Foreign investment in the Canadian critical minerals sector: recent developments signal higher bar for approvals

September 2024 | EXPERT BRIEFING | MERGERS & ACQUISITIONS

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Given the importance of the Canadian mining sector to the national economy, it is not surprising that proposed foreign acquisitions of Canadian minerals companies have figured prominently in the history of foreign investment reviews under the Investment Canada Act (ICA). Indeed, the first acquisition blocked by the federal government under the ICA involved BHP’s proposed takeover of Potash Corporation of Saskatchewan in 2010.

The sensitivities surrounding foreign investments in the Canadian mining sector have heightened even further recently with the Canadian government’s determination to safeguard Canada’s critical minerals supply chain, especially from investments by foreign state-owned enterprises (SOEs) associated with countries considered to be ‘hostile’ to Canada’s national interests. The Canadian government currently considers 34 different minerals to be critical minerals.

The Canadian government recently reaffirmed the enhanced degree of scrutiny applicable to foreign investments in the Canadian critical minerals sector with the release of a ‘Statement on Net Benefit Reviews of Canadian Critical Minerals Companies’ (Net Benefit Statement) on 4 July 2024.

The Net Benefit Statement toughens the standard for ‘net benefit approvals’ of certain foreign investments in Canadian critical minerals companies by providing that approval will only be granted in “the most exceptional of circumstances” to acquisitions of “significant” Canadian critical minerals companies that are subject to ‘net benefit’ review under the ICA.

Net benefit review under the ICA

Pursuant to the ICA’s net benefit review process, a non-Canadian proposing to acquire control of a Canadian business (including a business in Canada owned by a foreign entity), and whose acquisition exceeds certain thresholds, must satisfy the Canadian government that its investment will be of net benefit to Canada.

Although the ICA sets out various factors to be considered in this regard, the decision is largely discretionary and will depend on the type and quality of commitments that the non-Canadian investor is prepared to provide the Canadian government with respect to the conduct of the Canadian business post-investment.

Typical undertakings relate to the role of Canadian management, employment of Canadians and investments in the Canadian business, such as for capital expenditures and research and development.

The Net Benefit Statement

After some initial hesitancy, the Canadian government has become a full-throated advocate of the US-led effort to protect the critical minerals value chain from Chinese domination.

This objective is most clearly stated in the government’s Critical Minerals Policy of 2022, which focuses on proposed investments by SOEs in the Canadian critical minerals sector, especially those from jurisdictions that are considered ‘hostile’ to Canadian interests.

The Critical Minerals Policy states emphatically that Canada’s critical minerals industry is a strategic asset that is central to ensuring Canada’s future prosperity. In terms of the review of proposed foreign acquisitions in this sector by SOEs, the Critical Minerals Policy states as follows with respect to the two prongs of ICA review (net benefit and national security).

Net benefit review. Potential acquisitions of control of a Canadian business involving critical minerals by a foreign SOE will be granted net benefit approval only “on an exceptional basis”.

National security review. The participation of a foreign SOE in an investment involving a Canadian entity operating in the critical minerals sector will support a finding that there are reasonable grounds to believe that the investment could be injurious to Canada’s national security.

With the issuance of the Net Benefit Statement two years later in July 2024, the Canadian government has now doubled down on its commitment to subject foreign investments in the critical minerals sector to tough scrutiny. According to the statement, any foreign investment requiring net benefit approval that involves “important Canadian mining companies engaged in significant critical minerals operations…will only be found of net benefit in the most exceptional of circumstances”.

A few distinctions from the Critical Minerals Policy are noticeable immediately: (i) unlike the Critical Minerals Policy, the Net Benefit Statement is meant to apply to all foreign investors, and is not limited to SOEs; (ii) while there is no limit on the type of investor, the application of the statement is limited to proposed acquisitions of important Canadian mining companies engaged in significant critical minerals operations; and (iii) for those investments that are caught, the threshold for net benefit approval has been changed from approval only “on an exceptional basis” to approval only “in the most exceptional of circumstances”.

According to the government’s announcement, the Net Benefit Statement is meant to offer greater clarity about its views with respect to foreign capital in the critical minerals sector. However, the statement actually raises several questions about its intended scope of application, as outlined below.

Will the Net Benefit Statement really be applied equally to all foreign investors? On its face, the Net Benefit Statement is meant to cover all foreign investments in the critical minerals sector that are subject to net benefit review, regardless of whether the investor is an SOE and also regardless of the investor’s jurisdiction of origin.

However, based on the government’s approach to national security reviews, it seems reasonable to expect that the bar for net benefit approval will be relatively lower for investors from Canada’s close trading partners compared with those from less aligned countries.

What is meant by “important… mining companies engaged in significant critical minerals operations”? There is no explanation of how the Canadian government will assess what constitutes an “important” mining company or a “significant” critical minerals operation. The statement also refers to the intention to capture investments in “large Canadian headquartered firms engaged in critical minerals”, but this formulation is not any more specific.

In a briefing following the issuance of the statement, Investment Canada officials used yet another formulation, saying that the statement is meant to apply to investments in ‘core’ critical mineral assets, suggesting, for example, that acquisitions of early stage exploration companies would not be caught by the statement. Another possibility is that the statement also will not apply to investments in companies that largely operate non-critical mineral mines but may have some minor assets in the critical minerals space.

When is a target company ‘Canadian’ for these purposes? Yet another question is what does the government mean by ‘Canadian’ in this context? The Investment Canada briefing confirmed that a Canadian company with limited or no critical mineral operations in Canada but with critical mineral mines or operations outside Canada could still fall within the scope of the statement and face extensive review.

Similarly, the briefing suggested that the government could consider a company to be ‘Canadian’ so long as it had some meaningful management operations in Canada, even if management activities were not exclusively carried out in Canada. This is consistent with the government’s recent approach to national security reviews of critical minerals investments, as transactions have been blocked on national security grounds even though all operating assets were outside of Canada.

What are “the most exceptional of circumstances” that could lead to approval? Although the Net Benefit Statement establishes a new – and higher – standard of review, it still does not impose an outright ban on net benefit approvals of foreign acquisitions of control in the critical minerals sector. The Investment Canada briefing also confirmed that the Canadian government will continue to treat each review on a case by case basis.

In other words, a window of opportunity still exists. That said, it can be expected that the government will now require very persuasive evidence that the investment is likely to promote the government’s goal of protecting and growing Canadian strategic leadership in the development of critical minerals value chains. According to government officials at the briefing, the degree of competition and existing concentration of foreign ownership in the sector will also be relevant considerations.

Implications

At least in the near term, and notwithstanding its objectives, uncertainties associated with the Net Benefit Statement risk having a negative effect on domestic growth in the Canadian critical minerals sector.

Indeed, one of the criticisms of the 2022 Critical Minerals Policy is that it has deprived the sector of much needed foreign investment and limited exit options for Canadian critical minerals companies. It is not surprising, then, that reports continue of Canadian critical minerals companies taking steps to redomicile to jurisdictions without restrictions on raising capital from the Chinese (or others).

Contrary to this negative view, one could argue that the Net Benefit Statement is unlikely to have that major of an impact because net benefit reviews are relatively rare (there were only six last year in total), given that they only apply to acquisitions of control and the thresholds for review are generally high (for most private sector investors, the threshold is at least C$1.326bn in enterprise value of the Canadian business, while the threshold for SOEs is C$528m in asset value). Thus, for example, the Net Benefit Statement will not apply to minority investments or to the vast majority of acquisitions of control that fall below the net benefit review thresholds.

However, even here, a caveat exists. Recent amendments to the ICA will authorise the Canadian government to order the net benefit review of investments that fall below the relevant thresholds in cases where the investor is an SOE from a country without a trade agreement with Canada (such as China) and where the government is “of the opinion that a review of the investment is in the public interest”.

Accordingly, the government could use this public interest ‘call in’ power to order the net benefit review of an investment in the critical minerals sector (an SOE would have to be involved) even if the relevant threshold is not exceeded. Presumably the Net Benefit Statement could apply in such circumstances and approval would only be available “in the most exceptional of circumstances”.

All of which is to say that challenging times remain ahead.

Mark Katz is a partner at Davies Ward Phillips & Vineberg LLP. He can be contacted on +1 (416) 863 5578 or by email: mkatz@dwpv.com.

Mark Katz

Davies Ward Phillips & Vineberg LLP