Panama’s President Laurentino Cortizo said this week the country will shut down the controversial Cobre Panama mine owned by First Quantum Minerals (TSX: FM) after the Supreme Court declared the project contract as unconstitutional.
A chain of events sprouted after the news of the mine closure was public, including the resignation of Panama’s Trade Minister Federico Alfaro and First Quantum suspending its production guidance for the current year.
First Quantum also submitted to the Ministry of Commerce and Industry of Panama a notice of intent to initiate arbitration to enforce its rights under international law pursuant to the Canada-Panama Free Trade Agreement.
“The court’s decision does not take into account a planned and managed closure scenario, in which key environmental measures are required to be implemented to maintain the environmental safety of the site during this process,” said the company in a statement on Friday.
The company said that the normal procedure would involve the development of environmental controls to ensure the long-term physical and chemical stability of all infrastructure under extreme climatic conditions to avoid a long-term environmental impact.
“The future of Cobre Panama’s rehabilitation, reforestation and species conservation programs, as well as protection of almost 20 per cent of Panama’s total protected areas, currently funded by Cobre Panama will need to be addressed.”
On Tuesday evening, First Quantum announced that the orderly and safe closure of the mine would begin as soon as the court publishes the ruling. Protesters said they will continue with ongoing demonstrations until the ruling is made public.
Read more: Panama Supreme Court rules First Quantum copper mine contract unconstitutional
Read more: First Quantum may halt Cobre Panama operations due to blockades at main port
Analysts expect copper price increase after mine shutdown
The Cobre Panama mine has sparked controversy since the government passed a law extending First Quantum’s contract for over 20 more years. In return, the company would contribute with an annual revenue of US$375 million. Thousands of protestors blocked roads and the company’s main port arguing a heavy environmental impact due to the mine.
This month, the investment firm J.P. Morgan & Co. said that the odds of Panama losing its investment-grade rating would rise significantly if the contract was revoked.
The mine produced around 112,700 tonnes of copper in the third quarter and accounted for 46 per cent of First Quantum overall third-quarter revenue, which reached US$2.02 billion.
#Copper Supply Fears Rise
Closure of the Cobre Panama mine hurts global supplies. A fight for supply drives Chinese smelters to lower fees, implying the concentrates market is tightening. Reducing supply while demand for EVs rapidly increases. #StockMarket $HCH $ARG pic.twitter.com/rrBnmvGxOx
— Duane Hope (@DuaneHope5) December 1, 2023
Analysts say that copper prices may suffer because of the shutdown as Cobre Panama accounts for 1 per cent of copper production worldwide. If the copper supply continues to decrease because of the mine shutdown and other events, next year’s global surplus of copper could be depleted.
The metal reached the highest level in three months and rose as much as 1.2 per cent on Friday. Overall, the metal saw a 4.4 per cent increase in November which started to climb in July after stimulus measures in China and the possibility that the Federal Reserve may halt its tightening cycle.
The disturbance arises as the anticipated disparity between demand and supply for copper ore is expected to grow in the coming year, as reported by BloombergNEF. This projection is attributed to barriers impeding copper production in two significant production regions, Chile and Peru, coinciding with a surge in demand in China. BloombergNEF suggests that copper prices are likely to stay high in light of these factors.
On Friday, copper rose approximately to $8,528 a ton on the London Metal Exchange.
$FM.TO risks covenant breach, cost cuts if Panama shuts copper mine
The company is facing an estimated $625 million in debt maturities next year and another $1.8 billion in 2025, according to Citigroup.https://t.co/erjCrxnjjL pic.twitter.com/2xRrPxa4y5— JennyManyDots (@jenstilmanydots) November 30, 2023
“What we are seeing in Panama is not new,” Theo Yameogo, EY Americas and Canada mining and metals leader, told Financial Post. “In today’s licensing operations, particularly in South America, leaders in those countries typically seek input from the public and elected officials … and the outcomes can vary. We should expect to see even more of this in the future.”
This is not the first time First Quantum started an arbitration procedure because a country cancels one of its contracts. In 2021, the company exited the Democratic Republic of Congo after the African country cancelled its mining contract. To settle the dispute, First Quantum sold its assets to Eurasian Natural Resources Corp. PLC for US$1.25 billion.
Natalia@mugglehead.com
