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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.

As developers of the PurePlay product we therefore thought that it would be helpful for us to set out what we believe to be conservative prudential guidelines for the early issues. These guidelines are not prescriptive, and in time the market will find its own comfort level, which will then become the norm in place of these guidelines.

These are the core prudential guidelines - guidelines only, not rules, because each case depends on its merits (eg a major platinum miner could issue PurePlays for almost all of its gold production because gold is a by-product of its main business of mining platinum) - but the market will be aware of the prudential guidelines as they will be posted on our website, and will need to be convinced of the soundness of any departure from them.

1. The core principles are :

1.1. Annual Production Percentage Guideline

For mature Miners which are at or near full production, annual PurePlay maturities should not generally exceed about 5% of the Miner's annual production of the mineral.  Developing Miners, whose Reserves are disproportionately high while they ramp up production, should not generally exceed about 15% of their annual production of the mineral, coupled to a stated expectation that the issuance level will be closer to 10% of their annual production of the mineral once newly developed capacity enters annual production.  Once the market becomes thoroughly familiar with PurePlays, a new norm will be established as to what the market thinks this percentage should be. In those instances where the PurePlays are used specifically to hedge then this guideline will not apply but rather sound hedging principles will apply;

1.2. Proven and Probable Reserves Percentage Guideline

The total quantity of minerals used for PurePlays by an individual Miner should not exceed about 15% of the Miner's Proven and Probable Reserves of the mineral.  Again the market itself will eventually set this percentage;

1.3. Life of Mine Guideline

The projected life of mine at full production should be adequate to allow the mineral to be delivered on maturity of the PurePlays within the same guidelines;

1.4. Staggered Issuance Guideline

The redemption of PurePlays for the purpose of raising liquidity should be staggered to achieve price averaging and reduce delivery risk. It would generally also be advantageous to stagger issuance which will further enhance the averaging of gold price risk. In those instances where the PurePlays are used specifically to hedge sound hedging principles should apply in place of this guideline;

1.5. Program Maintenance Guideline.

Usually when a PurePlay liquidity raising or debt displacement program is in place, the Miner will stagger sales as per Para 1.4 and then instead of straightaway ramping down on the Maturity path will roll the program by issuing a new identical PurePlay for each maturing one. This enhances still further the power of compounding.  However the same basic guidelines (percent of annual production, percent of total Reserves and life of mine) still need to be observed;

1.6. The Sinking Fund Guideline

The benefit from PurePlays should be measured by the Miner by creating a notional sinking fund to which will be credited the proceeds of the issue of all PurePlays plus compound interest at the Miner's average cost of borrowing (or, if he has displaced all his debt, at a reasonable and realistic borrowing  rate). For compounding to be achieved, the proceeds of the PurePlay issues must be used in the business and not paid away out of the business. So for example proceeds can be used to replace debt, finance operations, finance new mines, carry out more exploration, acquire more Reserves and the like. They should not be used to pay dividends, fund bonuses to management or workers or for anything else which stops the proceeds working in the business;

1.7 The Non-Distributable Reserve Guideline

In order to prevent the inadvertent payment of the sinking fund money out of the business, the Miner should create a “Non-Distributable Reserve” (which need not be on balance sheet if that would conflict with the Miner’s accounting policy) which mirrors the sinking fund and retain profits equivalent to the annual interest savings as part of its official Reserves. By “Non-Distributable Reserve” we mean any mechanism which enforces the requirement actively to ensure that the revenues raised by, and the interest savings achieved by, PurePlay issues are not externalised through dividends, share buy-backs or other distributions such as bonuses. The accounting discipline of the “NDR”, even in the form of an internal constraint, will keep the compounding working. However we believe that, where permitted in terms of IFRS or GAAP, an official on-balance sheet preservation of the revenue and interest savings of PurePlay issuance programs would go a long way towards gaining enhanced Investor confidence in the PurePlay Instruments of such an issuer, with probable pricing benefits;

1.8 The Distribution of Benefits Guideline & NDR Cover Ratio

The most prudent approach is to adopt a zero distribution of benefits policy until maturity of all PurePlays. Of course over time the sinking fund/NDR could potentially grow so much (our modelling shows that it can be more than 7 times the historical opportunity cost of rising prices of gold, oil and other minerals over a 30 year period, and still growing) that it exceeds all reasonable prudential limits. It would be acceptable to distribute some of the benefits when a reasonable level of prudency has been reached. Historical analysis indicates that when the NDR is 3 times the then current cost of extracting, refining and delivering the quantity of mineral covered by outstanding PurePlays, the surplus above that can with reasonable safety be paid out of the business (or transferred to distributable Reserves). Each miner for each mineral will have to assess their own specific dynamics and apply an appropriate policy. As costs change, the NDR may need to be topped up, and this would have to be done as a first charge against incoming PurePlay benefits, to restore the 3 times cover ratio before any further excess benefits are paid out of the business.

The purpose of this rule is to retain inside the business the initial cash raised as well as a reasonable compounding effect, given that the Miner has an outstanding obligation to extract, refine and deliver and that the cost of that obligation could change over time. Thus the NDR pReserves the cash until it is needed for the costs, as well as retaining the benefits of having the cash (the notional interest) which combined over time will create an inherent structured pool of at least 3 times the potential obligation.

In addition the sinking fund and NDR are a useful quantification of the ongoing benefits of PurePlays working within the business.

2. Project specific issuances

PurePlays are exceptionally well-suited to providing liquidity for a specified project. An example is where a miner wants to commission a gold tailings plant. The reserve in extractable gold is 1.5 million ounces, at an expected annual production of 100,000 ounces and with a “life-of-project” of 15 years. Expected cost of the project is $100mil. The gold price at project evaluation date is say $1300. The prudent issuance and redemption design will revolve around the project while prudent guidelines will evaluate the miner’s larger gold mining profile as well as the specifics of the project. A potential design for the project with a faster maturity profile will be to issue 77,000 ounces of gold in PurePlay Gold Notes to raise $100 million and stagger redemptions at 20,000 ounces at the end of years 3, 4 and 5 with 17,000 ounces in year 6. The project can clearly sustain the redemption profile and only 5.13% of the project reserve is committed to the now interest-rate-free, borrowing-free and gold-price-risk free funding of the project. Full redemption is achieved in year 5, 10 years before the life-of-project ends. The same project specific principles will apply to a more complex mine development project, i.e. can the project sustain the redemptions profile, does redemption take place well within the life of the project and is the volume of recoverable reserve committed to issuance prudent?

By adhering to the prudential guidelines the Miner will in the medium term become self-financing, financially healthier, able to mine optimally without being driven by the need to meet interest and capital payments, able to expand, take on more employees, pay better wages, pay more tax, support a larger range of suppliers, and generally become a solid, stable major employer and corporate citizen. All this will be done without stressing its annual production or utilising more than a fraction of its Reserves. The miner will also achieve a much better balance of risks in the relationship between borrowings, interest rates and movements in the gold price while remaining hedge free for the gold production upon which it relies for profitability.

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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

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