The hidden costs of debt capital: Why the lowest interest rate is not always the cheapest financing

When mining executives evaluate debt financing, most of the discussion naturally centres on pricing. What is the interest rate? Are there commitment fees or prepayment fees? How does the proposed facility compare to competing offers? 

These questions matter. Debt is a cost of capital, and pricing drives much of its economics. But pricing is only part of the story. 

In recent years, lenders have often responded to commodity price uncertainty not by raising margins but by using more conservative financial models and tighter covenants. In other words, more of the cost of risk now sits outside the pricing grid. It is embedded in the reporting requirements, collateral package, operational covenants and other lender protections that come with the facility. These provisions can shape a project’s economics and flexibility long after the financing closes. Three areas deserve particular attention.

1. Reporting 

Mining lenders typically expect a flow of information throughout the life of a facility. Financial reporting has long been standard. Today, even on corporate (non-project) facilities, lender requirements may extend to technical reports, reserve updates, environmental matters, Indigenous consultation, permitting, construction progress and other operational metrics. 

None of this information is free. It must be prepared, reviewed and delivered. Management time is diverted, consultants may need to be hired, and reporting processes must be maintained for as long as the facility remains outstanding. Late or inaccurate reports can be technical defaults even when the mine is performing well, and a default may restrict drawdowns and give lenders leverage. Individually, reporting requirements may seem modest. But collectively over the life of a project, they can represent a real cost. 

2. Collateral

Lenders understandably want security over the assets that support repayment. In the mining sector, that often means security over substantially all assets, including mineral titles, shares of project subsidiaries, material contracts, bank accounts and project assets.  

Security has direct costs: legal and registration costs can be material, particularly outside Canada, where some jurisdictions impose significant mortgage registration taxes. Security also limits future flexibility. Once assets are pledged, a later financing will generally require the existing lender’s consent and, often, an intercreditor agreement, which takes time and adds expense. Security is often viewed as a “set it and forget it” closing item. In practice, its impact can be felt years later. 

3. Covenants 

Most mining debt facilities restrict additional indebtedness, liens, asset sales, distributions and other significant business decisions, subject to negotiated exceptions (commonly called “baskets”). These provisions protect lenders, but they can also limit management’s ability to respond to changing circumstances. 

At closing, those restrictions may seem remote. Few borrowers expect to restructure their capital stack or pursue a major acquisition in the near term. Yet, mining projects frequently evolve in ways that are difficult to predict. Commodity prices change. Development plans change. Market opportunities emerge unexpectedly. Amendments and waivers are rarely as easy to obtain after closing as they may appear before the loan agreement is signed, and they often come with consent fees, legal costs and, at times, repricing. Flexibility that seems unnecessary on day one can become valuable several years into a project’s life. 

Negotiating more than the interest rate 

Many lender protections are reasonable. Mining projects are long-dated and exposed to permitting, environmental, commodity price and geopolitical risks, and lenders legitimately seek protection against them. But these protections carry costs of their own, and borrowers who negotiate them as carefully as pricing can often recover real value. Borrowers should consider the following: 

• reporting that is more intensive during construction and scales back once steady production is achieved, with materiality thresholds so that only significant developments trigger notice; 

• debt and lien baskets that accommodate reclamation bonding and streaming and royalty arrangements without recurring amendment requests; 

• security packages focused on core mining assets, with clear release mechanics for permitted sales and refinancings; and 

• cure periods that distinguish administrative oversights from genuine credit events.  

In mining finance, the lowest interest rate does not always deliver the cheapest financing. The true cost of debt capital includes not only the interest paid to lenders but also the flexibility surrendered, the obligations assumed and the constraints that may shape a project’s future. Prospective borrowers who understand that distinction are better positioned to evaluate alternatives and negotiate debt packages that support a project over its full life. 

Simon Grant is a partner at Bennett Jones LLP.