Canadian miners facing big tax hikes as mineral-rich countries look to cash in on commodities boom

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First Quantum Minerals Ltd.’s tussle with Panama over taxes is a microcosm of a global phenomenon that threatens the profitability of some of Canada’s biggest mining companies, but worst-case scenarios of sites being nationalized will be the exception, not the rule, experts say.

Earlier this month, The Globe and Mail reported details of a tentative agreement between First Quantum and the Central American country that would see the big Canadian copper miner pay as much as eight times more in taxes. Panama has joined scores of international mining jurisdictions – including Mexico, the Democratic Republic of Congo, Pakistan, Peru, Bolivia, Colombia, Chile, Zambia, Mali, Papua New Guinea and Australia – that have pushed through, or have pushed for, royalty hikes, income tax increases and bigger ownership stakes in mines.

After spending big on social programs during the early years of the COVID-19 pandemic, many countries are looking for ways to raise funds as their economies slow. With metals such as gold and copper trading near record-high levels, foreign mining companies reaping windfall profits are an easy target.

“Government officials are looking at these companies making lots of money, and looking for a bigger piece of the pie to help fund government spending,” said Shane Nagle, mining analyst with National Bank Financial.

Panama says it has no intention of seizing First Quantum’s Cobre Panama mine, wants to sign deal with Canadian miner as soon as possible

But countries that push too hard risk seeing the tactic backfire, potentially scaring off future investment – or even jeopardizing the viability of an existing mine.

“You will choke the goose that lays the golden egg, literally, the golden egg, if you choose to implement a regime that takes too much of the froth off the top,” said Peter Marrone, founder and executive chair of Yamana Gold Inc., which has operations in Brazil, Argentina and Chile.

Occasionally, talks between Canadian miners and overseas governments go completely off the rails. In the case of gold miner Centerra Gold Inc. and the government of Kyrgyzstan, the Central Asian country ended up nationalizing the company’s Kumtor mine in 2021.

While the mining industry was shocked at that outcome, what transpires far more often between overseas states and Canadian miners is protracted negotiations that culminate in a deal that both sides can live with. Barrick Gold Corp. spent almost three years negotiating a new profit-sharing agreement with East African nation Tanzania before finally landing on a pact in 2020. Under that arrangement, the country received a 16-per-cent stake in the mines, and a guarantee of 50 per cent of future profits. For Tanzania, the deal was a vast improvement on legacy terms. Barrick, meanwhile, can still make plenty of money on its Tanzanian assets.

“Countries are looking at their tax and royalty regimes to get as much as they can for the extraction of a non-renewable resource in their country without making that extraction unfeasible,” said Alan Hutchison, mining lawyer with Osler, Hoskin & Harcourt LLP.

“The nation state does not want the mine to fail, because then they don’t get the royalties. They also don’t want the company to go bankrupt and leave reclamation risk.”

Like Barrick in Tanzania, First Quantum’s talks with Panama over its Cobre Panama mine have also dragged on, but earlier this month the Vancouver-based copper miner indicated that a deal was finally in sight. The company tentatively agreed to pay Panama a minimum of US$375-million a year in taxes from now on, but with downside protections in place, in case the commodity price plummets or if there are production problems.

The amount Canadian miners pay to foreign governments differs not only on the tax regime, but the size of the mine, and the amount of tax credits available. In the early years of a mine, companies routinely pay little-or-no tax, because of credits amassed during its construction. This goes a long way to explaining why First Quantum paid US$444-million to the Zambian government on the Kansanshi mine in 2021, or more than 10 times the US$42.6-million paid to Panama for Cobre Panama. In production since 2005, Kansanshi’s tax credits have been used up, while Cobre Panama, which was only completed in 2019, was able to use the generous tax credits it has amassed. In fact, one of the main sticking points holding up a final agreement now between both sides is how much of the existing tax credits the copper miner will be able to use.

Tax pacts between miners and host governments are also very case-dependent. Companies may end up paying a higher burden if they are particularly motivated to get a mine into production. Barrick last year agreed to what some in the industry interpreted as punishing terms to Pakistan in return for moving forward on the Reko Diq project. In that case, Barrick gave up an earlier multi-billion-dollar arbitration claim it won against the country. But the Toronto-based miner believes that Reko Diq is one of most promising copper and gold deposits on the planet, and that long-term investment returns will more than justify any concessions made to Pakistan.

Politics also plays a role in how agreements take shape. While moves to introduce higher taxes on foreign resource companies can help politicians win elections, getting the hikes over the finishing line is harder. Over the past few years, threatened royalty hikes by politicians in Chile, Peru and Colombia never came to pass after left-leaning proponents clashed with more right-leaning law makers.

Under right-wing president Jair Bolsonaro, Brazil had one of the lowest gold mining royalty rates in the world, at 1.5 per cent. But even with the recent election of leftist President Luiz Inácio Lula da Silva, the country’s tax regime isn’t expected to change much, as the right-leaning Senate will make it difficult for him to push through any increases.

Meanwhile, far from increasing the burden on the mining industry, some countries are actively trying to entice the foreign mining sector. Last month, Canadian copper development company Solaris Resources Inc. signed a fiscal stability agreement on its Warintza copper-gold project with Ecuador. Under the pact, the company will pay income taxes of 20 per cent, compared with 25 per cent previously. Warintza will also be exempt from both capital outflow taxes and import duties.

Mr. Hutchison sees a potential return to the adoption of this kind of stability agreement, which were common in industry in the 1990s and early 2000s. Such pacts see taxes legally locked in for long periods of time, with terms over expropriation and arbitration spelled out. He also sees companies engaging earlier with host countries, putting their cards on the table before mines are built and outlining how much taxes will eat into returns – all in the hope of finding a fair solution for both parties.