Panamanian Gov Eyes Restart of Cobre Panama Mine

A flurry of media reports over recent weeks have highlighted the Panamanian President Mulino’s desire to tackle the issue of First Quantum Minerals’ (TSX:FM) shuttered Cobre Panama mine (which had accounted for ~1% of global copper production, ~40% of FM’s revenue, and ~4-5% of the country’s GDP), which was set to happen after his new government completed addressing social security reform. On 27 Feb 2025, Mulino said he and his closest advisors are exploring “novel ideas on changing the framework of what the mine was to what the mine can be,” which caused FM shares to briefly jump 7% to C$18.84/sh. Later, the country’s commerce ministry said any negotiations with the miner could only happen if the $30B arbitration case against the nation was dropped.

And just last week on Thursday (13 Mar), Mulino said: “The issue of the mine will be approached with great responsibility and taking into account at all times the national interests…we’ll star as soon as next week,” which caused FM shares to rise 18% this past week to C$21.03/sh (vs. our 23-company copper producer peer group median share price performance of +1.0% over past week). Also this past week, FM signaled that it had instructed lawyers to begin the process of suspending its arbitration in preparation to renegotiate the reinstatement of its mining concession contract with the Mulino government.

The Cobre Panama mine has been shut since protests erupted following former President Laurentino Cortizo’s granting of a refreshed mining concession (in Oct. 2023, several months before a national election) that had an initial term of 20 years (permitted to mine until ~2043), with a 20-year extension option (to ~2063), requiring annual payments to the government of at least US$375M (in royalties and taxes). Local stakeholder concerns appear to relate to the terms of the granted concession (including economic terms, and the option for the 20-year extension) and included some typical environmental concerns such as deforestation, water management, tailings dams (all of which are addressed in an ESIA process in Panama - an Environmental and Social Impact Assessment, initially completed by FM in 2010). FM stock crashed 44% to C$15.72 (on 2 Nov) on news of the revoked mining concession and suspension of mining (the Supreme Court ultimately ruled that the granted 20-year concession had been unconstitutional).

A few things jumped out at us at the time of the contract renewal:

1. The initial 20-year concession period looked like would not require mining activities to encroach to beyond the company’s current, environmentally-permitted project footprint, from an approved 2010 ESIA (Environmental and Social Impact Assessment), which evaluated environmental and social impacts for mine design for it’s initially contemplated 2.1 Bt reserve and a 30-year mine life to ~2039 (from FM’s 2010 FEED Technical Report), provided the company adhered to some version of its 2010 mine plan. This should have been somewhat reassuring for the project’s local stakeholders.

2. However, mining of the larger 3.1 Bt reserve and deviation towards the latest 2019 Technical Report and mine plan (now including slight expansions of 3 existing open pit complexes/areas, and the addition of 2 new ones for a total of 5), would require enactment of the optional 20-year extension as the 2.1Bt reserve would become mined out by around the end of the initial 20 year concession period (should the company adhere to some version of 2010 mine plan).

3. Additionally, this larger reserve (~2.7Bt remaining in 2023) with production scheduled to ramp up to 100 mtpa from 85 mtpa (following recent CP100 expansion) as detailed in 2019 mine plan, would would require expansions to the 2010 environmentally-permitted footprint to include new open pit and tailings areas, through the submission and approval of a new or amended ESIA (expansion to ~the blue line from ~the brown line, in map below).

The looming May 2024 election amid former President Cortizo receiving ongoing pressure from leftist and environmental groups did not appear to help FM’s concession contract negotiation and associated ESIA processes. And while the former government of President Cortizo was willing to grant a 20 year refreshed mining concession (which could largely be carried out within the 2010 environmentally-permitted footprint), with option to extend for another 20 years (additional environmental permitting through submission and approval of a new or amended ESIA would also be required), it seems this former government (and its Ministry of Environment) may have been hesitant to fully entertain FM’s ESIA process in the months to years leading up to the election - a process that requires environmental and social study of new areas along with a public consultation process, which has probably been underway for years now in some capacity in anticipation of the new or amended ESIA. FM has provided few updates on the new ESIA in recent years, beyond periodic mentioning in its disclosures of various possible timelines for its submission and approval, and that “Provided that the same process and assessment is conducted as has been for the existing Project, and with similar commitments made, there are therefore no known reasons to indicate that there will be environmental and permitting issues that could materially impact expanded mining and tailings disposal activities.”

The 2010 ESIA had been prepared by expert engineers at Golder Associates (known for technical excellence in tailings management design), and had stated that the Project complies with Panamánian regulations and also met International Finance Corporation (IFC) Performance Standards on social and environmental sustainability.

While there is no certainty on timelines or outcome, we would expect the right-leaning Mulino Administration to move swiftly in renegotiating and reinstating some version of a refreshed mining concession contract, given the economic importance of the mine to all parties involved (FM, its shareholders, Mulino government, local project stakeholders and all Panamanian citizens). This entire fiasco appears to be largely a result of politics leading up to an election. Former President Cortizo appeared unwilling to meaningfully look beyond the initial 2010 planned and permitted mine footprint, as he might have been unwilling to risk disappointing his left-leaning and environmentalist base of supporters (going into election). But the new Mulino government has experienced firsthand the economic consequences of Cobre Panama going offline (especially after trying to plan social security reform without that $375M+ in additional revenue on the books!).

What might Mulino desire in the negotiation? When he says: “novel ideas on changing the framework of what the mine was to what the mine can be” and “The issue of the mine will be approached with great responsibility and taking into account at all times the national interests”, we see this as highlighting two things:

1. The potential long term 40+ year economic impact of the mine could be large.

2. Mining activities must be done responsibly, and that could possibly involve some desired tweaks to plans to further mitigate any perceived environmental and/or social risk, and to further alleviate concerns of locals stakeholders.

So, Mulino is likely looking to realize the huge economic benefit of what Cobre Panama is for the country now (by possibly granting a 20-year concession), while also appreciating the future further economic benefits for some 40+ years to come (by possibly also granting a 20-year extension), while also likely aiming to both: (a) help smooth/expedite FM’s current ESIA process for FM, and (b) satisfy environmental groups to some extent while at the same time helping to further ensure an environmentally and socially secure mine is maintained throughout its operations and closure.

The royalty rates that help make up the recently granted-then-withdrawn concession’s minimum $375M in annual (royalty + tax) payments are in the range of 12-16% - among the highest range globally. So Mulino should realize how sweet this part of the deal was and not push for more here, and FM will certainly not be eager to concede any further in this area.

What might FM desire in the negotiation? We see FM as wanting 3 things:

1. First and foremost, FM wants to get the mine cash flowing again, by obtaining a valid 20-year concession giving the company permission to mine and and occupy tailings disposal areas for the initially 2010 planned 3 open pit complexes (Colina-Medio, Valle Grande, Botija), to help justify the some ~$10B it has already invested into the mine, a port, and a power station (including heavy investment in renewable energy in part to help meet Panama’s needs).

2. Secondly, FM wants legal visibility on being able to mine beyond 20 years (according to the 2019 mine plan), to help justify ongoing and future capital expenditure needs, which FM would prefer would eventually start to involve two new open pit areas (Balboa and BA-BR), but not until ~2036 (according to above mining sequence chart provided in 2019 Technical Report). This desired legal visibility was somewhat offered by the prior granted-then-revoked concession’s “20-year optional extension” - to which the details on environmental permitting were not clear (which may have aggravated some local stakeholders). Presumably, the new or amended ESIA would also be required prior to mining activities encroaching on new areas.

3. Thirdly, FM needs to submit and gain approval for a new or amended ESIA, that environmentally and socially studies these new areas in accordance with top industry standards (as was initially done for the much larger area in 2010), in order to regain and maintain its social license in the jurisdiction. This may involve FM’s further investment in more bells and whistles in the areas of environmental modelling, analysis, studying, or even additional environmental protection measures for certain mine infrastructure (which may cost FM some more millions of $ but may be worthwhile conceding if it can more quickly alleviate any discount applied by investors to future production coming from areas that are not yet environmentally permitted).

Where could the FM stock go if plans for a restart are announced? We see each of these 3 above goals by FM as being independent catalysts that could each independently rerate the FM stock. Especially the first one, which would allow FM to realize its cash flow multiple on a more-than-doubling revenue. The next two would boost the stock more marginally by each allowing the long term NAV for the full ~35-40+ year project to be incrementally more realized (by allowing the stock’s P/NAV multiple to be realized on a less-discounted long-term NAV).

Three years ago before much of this ordeal began (and also before the much needed 20-year refreshed concession was granted), FM stock traded 38% higher than it does now (vs. our 23-company copper producer peer group median of 8.3% higher and mean of 8.6% higher). So if FM were trading at levels comparable to 3 years ago (which would exclude catalysts #2 and #3 above), its market cap might be roughly 30% higher than it is now, which would take FM up to share price of C$27.34 and a market cap of ~US$16B - or US$0.14/lb CuEq resource (which is in between the peer group median of $0.11/lb CuEq and mean of $0.15/lb CuEq), according to the below excerpt from our latest Peer Table (link to full Peer Table).

Disclaimer: Provided for informational and educational purposes, and is not intended as investment advice. For full disclosures, visit www.hostrockcapital.com/disclosures.