OFFICE OF 

THE GENERAL COUNSEL 

Dear 

COMMODITY FUTURES TRADING COMMISSION 

2033 K STREET, N.W., WASHINGTON, D.C. 20581 

(202) 254-9880 

(202) 254-6265 FACSIMILE 

71D-822-9327 TELEX 

By letters dated September 16 and 30, 1988, and in 

subsequent telephone conversations you have requested, on behalf 

of your client, ••• ["the company"], that the staff of the 

Commodity Futures Trading Commission ("Commission") confirm that 

it will not recommend to the Commission that any enforcement 

action be taken against the company in connection with its 

issuance of certain notes which will offer a return in part 

indexed to the prices of copp~r, gold or silver. 

In your letters, you represent that the company is currently 

the copper producer in the United States, engaged in both 

mining and smelting operations. The company produces gold and 

silver as by-products of its copper production. In connection. 

with a refinancing, the company proposes to issue to the public 

certain notes, a portion of the return. of which will be ind~xed 

to the prices of copper, gold or silver. 

Specifically, ·you represent that the company proposes the 

issuance of three types of notes: Copper Indexed Senior 

Subordinated Notes ("Copper Notes"), Gold Indexed Senior 

Subordinated Nqtes ("Gold Notes"), and Silver Indexed Senior 

Subordinated Notes ("Silver Notes"). (These notes are 

hereinafter collectively referred to as the "Notes".) The 

company expects to issue betw'een $ ..• and $... of the Notes 

denominated in units of $1,000. The company currently intends to 

issue equal aggregate face amounts of each of the Copper Notes, 

the Gold Notes, and the Silver Notes. Each Note will mature 

approximately ten years from its issuance and pay interest 

semi-annually at an interest rate to be determined at issuance, 

but which will in no event be less than 35 percent of the market 

rate of interejt on comparable pure debt instruments issued by 

the company. l. Fifteen percent of the original amount of Notes 

1.1 You represent that the interest rate for comparable pure-debt 

(Footnote Continued) 
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outstanding may be redeemed at the option of the holders 

beginning at the end of the fourth year after issuance and at the 

end of each year thereafter. 

You further represent that the Copper Notes will pay their 

principal amount at maturity or upon redemption and an additional 

amount at the time of maturity or redemption based upon the 

settlement prices 'for a copper futures contract in the near month 

for the 20 days prior to the calculation (the "Copper Price"). 

The exchange and contract will be designated by the company prior 

to the issuance of the Notes andwill probably be the Comex Grade 

1 copper futures contract. Specifically, each $1,000 Copper Note 

will pay at maturity or upon redemption $1,000 plus, if the 

Copper Price at the time exceeds a reference price to be 

determined at the time of issuance, currently expected to be 

between $.90 and $1.00, an additional amount equal to the lesser 

of (a) the increase over $1,000 in the value of the number of 

pounds of copper which, valued at the reference price, would be 

worth $1,000 and (b) an amount that would result in a 20 percent 

compounded annual rate of return on $1,000 to the dite of 

maturity or redemption from the commodity feature.~ 

The Gold Notes and Silver Notes will be identically 

structured, with the Gold Notes currently expected to be based on 

two troy ounces of gold valued initially at $500 per troy ounce 

per $1,000 Note, and the Silver Notes currently expected to be 

based on 133.33 ounces of silver valued initially at $7.50 per 

.ounce per $1,000 Note. Each Note will therefore return its 

(Footnote Continued) 

securities issued by the company is currently estimated at 14 

percent. Under these circumstances, the company envisions the 

effective interest rate on the Copper Notes, Gold Notes and 

Silver Notes, excluding the commodity-based component, to be 10 

percent, 7~75 percent and 8.75 percent, respectively. 

~/ In this regard, you have provided the following example: 

Assume that the Copper Price at the time of maturity or 

redemption is $1.50 per pound and $.95 is selected as the 

reference price. The reference copper amount would be 1,000 

divided by .95 or 1,052.63. The holder would receive 1,052.63 

times $.55 or $578.95 as the commodity-related component plus 

$1,000, i.e., $1,578.95 in respect of his $1,000 principal amount 

Note. The maximum payment a holder may receive will vary 

depending upon the year the principal payment is made. The 

maximum commodity-related payment upon redemption in year 4 would 

be $1,074 (which implies a $1.97 per pound Copper Price at the 

time) and the maximum commodity-related payment at maturity in 

year ten would be $5,192 (which implies a $5.88 per pound Copper 

Price) • 
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original principal amount with interest without regard to 

prevailing commodities prices. Each Note will pay an additional 

amount, which in all events will not exceed an annualized, 

compounded 20% rate of return, in the event that commodity prices 

at the time of maturity or redemption exceed the initial 

reference prices noted above. 

You indicate that the company intends to register the Notes 

under the Securities Act of 1933, as amended, in connection with 

offering them to.the public. The underwriter has informed the 

company that while the minimum permissible purchase will be 

$1,000, it anticipates that the overwhelming majority of sales in 

the initial public offering will be in blocks in excess of 

$200,000. The company .intends to list the Notes for trading on 

either the New York Stock Exchange or the American Stock 

Exchange. 

The Commission, in its Advance Notice of Proposed Rulemaking 

Relating td the Regulation of Certain Hybrid and Related 

Instruments ("Advance Notice"), 52 Fed. Reg. 47022 (Decembe.r: 11, 

1987), sought comment on a proposed regulatory framework which 

would exempt from Commission regulation specified instrum~nts 

having a commodity option-like component. In particular, the 

Commission proposed to establish an exemption for a class of 

hybrid instruments that are predominantly debt instruments and 

which possess only incidental commodity option elements. In view 

of the fact that the Advance Notice remains pending and that the 

Commission has not reached a final determination with respect to 

the proposals set forth therein, the staff believes that it is 

appropriate, in limited circumstances such as this, to address 

certain instruments on a case-by-case basis. In this regard, in 

your letter you compare the company and the Notes with regard to 

each of the following criteria set forth in the Commission's 

Advance Notice. 

(1) Term to Maturity 

Each Note will mature approximately 10 years from its date 

of issuance, and no portion thereof will be redeemable by its 

holder until four years from its issuance date. The commodity 

component of the Notes is not detachable from the Notes and 

therefore matures at the same time as the Notes. Accordingly, 

the minimum three-year term proposed by the Commission will be 

met. 

(2) Commodity-Based Return 

The Commission has proposed that any exemption based on 

incidental commodity-option elements be conditioned upon 

compliance with a requirement that the hybrid instrument have a 

minimum annual yield or return independent of its 

commodity-related component equal to at least 35 percent of the 

I 

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estimated annual yield at the time of issuance for a comparabl~ 

pure debt or depository instrument and have no more than the 

maximum average potential return on its commodity-related 

component of 20 percent, on an annualized basis, of the total 

'principal or face amount of a hybrid instrument. 

You represent that the non-commodity based and 

commodity-related returns of the proposed Notes meet both of 

these tests. In particular, you re~resent that each Note will 

pay interest semi-annually at an annual rate significantly 

exceeding 35 percent of the estimated annual yield at the time of 

issuance for comparable pure-debt notes issued by the company. 

In the current market environment, the company envisions the gold 

Notes paying interest at 7.75 percent per year, the Copper Notes 

paying interest at 10 percent per year, and the Silver Notes 

paying interest at 8.75 per9ent per year. These rates translate 

roughly into 55 percent, 71 percent and 63 percent of the current 

estimated 14 percent yield on comparable pure-debt notes issued 

by the company. You also represent that the maximum potential 

return on the portion of each Note indexed to the price of gold, 

copper or silver is capped at 20 percent of the principal amount 

of the Note on an annualized basis with annual compounding. 

(3) Line of Business 

You represent that the principal line of business of the 

company is producing copper and, as by-products, .gold and silver. 

The company has been in the business of producing copper, gold 

and silver for ••. years and is currently the •.. producer of 

copper in the United States. As a result, the commodity-based 

portion 1 of the return on the Notes is related to the company's 

principal line of business. 

(4) Otherwise Regulated Standard 

You represent that both the company and the Notes will be 

regulated by the Securities and Exchange Commission ("SEC"). The 

company's common stock is registered under the Securities and 

Exchange Act of 1934 (the "1934 Act"). Therefore, the company is 

subject to the rules promulgated by the SEC under the 1934 Act 

including reporting rules, such as those requiring the filing of 

quarterly reports, annual reports and proxy material. The 

company's common stock is quoted on NASDAQ. Further, a 

Registration Statement on Form S-1 with respect to the offer and 

sale of the Notes will be filed with the SEC under the Securities 

Act of 1933 (the "1933 Act"). Each prospective purchaser of 

Notes will receive a prospectus that complies with the disclosure 

requirements of the 1933 Act and discloses, among other things, 

the risks related to the commodity-indexed portion of the Notes. 

Furthermore, the Notes will be offered by an underwriter that is 

registered with the SEC as a broker-dealer and is a member of the 

National Association of Securities Dealers Inc. and the New York 
5 

Stock Exchange. Finally, the company interids to seek a listing 

for the Notes on the New York Stock Exchange or the American 

Stock Exchange. 

(5) Marketing and Disclosure 

The company represents that the Notes will not be marketed 

to the public as having the beneficial characteristics of 

commodity options except as may be necessary to disclose fully 

the operation and financial consequences of the Notes. 

(6) Special Calls 

You represent that the company agrees to submit to special 

calls from the Commission for information relating to the 

issuance of the Notes, the matters addressed by your no-action 

request and compliance with the conditions upon which any 

no-action position is based. 

(7) Net Worth and>Cover 

In the Commission's Advance Notice, the Commission proposed 

to condition any exemption on compliance with a requirement that 

the issuer have at least $100 million of net worth. That notice 

also proposed a cover requirement to ensure performance of the 

issuer's commodity-related obligations under a qualifying hybrid 

instrument. 

You represent that the company's net worth is currently 

approximately$ ..• and the refinancing of which the issuance of 

the Notes is a part is not expected to reduce the company's net 

worth. Moreover, the company int~nds to maintain a net worth of 

at least$ ... during the term of the Notes. 

You also represent that the company will maintain cover for 

the commodity component of the Notes equal to the greater of its 

current obligations to pay the cash value of the commodity 

component of the Notes or the maximtrm average annual amount of 

such obligations. 'You indicate that such cover may be in the 

form of physical copper, gold or silver, including reserves or 

long-term tolling contracts or in the form of futures contracts 

or options on futures contracts. You represent that the company 

has current proven/probable copper re.serves as of December 31, 

1987 of ••• billion tons of ore which, based on estimated grade 

and recovery rates which the company believes to be reasonable, 

would yield approximately .•• billion pounds. You have 

calculated that ••• pounds of copper would cover the$ ... million 

face amount of Copper Notes, assuming a $.95 per pound copper 

reference price. 

The company represents that its copper reserves will yield 

copper concentrate from which approximately ••. troy ounces of 
6 

gold will be recovered in the smelting and refining process, and 

that over the next ••. years it expects to recover approximately 

••• additional troy ounces of gold under a ••. agreement with 

Gold Notes having a$ ••• million face amount would require 

cover of ••• troy ounces of gold, assuming a gold reference price 

of $500 per troy ounce. The compa~y similarly represents that 

its copper reserves will yield copper concentrate from which 

approximately ••• million ounces of silver will be recovered in 

the smelting and refining process, and that over the next ••• 

years it expects to recover approximately ••• million additional 

ounces of silver under the ••• agreement with •••• Silver Notes 

having a$ ••• million face amount would require cover of ••• 

ounces of silver, assuming a silver reference price of $7.50 per 

ounce. 

(8) Minimum Unit Price 

The Commission, in its Advance Notice, proposed a $20,000 

minimum unit price for the sale of hybrid option instruments 

qualifying for exemptive treatment as a means of protecting 

customers in an off-exchange environment. However, you have 

indicated that the Notes will be denominated in $1,000 units in 

order to facilitate their trading on a national securities 

exchange. In this regard, the staff believes the listing and 

trading of the Notes on a national securities exchange and the 

registration, reporting and underwriting requirements of the 

securities laws, as noted above, adequately address the purpose 

of customer protection in the circumstances of this offering. 

Thus, the staff is of the view that in the circumstances 

presented by this offering, an exception to the minimum unit size 

requirement proposed in the Advance Notice is warranted. 

Accordingly, based upon the representation in your letters 

and your conversations with the staff, the understanding that 

although denominated in units of $1,000 the Notes will be 

registered under the Securities Act of 1933 and initially offered 

pursuant to an underwriting under applicable law, and the 

significant net worth and reserves of copper, gold and silver 

owned by the company, the staff has concluded that.the proposed 

offering is not inconsistent with the general conditions for 

granting exemptive relief articulated in the Advance Notice. 

Therefore, the staff will not recommend to the Commission any 

enforcement action under Section 4c of the Commodity Exchange Act 

based upon the issuance of the proposed Notes by the company. 

This position does not excuse the company from complying 

with any otherwise applicable provisions of the Commodity 

Exchange Act nor does it address any other instrument or proposed 

instrument. Any different, omitted or changed facts or 

conditions might r~quire a different conclusion. It should also 

be noted that this position is that of the staff and is not 

binding upon the Commission and that any subsequent determination 
7 

by the Commission with regard to the rulemaking proceeding 

initiated by the Advance Notice may require a reconsideration of 

this staff position. 

Sincerely, · 

Marshall E. Hanbury 

Co-Chairman 

Off-Exchange Task Force 

Paula A. Tosini 

Co-Chp.irman 

Off-Exchange Task Force