First Quantum facing ‘shocker’ tax hikes in Panama, as negotiations with government continue

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First Quantum Minerals Ltd., Canada’s biggest copper company, is potentially facing a substantial increase in taxes in Panama, as the government pushes for higher royalties at the company’s flagship mine in the Central American country.

The Vancouver-based miner has been in tax talks with Panama since last September, a period that has seen copper trade near historically high levels. First Quantum operates the Cobre Panama mine, 120 kilometres west of Panama City. Completed in 2019, it is one of the biggest copper complexes in the world, and was constructed at a cost of US$6.3-billion.

On Thursday, Ramon Martinez, Panama’s Minister of Commerce and Industries, said at a news conference that the country wants First Quantum to pay a royalty of 12 per cent to 16 per cent of gross profits from Cobre Panama, compared to the previously agreed 2 per cent of revenue.

The minister also wants to put an end to a tax holiday that allowed the Canadian miner to put off paying taxes until the capital costs of building the mine were recouped. Cobre Panama is already a huge contributor to the country’s economy, employing tens of thousands of people and accounting for 3.5 per cent of GDP.

Christopher LaFemina, an analyst with Jefferies, wrote in a note to clients on Friday that the magnitude of the proposed royalty hike for First Quantum is a “shocker.”

He had thought the copper miner would likely end up paying the equivalent of 5 per cent of revenue in royalties, significantly lower than what Panama has on the table.

“While negotiations are ongoing, these headline increases are worse than expected and a clear short-term negative for First Quantum shares,” Mr. LaFemina wrote.

Citing the sensitivity of the continuing talks between First Quantum and Panama, Brian Cattell, a company spokesperson, declined to comment on the proposed tax hike, other than saying in an e-mail to The Globe and Mail that “both parties remain committed to resolving this matter.”

First Quantum shares closed down 3 per cent on the Toronto Stock Exchange on Friday.

Many of Canada’s largest mining companies are already forking out significantly higher royalties than in the past, or grappling with potentially doing so in the near future. Over the past five years, as base and precious metals prices have raced to record levels, many overseas countries have successfully pushed back on miners to demand a bigger slice of the spoils.

Chile and Peru are among those pressing for more financially lucrative terms. Last year, Barrick Gold Corp., the world’s second-largest gold miner, agreed to give Papua New Guinea a 51-per-cent ownership stake in its Porgera gold mine in the country, compared to just 5 per cent previously.

The potential bright side for First Quantum of switching to a profit-based royalty, as opposed to one based on revenue, is that the company would be more insulated during a price downturn.

However, at the moment, the opposite dynamic is in play. Profits across the industry are at historically high levels, thanks to booming copper prices.

Earlier this week, First Quantum’s shares reached an all-time high, driven in part by the buoyant commodity price picture. On Friday, copper futures traded at US$4.40 a pound, about 35 US cents lower than the all-time high reached in May of last year.

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