‘It is a major national discussion that needs to happen’
Concerns rising over Chinese presence in Canadian Arctic
The federal government has commenced a national security review of a state-owned Chinese company’s proposed purchase of TMAC Resources Inc., which operates a struggling gold mine in Hope Bay, Nunavut.
In May, Toronto-based TMAC announced it had agreed to be acquired by Jinan, China-based Shandong Gold Mining Co. Ltd. for $215 million.
Under the deal, China’s second largest gold producer would pay $1.75 for each share — a 52 per cent premium to TMAC’s 20-day weighted average trading price at the time. The TMAC stock was trading at $1.18 per share, down 2.5 per cent, on the Toronto Stock Exchange on Thursday.
The deal came as the coronavirus pandemic had raised concerns over domestic supply chains and national security, and as Canada’s diplomatic tensions with China rose over the RCMP’s arrest of Meng Wanzhou, Huawei Technologies Co Ltd.’s chief financial officer, in 2018.
Although TMAC has struggled to achieve profitability, it has built considerable infrastructure including a port and an airstrip, as well as a processing plant. Its strategic infrastructure has drawn attention to — and criticism of — China’s growing presence in the Canadian Arctic.
“If you look at it from a security and military point of view, the concerns would be they have physical assets on the ground in the Arctic,” said Pierre Leblanc, a private consultant with military experience in the Arctic, who advises mining corporations.
The mine’s infrastructure could allow China to service ships using Arctic waters, the port could be used to bring large equipment into North America, and serve as a spot to covertly monitor conversations or Canada’s early warning radar system that is based in the Arctic, Leblanc said. Still, the government could monitor the site and these concerns need to be weighed against the economic benefits of an operating mine including the jobs and tax income it provides, he said.
TMAC had previously indicated that Ottawa was considering whether to review the transaction.
On Thursday, TMAC said in a press release that the review would occur under the Investment Canada Act and expects it to conclude by the first quarter of next year.
“We expected that there probably would be a national security review,” Jason Neal, chief executive of TMAC, told the Financial Post.
Zarah Malik, a spokesperson for the Ministry of Public Safety, which is conducting part of the review, initially said she would provide comment, but then deferred questions to the Ministry of Innovation, Science and Economic Development, which did not respond to questions by the time of publication.
A spokesman for Shandong, which opened an office in Toronto in 2019, declined to comment.
A press release made clear that the transaction expires on Feb. 8, 2021. The deal could be terminated if it’s not completed by that time, and TMAC would need to look for a new buyer. Alternatively, the two parties could also agree to extend their agreement until after the security review is complete.
TMAC went public in 2015 at $6 per share and rode a wave of enthusiasm to reach $19 per share by 2016, but technical issues related to processing the ore meant it could never recover as much gold as investors expected, and its shares traded as low as 46 cents in March. The company has estimated that the operations require around $700 million in investments.
In May, Shandong also invested $21 million to acquire 12 million additional shares, or just under 10 per cent of TMAC.
Apart from the proposed $1.75 per share buyout, Shandong would also take on TMAC’s debt, including a $168 million loan as of June.
Since Shandong made the offer, gold prices have surged above $2,000 US in August — an all-time high, but spot was trading at around $1,906.15 US per ounce on Thursday.
TMAC reported it had $45.7 million in cash on hand by the end of the second quarter, and this week announced it had sold around 27,650 ounces of gold in the third quarter.
In September, TMAC’s mine battled an outbreak of COVID19 that ultimately affected 16 people on site, although 13 cases were asymptomatic, the company said it never spread to any of the local communities.
On the positive side, after switching to a reduced operating schedule this summer, the company earlier this week touted its improved recovery rate, achieving a 90 per cent gold recovery rate from its ore for the first time in September.