Profit share

First Quantum wrestles with Panama’s government to secure the future of its Cobre Panamá cooper mine.

First Quantum Minerals Ltd. has been locked in intense negotiations with the government of Panama regarding the future of its Cobre Panamá cooper mine, operated by its subsidiary Minera Panamá, S.A. (“MPSA”) for over a year.

In December 2021, the government of Panama notified First Quantum of an increase in tax liabilities from 2% to include a minimum of USD 375 million per year in government income, comprised of corporate taxes and a profit-based mineral royalty of 12 to 16 percent, with downside protections aligned with the government’s position. These proposed royalty rates would be amongst the highest paid by copper miners anywhere in the Americas.

Unsurprisingly, First Quantum did not immediately roll-over and unable to resolve the dispute, Panama’s ministry of industry ordered to halt operations at the mine, prompting First Quantum to file two international arbitration procedures against the government. The row escalated further when Panama accused First Quantum of misleading its shareholders over its willingness to pay the USD 375 million minimum: the government’s legal counsel denied the claim and said that the company had rejected all the agreements proposed.

A spokesperson for the Panamanian Chamber of Mines commented, “During the negotiations, the company asked the government for some necessary protections in order to safeguard the continuity of the operation during the life of the project, however, the government argued that this was a new request and that it created obstacles with the current legislation in the country. We do not believe that the demands of each side are insurmountable, and relations between the parties are good but at present negotiations have stalled. It is important that the negotiations continue and above all that an agreement is reached because we are talking about the largest private investment in Panama, which generates 3.5% of GDP.”

“We do not believe that the demands of each side are insurmountable, and relations between the parties are good but at present negotiations have stalled.”

Spokesperson, Panamanian Chamber of Mines

An external advisor to the government on mining negotiations gave more detail about the major issues under debate, “There are legal and economic aspects to the negotiation. The main sticking points to the negotiation are:

  • The company wants additional areas of use and easements around their mining concession. The State can give them additional use area, however, they must abide by environmental requirements. Likewise, the State can give them use, but not easements over areas that are titled in the name of third parties, as this would be an act of expropriation.
  • The company wants legal certainty for 20 years. The State can give stability to tax laws for 20 years, but it cannot freeze all Panamanian laws for 20 years. The State can consider cases of substantial non-compliance and give it a cure period, but it cannot compensate in case of substantial non-compliance with 85% of the value of the company.
  • The State wants to ensure that if the copper price is above 2.75 or the number of metric tons of material extracted is above 250,000, the minimum income to be received should be USD 375 million in cash, with the possibility of improving its income as the copper price rises. Otherwise, the protection of the company is guaranteed.  It pays only what is due according to the royalty plus income tax on profits.
  • The company wants tax credits to form part of the payment of the USD 375 million, the State wants that amount in cash, even if tax credits are applied. If these credits were to be applied within the limits that the company itself sets per year, the State would no longer receive the guaranteed minimum income after 2026. And it would lose the possibility of receiving more if the price of copper soars.

In my view, the company needs to give in on these points as the terms and conditions proposed by the state are below international standards.”

For the spokesperson for the Chamber of Mines, “Both parties will have to make concessions to reach an agreement because going into arbitration would be a long, exhausting, and costly process for both. If, in an extreme scenario, the government decides to nationalise the project, it would be setting a very bad precedent for the country and it would also be a risky decision given that the State does not have the resources or the experience to manage a project of this magnitude. I think that the government and the mining company are obliged to reach an agreement, they must find common ground. Other scenarios would be very risky and even dangerous for both.”

“Both parties will have to make concessions to reach an agreement because going into arbitration would be a long, exhausting, and costly process for both.”

Spokesperson, Panamanian Chamber of Mines.

Fortunately, both sides seem to be softening their positions with a view to striking a deal. On 10th January, Tristan Pascall, First Quantum’s CEO commented, “We are ready to reach a mutually beneficial agreement that provides the legal certainty that we need to help promote the sustainable development of Panamá, safeguard our thriving Panamanian workforce and protect our investment.” Minister of Commerce and Industry Federico Alfaro Boyd said that the government’s preferred outcome is to reach a deal before arbitration.

The external advisor was confident that an agreement would be reached, prior to arbitration, “Remember that we are in a state governed by the rule of law and that mining is an activity that could bring prosperity to the country, as long as it does not take place in protected areas. A key lesson learned from all this is that the government needs to build internal expertise to develop the industry in an orderly manner, balancing the interests of companies and the state.“

“A key lesson learned from all this is that the government needs to build internal expertise to develop the industry in an orderly manner.”

External advisor to the government on mining negotiations.

The spokesperson for the Chamber of Mines shared this view,“It is imperative that the new agreement is beneficial for the country but also takes into account the company’s investment risks, so that the business can function successfully and generate profits for the company and the country.“

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