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Macro-Economic Implications of a Successful Implementation of the PurePlay® Project

1.    Introduction

The PurePlay® Instrument is a patented method, invented by South Africans. It allows Miners to sell, at spot value, minerals which have not yet been mined but have been identified, in terms of international standards, as their Proved and Probable Reserves. The Miner issues to an Investor a Pureplay Instrument which is a tradable Bill of Sale for a specified quantity of, say, gold. The Investor has to pay the full purchase price in cash at the front end when the Miner issues the PurePlay, and the Miner must deliver the gold after a stipulated period (mostly 10 years), and at a designated off-shore location.

 

In this brief explanation we shall use gold as an example, but the PurePlay concept applies to any ‘fungible’ mineral. That refers to a mineral which, in the first place, pre-exists in its final form in the earth and which requires no further production processes, whether mechanical, chemical or in any other way, so as to be ‘changed’ into anything it has not been for many millennia. With gold, for example, the mineral is extracted from the earth typically through moving tons of earth with the extraction process being completed finally through refinement. What is left is the still unchanged commodity available for use or trade, typically indistinguishable from other gold no matter where in the world it may have been extracted in the first place. It is this fact of unchangeable pre-existence in the earth that makes pre-mined sales of these minerals valid sales in law, as opposed to e.g. forward, deferred or conditional ‘sales’, or various types of financial instruments or derivatives that do not constitute a front-end direct investment in a mineral which may still be buried deep within that most reliable storage facility , the earth.

(The above is a high-level picture of PurePlay. The note which follows assumes that the reader is fully familiar with PurePlay. More information can be obtained from our website, www.pureplayholdings.com, or we would be happy to give a presentation.)

This communication aims to note the macro-economic benefits for South Africa through the successful implementation of the PurePlay project. Since these derive in the first place from the benefits the project offers to its participating parties, the Miner and the Investor, we note briefly what’s in it for them.

2.    The Miner

The mining industry is typified by often extended periods of development capital expenditure before any income is produced from that development. Presently, most mine mineral exploration and mine development is funded through a combination of raising share capital (usually the most expensive form of finance) and borrowings (still expensive, and with increased liquidity and certainty-of-access risks).

Debt Repayment:

Access to large quantities of long-term no-interest funding by receiving on the date of sale the full cash proceeds from current sales for long-term deferred delivery will be achievable through PurePlay Instruments. In the case of most of the listed mining companies, committing no more than 10-15% of their total unmined minerals in Proved and Probable Reserves would completely change the way in which to deal with the huge cost of funding capital development. In most cases this would require the Miner to commit no more than 3-5% of its annual production to satisfy these delivery commitments, and delivery commitments would therefore pose hardly any serious delivery risks. Also, most top companies, even within these very conservative restrictions, are likely to have enough value in their Proved and Probable Reserves to liquidate completely their accumulated debt via PurePlay Instruments. In the Attachment - Fig 1 we show the total debt facilities of only those listed companies we believe have the standing to successfully launch PurePlay programmes.

The advantage of no-interest funding to Miners can be appreciated by considering what it would actually have cost them to borrow the funds instead of obtaining date of sale funding through selling, for cash, a conservatively small portion of their existing minerals in Proved and Probable Reserves. We illustrate this below when we consider the national macro-economic advantage of such no-interest funding. The approximate interest incurred collectively by the major mining companies (as listed in the example shown in Attachment – Fig 2) on their actual facility utilization during 2013  totals R6.7 billion. On average this is just less than R480 million annually for each one of the 14 companies included. Funding this through PurePlay Instruments, if they had been available then, would have increased the total net profit of those mines for 2013 alone by R6.7 billion.

Compound interest:

This can be another important value of the PurePlay Instrument. The financial benefit to the Miner of the money raised from the sale of unmined minerals can be quantified by thinking of it as a notional sinking fund. One can then see the sale proceeds as if they were a borrowing which then shows what interest would have accrued on them if they had in fact been borrowed funds. The interest savings are not just a single occurrence in one financial year. The PurePlay programs are designed to permanently replace all debt needs. Considering that typically Miners are likely to replace expiring PurePlay Instruments on an ongoing basis, the Miner will also enjoy the powerful compounding effect on these interest savings until the Miner finally (if ever) decides to stop replacing expiring PurePlay Instruments. The PurePlay Instruments will mostly be issued for delivery after 10 years, and as part of the program will be replaced upon maturity by a new PurePlay Instrument. Thus the benefits of no-interest long-term funding will accrue to the listed mining companies for as long as their PurePlay programs are in place. This could create the enormous saving of a near perpetual compounding effect over the ultra-long term.

Balance Sheet value:

Enhancing the benefit of the PurePlay Instruments is the proper, legitimate recognition of the company’s true balance sheet value. Through a whole range of 3rd party Investors, by their actual purchases of PurePlay Instruments and  date of sale payments, the Investors will constitute that well trusted judge of value, the market - they are the market on the value of the Miner’s Proved and Probable Reserves as the sale of PurePlay Instruments will unlock the value inherent in this valuable resource. Not recognizing the market’s verdict on the value of Proved and Probable Reserves would result in patently undervalued financial statements, as is currently the case. We believe that even the current highly conservative accounting standards would already accept to some extent this real value, and very soon will have to recognize the full value of all Proved and Probable Reserves once this Instrument is more widely issued.

3.    The Investor

The PurePlay method suits the wholesale Investor community very well. Their interest lies exclusively in the price risk and benefit in the mineral in which they want to invest. ‘Extraneous’ costs such as expensive or even impossible storage (e.g. for lower priced or bulky investments like coal), and equally expensive insurance, materially drain their profitability. The PurePlay Investors will not have to (nor be able to) take ownership of the mineral until maturity of the Instrument, and then will most likely on-sell the mineral directly and re-invest the proceeds in newly issued PurePlay Instruments. Equally, interposed entities such as trusts, corporate owners and any number of esoteric financial legal entities which very often go hand-in-hand with currently available financial instruments such as ETFs, also cost (unlike PurePlays), and can even weaken legal recourse in the case of problems. The Investor is interested only in capitalising on price fluctuations, and that is what the PurePlay Instrument gives him.

            The fact that storage or insurance costs are effectively zero for both parties, since  the mineral is stored safely in "Nature's Vault™" for the duration of the PurePlay Instrument, has given the Investor another advantage with his PurePlay Instrument. Direct investment in high-bulk low-value minerals has until now been impossible because of prohibitive storage costs, but this natural zero-cost storage situation now allows this kind of investment in a whole range of other fungible minerals such as oil, gas, copper, coal etc.

4.   
The Macro-Economic Implications

General:

Most of the advantages on the ‘Miner’/‘Investor’ level very much apply also on the national level. South Africa is one of the most mineral rich areas in the world, and even more so in many fungible mineral sectors like gold, platinum, coal etc. If we see the South African mining industry as one of the Miners in this context, the national benefits of  PurePlay Instruments become a particularly beneficial development not only in the immediate sense, but also in making the South African mining industry and indeed our entire economy more competitive internationally.

It is also also important to point out that the international investing capacity for mineral-based financing is huge, and very much capable of accommodating any offers for  PurePlay Instruments. For example, in the gold industry alone the total amount invested in SPDR Gld (only one of many, albeit the largest, of only the United States gold ETFs) is approximately US$148 billion in a structured investment vehicle which is inferior to PurePlay Instruments both in terms of being an expensive way to invest in gold and also in having outright loss of gold risks due to its exposure to storing its gold in the vaulting facilities. It will take a very long time to exhaust the demand of the international body of eager Investors, especially once direct investment for the whole range of fungible minerals becomes available through the PurePlay Instruments. So, does a PurePlay market really exist ‘out there’? Extensive visits to and discussions with some of South Africa’s major mining groups as well as with some major off-shore mining groups and Investors have been met by an almost impatient interest in the PurePlay instrument. The FTSE-JSE has already indicated its interest in listing the product on its main board and we expect that the same will be true of the London FTSE, with which the FTSE-JSE liaises closely.

The PurePlay Instrument is a more cost effective instrument than ETFs, offers a much wider range of minerals than do ETFs, and carries much better security for Investors. It is therefore expected that many Investors in off-shore ETFs will not only prefer the South African PurePlay, but furthermore will generate a healthy volume of arbitrage into the latter.  This will be a source of foreign direct investment, as Investor money will flow from foreign ETFs to South African PurePlay Instruments.

The success of  PurePlay, and therefore its contribution to the national economy, is already guaranteed by the fact that the two contracting parties, Miner and Investor, form a classic win/win situation. With the very real national advantages for South Africa emphasized below, it actually becomes a win/win/win situation where South Africa as a major mining country and the creator of the PurePlay Instruments becomes the third winner.

In the Attachment, Fig.1, it is noted that the current debt facilities of only 14 of the top JSE listed mining companies total over R154.2 billion, all of which could be replaced by PurePlay Instruments. This is a mineral rich country and the total value for all the other fungible minerals still in the South African Nature’s Vault will be enormous. Yet, even the R154.2 billion listed mining debt facility is already a material number from a national perspective - compare e.g. the SA Reserve Bank’s Gross Reserves of R49.6 billion (January 2014).

5.   
Macro Economic Consequences

The national Macro-Economic benefits that will flow from the successful introduction of PurePlay Instruments will include:

 

  • Replacement of current interest-bearing debt through cash sales of unmined minerals via PurePlay Instruments will make a dramatic difference to the mining industry’s interest burden. Interest paid by the top South African listed mining companies in 2013 amounted to R6.7 billion - refer Attachment 1, Fig 2. This annual saving will be retained and extended through future funding also being obtained through no-interest PurePlay Instruments.
  • A significant portion of the Total Debt Facilities as shown in the Attachment, Fig 1 as R154.2 billion is obtained in foreign currency facilities. The repayment of the debt will not only remove the debt from the Miners but will also displace those foreign debt facilities. PurePlay Instruments are sales of unmined minerals and do not give rise to a new debt in some other form. This favourable impact on South Africa’s foreign debt situation will of course be materially expanded through the greater variety of fungible minerals which will now be ‘funded’ by long term, non-debt and no-interest funding through cash sales on long term delivery.
  • The interest paid on debt, to the extent eliminated by PurePlay Instrument issuances, will directly and annually expand the tax base – see below.
  • The use of PurePlay Notes will for the first time in history introduce a fair value mechanism for mineral Reserves. The effect will be that the minerals in Reserves which are currently treated as intangible assets, only valued to the extent of the costs involved in establishing them, can be revalued as tangible assets with a fair, market-dictated value. A sample of the listed mining companies’ Reserves as revalued to fair value based on PurePlay Notes is shown in the Attachment, Fig 4 – it is dramatic.
  • A major positive revaluation of South African mining assets will have a significant positive effect also on the “balance sheet” of South Africa as a country.
  • A significant revaluation of South Africa’s mining companies will have far-reaching effects on their ability to expand existing operations, to pursue more aggressive exploration and to allocate resources to new mine development.  It will also add significant value to their market capitalizations on the FTSE-JSE. This may well be the most important Macro-Economic value of the PurePlay – and will be enjoyed incrementally for a very long period.
  • Mining is a labour-intensive industry, employing, according to a 2014 World Gold Council study, some 150,000 people in South Africa. The study estimated that a further 150,000 people were employed indirectly by the industry, and that each of these 300,000 active employees supports eight further people. The total of 2.4 million people dependent on the mining industry is very significant in South African terms. We expect that with the lifting, through the sale of PurePlay Instruments, of the present constraints on exploration, development of new mines, further working of existing mines and the like, the impact on the South African employment and socio-economic development numbers will be enormous. Even on an immediate basis the mining sector will have more cash available to improve current living and working conditions, train, educate etc. Even such measures will represent a strong capital investment in enhancing general employee loyalty and labour stability.
  • Huge new finds such as the Karoo Basin Shale Gas discovery can be developed through the use of PurePlay Instrument programs, while coastal oil exploration can get a second wind. Obviously, anything that can positively influence and accelerate more energy independence is a crucial benefit.
  • New mining developments financed through no-interest PurePlay Instruments will have a material impact on South Africa’s Foreign Direct Investment and South Africa’s mineral exports, including improvements to the Trade Balance and the Balance of Payments of South Africa;
  • A significant improvement in the debt profile of South Africa’s mining industry and a significant revaluation of South Africa’s mineral resources will have a positive impact on South Africa’s country credit rating.

 6.    Positive Impact on Tax Base

There will not be any tax leakage whatsoever as a result of the introduction of the PurePlay Project. It is driven entirely by economic efficiencies and benefits for both country and Miner. Indeed, it will inevitably increase the tax base.

The interest paid by the top listed mining companies in South Africa as shown in the Attachment, Fig. 2 was over R6.7 billion rand annually, and that only for the chosen listed mining entities. Mining tax rates vary but applying a conservative 30% tax rate to the R6.7 billion increased taxable profit from operations indicates (all things being equal) a permanent increase in the tax base of some    R2 billion which will itself be increased through the compounding factor on the debts’ interest. The ‘loss’ of any tax on the interest that would have accrued to off-shore lenders will be more than compensated for by the greater tax base. Besides, most of our foreign lenders are tax treaty countries where our Double Tax Agreements limit tax on interest to 15% - so we lose 15% on interest for the assumed 30% on the enlarged tax base.

7.    Conclusion

The comments above can bear one more observation – as between Miner, Investor, and South Africa itself, introduction of the PurePlay Instruments is a no-fail win, win, win situation. If we consider SARS as a separate fourth party in view of its heavy responsibility to provide our country with what it needs to carry out its democratic mandate, it too will gain handsomely through the efficient private funding of our most important mining sector. That means we have an unstoppable win, win, win, win situation, which clearly needs to be realized with responsibility and speed.

 

Date : March 2014

Prepared by PurePlay Holdings (Pty) Ltd

            PurePlay and Nature’s Vault are registered trademarks of PurePlay Holdings (Pty) Ltd

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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