First Quantum Minerals Ltd. (FM) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the First Quantum update on Cobre Panama. [Operator Instructions] I would now like to turn the conference over to Bonita To, Director of Investor Relations. Please go ahead.

Thank you, operator, and thank you, everyone, for joining our call today. I would like to draw your attention to the cautionary statements at the end of our press release as we may be making forward-looking statements on this call. As a reminder, all dollar references are in U.S. dollars unless otherwise noted. On today's call will be Tristan Pascall, our Chief Executive Officer, with an update on the developments in Panama and our Cobre Panama mine. And with that, I will turn it over to Tristan.

Thanks, Bonita, and thank you, everybody, for joining the call today. We've received several inquiries from the market regarding the situation in Panama, and we wanted to take the opportunity to address these questions and provide an update on developments of the Cobre Panama mine. But first, I'd like to provide some context. First Quantum came to Panama in 2013 to take on a project that was unlikely to succeed as it was originally [ conceived ]. We did so in Reliance and on the insurance and with the expectation that Panama supported the project through a long-standing comprehensive agreement from 1997 that cover taxation, including mining royalties and other arrangements. The original concession contract, which predates First Quantum's involvement in the project was commensurate with similar incentives for other major mining projects at that time. There were many risks to the development of Cobre Panama. The project has very low ore grades compared with First Quantum's other mines and compared to other copper mines in Chile and Peru. At these low ore grades, Cobre Panama required a high capital cost to deliver the volume required to make the mine economically viable. The harsh terrain and weather made construction difficult and there was a lack of appropriately skilled mining labor due to the country's limited experience with complex mining projects. In addition, the developer had to invest very in very large infrastructure projects, including roads, power plants and housing, which often already exists from most other mining projects around the world. All of these elements made the capital intensity of Cobre Panama higher than historical norms. As a result, it took 22 years to bring Cobre Panama mine into commercial production from that original contract date. Since we became involved, we have met all of our obligations and the project has been successfully developed into one of the world's largest, safest and most advanced copper mines, with total investments amounting more than $10 billion since development. Again, this investment was made on the basis of the 1997 agreement. The importance of Cobre Panama cannot be overstated. It is the largest private investment in the history of Panama and a critical contributor to the Panamanian economy. In 2018, however, just before the mine was beginning to generate its first copper shipments and revenue, Panama Supreme Court declared that -- the law that approved our mining contract was unconstitutional. The decision was based on procedural technicalities taken by the government when the law was originally passed in 1997 and that were outside the company's control. Following the Supreme Court decision, the Government of Panama issued public statements reaffirming that the contract remained valid. They assured us expressly and through their actions that the company's rights were not affected by the court decision. We continue to invest and operate on that basis. As you are likely aware, we have been engaged with the Government of Panama for more than a year on a refreshed concession contract to secure the long-term future of the mine. We remain appreciative of the government's continued good faith engagement with First Quantum and Minera Panama S.A. We believe we have come a long way on the agreement as a result of a lot of effort from both the Government of Panama and First Quantum such that they are now only a few open, albeit important items to close out. Discussions are continuing, and we remain ready to reach an agreement that is fair and equitable to both parties. We are prepared to agree with and in part, exceed the objectives that the government outlined to us in January 2022 related to revenues, environmental protections and labor standards. We are prepared to accept these terms despite the additional time it will require to repay the large capital investment in the mine. Let me highlight a few key terms that we are prepared to accept. #1, a minimum of USD 375 million in government income per year from royalties and taxes. This minimum payment includes downside protections that are aligned with the government's position. This minimum payment structure is a benefit to the government that we believe is both unique and unprecedented in the mining industry in any other jurisdiction. It would deliver revenue to the government that is several times higher than the existing contract from 1997. #2, a profit-based mineral royalty of 12% to 16%. The gross profit royalty rates are equivalent to a higher levels than the 5% net smelter royalty rate established under the current Panama Mining Code and would be amongst the highest, if not the highest paid by copper miners in the Americas. #3, the immediate end to an income tax holiday and the application of withholding taxes on both interest and dividends. And #4, important environmental protections, labor standards, including training and development of our Panamanian workers and concrete benefits for the communities of the districts of Donso and [indiscernible], where the mine is located in [ Cocle and Colon ] province. It is worth noting that the mine also provides social security contributions, which we calculate to be about USD 125 million per year plus millions of dollars in additional payments for permit fees and taxes that will no longer be exempt. All of these additional revenues will fund critical community needs such as pensions, infrastructure, scholarships, hospitals, agricultural projects and Internet connectivity according to the government. We want to reach an agreement on the outstanding items without further delays, but it must be a mutually beneficial outcome that provides the legal certainty that we need to help promote the sustainable development of Panama, safeguarding our thriving Panamanian workforce and protecting our investment. In particular, the contract must be durable and stable. The key elements of the outstanding details to be finalized on the legal side include the security of surface rights, a stable tax and royalty regime and protections against expropriation and early termination. On the economic terms, there is discussion on ensuring that infrastructure tax credits and depletion results in a reasonable balance of revenues. We are prepared to agree to Panama's unique minimum payment objective and that government will share in the upside of higher copper prices through the upper bands of the gross profit royalty regime. We have also agreed to reduce the amount of credits available and limit how much the tax credits can be used each year. Absent an agreement, we are concerned that the government will require us to put the mine under care and maintenance. This is a drastic and, in our view, unnecessary step, which could potentially have a significant impact on employees, our suppliers and the communities around us. This is not an action that should be taken lightly, but we will regrettably be compelled to follow the government's directive if the final outstanding terms cannot be resolved on a reasonable basis. Suspending commercial operations of the mine will be damaging to the economy and could force us to suspend a significant amount of our valued workforce, which is more than 90% Panamanian. This action, if required, would be subject to Panama's legal and regulatory requirements and would be coordinated with the Ministry of Labor. This is not something that we want to do. We are doing everything possible to avoid the outcome. We asked for a reconsideration of the decision which the Ministry of Commerce and Industries has rejected. As a next step, we are submitting an appeal to the Minister today, the 10th of January. As required by government, we are currently working on a plan for how we would operate the mine under care and maintenance. Pending local, legal and administer of actions that are in progress, this plan will be delivered to the government, and they will need to review and respond to it. Due to the legal processes and the government's role in responding to the plan, the timing and impact of this requirement remain uncertain. I do want to underscore, however, that operations at Cobre Panama continue as normal at this time and that our preferred outcome is obviously a balanced agreement and no disruption to the site and our employees. As we advise to the government, our Panama-based subsidiary, Minera Panama S.A., has initiated an arbitration process under the existing concession contract. We have also notified the government our intent to initiate international arbitration under the Canada-Panama free trade agreement. Both of these processes are underway in the initial stages. These are precautionary measures to protect the company. It remains our hope that we can reach an amicable agreement with the government. Let me close by saying that we are proud of Cobre Panama. This project now contributes some 5% of Panama's GDP, makes up 75% of the country's export of goods and has created at least 40,000 jobs directly and indirectly that we estimate support 100,000 or more Panamanians. It has also further opened the world's eyes to the potential Panama offers and has encouraged other international capital to flow into the country. It does not make sense to jeopardize all this for Panama or for the company. That is why we continue to engage in good faith discussions with the government over the future of this project. In that regard, we are pleased that the government continues to seek a resolution. And before we open the line to Q&A, I would like to take a minute to thank our colleagues at Cobre Panama for their continued hard work and dedication. The success of Cobre Panama is thanks to everything that they do every day. And thank you to everyone for taking the time to join today's call. We will continue to update you on developments as needed. With that, I would like now to pass the call to Bonita.

Thank you, everybody. [Operator Instructions] And with that, I will ask the operator to open up the lines for Q&A. Thank you.

[Operator Instructions] Our first question comes from Greg Barnes of TD Securities.

Tristan, obviously, the current concession agreement differs very substantially from the new concession agreement. Can you talk through any other changes that you haven't discussed already? And I believe there's an article in the Globe Mail yesterday about the $375 million payment, and it steps through various levels that the government wanted, and it was confirmed that it wouldn't get that $375 million minimum from 2026 onwards. Can you address that also?

Sure, Greg. Thanks for the question. Yes. Look, we absolutely are prepared to accept the government's request for a minimum of $375 million income per year. And again, that's a very unique regime. We don't believe that exists anywhere else in the world at the present time. That minimum is subject to certain exemptions and protections, and those have now been negotiated and aligned with government. They relate to the copper price, production levels and tax thresholds and are just reasonable in terms of the profitability and the ability of the business to pay that cost. But according to our estimates, Greg, Cobre Panama will continue to generate at least $375 million a year for the government income for many years, unless the copper price or profitability decline substantially. We -- again, that minimum payment is unique, but it's -- and uniquely beneficial to the government. Panama's Mining Code for comparison, as I said before, prescribes around a 5% royalty rate based on net smelter revenues. And the original 1997 agreement was a 2% royalties based on net smelter revenues. So we're agreeing or prepared to agree to a rate of around 12% to 16% on a gross profit base basis. And depending on copper prices, that probably equates -- will translate to a net smelter royalty of -- in the range of 6.5% to 8% at that sort of level. So -- and then to address -- you talk about after 2026, and that was just really relates to the tax credits that come through from the business. We've invested more than $1 billion in infrastructure as part of the development of Cobre Panama already, and there was credits for that infrastructure, which is available to the country for the future, roads, power lines, power stations and so on and the port. Those tax credits we have made concessions already and concessions on deductions for or depletion. We've tried to accommodate requests from government in that regard. We've agreed to conceive more than $250 million of those infrastructure tax credits that are already installed in the country and also to limit how much of these credits can be used each year, which, in comparison to the normal tax regime, there's no limits on credit, tax credits can be used. So yes, from 2026 onwards, we consider we will be paying $375 million. There's a minimum of -- well, a maximum tax credit of $35 million per year, but that would be part of our payment each year. And so we do see that the government in what is the market outlook for copper prices will receive the minimum. Again, Greg, the agreement, as we said, is dramatically more favorable and will deliver more revenue to government than that existing contract from 1997. So we think it's a great deal for Panama.

Our next question comes from Orest Wowkodaw of Scotiabank.

Tristan, it sounds like you're more or less agreed on all the fiscal terms here with respect to the $375 million, the exceptions and so forth. Can you maybe speak to then what is left to actually resolve here? I mean you referred to I guess, legal certainty. But can you please elaborate? I mean, what's the major sticking point here?

Sure. Yes. So it's principally on the legal side. There's really, I suppose, one important point on the economic side that's left to close out. On the legal side, what we're asking for, I think, is very much normed for an investment of this stature and this size and scale. And those are really just to ensure legal protections to ensure that the contract is durable and into the long-term and support the project into the long-term. So the specifics there are the security of surface rights, the stability of the tax and royalty regime, reasonable protections against lawful expropriation and early termination and the cause around termination. That economic point that are referenced is really the main item is to ensure fairness and balance. We are prepared to accept the government's request for the minimum of $375 million per year subject to the protections that already aligned. Again, that's a unique taxation regime. It doesn't exist elsewhere. And, yes, Greg made reference to the years after 2026, and I did provide the response in terms of tax credits and depletion. We have met the government's requirement on downside protection to -- and the government will share in the upside of higher copper prices through the upper band to the gross profit royalty regime, so towards the 16% in higher copper price years. So we consider the government will continue to generate at least $375 million per year. We've tried to accommodate their requests around the economics. And as I said, we've granted and conceded more than $250 million of infrastructure tax credits and agreed to limit how much of the tax credit we would use each year. And we've also agreed to a depletion deduction regime that was more favorable to government that was in their earlier requests or was in the 1997 agreement. So yes, or as those are the main points outstanding. I don't think we're very far away. There has been progress and movement since December 14, and these final items do need to be resolved, but they do need to be resolved fairly for us to close this out.