Who Controls Critical Minerals: A New Paradigm of Ownership Emerges

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Neither the US nor China can power their economies from domestic mineral production alone, and both parties are jockeying to source critical minerals such as copper, lithium, cobalt, nickel, and rare earth elements from developing and emerging countries. The demand is almost insatiable: for example, it is estimated that we may need as much copper in the next 20 years than has been mined in the entire history of copper mining.

In many of these countries, however, there is a clash of interests: a lack of property rights and resource nationalism against the urgent need for the capital and technical expertise which foreigners, especially deep-pocketed international corporations, can bring.

Now, we are seeing hybrid models of ownership develop that could help resolve that conflict in several countries, from Ukraine to El Salvador. Although the situation of each country is different, a new paradigm is emerging that can offer host governments equity and control while ensuring that mining businesses remain attractive for foreign investors.

The biggest litmus test for the global mining sector is arguably currently unfolding in Panama, where multinational First Quantum Minerals is set to begin negotiations with the Government of Panama (GoP) over the future of the Cobre Panama copper mine.

Reopening the mine under a new ownership model is a unique challenge: Cobre Panama was already a fully operational mine, accounting for around 5% of national GDP and more than 40,000 domestic jobs.

So, what kind of structure could work for Cobre Panama?

Ideally, a full overhaul of the country’s mining code would be the most comprehensive solution. A new concession agreement could provide a clearer and more transparent framework for distributing economic benefits and legal protections, reassuring anxious citizens open to responsible mining and outside investors.

The political reality, however, is that President José Raúl Mulino is unlikely to pursue reform of the mining code. Not only would he need to pass such a measure in the National Assembly and launch a public consultation, but it would also—based on similar reforms in other countries—take at least a year to complete. With Panama still facing significant financial headwinds, Mulino would be racing against the clock and his sinking popularity to get one of the country’s key economic drivers and job creators up and running again.

Instead, the President’s public statements suggest a more likely path: the creation of a public-private company to own and operate the mine. Such a structure could give the GoP a significant stake in the mine while providing an acceptable economic return for First Quantum and its shareholders.

The devil, however, is in the detail of how such an entity might be constructed. For instance, there may be a temptation—primarily for political optics—to establish a company where the state would have a nominal majority, say 50.5%, and First Quantum and its minority partner Komir the remaining 49.5%. Such a scenario would see First Quantum transfer its mining assets to the entity while the GoP would contribute the exploitation rights. First Quantum may well transfer other major infrastructure assets, such as the port and the power station that it has built, to a separate entity.

The structure does complicate Panama’s ability to extract the maximum economic benefit. A critical consideration is that although the Supreme Court of Panama cancelled First Quantum’s mining concessions, all the assets in which First Quantum invested over $10 billion still belong to the company. For such a structure to make financial sense to First Quantum, it would need extract its return—for sunk costs and foregone equity—through shareholder loans, which are repaid in priority to equity distributions. This would minimal distributions to the Panama government in the near term where they need the funds to balance the state budget.

For the GoP therefore to take economic benefit from the venture it would require preferred equity or a golden share. That could be damaging to the transparency that the government of Panama and many Panamanians wish to see.

A far more sustainable alternative would see the GoP take a significant minority stake, say somewhere between 20% and 30%. This would reduce the need for shareholder loans. Under such a model, First Quantum would achieve its required return through more straightforward and transparent equity distributions. Panama would gain its economic proceeds through a combination of equity and generally applicable taxes, such as corporation tax.

Such a model would offer Panama significant advantages overall, ensuring that it takes overall proceeds from the mine that would rank very favorably compared to most other mining jurisdictions; and allowing citizens to see clearly how the country is benefiting and exactly how proceeds are contributing to different sectors.

Lastly, there should be doubts on the so-called contractor model. Under this scenario, Panama would assume full ownership of the mine itself, while First Quantum would retain ownership of its other key infrastructure, such as the port and the power station. The company would be compensated through a profit-share agreement. Such a structure, however, risks even greater pitfalls in the same vein as the public-private company model where the state takes a majority share in the mine, namely tunneling, transparency issues, and insufficient incentivizes for the multinational operator.

The contractor model falls short when considering Panama’s means to buy the mine is uncertain. It has a $3.5 billion deficit and annual spending of $20 billion. Compensation for First Quantum’s initial investments and the discovered ore could value the company between $20 and $30 billion.

President Mulino has already ruled out a new so-called “contract law,” yet it is unclear whether the elected body would need to approve the creation of a new public-private entity, or even a structure under which the GoP would own the mine with First Quantum as a contractor.

The mining industry and governments in similar situations will eagerly watch to see which route Panama eventually chooses. Like the other countries, that choice will mark a key new development in the evolution of a new public-private ownership model and could influence other jurisdictions and the global sector for years to come.