Navigating early-stage exploration financing can be tricky. Learn why junior mining companies often rely on equity over debt and the factors influencing funding decisions as projects progress.
Video transcription
Why Early-Stage Exploration Companies Can't Attract Debt
When you're at an early-stage exploration company, you have zero revenue and zero projections of revenue for maybe 10 or 15 years. A debt instrument isn't usually a realistic option for most junior companies because they have no repayment profile.
No one really wants to lend - no bank on the street is going to lend a million dollars to an exploration company because they'll never see the million dollars again. The million goes into the ground, gets capitalized on the balance sheet, and then says someone else can invest in it because we're now a million dollars more valuable - in theory.
That's why equity investors all invest in the early stages, because these companies can't really attract debt financing.
Evaluating the Debt vs. Equity Trade-Off
At a certain point in the future, these companies are going to make a business decision - whether the value of dilution through equity is valuable enough to grow, or whether they need to attract debt instead.
If they have a path to repaying debt, they can say: we're going to take a little bit of debt, pay 5%, but we're going to grow at 10% - so it's worthwhile for us to pay debt and not dilute the rest of the shareholders.
The Risk of Taking on Debt Too Early
But they need to be able to repay that debt. I think that's where a lot of companies that take on debt run into problems - they believe in a path to be able to repay coupon or repay the actual debt and aren't able to do that.
When we get the chance, we tend to advise early-stage companies not to take on debt unless they have an ability to repay it.