Would Canada allow Rio Tinto to buy Teck? Miners aren’t so sure 

The federal government’s attempt to clarify its rules for foreign investment in mining is instead causing more confusion as the industry grapples with changing rules under the Investment Canada Act. 

But Rio Tinto’s (NYSE: RIO; LSE: RIO; ASX: RIO) interest in buying Teck Resources (TSX: TCK.A/TCK.B; NYSE: TECK), as reported by Sky News, could serve as a test for what the feds will allow as it tries to keep critical minerals available for Canada. 

Last week, the federal government formally approved Glencore’s (LSE: GLEN) purchase of a 77% stake in Teck’s coal business, Elk Valley Resources. At the same time, Minister of Innovation, Science and Industry François-Philippe Champagne issued a statement saying the government would only greenlight future foreign takeovers of “important Canadian mining companies engaged in significant critical minerals operations… in the most exceptional of circumstances.” 

Most such transactions would not pass the “net benefit” test under the Investment Canada Act (ICA), he said. 

“This high bar is reflective of the strategic importance of Canada’s critical minerals sector and how important it is that we take decisive action to protect it,” he added. 

To meet the net benefit test, Glencore agreed to what Champagne called “strict conditions” intended to protect Canadian jobs and investment in Elk Valley Resources. Those include setting up and maintaining a head office for the subsidiary in Vancouver for at least 10 years and reserving the majority of senior and director roles for Canadians for the same period. It also agreed to earmark an extra $350 million over five years for closure and reclamation, and to maintain Teck’s commitments to First Nations.

While the July 4 statement appears to warn off potential bidders for the rest of Teck’s business, now focused on copper, John Turner, a partner at Fasken and co-leader of its mining group, isn’t sure that’s the case. 

“The announcement was not very clear. And if we really are closed to foreign takeovers, the TSX may as well pack its bags and go home,” he said, referring to the importance of mining listings to the exchange. 

“In a sense, I’m pleased that this is coming up. If a company like Rio can’t take a run at Teck, then we’ve got real problems.” 

Rio Tinto, which bought Canada’s Alcan in 2007 in a $38-billion deal that was subject to a less stringent net benefits test, already has a major presence in Canada, and is headquartered in Australia. 

‘Confusing and vague’ 

The Prospectors and Developers Association of Canada (PDAC) agreed Champagne’s statement was confusing. 

“Although the statement was intended to provide clarity, we believe it will only increase opacity in our markets. The mineral industry is struggling to understand the government’s motives regarding the net benefit and national security reviews,” Jeff Killeen, PDAC’s director of policy & programs said in an emailed statement. 

“It has taken nearly a century for Canada to build a highly accessible and transparent capital market, attracting listings from mineral exploration and mining companies worldwide. This dynamic is being put at risk when we hear that net benefit will only be found in transactions that involve large companies with critical minerals ’in the most exceptional of circumstances.’  

“This phrase lacks a formal definition, and no regulations have been proposed to clarify how the Investment Canada Act amendments in Bill C-34 will apply to public issuers,” he said. 

The amendments were first announced in late 2022 and came into force earlier this year. Killeen noted that part of the rationale for investing in miners is the potential for M&A premiums. 

“The uncertainty we have now will put Canadian-listed companies at a strategic disadvantage and create headwinds for valuations when compared to other marketplaces.” 

The government has signalled for the past two years that Chinese investment in critical minerals is a non-starter. That became clearer after Solaris Resources (TSX: SLS; NYSE: SLSR), a junior with a development-stage copper-gold project in Ecuador, cancelled a $130-million investment from China’s Zijin Mining after it got hung up in a national security review. 

Other development-stage juniors with assets outside the country are now considering redomiciling — packing up and leaving Canada — to avoid ICA reviews, lawyers at Fasken and McMillan have said. Graphite junior SRG Mining — now Falcon Energy Materials (TSXV: SRG) — completed its move to United Arab Emirates earlier this month rather than go through a national security review for a $16.9-million financing with a Chinese firm that it had to cancel anyhow in order to redomicile.

But the new statement appears to put any foreign capital in question.

“If this actually happens it will make us uncompetitive globally in an industry where we are a world leader,” Turner says. 

‘Affects only a very few’ 

A day after Champagne’s statement, Natural Resources Minister Jonathan Wilkinson dismissed the idea that the tougher ICA requirements could limit investment in critical minerals in Canada. 

“The new formulation of net benefit applies only to mining companies that actually have large-scale operations in Canada that are currently Canadian companies,” he said at the Energy Ministers Conference Calgary, responding to a question from The Globe and Mail.  

“It doesn’t affect exploration, it doesn’t affect early development, it doesn’t affect investments coming into the country to develop critical minerals,” he said.  

“But what it says is those companies that are headquartered in Canada, their head offices are in Canada, their research and development is done in Canada, are important. It’s important for Canada to have flagship enterprises in an area that is strategic. So, it affects only a very few companies in Canada and I don’t think it will have any impact on investment flows.” 

Teck is clearly one of those companies, and any potential acquirer of the miner now knows to expect a takeover could come with onerous or expensive conditions.

Despite Wilkinson’s assurances, mining capital may play it safe until investors are certain about the new rules of the game, both the net benefits test for major deals and national security reviews for all deals.

Rather than restricting capital and risking no new mines getting built, Krisztian Toth, another partner at Fasken specializing in mining M&A, says the feds could consider regulating what comes out of the mine instead. 

“As part of an ICA review, they (could) say, ‘we’ll let your deal go through, but fifty per cent has to go to North American markets,’” he said.  

That way they could use the ICA as a tool to get the product they want in Canada, he added. 

“What they’re doing now is actually protectionism, and I think history has shown protectionism is not strategy, it’s fear-based.”