Earlier this week, the Canadian miner First Quantum Minerals (TSX: FM) closed its massive Cobre Panama mine

This is a massive mine. It can produce about 1.0% of the world’s annual copper supply. The stock cratered, as you would expect:

A year ago, the Panamanian Supreme Court ruled that the government’s contract with First Quantum was unconstitutional. The agreement, signed in 2017, should have lasted until 2037. 

A year ago, I wrote a weekly update titled: We are getting a lesson in “jurisdictional risk”. As I said then:

Interestingly enough, that point didn’t come up in the six years prior to commercial production. During that time, First Quantum sunk over $10 billion into developing the mine. Now that it’s in production, the government can effectively hold the mine hostage.

And that’s what’s going on now.

Back then, I thought this would pass. This was just a negotiating tactic for Panama to get more favorable terms from the mining company. On Tuesday, November 28th, the President of Panama directed First Quantum to shut down the mine. 

We recommended First Quantum on November 11, 2022, at a price of $29.47 per share. We continued to monitor the risk, and applied a trailing to the position, against this possible outcome. We will discuss this in detail in our upcoming Spotlight issue later this month.

This illustrates the risk of investing in mining companies with assets in risky jurisdictions. I spent many years observing Freeport McMoRan (NYSE: FCX) renegotiate its license on the giant Grasberg mine. As metal prices rose, the government would lean on the company to renegotiate. Each time, the government took a larger slice. 

As copper and gold prices rise, we can expect more of this political extortion. You can’t just pack up a mine and move it somewhere else. And mines require massive up-front expense for exploration and development. That’s carried by the shareholders, who then expect to recover their investment once the mine goes into production.

Governments cheerfully overlook the period of massive investment, only to arrive with hands out when the mine begins to produce.

That’s why we need to spend the time understanding our risks. First Quantum is a sign of the times.

For the Good,

The Mangrove Investor Team