Fungible mineral commodities trading company PurePlay Holdings received a very favourable value-added tax ruling from the South African Revenue Service earlier this month, which opens the door for PurePlay Instruments to be listed in South Africa.

The company addresses a number of voids in commodity markets, such as the need for investors to access commodity investments in a cost-efficient manner, particularly with regard to the logistics and storage challenges that such investments pose.

“The PurePlay Instrument, which complies with the Mineral and Petroleum Resources Development Act as well as the Precious Metals Act, offers a cost-efficient investment product across all fungible minerals, irrespective of bulk or market value,” says PurePlay CEO Peter Dawe.

“The cost efficiency is achieved without prejudicing the trading of the investment at or slightly above spot, excluding pricing for delivery risk,” says PurePlay executive director Sarel Oberholster, adding that the PurePlay Instrument is an investment in a commodity which is in storage, in the same way that gold and similar exchange-traded funds (ETFs) are investments in gold, platinum, silver or palladium.

“The benefit of the instruments to the mining industry worldwide is potentially enormous. The concept, which is provisionally patented globally, enables miners to sell and store minerals in an unmined form for up to ten years before delivery, be paid upfront and use the funds interest-free in their businesses,” says Dawe.

He adds that these benefits can be measured by applying the interest which would have been incurred to borrow the same funds, and compounding that interest for the duration of the instrument.

“Back-testing from 2015 to 1976 in the gold industry, for example, shows that a miner who had issued PurePlay Instruments in 1976 would be seven times more profitable by 2015 than its counterpart that, all other things being equal, had not used them,” he notes.

Dawe points out that, for the commodity investor, PurePlay Instruments are the only cost-free means of access, globally, to price movements in minerals.

All other investments, mainly through ETF, incur a storage and structuring cost because minerals by themselves do not generate income.

“For example, if an investor were to hold a gold ETF for ten years, the intial 100 oz of gold with which his investment had been started would have reduced to about 85 oz because of the payment of costs over ten years,” he explains, adding that, had the investor bought 100 oz in terms of the PurePlay Instrument, the ounces would have remained the same after the same period.

He cites that the investor does take a delivery risk on the PurePlay issuer but that there is a negligible risk that the issuer will fail to deliver at the end of the ten-year period. This risk is easily incorporated into the initial pricing of the PurePlay Instrument.

For this reason, the PurePlay concept is suitable only for large and medium miners with proven records of delivery, although the product can also be used in a structured way for small miners.

“Of course, ETFs are suitable only for high-value low-bulk minerals, such as gold and platinum, because with a low-value high-bulk mineral, such as copper, coal or oil, the cost of storage becomes prohibitive.”

Dawe notes that PurePlay has no such restriction on its use because it relies on the mineral being stored in the ground in which it is found, where storage is free to the miner and investor.

“Therefore, PurePlay Instruments are suitable for oil, coal, copper, natural gas, as well as gold, platinum, palladium, zinc, lead and all other fungible minerals on the periodic table.”

He cites that using PurePlay Instruments will demonstrate that the reserves of the large miners have a commercial value.

Currently, accounting conventions preclude them from recognising that value on the balance sheet, says Dawe. Nevertheless, the value does exist and the market will react to literally bringing an in situ asset “into the sunlight” by re-rating the shares.

Most large South African miners have a market cap which is only about 10% of the commercial value of their reserves.

Dawe adds that PurePlay, using only a modest amount of reserves and annual production, can enable all the large miners in South Africa to become self-financing over the medium term, wiping out more than R154-billion of debt.

“With the turmoil in the mining industry, there has never been a greater need for PurePlay and its stabilising influence on the balance sheets of the large miners,” he concludes.