While the Canadian mining sector has not been immune to the challenges that have faced the global economy since the latter part of 2008, it has demonstrated admirable resilience in the face of previous commodity and financing cycles. Scale and access to financing are important contributors to such resilience.
Almost 60 per cent of the world’s public exploration and mining companies are listed on Canadian stock exchanges. In the first six months of 2009 these companies raised over CDN$8.8 billion in equity financings on Canadian exchanges, compared with the CDN$8.2 billion raised on the world’s other major stock exchanges. 2008 exploration expenditures in Canada reached CDN$5.45 billion, representing approximately 43 per cent of global exploration expenditures for the year.
In its most recent annual survey of mining companies, the Fraser Institute, a Canadian-based think tank, ranked seven Canadian provinces among the top 10 jurisdictions in the world for mining investment, based on various factors including mineral potential and the attractiveness of both government policies and legislation affecting the mining industry. Recently there have been several developments in Canada that might have an effect on mining activities in the country, including proposed policy amendments, legislative developments and changes to securities legislation. While some of these changes have yet to be implemented, the overall mining climate in Canada remains responsive to the industry’s needs. We therefore believe that the Canadian mining sector will be an important component of the global mining industry’s eventual recovery.
LEGAL DEVELOPMENTS AFFECTING MERGERS AND ACQUISITIONS IN CANADA
There have been several legal developments in 2009 that will affect mergers and acquisitions in the Canadian mining industry.
In September 2009 the Toronto Stock Exchange (TSX) amended its rules, requiring listed companies to obtain shareholder approval when acquiring another public company, if the transaction involves the issuance of more than 25 per cent of the listed company’s outstanding shares (on a non-diluted basis). The new rule will take effect from 24 November 2009, but transactions of which the TSX received notice prior to that date will not be affected by the amendment.
The Ontario Securities Commission released a decision relating to the proposed acquisition of Lundin Mining by HudBay Minerals. This case was significant in that it led to the changes in the TSX’s shareholder approval rules, as described above, and brought into question whether directors can properly discharge their fiduciary duties in approving transactions by relying on fairness opinions provided by financial advisers who are entitled to receive success fees, and incentive fees, on successful completion of the transaction.
In March 2009 the federal government introduced amendments to the Investment Canada Act which, among other things, were designed to reduce the number of foreign investments subject to government review and ministerial approval. The bright-line threshold for review of direct acquisitions of Canadian businesses (other than acquisitions of cultural businesses) by foreign investors has been increased from CDN$312 million (based on book value) to CDN$600 million (based on “enterprise value”) when implementing regulations have been passed. This new threshold amount will increase over five years to one billion Canadian dollars, and will thereafter be adjusted according to inflation. The lower review thresholds that previously existed for acquisitions of Canadian businesses engaged in uranium production or transportation services (including pipelines) have been eliminated, and the acquisition of such businesses is now subject to this higher threshold (ie, CDN$312 million based on assets and CDN$600 million enterprise value). While the higher review threshold should streamline acquisitions, foreign purchasers should note the introduction of a review process for investments that may be “injurious to national security”. This new national security review regime and test apply to all transactions, regardless of their size or the sector in which the foreign investment is proposed. Without definition of the term “injurious to national security” in the Investment Canada Act (and there are no proposals to define such a term in implementing regulations), the minister of industry and the federal cabinet appear to have wide discretion to decide which transactions should be reviewed and, if necessary, blocked on national security grounds. Shortly after the amendments to the Investment Canada Act were introduced, the acquisition of Forsys Metals was terminated, apparently because of the intervention of Industry Canada on the basis of national security considerations. It is noteworthy that Forsys’s connection to Canada appears to be very limited as its principal uranium mining and development activities are in Africa.
The Competition Act was also amended in March 2009. Of significance to M&A transactions will be the increase to thresholds for mandatory pre-merger notification, from CDN$50 million to CDN$70 million, with further annual increases based on changes in national GDP. In addition, the previous 14 and 42-day waiting periods associated with short-form and long-form notifications have been replaced by a single notification form with a 30-day waiting period, which can be unilaterally extended by the commissioner of competition by requesting supplemental information from the parties. Where the commissioner requires such information, the parties cannot close the transaction until 30 days after compliance with this request for supplemental information. These changes to the waiting period, and the introduction of the supplemental information request mechanism, bring the Canadian competition notification regime more in line with that of the US.
LEGAL DEVELOPMENTS AFFECTING THE CAPITAL MARKETS
In April 2009 Ontario’s legislature passed a resolution directing the Ontario Securities Commission to undertake a review of the province’s current corporate disclosure requirements, standards and compliance – including the existing requirements imposed on companies to make certain disclosures concerning environmental and social matters. Of particular note to the mining industry will be the mandate that the Ontario Securities Commission seek to develop and adopt an enhanced standardised reporting framework for both quantitative and qualitative social and environmental information, to ensure that corporate disclosures are understandable, comparable and outcome-focused.
In 2009, the provincial and territorial securities regulatory authorities began an informal consultation process to solicit the mining industry’s views on how National Instrument 43-101 – Standards of Disclosure for Mineral Projects (NI 43-101) might be improved. While regulators have made it clear that they do not anticipate fundamental changes to NI 43-101, this process offers a welcome opportunity to improve the instrument and its effectiveness for investors and companies alike.
ABORIGINAL ISSUES – THE DUTY TO CONSULT
Canadian courts have established that the Crown, in the form of the federal and provincial governments, must consult with, and accommodate, First Nations groups if it is contemplating conduct that may affect known aboriginal claims or treaty rights. This obligation to consult imposes obligations on both parties to negotiate in good faith, and does not give First Nations groups the right to veto development projects. The courts have traditionally noted that non-governmental parties, such as mineral companies, have no obligation to consult with aboriginal communities.
While proposed legislation in Ontario (discussed below) may impose consultation obligations on mineral companies, a recent case before the Federal Court determined that regulatory processes, while not a substitute for the Crown’s duty to consult, could be used in some circumstances as the forum for such a consultation process. In Brokenhead Ojibway Nation v Canada, 2009 FC 484 First Nations applicants opposed the granting of certain approvals relating to three pipeline projects. In the process of considering the pipeline applications, the National Energy Board held public hearings in which these First Nations groups elected not to participate. Instead, these groups attempted to engage the federal government in consultation and accommodation negotiations. The Crown declined to participate in these negotiations, and the First Nations groups applied to overturn the approvals on the grounds that the Crown did not fulfil its legal obligations of consultation and accommodation before granting the approvals.
In dismissing the application, the court found that the parties seeking to build the pipelines had engaged in an extensive consultation process with aboriginal groups and accommodated some of their concerns. The court analysed the applicable regulatory hearing process and found that it offered a forum well suited to address mitigation, avoidance and environmental issues. It went on to find that, once a satisfactory process existed for consultation, there is no at-large duty on the Crown’s part to consult with First Nations groups unless there is some unresolved impact related to Crown conduct.
QUEBEC – THE WORLD’S MOST ATTRACTIVE MINING JURISDICTION
The Province of Quebec has long been a highly prospective region for mining. In 2007, the mining industry employed 18,000 workers throughout Quebec and invested CDN$1.43 billion, with exploration expenditures making up CDN$476 million of that amount. It is therefore no surprise that the Fraser Institute ranked the Province of Quebec as the most attractive jurisdiction for mineral exploration for the second year running.
In June 2009 the provincial government launched a mineral strategy entitled “Preparing the Future of Quebec’s Mineral Sector” to strengthen support for mineral development and ensure that the industry continues to be a positive contributor to the province’s economy. Several aspects of this strategy are noteworthy. First, the provincial government intends to improve roads, airports and other infrastructure to promote access to Northern Quebec. Second, mining companies are encouraged to negotiate agreements with local aboriginal communities who may be impacted by the development and operation of a mine. Third, mines expected to produce more than 3,000 tons per day, will be required to file rehabilitation plans and environmental impact studies prior to the commencement of public consultation hearings. In addition, environmental bonding obligations will be increased from 70 per cent to 100 per cent of estimated rehabilitation expenses.
ONTARIO – A TOP 10 MINING JURISDICTION
The Province of Ontario was ranked the 10th most attractive jurisdiction for mineral exploration in the Fraser Institute’s most recent annual survey of mining companies. In 2009, the government of Ontario introduced Bill 173 to amend and modernise the province’s Mining Act. The amendments affect the process of staking claims, surface owner rights, exploration activities, diamond royalties and consultation with aboriginal communities. The proposed amendments to the Act include the apparent transfer of some measure of the Crown’s duty to consult with aboriginal communities to mineral companies, as well as a reduction in the lands available for resource development.
The Bill appears to require applicants seeking approvals for exploration, mining and mine rehabilitation to be proactive in their contact and consultation with aboriginal communities. However, the Bill does not say whether aboriginal consultation will be a condition precedent to obtaining the required approval and, if so, whether consultation is only mandatory in cases where there is a pre-existing duty to consult.
The Bill evidences a new approach to mineral exploration where Crown mineral rights underlie land where the surface rights are privately owned. In Southern Ontario, mining rights will be withdrawn from prospecting, staking, sale and lease where the Crown does not own the surface rights. In Northern Ontario, surface right owners may apply to have mining rights withdrawn. In making that decision to withdraw mineral rights, consideration will be given to the mineral potential of the land and whether mining claims underlie surface lands that are sites of “aboriginal cultural significance”. If the site is deemed to have aboriginal cultural significance, restrictions may be imposed on a mining claim holder’s right to use portions of the surface rights.
As a follow-up to last year’s announcement, the government of Ontario has introduced Bill 191, known as the Far North Act, which will reserve at least 50 per cent of the province’s boreal forest from development. It will also introduce a requirement that community-based land use plans are in place prior to the opening of new mines in the northern third of the province. In addition, mining claims may not be staked or recorded in areas where such staking or recording would be inconsistent with community-based land use plans.
After years of exceptional exploration and development activities, the Canadian mining industry is now faced with its share of challenges, including those arising from new domestic legislation and policy initiatives. This notwithstanding, Canada remains attractive, with its excellent geology, mature infrastructure and growth-oriented public policies.