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9B21M059

SHANDONG GOLD’S PROPOSED ACQUISITION OF TMAC IN THE
HIGH ARCTIC

Su Liu, Paul W. Beamish, and Alex Beamish wrote this case solely to provide material for class discussion. The authors do not intend
to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other
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Copyright © 2021, Ivey Business School Foundation Version: 2021-05-31

On May 8, 2020, Chinese state-owned enterprise Shandong Gold Group Co. Ltd. (Shandong Gold) held an
online signing ceremony simultaneously in Jinan, China, and in Toronto, Canada for the acquisition of
TMAC Resources (TMAC), a listed Canadian gold mining company. According to a series of agreements
signed by the two parties, Shandong Gold would acquire 100 per cent equity of TMAC in cash at a price of
CA$1.751 per share, with a total investment of approximately US$163 million. The acquisition still needed
to be approved by the relevant departments of the Chinese and Canadian governments.

TMAC’s core asset was its 100 per cent interest in the Hope Bay gold project located in the northeast of
the Canadian territory of Nunavut. The project was located about 160 kilometres north of the Arctic Circle.
Since production began in 2017, the project had faced numerous operational problems, which required
hundreds of millions of Canadian dollars to resolve, but TMAC had been unable to obtain the required
funding.2 Could Shandong Gold realistically take over the operation of this gold mine in the difficult polar
environment? Would Shandong Gold be welcomed into the project by Nunavut’s local Indigenous people,
who held the land’s mineral lease? What would be the effect of the Canadian government’s recent move to
strengthen its review of foreign acquisitions of Canadian companies?

SHANDONG GOLD’S INTERNATIONALIZATION STRATEGY

Proposed in 2013, the One Belt, One Road initiative became one of China’s three national strategies in
2014 and was fully devised in 2015. The next year, in 2016, the One Belt, One Road initiative entered the
full implementation stage.3 This ambitious economic development project comprised two parts. The first
part (the “Belt”) consisted of overland transport links between China and both Central Asia and Europe.
The second part (the “Road”) consisted of a series of maritime routes between Chinese seaports and ports
in other countries. By the end of October 2019, the Chinese government had signed 197 One Belt, One
Road co-operative documents with 137 countries and 30 international organizations, which included issuing
a series of related incentive policies and measures.4 The favourable policies of the One Belt, One Road
initiative and the active international mergers and acquisitions market brought huge development
opportunities to Chinese precious metal mining and processing enterprises.

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Shandong Gold was established in 1996 in Shandong Province. It was a large state-owned enterprise with
great financial and technical strengths. Since 2017, it had consistently ranked first among Chinese gold-
producing enterprises.5 Shandong Gold actively implemented the national “Going Out” strategy,
conducting resource development and production capacity co-operation overseas. In July 2016, Shandong
Gold signed a 50–50 joint venture partnership with Barrick Gold Corporation (Barrick), the world’s largest
gold miner, at Veladero, Argentina’s largest gold-producing mine. Shandong Gold quickly rose from 16th
to 12th in the ranking of global gold mining companies, based on annual gold production.6

In the process of overseas resource investment and development, gold companies often faced high risk in
terms of geopolitics, safety, environmental protection, and relationships with Indigenous residents.7 To
understand the overseas resource investment landscape, Shandong Gold had established a special team. The
team members studied key mines in production and under construction around the world. They analyzed
different countries’ political characteristics, investment environments, resource conditions, environmental
protection policies, and other first-hand information. Shandong Gold was then able to make safer plans for
future investments.

In addition, since international mining rights trading was mainly conducted through financial intermediary
investment banks, Shandong Gold maintained communication and co-operation with dozens of
international investment banks every year. This allowed the company to better understand the dynamics of
the global mining trading market and to learn about new potential mineral project investments.

CANADIAN MINING

Canada had always been recognized as a leader in global mining8 and was rich in more than 60 mineral
resources, such as potassium, cadmium, gold, diamonds, gems, and uranium. The country ranked in the top
five in the world in terms of output of many types of mineral resources (including gold). Canada’s rich
mining resources were highly sought after and favoured by investors from many countries. In 2018, Canada
attracted 15 per cent of the total investment in the development of global mineral resources. It was the
world’s largest non-ferrous metal mineral exploration destination. The mining industry was also a key
industry in Canada, with direct and indirect income from this industry accounting for 4.7 per cent of the
country’s total gross domestic product.9

In addition to the resource endowment advantages of mining, Canada had strong global competitiveness in
mineral exploration and development technology, mine management, and mining financing. Canada had an
active mining capital market and the world’s largest mining trading platform—the Toronto Stock Exchange
(TSX) and TSX Venture Exchange. There were about 1,400 mining companies in the world listed on the
main board of the TSX, accounting for about 60 per cent of the total number of mining companies in the
world.10 Many major international gold companies, such as Barrick and Goldcorp Inc., were headquartered
in Canada.11 In addition, Canada held a world-class mining conference every year, attracting the active
participation of global mining companies.12 Canada’s rich natural resources and good investment and
financing environment had seen Canada firmly established as a global mining centre.

Canada was a federal country composed of 10 provinces and three territories. The exploration,
development, and mining of mineral resources, as well as the construction, management, and reclamation
of mines, were mainly under the jurisdiction of each province, with each having its own mining legislation
and mineral tenure system.13 The mining process of mineral resources was relatively similar in each
country. Generally, it started with ordinary surveys, followed by detailed surveys, and eventually mining.
At different stages of the mining process, issues of prospecting rights and mining rights arose.14 Canadian

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mining rights leases were mainly divided into exploration rights (i.e., mineral claims) and mining rights
(i.e., mineral leases).15 Only after holding an exploration permit or a mining lease could a company have
the right to conduct exploration or mining activities in the designated area.

In Nunavut and some areas in the Northwest Territories, the surface land rights and underground mineral
rights were separate. The Indigenous Inuit people held mineral rights on the surface of the land. Holders of
underground mining rights, such as private companies, were required to negotiate with the Indigenous
people before they conducted underground mining. They also had to obtain a land entry permit or sign a
mining agreement before they could conduct related mining activities.16

To acquire an operating Canadian mining business that was priced above a certain financial threshold,17 the
acquisition transaction had to be submitted to the Canadian government for approval. There were two main
Canadian government approvals: the Competition Act (for antitrust issues) and the Investment Canada Act.
Investment law mainly examined whether this transaction could bring a net benefit to Canada. In addition,
the Canadian government had the right to review any transaction it believed could harm national security.

TMAC

TMAC was a Canadian gold mining company headquartered in Toronto and listed on the TSX. Its core
asset was the Hope Bay project (with 100 per cent equity), which held mining rights for three mines in
Nunavut with good growth potential. The three mines were named Doris, Madrid, and Boston and were all
located along Hope Bay.18

The Doris mining area was completed and put into production in 2017, with a total production of
approximately 9.5 tonnes of gold.19 The Madrid and Boston mining areas had not yet entered the mining
stage. A large amount of capital would be required for infrastructure construction of these mining areas. On
December 31, 2019, TMAC stated that according to the Ontario Securities Commission’s National
Instrument 43-101, the Hope Bay project had proven credible reserves of 3.545 million ounces (110.3
tonnes) of gold with an average grade of 6.5 grams per tonne (see Exhibit 1). The project’s reserves were
also likely to increase.20

The previous owners of TMAC were highly experienced mining companies. They had cumulatively
invested more than $1.7 billion to develop and construct the Hope Bay project. However, due to the
problems of mineral extraction design, operation, and mining supply capacity, the Hope Bay project had
not achieved the TMAC treatment capacity and recovery rate indicators (see Exhibit 2). To solve these
problems, TMAC needed strong technical support and a large amount of capital investment (see Exhibit 3).

The biggest hurdle for TMAC was funding. It had been unable to pay off its rollover debts. The stock
market downturn caused by the outbreak of the COVID-19 pandemic in 2020 would have made it even
more difficult for TMAC to raise funds from the securities market. But before the pandemic, at the end of
2019, TMAC’s declining share price caused the company to seek an external buyer. Jason Neal, the then
president of TMAC, initiated a strategic review because he understood that TMAC would not have the
resources to continue.21

SHANDONG GOLD’S INTEREST IN CANADA

In the early stages of the Hope Bay project, Shandong Gold inspected several Canadian production mines
that were up for sale. Because mines invested a considerable amount of capital during the infrastructure

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construction’s early stages, their asking price was usually very high and Shandong Gold did not consider
them ideal investment targets. Shandong Gold learned about the TMAC acquisition opportunity from the
investment bank contracted by TMAC’s seller, although Shandong Gold had always considered TMAC a
potential investment target. After completing the due diligence process on TMAC, Shandong Gold decided
that the potential acquisition was ideal and consistent with its internationalization strategy. The proposed
acquisition would become Shandong Gold’s first wholly owned mine outside of China.

Shandong Gold’s investment in the TMAC project would actually mean purchasing a producing mine plus
investment in subsequent expansion, to achieve gradual investment in various future phases. After the
proposed acquisition, the mine would have to meet a target output level within two or three years, which
would allow the project to maintain operations in the Doris mine. Both of the other two mining areas had
proven resources underground and mining rights. Still in early stages, TMAC had already invested $650
million in the two mines but had not yet entered the mining stage. Therefore, Shandong Gold planned to
continue investments in the two mines to extract gold. After refining the feasibility study reports of the two
mines, Shandong Gold planned to invest in construction during the second or third year for their completion
and to begin production within three years. Therefore, Shandong Gold would be expected to make a very
large investment in the near future.

TRANSACTION MODE

Agreement of Arrangement

On May 8, 2020, Shandong Gold and TMAC signed an agreement of arrangement stating that Shandong
Gold would acquire the TMAC current subsidiary in Canada at $1.75 per share through a proposed new
Shandong Gold subsidiary in Hong Kong. The total number of issued shares, which was currently
119,456,881, would be diluted after the sale. The acquisition agreement was issued with a consideration of
approximately $209 million (see Exhibit 4 for TMAC’s capital structure).

The purchase price was a 52 per cent premium to the volume-weighted average price for the first 20 days
of May 6, 2020, and a 21 per cent premium to the closing price on May 6, 2020. After the transaction was
completed, Shandong Gold’s subsidiary in Hong Kong would hold 100 per cent equity of TMAC through
direct and indirect means.

The acquisition required approval from at least 66.6 per cent of TMAC shareholders in a special meeting to
be conducted within 60 days after signing the agreement. As well, the transaction had to be approved by
relevant Canadian regulatory agencies, courts, and stock exchanges, in addition to meeting standard conditions
for this type of transaction. The deal would be completed within six months after signing the agreement.

Transition Financing

At the same time, Shandong Gold’s subsidiary in Hong Kong had to sign a non-public placement
subscription agreement with TMAC expressing intent to subscribe for newly issued TMAC common shares
at $1.75 per share for a total price of US$15 million. These newly issued shares would consist of 9 per cent
of Shandong Gold’s total TMAC shares.22 The revenue from these new shares would provide TMAC with
immediate financing. The acquisition of TMAC was officially signed, but approval from the governments
of China and Canada was still required. Without financing, during the six months before formal delivery of
the proposed acquisition the Hope Bay project would not have sufficient capital to maintain operations
before formal delivery of the proposed acquisition. Therefore, Shandong Gold carefully considered lending
the required funding to TMAC on its own.

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Before this transaction, TMAC had borrowed significant amounts of funding from the Toronto alternative
asset management firm Sprott Inc., which had mortgaged TMAC’s current property.23 With Shandong Gold
providing a loan to TMAC, nothing from TMAC would need to be mortgaged. However, this could become
a serious problem if the project failed to receive final approval and the transaction could not be completed.
TMAC would have already received the loan from Shandong Gold. If TMAC could not repay the loan,
Shandong Gold would have to go to Canada to apply for enforcement. The time and cost of such an issue
would be difficult to control, so the risk of lending was very high.

Shandong Gold finally opted for equity financing. TMAC would issue some new shares and Shandong
Gold would subscribe for these new shares. In this way, TMAC could also receive funds, but Shandong
Gold would become its shareholder. The advantage of becoming a shareholder was that if the transaction
failed to receive final approval, Shandong Gold still held the shares. If another investor were to then buy
TMAC, Shandong Gold could sell this part of the stock. Therefore, equity financing was more secure for
Shandong Gold. When the agreement of arrangement was signed, the funds were provided to TMAC
simultaneously by Shandong Gold. In the future, after collecting all other outstanding stock, Shandong
Gold would be able to use the new stock it purchased to delist TMAC from the TSX.

Lock-in Agreement

This project also included bidders from countries other than China. The Chinese buyers were proposing an
all-cash acquisition, but other buyers were more inclined to swap stock. Although TMAC’s major
shareholders would likely agree to a share swap, the TMAC company itself preferred cash, which could be
directly applied to resolve the dilemma of capital shortages. In particular, this transaction would take place
during the COVID-19 pandemic, when mining stocks on the Toronto stock market were underperforming,
which made cash transactions preferable for shareholders during the first quarter of 2020.

To increase certainty of the transaction, Shandong Gold’s subsidiary in Hong Kong also signed a lock-in
agreement with TMAC’s largest shareholder, Resource Capital; its second-largest shareholder, Newmont
Corporation; and TMAC’s directors and executives. The agreement stipulated that before the voting and
termination of the agreement, the major shareholders and executives irrevocably promised to vote for the
transaction and vote against other acquisition proposals. They agreed not to exercise any right to object to
the transaction. The transaction had been unanimously approved by TMAC’s board of directors.24

THE INUIT PEOPLE OF HOPE BAY

The Inuit people of Hope Bay were an important stakeholder in this transaction. They owned the land and
mineral rights of the mining area. According to Canadian law, the development of resources located within
the scope of Indigenous residences required the permission of the Inuit people, and a consensus with them
had to be reached. Previously, TMAC had signed a land and mineral exploration agreement with Inuit land
and mineral rights holders. That agreement was set to expire on December 31, 2035.25

The Canadian government would also first seek the opinions of the Inuit people before approving the
agreement; so, it was very important for the operation of the mine to properly handle the relationship with
them. Conducting exploration and mining in Indigenous settlements required considerable cost and energy
to communicate with the local communities.

The Inuit people called the area Hope Bay because they were very optimistic about its future. It was also
known that an investor with technical and financial strength was needed to extract the mining resources

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there. TMAC had started production in 2017, but after over two years of operation, the annual output had
not reached the expected value. As Neal said, “We have been making operational performance
improvements since construction was completed, although we have not reached our targets.” Now that
TMAC had difficulty with financing,26 it was not possible to develop this area, nor to fulfill the hopes and
requirements of the Indigenous people.

Shandong Gold also signed a commitment agreement with the local Indigenous people before entering into
the agreement. The mining and sales of mines involved in this project would provide the Indigenous people
with a net benefit. TMAC would also provide a certain percentage of the profits to the Indigenous people
in the form of an equity fund directly linked to the future income of TMAC in this project. The more
minerals that were excavated and sold, the more compensation that local Indigenous people would receive,
as a certain percentage.

TMAC also promised to help improve employment availability for the local Inuit people, who still lacked
economic opportunity. Shandong Gold offered workplace training and would help them build their
communities, and invest in their education systems. However, this would only be possible after TMAC had
the necessary funds.

After negotiating with the Inuit people, Hujie Duan, Shandong Gold’s acquisition project leader, felt that
Shandong Gold may be welcome to invest there. Shandong Gold had strong financial resources. It was also
a global leader in the technology of underground mine development. Some ports around Hope Bay had
been built by Chinese companies. Shandong Gold saw the opportunity to develop and increase good
relations with the locals. Some people had communicated to Hujie Duan that they hoped that powerful
companies could invest in the construction of the Hope Bay area as soon as possible.

INVESTMENT RISKS

Uncertainty Approval Risk

The acquisition of TMAC would need approval from relevant departments of both Chinese and Canadian
governments. China’s resource-based state-owned enterprises had increased the intensity and scale of
overseas investment, which had aroused widespread criticism in international public opinion. Many foreign
governments expressed concerns about the true intentions of the Chinese state-owned enterprises that were
seeking overseas investments and often identified the purchaser simply as the Chinese government.

Equating the investment of Chinese state-owned enterprises with an investment by the Chinese government
tended to increase risk and difficulty of investing in overseas non-ferrous metal projects. Shandong Gold’s
acquisition of TMAC came at a time when the Canadian government was stepping up its review of foreign
government-invested companies taking over Canadian companies, which could also increase the
uncertainty of approval for the transaction.27

Shandong Gold was optimistic that the project would meet the requirements of Canadian investment law.
The investment environment of Canadian mining was relatively transparent and stable when compared to
some other global mining environments. The governments of China and Canada had signed foreign
investment promotion and protection agreements (FIPAs), which were designed to encourage mutual
investment between the two countries. In the China–Canada FIPA, both countries promised each other
most-favoured-nation treatment, which could ensure that investors from both countries would not be
discriminated, in comparison to other countries.

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In the future, Shandong Gold planned to make a substantial additional investment in Canada to help its
Canada-based mine. This would create employment opportunities and stimulate local economic
development. However, the FIPA did not affect the Canadian government’s power to evaluate or reject
Chinese investment, from the perspective of national interests.28

Project Operation Risk

A major risk in the search for and development of mineral resources lay in the difference between actual
and estimated reserves. This difference led to various problems, such as mines never opening, unexploited
minerals, or difficulties in transportation after mining. Even after completing the exploration of mineral
resources and determining the reserves, investors still needed to provide mining, refining, and
environmental protection technologies, and to begin to build the infrastructure. All of these tasks required
a high level of technology and talent, which could lead to high risk if it fell below the needs of overseas
mineral investment.

Before signing the agreement to acquire TMAC, Shandong Gold had communicated with current TMAC
executives and received their support and recognition. TMAC executives, who had developed a great
fondness for the Hope Bay area and the mine, were very optimistic about the acquisition. They hoped to
see a major investment in the area in the near future. They also expressed their willingness to stay with the
new company after the final approval of the TMAC acquisition. These executives were veteran mine
managers. They were exactly the talent that Shandong Gold needed. Retaining them was conducive to
ensuring business continuity.

Shandong Gold was setting up an international management team that would eventually take over TMAC.
The company planned to appoint as general manager an employee who had worked as a mine manager in
many countries. This person would be a Canadian employee who had demonstrated excellent co-operation
skills with Shandong Gold for many years. The general manager would be accompanied by several Chinese
executives to form the new company’s management team.

TMAC’s Hope Bay project was located in the cold polar region of the Arctic Circle, but because it was an
underground mine, the cold temperatures had relatively low effect. The farther down the mine extended,
the warmer the temperatures. After the ore was mined, it had to be ground up before the gold could be
extracted. This process, which was known as beneficiation, generally took place in a heated frame structure.
Therefore, the Arctic Circle’s cold weather had very little impact on the mine’s operations.29

A more challenging issue in polar regions, however, was transportation, which became considerably more
difficult with ice and snow. Another challenge was an issue related to the discarded materials from
screening, which was referred to as tailings. During the ore extraction process, after screening out the high
gold content, the tailings (which looked like wet cement) would be discharged from the pipeline into a
tailings pond. If the pipeline was exposed to the outside cold, the excess material could freeze after being
discharged, which would create difficulties.

Cultural Differences Risk

Shandong Gold had only ever managed Chinese mines, which were very cost-efficient to manage. In
contrast, foreign mines carried high management costs. For example, director insurance provided great
benefits but at a much higher cost than in China. Also, Chinese employees could be asked to work extremely

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long hours, but non-Chinese employees often expected to have weekends and vacation time off work, when
they would not be available via telephone or email.30 Clearly, Shandong Gold would have to apply a very
different management style to employee relations and working methods, compared to what it was used to
in China’s mine operations, after final approvals of the proposed TMAC acquisition.

Market and Foreign Exchange Risk

The price of gold was affected by the international economic situation, and there was great uncertainty in
the prediction of long-term trends and short-term fluctuations in the market price of gold products. Between
2016 and 2019, gold prices hovered around $1,250 per ounce ($44 per gram) but seemed to be on an upward
trend starting in January 2019, reaching a peak of over $2,000 per ounce ($70 per gram) in August …

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