First Quantum mine: 'Panama's exposure in international arbitration is massive', says expert

Panama's supreme court will rule on whether the contract approved by law between the State and First Quantum Minerals’ Cobre Panamá mine is unconstitutional, but its decision will not be conclusive in international arbitration under the Panama-Canada free trade agreement, an expert tells BNamericas.

“People seem to think that the supreme court decision will be the end of the matter, but it won't,” says Damien Nyer, White & Case LLP’s regional head of international arbitration in the Americas. 

“Panama’s exposure in international arbitration is massive.” 

Panama’s social unrest and economic crisis have intensified over the past month amid strikes and protests sparked by the backlash against the new 20-year contract for the Cobre Panamá copper mine, which was ratified by the national assembly on October 20.

The protests have devolved into a wider anti-government movement that includes grievances over a lack of public-sector transparency and rampant corruption. In turn, roadblocks have left the economy reeling from shortages of basic goods, while S&P, Moody’s and Fitch have downgraded the country's outlook over the fallout from the contract controversy.

The supreme court hearing on the validity of the mining concession contract (law 406) is scheduled to begin on Friday and will last “as long as needed” to reach a decision, Nyer said. 

Panama’s top court is thought likely to rule against First Quantum when it decides on the fate of the contract, a majority of lawyers said in a Reuters survey last week, citing precedent. 

If the court’s nine judges decide the agreement is unconstitutional, the contract will be revoked, leaving in limbo the Cobre Panamá mine, which contributes 5% of Panama’s GDP and 1% of global copper production, according to Reuters data. 

Nyer said that, regardless of the supreme court decision, Panama’s actions will be subject to review and scrutiny, and the State could be found at fault in arbitration brought by First Quantum, meaning it would have to pay significant damages.  

“Under the Panama-Canada free trade agreement, First Quantum could seek the fair market value (FMV) of its mine, calculated by reference to its net present value,” Nyer said. 

As a precedent, the expert cited the case in which Tethyan Copper Company, owned equally by Barrick and Antofagasta plc, was awarded nearly US$6bn in damages by an international arbitration tribunal of the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) in a claim filed against Pakistan for the expropriation of the Reko Diq copper-gold project. In that case, the mine had not even been built and was not operating.

“The exposure here is much, much higher. I believe that they have already spent about US$10bn. The mine is operating and its FMV will be multiples of that,” Nyer warned. “For reference, I believe Panama’s entire annual government spending is US$15bn. This whole thing strikes me as totally reckless.”

"The amount of damages in an arbitration case filed by First Quantum Minerals, viewed conservatively, would be around US$50bn, considering the investment of US$10bn and adding expectations of future income, the value of the deposit, loss of profit, etc.," Panama's mining chamber Camipa said in a statement earlier this month.

"It is a deposit of enormous proven wealth and magnitude," it added.  

Attorney general Rigoberto González recently sent his opinion to President Laurentino Cortizo on the matter at the request of the groups that oppose the contract. Local media recently reported government minister Roger Tejada as saying that the report concluded “it would not be feasible to repeal the contract in law 406, so we must await the ruling of the supreme court of justice.”