Canada and Australia have increased scrutiny on deals by state-run Chinese miners this year amid economic dislocation caused by the coronavirus pandemic.
Ottawa's decision could further strain Canadian-Chinese relations, already damaged by Canada's December 2018 arrest of Huawei Technologies Co Ltd Chief Financial Officer Meng Wanzhou at the request of the United States.
"There were concerns about a Chinese state-owned enterprise taking over a mine in the far north and it was ultimately rejected," an Ottawa source familiar with the matter said on Tuesday. The source declined to say what those concerns were.
Shandong Gold, controlled by the province of Shandong and one of China's top gold miners, said Tuesday it had received notice of a decision made by Canadian authorities on Dec. 18 that it should not proceed with the deal. It added the sale was blocked on national security grounds.
Chinese foreign ministry spokesman Zhao Lijian said Canada should provide a fair, open and non-discriminatory business environment for companies from all countries including China.
"Any action that politicises normal commercial cooperation and engages in political interference in the name of national security is wrong," Zhao told a daily news briefing.
Shares in gold producer TMAC, which said it had been informed of the order to block the deal under the Investment Canada Act, fell as much as 16.2% Tuesday as investors worried about its ability to repay debt.
The miner said on Nov. 5 it had about C$99 million in cash on hand, short of the C$169.7 million of debt due in June.
"Given Canada's sensitivities with the high North and more recent tensions between Canada and China, we had anticipated the Canadian government would not approve the proposed purchase," Laurentian Bank analyst Barry Allan said.
TMAC now faces a potentially "messy refinancing which could ultimately hurt shareholders," he said.
Shandong Gold said in May it would pay C$230 million ($179 million) to acquire TMAC, which operates the Doris mine in the Hope Bay region of the northern and strategically important territory of Nunavut.
Canada in October launched a national security review of the proposed acquisition that was extended last month.
Mineral-rich but thinly populated, Nunavut is seen by Canada as vital as retreating sea ice opens up potential new shipping routes.
Canada in May 2018 blocked a proposed C$1.51 billion takeover of construction company Aecon by China Communications Construction Co Ltd, also on national security grounds.
Prime Minister Justin Trudeau has faced pressure to toughen the country's stance on China.
Canada's department of Innovation, Science and Economic Development, which oversees foreign investment, said in a statement that Canada remains open to investment but declined further comment, citing confidentiality provisions.
TMAC has not decided whether to relaunch a sale process, a spokeswoman said, declining further comment.
($1 = 1.2865 Canadian dollars)
(Reporting by Tom Daly; additional reporting by Jeff Lewis in Toronto; additional reporting by David Ljunggren in Ottawa; Editing by Steve Orlofsky and Jason Neely)
By Tom Daly and Jeff Lewis
