Big bucks lost: The repercussions of closing Cobre Panamá

The economic repercussions of permanently closing the flagship copper mine of Canada’s First Quantum Minerals in Panama would mean billions of dollars lost for the Central American country, according to research by business council Conep.

A report entitled ‘Socioeconomic repercussions of the closure of Cobre Panamá operations’ was prepared by Conep’s economic analysis unit and was presented on Monday at a forum where various authorities, including ministers, participated. The report can be downloaded from the Documents box in the top-right corner of the screen.

Almost a year after metal mining was suspended following the supreme court ruling in late November 2023 that the renegotiated concession contract between the State and First Quantum subsidiary Minera Panamá was unconstitutional, the Panamanian economy has failed to show the dynamism previously seen, with an average annual growth rate of 6% during the 20 years prior to the COVID-19 pandemic.

The World Bank and the IMF have adjusted their projections for Panama’s GDP growth to 2.5% this year, which is “well below the 8% required to address unemployment, informality, the urban-rural disparity and the development of specialized human capital,” according to the report.

“The sudden cessation of metal mining activity in the country has contributed to the marked slowdown of the economy, causing timid growth of 2.15% in the first half of 2024 compared with 9.03% in the same period of the previous year,” highlights Conep.

However, it warned that the impacts generated are greater if addressed holistically, since mining represented 5% of GDP in 2022, 75% of exported goods, more than 38,000 direct, indirect and induced jobs, and contributed to productive and export diversification and sophistication.

The Conep study also includes an analysis of the impact on the value chain, on domestic consumption and the potential for new industries that would be oriented towards exports derived from mining, along with the potential loss of innovation and technological development.

According to the research, the repercussions of closing Cobre Panamá would be as follows.

1. National production: The mining and quarrying sector has been the sixth largest in the Panamanian economy in the last three years, and its contribution to GDP has averaged 5% due to its multiplier effect.

"Whatever the value of the country's GDP over the next five years, it will be 5% less than it could have been in absolute terms due to the cessation of metal-mining activity," the report states. "With the cessation of operations at the mine, the generation of direct and induced added value will be reduced by the equivalent of US$3.9bn."

2. Value chain: According to Conep, the mine's local purchases accounted for almost 79% of its total purchases in 2023, amounting to US$888mn.

“In the first year of the mine's cessation of operations (2024), the value chain – made up of 24 subsectors – will stop selling approximately US$1bn,” the report states.

"The opportunity cost for the value chain could reach, cumulatively over 10 years, more than US$18bn." 

3. Public finances: Conep's research shows that "in an international scenario of conservative copper prices (US$3.65/lb), the treasury would lose between US$375mn and US$428mn per year in taxes over the next five years, equivalent to a range of 2.58% to 3.24% of estimated revenues.

With rising prices of the red metal due to the so-called “green wave,” Panama would lose up to US$600mn in taxes per year, or 5.2% of estimated revenues for 2024.

4. Exports: In 2021, Panama saw a record US$3.65bn in exports of goods, of which US$2.96bn were copper concentrates, according to Conep.

"With the introduction of copper concentrate into the country's exports of goods, Panama has managed to reconfigure its export matrix and position itself as an important link in the global value chains in the copper industry," the report states.

"With the cessation of operations of the Cobre Panamá mine, the country will not only stop exporting more than US$16bn accumulated in a period of five years or US$34bn in a period of 10 years, but will also suffer a setback in the volume and structure of the exportable supply," it added.

The research showed that without these copper exports, it will take the country five years to reach the levels of exports of goods achieved in 2008, when the country recorded a previous high.

5. Investment grade and FDI: The Panamanian economy has historically been an attractive destination for foreign investment. However, the loss of its investment grade in March this year due to a downgrade by Fitch Ratings, attributed to the deterioration of public finances, has generated concerns in the capital markets, according to the report.

“The main causes of this downgrade in investment grade include growing fiscal deficits, dependence on external markets for financing, and the closure of the country's most important mining operation, Cobre Panamá,” says Conep, which warns that a country's risk rating is a determining factor in its ability to attract foreign investment and obtain competitive financing.

And although FDI has not managed to recover its pre-pandemic levels, Conep highlights that, if one takes into account that Minera Panamá's capital investment represented 21% of FDI on average between 2021 and 2023, a year in which it fell by 31% to US$2.01bn, "it is most likely that this will continue its downward trend in the very short term."

“Everything seems to indicate that FDI in the coming years, without the mine, could be approximately 20% lower than it would be if metallic mining had been allowed,” according to the study.

Outlook

Conep's research indicates that "the possibility of restarting metallic mining in the country should not be completely ruled out, given the installed capacity that this sector offers for the country to address the challenges that the national economy currently faces in terms of employment, growth, FDI, tax revenues, etc."

According to the report, this option would have to involve an independent and permanent international audit, the renegotiation of better conditions for the country in the mining contract with the State and finally, the opening of the mine. The reopening must also be accompanied by a detailed follow-up and monitoring plan, and communication with local communities and authorities to guarantee transparency and acceptance.

“The international investment community would welcome the resumption of operations in the metal-mining sector and in particular the Cobre Panamá mine, where investment in capital expenditures averaged US$457mn annually in 2021-2023,” says Conep.

BNamericas contacted Antonio Fletcher, former president and advisor to Conep who was present at the forum, to ask how feasible a renegotiation of the Cobre Panamá mining contract is under the new government of José Raúl Mulino, given the massive protests that led to the contract being declared unconstitutional last year, but he did not immediately respond.

Cobre Panamá produced 330,863t of copper in 2023, down 5.6% on 2022, in addition to some gold.