Spotlight Weekly – We are getting a lesson in “jurisdictional risk”
Thanks to First Quantum Minerals (TSX: FM) we are getting a lesson in “jurisdictional risk”.
Cobre Panama, First Quantum’s massive copper mine in Panama can produce roughly 1.5% of the world’s annual copper demand.
The government of Panama renewed its contract with First Quantum in 2017. Legally, that contract runs through 2037. However, the Panamanian Supreme Court ruled the law governing the current concession is unconstitutional.
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.
First Quantum offered Panama $375 million per year from now on. In exchange, the company wanted assurances in case the copper price declines.
However, the Panamanian government disagrees. They recently gave the company ten days to come up with a plan to put the mine on “care and maintenance” – effectively shutting down commercial production.
From Bloomberg’s Yvonne Yue Li and James Attwood:
It’s the latest twist in an impasse over new tax terms after negotiations failed to produce an accord by last week’s deadline. Tearing up contracts would be a major blow to the company’s value, Panama’s reputation as an investor-friendly jurisdiction and the industry’s confidence in building new mines just as demand for the wiring metal is set to grow in the energy transition. Still, given the shutdown timeframe, there’s scope for an eleventh-how deal, with neither side closing the door on further talks.
That’s terrible news for us, as shareholder. However, this isn’t a new strategy. It’s the risk we take when we invest in natural resources. Governments know that the operator can’t move the mine. And this appears to be the government’s way to get better terms for Panama.
As the Wolfe Research analysts wrote to shareholders:
“Like many other stoppages, this seems to us an aggressive negotiating tactic.”
We are monitoring this situation. Obviously, we are disappointed in the performance. And we are actively looking for another copper miner for the portfolio. However, First Quantum should settle this dispute shortly.
On to some housekeeping – Happy Holidays!
The Mangrove investor team plans to take some time off. This will be the last weekly update in 2022.
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We have a lot of content up already, and a lot more coming.
Merry Christmas and Happy Holidays,