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PurePlay® Questions and Answers

A: No. PurePlay® Instruments are a spot sale of fungible Reserves in Proven and Probable Reserves. The Purchaser must pay for the Reserves as represented by the PurePlay® Instrument on the date of sale. The price risk and benefits of the commodity pass to the Purchaser from the date of sale. The Producer Issuer will store the commodity for the Purchaser in Proven and Probable Reserves for an agreed period. The Producer Issuer will, before the expiry of the storage period, extract and refine the commodity to spot market specifications and will on the expiry of the storage period deliver the commodity to the Holder of the PurePlay® Instrument in accordance with the delivery arrangements. See full description of the PurePlay® Instrument here

The question of spot vs forward sale has often been raised in converstations with Producers. We have provided a comprehensive answer to one of the major global oil Producers, which satisfied them. The answer starts with the concepts inherent to Nature’s Vault™ and fully explains the reasons why the sale is a spot sale and not a forward sale. Here is the full explanation:-

“Spot sale or forward sale?

The concept of Nature's Vault™ is easy to understand but we have found in our presentations that often the full implications of that concept are not readily apparent. The reality of Nature's Vault™ is that the owner of the mineral reserve already owns the mineral even though it is stored in Nature's Vault™.  As the economic and de facto owner of the mineral, your company would make a spot sale to potential Investors and not a forward sale. We are very aware of the forward markets and the difficulties that marking to market of a forward sale can create.  We are at pains to distinguish the PurePlay® Instrument from a forward sale. Please allow us to refer to some basic concepts to demonstrate the differences in spot vs. forward.

"Pre-existence" is a defining characteristic: oil in Reserves already pre-exists in or on the crust of the earth.

Compare pre-existing minerals with agricultural produce (from which most derivative and forward sale concepts originated), where the agricultural produce does not already exist and must be grown.  For a farmer to sell his crop before he has produced it, he must engage in a forward sale. He is selling, at a future date, an asset that he does not yet have and may in fact have to buy in.  By contrast, the oil pre-exists and needs only to be converted to a spot market format.  When oil is sold in terms of a PurePlay® Instrument, the asset is in existence and has been identified (although of course because the asset is fungible it is not important to identify which precise portion of the oil in Reserves is being sold), the price has been set at spot and paid and the sale is therefore a binding current agreement awaiting delivery.

The advantage of this to the Producer is that it receives spot prices for a portion of its Reserves, and incurs the cost of extracting and delivering only near to the 10 year maturity date. The advantage for the Investor is that he acquires the rights to the stated quantity of oil to stated specifications, to be stored free of charge for him for 10 years. That right is tradable, so the Investor has the advantage of to all intents and purposes owning the oil, without the immense disadvantage of taking delivery and storing it while he trades the market on the price risk.  

Again compare this to, for example, wheat. Compare on the one hand wheat not yet produced by a farmer and so being sold forward, to wheat in a silo awaiting milling before being delivered to the baker. The baker would buy the silo wheat spot and ask the miller to store it in either whole wheat or milled form until the baker has need of the flour. Why this example? The fact that the agricultural produce at the farmer level does not pre-exist means that the farmer will never be able to make a spot sale until the harvest is in. The oil Producer however, like the miller, actually already owns the oil in reserve: it pre-exists.

Usually, in a forward sale situation, there would be a facilitator who would finance the forward sale given that a commodity risk will be present in the transaction. The facilitator is usually a banking institution. The economic simulation for a Producer forward sale would imply that the facilitating bank will incur a cost to hedge the future price risk, usually through the short sale of the commodity where possible. Facilitators do not own pre-existing physical minerals in any form and thus are obliged to mimic the risks via financial structuring. It is clear to us from your questions that you are familiar with this process and that the bank will price the "fair value" of the forward sale based on the hedging costs, structuring costs and interest forgone or earned. A facilitator will take profit margins, usually incorporated in the forward pricing, from both the Producer selling the forward contract and from the Investor who buys the price risk, a price risk which has been re-priced due to the structuring by the facilitator. The PurePlay® Oil Instrument will cut out the facilitator as “middle man”, together with all its structuring and costs, to bring the seller (Producer) and buyer (Investor) together directly and beneficially to both parties. The PurePlay® Instrument will be priced at the spot price for the oil and not at a simulated forward price.

We will discuss spot pricing in more detail below using a gold ETF arbitrage as a proxy given the absence of physical Oil ETFs. Note however that the fundamental basis for a PurePlay® Instrument is that the physical mineral is sold from Reserves at the prevailing spot price and the money changes hands at the point of sale. The spot sale also implies that the price risk is transferred to the Investor on the date of the spot sale.” (For a comprehensive discussion of the gold arbitrage and spot pricing read more here)

A: The PurePlay® Instruments should trade at a small premuim to the spot price of the funguble commodity investment. The Holder of a PurePlay® Instrument holds an investment in a fungible commodity, say gold, and will at the expiry of the storage period receive delivery of the physical gold. The huge advantage of the PurePlay® Instrument is that the storage is done for the Investors free of charge. Any other commodity investment will have a storage cost and other costs associated with storage such as deliveries, secure transport, inspections, vaulting services, insurance, security,etc. The absence of the costs for the Investor makes the cost-efficient PurePlay® Instrument superior to any other similar commodity investment and as such it should trade at a premium to the spot price.

The principle that the PurePlay® Instrument should trade at a premuim is proven by the arbitrage opportunity which exists between the PurePlay® Instrument and commodity ETFs of a similar nature. Gold ETFs generally have an annual cost of around 1.5% on average. These costs are met through sales of the gold held in portfolio. The result is that the gold Investor in a Gold ETF would be better off buying a PurePlay® Gold Instrument by a 1.5% premium per annum on average. For more information on the arbitrage opportunity see here .

A: No. The PurePlay® Instrument is not a debt instrument but rather a Tradable Bill of Sale of a specified quantity of gold (or any other fungible mineral) in the Proven and Probable Reserves of the Producer. The Producer Issuer will then store the gold for a period in its Proven and Probable Reserves and will extract, refine and deliver it to spot market specifications to the Holder of the Instrument on the maturity date of the storage period. For the full definition see here .
A: PurePlay® Instruments are designed for physical delivery to every Investor according to spot specifications through usual market channels for each mineral. All Investors are treated equally. The PurePlay® Instrument normally provides altenative settlement methods for Investors in those cases where Investors are unable or unwilling to take delivery. Thus Investors always have the option to take physical delivery but may chose other options in accordance with the needs of the Investor. For alternative delivery options see here.

A: PurePlay® Instruments are designed to be fully tradable. Producers may list the PurePlay® Instruments on a national or regional Exchange where they will trade like any other listed instrument. The Exchange would list bid and offer prices of buyers and sellers and will match buyers and sellers in the normal course. Producers may even decide to issue and sell PurePlay® Instruments directly to an Investor or Investors without listing the PurePlay® Instruments, using what is commonly known as the Over-The-Counter (OTC) market. PurePlay® Instruments issued in the OTC market are fully tradable but trading will be by mutual agreement between buys and sellers rather than on an Exchange.

A: Commodity ETFs would generally claim to be “Insolvency Remote” which would make it sound as if there are no credit risks in a commodity ETF. The reality of credit risk for commodity ETFs is that the commodity, say gold, is stored with vaulting facilities. That means the gold is not held by the ETF but by another entity. Commodity ETFs generally describe vault entities as “Custodians” and the gold would be stored with Custodians, who may also use sub-custodians, who in turn may be allowed to use sub-sub-custodians. Any loss of the gold at any of the custodians through fraud, theft, insolvency or any other means would generally just be deducted from the portfolio of the Investors. It follows that Investors have very real credit risk exposure on custodians and sub custodians and given that Investors seldom know who those custoduians are, would not even be able to accurately allocate or access the credit risk. The credit risk of a PurePlay® Instrument is known and is normally against a listed, multi-national commodity Producer with a known track record and known financial standing. Investors would therefore be able to make an informed credit assessment on all the PurePlay® Instruments which they hold or purchase. See also our articles section here for an in depth description of the ETF credit risk.

A: Yes it is possible to sell the commodity content of Proven and Probable Reserves where the mineral being sold is a fungible commodity. This aspect is comprehensively dealt with here.

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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