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A TMAC mine site in Hope Bay, Nunavut.Handout

The federal government has rejected China’s state-controlled Shandong Gold Mining Co. Ltd.’s planned takeover of junior gold miner TMAC Resources Inc. because of concerns about national security in the Arctic and U.S. government pressure to nix the controversial transaction.

Shandong proposed an all-cash acquisition of Toronto-based TMAC for $1.75 a share in May, valuing the miner at $207.4-million, or about 4 per cent more than its market price at the time.

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

The takeover generated a debate about sovereignty in Canada’s Far North and whether China should be allowed to gain a strategic economic foothold in the High Arctic.

A spokesperson with the Ministry of Innovation, Science and Economic Development declined to comment on the specific reasons for rejecting the deal, citing confidentiality constraints under the Investment Canada Act.

But a senior government official told The Globe and Mail that the rejection was motivated by national-security concerns.

Another source told The Globe that Washington had been pushing the Trudeau government to reject the takeover because of concerns about Shandong being a state-controlled entity.

The Globe is not identifying either source as they were not authorized to speak about the review process.

The Chinese embassy in Ottawa deplored the rejection of the proposed takeover.

“The Chinese government has always asked Chinese enterprises to carry out investment co-operation abroad in compliance with international rules and local laws and regulations. Any politicization of normal economic co-operation and political interference with the excuses of national security is wrong. The Canadian side should provide a fair, open and non-discriminatory market environment for enterprises from all countries, including China,” the embassy said in a statement.

The U.S. embassy in Ottawa had no immediate comment.

Richard Fadden, the former director of the Canadian Security Intelligence Service and national-security adviser to prime ministers Stephen Harper and Justin Trudeau, applauded Ottawa for turning down the deal.

“It sends a message to China that we are on alert to protect our interests,” Mr. Fadden said in an interview Tuesday. “It does not mean that all Chinese investments will be turned down, but it is an area of strategic investment to Canada and our allies, so it is a good move.”

Retired major-general David Fraser said the rejection should form a part of a strategic rethink aimed at keeping China out of Canada’s Far North.

In late November, Mr. Fraser, who commanded Canadian troops in Afghanistan in the early 2000s, urged Ottawa to turn down the takeover, citing the mine’s location in Hope Bay, an inlet on the Northwest Passage, as well as its proximity to Canadian early-warning radar facilities.

“This thing has a port attached to it. [China has] written a paper saying they want to be a near-Arctic power,” Mr. Fraser said in an interview.

“If you look at what they have done on the South China Sea to extend their area of influence – what’s to stop them, once they get squatter’s rights and get into this port, of doing the same thing up there?”

Climate change is making the Northwest Passage an increasingly attractive shipping route between the Atlantic and Pacific. The Arctic thoroughfare can cut shipping time for vessels travelling between Asia and Europe. Shrinking summer sea ice, a consequence of global warming, is expected to make transit through this route easier in the decades ahead.

The mine site is a little more than 100 kilometres from a NORAD North Warning System radar station in Cambridge Bay, Nunavut, part of a chain of installations across the North that gather information and transmit it to military operations centres.

One concern of security experts is how China’s authoritarian Communist Party has extended its control over state-owned and private enterprises.

The presence of Communist Party units in China-based companies has long been a fact of doing business in the Asian country, where the law requires companies, including foreign firms, to set up a party organization. Earlier this year, the party issued a directive demanding greater loyalty from companies, saying they must “maintain high consistency” with the party regarding the political aspects of position, direction and principles. Chinese companies are also required by law to spy for the country if requested by the central government.

The rejection of the deal comes amid increasingly strained international relations between Ottawa and Beijing. In 2018, Canadian police arrested Meng Wanzhou, a senior executive with Chinese telecommunications giant Huawei Technologies Co. Ltd., who is wanted in the United States on fraud charges.

In retaliation, China jailed two Canadians, Michael Kovrig and Michael Spavor, over allegations of espionage. China has repeatedly pushed Canada to free Ms. Wanzhou, while the U.S. government has attempted to extradite her. In October, Mr. Trudeau spoke out about Beijing’s “coercive diplomacy,” and its repressive and aggressive actions at home and abroad.

“We’re in an especially challenging environment for Chinese investment in Canada,” Jason Neal, chief executive of TMAC, said in an interview. “It’s very obvious, just given foreign relations.”

The Mining Association of Canada declined to comment, citing the diversity of views on the federal decision by its members.

However, an industry source said mining executives would have to be “deaf, dumb and blind” not to realize the game has changed regarding Chinese investment in Canada’s mining sector. The industry will now have to look elsewhere for investment dollars, the insider said. The Globe is not identifying the source as they were not authorized to speak publicly.

The rejection of the takeover by Shandong injects doubt into TMAC’s ability to continue as a going concern. The company holds $71.5-million in cash, which it says is enough to fund a sealift of supplies into the mine in 2021, but has $170-million in debt coming due to Sprott Private Resource Lending next June.

“We’ll engage with Sprott over the next few months,” Mr. Neal said.

The Doris mine went into production in 2017 and has grappled with many operational issues, including a poorly performing mill. Close to $700-million is needed to fix the problems.

Some analysts speculated that a new bid may emerge for the company.

“The stock is now in play again,” said Don DeMarco, analyst with National Bank Financial Inc. “It opens the door to other M&A suitors, including U.S. groups.”

With the price of gold bullion up by about 10 per cent since the Shandong deal was announced, TMAC may generate more interest now from potential bidders than previously, said Barry Allan, analyst with Laurentian Bank Securities Inc. He singled out Kirkland Lake Gold Inc. as a possible bidder.

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