ETF Securities has filed paperwork with the SEC for a “ETFS Physical IM Basket ETF.” An ETFS Physical IM Basket Share is a single Share comprised of a fixed weighting of each Metal as shown in the table below. The table also shows the proportion of a Basket Share that each Metal would have represented by value as at [_________] [January] 2011. As the net assets per Share and Price of each Individual Share will change independently of each other the proportion by value represented by each Metal in the Basket Shares will also change over time.
Metal Weighting of Individual Metals (Tons)
Aluminum is the third most abundant element in the Earth’s crust, and weighs about one-third as much as steel or copper. It is malleable, ductile, easily machined and cast, and has excellent corrosion resistance and durability. Aluminum is used in transportation (automobiles, airplanes, trucks, railcars, marine vessels), packaging (cans, foil), construction (windows, doors, siding), consumer durables (appliances, cooking utensils), electrical transmission lines, and machinery. The primary raw material used for aluminum production is aluminum ore, most commonly known as bauxite. Bauxite, which occurs mainly in tropical areas, is refined into alumina and then electrolytically reduced into aluminum metal. Two to three metric tons of bauxite is required to produce one metric ton of alumina; two metric tons of alumina are required to produce one metric ton of aluminum metal.
Copper is one of the most widely used industrial metals because it is an excellent conductor of electricity, has strong corrosion-resistance properties, and is very ductile. It is also used to produce the alloys of brass (a copper-zinc alloy) and bronze (a copper-tin alloy), both of which are far harder and stronger than pure copper. Electrical uses of copper including power transmission and generation, building wiring, telecommunication, and electrical and electronic products account for about 75 percent of total copper usage. Copper is biostatic, meaning that bacteria will not grow on its surface, and is therefore used in air-conditioning systems, food processing surfaces, and doorknobs to prevent the spread of disease. Building construction is the single largest market for copper, followed by electronics and electronic products, transportation, industrial machinery, and consumer and general products.
Lead is soft, ductile, and highly resistant to corrosion. It has been used for more than 7,000 years and is easy to extract, usually being found in ore with zinc, silver, and copper. Lead’s high corrosion resistance makes it ideal for buildings; the high density makes it an effective barrier to radiation in hospitals and helps reduce noise in factories as well as in ships. More than 50 percent of lead’s end use is for lead-acid batteries to provide power in vehicles and emergency power. At least three-quarters of all lead used goes into products which are suitable for recycling and the recovery of lead from scrap requires much less energy than extracting from ore, which is why lead has the highest recycling rate of all the common non-ferrous metals. Over 50 percent of lead consumed is derived from recycled or re-used material.
Nickel is a hard, malleable, ductile metal that can take on a high polish. Nickel is also a fair conductor of heat and electricity. Approximately 65 percent of nickel is used to manufacture stainless steel and 20 percent in other steel and non-ferrous (including “super”) alloys, often for highly specialized industrial, aerospace and military applications. About 9 percent is used in plating, and 6 percent in other uses including coins and a variety of nickel chemicals (e.g.,rechargeable batteries). Nickel plating techniques are employed in applications such as turbine blades, helicopter rotors, extrusion dies, and rolled steel strip.
Tin has been used in the production of bronze for at least 5,500 years. Tin is soft, pliable, resistant to corrosion and does not easily oxidize in the air. Therefore, it is widely used to coat other metals. The other important properties of tin are its low melting point, attractive appearance and the ability to readily form alloys with most other metals to create useful materials. Because of the softness of tin, it is seldom used in its pure form and is mainly combined with other metals. The end uses of tin are mainly solders (50 percent), tinplate (18 percent), and chemicals (14 percent).
Zinc is the 24th most abundant element in the earth’s crust. Zinc is never found in its pure state, but is rather produced from ores (primary zinc), or from scrap and residues (secondary zinc). Approximately three quarters of all zinc is consumed as metal, mainly as a coating to protect iron and steel from corrosion (galvanized metal), as alloying metal to make bronze and brass, as zinc-based die casting alloy, and as rolled zinc. The remaining quarter is consumed as zinc compounds mainly in the negative electrode in dry cell (flashlight) batteries, in the zinc-mercuric-oxide battery cell typically used in watches, cameras, and other electronic devices, and as an antiseptic ointment in medicine. Zinc is also a necessary element for proper growth and development of humans, animals, and plants; it is the second most common trace metal, after iron, found naturally in the human body.
The investment objective of each Fund is for the Fund’s Shares to reflect the performance of the price of the physical Metal represented by the Fund, less expenses and liabilities. The Shares are intended to mirror as closely as possible the performance of the price of a particular physical Metal, and the value of a Fund’s Shares relates directly to the value of the Metal held by that Fund less the Fund’s liabilities (including estimated accrued but unpaid expenses). An investment in physical Metal requires expensive and sometimes complicated arrangements in connection with the assay, transportation, warehousing and insurance of the physical Metal. Although the Shares will not be the exact equivalent of an investment in physical Metal because the Warrants (and Warehouse Receipts) represent only the ownership and possession of Metal and do not reflect the expenses associated with the operation of the Fund, they provide investors with an alternative that allows a level of participation in the physical Metal market through the securities market.
Each Fund Share will be backed by physical Metal evidenced by Warrants (or in some cases Warehouse Receipts). Each Warrant specifies the location of the Metal it evidences, which can be in any one of the [___] LME Warehouses across 39 global locations. To create a Creation Unit, Authorized Participants may deliver any Warrant that is admitted for settlement in LMEsword, meets the requirements in the applicable Authorized Participant Agreement, and does not breach the Proscribed List. The Proscribed List outlines the characteristics (e.g., jurisdiction) of the types of Warrants accepted by the Trust for purposes of Creations. The Trust expects that it will receive Warrants that trade with the lowest premium in the “over the counter” market (so-called “cheapest to deliver”). Conversely, the Trust expects to deliver Warrants for redemption without regard to any potential premium attached to such Warrants.
Metal can be stored anywhere, but storage locations are determined by proximity to production, and/or transport. The majority of Metal is (and all of the Trust’s Metal will be) stored in LME Warehouses. The LME has over 500 approved warehouses in 39 locations throughout the U.S., Europe, the Middle and the Far East. Criteria for choosing locations for LME Warehouses include appropriate fiscal and regulatory systems, service by a good transport network, a tax regime that allows for storage without payment of duty and political and economic stability. Holders of Warrants must have clear title to and be able to take possession of the underlying Metal in the event of the insolvency of the LME Warehouse. Taxation on the storage and transfer of Metal is an important criteria in determining the location of LME Warehouses and to that end, the LME conducts due diligence to ensure that jurisdictions in which LME Warehouses are located allow for the storage of Metal indefinitely in a secure customs warehousing regime without liability for any duties prior to customs clearance (including any domestically produced Metal or any Metal that has previously cleared customs), do not impose any tax liability on transactions for Metal held in LME Warehouses, do not require the determination of ownership of the Metal being stored and do not impose any taxes on storage costs. Each LME Warehouse must enter into a Warehouse Agreement with the LME that requires the LME Warehouses to maintain minimum levels of insurance and appropriate security. Each LME Warehouse is subject to at least one independent audit a year relating to its stock and its storage facilities.
LME Warehouses may only store On Warrant Metal in areas that comply with LME Rules and are subject to LME supervision; such areas may also contain Off Warrant Metal. Off Warrant Metal may also be held in areas that are not subject to the LME rules or supervision.
Each Fund’s ordinary recurring expenses will be composed of the Sponsor’s Fee, Storage Fee, and Insurance Allowance. Please see “Description of the Shares” for further details on how such fees are calculated and deducted from the Metal Entitlement of each Creation Unit and paid to the LME Warehouses and the Insurance Underwriters, respectively.
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