Debt Financing a Mining Company

If conditions are right, ABC Mines may get debt financing, by issuing a bond or a debenture and selling units in it to the public. The bond or debenture is treated as a loan and must be repaid when the company starts to make money.

In some cases, the bond or debenture certificate may have a warrant or right attached to it. This is in order to give the investor an added inducement to purchase the bond.

A warrant usually gives the purchaser the right to purchase so many equity shares at a stated price if exercised by a stated time. The warrants or rights are themselves negotiable on the market, and their prices are listed on the stock exchange with the share prices of the issues they represent.

Banks are often willing to consider project loans to a mining company for a specific mine, or for an expansion. But the mining company must have a sure orebody and management with a proven track record.

One way to borrow money at low interest rates is to negotiate a gold loan. This is an option for companies with a potential gold mine in the works. In this case, a company borrows bullion from a financial institution in exchange for bullion from future mine production. The company sells the bullion at the prevailing market price and uses the cash to build the mine. Once in production, the company then pays back the loan with actual bullion produced from the mine.

If markets are weak, ABC Mines may decide to form a joint venture with a senior company to develop the mine. Typically, the major company will put up the capital required to build the mine in return for a direct ownership interest. This may range from 25% to 60% or more, depending on the projects economics and the capital cost requirements.

In certain cases, the major company may make an offer to buy all the shares of ABC Mines, sometimes at a premium to the trading price. In this way, a patient share holder can be rewarded by receiving a return many times his original investment.