Ian Telfer – Lessons about Debt. Borrower Beware
I’ve spoken about some of the business lessons I’ve learned over the years as an executive in the mining industry and one of the key ones worth discussing with readers of this blog involves debt.
In my mind, and I've spoken on this topic before, one of the biggest mistakes I see too many mining companies make involves taking on debt.
When commodity prices go up, it’s extremely seductive when lenders are lining up to give you money. All the banks want to lend you money and it’s tempting to take it. It’s tempting for several reasons, one being that we can get lulled into a false sense of security by assuming that lending institutions have more knowledge about the industry or situation than we do.
The thinking is that if Bank X wants to lend me a million dollars, well they must know what they’re doing. After all, they’re smart and have plenty of analysts and industry experts. So, if they want to lend me money, they must know it’s a safe investment. Oftentimes, companies, particularly young companies, are thrilled that someone is interested in their business and that someone is confident enough in what they’re doing that they’re going to write them a cheque.
They’re also thrilled they’re going to have access to the cash. But, they don’t always think clearly about what might happen when commodity prices go back down. Most disasters I see out there and one I was involved in was precipitated by a drop in commodity prices.
I’ve mentioned this particular learning experience before in some of my speaking engagements.
I was involved in a mine in Papua, New Guinea. Everything appeared fine for awhile. The government of Papua, New Guinea had an interest in the mine and when they decided to sell their shares, an opportunity came up for us to buy them. An Australian bank came along that was willing to lend us 100 million dollars to buy the shares.
The mine was working fine, but gold prices began to weaken. With the loan coming due, the shares of the mine started to fall below the amount we owed the bank. Naturally, the mood of the bank went from being happy to lend us the money to being very nervous about whether we were going to be able to pay back the loan.
In our case, the price of gold rebounded in the nick of time for me to sell shares of the company and pay off the bank. I had made the decision to sell when the price hit a certain level and stuck with that plan. In that particular instance, the decision proved to be a very smart one because the price of gold only rebounded briefly before falling further. The price went up long enough for us to sell shares and pay off the bank.
That’s the other important lesson I would offer is that once you’ve made your mind up about selling something, don’t change your mind just because the stock is on the rise and you think it might keep going. Again, the biggest mistakes are usually debt related. Just remember that debt is the one thing that doesn’t go down. The value of your house might go down, the value of gold might go down, but the value of debt never does.
It is something to be very wary of whenever someone wants to give you money. That’s a mistake I’ve made and others have made. I believe you only really learn from your mistakes.
You can’t assume you know what the future is going to look like based on the past. It’s human nature that even after hearing of my experience with debt that you’ll make the same ones, but that’s the way we are. Unfortunately, we often need to learn the hard way.