First Quantum threatens to shut vast copper mine over Panama tax dispute

First Quantum Minerals has threatened to close its vast copper mine in Panama if it fails to resolve a tax dispute that it says risks damaging the country’s business-friendly reputation.

Panama has demanded that the Canadian group pay corporate tax of at least $375mn a year along with a profit-based mineral royalty of 12-16 per cent, a steep rise on the $61mn FQM paid to Panama on a project that raked in $1.4bn of gross profit in 2021.

The Canadian group’s chief executive Tristan Pascall said it would put its flagship project, responsible for 1.4 per cent of global copper supply, into “care and maintenance” if the country did not offer certain legal protections.

“Regrettably we would be compelled to follow that directive if the terms cannot be resolved on a reasonable basis,” he told the Financial Times.

The dispute highlights growing demands on resource companies to plug producer countries’ fiscal holes after the pandemic ravaged their finances.

Cobre Panama began commercial copper production in 2019 after First Quantum and its predecessor spent $10bn developing it, representing Panama’s largest-ever private investment.

FQM plans on Tuesday to issue an appeal to the government over a December 20 resolution that gave the company 10 business days to submit a plan for halting Cobre Panama.

Panama says it was obliged to renegotiate the project’s original 1997 contract after the supreme court declared it unconstitutional. It also accuses FQM of reneging on an outline deal reached a year ago in which the company provisionally agreed to the $375mn minimum as long as measures were added to protect it against slumping copper prices.

The stakes rose late last year when Panama gave the group a December 14 deadline to reach a final agreement and suggested it could expropriate the mine.

Pascall said the company needed legal guarantees on the stability of the tax regime, protections against expropriation or early termination of the deal and security of rights to the concession area, as well as on the thresholds in the copper price at which the minimum payment would be adjusted.

In an internal letter to Cobre Panama employees seen by the FT, the company said it would be forced to suspend jobs and local community projects to cut costs if it halted mine operations.

Federico Alfaro Boyd, the industry minister leading negotiations with the mining group, said he wanted a deal that was “fair and reasonable for all parties”.

“Clearly it depends on the goodwill of the company whether or not they want to sign a contract,” Alfaro told the FT. “After 11 months I think enough time has passed . . . We are continuing to have discussions . . . but there are some fundamental legal and economic matters on which we still have differences.”

FQM believes the arrangement proposed by Panama would be “unique and unprecedented” in the industry, and that the royalty rates would be among the highest paid by copper miners in the Americas.

Mining executives say growing political and legal uncertainty in resource-rich nations makes it harder to invest despite the huge boom in demand forecast for commodities such as copper, which is used in renewable power projects and electric cars.

“The deal does set precedent and the reputation of the country linked to it,” said Pascall.

James Otto, an independent mining tax expert, said that it was “exceedingly rare” for mining companies to pay a minimum royalty to governments since they typically vary based on commodity prices. “A fixed amount like this — I just haven’t seen it,” he said.

But Alfaro said Panama had benchmarked the proposed terms for the new contract against other Latin American copper-producing nations with the help of outside advisers. “We weren’t the lowest or the highest,” he added.

He insisted that Panama remained an attractive destination for foreign investment, with more than 200 multinational companies operating there, but wanted “just recompense” for its mineral assets.