Debt
Loans are cheaper than equity but must be repaid. Project finance funds mine construction; juniors use convertible and bridge loans.
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Debt is borrowed money that must be repaid with interest. It is the cheapest source of capital for building a mine, and the most dangerous if things go wrong.
What it is
Lenders do not share in the upside. They want their money back with interest, so they lend only when there is cash flow, or a clear plan for it, to repay them. That is why debt is mainly used to build mines after a feasibility study, and rarely to fund exploration.
The main types
- : a loan from a bank or group of banks to build a specific mine, repaid from that mine's cash flow and secured on its assets. The main debt for construction.
- Convertible debt: a loan that the lender can convert into shares at a set price. Common for juniors and developers, because the conversion option lets them borrow at a lower interest rate.
- Bridge loans: short-term loans to cover a gap, for example until a larger financing closes.
- Mezzanine debt: higher-interest loans that rank behind senior debt, sometimes with a share of upside.
- Corporate loans and bonds: borrowed by established producers against the whole company.
- Export credit agencies and development banks: government-backed lenders that support projects buying their country's equipment, or meeting development goals. They often lend alongside commercial banks.
- Equipment finance: loans or leases secured on the mining fleet and plant equipment.
What project lenders require
| Requirement | Why |
|---|---|
| A bankable feasibility study | Proof of the plan, costs and reserves |
| An independent engineer | A check on the study for the lenders |
| Reserve tail | Reserves that last well beyond the loan's term |
| Completion test | The mine must prove it works before lenders release the owner from extra guarantees |
| Cost-overrun funding | Money set aside or committed for overruns |
| Hedging and offtake | Some price and sales certainty |
Typical terms
| Item | Typical range |
|---|---|
| Project debt share of capex | Often 40–60% |
| Loan term | Often 5–8 years |
| Interest | A benchmark rate plus a margin, varying with risk and jurisdiction |
Advantages and disadvantages
| For the miner | |
|---|---|
| Advantages | Cheapest capital; no dilution; interest is usually tax-deductible |
| Disadvantages | Must be repaid on schedule; covenants restrict the company; delays or cost overruns can lead to default and loss of the mine |
Terms and ranges are indicative and vary by market, jurisdiction and project. This is educational material, not investment advice.
Key terms
Next in this track
Offtake and prepaymentsAn offtake agreement secures a buyer for a mine's product. A prepayment is cash paid upfront by that buyer, repaid in future deliveries.Related articles
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Educational material only. Nothing here is investment advice or an offer to buy or sell any security or mineral interest.