Canadian Prime Minister Stephen Harper expressed concern on Tuesday about allegations that a Canadian intelligence agency had targeted Brazil and said officials were reaching out to their Brazilian counterparts.
Brazilian President Dilma Rousseff on Monday demanded Canada explain a media report that said the Communications Security Establishment Canada (known as CSE or CSEC) - the equivalent of the top-secret U.S. National Security Agency - had spied on Brazil's Mines and Energy Ministry.
The affair is a potential embarrassment for Harper, who visited Brazil in 2011 and held talks with Rousseff in a bid to deepen ties with a regional power that is both a trading partner and a competitor.
"Canadian officials are reaching out very proactively to their counterparts ... I'm obviously very concerned about this story and some of the reports around it, very concerned," Harper told reporters in Indonesia on the sidelines of an Asian summit.
"That said, you know I cannot comment on national security operations."
Harper did not give details of which Brazilian officials had been approached about the situation.
A spokesman for Foreign Minister John Baird said Canada's ambassador to Brazil "speaks with the Foreign Ministry on a regular and ongoing basis" but declined to comment further.
Defence Minister Rob Nicholson, who is ultimately responsible for CSE, declined to discuss the allegations when speaking to reporters on Monday.
The spying allegations are not welcome news for several Canadian mining companies with operations and exploration programs in Brazil, and at least one chief executive called on the Canadian government to straighten things out.
"If allegations are true, I am flabbergasted, surprised and outraged," said Buddy Doyle, CEO of Amarillo Gold Corp, a small Vancouver-based mining exploration company whose prime asset is the Mara Rosa gold project in central Brazil.
He said it "would be nice of Ottawa to say that the Canadian mining industry had no role to play in this." Doyle said the Canadian mining industry spends about $500 million a year in Brazil.
Two of Canada's largest gold miners, Kinross Gold Corp and Yamana Gold Inc have operations in Brazil. Kinross declined to comment and Yamana could not immediately be reached for comment.
There could be worse to come for Ottawa. Glenn Greenwald, the reporter who broke the story with the aid of former U.S. spy agency contractor Edward Snowden, told the Canadian Broadcasting Corp that he had evidence of more spying abroad by Canada.
CSE is part of the so-called Five Eyes intelligence-sharing network that also includes the United States, Britain, New Zealand and Australia.
Last month Rousseff canceled a state visit to the United States in October over revelations the NSA had spied on her personal communications and those of other Brazilians.
Wesley Wark, one of Canada's leading intelligence experts, told Reuters he doubted CSE had planned to steal Brazilian commercial secrets and then pass them onto Canadian firms.
"It was probably something assigned to them to work on by their Five Eyes partners, presumably the NSA, which of course has already been implicated in Brazilian intelligence gathering," said Wark, a professor at the University of Ottawa.
"I don't think there's much indication CSEC has been devoting resources - particularly after 9/11 - to economic intelligence gathering," he said, adding it was quite possible Harper did not know about the Brazil operation.
Bilateral relations have improved markedly from the period around 2001, when the two sides were involved in disputes over Brazilian beef exports and whether Canada was illegally subsidizing foreign sales of airliners.
"Brazil is a priority market for Canada. It is a major economic player, not just in South America, but also globally, as our 11th largest trading partner globally," Canada's Foreign Trade Ministry said in a statement in July this year.
Bilateral trade has grown by more than 25 percent in the past five years, reaching C$6.6 billion ($6.4 billion) in 2012.
Wark said information gained by CSEC might have helped the Canadian government set its economic priorities.
"I'm not sure that's worth the price of a downturn in political relations between the two countries and someone should have calculated that," he said.