TSX: a global buffet for investment in mining

By Kenneth G Klassen and Eden M Oliver, Bennett Jones LLP
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Canada is a leader in the global mining industry with its extensive natural resources and long history of mineral development. Over 1,530 mining companies listed on the Toronto Stock Exchange and Venture Exchange (collectively TSX) hold more than 9,700 exploration projects, 50% of which 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. Consequently, there are many companies that can be good partners or offer valuable investment opportunities. It is only logical that, as the global hunger to secure reliable access to these resources intensifies, Canada will increasingly serve as a global “buffet” for mining investors.

Review of foreign investment

Foreign investment in Canadian businesses may trigger Investment Canada Act (ICA) review, which requires a finding that the investment is “likely to be of net benefit to Canada”. There are specific rules in an ICA review 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 a state-owned enterprise. Where required, ICA approvals have generally been issued on manageable terms, and we do not view the recent ICA decision on BHP Billiton’s 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:

(a) 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.

(b) Private investment in public equity (PIPE): 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 not own 20% or more of the company’s shares and the issue price is within the acceptable permitted discount (generally, 15% for shares that are C$2 or more per share).

(c) Acquisition of a direct interest in a project (earn-in): Investors may acquire a direct interest in a mining project and, if less than all of a project is acquired, manage it by joint venture. This structure generally involves the negotiation of a purchase and sale agreement with one or more sellers. This often results from an auction process administered by an investment bank. Direct interests may be acquired at the outset or upon 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.

(d) Purchase of production (offtake): Investors may purchase all or a portion of a mine’s production. This may take the form of a traditional off-take agreement or a more secure long-term supply arrangement such as is used by Silver Wheaton, which is an approximately US$11 billion market capitalization company based almost exclusively on production purchase agreements and not operating mines.

(e) Royalty: Investors may acquire the right to receive cash payments related to production. These can take the form of net smelter return royalties, net profits interests, sliding scale royalties, etc.

In deciding which one or which combination of these structures to use, investors will take into account the business objectives of the TSX-listed company and the investor, 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 such as BHP Billiton’s failure to meet the net benefits test in the case of Potash Corporation.

Kenneth G Klassen and Eden M Oliver are partners at Bennett Jones LLP and can be contacted at [email protected] and [email protected] 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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