of Indonesia.

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