China in the Canadian Arctic: Context, Issues, and Considerations for 2021 and Beyond

Shandong Gold Mining Co., a Chinese state-owned enterprise, brokered a deal in May 2020 to acquire TMAC Resources, a Canadian gold mining company with operations in the Hope Bay region of Nunavut. At the time, observers voiced concern about the merits of the deal, speculating that Shandong Gold may be motivated by political/strategic interests rather than solely firm-level economic considerations.

The deal faced a national security review from the Canadian government under the Investment Canada Act (ICA), after receiving added scrutiny in accordance with the April Policy Statement on Foreign Investment Review and COVID-19. Broadly, the review process – announced in October 2020 - examined elements of the proposed transaction that could be injurious to Canadian national security. This culminated in a formal rejection of the bid by the Governor in Council on December 21, 2020. A number of Arctic-related security concerns likely informed this process. As well, while not encompassed within the ICA, bilateral political considerations between Canada and China - as well as current public opinion in Canada towards China - are likely to have been factors taken into consideration by the Government in coming to a final decision. 

Though this investment deal received significant attention in Canada and abroad, it is just one example of several mining related investments made in Canada’s north by Chinese state-owned enterprises (SOEs) in recent years. In light of Chinese state interest and investment in Northern Canada broadly, examining the numerous considerations facing Canada, such as the motivations of investors, domestic and international politics, and opportunities for industry development and growth in the Canadian North, is an important matter.

Overview: Political and Security Context

Previous Canadian governments have shown interest in developing industry in Canada’s northern regions but many have lacked follow-through. High costs of development in the north, at approximately 250% of development projects further south, have been a prime deterrent, as demonstrated by former Prime Minister Diefenbaker’s failed “Roads to Resources” initiative – part of his broader “Northern Vision” strategy – which sought to spur northern development. Sixty years later, barriers to undertake major projects in the Canadian north remain, as evidenced by numerous failed projects and TMAC Resources’ initial struggle to attract investors. The Shandong purchase situation arose due to TMAC Resources’ struggle to establish profitable operations. Therefore, the proposed deal may have been underscored by the fact that the greater barriers to industry development in Canada’s northern regions make it relatively easier for well-capitalized companies, like Chinese SOEs, to undertake the costly operations.

As the results of the national security review suggest, there are Canadian concerns, shared by the United States (US) Government, about allowing a Chinese state-owned enterprise such as Shandong to operate in the Canadian Arctic region. While the specific concerns of the Canadian government are not publicly known, they probably linked China’s broader Arctic-related interests and political imperatives. These are outlined in China’s 2018 Arctic Policy White Paper, which describes China’s priority in “shipping, resource development, regional governance and science” in the region. This falls against a backdrop of relatively poor China-Canada relations and the recently-announced Canada-US Joint Action Plan on Critical Minerals Collaboration, which seeks to lessen reliance on Chinese-produced rare earth metals used in technology and military manufacturing. Gold is currently not covered by the plan, though Richard Fadden, former director of the Canadian Security and Intelligence Service (CSIS), argues that including the precious metal in the scheme, even though it is widely distributed globally and freely-traded internationally, would be in Canada’s interest. Canada, however, under the current Trudeau government, expressed interest in further developing its northern infrastructure. In 2019, the government released the Arctic and Northern Policy Framework in collaboration with local governments and indigenous groups. This is aimed at promoting northern development in support of the prosperity and access to services of northern communities and individuals.

Pessimism, however, surrounds public opinion on Chinese investment in Canada’s northern regions and though there are differences between the sentiments of Canadians living in the northern and southern regions of the country regarding foreign investment, both groups rank China as the least favorable source of investment when compared to Russia and the US. Moreover, resource development in northern Canada is entangled with the politics of climate change, indigenous sovereignty, and land rights. The aforementioned Arctic and Northern Policy Framework has a stated objective of empowering northern communities that, with the 2017 Pan-Territorial Vision for Sustainable Development, could attract investors seeking to develop resource extraction facilities in the region.

The gold mine in question is situated on Inuit-owned land and is thus subject to the impact and benefits agreement reached between TMAC and KIA, a designated Inuit organization, which stood to gain as much C$400 million in royalties and other payments over the lifespan of the mine. Executives of Shandong Gold have demonstrated their awareness of the importance of local cooperation, stating that the company was “looking forward to working closely with all stakeholders and local communities in Nunavut to deliver a world-class operation that will benefit the regional economy for generations to come.”

Investors interested in undertaking challenging projects in Northern Canada, particularly Chinese SOEs, are forced to navigate Canada’s increasingly scrutinous regulatory system amid China-Canada tensions - while also negotiating with local and indigenous stakeholders where environmental and community impact concerns play important roles. Consequently, investors require a high-degree of Canadian political competency to undertake such investments.

Arctic investment is also shaped by geostrategic politics that transcend the scope of Canadian or even Chinese interests. Unmistakably, the region has been gradually opening up as a new and potentially hostile stage of strategic rivalry involving the major powers – the US, Russia, and China – alongside Canada and several other medium-sized and minor powers. This nascent competition in the Polar North is significant for Canada in several ways. The melting ice-caps will present all nations with an attractive alternative sea route to major markets, including the European Union (EU), Africa, and the Middle East. For Russia, the Arctic constitutes a considerable portion of its wealth and represents a natural extension of Russia’s interests. Equally part of Canada’s “backyard,” analysts and policymakers have revisited critical questions regarding the security and defence capacity of Canada in a region that will become increasingly open, ice-free, and used by other nations, including China. These geopolitical factors dictate that an analysis of Canada’s relationship with its North, and investor decisions, account not only for domestic politics, but also for the politics of Arctic rivalry and security considerations.

Russia has shown far more initiative than any other country in adapting its defence strategy and posture with respect to the Arctic, militarizing parts of the region through the construction of airfields, radar facilities, ports, and various critical infrastructure in addition to the training and stationing of offensive-capable military forces. From Canada’s position, the question of Arctic security is a perplexing one. While Canada is part of the North Atlantic Treaty Organization (NATO), the US – the Alliance’s strongest and most military-capable member – has comparably less Arctic exposure, placing a heavier onus on its Canadian counterpart to undertake critical defensive and security responsibilities – a task for which Canada is largely unprepared. This imbalance of responsibilities and capabilities is also true regarding the North American Aerospace Defense Command (NORAD).

China’s role in the Arctic can be expected to grow as a result of the China’s interest and investments in the Polar Silk Road in stride with its tacit “alliance” with Russia and steps to build and enhance its military partnership. Unlike Canada and a number of other medium-sized Arctic states, Russia, in theory, possesses the military resources to secure the NSR for its interests and to ensure the route as a reliable economic transmission belt for its national wealth. The NSR, for example, would diminish transport times from Asia to European markets from approximately 48 days to just 20 by facilitating transport through the Bering Strait and directly to Europe. Indications are that the NSR will be ice-free well before the Canadian Northwest Passage becomes an attractive competitor to the NSR.

China is not a full member of the Arctic Council but takes part as an Observer. However, Beijing’s presentation of China as a “Near-Arctic-State” in its 2018 White Paper carries considerable weight for Canada in particular, as the self-assigned definition conveys China’s intentions to play an active role in the Arctic.

Describing in part its policy objectives in the Arctic, China’s White Paper states that the country seeks to “understand, protect, develop and participate in the governance of the Arctic, so as to safeguard the common interests of all countries and the international community in the Arctic, and promote sustainable development of the Arctic.” While China is active as an Observer within the Arctic Council, and is a party to the international agreement on the prohibition of fishing in the High Arctic, China’s Arctic policy remains unclear and its stated goals have given rise to a degree of suspicion in the West. Some observers believe that China’s foreign policy objectives toward the Arctic may echo China’s South China Sea (SCS) policies. However, China has not identified the Arctic as a “core interest”, and the resources that China has deployed in support of its Arctic policies are modest by comparison. However, as a rising power with global ambitions China’s interest in the Arctic are likely to grow over time and in accordance with its political and military capabilities.

Despite the rising concerns associated with China’s Arctic interests and policies, China’s voice in the Polar North will likely be a permanent factor in the region. What remains less clear is to how best define the balance of threats and opportunities that China’s Arctic interests, investments, and activities pose for Canada and its allies in the short and longer terms.

Activity and investment continues and, as is evidenced by the coverage of the TMAC/Shandong deal and the result of the national security review, these concerns weigh heavily on Canadian regulators. In part, this is because the benefits to Canada and its Northern communities are potentially high. Some, like Leona Aglukkaq, a former federal minister, TMAC board member, and Nunavut Inuk community leader, argued that, ”the benefits are too great to pass up.” Aglukkaq notes that, from her perspective, sufficient oversight for mining projects is provided by a plethora “regional and federal regulatory bodies and laws.”

In the case of the Shandong-TMAC deal, strategic concerns included concerns over the location of the Hope Bay mine – an important consideration due to its proximity to Arctic maritime routes. However, the proposed development of the TMAC facility involved a docking and ore-loading facility, not a naval base. The US, for example, already ships crude oil from Alaskan ports directly to China.

Some of the Northern sentiment expressed in support of investments reflect concerns that resource developments cannot attract sufficient investment capital. TMAC, the region’s largest private employer, faced an uncertain future and with the denial of the Shandong investment. Aglukkaq noted that the Hope Bay mine offers employment opportunities, stimulates local “prosperity” and businesses, and delivers significant royalties and taxes to the local and territorial governments. While the cancellation of the Shandong deal led to initial worry that the overall economic benefit derived from Hope Bay could be limited, Canadian mining company Agnico Eagle has since stated that it would purchase TMAC Resources for a total equity value of C$286.6 million. This should placate the financial strain currently facing TMAC and is a positive outcome for the firm.

Economic Ambitions

The economic factors underpinning Chinese investment interest in Canada’s North are significant. China’s Arctic ambitions are heavily motivated by the vast economic opportunities in shipping and resource extraction associated with the region. According to the US National Oceanic and Atmospheric Administration (NOAA) and as noted previously, the impacts of global warming will create an “increasingly-accessible” Arctic, opening the door to “increased shipping and transportation, research and exploration, and other economic development activities.” China’s Arctic Policy, the aforementioned White Paper, notes that, “[t]he utilization of sea routes and exploration and development of the resources in the Arctic may have a huge impact on the energy strategy and economic development of China.”

Shipping

The NSR and Northwest Passage (NWP), two polar shipping routes, are emerging as increasingly viable alternatives to traditional maritime pathways. While variable weather, glacial masses and ice floes could create additional short-term risks for shipping operators, declining sea ice is increasing the region’s accessibility. According to a Reuters report quoting an estimate from Nordic Bulk Carriers, a ship using the NWP to transit from the west coast of Canada to continental Europe would reduce transit distance by approximately 1,000 nautical miles and an estimated US$80,000 in fuel costs (in addition to the associated carbon emissions) when compared to the traditional Panama Canal route. Ships are also no longer encumbered by the canal’s depth, thus enabling them to carry more cargo and increase efficiency.

Chinese state-owned shipping company, COSCO (the world’s third largest carrier by 20-foot equivalent unit), has steadily increased its Arctic shipping activity since 2013, when the Yong Sheng became the first Chinese cargo ship to travel through the NSR. According to research from Malte Humpert, a Senior Fellow and Founder of the Arctic Institute, COSCO was the “only major international operator on the route” and aimed to complete 14 transits in 2019. Humpert quotes Michael Byers, Canada Research Chair in Global Politics and International Law at The University of British Columbia, as stating, “the COSCO voyages indicate a serious intent on the part of the Chinese government, via a state-owned company, to take advantage of increasing Arctic shipping routes.”

The NWP, which passes through the islands of the Canadian Arctic archipelago and is comparably more difficult to navigate than the NSR, is attracting increased attention from China. China’s ice-breaker, Xuelong, completed its maiden voyage through the route in September 2017, leading to speculation that China would eventually become a more active commercial shipping player in the region. Canada claims sovereignty over the passage, although the US contests this. However, while China has not recognized Canadian sovereignty over the NWP, and is unlikely to do so, the passage of the Xuelong was completed in coordination with the Canadian authorities.

Resource Development

It is estimated – according to a report U.S. Energy Information Administration - that 22% of globally undiscovered petroleum resources and immense diamond, gold, base metals, and iron ore deposits are located in the Arctic region.   From 2005 to 2017, cumulative Chinese investment in Arctic nations (Canada, Greenland, Iceland, Norway, Russia, and the US) in addition to Sweden and Finland, was estimated by CNA Analysis to be over US$1.4 trillion. Of this, US$89.2 billion was invested in projects above the 60 degrees north line. The majority of this investment, as categorized by CNA, was directed towards energy, project-related infrastructure, and mining projects.

Arctic energy resources are disproportionately located in Russia, where China has invested heavily in major projects as part of its Arctic Silk Road initiative. The China National Petroleum Corporation (CNPC) and China’s Silk Road Fund together, hold a 29.9% stake in the sprawling Yamal LNG project, a joint venture with Novatek and Total. According to Xinhua, CNPC will import 3 million tons of LNG from Yarmal each year. Chinese firms are also involved in the development of the Payakha oilfield, a US$5 billion project, and two major Arctic ports.

Chinese investment in the Canadian Arctic is, conversely, heavily-concentrated in mining projects. Chinese firms have invested a cumulative US$19 billion into the Canadian metals and minerals sector, according to data from the CIUA Investment Tracker. This includes several prominent current and proposed projects in the Arctic and Arctic-adjacent regions in and around Northern Québec, Labrador, Yukon, the Northwest Territories, and Nunavut.

State-owned Jilin Jien Nickel Industry Co., Ltd. is the sole owner of Canadian Royalties Inc., the operator of a copper and nickel mine in Nunavik, after completing a US$192 million purchase in 2010. Jinduicheng Molybdenum Group Co., Ltd. (JDC) – a Chinese state-owned firm – acquired Yukon Zinc for US$113 million in 2008. The firm’s Wolverine Mine is located in western Yukon and has “on-site milling capabilities of 1,700 tonnes per day to produce zinc, copper and lead concentrates.” Yunnan Metallurgical Group Co., Ltd, another state-owned firm, invested US$100 million to establish a 50/50 joint venture zinc-lead mining project with Selwyn Resources in 2010. Yunnan subsequently invested an additional US$50 million in 2013 to assume full control of the project in Yukon.

While the vast expanses of Northern Canada are home to an immense frontier of valuable and strategic minerals, the “high cost environment, where operations are difficult and infrastructure is either poor or non-existent” may act as a limiting factor for development. Investors are faced with lengthy, capital-intensive projects and immense international price volatility. This reality has also been exacerbated by the global uncertainty and disruption arising from the implications of the COVID-19 global pandemic and government response measures to the virus.

Chinese SOE Hebei Iron & Steel Group, one of world’s top steel producers, invested US$181 million to acquire 25% joint venture stake in the Kami iron ore project (located near the Labrador/Québec border) and a 19.9% stake in Alderon Iron Ore Corp, the Vancouver-based operator of the Kami project, in 2012 and 2013. Although there was hope that the partnership with a global powerhouse, Hebei, would ease the procurement of additional financing from international sources (including Chinese banks), the project was abandoned after global iron ore prices dropped in 2014. As of late 2019, the project was still attempting to raise an additional US$1 billion in capital. Despite efforts to secure last-minute investment from another Chinese firm, the deal fell through (due to COVID-19-related volatility) and the entire project “imploded” in April 2020 after Alderon failed to repay a US$14 million loan. The project’s economic assessment had previously been determined to lead to a “$5 billion benefit over the 26-year life of the project, $2.2 billion in direct and indirect employment income and $2.3 billion in taxes.”

This made the sale of TMAC Resources to Shandong Gold Mining an illustrative example of the complicated nature of mineral resource extraction projects in the Canadian Arctic region. At the time, Shandong represented an economic lifeline for TMAC – whose economic fortune has declined rapidly since 2016. TMAC CEO Jason Neal, speaking to the Wall Street Journal in July 2020, indicated that Shandong was the only bidder to emerge out of 76 that the company contacted. The transaction was supported by 97% of shareholders, indicating broad internal support for the deal. While the failure of the Hebei/Kami project demonstrates that investment from a capital-rich Chinese firm does not necessarily guarantee success, it still presented a comparably positive opportunity from the perspective in TMAC in a time of immense global uncertainty and volatility.

Effectively blocking access to the deep pools of Chinese capital means that the collection of interested and/or capable investors could drop significantly. Given China’s status as the largest importer of mineral ores, closing options for Chinese investment may well mean that the value of underdeveloped ore bodies in the Canadian North are lessened. Chinese mining companies have an unparalleled ability to provide capital, engineering capacity and market access. This is not to say that Chinese options are the only means of developing major resource developments in Canada’s North, as evidenced by the eventual purchase of TMAC by Canadian miner Agnico Eagle. But the emergence of a reputable Canadian purchaser may not always be a realistic outcome in future cases involving northern resource development projects. While foreign investment in Canada is dominated by the US and European firms, broadly shutting out Chinese capital from the North may have economic consequences moving forward.

Concluding Remarks

Chinese interest in Canadian resources can represent an opportunity for both countries to mutually benefit, if properly regulated and duly scrutinized. But the manner in which Canada treated the TMAC/Shandong deal may, at least in part, inform the course of future Arctic engagement between the Canada and China. The Canadian government has now signalled that it views Chinese investment in the Canadian Arctic as a security risk. This may act as a deterrent for Chinese investors in the future.

Without a full accounting of the specific factors considered by the government in this review process, it is difficult to predict whether the concerns are specific to the Shandong/TMAC deal (relating to its geography, for example) or to a broader array of potential Chinese investments in Canadian companies/assets in the Arctic/sub-Arctic regions.

Proposals such as the TMAC/Shandong deal present regulators with the complicated task of balancing Canadian commercial, security, and community interests using the Investment Canada Act (ICA) and the associated national security review process. These tools should continually be evaluated to best tailor our regulatory policies to the dynamic environment of the Arctic.

As the Arctic becomes increasingly accessible to sea-borne transportation due to climate change, the need to renew and re-evaluate Arctic policy will grow. These policies must take into account domestic political realities in Canada as well as foreign policy, economic, and geostrategic interests.

  

Evan Oddleifson Policy Research Assistant
Evan Oddleifson is a Policy Research Assistant at the China Institute at the University of Alberta (CIUA) and a recent U of A graduate in political science and economics studying finance and investment.

Tom Alton Policy Research Assistant
Tom Alton is a Policy Research Assistant at the China Institute at the University of Alberta (CIUA) and a BCom graduate from the Alberta School of Business.

Dr Scott N Romaniuk Postdoctoral Research Fellow
Dr Scott N Romaniuk is a Postdoctoral Research Fellow in Security Studies at the China Institute at the University of Alberta (CIUA).