First Quantum vs Panama: throwing a hat into a ring of trouble

News Analysis

8

Dec

2023

First Quantum vs Panama: throwing a hat into a ring of trouble

  • Erik Sardain

Panama has announced the closure of the Cobre Panama copper mine after the Supreme Court ruled that a 20-year concession granted to Canada’s First Quantum was unconstitutional.

Panama has announced the closure of the Cobre Panama copper mine after the Supreme Court ruled that a 20-year concession granted to Canada’s First Quantum was unconstitutional, arguing that the mine damages a forested coastal area and threatens scarce water supply in the region.

Cobre Panamá, which has two open pits, a processing plant and its own port, is one of the largest copper mines to be opened in the past decade anywhere in the world. It began producing copper in 2019, providing around 1% of the global copper output. Cobre Panama’s proceeds accounted for about 5% of Panama’s GDP, employed 8,000 people directly and created indirect employment for tens of thousands more.

First Quantum has initiated international arbitration against Panama, raising the prospects of a long and expensive legal battle. Ahead of the Supreme Court ruling, S&P revised Panama's outlook to negative from stable on potential risks to investor confidence and economic growth if the contract was found invalid. The implications for the nation’s fiscal outlook are bad. The country is running a fiscal deficit of 5% of GDP and the income loss will increase the deficit by about 0.6%, excluding the potential indemnities depending on the outcome of the arbitration.

First Quantum has invested US$10Bn in the mine and associated infrastructure, including a power plant, cross-country transmission lines, roads and a port.

For First Quantum, the developments in Panama could be a repeat of its experience in the Democratic Republic of Congo. The miner exited DRC in 2012 after its mining contract for the Frontier copper-cobalt was cancelled. In that case, the DRC government seized the Kolwezi project site, citing contract violations. Ownership of the mine subsequently passed to Sodimico, a state-owned enterprise, after the DRC’s Supreme Court decided in May 2010 that FQM illegally obtained the rights to the concessions.

However, all may not be lost for Cobre Panama. General elections are due in May 2024 and one cannot rule out that a contract re-negotiation could take place afterwards. It would be the interest of Panama to find an agreement with First Quantum, given the financial implications of the contract cancellation. Besides, Panama is also facing additional issues with the current drought which limits the shipping traffic in the canal. 

Regardless of the outcome, this episode is another example of the hurdles the mining industry faces to secure copper supply, on top of falling grades, water issues and permitting delays. More supply risk set against the ambitious targets of energy transition makes copper more than ever a critical material.  



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