Convertible Debt Financing in Junior Mining Firms: Strategic Leverage or Financial Vulnerability?

Convertible debt has emerged as a double-edged sword for junior mining firms in the gold and base metal sectors. Between 2023 and 2025, companies like enCore Energy Corp. and Graphite One Inc. have leveraged convertible notes to raise hundreds of millions in capital, avoiding immediate equity dilution while offering investors upside potential. However, the same instruments that provide flexibility also expose firms—and their investors—to structural risks, including default probabilities, dilution, and governance imbalances. For investors evaluating exploration and development-stage projects, understanding the nuanced interplay between convertible debt and capital structure is critical to navigating the sector's volatile landscape.

The Rise of Convertible Debt: A Strategic Tool for Capital Efficiency

Junior mining firms face a unique challenge: they require substantial capital to advance projects from exploration to production but often lack the cash flow or asset base to secure traditional debt. Convertible debt offers a hybrid solution. By issuing bonds that can later convert into equity, companies secure immediate liquidity while deferring dilution. For example, Bunker Hill Mining Corp. (OTCPK:BHLL) raised $41.2 million in 2025 through a mix of equity and convertible debt, with Sprott Streaming acquiring a 1.65% life-of-mine royalty and a 39.1% equity stake. This structure allowed Bunker Hill to fund its zinc-lead-silver mine restart without ceding full control upfront.

The appeal for investors lies in the dual benefits: fixed interest income and the potential for equity appreciation. Convertible debt often includes valuation caps or discount rates, ensuring investors receive favorable terms if the company's share price rises. For instance, Sprott Streaming's $4 million convertible debentures in Bunker Hill carried a 5.0% interest rate and a conversion price of $0.15 per share, locking in a potential 10x return if the stock reaches $1.50.

Risk-Reward Dynamics: Default, Dilution, and Governance

While convertible debt offers flexibility, it is not without risks. Junior mining firms are inherently volatile, with projects often dependent on commodity prices, exploration success, and regulatory approvals. A decline in gold or base metal prices—such as zinc dropping below $4,000/tonne or silver below $100/oz—could render projects uneconomical, increasing default risks. Bunker Hill's 23.8% share price decline in 2024-2025 underscores this vulnerability, as does the company's reliance on Sprott Streaming for ongoing financing.

Conversion terms further complicate the risk profile. Aggressive conversion discounts or valuation floors can lead to significant dilution for existing shareholders. In Bunker Hill's case, Sprott Streaming's 39.1% stake on a fully diluted basis gives it substantial governance influence, potentially aligning with or conflicting with minority investors' interests. This concentration of control is a common feature in convertible debt deals, where major lenders seek to secure their returns through equity stakes.

Capital Structure Implications: Balancing Liquidity and Equity Stability

The use of convertible debt reshapes a company's capital structure in ways that can either stabilize or destabilize its financial position. For firms like Miata Metals Corp. and Powermax Minerals Inc., convertible notes have acted as a bridge to equity markets, allowing them to advance base metal projects without over-leveraging. However, the conversion of debt into equity at lower valuations—often seen during down rounds—can erode shareholder value.

A key consideration is the interplay between convertible debt and traditional financing. Equity raises, while dilutive, provide clearer ownership stakes and transparency. Debt financing, on the other hand, carries fixed repayment obligations that can strain cash flow. Convertible debt sits in between, offering a middle ground but introducing complexity. For example, Bunker Hill's $21 million senior secured credit facility with Sprott Streaming includes tranches that can be converted into equity, creating a hybrid structure that balances liquidity with future upside.

Investor Considerations: Navigating the Convertible Debt Maze

For investors, the key to evaluating convertible debt in junior mining firms lies in three areas:
1. Project Economics: Assess the viability of the underlying project. Is the gold or base metal deposit large enough to justify the capital outlay? Are metal price assumptions realistic?
2. Conversion Terms: Scrutinize valuation caps, discount rates, and conversion triggers. Aggressive terms may signal overconfidence or desperation, while balanced terms reflect a company's confidence in its growth trajectory.
3. Governance Risk: Evaluate the influence of major lenders. A single investor with a 30%+ stake, as in Bunker Hill's case, can sway strategic decisions, potentially prioritizing its own returns over broader shareholder interests.

Investors should also monitor macroeconomic trends. Rising interest rates, for instance, increase the cost of debt servicing, while geopolitical demand for critical minerals (e.g., lithium, cobalt) can drive up the value of base metal projects.

Conclusion: A Calculated Bet on Exploration

Convertible debt is neither a panacea nor a trap for junior mining firms. When structured prudently, it can provide the liquidity needed to advance high-potential projects while aligning investor incentives. However, the risks—default, dilution, and governance imbalances—demand careful due diligence. For investors willing to navigate these complexities, convertible debt can offer a compelling risk-reward profile, particularly in a sector where exploration success can transform a company's value overnight.

As the junior mining sector continues to grapple with capital constraints and market volatility, the strategic use of convertible debt will remain a critical tool. But as the Bunker Hill case illustrates, the line between leverage and vulnerability is razor-thin. Investors must weigh the potential for outsized returns against the structural risks inherent in this financing model.