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Canada’s First Quantum expected to pay $1-billion in Zambia tax dispute: Wall Street analyst

Canadian copper producer First Quantum Minerals Ltd. will ultimately pay around US$1-billion to settle its tax spat with Zambia, according to a Wall Street analyst.

Last week, the Zambia Revenue Authority (ZRA) slapped First Quantum with a US$7.9-billion tax bill, claiming the miner had drastically underpaid certain import duties over a period of five years.

In a subsequent conference call with analysts, First Quantum’s chief executive officer Philip Pascall declined to speculate how much the company may end up paying, saying it wouldn’t be prudent to comment in a public forum.

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Shares in the company have lost about 10 per cent of their value since word of the tax claim first surfaced on March 20.

“We expect the company to have to pay something significant to resolve this issue,“ wrote Jefferies analyst Christopher LaFemina, in a note to clients on Tuesday.

“We assume for now that the total cost will be US$1-billion.”

Mr. LaFemina also predicts First Quantum’s cost of capital will go up due to higher operating risk in Zambia and the possibility of additional tax penalties. The company’s weighted average cost of capital (WACC), a measure which includes the cost of raising equity or debt, will rise to 10.5 per cent from 8.5 per cent, he wrote.

First Quantum is far from the only Canadian mining company to be blindsided by tax demands from developing countries attempting to obtain an increasing share of resource riches, as commodity prices rebound.

Earlier this year, the Democratic Republic of the Congo (DRC) government announced plans to significantly increase royalties and eliminate existing stability agreements that protected mining companies from tax hikes. A number of top mining executives, including Robert Friedland, executive chairman of Ivanhoe Mines, later met with DRC President Joseph Kabila in an attempt to soften his demands, but the tax changes were ushered in regardless.

Last summer, the Tanzanian government presented Barrick Gold Corp. subsidiary Acacia Mining PLC with an astronomical US$190-billion tax bill. In a provisional agreement announced in October, Barrick said it was prepared to grant Tanzania a 16-per-cent stake in Acacia’s gold mines in the country, and pay it US$300-million. But five months on, a final settlement has yet to be reached and Acacia remains subject to a gold-concentrate export ban in Tanzania.

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“What we’re seeing in the DRC, Zambia and Tanzania is just the grab. It’s outrageous numbers [their governments are] throwing out,” Rob McEwen, chairman of McEwen Mining Inc. and former CEO of Goldcorp Inc., said in an interview.

“But they’re looking at it and saying, ‘okay, mining is a sitting duck. You can’t move the ore body and once you build the [mine], there’s a revenue stream.’”

Mr. McEwen’s junior-gold company has also encountered so-called “resource nationalism,” albeit on a smaller scale. The company’s Mexican mine was hit with an unexpected royalty increase about two years ago.

The mining veteran is expecting increased incidences of resource nationalism for Canadian mining companies operating abroad, and says it’s an added risk investors should consider.

“We’ll see more of it,” he says.

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