U.S. military weighs funding mining projects in Canada amid rivalry with China

Source: MSN

By: Alexander Panetta

Date: Nov 13, 2022

The United States military has been quietly soliciting applications for Canadian mining projects that want American public funding through a major national security initiative.

It’s part of an increasingly urgent priority of the U.S. government: lessening dependence on China for critical minerals that are vital in everything from civilian goods such as electronics, cars and batteries, to weapons.

It illustrates how Canadian mining is becoming the nexus of a colossal geopolitical struggle. Ottawa just pushed Chinese state-owned companies out of the sector, and the U.S. is now considering moving public funding in.

The American military has a new pot of money at its disposal to help private companies inaugurate new mining projects; it’s for funding feasibility studies, plant renovations, battery-recycling and worker training.

President Joe Biden invoked the 1950 Defense Production Act to expand the domestic mining sector, and the military received hundreds of millions of dollars to implement it.

This whirlwind of activity was prompted by a White House study last year warning that dependence on certain foreign-made products represents a national security risk to the U.S., and it cited semiconductors, batteries, medicines and 53 types of minerals.


An official from the U.S. Department of Defence this week provided a briefing on the program at a cross-border conference, and he made one thing clear about the funding: Canadians qualify.

That’s because Canada has, for decades, belonged to the U.S. military industrial base and is every bit as entitled to the cash as American mining projects.

“It’s really quite simple. It’s a matter of law,” said Matthew Zolnowski, a portfolio manager for the Defense Production Act program, speaking to a gathering of the Canada-United States Law Institute in Washington, D.C.

“So an investment in Alberta or Quebec or Nova Scotia would be no different than if it was in Nebraska or anywhere else in the United States. As a matter of law.”


Canadian government provides list of 70 projects

Zolnowski said the U.S. is actively reaching out to companies to explain the process, as many have no relationship with the U.S. government and might not realize how it works.

“We are actively engaging those firms,” he said, describing a flurry of recent activity by quoting an old movie line: “It’s a duck on a pond. It looks quiet on the surface, but there’s a lot happening.”

The Canadian government has been active, too. Canadian officials say they’ve already provided the U.S. with a list of 70 projects that could warrant U.S. funding.

Both countries describe this as a generational initiative still in its early stages: Canada, for now, is still a bit player in producing these minerals, which include lithium, cobalt and manganese.

Canada’s critical mineral reserves 🇨🇦

But one Canadian official said this can change. Jeff Labonté, assistant deputy minister at Natural Resources Canada, told the conference that Western democracies are now engaged in industrial policy in a way they haven’t been for decades.

“We have this resource potential…. We also have a huge capacity,” he said, touting 200 mines and 10,000 potential products in the exploration phase. 

“We have a skill set in this area. We have capital markets, we have engineering expertise, we have companies that operate around the country and around the world.”

Canada is also providing billions of dollars in public funds to the sector over the coming years through federal and provincial programs.

What’s driving this sudden minerals rush?

The transition to electric cars is a key driver of this challenge. They’re hugely reliant on minerals like lithium, and current production is not close to meeting projected demands.

Making matters more complicated is China’s dominance of the market; it controls two-thirds of the world’s lithium processing capacity, for example.

Beijing has already revealed a willingness to cut off rivals from mineral exports, as it did a few years ago amid a fishing dispute with Japan.

The U.S. has, more recently, suspended semiconductor exports to China in an emerging digital cold war in which Canada is increasingly involved.

In his talk, Zolnowski said countries spent decades leaving themselves in this vulnerable position; resolving it won’t happen overnight.

He said the U.S. government has a four-part strategy for this.

Part 1 is to stimulate domestic demand for these goods by designing new sustainability initiatives around these materials.

Part 2 is stimulating supply by funding new production and recycling, while Part 3 is building stockpiles. The final component involves working with allies.

Zolnowski noted that back in 1984, Robert Gates, at the time a U.S. intelligence official who went on to become secretary of defence to two presidents, articulated his fear in a speech that foreign government-funded companies would come to dominate the industry.

This worries the Pentagon for security reasons, both economic and military. Zolnowski called these minerals the building blocks of a thriving economy.

And in times of war, he said, industrialized nations that lack secure and reliable access to these materials have suffered mightily: “[They] have suffered significant performance tradeoffs, which contributed to their defeat.”

He said civilian goods will dominate the market, as well as receiving the lion’s share of Pentagon funding. Indeed, the language of the Defense Production Act stipulates that funds can be used for non-military purposes, including the U.S.’s general economic well-being.


Pentagon’s main role: Building market confidence?

Zolnowski said the U.S. is looking primarily at offering grants, not loans, and it’s willing to fund projects at various phases of implementation, as it views this as a long-term project.

One partner at an investment firm present at the conference said the Pentagon’s role is not to become a major investor.

What the private sector wants, he said, is help with confidence-building: Once you demonstrate that a project has the Pentagon’s imprimatur, he said, it’s easier to reassure investors this is a safe bet.

One attendee said there are still flaws to iron out in the program design of Canada’s own critical minerals strategy, including its 30 per cent tax credit.

Jonathan Garbutt, a Calgary-based tax lawyer, cited industry estimates that lithium extracts from brine deposits in Western Canada could produce hundreds of thousands of tonnes per year, but, under the current language of the Income Tax Act, the credit wouldn’t apply to those extracts.

Another speaker at the conference noted that this new conversation about cross-border co-operation carries historical echoes.

International trade lawyer Lawrence Herman, who is based in Toronto, noted that the precursor to the countries’ current military-industrial partnership was a 1940 agreement between the U.S. and Canadian leaders.

Back then, American funding discreetly helped turn Quebec aluminum into a global powerhouse.

Since then, Quebec aluminum has had mostly civilian uses. It also helped the U.S. build its arsenal for the Second World War.

Canada was heavily involved enough in that effort that Quebec became the site of the wartime allied leaders’ conference.



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