Mining Mindset Clips: Deciding Between Debt and Equity for Project Funding – Myroslav Chwaluk

Myroslav Chwaluk:

So yeah, 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 to an exploration company. No bank on Bay Street is going to lend a million dollars to an exploration company because they’ll never see that million dollars again.

The million dollars goes into the ground, gets capitalized on the balance sheet, and then someone else invests in it because the company is theoretically now a million dollars more valuable. That’s why equity investors typically invest in the early stages—these companies can’t attract debt financing.

At a certain point in the future, these companies will have to make a business decision about whether the dilution caused by equity is worthwhile to grow. They need to assess whether they have a path to repaying debt or if they should take on a little bit of debt, pay a 5% interest rate, and aim to grow at 10%. In such a scenario, it might make sense to pay the debt instead of diluting the existing shareholders. However, they must be able to repay the debt.

Many companies that take on debt run into problems because they believe they have a path to repaying the coupon or principal but aren’t able to do so. That’s why we often advise early-stage companies not to take on debt unless they have a clear ability to repay it.