Canada’s mining sector is in high demand now and as a result, it faces questions over the durability and lasting power of this boom. With stakeholders such as foreign investors, indigenous concerns, and multiple levels of government, navigating the prevailing currents is more complex than ever before. We asked partner Adria Leung Lim of Aird & Berlis’ mining team to give us a primer on the current state of the minerals space, the long-term trends that have emerged over time, and how clients can maximize the current bull market for Canadian natural resources.
What advice do you have for mining clients seeking to reconcile rising demand for resources while facing increasing environmental regulation? How can the sector meet the needs of both concerns?
The courts and Parliament have been working to strike a balance between environmental regulation and economic interests, and in recent years, there has been an increased dialogue between the two on how to best handle these two seemingly competing interests. Courts have made it clear in the past that notwithstanding a high demand for resources, resource companies must always plan for remediation before they embark on major resource projects and account for the anticipated future and contingent costs associated with such remediation. Mining companies must also put their environmental, social and governance (“ESG”) policies top of mind, as public appetite for responsible investments increase and become a prevalent focus in the mining sector. There is evidence of correlation between strong ESG policies and long-term investment performance, and mining companies should be mindful of this when looking to invest in their strategic planning and corporate governance initiatives.
How has Canadian mining law evolved to incorporate indigenous rights and claims? How do you see the relationship between mining interests and indigenous concerns evolving going forward?
The intersection between indigenous concerns and mining interests, much like environmental regulation and mining competitiveness, is a dynamic and evolving area of Canadian law. Canadian mining law has evolved over the decades to include a duty to consult, accommodate and, in some circumstances, obtain the consent of indigenous communities with respect to projects that may affect their rights or land. All resource projects are mindful of these issues. Further to the duty to consult, mining companies frequently take a lead role in engaging affected indigenous communities to try to find common ground and mutual benefits when developing a mining project. This may come in the form of a “side agreement” with the affected indigenous communities to try to come to a consensus on mining projects to be undertaken. Respecting the environment and taking a people/community-focused approach to investing is often a key factor in a mining company’s ability to succeed. The interests of mining companies and indigenous communities need not be mutually exclusive. The synergy between indigenous communities and resource companies will continue as the governments further safeguards indigenous interests, and companies proactively develop their internal policies to address indigenous concerns.
How do the challenges and opportunities of mining operations in Canada’s north differ from those in the provinces? What are the major regulatory, environmental, and investment challenges mining clients face?
Mining investors have previously identified infrastructure issues in Canada’s north as a major area of concern. The lack of critical infrastructure, challenges in getting supplies transported, and disputed land claims are critical issues that isolated northern communities face. The pandemic further exasperates these issues as regulatory safeguards are put in place to further protect workers in the workplace.
While investors have generally increasing positive perceptions of investing in the minerals and resources in Canada’s territories, the policy environment in the north creates some concerns and raises questions as to whether the territories can benefit from policy reform. Regulatory duplication and inconsistencies seem to be an escalating concern, and mining investors view these factors as a deterrent to investment.
Why is there an increased focus on using Canada’s natural resources for new technological hardware? What are some of the obstacles companies face in trying to exploit this demand?
There have been market shifts in the resource industry as the demand for computers, batteries and other hardware increases. The best example is the global demand for lithium which has been trending upwards due to the increasing need for energy storage solutions. Large batteries, such as those in electric vehicles, require a significant amount of lithium, creating great opportunities for mining companies with lithium projects. As electric vehicles become cheaper, battery capabilities improve, and concerns over climate change increase, the demand for electric vehicles and their lithium components, is expected to accelerate.
However, if mining regulations cannot evolve to facilitate the development and production of lithium at the pace at which it is required, this creates an obstacle for mining companies with lithium projects to capitalize on the demands in the industry. Amendments to existing directives, legislation and regulations relating to the lithium industry may be required, and mining companies are often at the mercy of government reactivity to market trends.
What trends have you seen in terms of foreign investment in the Canadian mining sector and do you anticipate that these patterns will continue?
With an abundance of natural resources controlled by Canadian companies, both domestically and internationally, Canada has always presented excellent opportunities for foreign investors. Foreign investors have been active in participating in recent acquisitions and joint ventures in the Canadian mining sector and are poised to continue fuelling the demand of expanding economies for metals and other natural resources.
Do you see consolidation and M&As in the mining industry increasing in 2021 and beyond? What advice do you have for investors in light of this trend?
Canada is a global leader in the mining industry and an active centre for the resource sector. Canadian entities, especially junior resource companies, harvesting the natural resources in Canada and abroad have an appetite for capital and are open to acquisitions, takeovers, investment, and joint ventures. In the short term, operational inactivity will also catalyze M&A transactions as companies look for asset divestitures. M&A will likely increase in mining in the short and long term for a number of reasons:
(1) many Canadian mining companies are carrying high-debt loads due to the pandemic, which means that they will look to sell off non-core assets to reduce such debt;
(2) the combination of strong industrial metals prices and increasing demand for such metals during post-pandemic recovery will bolster those mining companies with sufficient cash flow to engage in further acquisitions; and
(3) debt financing through Canadian banks is often difficult to achieve due to the cautious attitudes of lenders for high-risk investments in the mining sector particularly amidst the pandemic, and as a consequence, many companies turn to non-traditional sources of financing like joint ventures, strategic partnerships or outright M&A.
Do you have any other insights on helping mining clients navigate the legal landscape post/during COVID?
The pandemic has added a number of new considerations for mining clients to be mindful of when looking to navigate the legal landscape. Mining companies should take advantage of some of the policies the government has implemented in an attempt to stimulate the sector. For example, the Department of Finance Canada announced last year that in lieu of the pandemic, the timelines for incurring eligible expenses applicable to mining companies issuing flow-through shares would be extended by 12 months, which provides relief to mining companies with operations that have been impacted by the pandemic.
Mining companies should engage with their shareholders to ensure that they have strong support for their corporate strategies, visions, and goals. In an environment constantly shifting due to the pandemic, shareholders, employees, suppliers, and customers should all be kept informed of the operations and plans of the mining company moving forward. A fulsome dataroom should be populated and ready-to-go to address any prospective M&A activity. Mining companies should also develop clear strategies in managing supply chain risks with key suppliers, facilitate operating resilience and safeguarding of operations and critical systems, and ensure that safety measures within the workplace are implemented to protect their workers.
Adria Leung Lim is a partner at Aird & Berlis and a member of the firm’s Capital Markets and Mines & Minerals Groups. Her practice focuses on executing corporate finance and mergers and acquisitions transactions for both public and private issuers and investment dealers. She also advises on general securities compliance matters such as corporate governance, continuous disclosure and other regulatory matters. By drawing on her business background, Adria leverages her expertise to advise public companies across a variety of industries, including mining, cannabis, and technology. With her clients’ interests top of mind, Adria provides pragmatic advice and effective solutions to issues that arise from negotiating and closing complex transactions.