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TMAC’s Doris gold mine is situated in Hope Bay, Nunavut, near tidewater in the Northwest Passage.

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Ottawa is ordering a formal national security review of state-owned Chinese miner Shandong Gold Mining Co. Ltd.'s proposed acquisition of TMAC Resources Inc., injecting more uncertainty into a deal that had already generated a national debate about sovereignty in Canada’s Far North.

In May, Shandong proposed an all-cash acquisition of TMAC for $1.75 a share, valuing the Toronto-based junior gold miner at $207.4-million, or about 4 per cent more than its market price at the time. Shareholders of TMAC voted overwhelmingly in favour of the deal in June and it received regulatory approval in China.

The enhanced security review by the federal government, which comes at a time of increased tension between China and Canada, raises doubts about whether the transaction will be successful, and at the very least pushes out the timeline for it to close to the first quarter of next year.

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TMAC’s Doris gold mine is situated in Hope Bay, Nunavut, near tidewater in the Northwest Passage, a highly strategic shipping route connecting the Atlantic Ocean to the Pacific.

“I’m glad they’re doing it,” Michael Byers, Canada Research Chair in Global Politics and International Law at the University of British Columbia, said of Ottawa’s review.

“This is a Chinese state-owned company. A full review should determine whether there are any ulterior motives other than the economic motive associated with this purchase,” he said. “China is a superpower and does make strategic investments in addition to economic ones.”

Of particular interest to the government, according to Prof. Byers, will be whether the purchase of TMAC is part of a longer-term strategy by China to industrialize the Canadian Arctic, as it has already done with great success in Latin America and Africa.

In a statement on Thursday, TMAC said that both the company and Shandong say they believe the transaction poses no security risk and would be a strong overall net benefit to Canada.

“TMAC and Shandong remain committed to working with the Investment Review Division to obtain approval,” TMAC said.

Shares in TMAC, which had been trading much less than the offer price, fell by a further 2.5 per cent during Thursday trading but recovered to end the day at $1.23, up 1.7 per cent. Nonetheless, the almost 30-per-cent discount to the original takeover price suggests that investors are deeply unsure about whether the deal ultimately will be approved.

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The TMAC acquisition was already subject to tighter scrutiny than usual because of the COVID-19 pandemic. In April, the Liberal government said that all foreign investments by state-owned investors, regardless of their value, would be subject to enhanced scrutiny.

The TMAC review also comes amid increasingly strained international relations between Ottawa and Beijing. Earlier this week, Prime Minister Justin Trudeau spoke out about Beijing’s “coercive diplomacy,” and its repressive and aggressive actions at home and abroad. In 2018, Canadian police arrested Meng Wanzhou, a senior executive with Chinese telecommunications giant Huawei Technologies Co. Ltd. In an apparent retaliatory act, China subsequently jailed two Canadians, Michael Kovrig and Michael Spavor, over allegations of espionage. China has repeatedly pushed Canada to free Ms. Wanzhou, who is currently under house arrest in Vancouver as the U.S. government attempts to extradite her to face fraud charges. In the meantime, China has refused pleas from Canada to release the two Canadians, who according to Bob Rae, Canada’s ambassador to the United Nations, are living in “terrible conditions.”

Prof. Byers said the current international political climate will certainly be a factor in whether Ottawa approves the TMAC acquisition.

“Unless the security review turns up something unexpected, this should proceed, but the question as to whether it will proceed, to some degree [depends] on political considerations in Ottawa,” he said.

Canada has rejected deals on security grounds in the past, including the proposed $1.5-billion acquisition of Canadian construction giant Aecon Group Inc. by China’s CCCC International Holding Ltd. in 2018.

A sale to Shandong could potentially stave off financial ruin for TMAC, which has struggled to mine gold for a profit. Doris went into production in 2017 and has grappled with myriad operational issues, including a poorly performing mill. Close to $700-million is needed to fix the problems. Analysts have said that if the Shandong deal falls through, TMAC will struggle mightily to secure long-term funding.

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TMAC is also grappling with a COVID-19 outbreak at the Doris mine. So far, 14 positive cases of the virus have been confirmed at the site. TMAC’s Nunavut-based workers were sent home in March to reduce the risk of transmission into the local Inuit community. “There is no material risk of COVID-19 transmission to local Kitikmeot communities as Hope Bay is geographically isolated from these communities,” TMAC said in a statement earlier this week.

As Shandong waits to see whether the TMAC deal will be approved, it has continued to buy gold assets. In September, Australia’s Cardinal Resources Ltd., which operates in Ghana, agreed to a sweetened takeover offer by Shandong worth US$401-million. That same month, Shandong offered to buy fellow Chinese gold company Hengxing Gold Holding Co. for US$387-million.

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