National Post (National Edition)
NO GOLD FOR CHINA
OTTAWA INVOKES NATIONAL SECURITY TO BLOCK CHINESE TAKEOVER OF NUNAVUT MINE
Canada has blocked a Chinese state-owned mining company from purchasing a gold mine in Nunavut following a national security review, signalling a possible escalation of tensions between the two countries.
Shanghai-listed Shandong Gold Mining Co. Ltd had proposed to pay about $230 million not including debt to purchase Toronto-based TMAC Resources Inc., which in 2018 developed the gold mine in Hope Bay, Nunavut.
A spokesperson for Innovation, Science and Economic Development Canada declined to answer questions about why the deal was blocked, but provided a statement noting that all foreign investments are subject to review under the Investment Canada Act.
“Reviews are conducted on a caseby-case basis as part of a rigorous and evidence-based process,” the statement read. “Due to the confidentiality provisions of the Investment Canada Act, the government cannot comment further.”
TMAC, which had been searching for a buyer that could invest hundreds of millions of dollars to overcome operational challenges and is carrying growing debt, now faces an uncertain future.
“The one thing I would say is that in taking action, the government has definitely shown that what we have built in Nunavut, they see as important to Canada,” Jason Neal, chief executive of TMAC, told the National Post. “You know, that's a silver lining.”
But Neal added that he believes the government should be more supportive of companies that build infrastructure in Nunavut and other parts of the Arctic.
His company had announced a strategic review in January. Located in Nunavut, the company faced high operating costs because all its supplies need to be shipped by air or sea. These costs were exacerbated by a mill that never performed at the expected level, which led to lower gold recovery and production and difficulties with debt repayment.
“What's really been a fly in an ointment is the mill. It never worked well and it never met expectations,” said Barry Allan, an analyst with Laurentian Bank Securities who covers TMAC. “That's been the Achilles heel.”
In May, TMAC announced its deal with Shandong as anxiety in Canada about the coronavirus pandemic was reaching an initial peak, and much of the country remained shutdown.
In June, 97 per cent of TMAC's shareholders, including its two largest, both based in Colorado and that together control 53 per cent of the company, as well as Resource Capital Fund and Newmont Corp., the largest gold mining company in the world, voted in support of the sale.
In October, TMAC received notice the federal government had ordered a national security review.
The news of the sale came amid a backdrop of heightened tensions with China.
In December 2018, the RCMP arrested Meng Wanzhou, a permanent resident of Canada who is also chief financial officer of Chinese telecom giant Huawei Technologies Ltd, so she could be extradited to the U.S. Prosecutors there have accused her of violating Iran sanctions, as well as theft of trade secrets.
Not long after her arrest, in what Canada has interpreted as an act of retaliation, China arrested two Canadians on espionage charges: Michael Kovrig, an analyst with the International Crisis Group in Washington and former diplomat, and Michael Spavor, an entrepreneur who had been living near the North Korean border.
Gordon Houlden, director of the China Institute at the University of Alberta, said he sees the government's rejection of Shandong's purchase of TMAC as part of a trend toward less investment from China in Canada.
He downplayed the national security concerns about a Chinese state-owned company owning a gold mine in the Arctic, and said he believes a public backlash against China for the arrest of the `two Michaels' likely played a factor in the government decision.
“The public is furious about the `two Michaels,' spitting mad,” said Houlden.
“The idea that (the government) would approve anything right now is unlikely.”
According to a poll earlier this year by the Asia Pacific Foundation of Canada, a Vancouver-based non-profit, 75 per cent of Canadians oppose more Chinese investment in non-renewable resources here.
It's not the first time the government has blocked a Chinese takeover. In 2018, the federal government cited national security to block the $1.5-billion buyout of the construction and engineering firm Aecon Group Ltd by a Chinese state-owned firm.
Perhaps not surprisingly, Chinese investment in Canada has been declining, from $9.9 billion in 2017 to less than $2 billion so far in 2020, according to the China Institute's China-Canada Investment Tracker.
With regards to the purchase of TMAC, some security analysts questioned whether a Chinese company's control of its assets in the Arctic would pose a strategic risk. The assets include the gold mine and processing facilities, camps, power generation, satellite communication as well as two airstrips and a tidewater port — and boats can dock several kilometres off the coast and unload onto a barge.
“I think that all got a bit exaggerated,” said Houlden, about the security risk of TMAC's assets, noting that he is concerned about Chinese investment in Canadian technology or defence companies for their intellectual property.
The opening of the Northwest Passage and a longer shipping season has created record traffic through Canadian Arctic waters, which some analysts say could upend global trade routes as previously frozen water becomes more navigable.
Still, Chinese investment in the Canadian Arctic is growing. Another stateowned Chinese mining company, MMG Resources Inc., controls zinc, lead and copper deposits in western Nunavut, although construction to build mines does not appear to be imminent; and Chinese state-owned companies have invested in companies such as Sabina Gold and Silver Corp., which is developing a mine in Nunavut.
This fall, TMAC faced an outbreak of COVID-19 at its facilities, and it has been operating at reduced capacity, producing 18,000 ounces of gold in the third quarter compared to 38,000 during the same period last year. Although it has $71.5 million in cash, much of that will go toward debt, which Sprott Lenders had placed on hold while the sale was pending.
In addition, the company released a pre-feasibility study that suggested it would take around $600 million to fix some of the operational challenges.
TMAC's Neal declined to comment on what would happen next to TMAC. The company has roughly $170 million in debt due in June, which it has said it cannot pay.
While the company faces challenges, there are some upsides to the deal falling through, says Laurentian Bank's Allan. Gold prices have risen roughly 10 per cent since May and that could attract new buyers.
“I think at the end of the day, it's the lenders that are going to call the shots because of the possibility of default — that debt is due in June,” he said.