Digging up profits in Canada’s mining sector

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In today’s capital markets, Chinese mining investors have a broad range of opportunities from which to choose. Many countries are seeking capital investments in their mining sectors, including Canada, which has long been the leading destination for investment in mining exploration. Canada currently attracts 19% of the world’s spending on mining exploration, and that percentage is expected to grow.

Cameron Mingay
Cameron Mingay

Canada’s many attributes appeal to global mining investors. Kurt Badenhausen, a senior editor of the international business magazine Forbes, has noted that “Canada ranks No. 1 in our annual look at the Best Countries for Business. … The US$1.6 trillion economy is the ninth-biggest in the world, and grew 3.1% last year.

“Canada is the only country that ranks in the top 20 in 10 metrics that we considered to determine the Best Countries for Business … It ranks in the top five for both investor protection as well as lack of red tape.”

Government policy

In its official Minerals and Metals Policy, the Canadian government has stated: “Canada must compete as never before to attract investment capital to sustain its minerals and metals industry. In this environment, all governments must work together to ensure that a positive investment climate is maintained.”

Recently, the government provided solid evidence of its enthusiasm to attract foreign capital by announcing it plans to raise the limit of external investment required to trigger a regulatory review to C$1 billion, further enticing offshore investors at an unprecedented level. In February 2012, when Canada signed a letter of intent with respect to the China-Canada Foreign Investment Promotion and Protection Agreement, the office of Stephen Harper, the prime minister of Canada, affirmed that “the government of Canada is committed to strengthening its strategic partnership with the Peoples’ Republic of China”.

Provincial support

In conjunction with the federal government’s efforts, Canada’s provincial governments are taking aggressive steps to attract foreign capital to the mining sector. In 2011, the province of Quebec announced Plan Nord, described as the “biggest economic, social and environmental project of our time”. Its goal is to attract investment to the area in which all of Quebec’s nickel, cobalt, platinum group metals, zinc, iron ore and ilmenite – and significant quantities of gold – are produced. This initiative is expected to lead to C$80 billion worth of investment in the region over the next 25 years as a result of Quebec’s infrastructure plans, which include building an integrated transportation network to assist in the exploitation of the mineral riches in this area.

Quebec’s neighbouring province, Ontario, is the site of the Ring of Fire, a 5,000-square-kilometre region that holds significant deposits of copper, zinc, nickel, platinum, vanadium and gold. The area contains a chromium deposit that is huge by global standards, and is the only such deposit in North America. China purchases half of the world’s chromium production supply. It is significant to note the Ontario government is backing a number of sizeable infrastructure developments in this area, including a 320-kilometre railway and a winter road.

Equity markets

Despite its relatively small population, Canada has the fourth-largest equity market by float capitalisation, with a total market capitalisation of approximately C$2 trillion. The country is home to Toronto Stock Exchange (TSX) and the associated TSX Venture Exchange (TSXV) which, considered together, were the global exchange leader for new listings from 2009 to 2011. The TSX and TSXV maintain a unique market structure with a strong feeder system that helps development-stage companies to grow and ultimately qualify for listing on the TSX, where 40% of daily trading originates with international brokers.

The TSX and TSXV have the highest number of listings of mining companies globally and have raised the most equity capital of the world’s exchanges for such companies. They provide an excellent vehicle for Chinese mining companies seeking to acquire capital for expansion into international markets. In fact, in 2011 more than 90% of all global mining equity financings took place on the TSX and TSXV.

Services infrastructure

Chinese mining investors who come to Canada will also find a well developed services infrastructure in place to help their companies grow. There are more than 3,200 companies in Canada that provide the industry with services ranging from engineering consulting to drilling equipment. Cassels Brock & Blackwell is a legal firm that has helped structure deals to the ultimate benefit of Chinese investors. In September 2011, Cassels Brock acted for a subsidiary of Yanzhou Coal Mining Company in acquiring an aggregate of 19 potash mineral exploration permits in Saskatchewan for the acquisition price of C$260 million. In April 2012, with the support of Cassels Brock mining group lawyers, Canada’s Alderon Iron Ore Group sold a 19.9% stake in the corporation and 25% partnership in its large Kami project to China’s Hebei Group for $195.4 million. The associated off-take agreement enables Hebei to buy 60% of Kami’s annual iron ore production.

While Canada presents a number of opportunities to Chinese investors, especially those prepared to take advantage of short-term fluctuations in valuations to achieve long-term rewards, some execution risks exist, but they are relatively insignificant compared to other mining jurisdictions. Most of these execution risks are due to ineffective relations with regulators, an inadequate network of business and professional contacts to identify high-potential investments, and failure to comply with Canadian and international standards regarding corporate social responsibility, governance, health, safety and environmental concerns, native treaty rights, and various other issues. Virtually all of these risks can be avoided by retaining well qualified legal and business advisers.

We believe there is no more welcoming jurisdiction for the Chinese mining investor than Canada, and no greater time to begin reaping the rewards of prudent, knowledgeable and creative investment in one of the world’s most important resource sectors.

Cameron Mingay is a senior partner, mining group, at Cassels Brock & Blackwell’s Toronto office. He may be contacted at +1 416 860 6615 or be email at cmingay@casselsbrock.com