First Quantum closes Frontier

VANCOUVER — The saga of First Quantum Minerals’ (FM-T, FQM-L) wranglings in the Democratic Republic of the Congo (DRC) has taken another turn with the company suspending operations at its Frontier copper mine.

The action comes after the DRC’s mining registry, CAMI, suspended First Quantum’s exploitation permit for the mine. The DRC later transferred the mine’s titles to state-owned mining firm SODIMICO, which then demanded First Quantum to stop all mining and exports and leave the area. Citing the impossibility of maintaining safe and orderly operations, First Quantum shut the mine.

“It’s a pretty unfortunate development,” said First Quantum’s CEO Philip Pascall in a recent conference call. “We believe there’s no legal basis for the withdrawal of Frontier’s exploitation permit.”

First Quantum opened Frontier in 2007 after a capital investment of US$226 million. The mine was expected to produce 1.43 million tonnes of copper in concentrate over its 19-year mine life.

As it has stated in the past, First Quantum believes the actions against the Frontier mine are in response to the company launching arbitration related to the Kolwezi copper-cobalt tailings project.

The DRC government seized the Kolwezi project from First Quantum in September 2009, after the company had spent $388 million acquiring it and another $406 million developing it. First Quantum has since brought the matter before the International Chamber of Commerce in Paris, which has formed a tribunal to hear the matter.

On August 19, the tribunal ordered that the DRC and state-owned Gcamines, the defendants in the case, not transfer or allow the transfer of the Kolwezi exploitation permit. The tribunal also prohibited the defendants from taking any action to enforce a US$12-billion damages ruling made against First Quantum.

The day after, Kazakhstan-based Eurasian Natural Resources (ENRC-L) announced it had agreed to pay US$175 million for a 50.5% stake in Camrose Resources. Camrose, in turn, owns 70% of a company that maintains it owns the Kolwezi exploitation licence. First Quantum has issued a statement affirming

that any transfer of the exploitation permit is “ineffective and contrary to the orders issued by the tribunal.”

Pascall said that efforts to communicate with Eurasian have not proved productive.

“We corresponded with them briefly to point out the flaws in the way that they were going, and we had a very brief response which suggested that they weren’t very receptive to that,” said Pascall.

In the conference call, Pascall refuted speculation that the Kolwezi contract was not well-defined.

“I’d like to be clear on this, this is complete nonsense,” said Pascall. “The Kolwezi contract is in accordance with the country’s mining code and was signed onto by the IFC (International Finance Corp.) and the IDC (Industrial Development Corp. of South Africa) after significant due diligence on their part. There are no weaknesses in that contract.”

As to Frontier, the company still controls the property but operations have ceased. Pascall said there was no legal basis to liquidate Frontier, but acknowledged that the country is unpredictable.

“At the moment, there wouldn’t be any grounds (for a court-ordered liquidation), no, but in the (DRC) nothing surprises us, maybe somebody will think of something,” said Pascall.

The closure directly affects not only First Quantum, but the roughly 1,500 workers at the site. The actions also hold larger implications for the DRC, where First Quantum was the largest taxpayer last year and which was already too risky for many investors.

“The fragile foreign investment environment is severely damaged, and will likely remain so for some time without immediate action,” said Pascall.

He clarified that the closure of Frontier will not have enough of an impact on cash flow to disrupt development of the company’s other projects. The two main projects the company has in development are the Kevitsa nickel-copper project in Finland and the Ravensthorpe nickel operation in Australia.

With the latest Frontier development somewhat expected, and analysts having already factored in the potential loss of Kolwezi, the company’s stock price was not brought down by the latest news. Copper prices in New York, at a near four-month high, also could have helped buffer the stock.

In Toronto, the company’s stock price was up $2.49 to $61.17 on Aug. 30.