First Quantum takes misleading stance, Panama says

The government of Panama expressed its discontent on Wednesday with the latest investor update given by First Quantum Minerals (TSX: FM) about the Cobre Panama contract negotiations, saying it contained several inaccuracies that could mislead investors.

The Canadian miner’s chief executive officer, Tristan Pascall, said in a Tuesday call with analysts that the parties had made significant progress in resolving the dispute over a new contract that would increase royalties paid by the company.

The country’s Minister of Commerce and Industry Federico Alfaro noted the government believes that the company’s most recent contract proposals had done nothing but drive the two sides further apart.

There are more than a “few disagreements”, the minister said, adding there were fundamental differences around issues such as royalties, deductions for depletion, international measures to mitigate tax avoidance, value added tax, scope of easements, material breach, termination, and others.

Alfaro highlighted key aspects of First Quantum’s narrative the government finds misleading.

Panama’s Supreme Court ruled in 2017 that the contract governing the giant Cobre Panama copper mine was unconstitutional and annulled it. This meant a new contract was required to regularize First Quantum’s operations, the minister said. The Vancouver-based miner, however, believes the original contract remains in effect until a new one is signed.

The government also dismissed First Quantum’s alleged economic benefits for Panama, stating the company had submitted proposals “that offer more upside benefit, when copper prices are high, and not just downside protections, when copper prices are low.”

It also noted the miner’s proposal on depletion shortens the number of years it will pay the guaranteed minimum sum, decreasing Panama’s fiscal take in high-copper-price and/or high-production scenarios. 

“This would make Panama’s fiscal take considerably lower than that of its comparator countries and results in an asymmetrical economic upside to the benefit of [First Quantum]”, Alfaro said.

The Ministry said the company’s comments show it’s resisting customary termination rights and seeking an “unreasonably high payment for certain assets in the case of termination”, which it deems inconsistent with international best practices.

Pascall said earlier in the week the company was prepared to meet, and even exceed, the government objectives regarding revenues, environmental protections and labour standards. 

These include a minimum of US$375 million ($503.3 million) per year in government income from 2026 onwards, and a profit-based mineral royalty of 12 to 16%, with downside protections aligned with the government’s position.

The Ministry also took issue with the miner’s statement that putting the operation on care and maintenance was a “drastic and unnecessary step.”

Imminent halt?

Panamanian President Laurentino Cortizo ordered last month the halt of operations at Cobre Panama after the parties failed to agree on the terms for a new contract due to issues around taxes and royalties.

The mine hasn’t closed yet, but First Quantum is preparing for the scenario that would put thousands out of work.  In the interim, the company has filed an appeal in an attempt to reverse the decision.

“Entering care and maintenance may be necessary because [First Quantum] has continued to operate the Cobre Panama mine without a contract, and the irregular status quo cannot continue indefinitely,” the ministry said. 

Cobre Panama is the biggest foreign investment in the Central American nation, supporting 40,000 jobs. (Image courtesy of Minera Panama.)

First Quantum is one of the world’s top copper miners and Canada’s largest producer of the metal. It produced 816,000 tonnes of copper in 2021, its highest ever, thanks mainly to record output at Cobre Panama.

The Cobre Panama mine complex, located about 120 km west of Panama City and 20 km from the Atlantic coast, contributes 3.5% of the Central American country’s gross domestic product, according to government figures.

The asset is estimated to hold 3.1 billion tonnes in proven and probable reserves and at full capacity can produce more than 300,000 tonnes of copper per year, or about 1.5% of global production of the metal.