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Minera Panama, S.A. (“MPSA”), a subsidiary of First Quantum Minerals (“FQM”), pursuant to its 1997 mining concession granted by the executive branch of Panama´s government and approved by the National Assembly of Panama through Law 9 of 1997 (“Law 9”), developed and currently operates the Cobre Panama copper mining project, a more than US$10 Billion investment– the largest private investment in Panama´s history, which represents approximately 1.5% of the world´s copper production.
In September 2018, the Supreme Court of Panama issued notice of a ruling on an action filed in 2009 seeking a declaration of unconstitutionality of Law 9, through which the National Assembly of Panama approved the 1997 mining concession contract. The Court declared Law 9 unconstitutional. The ruling entered into effect in December of 2021. Although highly questionable, and our comments on the same may be the subject of a subsequent post, the ruling is final and has caused legal uncertainty in connection with the Cobre Panama investment and potential legal risks for both contracting parties (including commercial and investment arbitration).
Upon assuming power, the government of President Laurentino Cortizo started a negotiation process with FQM and MPSA on a refreshed concession agreement. After more than two years of negotiations, in March of 2023 the parties reached agreement on the terms of the refreshed contract. As a condition to entering into effect, the contract requires a public consultation process (already completed), approval by the Cabinet Council (already granted), countersignature of the Comptroller General of Panama (in progress), and approval by the National Assembly through a law.
Since the announcement of the agreement in March, different persons or groups mainly opposed to mining have made public comments in opposition to the refreshed contract. I will try to briefly clarify some of the negative comments that have been made.
- The refreshed contract was granted directly by the GOP and not through a public bid process as allegedly required. The principal basis for this argument is the supposed application of Cabinet Decree 267 of 1969 (“CD 267”), which created a special regime for mining concessions in the Petaquilla area, to the refreshed concession contract. This argument does not take into account that CD 267 is no longer in effect. CD 267 was repealed through article 2 of Law 9. Even though Law 9 was declared unconstitutional by the Supreme Court of Panama, said declaration does not revive or reinstate CD 267, as the Supreme Court did not expressly provide for said reinstatement in its Law 9 ruling (express reinstatement is required in order to revive a repealed norm as previously interpreted in other Supreme Court rulings and as concluded by Panama´s Procurador de la Administración (Solicitor General) pursuant to an opinion request of the then Minister of Commerce and Industries in connection with the Law 9 ruling and its effects on CD 267).
- The mine may force the government to prohibit overflights up to 3,000 meters over the mine in order to eliminate the possibility to monitor what is happening with mine operations and thereby impairing Panama´s sovereignty. Not true. The concessionaire may request the government to issue flight restrictions as a safety measure in connection with explosions and other operative conditions at the mine. Approvals of said requests are not automatic. Similar safety measures have been taken in other important infrastructure projects in Panama in the past. The refreshed contract is clear that said restrictions do not affect the government´s right to supervise and audit mining operations.
- The concessionaire may undertake mining operations outside of the concession area and may expand said area at its will. Important project infrastructures area located outside of the concession area, such as the Punta Rincón International Port and the thermoelectric power station. However, mining exploration and extraction operations can only take place within the delimited concession area. The concessionaire does not have a right to expand the concession area. It may request additional concessions for gold, silver and molybdenum, but only inside of the concession area delimited in the contract. The only way to expand the concession area would be through a contract addendum, negotiated with the government. Said addendum would need to be approved by law to enter into effect – a difficult and cumbersome process.
- The refreshed contract grants MPSA the right to mine for 60 or more years. Not true. Clause 2 of the refreshed contract established an initial 20 year term, that will run from December 22, 2021 if the law that approves the refreshed contract is passed by the National Assembly. The contract provides for the possibility of one 20 year extension of the concession, assuming MPSA has not breached essential obligations under the agreement and subject to life of mine exceeding the initial contract term. Any other extension would need to be negotiated between the parties and be subject of a contract addendum or a new contract (assuming agreement on terms), which must be approved by the National Assembly of Panama.
- Panama must pay to the concessionaire for depletion of mineral reserves. Not true. Panama makes no payment to the concessionaire for depletion. However, the Code of Mineral Resources (“CRM”), which applies to all mining operations in Panama (be it metallic or non-metallic minerals) provides that concessionaires may take a tax deduction in connection with the depletion of reserves. Note, however, that the depletion formula applicable in the CRM is more advantageous to mining concessionaires in general, than the depletion deduction that the government negotiated in the refreshed contract. Also, the government negotiated limits on said deduction in the refreshed contract. MPSA can only deduct depletion from income tax or alternative minimum tax, not from other payments due to the government. The current concession contract allows for depletion to be deducted from other contract payments, including royalties. Therefore, the refreshed contract limits the depletion deduction when compared to the general mining regime in the CRM or to the 1997 concession contract.
- The refreshed contract allows the concessionaire to expropriate lands outside of the concession area. The concessionaire cannot automatically expropriate land. If MPSA needs to acquire land in connection with its mining operations (not for other purposes), and fails to reach agreement with the affected landowner, MPSA may request the Ministry of Commerce to expropriate the required land. The refreshed contract does not establish a special expropriation process and incorporates by reference the applicable provisions of the CRM that would apply to any mining concessionaire in Panama. Note that MPSA would have to justify the need for the requested land, it must pay the value established for the same and title will remain with the State (not the company) and MPSA would have the right to use said land as long as the concession remains in effect.