Ethical mineral sourcing

2019-06-18T14:27:00+00:00 June 18th, 2019|Business|

Ethical sourcing of minerals used in electronic equipment has become a hot topic of late, write Nicolaas C. Steenkamp and Breton Scott.

In recent years, there has been an increase in the requirements of sourcing ore from artisanal and informal small-scale miners. This mostly relates to ensuring that the material was not obtained through child labour or forced mining to fund conflicts.

The passing of the Dodd-Frank Act relating to tin, tungsten, tantalite, and gold (3TG) mined in the Great Lakes region of Central Africa, states increased scrutiny by the London Metals Exchange (LME), focusing on tin, cobalt, and potentially, copper, sourced from the Democratic Republic of the Congo (DRC) and hence, broadening of the definition of ‘conflict’ or ‘blood’ diamonds by the Kimberly Process (KP).


The DRC suffered an extended period of conflict and unfortunately became infamous for producing conflict minerals and gemstones, leading to the coining of terms such as ‘blood diamonds’ and ‘conflict minerals’. In recent years, the concern has moved from gemstones to critical metals, specifically cobalt, and the use of forced and child labour.

Cobalt is considered a critical mineral for all modern electronics, particularly in the rechargeable battery sector. The other minerals produced in the so-called Great Lakes of Africa, namely tin, tungsten, tantalum, and gold, have now been included in the focus of social awareness groups. This has motivated several large multinational companies to demand proof that the minerals and materials supplied and used by them in the production of their goods are considered conflict-free.

Conflict in the Central African Republic exposed widespread smuggling and links to conflict, and Zimbabwe’s diamonds documented hidden links that have funnelled significant diamond revenues to the partisan army and intelligence services.

South American countries such as Peru and Columbia have also been cited as sources of conflict gold. The Southeast Asia region, in turn, is known for conflict gemstone smuggling.

Industry requirements

Section 1502 of the Dodd-Frank Act addresses conflict minerals by setting out requirements for due diligence, reporting, and public disclosure, and is designed to ensure accountability and discourage companies from doing business in ways that ultimately support exploitation and finance conflict. It affects the DRC and all its neighbours, including Angola, Burundi, Central African Republic, Republic of Congo, Rwanda, South Sudan, Tanzania, and Zambia.

All parties subject to the Act are required to file a Specialised Disclosure Report (Form SD) and depending on the origin of their conflict minerals or level of determination, issuers may need to submit a Conflict Minerals Report (CMR). This reporting can be a complementary output of a third-party audit process.

The Independent Private Sector Audit (IPSA) of CMRs must be conducted in accordance with the requirements of the Generally Accepted Government Auditing Standards (GAGAS) as established by the US Government Accountability Office (GAO).

The London Bullion Market Association (LBMA) has issued the LBMA Responsible Gold Programme based on anti-money laundering principles as well as the OECD Due Diligence Guide’s five-step framework for risk-based due diligence. The London Bullion Market’s Responsible Gold Guidance Sourcing Programme is mandatory for all of its accredited refiners. The companies are audited annually under the programme and are required to report publicly. It requires the companies to securely record data on brand, origin, custody, and location on a global platform, with blockchain seen as a possible solution.

The new LBMA guidelines now also call for regulation of the safety and environmental factors associated with the sourcing of the gold from small-scale or artisanal sources. The seriousness of enforcing these requirements was demonstrated in May 2018 when Elemetal, previously one of the biggest US refiners, was sentenced on charges linked to illegally mined gold from Peru.

The Responsible Jewellery Council (RJC), an international, not-for-profit organisation established to reinforce consumer confidence in the jewellery industry, initiated its Chain-of-Custody (CoC) Standard and supporting documents for the precious metals supply chain. This called for two main requirements: conflict-free as a minimum, and responsibly produced at each step of the supply chain.

Conflict-free diamonds

The KP is a binding agreement that prevents conflict diamonds from entering the mainstream rough-diamond market. The current format of the KP applies to only rough diamonds, allowing stones that are fully or partially cut and polished to fall outside the scope of the initiative.

The LME is reviewing its requirements to ensure that no metal traded on the bourse has links to child labour, conflict, or corruption. Copper producers that buy from the DRC will be categorised as higher-risk suppliers, alongside manufacturers of tin and cobalt (the changes, however, have not been made public yet). The designation will mean that copper producers could be removed from the LME’s list of deliverable brands unless a third-party auditor signs off on their sourcing standards. While there are no LME-listed copper brands originating from the DRC, smelters in neighbouring Zambia that import semi-processed ores, known as concentrates, from the DRC, may need to carry out audits.

The United Nations Guiding Principles on Business and Human Rights make it clear that companies have a responsibility to ensure that they do not finance conflict or human rights abuses. Supply chain due diligence is the internationally accepted way through which companies can meet this responsibility.

A practical standard has been developed by the Organisation for Economic Cooperation and Development, which covers diamonds, gold, tin, tungsten, and tantalum. The five-step process can basically be summarised as:

  • Establish strong company management systems;
  • Identify and assess risks in the supply chain;
  • Design and implement a strategy to respond to identified risks;
  • Carry out independent third-party audits of refinery/smelters due diligence practices; and
  • Report annually on supply chain due diligence.

Independent auditing

As regulatory deadlines approach, organisations need to ensure that their conflict minerals due diligence systems are effective and meet requirements. A review of due diligence systems is to identify any gaps between organisations’ existing systems and the recommendations outlined in the OECD Due Diligence Guidance, or a specific industry framework, such as the EICC CFSI Checklist. Impartial audits and certification ensure consistency, accuracy, and reliability and demonstrate the highest level of commitment

Associated costs

ITSCI was introduced after the 2010 Dodd-Frank legislation was drawn up in response to the global financial crisis and required US companies to vet their supply chains. The scheme has provided a way for companies to continue using minerals from the designated countries.

These initiatives, however, come with a price tag. The current cost associated with a mine being a member of the scheme ranges between USD130 and USD180 per ton, depending on the mineral. Small-scale or artisanal miners incur about USD3.5 per kilogram. The main criticisms against the current system used by the ITSCI is that it does not review the traceability cost, which is becoming an increasing burden to the participants. The only concern that stops some of the Rwandan miners from joining other traceability programmes, for example, is whether or not the end buyers will recognise those schemes.

The industry has expressed concerns that the responsible-sourcing efforts could result in a disconnect in pricing between audited and unaudited brands. The industry is also keen to avoid a mass delisting if producers are not able to complete the reviews before a planned deadline.

The introduction of the concept of the value stack will have a significant impact on the industry in the affected countries. The value stack will distribute the cost for implementing and operating the system, the lowest cost being incurred by the primary producers of the ore and increasing the contribution to higher-end users who want to ensure that their product is certified as conflict-free.

Practical applications

The process combines ground visits and spot checks to ‘assess and verify’ the responsible practices of counterparties. This can be done by the independent consultant and substituted by the use of drone-based monitoring.

Firms will use a platform to tag and trace minerals and gemstones mined in conflict areas as they go through the supply chain, as opposed to manual tracing systems, which rely on paperwork. Unique tags are electronically generated from various mining sites, which will act as an online record, tracing the minerals from the source to refinery. The system of bagging and tagging metals is designed as a guarantee that the minerals in question are unconnected with conflict, child labour, or other human rights abuses.

The system can be supplemented with technology such as facial recognition and a database that captures geographical longitudes and latitudes, and geochemical characteristics, among other aspects. This type of system, based on blockchain platforms, generates an open, distributed ledger that can record transactions along the value chain. User-friendliness is another consideration, such as smartphone applications to record the tag and trace the minerals or gemstones as it progresses through the system. Companies can trace metal even as it is processed into intermediate products and mixed with other raw materials.


A number of proof-of-concept blockchain platforms are being developed by the minerals and mining industry. A global standard platform still needs to be developed, accepted by industry, and the use thereof implemented. The diamond and gold industries are taking the lead in this regard. De Beers has developed a blockchain platform that is intended as a digital certificate, created by Tracr, for each diamond registered on the platform and storing its key attributes and transactions. It will enable retailers to provide consumers with confidence that the diamond is natural and conflict-free and has been tracked across the value chain.

The main advantage touted for the use of blockchain platforms is that they will change the current model of incurring traceability costs, shifting it from miners to the end users. Provisional surveys and studies conducted have shown that there is more demand for traceability higher in the value chain among users of the minerals and that end consumers would be willing and able to pay to ensure that the product is conflict-free. This will have a major impact on small-scale and artisanal buyer companies downstream who, to date, have had to shoulder a larger portion of the cost with little value added for them.

Purchasing from artisanal miners

There are several models for the purchase of minerals and gems for artisanal miners. The two most popular options are: establishing co-operatives for the artisanal miners that can sell to the larger companies, or establishing purchase centres at mines.

The cheapest option is done by organising artisanal miners into legal business entities, such as co-operatives, and providing them with the required training. It is beneficial to cluster these operations geographically into units of five to 10 operations and assign an engineer and a health and safety officer to each cluster. This is followed by creating a central buying agency that will legally buy from these miners and offer them market-related prices.

Incentives related to enlisting artisanal miners into co-operatives will also facilitate compliance with regulations. As a case study: In La Llanada, Colombia, members of the Coodmilla mining co-operative were paid the equivalent of USD8 for a gram of guideline-compliant gold and USD6 for a non-compliant gram in 2018. With the premium, they have been able to fund health, nutrition, and work training programmes.

The second option is to establish a purchase centre and buy directly from the artisanal miners. It is a more reliable system, but entails additional start-up costs. These costs include the security (both active and passive), the registration system of the accredited artisanal miners, testing and weighing equipment, shipping package material and tags, along with computers and internet connection. Running costs are related mainly to staff and transport.

Bowline Professional Services offer auditing and consulting services to meet industry requirements. Auditing of sourcing ore can be done to demonstrate compliance with the OECD’s responsible-sourcing guidelines. Bowline Professional Services also offer consulting services to meet industry best practices and standards to establish provenance of purchases of ore concentrates or gems from artisanal or informal small-scale miners.

Consultation services include:

  • In-loco inspections and audits of mining and purchase sites;
  • Guidance on passive and active monitoring of mining activities;
  • Trade-offs for identification systems, including biometric, for registration of artisanal sellers;
  • Scrutiny on selection of security measures and companies for buyer centres and stockpiling warehouses;
  • Evaluation of active and passive infrastructure security;
  • Selection and training in use of geochemical testing instruments to determine grade of ore material or concentrates and sorting, as well as determining potential provenance of ore;
  • Assistance on selection of applicable blockchain platform and databases;
  • Guidance on monitoring methods, from stockpile and packing area and along the transport route to final destination;
  • Selection of tamper-proof seals and RF tags; and
  • Periodic audit and monitoring reports.

About the authors

Breton Scott has over two decades of post-qualification experience in the mining and project engineering industry. He has been involved in a variety of activities, ranging from mine operations, project management, mining and rock engineering, mineral asset valuations, due diligences, EPCM contracts, and related feasibility studies.
Nicolaas Steenkamp has a decade and a half of post-qualification experience in the geological and geotechnical industry. He has been involved in various activities, including exploration, geochemistry, geological and geotechnical, desktop studies, due diligence, EPCM contracts, and related feasibility studies.