On July 4, 2024, the Canadian federal government reaffirmed its protective policy on foreign direct investment, announcing a new approach to the review of certain investments in Canada's critical minerals sector under the Investment Canada Act (the "ICA"), and attaching significant undertakings to the approval of the acquisition by Swiss-based Glencore Plc ("Glencore") of Teck Resources Ltd.'s ("Teck") steelmaking coal arm (the "Teck Transaction"). In a directive issued by Francois-Philippe Champagne, Canada's Minister of Innovation, Science and Industry, the Minister highlighted the importance of foreign investment in funding exploration and development efforts in the critical minerals industry, but also noted that the government must proactively protect the industry's strategic importance, as well as Canada's national security interests. The Minister's full statement can be found here.
The New Approach
The ICA permits the government to approve or reject proposed acquisitions of Canadian entities and assets in critical minerals sectors by foreign state-owned enterprises or private investors with close ties to foreign governments based on their "net benefit" to Canada. Whereas prior to July 4, 2024, the government's approach was to only approve such investments "on an exceptional basis," the Minister's statement signals a more restrictive approach to the review of certain investments going forward. The government will now set a high bar when assessing the net benefits of any deal involving critical minerals producers, such that foreign investments in large Canadian-based firms in the critical minerals sector will only be permitted "in the most exceptional of circumstances." However, it is unclear as to what constitutes the "most exceptional of circumstances." Notably, there appear to be two limits to the government's new approach:
- Non-Net Benefit Investments: The new approach will only apply to investments that qualify for "net benefit reviews." Net benefit reviews are usually only required where: (i) there is a direct acquisition of a Canadian firm with an enterprise value of at least $1.326 billion; (ii) the book value of the assets of a Canadian firm is at least $528 million, in cases where the investor is owned or influenced by a foreign state; or (iii) where the federal government orders a net benefit review in a transaction involving certain state-owned investors, or if a review would be in the public interest, regardless of value.
- Small and Medium-Sized Firms or Firms with Limited Critical Mineral Operations: Canadian firms with a smaller presence or limited activities in the critical minerals space may not be subject to the new approach, as the Minister's statement focused on acquisitions of "large Canadian-headquartered firms engaged in critical minerals operations" or "Canadian mining companies engaged in significant critical minerals operations."
Reactions and Reflections
The new approach has been met with mixed reaction by the critical minerals industry. Proponents of the new approach hold that it will better shield domestic companies, which have become appealing targets for takeover by large, foreign rivals in recent years. However, the new approach could be seen as an impediment to attracting investment from outside of Canada, to the detriment of the funding efforts of entities operating in this space, as it could limit the number of smaller mining companies that may seek to list their shares on a Canadian stock exchange. There is also considerable uncertainty with respect to the approach's reliance on the "most exceptional of circumstances" threshold. Historically, "exceptional circumstances" thresholds have had chilling effects on the investment climate of the time. Conversely, the government is confident that the new approach will not limit capital available to the critical minerals industry in general, as it is meant to affect only companies with large-scale production, not early-stage miners and explorers.
The approval of the Teck Transaction also highlights the government's view of the fundamental role of foreign capital in supporting the operations of Canadian businesses, but with an emphasis on protecting Canadian businesses in the critical minerals industry. The approval came following a year of attempts by Glencore to acquire Teck's entire operations by hostile takeover, before settling on a much narrower acquisition pursuant to substantially more stringent undertakings than those typically witnessed in the industry. To push the acquisition over the finish line, Glencore was forced to accept longer terms on its committed undertakings and to make stronger ESG-related promises. The government also took the unusual step of securing undertakings from Teck to reinvest a significant amount of the deal proceeds into copper mines. Without the support of the new approach, it could be argued that Teck would have been left vulnerable to continue to endure a battle that it did not have the resources to fight on its own. A full summary of the government's approval and the undertakings can be found here.
Based on recent events, it is clear that the government will subject foreign investment in the critical minerals space to greater scrutiny. By asserting, as the Minister writes, a "high bar" for qualifying investments to be found of net benefit to Canada, the Minister implies that select foreign investment, which would otherwise have been available to entities in the space, may be blocked. This, to some within the critical minerals industry, represents a tilt in the Minister's proclaimed "balancing" of the forces at play in favour of national policy, and at the expense of private enterprise. Only time will reveal whether the "most exceptional circumstances" approach is capable of considering the many interests at stake to routinely produce "most exceptional" outcomes for all involved.
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