Foreign Investment in strategic commodities affected by new rules
On April 24, 2014 the Canadian government published new regulations amending the Investment Canada Act, imposing new rules on investments by non-Canadians. The amendments fundamentally alter the calculations used to determine which foreign investments will be reviewed by Industry Canada, expand transparency obligations for foreign investors, and increase the length of “national security” reviews. In all cases, carefully considering the impact of the new rules will be critical for foreign investors, as well as domestic producers seeking foreign investment, but this is especially the case for those dealing in strategic commodities such as uranium and potash, which are critical to energy and food security.
Under the Investment Canada Act framework, a non-Canadian proposing to establish a new Canadian business, or to acquire an existing one, must file a notification of the investment with Industry Canada, or if the investment is of sufficient size or raises national security concerns, submit the transaction for review and approval by Industry Canada in advance of closing. Prior to the amendments, the basic trigger for such a review was based on the book value of the Canadian business’ assets; the amended regulations instead refer to the “enterprise value” of the target. Generally, investments by non state-owned enterprises are now subject to approval by Industry Canada when the enterprise value of the target exceeds $600 million. The enterprise value of the target is calculated based on the market capitalization, acquisition value or consideration payable, depending on whether the target is publicly traded, privately held or an asset acquisition, respectively, subject to certain adjustments.
The amendments also significantly increase the disclosure that foreign investors must provide to Industry Canada, including details regarding the foreign investment vehicle’s structure, ownership and governance. Moreover, and of particular importance to producers of strategically important commodities including potash and uranium, if imposed, a national security review could now exceed 200 days in length.
Implications for Canadian Mining Participants
Canada is the second largest producer of uranium in the world providing almost 16% of global supply and is the world’s largest producer of potash, providing almost 30% of global supply. Potash and uranium represent key strategic resources which attract international investment for their importance to agriculture and energy security. As governments seek to secure adequate food supplies and stable sources of energy, transactions that reduce Canada’s control of its domestic reserves of strategic commodities like potash and uranium will very likely face increased public scrutiny and government oversight.
Employment of the “enterprise value” metric will result in more investments being subject to review where market capitalization exceeds the book value of assets, as is common in the mining industry. Additionally, the enterprise value calculations have the potential to create “first bidder” advantages in auctions for publicly traded entities. This is because the average share price used to calculate market capitalization is referenced to the point in time at which an investor’s first filing is made with Industry Canada and not when the transaction closes. Thus, the first bidder may be able to obtain non-reviewable status while subsequent bidders are subject to a review if the target’s share price increases following announcement of the initial transaction.
With growing public awareness of the strategic importance of Canada’s potash and uranium reserves, transactions involving such commodities will likely also be subject to political risk as Canadian decision makers may seek to position themselves as the guardians of the food supply and energy infrastructure. This political risk may be further aggravated depending on sovereign relations with resident jurisdictions of potential purchasers of strategic commodities such as potash and uranium.
Industry Canada may impose a national security review where the foreign investment may be “injurious to Canada’s national security” regardless of the size of the investment. A lengthy review period of 200 days or more could lead to investor fatigue or cause the transaction to overlap with unexpected economic or industry changes. When faced with the realization that the government can prohibit the investment, or even require the unwinding of the transaction once closed, foreign investors may avoid such transactions or demand commercial accommodations to account for such risks.
As a result of the amendments, transactions in Canada involving strategic commodities will likely face longer timelines, increased risk and less certainty. Domestic mining entities that are seeking foreign investment, particularly those with interests in strategic commodities such as potash and uranium, should carefully consider these factors when planning and structuring such investments.