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First Quantum has its work cut out on Cobre Panama

Specific challenges include the scale of Cobre Panama, which is much bigger than anything First Quantum has built to date.

Inmet Mining

It took six months and more than $5-billion for First Quantum Minerals Ltd. to get its hands on Cobre Panama, one of the world's largest copper projects.

The trick now will be to build the mine on time and on budget in a world where costs have skyrocketed and the outlook for metals prices is murky. Moreover, Cobre is to be built in a country, Panama, that has virtually no mining industry to speak of.

Vancouver-based First Quantum gained control of the project this week with the hostile takeover of Inmet Mining Corp., and hopes it can shave as much as $1-billion (U.S.) from the $6.2-billion construction cost budgeted by its current owner.

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The mine, already fully financed under Inmet, will be the largest ever in Central America and represents the most ambitious development project in Panama since the building of the Panama Canal. After it comes into production in 2016, it is expected to produce about 300,000 tonnes of copper a year for 40 years.

Analysts are divided on whether First Quantum can build Cobre Panama more cheaply than Inmet, pointing to such massive cost escalation across the mining industry that it has felled free-spending CEOs and decimated smaller companies.

Specific challenges at Cobre Panama include the scale of the project, which is much bigger than anything First Quantum has built to date, and working in the Panama rainforest. The company will need to work with the government and local communities to assure them the project will proceed as planned under Inmet.

"The company has provided no information about where they think they could save on the costs as estimated by Inmet, and given their lack of experience in that part of the world … my assumption is that they won't find any cost savings," said Salman Partners Inc. analyst Raymond Goldie, pointing out the industry has seen cost inflation of about 15 per cent in the past year alone.

TD Securities Inc. analyst Greg Barnes said in a recent report that costs could be as high as $7-billion, and also forecast the project might take a year longer to build than Inmet's base case scenario.

Delays have had among the most injurious effects on a project's costs, especially where work forces numbering in the thousands must be maintained and co-ordinated.

On the other hand, analysts point at First Quantum's mines in Mauritania, Zambia and Australia as proof it can build projects cheaper than rivals.

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"By their own admission, First Quantum has identified about $1-billion that they don't think needs to be spent on the project," said John Hughes, an analyst with Desjardins Securities in Toronto.

First Quantum declined to comment because its acquisition of Inmet is not yet complete, with the deadline for shareholders to tender to the deal on March 21.

In an interview in January, First Quantum said the company could extract savings from indirect costs, such as contractors and staff not directly associated with equipment and plants.

The company had access to Inmet's confidential books for nearly a week in February, including a visit to the property, but it may be months before it has sufficient data to map a cost-savings plan.

While differing on how much First Quantum can do to reduce costs, analysts agree the company will be challenged by a volatile copper market and uncertain demand from key markets. They point out that Panama, while politically stable, has no mining culture.

"Panama is not exactly a proven mining district," Mr. Hughes said. "Without a real history and structure and without precedent set with regards to large mine development and construction, the Cobre Panama will be, really, the test project for existing mining laws in Panama."

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About the Author
Mining Reporter

Pav Jordan is a mining reporter for the Report on Business. More


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