First Quantum could face higher tax and royalty payments in Panama

First Quantum Minerals (TSX: FM) may have to pay more tax and an annual royalty payment that is eight times higher than the current one for their Cobre Panama copper mine in Panama as the company continues to negotiate a new contract with the government, media reports say.  

According to the Macau News Agency and Barron’s, the government has asked the company to increase its yearly royalty payment on gross profits from 2% to 16% and eliminate tax benefits agreed in its previous contract. 

A spokesperson from First Quantum declined a request for comment from the Northern Miner. 

Negotiations for a new contract between First Quantum and the Panama government began in September. The mine contributes 3.5% of the Central American country’s gross domestic product, according to government figures. 

Panama President Laurentino Cortizo pledged just before taking office more than two years ago that a new contract for the lucrative Cobre Panama open pit mine should provide more public benefit, according to Reuters.  

Located in Colon province, 120 km west of Panama City, Cobre Panama is considered to be one of the largest copper mines opened globally in the last decade.  

Commercial production at the mine started in 2019. In 2020, the mine produced 205,548 tonnes of copper and 84,667 oz. of gold.   

At full capacity, the plant can produce more than 300,000 tonnes of copper a year, along with gold, silver and molybdenum.  

“Because FM has had a history of constructive relationships with government and strong community engagement, we are comfortable assuming that First Quantum makes adjustments to benefit all stakeholders and that the outcome of negotiations is better for First Quantum than the proposals reported by the media,” Jackie Przybylowski, a mining analyst who covers the company for BMO Capital Markets, commented in a research note to clients.  

“We maintain our market perform rating, but we would view a significant drop to the share price today as a result of this news to be a buying opportunity. We expect First Quantum to address the risks and provide an update on the negotiations at its January 18 capital markets day.” 

Orest Wowkodaw, an analyst from Scotiabank, described the news as “modest negative.”  

“On a preliminary basis, we estimate that a shift to a 16% gross profit-based royalty would result in a relatively minor ~4% net decrease to our corporate 8% NAVPS [net asset value per share] based on $4.00 per lb. of copper,” Wowkodaw wrote in a research note to clients.  

“However, we caution that no new fiscal agreement between FM and the government has been reached to date as negotiations are slated to continue shortly.”  

First Quantum’s shares fell 3.04 per cent or $1.09 to close at $34.71 per share. 

Over the last year the company has traded in a range of $19.21 and $36.25.