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While the pivot away from fossil fuels as a power source is not
a new concept, 2022 may have marked a tipping point for the
Canadian mining industry in the pursuit of “critical
minerals” to facilitate this transition. As we discuss in our
Energy Transition article, the push towards
energy transition and a net-zero future has accelerated,
emphasizing critical minerals in the drive towards non-carbon based
fuel sources. In 2022, the Canadian federal government focused on
the development of a critical minerals strategy and implemented a
number of measures designed to support the strategy and focus on
the advancement of critical minerals projects. At the same time,
the government has taken action to reduce the influence of foreign
state-owned enterprises (SOEs) in critical minerals. In this
article, we summarize a number of recent developments related to
critical minerals in Canada.
The strategy extends beyond mining and seeks to address the
entire value chain, from exploration and extraction, to processing,
advanced manufacturing and recycling.
The federal critical minerals strategy
In April 2022, the federal government announced a $3.8-billion
critical minerals strategy aimed at
identifying and developing mineral projects and related
infrastructure for critical minerals. The list of critical minerals
includes 31 minerals, but six have been identified as an initial
focus – lithium, graphite, nickel, cobalt, copper and
rare-earth elements. The strategy extends beyond mining and seeks
to address the entire value chain, from exploration and extraction,
to processing, advanced manufacturing and recycling.
Most of the details of the strategy will unfold in the coming
years. As part of the development of its strategy, the federal
government issued a discussion paper exploring opportunities for
critical minerals. The comment period closed in September 2022 and
the government expects to publish the formal strategy at the end of
2022. Once finalized, the federal strategy is expected to pair with
similar provincial strategies, including those in Alberta [PDF], Ontario [PDF] and Québec.
It is expected that the largest funding commitments will be
required to help build infrastructure to facilitate the development
of critical minerals deposits in Canada. The “Ring of
Fire” deposit in northwest Ontario is an example of a
prospective mineral deposit that has had multiple owners without
significant progress. This is due, in part, to the remote and
rugged terrain that makes development difficult to finance. Many of
the other critical mineral rich regions identified in the
discussion paper are similarly remote and face development
challenges.
A key aspect of Canada’s critical minerals strategy is the
acceleration of project development. In recent years, the timeline
of mining projects from discovery to production has become
increasingly prolonged. If Canada (and the world) is to become a
net-zero economy by 2050 as currently targeted, critical minerals
will be required in even greater quantities than today. Taking 20
to 30 years to bring new critical minerals mines into production
will not allow for production of necessary minerals at a level that
will enable Canada to achieve that goal.
How timelines can be shortened is not entirely clear. Presumably
the government’s commitment to robust environmental review and
meaningful participation of affected First Nations is not going to
change. With many critical minerals projects located in areas that
have only limited infrastructure and no history of previous mineral
development, the scope of the permitting process could be broader
than the footprint of a particular mine. The relationship building
process for local communities and Indigenous communities is also
likely to present new challenges.
We have seen some critical minerals project proponents back away
from projects in the face of uncertain community support. With
these projects already facing significant technical and operational
risks, additional uncertainty associated with permitting and social
licence to operate can only compound impediments to building mines.
However, this is likely one area where the government may be able
to play a leadership role in assisting with project
development.
Funding commitments and tax relief
In addition to project infrastructure and development, critical
minerals strategies are also focused on identifying new deposits
for potential future development. The Canadian government has made
significant funding commitments in this regard. Of particular
interest to the Canadian mining industry is the immediate
commitment of $79.2 million for public geoscience and exploration
to better assess and identify mineral deposits.
Additional funding includes $47.7 million for targeted critical
minerals research and development through Canada’s research
labs and $144.4 million for critical minerals research and
development and the deployment of technologies and materials to
support critical minerals value chains.
On the tax front, the government has expanded the current
flow-through share regime with a new 30% critical minerals
exploration tax credit, which doubles the existing 15% flow-through
tax credit. So far there appears to be limited take-up of this
credit. That may be due to the poor state of the capital markets or
it may be due to the need for additional details regarding the new
tax credit that were to follow the initial announcement. For
example, a key eligibility requirement is the need for a qualified
engineer or geoscientist to confirm that the flow-through
expenditures will be incurred on a mineral project primarily
targeting critical minerals. The details around the form and timing
of this certification are still pending, even though the Canada
Revenue Agency issued guidance [PDF] in October 2022.
Notably, charity flow-through providers seem to have been early
adopters of critical minerals tax credit flow-through financings.
This should give the rest of the industry some comfort and a body
of precedent documentation.
Role of foreign investment
Through the tax credits and funding, a key goal of the critical
minerals strategy is to attract foreign investment to drive project
development. However, a number of developments regarding critical
minerals in Canada have targeted reducing foreign ownership of
critical minerals projects – at least in some respects.
Recent initiatives have sought to limit or preclude ownership of
critical minerals projects by foreign SOEs and groups linked to
them. Thus, the federal government has announced enhanced measures targeting foreign
SOE investment in critical minerals projects.
Following this announcement, the government went further and
issued divestiture orders for three equity investments by Chinese
SOE or SOE-linked investors in Canadian junior exploration
companies. One of these companies had no projects in Canada –
which represented a notable shift in the target of the Canadian
government’s actions to prevent foreign ownership. We have previously discussed these critical minerals
restrictions and divestiture orders. Additional information can
also be found in our Competition and ICA article.
China has been the dominant player in financing, investing in
and acquiring critical minerals projects globally. Removing Chinese
investment in critical minerals will leave a financing gap to fill.
Industrial end-users of critical minerals who are looking to
increase their consumption of critical minerals in the pivot
towards non-carbon based fuel sources have shown interest in making
these kinds of investments. However, there is a limited track
record for mining companies successfully vertically integrating
into end-product manufacturing. There is also significant
uncertainty as to whether earlier stage projects will receive
needed funding.
With focused government strategies and significant
funding commitments from provincial and federal governments,
Canadian advancement in critical minerals will definitely be a key
area of growth for the Canadian mining industry.
Looking ahead
With focused government strategies and significant funding
commitments from provincial and federal governments, Canadian
advancement in critical minerals will definitely be a key area of
growth for the Canadian mining industry. Having Canadian
geoscientists, engineers and financiers who are global leaders in
finding and developing minerals projects creates further optimism
that the industry can meet challenges associated with critical
minerals development.
For years the industry has lamented the increased costs to make
a discovery, the need to contend with the longer timeline for
permitting, as well as the challenges to manage development costs.
Public policy in this regard has often been viewed as ambivalent or
at odds with efficient project development in Canada. Critical
minerals development may present a rare occasion of alignment
between public and private stakeholders that could kickstart mine
development and serve as a catalyst for the broader mining
industry.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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