Caribbean & Central America - February 2023

Wrangling over the future of the huge Cobre Panamá copper mine continues as the government led by President Laurentino Cortizo and Canadian miner First Quantum Minerals (FQM) struggle to agree on the terms of a new contract.

The mine is the single largest private investment in Panama and is a key driver of economic growth, but the Cortizo government ordered operations to cease in mid-December after FQM subsidiary Minera Panamá missed a deadline to sign an updated contract. Discussions have been centred on increased royalty payments and other contractual changes necessary due to a 2018 supreme court ruling which declared that the legal basis for the contract was unconstitutional.

The importance of the mine cannot be overstated. It is one of the largest new copper mines opened in the world in the last 10 years, boasting 3.0bn tonnes (t) of proven and probable reserves and the ability to produce 300,000 tonnes (t) a year at full capacity. Therefore it is no surprise that doubts over the future of the mine have impacted the economy and investor confidence, sparking concern among business groups.

On 18 January, international credit ratings agency Fitch, placed FQM’s longer-term issuer default rating (IDR) and senior unsecured rating of B+ on Rating Watch Negative (RWN). “The RWN reflects the uncertainty of FQM's operations at its flagship Cobre Panamá mine following a dispute between FQM and the Panama government over the final terms of a revised concession contract,” said Fitch, underlining that it is unclear when the final terms of the new contract will be agreed. “Cobre Panamá is fundamental to both the economy of Panama and FQM's operational and financial profile,” continued the ratings agency, noting that “Cobre Panamá represents up to 4% of Panama's GDP, the majority of its export revenues, and employs 40,000 people, including direct employees, contractors and indirect workers supporting the mine.”

Minera Panamá has also underlined the importance of its operations to the Panamanian economy. A one-year closure of the mine would mean losses of up to US$4.68bn, according to the results of a study by economic analysis firm Indesa Capital, which was published on Minera Panamá’s website. Losses of US$3.06bn are estimated from mine operations, which is equivalent to 4.8% of national GDP in 2021. Of this US$1.719bn would be lost by other businesses that work directly or indirectly with Cobre Panamá and in the wider economy, according to the study. Almost 6,000 direct jobs and a further 35,000 indirect jobs would be at risk, it added. 

There is no disputing the mine’s importance to Panama’s economy. Given its “strategic importance” to both the government and FQM, Fitch predicts that there will “likely” be an agreement on a new contract. However, the ratings agency believes there is “significant uncertainty” over a timeframe for a deal to be signed, as well as how production will be affected during that time. Fitch says that FQM has agreed to an annual minimum payment of US$375m, which comprises corporate taxes and profit-based royalty of 12%-16%. However, there is no agreement on the stability and duration of the contract yet, according to Fitch. For its part, FQM said that its “engagement” with the government continues. “The Company remains ready to reach an agreement that is fair and equitable to both parties,” it said in a statement published 10 January. The company called the minimum payment structure “unique and unprecedented in the mining industry,” adding that “the proposed royalty rates would be amongst the highest, if not the highest, paid by copper miners in the Americas.” Developing the mine has cost US$10bn, according to FQM.

On 23 January, Panama’s ministry of business and industry (MICI) was cited by the local media as saying that there were still “more than a few” issues to be resolved, including the length of time that FQM would pay the guaranteed minimum payment. Environment Minister Milciades Concepción also said that FQM was pushing for relaxed environmental regulations, as well as more land to expand its mining concession. On 25 January, MICI minister Federico Alfaro was also cited by the media as warning that Minera Panamá was putting its investment at risk, and accused the company of attempting to modify terms which were agreed in January last year. However, he has also been cited as saying that the parties are finalising details of a new deal. Alfaro also said that MICI had not accepted any royalties from FQM for 2022 as they were agreed under a contract which has been declared unconstitutional.

It is difficult to decipher what is going on in negotiations, and whether a deal will be reached any time soon. However, finding a solution is in the interests of both FQM and the Panamanian government, suggesting that some sort of agreement will be found at some point. Given the size of the mine, each day of disruption has an impact on the economy, but the Cortizo government has showed no signs of backing down. While this may play well politically with members of the public keen to maximise the benefits of mining for the public purse, the government will be wary of impacting the wider business climate.