Optimal debt level of mining companies in Peru and determinants of debt levels

Abstract

The relationship between the investment and financing decisions of a firmand the influence these have in its market value has motivated many of studies that focus on the analysis of capital structure. Such decisions are key in business management. It is a widespread belief that mining companies do not need debt in order to carry out their functions on account of the domestic resources they generate and the overvaluation of their market shares owing to recent high prices for minerals.

This paper seeks to establish the optimal point of debt for companies and, using panel data, to contrast empirically the different factors explaining the level of indebtedness of mining companies in Peru. It uses a sample of 22 mining companies listed on the stock market for the period 2000-2006.

It concludes that the actual level of indebtedness is low comparing it to an optimal level of indebtedness, which means that mining entrepreneurs prefer to minimize their levels of debt and not take advantage of the possibility that their companies could achieve more value as a result of an Actual Present Value achieved with the lowest-weighted average capital cost.