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Drought risk and the cost of debt in the mining industry

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  • Pinto-Gutiérrez, Cristian A.

Abstract

We examine the impact of a borrower's vulnerability to drought risks on loan contracts in the mining industry. Our analysis of a sample of 675 loans between 1995 and 2018 demonstrates that mining companies that are impacted by droughts face significantly higher loan spreads. Additionally, we find that the association between drought exposure and loan spreads is more pronounced for larger and longer-term loans. These findings provide evidence that externalities from climate-related events are relevant in the private debt market and that banks consider climate risks when making lending decisions to borrowers who cannot mitigate the risks through relocation, such as those in the mining industry.

Suggested Citation

  • Pinto-Gutiérrez, Cristian A., 2023. "Drought risk and the cost of debt in the mining industry," Resources Policy, Elsevier, vol. 83(C).
    • Handle: RePEc:eee:jrpoli:v:83:y:2023:i:c:s030142072300435x
    DOI: 10.1016/j.resourpol.2023.103724
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    More about this item

    Keywords

    Climate change; Drought; Bank loans; Loan spreads;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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