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Aerial view of Cobre Panama mine in Donoso, Panama, on Dec. 6, 2022.LUIS ACOSTA/Getty Images

First Quantum Minerals Ltd. FM-T is ceasing copper ore processing at its giant Panamanian mine, and could soon face a total shutdown of mining operations there, as a bitter tax dispute with the Central American country escalates.

Late last year, First Quantum failed to reach an agreement with the government of Panama over how much tax and other benefits it should pay from revenue generated by the Cobre Panama mine.

Earlier this month, Panama’s maritime authority prevented the loading of copper concentrate at port, which effectively prohibited First Quantum from exporting the metal out of the country. With limited storage capacity at the mine, the Vancouver-based producer indicated it would soon run out of space.

As pressure on First Quantum has intensified over the past few months, talks with the government of Panama have continued. The company said in a statement on Thursday that it “remains committed to achieving an outcome that will be to the benefit of all stakeholders and support the long-term operations” of the mine.

Still, the company said it will be forced to start winding down mining operations and laying off its work force of 8,000 people in Panama over the next few weeks if it isn’t allowed to resume concentrate shipments.

Panama’s Ministry of Commerce and Industries meantime urged First Quantum in a release to “refrain from creating unrest and uncertainty” about the stability of the workers.

“Using pressure mechanisms does not contribute to improving the levels of understanding that both the government and [First Quantum] require for a fair, balanced and satisfactory relationship of both national interests and foreign investment,” the ministry said.

Located 120 kilometres west of Panama City, Cobre Panama is First Quantum’s biggest operation, accounting for 57 per cent of its net asset value and 56 per cent of its 2023 earnings before taxes, depreciation and amortization (EBITDA), as estimated by RBC Dominion Securities. Production at the mine started in 2019, but the company has so far paid only small amounts of tax to Panama, owing to generous credits negotiated earlier.

Panama’s government in December ordered the mine to close, but it has remained in production pending an appeal filed by First Quantum.

As part of a new fiscal agreement, the Canadian miner says it is willing to pay Panama a minimum of US$375-million a year in fiscal payments, about eight times higher than its last disclosed tax bill. The floor payments are contingent on copper trading at elevated prices, and the company hitting certain production metrics.

However, major sticking points over a final agreement remain around the size and amount of tax credits First Quantum can use. The two sides have also clashed over legal clauses that would prevent early termination of the fiscal agreement and expropriation of the asset.

Shares in First Quantum have fallen by 20 per cent since mid-December amid the tax dispute. The stock fell initially on Thursday, but recovered to close up 2.4 per cent at $26.59 on the Toronto Stock Exchange.

That suggests investors expect the outage to be short-lived, especially as the mine accounts for as much as 5 per cent of Panama’s gross domestic product, said Nick Szucs, Canadian equity analyst at Leith Wheeler Investment Counsel Ltd., which owns First Quantum shares. Panama is currently seen as a friendly mining jurisdiction, but a protracted shutdown would label it as too politically risky for global companies, Mr Szucs said.

“Ultimately, I think this will get resolved, with some concessions to the government, this being a political negotiation tactic to force First Quantum’s hand,” he said.

Panama joins scores of other countries – including Mexico, the Democratic Republic of Congo, Pakistan, Peru, Bolivia, Chile, Zambia, Tanzania and Australia – that have pushed through, or pushed for, income tax increases and bigger ownership stakes in mines as metals prices have climbed to near-record highs.

First Quantum can financially weather a shutdown of Cobre Panama in the near term, but if the dispute drags on, the company’s debt load may become an issue, particularly if the price of copper falls. Through to the end of 2024, First Quantum faces debt payments of just under US$2-billion. As of the end of last year, it had access to about US$2.2-billion in liquidity, consisting of US$1.7-billion in cash and access to an additional US$530-million in credit.

Orest Wowkodaw, an analyst with Scotia Capital Inc., predicted in a note to clients that the company will generate about US$600-million in free cash flow this year, and said its balance sheet appears “reasonably well positioned” for now.

First Quantum also operates large copper mines in Zambia, and has additional operations in Finland, Turkey, Spain, Australia and Mauritania.

But the Panamanian mine remains its most important asset. Every month of lost output would cut First Quantum’s EBITDA by about US$150-million, before taking into account shutdown and maintenance costs, RBC Dominion analyst Sam Crittenden wrote in a research note.

Franco-Nevada Corp., the Toronto-based mining royalty and streaming company, garnered 15 per cent of its revenue from the Cobre Panama project in the third quarter. Franco bears no costs for the production that isn’t delivered, it said in a release on Thursday.

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