By Lauren McKeon Battered by recession and hungry for cash, mining companies are turning away from traditional partners and courting Chinese investment with increasing success. As our doors open, and the slow gobble of Northern resources starts, we ask if China can really be our savior.

When takeover talks between Noranda and China Minmetals fizzled in March 2005, Canadian union members, protectionists, and many policy makers cheered. The $4.7-billion bid to bring Canada’s largest mining company (the world’s third largest zinc producer) plus its majority share of Falconbridge, under the control of a Chinese state-owned company was broadly unpopular. The Canadian public rallied under naysayers who demanded a thorough review by Investment Canada, igniting a political firestorm. The Canadian Auto Workers, representing 1,700 Falconbridge employees, went as far as to call China a colonizer and Canada its new colony. At the time, it seemed unlikely any future move by China to buy Canada’s resources would succeed.

How times have changed.

China Minmetals secured its first Canadian assets in June 2009, when it acquired most of the properties of Australian miner Oz Minerals – including the Izok, High Lake and Gondor projects in Nunavut’s Kitikmeot region – for $1.34-billion (U.S.). A month later, with little fanfare, Wuhan Iron and Steel Corp. paid $240-million (U.S.) for a 25 per cent share of Toronto-based Consolidated Thompson Iron Mines. Also in July, the $200-billion (U.S.) sovereign wealth fund China Investment Corp. paid $1.75-billion for a 17.2 per cent stake in mining giant Teck Resources. And in September, PetroChina paid $2-billion for 60 per cent of two oil sands projects in Alberta. While that last purchase raised eyebrows in the U.S., the rest – compared to Noranda – went unnoticed.

In the North, it’s not a multi-billion-dollar transaction that will test the emerging relationship between Canada and China, but the comparatively tiny purchase of Yukon Zinc. Eyes turned to the company when, in July 2008, two state-owned Chinese firms, Jinduicheng Molybdenum Group and Northwest Nonferrous International, jointly purchased the company and its Yukon-based Wolverine zinc-silver project for $87-million, taking it private. Observers say if this deal is successful and Wolverine is put into production (and it appears to be heading that way) it will be only the beginning. As Yukon Economic Development Minister Jim Kenyon says, “Wolverine is going to be a real test case.”

THE GLOBAL RECESSION is one reason for the change of heart. Back in 2005, when the Noranda deal was falling apart, nobody was predicting that the world was heading into a killer downturn, one that would dry up traditional investment sources for Canadian mining companies and spark America’s own protectionist sentiments. When the economy collapsed in 2008, the choice for those who weren’t willing to abandon exploration, drilling and construction schedules was – and is – either become creative and think global, or be dragged deep into debt. China quickly emerged as the leading suitor in many cases. “China is one of the few countries left in the world that has deep pockets,” says Kenny Zhang, senior policy analyst at the Asia Pacific Foundation of Canada, a non-profit think-tank studying Canada’s relations with Asia. “You’re not going to a dollar store to talk about the natural resource business. It has to be a big chunk of money, and who has that?”

Harlan Meade, CEO of Yukon Zinc when the proverbial fan was hit, wasn’t prepared to let the Wolverine project tank. But, like others, he was in a pickle. The traditional doors for project financing – large international mining companies and European and New York banks – closed (some figuratively and some literally) more than a year ago and haven’t opened since. “If you want to move forward with project financing in the zinc sector you’re probably talking about the Chinese, perhaps the other two Asian groups – the Koreans and the Japanese – India and probably Brazil,” he says. “That’s it in the world.”

For Meade, who had already spent a couple years courting investment in Asia prior to the downturn, the Chinese were the logical choice – and continue to be so today. He breaks China’s attractiveness down to four points: the Chinese take a long view on rate of return and aren’t likely to pull out early because they need the end product; Chinese interest rates are significantly lower than those in the West; Chinese banks often don’t require companies to hedge metal prices; and some Chinese technology is only accessible through a Chinese partner. “These are the basic fundamentals behind why I think we’re going to see more projects funded in Canada by Chinese investment,” he says.

Indeed, Meade continues to look for more. While he no longer heads Yukon Zinc – he was ousted when a Chinese management team was installed after the takeover – he has recently secured Chinese investment for his remaining company, Selwyn Resources, which has a zinc project at Howard’s Pass in the Yukon. Like others, Meade considers the Yukon Zinc takeover a harbinger of Chinese investment in Canada. With the project speeding toward production, it’s easy to figure out why.

“Wolverine Mine project is actually progressing as planned from previous feasibility studies,” says Shae Dalphond, Yukon Zinc’s community and economic development coordinator. “Established Chinese owners have made this possible.” Dalphond, who directed all questions to his email, says the communities near the project, 440 kilometres east of Whitehorse, overwhelmingly support the company. The reason for that is easy to figure out, too: Throughout the 2009 construction phase, approximately 40 per cent of the staff – 80 out of 200 – was Yukoners, many from the Ross River Dena First Nation. When the 241-person operations camp opens in mid-2010, locals will continue to find work at Wolverine.

In part, Yukoners have their government to thank. “(Chinese investment) has been largely a result of works done by the governments in Canada,” says Meade, “particularly the Yukon government, which was there early and perhaps most aggressively.” Keeping that in mind, one has to concede China’s interest – and success – in the Yukon is not really just a fluke of the recession. While many have rightly dubbed it the catalyst, much hard work was put into securing Chinese-Canadian partnerships before the dreaded R-word became the trademark of 2008 and 2009.

China’s global spending spree has been driven by Chinese Premier Wen Jiabao’s “Going Out” policy, which urges businesses – and the country’s massive sovereign wealth funds – to invest beyond the country’s borders. When Premier Wen introduced the “Going Out” policy in 2004, Kenyon was on his first business trip to China. For Kenyon, welcoming Chinese investment is just good sense: China needs the Yukon’s resources and the Yukon needs China’s cash.

“We’re a huge territory with a small population base, so capital [to develop a mine] is going to have to come from the outside, be it Beijing, Vancouver, Toronto, London, Frankfurt or anywhere else,” he says. Beijing, however, makes the most sense if Yukon companies also want to sell their product to their new investors – which they do. “Just looking at a map you can see we’re better than five sailing days closer to Asia than anyone from California,” says Kenyon.

In addition to the Yukon Zinc deal, Chinese companies pumped $7-million into Yukon mining companies in 2008, bringing the year’s total mining investment into the territory close to $100-million. That’s not a bad return for the $47,000 the Yukon government spends to take representatives of seven or eight companies to China each year. “If one of those goes like Yukon Zinc,” he says, “with a $400-million return and 200 or 300 jobs, that’s a pretty darn good investment.”

The Yukon’s support is much more than just a cash effort, however. The territory has also entertained delegates from Chinese companies over the past two years and has had great luck schmoozing at China’s big mining conference, China Mining, where the government’s presence puts many state-owned companies at ease. Hugh Bresser, managing director of Overland Resources (which is working to develop projects throughout a 60 square kilometre area of the Yukon’s Selwyn Basin) believes the Yukon government has helped the company shave years off the company’s networking time. “We’re able to circumvent a lot of the relationship building, and it gets us introductions to the right people at the right levels,” he says. “That’s really why went with the Yukon government (to China).”

Last year was Bresser’s second time attending China Mining, but his first time going with the government. “Our first one (was) in 2008 and I walked away feeling a little bit numb,” he says. “I spent a lot of time and effort, met with a lot of people, and we didn’t get much response from the Chinese.” Since then, Bresser has worked with the Yukon and federal government “hand in glove” to secure more meetings – three more at various events – leading up to the 2009 conference, where he had noticeably more success. “It’s not a one-off event,” he says, “I don’t think (China Mining) can be seen in isolation. It is an ongoing battle of relationship building.”

And it’s a battle the Yukon government is committed to helping win. “We want to know that when a Chinese company says to their government that they have an interest (in the Yukon), they know who we are and they know where we are,” Kenyon says. “Our role is to put company A together with company B and let them do their good work and show that we’re in support of them.” It’s a role the territorial government has played well. Already, the Yukon is millions of dollars ahead of the NWT and Nunavut when it comes to grabbing Chinese cash. Of course, the downside of success is that it tends to breed imitation – and the Yukon government could soon have some big competition.

IT'S NO secret China has a lot to spend – or that it’s willing to spend it. If anyone had any doubt about the country’s “Going Out” policy, Premier Wen quashed it last July, when he called on his nation’s business sector to increase acquisitions abroad. Urging China to use its $2-trillion (U.S.) in foreign reserves to support outward expansion, Wen told a group of Chinese diplomats: “We should hasten the implementation of our Going Out strategy and combine the utilization of foreign exchange reserves with the Going Out of our enterprises.” Jiaboa, trained as a geologist at the Beijing Institute of Geology, is a smart man, but even a dumb man can figure out why it’s a good move for an aspiring superpower to at last look outward: With $2-trillion, China can make an awful long shopping list.

“Chinese are just looking everywhere,” says Kenny Zhang of the Asia Pacific Foundation of Canada. He points to the state-owned Chinese Investment Corp., which, with $200-billion in its pocket, manages 10 per cent of China’s foreign reserve. “If we assume the $200-billion has to be invested over a five year horizon, it turns out the CIC has to spend $100-million a day,” he says. “That is something that is not paying a telephone bill.”

But it is something that could help to invigorate aboriginal communities, says Calvin Helin, a well-known aboriginal lawyer, advocate, and co-founder of two mining funds geared to investment with aboriginal partners, both of which were funded by Asian investors. “Aboriginal people need to start developing their resources,” he says. “Typically what happens is projects take place in their territory and they get some jobs and business opportunities, but all the wealth is exported out of the North. It’s time to change that model and it’s time to ensure some of the wealth stays in the North.” Helin says the two funds he helped found, one of which focuses on the development of mining projects, are designed to allow aboriginal groups to get financing and meaningfully participate in projects in their own territory.

He believes getting aboriginals partnered with investors who can develop resource projects is a big step toward creating an aboriginal economy, and will allow the Canadian government to drastically reduce the money it currently spends on transfer payments. For proof, he points to the Centre for the Study of Living Standards in Ottawa, which, in 2007, established the value of engaging aboriginal people in the workforce and education system, giving them pay parity with the mainstream population. The Centre concluded that, given the best-case scenario, aboriginal people could return more than $400-billion to Canada’s GDP by 2026. But for Helin, that’s not even the whole story: the picture gets even bigger once you factor in that, through treaties, 22 Northern First Nations control, or have influence over, five million square kilometres of Canada’s landmass.

“Getting aboriginal involvement in the development of their resources – there is nothing else that Canada could do as a nation that could create more wealth for the benefit of everybody,” he says. “It’s not just for the sake of relieving the horrendous poverty in aboriginal communities, but for the sake of Canada’s future prosperity. We need this.”

Helin is not alone in his views. This spring, 150 people will form a high level delegation to accompany Helin to China – and possibly South Korea – to talk Asian-aboriginal partnerships. Among them will be Darrell Beaulieu, CEO of NWT-based Denendeh Development Corporation, who has been on trade missions to China before, always with the same key goal. Beaulieu is looking to secure Chinese investment for the long held dream of a Mackenzie Valley Highway. “These relationships take time,” said Beaulieu in 2008, shortly after one of his China visits. “I don’t think [the Chinese] are any different than the BHPs and Rio Tintos of the world coming to Canada. They are looking for some business opportunities.” The road, if built, would run from Wrigley to Tuktoyaktuk, and many believe it could open up dozens of investment opportunities, spawning hundreds of jobs in the territory.

WITH SO MUCH MONEY flowing, it’s easy for cash-strapped Canadians to get blinded by the flashing dollar signs. Certainly, few have asked the elephant-in-the-room question likely to have been on the tips of everyone’s tongues, pre-recession: What if the Noranda protestors were right? What if by opening the doors to China Canada is trading one too-powerful partner – the US – for another?

It’s not a question that seems to dog most suitors. “There are still risks. There is still corruption over there. There are political risks and regulatory risks that you have to manage,” says David Emerson, former minister of foreign affairs and the only Canadian on China Investment Corp.’s International Advisory Council. “But you just have to do it.” For Emerson, the question is instead what will happen if Canadians don’t turn to China. “I think we’ve been spoiled by [the North American Free Trade Agreement] since the early ’90s,” he says, “but NAFTA is going a little sour because of creeping protectionism in the US.”

To Emerson, Canada’s old narrative, – come to Canada because we’re not America, we’re not imperial, we’re good guys, we’re honest and humble and you can sell into a market not of 33 million Canadians, but of 440 million North Americans – is becoming badly eroded. So eroded, he believes, that if Canada wants to continue its current standard of living it has to look out in the world.

That means getting rid of old fears of communists and state-run companies. “If you want to do business with China, you have to face it’s state-owned companies,” says Zhang, but it’s nothing to be afraid of. “It doesn’t matter where (investors) come from, they have to follow the rules in Canada and why we do have to be afraid of that?”

Chinese-owned mining companies have faced allegations of human rights abuses and terrible environmental practices in a number of developing countries, but Meade says the Chinese are comforted by Canada’s strong, clear laws and regulatory processes. “I believe that is what is making Canada a lot more attractive now to China,” he says.

Meade thinks Canadians have to get over to China to see past its made-in-the-media reputation: “There are many people (who), because they have not visited China, really have no idea what’s going on,” he says. To them, it’s all poorly run coalmines, worker fatalities, and human rights violations. “There’s always going to be that fear of the unknown,” he says, adding the media often gets it wrong.

Of course, some fears aren’t baseless. That’s why Meade does expect that, as the Yukon Zinc test case chugs forward, public pressure will demand more cooperative, joint-venture type transactions over outright sales, as has happened in Australia.

“The initial transactions (have been) 100 per cent buyouts,” he says, “but I don’t believe that will be acceptable to Canadians in the long term. I think there will be increasing public pressure on seeing co-venturing as opposed to just outright sale of Canada’s assets.” It would seem that the dance between the dragon and the polar bear is only just beginning.

Lauren McKeon is Up Here Business’s newest associate editor.