By Marin Katusa
What I’m about to show you is frightening to some people…
And will become lucrative to a select few others. So there’s no way to sugar-coat this.
The mining industry loaded itself up to the gills with low-cost debt when commodity prices were a lot higher than they are today.
This was in an attempt to advance their assets towards production.
The Secret Investment Vehicle of the Ultra Rich – Debt
Here’s something critical in the hierarchy of a company’s capital structure that you need to know…
The rights granted to the debt holder supersede the rights of the shareholder.
Let’s use the example of a producing mining company that has debt on the balance sheet and pays a dividend in a falling commodity environment…
In simple terms, if costs stay the same while the commodity price goes down, the business will generate less free cash flow.
The company must either pay interest on the debt or default on the debt.
And debt always gets paid before the dividend.
If the company can’t pay the debt, then the debt holders have rights to the value of the asset before the shareholders.
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