China’s Zijin Mining acquisition of Neo Lithium will likely trigger full national security review, expert predicts

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Canada’s Neo Lithium Corp. has agreed to a $960 million acquisition by Chinese state-owned Xijin Mining Group Co., Ltd., a security expert predicts will trigger an in-depth national security review by Ottawa.

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Toronto-based Neo Lithium is developing a lithium mine in Argentina and hopes to eventually supply the silver-white metal to the electric vehicle industry. A pre-feasibility study from 2019 predicted that the company’s 3Q mine could generate a 50-percent return on investment once it goes into production.

A key component in electric vehicle batteries, demand for lithium has increased over the past decade with the adoption of zero-emissions vehicles and government commitments to reduce carbon emissions even further. Earlier this year, the Canadian government designated lithium as an important mineral, meaning it is essential to the economy.

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Late Friday, Neo Lithium agreed to be acquired in a cash transaction at $6.50 per share, an 18 percent premium to its closing price on the TSX Venture Exchange.

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The proposed acquisition of Neo Lithium is the second acquisition by a Chinese mining company last month of a Canadian lithium development company. In late September, Vancouver-based Millennial Lithium Corp. agreed to a $376 million acquisition by Contemporary Amperex Technology Co., Ltd.

All foreign acquisitions of Canadian companies are subject to preliminary security checks by Ottawa. If the federal government suspects that the transaction may be a threat to national security, a more thorough review of the deal is warranted under Section 25.3 of the Investment Canada Act (ICA).

Wesley Wark, senior fellow at the Center for International Governance Innovation in Waterloo, Ont., said both the Neo Lithium and Millennial Lithium acquisitions are likely to receive formal review under the ICA, with a particular focus on the potential loss of intellectual property to China. . “I would expect some consultation with the US as well,” he said.

Last year, Ottawa and Washington finalized a joint action plan on critical minerals, with commitments by both governments to build safe domestic supplies of battery minerals, as fears of growing clout China sharp on supplies. At the moment, Canada is a minor player in two battery minerals, lithium and cobalt, although there are pockets of growth in the country that point to the eventual emergence of a short domestic supply chain.

Junior development company First Cobalt Corp hopes to revive a cobalt refinery in Ontario that will feed the refined metal to electric vehicles industry. Nemaska ​​Lithium Inc. plans to build a lithium mine in Quebec, despite several costly setbacks. In 2019, the company, which was backed by the government of Quebec, was forced into creditor protection, eliminating public shareholders. Nemaska ​​was eventually reorganized and is now privately held.

Shares of Neo Lithium closed Tuesday at $6.25 per share, which is 25 cents below the acquisition price, indicating some investors’ uncertainty over whether the deal will close.

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Neo Lithium declined an interview with Ne.

Canada has rejected several acquisition deals over the past decade over national security concerns. Late last year, Ottawa canceled a proposed acquisition of junior gold miner TMAC Resources Inc. by China’s Shandong Gold Mining Co Ltd because TMAC’s Doris mine is located on strategically sensitive land. The mine is only about 100 kilometers from a NORAD North Warning System radar station in Nunavut. The system is part of a series of military information gathering installations across the north.

In a note to clients about the Neo Lithium acquisition, Puneet Singh, an analyst at Industrial Alliance Securities Inc., wrote that the risk of the Canadian government eventually blocking the deal is low, given that the 3Q project is located overseas. “The TMAC issue was different, as the Nunavut project area was strategic for Canada,” Mr. Singh said.

Canada is taking a tough stance against China following the recent releases of Michael Kovrig and Michael Spavor, with the mining industry also looking for any clues.

Both Michaels returned home after spending nearly three years in prison in China. After Canada detained Huawei Technologies Co Ltd chief financial officer Meng Wanzhou in 2018 on a US extradition request related to bank and wire fraud charges, it was accused of spying in apparent Chinese retaliation. Michaels’ release came after Washington and Beijing cut a deal that allowed Ms Meng to return to China as part of the US deferred prosecution agreement.

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