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When I use explosive weapons, such as rockets and grenades, to reduce the health of enemies, am I losing or reducing the amount of loot these enemies will drop, or does loot destruction only apply to killing blows with explosives?

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Explosive weapons (such as Launchers and thrown Grenades) will only destroy the equipment of a target when they are the killing blow. If they only injure a target with an explosive weapon this causes no damage to their equipment and they will still produce a corpse if later killed. They are even still available for live capture.

A quick explosive to destroy cover followed by a hail of gunfire is an effective take down measure, and won't cost you any of the materials you could expect to obtain.

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    this only applies to sectoids, but if the mind controller and the controllee are both caught in the explosion, the 'feedback' from the death of the controller triggers before the calculation for equipment damage for the controllee so you'll be able to recover some weapon fragments from the controllee even if he dies from the explosion.
    – l I
    Dec 20, 2012 at 14:41

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