Gold Loan - Financing Mining Focus

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Gold Loan - Financing Mining Focus

Mining IQ has recently received a significant amount of interest from members on the subject of ‘gold loans’. Most specifically, this interest has come from members trying to ascertain the parameters of gold loans and the definition of a gold loan.

Mining IQ wanted to respond to this interest in gold loans and so decided to create a piece of editorial that focused on this source of funding for mining projects.

As per the Mining IQ glossary a ’gold loan’ can be defined as:

“A gold loan can be defined as a form of debt financing whereby a potential gold producer borrows gold from a lending institution, sells the gold on the open market, uses the cash for mine development, then pays back the gold from actual mine production.”

In fact three varieties of commodity-linked financing exist. One of these varieties is a gold loan whereby the loan and interest payments are denominated in the commodity itself. Gold loans represent a classic example of this.

Within the boundaries of a gold loan – finance is advanced to build the mine with the load to be repaid over a set timeframe usually at an interest rate of 3% per annum. The gold is monetized for financing purposes through this method.

A caveat to be aware of is that, although monetised for funding purposes, if the price of gold doubles the loan principal amount and the interest rate have also doubled in monetary terms.

As a direct correlation to this – gold loans must (usually) only rely on 15 – 30% of a mine’s annual output for repayment.

Financing in this way is a complex process and – before undertaking – gold loan projects must still comply with strict risk assessment and pre-feasibility assessments. This due diligence is essential.

Once financing has been achieved and the gold mine is operational and in production, there has been some theoretical research done which suggests that gold producer’s exhibit greater leverage where gold loans are used because of the hedging activity. The implicit hedge in gold loans commits operating gold producers to hedging and thus, a greater leverage is expected as a direct result. Mining IQ would be interested to learn from our members and readers whether they believe this to be the case.

Mining IQ Glossary: www.miningiq.com/glossary/gold-loan/