Proactive Investors - Shares of First Quantum Minerals (TSX:FM) (TSX:FQM) plunged almost 30% on Monday after the Panama government announced it would be holding a referendum about whether it can continue to operate its flagship project, the Cobre Panamá open-pit copper mine.
The government earlier this month granted the Canadian miner’s local subsidiary an extension to its mining license for Cobre Panamá, which saw thousands of people take to the streets in protest of the economics of the deal and the mine’s environmental impact demanding the contract be withdrawn.
In response to the unrest, Panama’s President Laurentino Cortizo on Sunday said a binding national vote would be held on December 17 on whether to revoke First Quantum’s license.
The approved contract had guaranteed Panama an annual income of $375 million while allowing First Quantum’s local unit Minera Panama to operate the project for another 20 years, with the potential extension for another 20 years.
According to analyst estimates, Cobre Panamá accounts for nearly 5% of Panama’s gross domestic product and 1.5% of global copper production.
With this significant asset’s future now uncertain, First Quantum’s Toronto-listed stock plummeted 27.8% to C$20.18, while its United States-listed shares fell 28.8% to US$14.39 early on Monday afternoon.
No clear path forward, analysts say
Analysts at Jefferies downgraded their rating on First Quantum to ‘Hold’ and slashed their price target on the stock to C$18, from their previous target range of C$22 to C$40, in light of the 180-degree turn by President Cortizo.
They raised their weighted average cost of capital (WACC) on the project from 8% to 15%, which alone reduces their discounted cash flow valuation for Cobre Panamá by 36% and for the company by C$11 per share.
They believe the issue will likely be an overhang on First Quantum’s shares until the outcome of elections in Panama in May 2024, if not longer.
“The selloff today is not unreasonable in light of yesterday’s developments as the risk of a negative outcome in Panama has clearly increased,” they wrote in a note to clients.
“While it may be tempting to buy these shares on today’s weakness, we do not see a clear path to resolution of these issues aside from either significantly higher royalties or international arbitration (and the arbitration option assumes the existing contract is not deemed to be unconstitutional).”
Should production at Cobre Panamá be disrupted, the Jefferies analysts believe this would be a positive catalyst for copper as it would likely push the market into deficit.
“Other copper miners could benefit from a higher copper price if that is the ultimate outcome,” they wrote.