The news earlier this month that Canada would drastically increase its scrutiny of large mergers and acquisitions in its critical minerals sector was met with some resistance.
A week of contemplation later, and some players in the sector seem just as against the new measures.
It was on Thursday, 4 July, that Canada’s Industry Minister Francois-Philippe Champagne warned major deals — like Glencore’s (LSE:GLEN) recent multi-billion-dollar takeover of Teck Resources’ (NYSE:TECK) steelmaking coal division — would only be allowed in the future under “the most exceptional circumstances”.
Canada currently has a list of 31 minerals it considers critical for their use in modern technology, including uranium, tin, copper, lithium, rare earths, aluminium, and graphite.
Under the Investment Canada Act, the government can approve or reject mergers and acquisitions based on their net benefit to Canadians and the Canadian economy.
Over the past two years, Canada has taken a tougher stance on foreign investments in the critical minerals industry, specifically from China where it has asked investors to divest from Canadian companies due to their Chinese involvement.
Mining.com.au spoke with two junior explorers operating in Canada’s critical minerals sector, who offer their insights on the new restrictions, as well as their predictions going forward.
On heightened M&A scrutiny
Clean Air Metals (TSX-V:AIR) is primarily a platinum and palladium explorer. Based in Toronto, the company operates the Thunder Bay North Project in Ontario which, according to a May 2023 release, contains 1.2 million ounces of platinum and palladium, 57,500 tonnes of copper, and 34,300 tonnes of nickel.
In response to questions sent by Mining.com.au, Clean Air Metals CEO Mike Garbutt acknowledges that dealmaking oversight is necessary, as long as it fosters productivity.
“I believe that there should be some oversight and review of M&As involving foreign enterprises to ensure any transaction is in the best interest of Canadian entities,” Garbutt says.
“However, the government needs to also create an environment where Canadian mining companies can thrive and compete on a global scale.”
Power Nickel (TSX-V:PNPN), meanwhile, is focusing on the Nisk property in Québec, as well as others in British Columbia and Chile. The company is looking to expand historical high-grade nickel-copper-PGE mineralisation at Nisk with a series of drilling campaigns.
Power Nickel CEO Terry Lynch describes the new restrictions as a “classic government move after (the) ship has sailed”.
“I think the market over-reacted. All countries review deals of this size to ensure their interests are protected,” he tells Mining.com.au.
“Is it a good thing? I am a true believer in capitalism, so not a big fan of big brother and regulations and impediments. However, we need a balanced playing field and we don’t have that internationally, so in this respect governments have to take action.”
On the broader market implications
What will be difficult to ascertain, at least for now, are the broader market implications. Perhaps a sign of that challenge, perspectives so far seem mixed.
Garbutt, for example, sees valuations dropping as Canadian companies find it more difficult to compete on the global stage.
“When heightened scrutiny becomes protectionism, it stifles economic growth,” he says.
“I really don’t see an abundance of Canada-based capital being ready to deploy on critical minerals projects, so I ask where the significant investment is going to come from without a large portion coming from foreign investment. Couple this announcement with the recent capital gains tax changes in Canada, and you can see investment in the sector drying up in an accelerated fashion.”
Lynch, however, seems less concerned, even optimistic.
“Honestly, this government and its view will likely not matter in 18 months,” he says.
“Investors will suffer in the short-term, but Canada’s great copper companies are world-class. It’s a hell of a buying opportunity and I expect them to rebound from this over-reaction.”
On tension with China
Tension between China and the west is certainly nothing new. But with geopolitical uncertainty continuing to gather pace around the world, are the M&A restrictions reflective of even greater pressure?
“Unfortunately, it appears so,” Garbutt says.
“There is not an economic basis for this action. Capital flows in mining are liquid and the investment will simply go elsewhere, and Canadian enterprises will struggle to compete.”
Once again, Lynch is more reserved: “Yes and no,” is his assessment.
“It is topical to go after China now, or Russia,” he adds.
“But the real question is, can we invest in their companies and take them over? In China, that would be no. In Russia, obviously no one would do that today, but before this I believe it would have been okay.”
What is the Canadian Government saying?
In his statement on 4 July, Industry Minister Champagne stressed the need for greater clarity with respect to foreign capital doing the rounds in Canada’s mining sector, particularly when it comes to major Canada-based firms involved in critical minerals.
“Foreign capital will continue to play an important role in our industry. However, Canadians cannot ignore that we are in a world of geopolitical competition, with critical minerals at the very core of advanced industrial and defence policies,” Champagne warned.
“Canada welcomes foreign investment and recognises how important it is, particularly for small Canadian firms to advance exploration and site development efforts. In this light, the Government must balance protecting Canada’s strategic interests while supporting the development of Canada’s resources.”
Champagne also noted that such a “high bar” is reflective of the strategic importance of Canada’s critical minerals sector, but offered no details about how exactly that high bar might look.
A spokesperson for Champagne’s office responds to questions from Mining.com.au, if only to reiterate the same “clear signal”.
“Through the statement released on July 4, the government is sending a clear signal about how net benefit reviews under the Investment Canada Act will be conducted when it comes to important Canadian mining companies engaged in significant critical minerals operations.
“Such transactions will only be found of net benefit in the most exceptional of circumstances, on a case-by-case basis.”
Write to Oliver Gray at Mining.com.au
Images: iStock, Twitter (@FP_Champagne)
