The federal government says it is reviewing a Chinese mining company’s proposed $207 million buyout of a struggling gold mining company in Nunavut under the Investment Canada Act, as a high-profile case against a Chinese executive in Canada reaches a crucial point.
Shandong Gold Mining Co. Ltd., a Chinese state-owned enterprise that’s listed on the Shanghai Stock Exchange, announced earlier this month it would purchase Toronto-based TMAC Resources Inc., which operates a mine near Cambridge Bay that has been beset by operational challenges.
Ottawa declined to provide any details on why it is scrutinizing the TMAC buyout, but lawyers who practise in this area said the government can easily invoke national security concerns amid rising political tensions with China. Indeed, on April 18, the government said that as a result of the coronavirus pandemic, it would subject all investments by state-owned enterprises, such as Shandong, to “enhanced scrutiny.”
The review comes amid rising tensions between Canada and China, with the British Columbia Supreme Court expected to release a key decision on Wednesday in the extradition case of telecom giant Huawei Technologies Co., Ltd. executive Meng Wanzhou. Meng was arrested at Vancouver’s airport in December 2018 after U.S. prosecutors charged her with violating sanctions against Iran. China has pressed Canada for her release, and she denies the charges. The Supreme Court decision could lead to her release, or could start a new round of legal arguments.
China has also retaliated by imprisoning two Canadians under suspicious circumstances.
“I think that what you’re seeing is a very interesting mix of security considerations and political considerations,” said Andrew House, counsel at law firm Fasken LLP, who served as the chief of staff to the Ministers of Public Safety and Emergency Preparedness under former prime minister Stephen Harper’s government.
House said that the Investment Canada Act allows the government to review transactions for national security reasons, without having to disclose its specific reasons.
Lawyers note that national security has no legal definition, giving the government broad authority in this area.
“National security is not a defined term in the law,” said Toronto-based Daniel Edmonstone, a partner at McMillan LLP and a member of the competition group, adding, “It means exactly what we say — neither more nor less. It’s a very flexible concept.”
There is global wariness toward Chinese investments of vulnerable companies in the West. In April, the European Union’s competition chief Margrethe Vestager told the Financial Times that member countries should buy stakes in companies to counter the threat of Chinese takeovers.
“It’s very important that one is aware that there is a real risk that businesses that are vulnerable can be the object of a takeover,” she added. “The situation now really underlines the need so we work really intensively,” she told the FT.
There is a real risk that businesses that are vulnerable can be the object of a takeoverEU competition chief Margrethe Vestager
The location of TMAC’s mine in the Arctic, which is seen as increasingly important from a military and geopolitical perspective, could also be relevant to a national security review, said Edmonstone.
But the political sensitivity of a Chinese company buying a Canadian company while its share price is battered, could also play a role in triggering the review, he said.
TMAC, which started producing gold at its mine in Nunavut in 2017, never hit peak capacity as a result of problems with its mill. Despite US$1.5 billion in investment over the years, its costs were at the high end of the industry norm, at around US$1,100 per ounce in 2019, and it did not produced as much gold as expected.
The company has commissioned several reports about its Doris mine and expansive land package in western Nunavut, known as Hope Bay, saying it would take hundreds of millions of dollars of investment to revitalize the mine and operations.
In January, the company announced it was exploring strategic options, but its value had already declined markedly over the past year, with its share price down 75 per cent since July at $1.55.
Jason Neal, chief executive of TMAC, told the Financial Post on Tuesday that the company began discussions with Shandong Gold late last year, and was “impressed” with the company’s financial and technical capacity.
“The transaction announced earlier this month had nothing to do with COVID-19,” Neal said in a statement, “and everything to do with delivering long-term sustainable operation at Hope Bay, which measures extremely well against the Investment Canada net benefit test.”
The net benefits test under the Investment Canada Act looks at whether a deal is likely to increase employment in Canada, as well as its economic and other impacts.
Peter Glossop, a foreign investment lawyer and a Osler, Hoskin & Harcourt LLP partner, said that in the wake of the coronavirus pandemic, which has devastated many Canadian companies’ share prices, the federal government has also started reviewing nearly every transaction on national security grounds.
Earlier this month, the Justice Department proposed draft legislation that would provide an additional 180 days for the federal government to review a foreign direct investment.
There is more tension around national security than there has been historicallyPeter Glossop, Osler, Hoskin & Harcourt
While a small overall percentage of deals — Glossop estimated less than one per cent — are flagged for national security review, he noted the number rose in the 2018-19 fiscal year to nine, up from four in each of the previous two years.
“There is more tension around national security than there has been historically,” he said.
But Fasken’s House said there could also be a political element to the current security concerns.
In the past, particularly in 2017, the federal Liberal government faced political blowback after it approved two acquisitions by Chinese companies.
In March of that year, the federal government allowed China’s O-Net Technologies to acquire Saint-Laurent, Que.-based ITF Technologies Inc., which produced laser technology with potential military applications.
Later that year, in June, it allowed China-based Hytera Communications Corp. to acquire Vancouver-based Norsat International Inc., a satellite technology company that had contracts with U.S. military.
“The Conservative opposition made hay for weeks every Question Period,” said House.
But the following year, the Liberal government blocked the $1.5 billion buyout of Canadian construction company Aecon Group Inc. to China’s state-owned CCCC International Holding Ltd, citing national security.
“There’s always been a great deal of politics happening in the background,” said House.