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Mining Finance: Mining For The Miner Or Mining For The Bank?

Dec. 05, 2018 1:54 AM ETAU, GFI, HGM, PAFRF, SBSW4 Comments
Sarel Oberholster profile picture
Sarel Oberholster


  • Cash borrowings by commodity producers pose an existential risk to miners should they face price deflation.
  • The extent of price downside risk is disproportionately negative for cash debt servicing and repayment where even a small decline in price will have a huge negative consequence.
  • Product-funding as opposed to cash-funding does not suffer from the same risk and will eliminate the existential risk posed by cash-funding.
  • South African gold miners are assessed for there exposure to existential risk from cash borrowings in the event of ZAR gold price decline.
  • The conclusions drawn from scenario analysis and from the evaluation of South African gold miners can be applied equally to miners around the globe and under any currency jurisdiction.

"According to Darwin’s Origin of Species, it is not the most intellectual of the species that survives; it is not the strongest that survives; but the species that survives is the one that is able best to adapt and adjust to the changing environment in which it finds itself."

Megginson, ‘Lessons from Europe for American Business’, Southwestern Social Science Quarterly (1963) 44(1): 3-13, at p. 4.

Financing a new mine or mining project typically involves a mixture of share capital and cash debt financing. It is seldom the case that a new mine is financed entirely from debt. Enterprise survival risk rises disproportionately when the cash debt ratio in the funding mix rises. The reason for the skewed rise in risk lies in the fact that the resource producer has only one source from which it can settle the debt, and that is from the sale of the commodity (in case of a single commodity producer) or commodity basket (multiple commodity producer).

Seems like a statement of the obvious?

Hidden in this statement of the obvious is a mining debt trap which can easily turn into a death trap. The commodity producer typically is a price taker with regards to its product. A vehicle producer (or perfume producer), for example, can set his own price and then design a marketing campaign around that vehicle (perfume) to support its price strategy. A miner has an extremely limited ability to influence his product’s price. He can engage in hedging to protect a given price level for a given level of production but even hedging does not alter the fact that the miner does not have control over the price of his product. Hedging takes place in-market at the price levels determined by the market.

This lack of control over price gives

This article was written by

Sarel Oberholster profile picture
My retail trader book series, The Paranoid Trader and The BIG FISH Trader, is now available on Amazon. It is a strategy guide for Retail Traders/Investors to motivate them to become profitable Traders/Investors and then remain profitable. Equally important to experienced Retail Traders/Investors, as it reinforces winning trading strategies. I seek understanding in everything but economics, markets and investing are where my mind is most at ease. In this I am forever doing research in my quest for answers. I do view the world from many different angles. Understanding economic behavioral patterns are important to me. Strategic investing over the medium to longer term is predominantly my focus when I contemplate my research or philosophies. I have a compulsion to express my thoughts in ordered form and my essays are the result of such expressions. I'm an economist by training, a financial engineer by talent, a banker by profession, a trader by interest and a father by chance.

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