The Canadian mining company SRG is looking to move its headquarters outside Canada to circumvent a national security review that would allow the federal government to block a financing deal with an important Chinese mining company.

SRG Mining, headquartered in Montreal, Quebec, announced in July a provisional deal worth CAD 16.9 million to sell a 19.4% stake to the Chinese group Carbon One New Energy Group (Carbon One). However, the federal government announced last year that it would block Chinese companies from acquiring Canadian mining companies over concerns that China’s dominance over critical minerals would affect Canada’s national security.

SRG warned investors when announcing the deal that it must obtain federal approval. But in a public filing last week, SRG suggested a way to circumvent the regulations: the company will remain listed on the Toronto Stock Exchange but will re-domicile outside Canada. In this way, the deal with Carbon One would not require government approval.

This could lead a large number of Canadian companies to follow suit.

Christopher Ecclestone, senior mining strategist at Hallgarten & Co. in London, criticized that if SRG manages to circumvent the regulatory and trade rules successfully, it would be a slap in the face of Canada’s national security policy and open Pandora’s box. This caused a significant stir with a number of Canadian companies following suit and re-domiciling abroad to avoid restrictions under the Investment Canada Act (ICA).

Ecclestone said that unattractive companies that no one wants to buy will be the only ones left in Canada.

Also, after the government announced the ban last year, experts expected Canadian companies to stop trying to secure financing from China. However, an increasing number of critical Canadian mineral companies, including SRG, continue to engage in mergers and acquisitions with Chinese buyers. Naturally, Chinese companies eager to strengthen their dominant position are happy to participate.

If the SRG-Carbon One deal goes through, China’s position in graphite, a key component in electric vehicle batteries, will become stronger. SRG said the deal could significantly accelerate its graphite projects in West Africa. According to the U.S. Geological Survey, China accounts for 65% of the world’s graphite production.

SRG declined to comment.

Carbon One is a private company, and there is little public information about its management or investors. According to SRG, Carbon One was established last year by Chairman Yue Min, who holds more than 300 patents in the battery industry and is a co-founder of BTR New Materials Group Co., Ltd. (BTR).

“Whether the Canadian government is truly unable to intervene in the proposed deal has not yet been determined,” Allison Rylander, spokesperson for Innovation, Science and Economic Development Canada, responded via email, saying the federal government is aware of the proposed SRG deal but, due to confidentiality provisions under the Investment Canada Act, cannot comment. Leland said that the government always takes proactive measures against transactions that undermine Canada’s national security.

China restricts graphite exports and takes strict measures against Western automakers.

The government also took a hard line against China in 2022, using its dominance in critical minerals for economic pressure on Western countries. China dominates supply chains including lithium, cobalt, and graphite, and in October announced restrictions on graphite exports aimed at suppressing Western automakers.

Despite Canada’s efforts to thwart them, local mining companies appear to have no intention of stopping seeking investments from China. Brad Nichol, CEO of Alpha Lithium Corp. (APHLF), based in Vancouver, believes that cutting off this massive source of financing and decades of Chinese expertise in battery minerals would be critical to the Canadian mining industry.

Another reason driving companies to seek investments from China is a lack of local financial support. Reasons include Canadian pension funds failing to invest in the mining industry, the shrinking brokerage industry providing services for small-scale mining, and the poor past performance of the mining industry, which has discouraged investors from taking risks.