Cobre Panama Dispute Highlights Increasing Resource Nationalism In Copper Sector (2024)

Key View

• Disruptions at Panama's Cobre Panama copper mine will weigh heavily on short-term copper supply in Q123, exacerbating the existing global supply tightness, with low volumes of copper inventories across global exchanges.
• We believe that this will place a floor under copper prices in the near term. At Fitch Solutions, we expect the suspension to drive a more favourable taxation or royalty payment for the Panama government.
• The significance of the mine to First Quantum Minerals and the economy of Panama is too important to risk a long drawn legal case and prolonged disruption to operations. This event highlights the increasing risk of authorities nationalising assets, localised intervention and disruptions in the sector of critical minerals.

Disruptions at First Quantum Minerals’ Cobre Panama Copper mine highlights increased resource nationalism and operational risks to mining projects as governments heighten oversight on domestic key critical resources and demand more taxes and royalties from miners. At Fitch Solutions, we note that the halt to Cobre Panama's operations will weigh on already tight global supplies of copper in the short term, placing a floor under copper prices. However, we do not expect mine disruptions to last for prolonged periods given its economic significance to the country, contributing up to 3.5% of the country’s GDP according to national sources. As of December 30, the government of Panama and First Quantum remained in negotiations with the government rejecting the latter's legal proceedings to avoid halting operations.

On December 21, Panama’s government ordered First Quantum Minerals to halt operations at the mine after failing to agree on the terms for a new contract with the Canadian miner by a December 14 deadline. The contract renewal negotiations have been ongoing since September 2021, with priorities on higher royalty payments and better environmental conditions of mining operations. According to news sources, the dispute lies with royalty payments of 12% to 16% of gross profits to the state, with the minimum payment amount at USD375mn. First Quantum attempts to push for exceptions in the event of lower prices and profit. Beyond annual royalty payments, First Quantum would have to start paying a 25% corporate tax rate. That said, while negotiations were ongoing as of December 30, the mine has been placed under care and maintenance. The mine alone contributes significantly to the country’s economy and is First Quantum’s biggest asset, costing USD10bn to build.

We expect Cobre Panama mine’s disruptions will place further pressure on tight global copper inventories, and if the issue prolongs, our copper supply outlook for 2023 will face upside risks with support to prices. Having peaked at USD10,674/tonne in March 2022, we forecast copper prices to average USD8,500/tonne in 2023. Currently, copper stocks at global exchanges such as LME, SHFE, and COMEX are down to just a few days of consumption. Further, firms such as AngloAmerican recently announced 2023 production cuts to copper owing to lower ore grades. Its production is expected to fall to 840kt – 930kt, from 910kt – 1.02mnt. Peru, another key copper producing country, is also facing supply chain problems from protests as transport of people, supplies and products have been hindered ever since the ousting of former President Pedro Castillo. These factors all contribute to a worsening outlook in the near term for copper production, now exacerbated by the dispute between First Quantum and the government of Panama.

First Quantum, which is the world’s sixth largest copper miner and Canada’s largest producer of copper achieved its highest annual copper production at 816kt in 2021 owing to Cobre Panama’s record production at 331kt. The firm holds a 90% stake in the Minera Panama local unit that runs Cobre Panama, which began operations at the project in 2019. The firm was also considering expanding processing capacity at Cobre Panama, where its Colina pit is expected to begin mining operations in 2023. Ultimately, the goal for the firm was boosting Cobre Panama’s copper production to 350 – 380kt in 2023. Disruptions to the mine's operations risks jeopardizing this target. In our 2023 Mining and Metals Key Themes, we highlight that critical minerals will face supply issues as they remain in the spotlight for increasing resource nationalism and localisation policies, fueled by a slowing global economy and accelerating energy transition.

Our core expectation is for the suspension of operations at Cobre Panama to likely culminate in a more favourable tax or royalty payment plan for Panama and the resumption of operations in the near term, while the nationalisation of the mine or a change in ownership will be most unlikely. The mine has generated some USD6.7 billion in private investment, with plans of brownfield growth into other commodities. Further, a molybdenum plant is planned next year, while copper production has a lengthy timeline of five phases, ending with the Balboa pit in 2054. Hence, we at Fitch Solutions do not expect the worst case given the mine’s significance to both parties, the downsides of a long drawn legal case and reputational risks involved to Panama's government for investors and First Quantum.

We maintain our long held view that resource nationalism, asset seizures and increased government intervention in the natural resources sector will only increase over time as critical minerals demand ramps up. Globally, we have seen numerous instances of such events in 2022 and earlier, and expect similar occurrences in 2023. Mexico nationalised its lithium industry in April 2022, creating Litio para Mexico, a state-run company to mine the metal. Alongside the firm, a newly enacted bill declared the exploration, exploitation, and use of lithium to be the exclusive right of the state. It also includes a clause allowing the state to take charge of other minerals declared strategic by Mexico. In July 2022, Rio Tinto and Winning Consortium Simandou’s Simandou iron ore project development also faced disruptions from Guinea’s government over reasons based off disagreements in their partnership to build rail and port components of the project. The suspension was lifted after an agreement was signed with the Guinea government taking a 15% free carry equity stake in the railway and port venture. Lastly, besides outrightly nationalising mining assets, a more indirect approach many other countries have taken is through higher royalties and profit taxes on mining operations and miner profits. And where disputes arise, disruptions to mining operations and global supplies can take place as evidenced in Panama.