Canadian gov’t orders national security review of Shandong-TMAC deal

Months after shareholders of TMAC Resources (TSX: TMR) approved a takeover of the company by China’s Shandong Gold Mining, the federal government has ordered a national security review of the transaction.

The US$149-million, $1.75-per-share deal was announced in May, with more than 97% of shareholders voting in favour in June. The plan was also approved by the Ontario Superior Court of Justice in June.

TMAC owns the Hope Bay gold mine, 125 km southwest of Cambridge Bay, in Nunavut.

In a statement, TMAC noted that the review extends the expected timeline for approval of the transaction to February, as the federal government has lengthened review periods under the Investment Canada Act due to the pandemic.

“Both TMAC and Shandong believe the transaction has a strong overall net benefit to Canada and does not pose a security risk,” TMAC said. “The extension to timelines as a result of Bill C-20, An Act respecting further Covid-19 measures, and the related Ministerial Order issued on July 31, 2020, mean that the government of Canada may not complete the regulatory review process and provide Investment Canada Act approval by February 8, 2021, which is the extended outside date in the arrangement agreement.”

The “outside date” in the agreement is Nov. 8, 2020, six months after the agreement was signed. That date can be extended by up to three months to Feb. 8, 2021, but if approvals take longer, the deal could be jeopardized.

The transaction is drawing scrutiny under the Investment Canada Act because of the Hope Bay site’s location in the Arctic, considered strategically important as climate change makes resources in the region more accessible. The project is also just a few kilometres away from the Arctic Ocean.

Another condition of the deal is that senior officers of Shandong are able to conduct a site visit, something that’s been delayed by a current outbreak of Covid-19 at the site that began in September.

The company has reported 14 confirmed positive cases and two presumptive cases, although most have been asymptomatic. The company is in the process of commissioning rapid-testing equipment that has been deployed to the site.

Since July, the mine has been operating on a reduced operating plan, running the processing plant for three weeks, and then idling it for three weeks. With reduced capacity and staffing, the mine produced 18,420 oz. gold in the third quarter.

While Hope Bay has been in production since 2017, it has struggled to make a profit. A prefeasibility study released in March pegged the cost of necessary upgrades to the operation, including a new 4,000-tonne-per-day processing facility to replace the current 2,000-tonne-per-day mill, at $683 million.

Hope Bay holds reserves of 16.9 million tonnes at 6.5 grams gold per tonne for a total of 3.5 million ounces.

Rising tensions

News of the national security review came the same week as tensions escalated between Canada and China over Hong Kong and other issues. The Globe and Mail, Canada’s national newspaper, reported that at a press conference on Oct. 15, China’s ambassador to Canada, Cong Peiwu, told Canada to refrain from giving pro-democracy activists in Hong Kong asylum in Canada. According to the newspaper, Ottawa accepted at least two Hong Kong activists as refugees in September in the wake of China’s imposition of a national security law in the former British colony.

“‘We strongly urge the Canadian side not to grant so-called political asylum to those violent criminals in Hong Kong, because it is interference in China’s domestic affairs, and certainly it will embolden those violent criminals,” the Globe and Mail quoted the Chinese diplomat as saying. “’If the Canadian side really cares about the stability and the prosperity in Hong Kong, and really cares about the good health and safety of those 300,000 Canadian passport holders in Hong Kong and the large number of Canadian companies operating in Hong Kong … you should support these efforts to fight violent crime.’”

Cong also cautioned Ottawa not to interfere in China’s internal affairs and its treatment of its Uyghur minority in Xinjiang. Cong’s comments came shortly after Trudeau accused Beijing of practicing “coercive diplomacy” on both issues, and on the detention in December 2018 of two Canadian citizens, Michael Kovrig and Michael Spavor, who were incarcerated after Canada’s house arrest of Meng Wan-Zhou, a top executive at Chinese tech giant Huawei, due to an extradition request from the United States.

“There’s no coercive diplomacy on the Chinese side,” Cong said in his news conference. “Those two Canadian citizens have been prosecuted because they were suspected of engaging in activities which endanger our national security.”