The Canadian government recently blocked the proposed acquisition by Shandong Gold (Shandong) of Canadian gold-mining company TMAC Resources (TMAC) on national security grounds.
What you need to know
- This is the first time that a Chinese investment in Canada's mining sector has been formally blocked under the Investment Canada Act (ICA).
- The decision is a reminder that national security reviews are fact- and context-specific. It also highlights the complex and evolving nature of the national security review regime and re-enforces the need for up-front and broad risk assessment early in the transaction planning process.
The ICA national security review regime
Under the ICA, the Canadian government can review virtually any foreign investment by a non-Canadian to determine whether it could be injurious to Canada's national security having regard to characteristics of the foreign investor (including the potential for government influence) and the nature of the target's assets or businesses. The government will also consider, among other things, whether the investment would increase, create or enhance a risk of espionage or domestic interference. In the case of critical North American defence, infrastructure or technology matters, the views of the U.S. Government and other Five Eyes allies will also be an important consideration.
The government has broad powers to take any measures it considers advisable to protect national security, including: directing the investor not to implement the investment, imposing conditions on the investment or, where the investment has already been completed, requiring divestiture.
The ICA national security review process can take up to 200 days or longer with consent of the investor.
The proposed investment
On May 8, 2020, Shandong and TMAC announced they had entered into an agreement pursuant to which Shandong would have acquired all of TMAC's outstanding shares for approximately C$207 million. TMAC operates the Hope Bay property in Nunavut and began producing gold in 2017 at the Doris mine. TMAC announced on October 15, 2020 that the Canadian government ordered a formal national security review under the ICA and on November 27, 2020 that this review was subsequently extended for a 45-day period. Based on these timelines, it appears that the national security review process took close to 200 days.
Past Chinese investment in the Canadian mining sector
Historically, there have been many successfully completed acquisitions of and investments in Canadian mining companies by Chinese entities, including state-owned entities. The TMAC transaction is the first such transaction that has been blocked by the Canadian government on national security grounds.
In contrast, Chinese investments that have been blocked or required divestitures under the national security regime have involved other business sectors: critical infrastructure and advanced military laser technology.
Several factors are reported to have influenced the decision to block the Shandong/TMAC transaction, including substantive national security concerns arising from an investment by a Chinese state-owned enterprise in a business geographically proximate to sensitive military and strategic assets in the Arctic and the current challenges in the Canada-China relationship. There are also reports that the U.S. Government had concerns with the transaction.
Although Chinese investments in Canada and other western countries are likely to continue to face significant scrutiny, it is also clear that investments can continue to be approved. For example, transactions involving assets located outside Canada are generally likely to be less sensitive from a Canadian foreign investment review perspective. Earlier this year, for example, China-based Zijin Mining Group acquired Guyana Goldfields, a Canadian-based gold producer focused on the exploration, development and operation of gold deposits in South America. Evidently, potential investments continue to be assessed by Canadian authorities on a case-by-case basis.
When considering potential investments where national security issues are expected to arise, investors and Canadian businesses alike are encouraged to engage counsel and government relations advisors as early as possible in the transaction planning process given the complex and evolving nature of the national security review regime under the ICA.
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