The Raw Materials Convertible into Bonds

Abstract

This article is dedicated to the instrument such as raw materials convertible bonds, the application of which in the mining industry can increase the efficiency of mining investments and, consequently, contribute to the improvement of the economic and financial market of mineral resources. Bonds with the option of conversion into raw materials bring relevant benefits to both the investor – the bondholder who buys these bonds, and to the mining company as the issuer. The use of this debt instrument increases the efficiency of mining investments, mainly by lowering the cost of capital in relation to traditional sources and by flexibility of being able to convert the capital debt into raw materials. Due to the fact that the article is illustrative only, and its goal is just to present a relatively new instrument, which are raw materials convertible bonds, the author focused an attention on its possible use in the financing of investments in the mining industry and the potential economic effects of such a solution. In order to identify the likely financial benefits, discussed debt instrument was compared with selected sources of funding, such as ordinary bonds and simple bank loan. Due to this fact, the article doesn’t present the consideration of every aspect associated with the bond that has an option, but is mainly focused on its main attribute, which is the ability to convert debt into raw material. The paper presents the general assumptions regarding the raw materials convertible bonds, the advantages of this solution and the requirements that the issuer of such instrument will have to cope with. The article contains also a diagram showing the use of a raw materials convertible bonds in the tripartite agreement. The final part of the publication shows an example of a calculation comparing the newly presented instrument to the ordinary bonds and bank loans. The summary presents the conclusions of the analysis of the possible use of raw materials convertible bonds as an instrument of financing investments in the mining industry.