Sunday, August 14, 2022

China has encroached on Canada’s critical minerals industry, with almost no obstruction from Trudeau and Ottawa

China has encroached on Canada’s critical minerals industry, with almost no obstruction from Trudeau and Ottawa

For the past two decades, China has built up a powerful position in Canada’s critical minerals and mining sector, with little oversight from Ottawa

Aug 14 2022

The Tanco Bernic Lake mine in Jahre years ago, Sinomine Resource Group Co., a Chinese company, quietly bought the Tanco mine in Manitoba. At the time, Tanco was one of the world’s few sources of the critical mineral cesium, a key input in atomic clocks and radiation detectors. The mine had previously produced lithium, a battery metal used in electric cars.

Even though Tanco was owned by an American chemicals company, Cabot Corp., Canada’s federal government had the authority to block the acquisition on national security grounds. But far from blocking the deal, Ottawa gladly let it go.

Earlier this year, under its new Chinese ownership, the Tanco mine started producing lithium and shipping it back to China, where it is fed into the country’s massive domestic electric car industry. Tanco is now the only operating lithium mine in Canada, and Sinomine has plans to expand production over the next few years.

“It’s known for having the world’s highest grade lithium. The grade is so high that nobody had the technology to process it,” said mining investor and activist shareholder Peter Clausi. “And the morons let it go.”

Mining is one of the most capital-intensive industries on the planet, and so historically it made sense for Canadian miners to turn to China as a source of funding. But in recent years China has emerged as a clear national security threat.

Although Ottawa has made clear that it does not want to be beholden to a hostile foreign power for critical minerals such as lithium, so far there has been little in the way of action from the federal government to prevent that from happening.

Parliamentary hearing witnesses call for more scrutiny over China in Canadian critical minerals after state-owned Zijin Mining buys Canada’s Neo Lithium

Mr. Clausi is one of several mining industry observers who have watched in horror as China has encroached on the Canadian critical minerals industry over the past 15 years with almost no obstruction.

“Where was the review?” said Bruce Downing, who co-invented a method of extracting cesium.

Lauren Quist, who works in the natural resources industry and is a long-time resident of the small Ontario forestry town of Hearst, is also aghast. “Many folks I talk to here in Northern Ontario are aware of our vulnerability to Chinese businesses buying up properties, and especially mines,” she said.

Ms. Quist noted that Sinomine had secured an offtake agreement earlier this year, guaranteeing it all the lithium, cesium and tantalum produced from Power Metals Corp.’s Case Lake critical minerals property, near Kirkland Lake, Ont. “It is the next thing to ownership, without all the messy headlines,” she said.

Xinwangda Electric Vehicle Battery Co. Ltd makes lithium batteries for electric cars and other uses, in Nanjing, China. China is among the world’s biggest miners of lithium, with control of about two-thirds of the refining process globally.

Messy headlines have been plentiful this year, after the federal government approved the sale of Canadian lithium development company Neo Lithium Corp. to Chinese state-owned Zijin Mining Group Ltd. The government’s decision not to order an advanced security screening drew severe criticism, culminating in parliamentary hearings that put the Industry Minister, François-Philippe Champagne, on the defensive.

In those hearings, Mr. Champagne justified the deal by saying Canada was unlikely to benefit from lithium produced from Neo’s project, because it was located far away, in Argentina. But at the moment, experts say, Canada can’t afford to turn its nose up at any lithium projects, because this country is a bit player in the industry.

China, meanwhile, is among the world’s biggest miners of the silvery white, superlight metal, with control of about two-thirds of the refining process globally.

Industry Minister Francois-Philippe Champagne said the takeover of a Canadian lithium mining company by a Chinese state-owned company earlier this year was subjected to a thorough national security review – contrary to what some experts and Conservative politicians have asserted.PATRICK DOYLE/THE CANADIAN PRESS

Chinese lithium manufacturer Ganfeng Lithium Co. Ltd. is the biggest shareholder in Canada’s largest publicly traded lithium miner, Lithium Americas Corp., and has a major stake in its Cauchari-Olaroz lithium project in Argentina.

Canada has similar also-ran status when it comes to cobalt. This country produces only small amounts of the vital battery metal input, while China controls about 70 per cent of the market. China is even more dominant in graphite, with an 80-per-cent lock on the market. And while Canada is a major miner of nickel, another battery metal, it has no refineries that can process it for the battery industry.

“How can Canada build a lithium supply chain, or any other critical mineral for that matter, when it allows the assets of Canadian companies to be acquired by a country that seeks to cement its dominance in this sector?” Jeffrey Kucharski, an adjunct professor at Royal Roads University and former assistant deputy minister of Alberta’s Department of Energy, said during the parliamentary hearings earlier this year.

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But it’s not only the critical minerals sector where China is firmly ensconced. Many of Canada’s biggest gold and base metals mining companies – including Barrick Gold Corp., Teck Resources Ltd., First Quantum Minerals Ltd. and Ivanhoe Mines Corp. – have significant Chinese ownership, joint ventures with Chinese companies, and, in most cases, Chinese representation on their boards of directors.

“The creeping of Chinese interests into the Canadian scene is a big deal,” said Bob van Leeuwen, president of van Leeuwen Engineering Ltd., who has assisted with university research into 3-D printing with titanium. “What China is trying to do is ensure the supply of everything it needs all over the world.”

After decades of laissez faire, Ottawa seems to have woken up to the possibility that Chinese encroachment in Canada’s mining sector could give Beijing a powerful negotiating lever.

“Everybody’s looking at what’s happened to Germany in the context of its dependence for oil and gas on Russia,” Jonathan Wilkinson, the federal Natural Resources Minister, said in a June interview. “Nobody wants to be in that position with respect to China and Russia for critical minerals.”

Ottawa, he said, “will need to be very thoughtful going forward about what we are willing to allow.” He said both acquisitions and offtake agreements will be given greater scrutiny.

“Canada needs to ensure that it is protecting itself in an area that is clearly strategic,” he said.

Visitors attend the Prospectors and Developers Association of Canada show on Mar. 2, 2020.

But the evidence suggests that, up until a short time ago, critical minerals weren’t on politicians’ radar. Only in the past 18 months has Canada started moving with any kind of urgency. The government came up with an official critical minerals list last year, and this year committed billions of dollars in funding to jump-start the industry.

“The real problem is that until very recently nobody cared about critical minerals,” said Jack Lifton, a United States-based consultant to the critical minerals and rare-earth metals industry. “They were exotica and there weren’t any shortages.”

Canada now finds itself in a fragile spot, experts say, because of a lack of foresight, inadequate planning and questionable judgment in allowing foreign investment in domestic assets.

In contrast, China’s entry into the Canadian critical minerals sector came about through a carefully planned strategy, executed over decades. Since the early 2000s, China has directed its state-owned enterprises to invest abroad as a way of securing long-term supplies of oil, natural gas and critical minerals. A key aim of its “Made in China 2025″ policy is to wean itself off reliance on other countries by buying as many foreign assets as possible.

In the past 20 years, China has invested about $90-billion in Canada alone as part of that program. Beijing supports its state-owned enterprises by providing subsidies, access to cheap capital and tax breaks that are orders of magnitude greater than those offered by Western governments.

That disparity in government support is a major reason Canada has lost its footing in critical minerals industries it used to lead. In the 1990s, Canada had a thriving magnesium industry anchored by Noranda Inc. The company was known as an innovator, particularly in the automotive sector. But in the early 2000s China flooded the global market with cheap magnesium, forcing Noranda out of the industry.

Guy Saint-Jacques, Canada's former ambassador to China, says there is no level playing field for foreign companies in China.JASON FRANSON/THE CANADIAN PRESS

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While Canada has mostly welcomed inbound Chinese investment, there has been little or no reciprocity.

“There’s no level playing field for foreign companies in China, and many sectors remain closed to them, or access is similarly limited,” Guy Saint-Jacques, Canada’s former ambassador to China, said in a Canadian parliamentary hearing earlier this year. “China does not play by international trade rules.”

China has routinely used its dominant position in critical minerals to exert leverage over other countries. In 2010, it temporarily halted rare-earth metals exports to Japan as the two Asian countries sparred over disputed territories. The ensuing metals supply shortfall caused short-term price spikes. The year after the 2018 arrest of Huawei chief financial officer Meng Wanzhou at Vancouver airport, Canada lost $4.5-billion in exports to China.

While Canadian politicians claim to want to scrutinize foreign takeovers, over the past five years fewer than 1 per cent have been subject to in-depth security reviews under section 25.3 of the National Security Act, and almost none were blocked. Last year, out of 826 foreign investment filings, Canada conducted only 11 section 25.3 reviews. The government blocked only one of those transactions: Chinese state-owned Shandong Gold Mining Co. Ltd.’s attempted takeover of Canadian gold mining company TMAC Resources Inc.

Wesley Wark, a senior fellow at the Centre for International Governance Innovation, said far more transactions need to be subject to in-depth security reviews, and that every foreign state-owned enterprise, or SOE, attempting to acquire Canadian critical mineral assets should automatically be subject to them. “Especially if it is a SOE from a country regarded as adversarial to Canada’s national security interests.”

Canada could look for guidance to Australia, another resource-rich country whose significant deposits of critical minerals have attracted interest from China. It has taken a far tougher stand than Canada on proposed Chinese investments.

A conveyor belt carries chunks of Raw cobalt after a first transformation at a plant in Lubumbashi before being exported, mainly to China, to be refined.

Over the past few years, the Australian government has rejected several transactions on national security grounds, including a proposed US$20-million investment in Australian rare earths company Northern Minerals Ltd. The prospective buyer was Baogang Group Investment, a Chinese state-owned steel company.

Australia also rejected a $14.1-million investment by Chinese lithium chemical producer Yibin Tianyi Lithium. The company was attempting to buy a stake in AVZ Minerals, which has a project in the Democratic Republic of the Congo. The Australians mandated that YTL reduce its investment to $10.7-million.

Last year, Australia toughened its oversight even more, introducing a new “last resort” power, under which the government has the authority to review previously approved transactions where national security risks emerge after the fact. The government can now roll back the clock and impose new requirements on deals that have already been approved.

Canada also has to think about controls on minerals that may not be as in vogue as battery metals, but that are still vitally important to the economy, mining experts say. For example, helium – which is used in rocket propulsion, meteorology and cryogenics – is an element Canada produces but does not keep a tight leash on.

“We have miners out west that are currently continuing to drill holes to tap into helium resources, and it’s immediately being snapped up by buyers outside of the country. We need to control that,” Mr. van Leeuwen said.

Sand containing titanium is shown at the Professional Developers Association of Canada convention and trade show in March 2020. The titanium is found on beaches and don't require heavy mining to recover it.FRED LUM/THE GLOBE AND MAIL

Titanium, a lightweight but extremely strong metal used in passenger planes and fighter jets, is another example. Canada is a major miner of titanium, but doesn’t keep track of where the strategic military material ends up. It’s a very different story in the U.S., where the State Department obsessively tracks the metal’s movement.

Mr. van Leeuwen recalled working at a machining shop in Kitchener, Ont., that made titanium landing gear for a U.S. fighter jet. The metal came in from the U.S. as a 500 pound forging. The final machined product weighed about 75 pounds, and the rest of the titanium was turned into chips.

“The fact that titanium is considered a strategic material by the U.S. meant that the customer demanded they account for every single pound of chips, as well as the finished part, and ship everything back to them, chips and the final part,” Mr. Van Leeuwen said. “We don’t do that kind of thing here.”

The truth about Canada’s relationship with China – one that few executives will voice publicly – is that Canada needs China. When the balance sheets of Canada’s mining companies go awry, when billions of dollars are needed to build a high-risk project or when a heavy is needed to negotiate with a despotic government abroad, China is the investor of last resort.

In 2009, Chinese state-owned China Investment Corp. bailed out Teck Resources Ltd. to the tune of $1.74-billion when the coal miner’s debt was spiralling of control. A few years later, when Barrick Gold Corp. needed to sell billions of dollars worth of assets to pay down its titanic debt, the big Canadian gold miner turned to Shandong Gold and Zijin Mining Group. When Canadian mining financier Robert Friedland needed to raise billions to build a copper mine in the Democratic Republic of Congo, an extremely risky mining jurisdiction, he tapped Zijin, as well as China’s CITIC Metal Co., Ltd.

In 2009, China Investment Corp. bailed out Teck Resources Ltd. to the tune of $1.74-billion when the coal miner’s debt was spiralling of control.

“He couldn’t get it financed in the West,” said Alex Tsukernik, chief executive of Nova Royalty Corp. “The Chinese will end up controlling it. That’s the issue.”

Similarly, when the Tanco mine was for sale a few years ago, nobody wanted it. It took Sinomine to buy it, take on the risk and invest in it. Were it not for China, chances are the 110 employees that work there, 90 per cent of whom are Canadians, would be out of work. Frank Wang, general manager and president of Sinomine, is well aware that in the current political climate there is little or no chance the Canadian government would have allowed the takeover to happen.

“Probably we wouldn’t own Tanco, honestly, if the transaction was happening currently,” he said.

Owing to mining’s inherent riskiness, its extremely high capital expenditure requirements and the decade-plus timelines between mineral discoveries and mine production, nobody is sure whether the Canadian mining industry can thrive without China. Few investors from other parts of the world have the same deep pockets and patience.

The downside of more protectionist action against China is that it would likely put some Canadian mining companies in a bind – particularly those that already have Chinese owners.

This dynamic is already playing out. Lithium Americas needs a partner for its Thacker Pass lithium project in the U.S. But its CEO, Jonathan Evans, said in an interview earlier this year that turning to the company’s existing Chinese investors is not an option. He said there is no way the U.S. would allow it, given the political climate.

The days of Canadian miners cozying up to China may be over. That will leave them with a gigantic capital hole to fill, and few other obvious takers. In a world where mineral deposits are found in increasingly remote regions that demand gargantuan capital expenditure, and without access to the Chinese cash register, Canadian companies may be forced to scale back their ambitions.

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