Panama: Closure of the country’s largest copper mine and historic low water levels in the Panama Canal are a setback for the economy

Event

End November, the Supreme Court of Panama declared a 20-year concession between the government and Canadian mining firm First Quantum Minerals to operate the country’s largest copper mine ‘Cobre Panama’ unconstitutional. As a result, Central America’s largest open-pit copper mine will be closed.

Impact

Cobre Panama is one of the world’s largest new copper mines that opened in the past decade. It began commercially producing copper in 2019, provides around 1% of the global copper output and ranks in the top 10 of biggest copper mines globally. However, it has a troubled history since a ruling of the Supreme Court in 2018 questioned the constitutionality of the original concession of 1997. It took more than four years to negotiate a new contract. Nevertheless, the new contract, which was signed on 20 October 2023, was very contentious: it led to widespread – at times violent – protests and multiple road blockades. Protesters claimed that the royalties of the contract were too low, and that the deal threatens sovereignty and does not cover precious metals and environmental damage.

Panama’s economy and exports will likely take a hit because of the closure of the mine, since copper revenues are the country’s second largest source of exports and account for a tenth of total current account revenues. On top of that, the closure of the mine comes at a bad time as the country’s biggest export source, the Panama Canal (accounting for a fifth of current account revenues), is already suffering from historic low water levels due to the ongoing El Niño. As a consequence, shipping traffic is currently restricted at less than 60% of its normal capacity. There is no improvement in sight in the coming months since the dry season will start at the end of December and the current shipping traffic restrictions will be tightened. There are plans to build a new reservoir but this will not happen in the short term.

Considering the expected decrease of liquidity, the ST political risk rating (2/7) has a negative outlook. Moreover, Cobre Panama accounts for about 5% of the country’s GDP. The closure of the mine in combination with an expected increase in shipping traffic restrictions is therefore estimated to decrease economic growth to a meagre 1% next year, coming from a strong 6% this year. Lastly, public finances – which are at a healthy level – will also feel the pinch of the mine’s closure since the mining royalties of around 0.5% of GDP per year will be lost.

Given the copper mine’s economic and fiscal benefits, the most likely scenario is that a new contract will be negotiated. However, it will be very difficult to do so in the run-up to the general elections of May 2024. Hence, the re-opening of the mine could be stalled for a long time. A downside risk is that the Canadian firm will pursue international arbitration, which could severely hurt Panama’s public finances.

In this context, the MLT political risk rating (4/7) also has a negative outlook. A possible downgrade will depend on the duration of the mine’s closure and of the canal’s low water levels, among others.

Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com