Canada has sent a message to its mining sector: Stay away from state-linked money from China that targets critical minerals.

Canada set new policy Oct. 28, limiting transactions between domestic critical mineral projects and foreign state-owned enterprises while incentivizing investments from "partners that share our interests and values." Canada's Nov. 2 decision ordering three Chinese companies to divest minority stakes in three lithium developers signaled that Ottawa's days of overlooking investments in critical minerals by China are over, experts in foreign policy and international law told S&P Global Commodity Insights.

Under the order, subsidiaries of Sinomine Resource Group Co. Ltd., Chengxin Lithium Group Co. Ltd. and Zangge Mining Company Ltd. were required to divest their respective interests in Power Metals Corp., Lithium Chile Inc. and Ultra Lithium Inc.

Chinese companies have invested over $7 billion in Canada's non-precious metals sector over the past 20 years, including major investments in copper producer Ivanhoe Mines Ltd. and diversified miner Teck Resources Ltd., as well as takeovers of Nevsun Resources Ltd. and Neo Lithium Corp.

Canada's move largely cuts off its mining and exploration companies from Chinese funds linked to state-owned enterprises, or SOEs, at least where that cash stimulates the production of metals and minerals that Canada defines as crucial to the energy transition and the country's economic security. The list covers 31 materials including copper, aluminum, lithium, nickel, rare earth elements, platinum group metals, uranium and potash. Precious metals gold and silver are not included.

"The global market for critical minerals is ... rapidly evolving and the strategic value of certain critical minerals to important technologies and their supply chains has grown," Hans Parmar, a spokesperson for Innovation, Science and Economic Development Canada, a federal agency, said in an email. "Therefore, a lack of secure access to critical minerals found and developed both within and outside of Canada, by Canadian firms, is a source of national security risk for Canada."

New foreign policy

This is a big shift for Canada's mining market, where Chinese SOEs and companies with SOE ties have largely had free rein to buy what they want in the past couple of decades. Canada had denied Chinese firms from investing in some cases but has largely allowed most deals to proceed.

In 2021, China's Zijin Mining Group Co. Ltd. took over Neo Lithium in a $719.6 million transaction targeting lithium assets in Argentina, and in 2018 the company acquired copper miner Nevsun Resources in a $1.41 billion deal.

Other major Chinese mining companies, many with unclear relationships to China's government, have made sizable investments in recent decades and remain important shareholders in Canadian miners that produce metals on Canada's critical minerals list. Jiangxi Copper Co. Ltd. has an 18.45% stake in copper-miner First Quantum Minerals Ltd., Citic Ltd. has a 25.92% interest in Ivanhoe, and China Investment Corp. holds an 11.58% stake in Teck.

Canada has always been able to bar transactions from SOE-linked companies under investment and national security laws, but it has rarely used such measures, said Adam Kalbfleisch, a lawyer with Bennett Jones whose focus includes foreign investment reviews. Canada's move to make an order against three companies in one announcement while naming the Chinese companies over their critical minerals investments marked a big departure from the country's previous approach to national security reviews, Kalbfleisch said.

"Historically, they didn't do it that way," Kalbfleisch said. "In the large majority of cases, the public would have no knowledge of the fact that a national security review had been carried out and that, ultimately, there had been a block or divestiture."

Canada is unlikely to order divestments of high-profile investments in its larger mining companies. Similar takeovers or investments attempted today would face a much higher bar for approval with a strong chance of being denied, experts said.

The Canadian government's divestment orders came on the heels of the Oct. 28 announcement of guidelines to get tougher on transactions involving SOEs in Canadian critical minerals. Experts tied the divestment orders to the new guidelines over foreign investments, saying the government wants to make clear it's willing to back policy with action.

"They absolutely are sending the message," said Aaron Shull, a national security expert and managing director of the Centre for International Governance Innovation. "It's a clear and dispositive statement that state-owned enterprises from adversarial state actors need not apply to invest in Canadian critical minerals."

Canadian companies targeted by the divestment orders did not respond to requests for comment.

Safe for now

The new policy does not necessarily bar all Chinese investments in Canada's critical minerals sector, experts told Commodity Insights. Such investments might still go ahead when a Canadian company can show that the buyer will have little influence on the corporation or minimal impact on Canada's critical mineral supply chains.

Likewise, Canada probably won't target older investments that made Chinese firms key shareholders in Canadian miners, experts said. But if Chinese investors bulk up existing stakes in Canadian companies, they could open the door to scrutiny.

"You've given them another hook ... wherein [Canada] could opt to review your investment in the company," Kalbfleisch said. "Would they only review that additional investment or ... try to open up the investment you've already made? I don't know."

Divestment orders could be challenged, but international law experts said it would be difficult for companies to reverse them or win compensation in cases where a country uses the lever of national security. Riyaz Dattu, a trade and investment lawyer with ArentFox Schiff, noted that courts are deferential to governments over national security.

"There are a number of hurdles and the chances of success ... are low," Dattu said.

Still plenty of cash

The recent order targeted lithium, but the Canadian government says its extra scrutiny applies to foreign investments in all critical minerals, including copper.

Although this pivot on critical minerals denies companies access to Chinese investments — historically a significant source of funding — it is unlikely to impede most Canadian miners and explorers from financing their activities. Experts noted that Canada and other countries, including the U.S., are increasingly allocating taxpayer funds aimed at supporting domestic critical mineral production in an effort to advance the energy transition.

U.S. electric vehicle subsidies hinge on critical mineral supply chains in the U.S. or in allied nations such as Canada through the Inflation Reduction Act, while Canada has devoted substantial funds and crafted new incentives in an effort to expand mining and processing of critical minerals.

"It's very attractive for companies to go out and launch programs for critical minerals right now," said Osisko Mining Inc. Chairman and CEO John Burzynski. "They're very financeable. They're highly desirable."

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