Barclays calls to restore confidence in mining in Panama

Barclays believes that achieving sociopolitical consensus around Panama's economic model and its role in a green transition will be needed to restore public trust in mining and avoid further financial setbacks.

“Panama's decision to abruptly close the fourteenth largest copper mine in the world may continue to have significant financial consequences for the country and First Quantum,” the British bank said in a special report. 

Last year, the government and Canada’s First Quantum Minerals agreed to a new contract after the original agreement for the Cobre Panamá mine was declared unconstitutional in 2017. However, thousands of protesters opposed the new contract on environmental grounds.

After the supreme court declared the new contract unconstitutional, authorities ordered the open pit mine to close at the end of November.

“As the mine was put in 'care and maintenance,' commercial operations ceased and the mine has only retained a minimal workforce to comply with the plan. This has resulted in Panama's GDP markedly decelerating to 1.7% y/y during Q1, when the mining sector contracted by 49.5% y/y, offset by positive performances in construction and [the] services sector,” Barclays said in its report. 

The mining sector represented almost 6% of Panama’s GDP before 4Q23, the bank said. 

“We forecast the economy to grow 2.2% this year, from 7.3% in 2023. The impact was apparent on domestic good[s] exports, which fell by 76% y/y during the first quarter of the year,” the bank added.

Barclays noted that although the mine became a sensitive subject during the 2024 presidential campaign, most candidates did not have clear plans for it. “The new president, José Raúl Mulino's, rhetoric on the future of mining has been ambiguous and noncommittal,” the report says.

“Although he did not provide specific details, we think he could be planning to re-open the mine in order to take care of environmental and security hazards while also finding a way for the mine's temporary operation to finance the closure plan. Nonetheless, the timing is uncertain,” the bank added. 

According to the report, while First Quantum has repeatedly stated that international arbitration is not its preferred approach, the threat of a multibillion dollar judgment is one of the company's best forms of leverage to bring the Mulino administration to the negotiating table. 

“President Mulino has publicly conditioned negotiations on the cessation of arbitration proceedings, but we do not view the suspension of arbitration without a clear reopening plan as a likely course of action,” Barclays said. 

The copper mine currently remains in a state of preservation and safe management (P&SM), with production guidance suspended. P&SM is expected to cost US$15-20mn/month, and 1,400 workers oversee the care and maintenance plan. Closure of the mine is estimated to cost over US$800mn and the process could take over eight years.

“So far, the plan has been financed by First Quantum, but there is a risk that if negotiations and the arbitration process turns sour, the government could be forced to finance it. This would come at a time when the government might require fiscal adjustment of at least 1pp of GDP per year to ensure fiscal sustainability,” Barclays analysts wrote.

Barclays recalled that First Quantum had filed two international arbitration claims against Panama. The first – through the ICSID – is a US$10bn claim for capital expenditures under the Canada-Panama Free Trade Agreement. The second – through the ICC –is also for US$10bn in damages for the early termination of the contract.

“We believe that First Quantum's strategy is to accelerate the arbitration process by seeking one award through an ad-hoc, and thus faster, process. While ICSID and ad-hoc processes can be pursued concurrently, First Quantum cannot seek awards for overlapping contract violations,” the report said.

“However, First Quantum can ultimately suspend the ad-hoc arbitration and transfer damages to another forum, in this case, ICSID. We expect to hear more details on FQM's [First Quantum’s] arbitration processes on its quarterly earnings call on July 24, 2024,” Barclays added.

Barclays considers that to reopen the mine – either to run it commercially or to simply “open to close” – the new government would need to complete most, if not all, of the following steps: an environmental audit (in progress), legislative approval of a new contract, repeal of the mining moratorium law (law 407), run public consultations and update the mining code. 

“In order to shore up political support in the Assembly and public support on the streets, a public campaign and a transparent consultation process with key stakeholders would help pave the way,” the bank said. 

“Panamanians believe that not only were contract negotiations conducted behind closed doors but that First Quantum had not properly engaged the citizenry on the benefits of developing Cobre Panamá, especially in the years leading up to production,” Barclays added.

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