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Written by Sarel Oberholster.

1.1    What is a PurePlay Note?

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. The terms of the sale will include (i) a delivery date and place, usually a number of years after the sale (maturity date); (ii) an undertaking by the miner to store the gold, without charge, in Reserves for the duration of the PurePlay Note (cost free storage); and an undertaking by the miner to extract, refine and deliver the gold at the miner’s cost at the specified gold delivery standard (say “London Good Delivery”) on the maturity date (extraction, refinement and delivery costs to remain with the miner).

The sale of gold under the PurePlay Note is a spot sale and as such will price off the spot gold price with a discount for the delivery risk assumed by the Investor on the miner (usually the credit spread) as well as any premium or discount as a result of whether the gold market is in a bull or bear phase. We will use a price at par (i.e. the credit spread is equal to a market premium on day of issue for a net par issue price) for the sake of simplicity in our example hereunder.

1.2    How is a PurePlay Note Program designed for a Project?

We have published on our website Prudential Guidelines which we summarise for design purposes. One will look at the available gold for extraction ounces underlying the project, the cost of the project, the duration until the project starts producing gold, and the life-of-project in terms of production, i.e. how long it will take before the gold reserve is depleted. Projects which are economically viable would normally all be viable also for a PurePlay Note Program. The PurePlay Note Program will enhance the value of the project and significantly de-risk the high risk variables of cash flow, interest rates, interest and capital repayments, and gold price movements relative to the funding portion of the project.

The objective of the project finance design will be to sell sufficient gold ounces in PurePlay Notes to provide the funds for the project while at the same time staggering the maturity dates to coincide in a sustainable manner with the production schedule of the project. One would also have to make sure that the scheduled deliveries will not go beyond the life-of-project.

We will use a gold tailings plant as a simplified example to demonstrate the application of the principles.

We will assume that the reserve in extractable gold is 1.5 million ounces, at an expected annual production rate 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. A potential design for the project 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?

1.3    How are a Miner’s Risks Balanced when using a PurePlay Note Program for Project Finance?

The example provides the following insights:

  1. Only 5.13% of the extractable gold reserve was sold to generate 100% of the funds required for the project;
  2. The sale of gold is not a loan and thus the funds will not attract any interest;
  3. The delivery of the gold for the funding of the project will be taken from the production of gold in years 3, 4, 5 and 6.

The following table will demonstrate the Balance of Risks, comparing a PurePlay Note Program with banking project finance at a variable interest rate:

Type of Risk

PurePlay Note Program

Banking Project Finance

Interest rate risk

No interest payable, credit spread fixed at date of issue.

Full interest rate risk on borrowings.

Allocation of actual ounces of gold risk

Fixed on date of issuance (in the example it was 20,000 pa for 3 years and one 17,000 ounces final delivery)

Interest rate movements, credit risk movements, exchange rate movements and gold price movements all will impact on the number of ounces which will eventually be allocated to the repayment of the borrowings. We have often seen miners increase production in a bear market to make up cash required to sustain borrowings which usually also then increases the mining costs to further erode profitability. It is an asset allocation and risk nightmare when these risks move against the miner.

Exchange Rate Risk


In the event of a borrowing which is not in US$, the currency in which gold is predominantly priced, the cash flows to repay the borrowings will be exposed to exchange rate risk as it must come from the sale of gold in US$.

Gold price risk

None, the project is funded upfront in gold sales.

Repayment and interest cash flows are fully exposed to gold price movements which can literally cause existential risk to a gold miner in the event of a bear market in gold.

Production cost risk

No differences for either form of funding.

No differences for either form of funding.

The above risks are serious risks which can easily run away from a miner to push him into distress or even bankruptcy. Which miner has such certain knowledge of the future that it wil justify him taking on these existential risks when launching a mine or project? Sadly before the advent of PurePlay Notes miners often had no feasible alternative but to risk the whole reserve of a project just to obtain the funding for it or to rely heavily on rights issues from shareholders to subsidise the project at inception and even during its life when risks develop in the wrong direction. How often do we see the suspension of dividends and a rights offer when the gold price drops or when interest rates rise, both of which more often than not happen at the same time? These existential risks can now be eliminated almost in their entirety by using a PurePlay Note Program.

It is important to emphasise that only 5.13% of the reserve has been allocated to the project funding in the example, while almost 95% of the gold from the project  upon which the miner will rely for its profitability, has been left fully exposed to gold price movements and unhedged.

The PurePlay Note Program has simply rebalanced the risk profile of the miner to a much healthier, more sustainable, interest-free and viable project funding alternative, using a presently passive asset to fund the project.

PurePlay® is a registered trademark 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™.

Contact Details

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Durban, 3610,South Africa

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