Once again this month, Toronto hosts the Prospectors and Developers Association of Canada (PDAC) Convention and Trade Show, expected to draw over 28,000 participants and visitors from 120 countries. Given this wide interest, readers may be interested to know the important role that Canadian financial markets play in global mining finance and some of the opportunities available.
Canada is a leader in the global mining industry with its extensive natural resources and long history of mineral development. Over 1,640 mining companies are listed on the Toronto Stock Exchange and Venture Exchange (collectively TSX). Of the 9,500 mineral exploration projects held by such companies, 50% are located outside of Canada.
Canada’s stable and sophisticated financial, business, governmental and legal environment, as well as its policy of welcoming foreign investment, supports the vibrancy of the mining industry domestically and abroad. The Canadian mining industry is recognized for its technical expertise, which has resulted in the development of increasingly efficient methods of exploiting known deposits and discovering new ones.
With many companies that can be good partners or offer valuable investment opportunities, Canada will increasingly serve as a global “buffet” for mining investors as the global hunger to secure reliable access to these resources intensifies.
Foreign investment review
Foreign investment in Canadian businesses may trigger an Investment Canada Act (ICA) review, which requires a finding that the investment is “likely to be of net benefit to Canada”, and which has specific rules for state-owned enterprises and for investments potentially injurious to Canada’s national security. ICA approval is generally not required for the acquisition of a minority interest in a mineral project even if the buyer is state-owned.
Where required, ICA approvals have generally been issued on manageable terms. We do not view BHP Billiton’s failure to meet the net benefits test in its proposed acquisition of Potash Corporation as a sign that Canada’s attitude toward foreign investment is becoming more restrictive.
Structures for investment
The global drive to secure access to minerals is increasingly focused on acquiring exploration and development stage projects, as few developed world-class projects are available for purchase. As a result, we expect mining investment in the future to be made using one or a combination of the following structures:
Public M&A: Investors may acquire all the shares of a TSX-listed company by takeover bid (a regulated process by which the same offer must be made to all shareholders, be open for at least 35 days and be fully financed if for cash); plan of arrangement (a court-sanctioned series of corporate transactions which results in an acquisition); or amalgamation (a corporate combination of companies). This often results from an auction process conducted by an investment bank.
Private investment in public equity: Investors may acquire new shares (or debt convertible into new shares) of TSX-listed mining companies via private agreement. A TSX-listed company can issue new shares, provided the investor will own less than 20% of the company’s shares and the issue price is within the acceptable permitted discount.
Acquire direct interest in project: Investors may acquire a part interest in a mining project (earn-in) and manage it by joint venture. This generally involves negotiating an agreement with one or more sellers, often after an auction process administered by an investment bank. Direct interests may be acquired at the outset or on the exercise of an option (also commonly referred to as an earn-in or a farm-in), exercisable by prescribed spending on exploration or other commitments. Option and joint venture agreements are common.
Purchase of production: Investors may purchase all or a portion of a mine’s production through a conventional off-take agreement or a more secure long-term supply arrangement.
Royalty: Investors may acquire the right to receive cash payments related to production, through net smelter return royalties, net profit interests, sliding scale royalties, etc.
In deciding which, or which combination, of these structures to use, investors will take into account their business objectives and those of the TSX-listed company, including operational control, tax planning and exit strategies.
Canada offers an abundance of opportunities for investors seeking access to mining projects in Canada and abroad. Well-established structures have been developed for making investments that can be tailored to particular circumstances. Where triggered, Canada’s foreign investment review regulatory process has generally resulted in allowing investments in the mining sector, with very few exceptions.
Kenneth Klassen and Eden Oliver are partners at Bennett Jones LLP and can be contacted at email@example.com and firstname.lastname@example.org. Bennett Jones has particular expertise in the energy and natural resources sector, especially oil and gas. It has more than 400 lawyers and advisers in major cities across Canada as well as in Dubai.
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