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Tactical PurePlay® - Part Two

Tactical Deployment of PurePlay® Programs for Producers

By Sarel Oberholster and Peter Dawe

In Tactical PurePlay® - Part One “Understanding PurePlay® Instruments” we have provided a frame of reference to comprehend the fundamental principles of PurePlay® Instruments. We have shown how PurePlay® Instruments are the key to unlocking Nature’s Vault™. Having access to the inside logic and deploying the full flexibility of PurePlay® Instruments will empower the Issuers of PurePlay® Instruments to design their PurePlay® Programs with targeted precision.

A PurePlay® Project can easily be viewed narrowly for just the immediate cash generation and the interest savings. Those are definite advantages but a visionary and tactical point of view would start at the Total Ore Body at the disposal of the Mining Group. Here we include the Measured and Indicated Reserve as it shows the total potential available to the accomplished strategist.

1. Total Ore Body as a Source of Liquidity

The popular cliché is to talk about “sweating” assets. In the case of mining we found that IFRS 6, which classifies mining Reserves as intangible assets only worth what has been spent on them directly, has created a perception that this asset should just be left out of all asset returns management.

It now requires a mental shift to “see” this asset as the most valuable and most under-utilised asset that Mining Entities own. No longer should ownership and development of ore bodies be seen as a huge capital drain. Nor should it be expected that the miner alone should carry and finance without any return all the price risk and carry cost of holding quality Reserves. The price risks and carry costs can now be shared with willing Investors who want exposure to commodities for many reasons.

The current practice of funding Reserves acquisitions mostly with expensive share capital or borrowed money will be changed forever by PurePlay® Instruments. An identified Proven or Probable Reserve will become self-funding not only with respect to its acquisition but also with respect to its development. It is expected that in time the deployment of PurePlay® Instruments will be initiated even at the Measured and Indicated classification of an ore body.

These trends will clearly also impact on the future sales of such ore bodies. The visionary mining entity will embrace the development early and gain an unassailable strategic advantage over its peers.

The total ore body can be freed from the artificial classification of IFRS 6 and be re-classified as an asset to be fully deployed in the tactical management of the Mining Entity.

2. Tactical Resource Accumulation

The effect of IFRS 6 has also caused the market in general to be blinded to the true value of ore bodies. The technological advances of estimating and establishing evermore reliable measurements of ore bodies have been ignored in favour of an “Intangible” classification. The modern established ore body can certainly not be classified as “Intangible” by any standard of logical thinking. It is very much a tangible asset, its physical attributes are estimated to a very high degree of certainty at the Proven or Probable classification stage and should be managed as such.

It follows logically that the acquisition of quality Reserves should be of much more important strategic importance not only for the long term growth and survival of the Mining Entity but now also as a significant contributor to sellable Proven or Probable Reserves through the use of PurePlay® Instruments.

PurePlay® Note Programs make it tactically possible to leverage the Reserves of existing mines to develop new mines, to acquire an ore body within a consolidated mining group and effectively also acquire the liquidity required to develop that ore body all in one package deal.

Resource accumulation will be changed forever by PurePlay® Instruments and those mines who understand this will be the miners of the future.

It is appropriate to comment here on the Evander acquisition by PAN African Resources plc during 2013. PAN Group Proven and Probable Reserves were 1.18 mil ounces of gold before that acquisition. The PAN Group Proven and Probable Reserves after that acquisition were 9.18 mil ounces. The tactical advantage gained in this acquisition should be obvious when viewed with the potential of using PurePlay® Instruments.

The market did not credit this strategic value creation, in line with current thinking that quality Reserves are just valueless intangible assets only serving to confirm that the mine has a potential growth path. The use of PurePlay® Instruments will change that perception and visionaries will recognise the potential early rather than only when it has become a fact.  By then the market price will reflect the true value of such strategic reserve acquisitions.  

In time those miners who acquire resources with PurePlay® vision will reap market capitalisations based on the tangible fair value of those resources.

3. Tactical Debt Management

It is almost a forgone conclusion that currently Mining Entities must go deeply into debt to acquire mineral resources, to develop those resources over long lead times and then to repeat the process even before the prior one has become fully cash generating. The constant cash drain to meet interest payments has been accepted practice until now.

Now it will become strategically and tactically important to retain the cash flow, previously paid out to funders, inside the Mining Entity. To remove cash debt from the balance sheet and replace it with long-dated service obligations. PurePlay® Instruments will forever change the financial and accounting ratios of a Mining Entity.

PurePlay® Instruments will usher in a new era of debt-free mining and debt-free Mining Entities. Only miners with short life, low quality ore resources will now need to use debt.  Of course they will find it hard to raise debt for the very same reasons.

4. Tactical Mine Development Management

Planning a mine with full cognisance of the financing, cash flows and Capex requirements has until now meant that mine planning was largely driven by the financial flows rather than mining efficiency and maximising the potential of the ore body. PurePlay® Instruments will shift the focus and value exploitation to the ore body.

PurePlay® Programs can be deployed with incredible advantage in leveraging the production of existing mines to facilitate the development of new mines or unutilised Proven and Probable Reserves by larger more diversified Mining Entities. The flexibility of PurePlay® Instruments inside the larger Mining Group is such that PurePlay® Instruments denominated in one mineral can provide the liquidity to develop a mine in another mineral. An example would be where copper and platinum is mined in the same group. Platinum PurePlay® instruments can be deployed to provide the liquidity to develop a copper mine. Copper PurePlay® Instruments can then be used, once the copper mine is operational, to provide liquidity for another mining venture. The advantages of PurePlay® Instruments “stack” and are mutually supportive rather than mutually exclusive.  

5. Tactical Production Management

Until now, mining entities planning production have been very much driven by the cash flow needs of the mining entity. Capex for the next project must be underwritten through the production targets of existing operations. Cash flow to meet financial obligations had to be generated by production targets.

PurePlay® Instruments will alter the tactical deployment of production. Production will be focused on maximising returns of the ore body by for example not flooding the market with over-production driven by the need to meet cash flow obligations. Holistic planning will become possible through innovative Pure Play™ Issuance to manage production in accordance with market needs and the maturity profile of PurePlay® Instruments in issue.

Managing  production profitability will be strongly supported through the use of tactical PurePlay® Issuance, as the compound interest advantage will over time trump price movements.

6. Tactical Company Standing Management

No mining company can ignore the activities and competitive advantages of other miners. Here the “Red Queen Theory” applies: every Mining Entity must run as fast as it can just to stay in the same place competitively. It takes extraordinary effort and unusual competitive advantages to get ahead. Miners who are able to take advantage of PurePlay® Instruments, particularly in the early stages, will gain tremendous competitive capital advantages.

We fully expect, given the time-sensitive nature of the advantage of compound interest, that the early users of PurePlay® Instruments will gain absolute competitive advantages over their peers. Consider carefully the nature of compound interest. The compounding effect in the early years is muted but, subject to the absolute level of interest rates, the compounding begins to accelerate handsomely from around the 3rd year. By around the 5th year compound interest hits the sweet spot and from about ten years on it starts up the vertical exponential part of the growth curve. The strategic reality is that the PurePlay Issuer who has a two year start on its peers will hit the 3 year growth spot two years early, similarly will hit the 5th year sweet spot two years early and again will hit the 10 year vertical exponential curve two years early. That is a permanent absolute competitive advantage over its peers with the laggard always chasing the tail of the front runner.

Let me give an example of the effect of compound interest. Say two competing but equal entities have done similar PurePlay® Programs, but one has done so two years later than the other. Both have raised (for the sake of the example) the same amount on issue, but Entity A would have accumulated $570mil of interest by the time that Entity B had only accumulated $260mil. Entity A would have accumulated $2.3bn while Entity B would only have accumulated $1.17bn at the same point. So the two year start has doubled the competitive advantage in 10 years.  Entity B can never catch up, and the gap will widen faster and faster over time. The results are also displayed visually in the chart. The relative competitive disadvantage and relative lessening of competitive standing going forward of Entity B, together with the risk of being taken over by Entity A, must be obvious. The effect of compounding is less at lower interest rates but it becomes very significant at higher interest rates.  Even at lower rates, the effect is enormous over time.

7. Tactical Advantages for Resource Rich Countries

The advantages of PurePlay® deployment are not restricted to the individual issuing Mining Entities. PurePlay® Instruments issuances will contribute consequential advantages to the countries of origin. These advantages include:

  • Improved access to new inward foreign investment;
  • The re-rating of the strategic value of mineral Reserves will cause a re-rating of the credit standing of mineral-owning and producing companies and a re-pricing of the net asset value of those companies, both of which should also result in higher share prices for those companies;
  • The re-rating of the strategic value of a country’s mineral resources will impact that country’s credit standing, particularly dramatically in the case of resource-rich countries.
  • Re-rating the strategic value of discovered mineral Reserves and greater access to liquidity for the development thereof will encourage the funding for and actual exploration for new mineral deposits as yet undiscovered, and lead to employment opportunities for increasing numbers of people, with knock-on effects on the pool of dependents supported by each employee.    

The strategic importance of PurePlay® Instruments is immense. The tactical advantages of deploying PurePlay® Instruments will redefine the whole mining industry from the planning stages right through to final production. It will alter the financial structuring of the mining entity, its financial standing and the composition of its financial statements. Those with the vision to embrace this new technology early will leave their peers behind not only in absolute terms but also through the effect of compound interest savings which will propel them forward with the momentum of a permanent and ever-increasing competitive advantage.

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™.

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