Ottawa signals tougher stance on Chinese investments in critical minerals

The federal government has ordered three Chinese companies to divest recently acquired interests in critical mineral assets. The statement confirming the order comes on the heels of a new policy on investments in the critical minerals sector by foreign state-owned or state-influenced enterprises (SOEs).

What you need to know

• The recent government crackdown reflects a tougher stance on investments in the critical minerals sector, especially for Chinese investors. Until recently, minority investments, investments in small or early-stage mining companies or those with largely foreign operations were likely to be approved.
• The new developments suggest investments by some investors into the critical minerals sector may now be difficult or impossible.
• Outside of the critical minerals sector, SOE investments from countries such as China in Canadian mining companies are likely to receive a more nuanced substantive assessment—but most will likely be approved.

Background

The policy and statement affirm that SOE investments in Canada’s critical minerals sectors will be heavily scrutinized (and potentially blocked) on national security grounds.

The focus on critical minerals and critical mineral supply chains is not new. This was emphasized in national security guidance released in March 2021. Canada also maintains a list of 31 minerals considered critical to its and its allies’ sustainable economic security.

As for the three divestitures, the Canadian target businesses are all relatively small and engaged in exploration and development activities. In each case, the investment comprised a minority stake of less than 20%.

One case involved a cesium deposit located in Canada. Cesium is a rare metal used for a number of specialty applications including radioisotopes. The other two cases involved lithium deposits in South America and Canada. Lithium is an important input for the battery ecosystem. In all three cases, the investor entities appear to be connected to the Chinese state.

What the critical minerals crackdown means in practice

Although the policy is investor-neutral, it is clearly aimed at a subset of SOE investors, namely investors from China. SOE investments from allied countries or regions, such as the United States, the U.K., Australia, New Zealand, Western Europe and Japan, are likely to receive approval in the ordinary course.

For national security reviews, SOEs from countries such as China seeking to invest (whether on a control or minority basis) in Canadian mining companies operating in critical mineral sectors should expect a lengthy review and the real possibility that investments will be rejected.

More broadly, SOEs from countries such as China seeking to invest in Canadian mining companies outside of the critical minerals sector are likely to be subject to a more nuanced substantive assessment—but we expect most to be approved unless they involve the acquisition of major Canadian businesses.

Foreign investors wishing to invest in Canada’s critical minerals sectors, especially SOEs and similar entities from China, are encouraged to engage counsel early on in the transaction planning process given the complex and evolving nature of reviews under the Investment Canada Act. Canadian target businesses are also advised to protect themselves by reaching out to counsel at the earliest stages of proposed transactions.