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The Globe and Mail

Takeover rules must be careful not to dull Canada's edge in resources

The multiparty merger fest that's reshaping the copper mining industry in Canada has one very odd twist: The companies are here, but the metal is not.

The main assets in Canada for Lundin Mining Corp., Inmet Mining Corp. and Equinox Minerals Ltd. are office space, Toronto Stock Exchange listings and investor interest. None is focused on Canada as a place to produce.

China's Minmetals Resources Ltd., the interloper that on Sunday announced an intention to buy Equinox, is the only player that highlights its assets in Canada - a couple of exploration projects in the country's North.

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Inmet, which tried and failed to merge with Lundin, had an operating mine in Canada until last year, but no more; it now focuses on projects and exploration in countries such as Peru and Finland. The main assets for Lundin, the target of an Equinox takeover bid, are across the Atlantic, in Africa and Europe. Equinox's big project is in Africa.

This ability to draw and keep resource companies that have little actual business in Canada is a testament to the power of the attractiveness of the TSX and its little sibling, the TSX Venture Exchange, and to the resource expertise in Canada that helps companies that list here grow and prosper. The birth, expansion and eventual disappearance through sales of these companies feeds an ecosystem of bankers and lawyers, such as the folks at Toronto-Dominion Securities and Osler Hoskin & Harcourt who are advising Equinox, or the Scotia Capital bankers and Cassels Brock & Blackwell lawyers who are in Lundin's corner.

A situation such as this highlights how crucial it is for regulators to ensure that TSX owner TMX Group Inc.'s plan to merge with London Stock Exchange Group PLC doesn't upset that ecosystem.

This also demands a sensitive touch from regulators and politicians as they look to rewrite takeover rules in Canada, in the wake of the bid for Potash Corp. of Saskatchewan that was blocked by Ottawa. The reality is that all "Canadian" companies are not created equal.

The Conservative government was slow getting that promised review under way, and now it's dead because of the federal election. When it restarts, there are some fascinating questions raised by companies such as Equinox, which is listed in Canada not because this is where the mines are but because it needed access to this country's big investor base as it developed its main African project.

For example, does it make sense that Equinox is Canadian when it comes to bidding for Lundin, and as such, that transaction doesn't require an Investment Canada review; but not Canadian enough to cause any trouble for regulators when it comes to being bought by Minmetals, as Minmetals executives contend will be the case?

How much weight should a headquarters and TSX listing such as Lundin's or Equinox's get in a "net benefit" calculation by the policy wonks at Industry Canada, given that those result in fees for bankers and lawyers, and opportunities for Canadian investors, all contributing to Canada's status as a financial centre? Should the real issue be the minerals in the ground and the jobs extracting them, and therefore a deal to buy such a Canadian company can be waved on through? Balanced against that, regulators must ensure that Canada remains open and attractive for investors, or the companies won't come here in the first place.

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This is not going to be an isolated situation, as a glance at the resources companies on the TSX today illustrates.

There are lots of companies that fit a similar template of having head offices in Canada but much or all of their operations elsewhere, such as Centerra Gold Inc., Eldorado Gold Corp., Kinross Gold Corp. and First Quantum Minerals Ltd. All could conceivably one day fetch large takeover bids, and raise the very same questions

It's also not a new trend, though it is likely to accelerate given the changing face of the Canadian resource industry. Addax Petroleum, which produced oil in Nigeria, listed in Toronto in 2006 and was sold to Sinopec for more than $7-billion in 2009. RBC Dominion Securities and Fasken Martineau DuMoulin feasted on those fees, and Canadian investors enjoyed a huge runup in Addax stock while it was a guest on the TSX.

This is not to say that the federal government has done a bad job of regulating such companies, or has been too protectionist. Addax went without a ripple. So far, so good.

But with the review of the takeover rules coming about because of a decision to stop the Potash Corp. transaction, and with more protectionist talk in the air, it's worth emphasizing that Canada's resource industry is becoming even more international, to the benefit of cities such as Toronto and Vancouver. Canada needs takeover rules that recognizes and nurtures that trend.

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