RNNR Committee Report

Conservative Dissenting Report - FROM MINERAL EXPLORATION TO ADVANCED MANUFACTURING: DEVELOPING VALUE CHAINS FOR CRITICAL MINERALS IN CANADA

June 16^th, 2021

Introduction:

This dissenting report represents the views of the Conservative Members of the Committee.

We appreciate the efforts of our Committee analysts in the drafting of the original report, From Mineral Exploration to Advanced Manufacturing: Developing Value Chains for Critical Minerals in Canada. That said, we feel that the main report neglects to include critical information and testimony from witnesses which would guide the federal government in making integral decisions which could affect the long-term prosperity of this rapidly growing sector.

We are of the opinion that witness testimony demonstrated serious shortfalls in current government legislation and strategies which are unnecessarily hindering the rapid development required to meet the growing global demand for critical minerals.

We would like to reiterate that we appreciate the work of the Members and staff of the Standing Committee on Natural Resource, however, we must provide a dissenting report as laid out below.

Recommendation 1:

Establish protections for critical Minerals to ensure national security is maintained.

It is the responsibility of the federal government to ensure adequate access to strategic critical minerals. Within the mining industry, this means ensuring key resources are not exploitable by hostile foreign state-owned entities, to the detriment of Canada’s national security interests.

The Government of Canada needs to recognize that the market for numerous critical minerals is dominated by State-Owned Enterprises whose trade and security interests are, at times, counter to those of Canada and other liberal democracies. In effect, their dominance of the market for these thinly traded minerals makes them an effective cartel at setting the price for these minerals in the world market. The objective of these non-market entities is to maintain control of the value chain of these critical minerals – that is, the end products from their processing – where the bulk of economic value lies. There is also a strategic importance in controlling the high-tech production output that requires these critical elements.

Conservatives are calling for mechanisms to ensure that Canada does not become a low-cost commodity supplier to price-setting jurisdictions which are capturing the downstream value of technological applications and final product development. This could include ensuring that entities connected with state-owned enterprises are limited in their ability to take a strategically significant position in any of the critical mineral elements identified by Natural Resources Canada.

Conservatives recognize that critical mineral developments have failed in market economies over the past two decades because of price volatility. When the cartelized supply of these rare minerals is low, the price is high, resulting in the market price for the advanced products that required these minerals to be high. At this point in the commodity cycle, the impetus for starting new critical mineral mine developments in market-oriented economies becomes evident. Investors (and governments – either through direct investment, or through tax incentives like ‘Canadian Exploration Expenses’ or similar provincial equivalents, or through Mineral Tax Exemptions) expend significant resources in new mineral developments.

As pointed out in testimony, the expected time from discovery of a resource to mineral output can take ten years. Ten years is a long time in a commodity cycle. Due to the actual supply of the available material in the world market being somewhat opaque (as many state-owned enterprises recognize their interests are not well-served by disclosing what market-based firms are required to disclose), the mine developments in market-oriented economies falter as the pricing for the critical minerals finds its ebb in the marketplace. The project under development will be starved for capital, and often, the entity and investors backing the project face bankruptcy. As most of these developments occur in remote areas, the cost of commission and decommission is large –even when no project ensues. So the residual value of a mineral development that has been starved of development capital is usually significantly less (<20% of the funds that have been expended in its development).

The full cycle of what happens in market-oriented economies through the efforts of state- owned enterprises manipulating the world market price of critical minerals is the loss of billions of dollars of investment – some of which comes from individual, institutional, and corporate investors – and some of which is borne by governments – through tax incentives that did not result in a taxable outcome, or through direct provision of taxpayer funds by various governments to project developments.

Once the new entrant, market-oriented forthcoming supplies of critical minerals are interrupted in their development, the world market price for the critical minerals rises once again, as does the value of the finished goods that are dependent upon their provision.

The beneficiaries at all stages are the state-owned enterprises who have cornered the market, developed the supply chains, and often constrained supply of the critical elements further by purchasing development sites in the developing world.

Simon Moores of Benchmark Mineral Intelligence clearly stated that, “China has built dominance in the supply chain from more than a decade of investments.” He went on to say, “The way China does it is that it goes in and either owns part of the mine or takes over a company, or it does long-term contracts in supplier states. The one thing China does do is it goes to other countries and puts money into the ground and therefore it guarantees the raw materials for its own economy.”

Note that the investment benchmark in market-oriented economies – meeting a benchmark cost of capital – required for a project to proceed – is not obvious with state-owned enterprises which look at the value chain of the finished product from start to finish – that is, from commodity extraction through to finished good production – from both an economic value added and a national security perspective.

With Canada’s growing reliance on critical minerals for the development of modern technology and our increasingly strained relationship with China, it is the federal government’s responsibility to Canadians to ensure standards are in place to protect our national security interests while fostering a positive investment environment for development of a critical minerals industry with our global partners.

Recommendation 2:

Revise Impact Assessment Act to cut red tape and eliminate disincentives.

The current approval processes in place imposes barriers and represent a serious financial risk for reputable mining companies to move forward with new projects to develop our abundant critical mineral deposits.

The federal government must work with the mining industry and the provinces/territories to create a cohesive environmental approval process to reduce legislative redundancies and reduce risks for companies caused by delayed approval processes. Often, these delays act as a disincentive to companies who wish to invest in the Canadian mining industry.

During their testimony, witnesses clearly stated that current government legislation seriously hinders the Canadian mining industry and their ability to grow and meet the ever-increasing global demand for critical minerals.

Pierre Gratton, President and CEO of the Mining Association of Canada, stated, “For the federal one, that involves an impact assessment, an environmental assessment, and that takes several years.” He went on to say that, “The timelines that it takes to get mines through both federal and provincial processes present a real risk to our ability to take advantage of this opportunity.”

These thoughts were echoed by witness Samson Hartland, Executive Director of the Yukon Chamber of Mines, when asked about whether federal government approval requirements would hinder our ability to meet our 3 year agreement under CUSMA; “We have an abundance of materials, as noted earlier, but if you were to go through the environmental assessment process to permit one of these mines to meet those demands, you're looking at anywhere from three to 10 years… I would put money on it and guarantee that it will go beyond that three-year window.” Jamie Dieth, President and CEO of Eagle Graphite Inc., also testified that 10 years is an accurate representation of how long the approval process takes.

For example, Sean Cleary, Chairman and Chief Executive Officer of BlackRock Metals Inc., discussed the approval process they underwent to receive authorization for their mine in Chibougamau and the metallurgical complex in Saguenay. He stated that they have invested over $150 million dollars in the approval process, which has taken between 10 – 15 years to complete, and they still don’t expect to see shovels in the ground for another couple of years.

Canada must also learn from other market-oriented liberal democracies. Countries like Australia realized that they were falling behind and made significant legislative changes to speed up approval processes for projects while still maintaining exceptional environmental standards. The current government, however, has gone the opposite direction and has made it more difficult to get projects approved through unnecessarily excessive assessment practices.

Contrasting the importance of the strength of our environmental and accountability regime in Canada – which we need to maintain – is the lack of such standards with state-owned enterprises and non-market economies. James Dieth commented, “One of the advantages that China has over the rest of us is that it gets to play by a different set of rules. Sometimes those rules are environmental rules and sometimes they have to do with labour and safety. It would be best, in my view, if we and our allies could ensure that there’s some level of accountability for those actions, so basically levelling the playing field so that China doesn’t translate a lax regulatory structure into a cost advantage at the expense of our own industries.”

If the federal government maintains the status quo, Canada will not be able to take advantage of the growing market demand for critical minerals and we will miss out on the exceptional economic potential this industry could provide.

The regulatory burden serves as an overwhelming counterweight to any concerted action governments may take in assisting with project developments. Therefore, it should be quickly examined, and the regulatory process should be reduced to a manageable, transparent process within the next six months. There is no time to waste in reducing this regulatory overburden.

Recommendation 3:

Develop an integrated supply chain with international allies.

As the global demand for critical minerals increases, it is paramount that the federal government have well-established supply chains with our allies with whom we already have strong partnerships.

Currently, China controls the vast majority of the world’s critical mineral supply and associated value-add supply chains, and that share continues to grow. According to Simon Moores, by 2030 China will “hold the sway of this industrial power, accounting for 67% of the world’s battery capacity,” while Europe is projected to hold 18% of the capacity by 2030. Moore also stated that North American only holds 12%, which is a fraction of what it needs to meet the projected demand in this space. Pierre Gratton echoed these fears in his testimony, where he stated, “For decades, China has held monopoly-like control over critical minerals production and distribution, rendering the rest of the world reliant on procurement and creating a level of risk that deters investors from entering these markets.”

There is hope, however, for Canada to meet these critical demands if swift action is taken by the federal government and if we work with our partners to improve these value chains. Gratton stated that, “An increasingly uncomfortable reliance upon China for many of these commodities has led Europe, the U.S., Canada, Australia and other allies to come together to develop strategies and policy instruments to lessen this dependence.” We need to continue working with our international allies and develop a strategic plan to create a secure supply chain system among our countries.

If the federal government neglects to engage with our partners and turns a blind eye to learning from our allies’ legislative successes in this area, Canada will continue to fall behind and we will fail to see the economic benefits this industry holds. Instead, we will be reliant on other countries to provide us with these critical minerals and the processing they require to create value-added products, like batteries.

Recommendation 4

Coordinate with our allies to establish a dedicated supply stock of critical minerals, possibly through a physical storage and floor pricing mechanism for visibility and pricing purposes.

Canada is too small of a market to undertake this effort on its own, but it can play a key role with its longstanding leadership as the mining jurisdiction of choice in the world. Canada’s pre- eminent role as a financing jurisdiction for international mining is well understood. Although we are at the early stages of losing this historical leadership to Australia, acting quickly to solidify Canada’s leadership will be a strong signal.

Australia and Europe have already established critical mineral strategies to offset the dominance of the market that China has exerted. At the very least, Canada’s coordination needs to include the United States, and probably Mexico (through CUSMA), as the ongoing funding of a critical mineral supply may require backstopping developments with a price amelioration mechanism. In essence, a floor price to ensure the protection of critical mineral developments from manipulating price volatility – and which has held back developments, or caused the insolvency of several of these developments, due to non-transparent world market pricing mechanisms.

With a steady demand for critical minerals, it will lead to the requirements for further value- added development, including concentrations, and processing of the minerals, eventually leading to production of high value-added finished products.

Canada could fulfill the role of maintaining the physical supply and verification – much like Canadian corporate and financial parties perform in other non-critical minerals supply stockpiling.

Establishing a steady supply of these critical minerals will lead to more value-added opportunities, in conjunction with our trade partners. The constraints around dependence on consistent supply of minerals will be reduced, and opportunities building on the demand for these critical minerals will be less risky and less dependent upon foreign, state-owned enterprises manipulating the price and supply of these key minerals.

The value chain – for both the critical minerals and their strategic finished products – is solidified in the non-market, opaque state-owned enterprises. Obviously, their governments benefit significantly from this strategy – economically, strategically, technologically, and they solidify their national security, at the expense of market-oriented liberal democracies.

As stated by Simon Moore of Benchmark Intelligence, “China has built dominance in the supply chain from more than a decade of investment. Despite the common misnomer, only 23% of all battery raw materials are mined in China, but 80% of battery chemicals are refined there. Having huge midstream capacity ensures these key raw materials flow into China to be value- added. It also translates into creating trillions of dollars in downstream industries.”

Canada needs to interrupt this negative feedback mechanism or we will be only a provider of cheaply-price raw material inputs to state-owned enterprises elsewhere, which will continue to concentrate market dominance of the technological supply chain associated with the development of advanced technology products.

Recommendation 5:

We strongly advise AGAINST any large investments on specific critical mineral downstream industry development.

Developing key points of value in the supply chain does not occur overnight. Other world jurisdictions are pursuing the same strategy. Australia is ahead of Canada in their development and implementation of such a strategy, and they are in the shadow of a large resource consumer (China) that represents much of the state-owned enterprise market manipulation in minerals. Canada should examine Australia’s approach to their efforts to development their critical mineral supply chain. However, Canada should also clearly recognize that its market advantage is its proximity to the other world leader in technology development, that requires critical minerals. Canada’s approach should advance in partnership with the U.S. (and possibly Mexico). Further, the European Union also has its own critical minerals development strategy, with which Canada should pursue a partnership.

Strategies are best exemplified by governments investing $130 million in Nemaska Lithium, which included the development of a lithium mine and a lithium processing facility, using proprietary (first of its kind) processing technology. Along with all other investors, totaling approximately $600 million, this investment was worth nothing by the end of 2020, as the market swings in the price of lithium (and other factors) pushed the company into bankruptcy. One issue we recognized is the development of “mission creep” as the development sought to become more ambitious in order to attract more capital, ultimately leading to its own demise as capital expenditures grew unsustainably.

As quoted by Liz Lappin, the President of the Battery Materials Association of Canada, regarding the failure of Nemaska, “We understand that the deposit there is strong but we also understand that the production of battery-grade materials is challenging and complex.”

When asked for his input on the reasons Nemaska went bankrupt, Don Bubar, President of Avalon Advanced Materials Inc., stated, “I followed the Nemaska story, and the mistake they made was they took a miner's approach and tried to make it too large scale too quickly. With many of these operations, you're best to start out at a more modest scale, make sure your process flow sheet works, start with a small, modest amount of product to the market and then scale it up after time. If your plant doesn't work right from day one, then you're going bankrupt, if you build it too big.”

There are political reasons to make large investments, but the risks of committing taxpayer funds to speculative projects is the usual curse of unaccountably deploying ‘other people’s money’. At the end of the day, if the manager does not bear the same risk, or detriment as those who will lose their funds due to a project failure (in this case, the taxpayers), the accountability mechanism is faulty.

Therefore, any government should not be the direct investor in these project developments. Should any development warrant public support – beyond economic incentives – funds deployed into projects should only be managed through third parties with an adequate risk / reward accountability structure.

Conclusion:

This study should be a wake-up call for the federal government. It has been made abundantly clear that the overarching issue within this industry is the fact that the federal government has created a business environment where Canada will be unable to meet the growing global demand for critical minerals and, therefore, be reliant on other countries to meet our needs.

Canada will not be able to meet our climate and national security goals if the federal government does not take serious action to reduce approval periods and work with our allies to develop an adequate supply chain for value-added, high-technology products.