China’s growing control over strategic minerals could be a threat to Canada’s national security, a former head of CSIS says, and Ottawa should recognize this when it reviews a proposed takeover of an Arctic gold mine by a Chinese state-owned conglomerate.
Shandong Gold Mining Co. Ltd., one of the world’s largest gold producers, is paying $207.4-million to buy TMAC Resources Inc., the latest struggling Canadian junior miner to be swept up by a larger and better-capitalized company.
The deal will be among the first pored over by Ottawa after it announced in April that it would bring “enhanced scrutiny” to bear on acquisitions by foreign state-owned investors in a period where the COVID-19 pandemic has driven down the value of companies. China is the largest producer and consumer of gold in the world.
Richard Fadden, the Canadian Security Intelligence Service director from 2009 to 2013, said Ottawa should examine the proposed TMAC takeover within the larger picture of Canada’s national interests and Beijing’s strategy of gaining control over critical metals and minerals.
Chinese companies have not only been active buying up gold mines around the world but Shandong Gold Group, the state-owned parent company, signed up in 2015 to back a national Beijing effort to stockpile the precious metal, which is considered one of the best hedges against economic volatility.
China is also active in the Canadian North in zinc, a key ingredient in making galvanized steel, computers, cellphones and batteries.
MMG Ltd., whose major shareholder is the Chinese government, owns zinc and copper assets in the Izok and High Lake deposits in Nunavut. Those deposits could be worth billions of dollars to China if Ottawa goes ahead with a plan to build a road and a deep-water port to ship the zinc and copper out through the Northwest Passage.
China’s designs on Northern Canadian minerals in part prompted a recent joint U.S.-Canada strategy to reshape global metallic supply chains to reduce reliance on China, which has moved aggressively to control rare-earth minerals that are critical to high-tech and military products.
Key minerals, such as zinc, lithium, cesium and cobalt, are used in an wide variety of products ranging from lasers, computer chips, electric vehicles, solar panels, smartphones and military equipment.
Mr. Fadden said that while gold is not part of the Canada-U.S. critical-mineral strategy, the precious metal should be added to the list.
Gold is not only viewed as a safe-haven investment in turbulent economic times, but it is widely used in the control systems of nuclear-power plants and nuclear-weapons facilities, he noted.
“I think gold is pretty important for the world economy. China has enough of a grip on the world economy as it is, given its capital assets, so I would include gold," Mr. Fadden said. “Governments should sit down, convene a bunch of experts and talk to our allies about it.”
Mr. Fadden, who was also national security adviser to Stephen Harper and Justin Trudeau, said there had been growing concerns within Canadian national-security agencies about how China was carefully investing in Canadian companies “so as to be beneath regulatory thresholds.”
“There was a worry that the Chinese seemed to be very knowledgeable about regulatory thresholds and were coming just underneath them and, as is well known, Chinese corporations abroad are required to comply with Chinese government directives,” he said. “If you had enough of these, either beneath regulatory thresholds or small investments, they would eventually be consolidated and there would not be very much anyone could do about it,”
Pierre Gratton, president of the Mining Association of Canada, said the TMAC takeover has “raised eyebrows” within the industry because Shandong Gold Group is a Chinese state-owned enterprise. It’s prompting discussion about how this takeover would fit into the Canada-U.S. strategy to limit China’s involvement in rare-earth minerals, he said.
“I think the action plan is pretty serious and I think the commitment by Canada and the U.S. to lessen their dependence on the Chinese for these materials is pretty serious,” Mr. Gratton said.
If Ottawa were to reject the takeover, Mr. Gratton said it would “send a pretty strong message” that Canada has serious concerns about Chinese state-owned companies buying up resource industries in Canada.
Toronto-based TMAC’s sole gold mine is in Hope Bay in western Nunavut, 160 kilometres above the Arctic Circle. The mine is situated near tidewater in the Northwest Passage, a highly strategic shipping route connecting the Atlantic Ocean to the Pacific.
While a sale to Shandong could stave off financial ruin for TMAC, which has struggled to mine gold for a profit, it also raises questions about sovereignty in the Far North, national security, and whether Canada should allow China to scoop up a domestic resource company at a fire-sale price.
“China as a very large powerful authoritarian state acquiring assets in the Canadian Arctic, that concern is legitimate,” said Michael Byers, Canada Research Chair in Global Politics and International Law at the University of British Columbia.
“It's not a reason for saying no to all investments. It's just a reason for being vigilant and that's what the Canadian government needs to do here.”
Arctic expert Rob Huebert, who teaches at the University of Calgary’s Centre for Military, Security and Strategic Studies, said Canada should assume every Chinese state-owned investment in Canada is in part a strategic purchase for Beijing.
“You can’t separate it. It’s all part and parcel of the Silk Road initiative, which is ultimately the Chinese effort to become a global power,” Prof. Huebert said, referring to Beijing’s worldwide Belt and Road investment strategy.
However, he said Canada should probably approve the TMAC transaction because increased obligations imposed on resource development by the Trudeau government in recent years are making it harder to attract investors to Canada’s North.
“I think we have no choice – given the fact that almost everything else is being blocked in terms of development,” Prof. Huebert said. “It’s hard to see us being able to say no.”
The deal is subject to a review under the Investment Canada Act (ICA). Ottawa will assess whether the acquisition will be a “net benefit” to Canada and will look at factors such as jobs, revenue and the impact on the local Indigenous community.
The government will also conduct an initial screening that will look at the deal from a national-security viewpoint. If Ottawa suspects the deal could be damaging to national security, the transaction could undergo a more thorough review under section 25.3 of the ICA.
Canada has rejected deals on security grounds in the past, including the proposed $1.5-billion acquisition of Canadian construction giant Aecon Group by China’s CCCC International Holding Ltd. nearly two years ago.
While the local Inuit community near the Hope Bay mine doesn’t have veto power over the deal, it’s an important stakeholder. The Inuit own the land on which the mine was built, the Kitikmeot Inuit Association (KIA) has a royalty on it, and it also owns about 1 per cent of the common shares in TMAC.
Although the gold is high grade, the company’s mill has not done well. Shandong has the money to keep the operation going, invest in upgrades and guarantee employment.
But even if an acquisition looks good on paper, there are no guarantees it will be approved.
Since 2012, 22 foreign takeover deals have been reviewed under section 25.3 of the ICA. Fourteen of those were by Chinese investors, with the vast majority subsequently either blocked by the government, subject to divestitures, or withdrawn proactively by the Chinese buyer.
“Part of the challenge in dealing with these cases is you don’t know what you don’t know, and the government will always have a better understanding in their mind of what might be important to them," said Peter Glossop, Toronto-based foreign-investment lawyer with Osler.
One aspect of the deal likely to be examined is TMAC’s mine location in the Arctic and its proximity to the Northwest Passage.
“What we call proximity analysis is something that’s taken into account in a national-security context," Mr. Glossop said.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.