First Quantum launches international arbitration over Panama copper mine

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First Quantum Minerals Ltd. FM-T has launched arbitration proceedings against Panama in an attempt to mitigate the huge financial damage the company faces after the country’s President ordered the closing of its biggest copper mine.

President Laurentino Cortizo’s order to First Quantum on Tuesday night to close Cobre Panama, came the same day Panama’s Supreme Court declared the Canadian miner’s latest mining contract to be unconstitutional.

The Panamanian government last month signed a new agreement with First Quantum into law, but amid widespread public protests Mr. Cortizo directed the country’s top court to rule on the legality of the contract.

Vancouver-based First Quantum in a statement on Friday said that it has now started arbitration against Panama in the International Court of Arbitration, and hearings will be held in Miami.

Arbitration between the private sector and governments typically takes years to play out, and even in the event of a victory for the company there is no guarantee of ever receiving compensation.

In 2011, Barrick Gold Corp. ABX-T and its partner launched arbitration proceedings against Pakistan in a dispute over the right to mine a massive copper and gold project. Seven years later, Barrick was awarded a multibillion-dollar payout, but Pakistan refused to pay. It would be another three years before a deal was reached that saw the project revived.

On Wednesday, Ryan MacWilliam, chief financial officer First Quantum Minerals spoke at the Scotiabank mining conference in Toronto and addressed the possibility of bringing in a partner on Cobre Panama to alleviate its financial exposure.

Orest Wowkodaw, analyst with Scotia Capital in a note summarizing Mr. MacWilliam’s comments, said First Quantum believes it’s “too early and likely too challenging” to consider partnering with anyone at this juncture, given the uncertainty over the outcome.

Earlier in the year, Barrick approached First Quantum to discuss a deal that could have seen the Toronto-based gold miner acquire the company, an industry source said. The Globe and Mail is not identifying the source as the person was not authorized to speak publicly.

Bloomberg News in June first reported Barrick’s approach to First Quantum.

First Quantum declined to comment.

Barrick did not respond to a request for comment about reaching out to First Quantum earlier in the year, and whether it had attempted to engage with the company recently in light of this week’s developments in Panama.

Regulation of the mining sector is front and centre for Mr. Cortizo’s Democratic Revolutionary Party, as he heads into a general election next year. The environmental impact of the open pit Cobre Panama mine, which is located in a densely forested area, 120 kilometres west of Panama City, has emerged as a major issue for voters, particularly as the country endures its worst drought in decades. Concerns have been raised about the mine possibly tapping into water sources for the Panama Canal.

Federico Alfaro Boyd, who resigned as Panama’s minister of commerce and industries on Thursday, acknowledged in a statement “the patriotic fervor” whipped up by the thousands of Panamanians who protested against the mine over the past few months. But he also raised concerns about the financial damage the Central American country could incur by the closing of Cobre Panama, including possible job losses, economic instability, and damage to the country’s international credit rating.

Cobre Panama has created around 40,000 direct and indirect jobs, and accounts for about 5 per cent of Panama’s gross domestic product.

A permanent shutdown of the mine would put significant stress on First Quantum’s balance sheet. As of Sept. 30, the company was carrying US$6.8-billion in debt.

Mr. Cortizo said in a television address to Panamanians on Tuesday that Cobre Panama must close in an “orderly and safe” fashion.

First Quantum has outlined the huge challenges in closing the site and the timelines involved in doing it responsibly. The company in a statement said that mine closings are typically preceded by rehabilitation measures that are implemented at least five years ahead of time.

“This would involve the development of engineered controls to ensure the long-term physical and chemical stability of all infrastructure under current and extreme climatic conditions to avoid an environmental disaster,” First Quantum said. “To ensure environmental protection from an unplanned closure, similar timelines and actions concerning environmental, economic, labour, social and legal considerations must be observed.”