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PROJECT FINANCE WITH PUREPLAY® NOTES

A PurePlay Note is the instrument used to embody a sale of unmined minerals held in Reserves by a miner.

We’ll use gold as a proxy for minerals for the sake of simplicity but a PurePlay Note will be possible for virtually any minerals including oil and gas.

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PRUDENTIAL GUIDELINES

Inevitably, with a new and innovative product, the market takes some time to mature and reach a stage where issuers are comfortable with the level of PurePlays that they can handle without strain on their production resources, and Investors are comfortable with assessing the risk and reward balance of a particular issue.

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PurePlay® Case Study

Diversified Mining Corporation (“DMC”)

A Practical Case Study using PurePlay® Instruments to convert a highly indebted mining corporation into a secure debt free entity.

DMC has $4bn in debt and is paying an average interest rate of 5.75% on that debt.

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Pricing of any PurePlay® Instrument is at or slightly above the spot price of the commodity in which the PurePlay® Instrument is denominated and issued. A PurePlay® Gold Instrument will trade at or slightly above the spot gold price and a PurePlay® Platinum Instrument will do the same with the spot platinum price. Arbitrages will generally exist between the PurePlay® Instrument and an Exchange Traded Fund (“ETF”) in the same commodity as the instruments are at heart both investments in that commodity in storage.

The PurePlay® Instrument is superior in its cost efficiency and generally offers a greatly reduced storage risk. It follows that there will be a positive arbitrage in favour of the PurePlay® Instrument compared to a similar commodity ETF instrument for a similar quantity of the same commodity.

We use gold in the following example for ease of reference but the principles will be the same across all fungible commodities.

  1. A gold EFT instrument purchased today will be eroded by costs of about 1.5% on average per annum and actual physical gold will be sold from the gold held in storage to pay for the costs. Thus an investment of 100 ounces gold in a gold ETF will tend to be eroded to only 85 ounces of gold over a ten year period (a falling gold price will see a higher number of ounces eroded and a rising gold price will see a lower number of ounces eroded).
  2. The PurePlay® Gold Instrument for a similar 100 ounces of gold will deliver 100 ounces of gold to the holder in 10 years.
  3. The holder of a PurePlay® Gold Instrument will therefore have 15 ounces of gold more than the Investor in a gold ETF instrument after 10 years or 1.5 ounces more on a per annum basis.

Arbitrage profits can be made in the event that the PurePlay® Gold Instrument’s price does not reflect the cost efficiency superiority, meaning that the PurePlay® Gold instrument is trading at a discount to the spot gold price or at a discount to the gold ETF Instrument (gold ETF instruments are managed to trade at the spot gold price).

  1. Say that the PurePlay® Gold Instrument is trading at a 5% discount to the spot gold price. We will continue to use the 100 ounces example.
  2. Sell the gold ETF instruments short representing 100 ounces gold and buy PurePlay® Instruments for 100 ounces at a 5% discount which yields an immediate 5% profit while price risks are covered 100 ounces for 100 ounces.
  3. The short gold ETF will lose another 1.5 ounces every year for a total of 15 ounces over 10 years which will be additional arbitrage profits.
  4. Collect 100 ounces at the end of 10 years under the PurePlay® Gold Instrument, sell the 100 ounces, settle the short gold ETF instruments now worth only 85 ounces and pocket the 15 ounces arbitrage profit.

 

Thus the trader of this arbitrage collected a 5% cash profit upfront and collected a 15 ounce arbitrage profit at the end. The net arbitrage profit will have to include the trader’s trading costs and the carry cost of the short but neither will have a material impact on the arbitrage profit.

Patents and Trade Marks

The Intellectual Property of PurePlay Holdings (Pty) Ltd is protected by world-wide pending Patents.

Trademarks awaiting registration are PurePlay™, Nature’s Vault™, As Good as Gold™ and Sp☼t True Value™.

Contact Details

5 Jan Smuts Avenue,Winston Park
Durban, 3610,South Africa


Tel: +27 31 7670156
Cell: +27 82 4515864
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