First Quantum’s Panama future in jeopardy after top court says mine contract unconstitutional

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First Quantum Minerals Ltd.’s FM-T future in Panama is in jeopardy after the country’s Supreme Court ruled that its mining contract is unconstitutional and its president ordered the imminent closing of the Cobre Panama mine.

The Vancouver-based copper miner has been operating under a cloud after President Laurentino Cortizo a few weeks ago directed the country’s top court to rule on the legality of the recently negotiated 20-year mining contract.

The government only last month signed a new 20-year contract on First Quantum’s Cobre Panama mine into law. As the contract was making its way through the legislature, thousands of environmentalists, Indigenous groups and labour activists staged public protests against the Canadian miner.

Following Tuesday’s Supreme Court decision, First Quantum said in a statement that it is reviewing the ruling and considering its local and international legal rights.

On Tuesday night, Mr. Cortizo in a televised address said that as soon as the ruling from the Supreme Court is published in the official gazette, an “orderly and safe” closing of Cobre Panama will occur.

The company said earlier on Tuesday that it had already halted commercial production at Cobre Panama because of “illegal blockades” by protesters at its port and roads leading to the port.

Cobre Panama started production in 2019, cost First Quantum US$6.8-billion to build and is the Canadian copper miner’s biggest mine by far.

Demonstrations against the mine had attracted huge international media attention, with Hollywood movie star Leonardo DiCaprio recently voicing his support to protesters in an Instagram post flagging environmental concerns about its impact on the densely forested local environment.

The next step for First Quantum appears to be launching an international arbitration suit against Panama.

First Quantum on the weekend, in fact, already informed Panama’s Ministry of Industry and Commerce that it had taken a legal first step that could lead to arbitration.

Arbitration cases between governments and the private sector can take a long time to play out. Barrick Gold Corp. ABX-T spent around seven years in proceedings against Pakistan over the right to mine a copper and gold project, before winning a multibillion-dollar payout.

“Pursuing international arbitration to recoup the massive financial loss of Cobre Panama would likely take years to resolve,” Orest Wowkodaw, analyst with Scotia Capital Inc., wrote in a note to clients. “However, we believe this course of action could ultimately bear fruit.”

First Quantum’s stock price has fallen by about 60 per cent over the past six weeks, owing to the uncertainty over the company’s future.

Regulation of the mining sector has become a major issue for voters in the Central American country.

Several candidates vying to replace Mr. Cortizo in the country’s 2024 election had already opposed First Quantum’s new contract with Panama.

Located 120 kilometres west of Panama City, Cobre Panama is a major engine of the Panamanian economy. The mine has created around 40,000 direct and indirect jobs, and accounts for about 5 per cent of the country’s gross domestic product.

Under First Quantum’s now void contract, the company had agreed to pay a minimum of US$375-million in taxes a year to Panama, or about nine times more than it had been paying. Earlier this month, First Quantum made a payment of US$567-million to Panama, which covered the period from December, 2021, to October of this year.

Cobre Panama is 80 per cent owned by First Quantum, with Korea Panama Mining Corp. holding the remaining 20 per cent.

For the first three-quarters of 2023, Cobre Panama generated US$930-million in revenue, accounting for about 46 per cent of First Quantum’s top line, and provided about 80 per cent of the company’s operating profit.

First Quantum also operates mines in Zambia and Australia.

An extended shutdown of the mine will put added stress on First Quantum’s balance sheet. As of Sept. 30, the company was carrying US$6.8-billion in debt.

Mining royalty firm Franco-Nevada Corp. FNV-T is also being affected by the turmoil in Panama. It owns a gold stream on Cobre Panama that represents about 20 per cent of its EBITDA (earnings before interest, taxes, depreciation and amortization), according to RBC Dominion Securities analyst Josh Wolfson.