Panama panel backs path to Cobre Panama restart

Panama should negotiate a restart of First Quantum Minerals’ (TSX: FM) Cobre Panama mine to fund its eventual orderly closure without burdening the state, a ministerial committee has recommended to President José Raúl Mulino.

The three-minister commission’s recommendation — part of a list of 17 — follows an audit conducted by independent Swiss consultants, along with an assessment of the mine’s economic, environmental and legal implications. The commission stressed that its proposal was not a final decision, which rests with the president.

The recommendations point toward negotiations that could allow Cobre Panama to operate long enough to meet Panama’s objectives, rather than an imminent shutdown, BMO mining analyst Matthew Murphy said. The commission’s report cites a 25-year active mine life as an illustrative example, he noted.

“We believe Cobre Panama likely needs to run for decades to satisfy these objectives,” Murphy said in a note. “Risks are elevated but mutually agreeable solutions that preserve value remain possible.”

Stock plunge

First Quantum shares plunged as much as 36% Wednesday morning in Toronto before trading was halted as investors reacted to the government’s framing of renewed operations as a mechanism for eventually shutting Cobre Panama. They last changed hands at $31.10 apiece, leaving the miner with a market value of $25.9 billion (US$18.2 billion).

“We think the market got it wrong,” Scotia Capital mining analyst Orest Wowkodaw said in a note to investors. 

“While additional clarity is required based on today’s public comments from the Committee of Ministers, we see the massive sell-off in First Quantum shares as a buying opportunity for investors,” he added. “We do not think anything has changed with respect to an inevitable permanent restart of the operation under renegotiated terms.” 

First Quantum shares have a floor value of about $30 apiece, excluding any potential recovery through suspended arbitration claims, National Bank Financial mining analyst Shane Nagle said in a note. On that basis, Franco-Nevada (TSX, NYSE: FNV) — which has streaming agreements on Cobre Panama’s output — has a floor value of about $340 per share, he added. Franco-Nevada dropped 3.4% to $340 in late afternoon Toronto trading Wednesday.

Potential route

The document offers a potential route through the economic, legal and environmental problems surrounding Cobre Panama: generate revenue from renewed operations to finance a controlled shutdown rather than leave Panama responsible for the cost. The mine produced about 1.5% of global copper before mining stopped and was one of the country’s largest private investments.

Panama’s Supreme Court ruled in 2023 that First Quantum Minerals’ contract to operate Cobre Panama, the only mining operation in the Central American country, was unconstitutional. Challenges against the contract piled up in court following public protests against the deal signed that year by the government and First Quantum’s local subsidiary, Minera Panama.

Murphy highlighted a potentially important distinction in the commission’s report: the 2023 court decision declared the mining contract unconstitutional but, according to the report, did not prohibit mining activity itself. That could leave room for the government and First Quantum to negotiate a new legal framework for operations.

Any agreement should prevent an extension of the mine’s operating period and resolve outstanding international arbitration proceedings, according to the committee. Mulino has not made a final decision on the mine’s future.

Resolving those proceedings is central to the commission’s recommendations, Murphy said. Claimants are seeking a combined US$27 billion through arbitration, while the proposed framework would establish conditions for a restart capable of financing what the commission calls an “orderly, self-funded closure.”

First Quantum said Wednesday it would engage “constructively and in good faith” with Panama on a new legal framework for Cobre Panama that is fair, transparent and consistent with the country’s Constitution and laws. The company said any agreement must respect Panama’s sovereignty, democratic institutions and the government-led process.

The miner also noted that the commission makes termination of the pending international arbitrations a mandatory condition of any agreement.

Eight principles

The commission also laid out eight principles for any new arrangement. It said Panama, as owner of the mineral deposit, should act as more than a state collecting royalties from a mining concession. The government should independently verify financial flows from the operation rather than rely solely on figures reported by the operator, while exercising effective oversight and requiring transparency over both the mine and the use of revenue it generates.

The framework also calls for a definitive closure date with no renewal or extension, prohibits further expansion of the mine site and requires operations to adapt to a progressive shutdown. A clear mechanism would also have to be established to restore and rehabilitate the site, while the use of mining revenues would be subject to transparent mechanisms open to public scrutiny.

“A closure isn’t done in one year, nor in five years,” Commerce and Industries Minister Julio Moltó said in a press conference.

Moltó said the committee’s proposals were based on visits to communities surrounding the mine rather than assessments conducted solely from government offices. He and his team toured Donoso, Omar Torrijos Herrera and La Pintada, where they met mine workers, local authorities and suppliers before presenting their findings as part of the government’s review of Cobre Panama’s future.

First Quantum said a sustainable path forward must also provide long-term stability and tangible economic benefits for Panama through employment, workforce development, local procurement, community investment and broader economic contributions.

Closure costs

Economy and Finance Minister Felipe Chapman backed an orderly closure while arguing that Panama should not bear its financial cost. The abrupt shutdown inflicted a substantial economic blow to the nation, he said, eliminating thousands of direct and indirect jobs while cutting government tax and royalty revenue.

The recommendation is in line with President Mulino’s previous statements framing a mine reactivation as an “open to close” plan. The giant Cobre Panama mine, which produced as much as 1.5% of global copper before mining stopped in 2023, accounted for about 5% of Panama’s gross domestic product that year, according to First Quantum.

Investors may be putting too much weight on the closure language and not enough on the potential duration and economics of renewed operations, BMO’s Murphy said.

“The immediate market response to this report has been to focus on the risk of closure,” he said. “However, we believe the full report details offer a more promising frame of reference and believe a mutually agreeable negotiated outcome is possible that would preserve substantial asset value for First Quantum and satisfy all of Panama’s objectives.”

What comes next

The commission’s deliberations follow months of study into the consequences of shutting one of Panama’s largest private investments. A government study published in September found the closure eliminated close to 36,000 jobs and reduced taxes and royalties flowing to the state by nearly US$1.4 billion.

Environment Minister Juan Carlos Navarro argued the mine should never have been built and characterized the problem of closing it as one inherited from the previous administration.

Cobre Panama was First Quantum’s largest revenue generator before its shutdown, accounting for about 40% of company revenue. Its closure followed nationwide protests over environmental concerns and the terms of the mining concession.

First Quantum resumed processing in July previously mined stockpiled ore with government authorization, an activity that does not amount to reopening the mine for new extraction. The company restarted one of three milling circuits during the second quarter and continues to forecast production of 30,000 to 40,000 tonnes of copper from stockpiles this year.

The stockpile program forms part of the government-approved preservation and safe-management plan. Panamanian authorities have said processing the material can reduce environmental risks associated with leaving mineralized ore exposed to rainfall.

President Mulino must now determine whether negotiations with First Quantum can produce an arrangement that addresses the commission’s recommendations while generating enough economic value to cover a permanent closure plan.

First Quantum said it is awaiting guidance from Panama’s government on the next steps for negotiations following the commission’s recommendations.

Murphy’s reading of the report suggests that could mean years or even decades of renewed mining before closure, provided First Quantum and Panama can settle the legal disputes and agree on terms that meet the government’s economic and environmental objectives.