A new Thomson Reuters white paper on conflict minerals and the supply chain brings
clarity to an area that has, in the past few years, become surrounded by regulatory rules, guidelines, and initiatives, and explains how these changes and proposals are affecting the gold supply chain.
A closer look at gold
The gold mining industry currently produces approximately 3,155 tonnes of mined gold per annum. This may seem paltry tonnage by comparison with the 63 million tonnes of annual aluminium production, for example, but at current prices, the value of this annual production of gold amounts to $108 billion, compared with aluminium’s $94 billion.
Gold refining is a multiple of that tonnage, reflecting not only primary refining (i.e., from the mine gate), but the recycling of scrap from jewelry and the electronics sectors in particular, process scrap (often termed “new scrap”) from findings, sweepings, etc. in the manufacturing process, plus the re-melting and re-refining of large London Good Delivery (LGD) bars into smaller, higher-purity investment products, anything from a gramme up to a kilo, and usually in 99.99% fineness (“four nines” or “4 9’s”).
The industry is particularly secretive, with a number of refiners refusing even to divulge their capacity, let alone their turnover, but what we can say with confidence is that the amount of gold refined or re-refined in any one year substantially exceeds the tonnage that is mined in any one year.
The concept of “conflict minerals” (currently tin, tungsten, tantalum and gold) grew in the wake of the genocide in the Democratic Republic of the Congo and Rwanda in 1994. The primary legislation is Section 1502 of the Dodd-Frank Act 2010 in the United States, aiming to minimise the extent to which the commodities trade aided the financing of armed groups while continuing to source legitimately from the Democratic Republic of the Congo (DRC) and those with which the DRC shares an internationally recognised border.
The role of refiners
Refiners have to be actively involved in due diligence in terms of their sources of supply, “Third Party Risk” and “Know-Your-Customer.” They are not only responsible for ensuring their sourcing is compliant with Dodd-Frank, but also with educating their suppliers and customers about the importance of being compliant with Dodd-Frank and the OECD Guidelines.
The World’s Major Producing, Consuming and Refining Countries
How refiner attitudes differ across the world
Europe and North America
In the majority of cases tend to be operating to the highest standards. The majority of European refiners have commented that they have stopped taking metal from the conflict region of Africa entirely and more than one has stopped taking metal from Africa at all. At least one refiner goes to all new mines before signing any agreements and to existing operations at least annually.
Hong Kong (where refining is largely recycling) regulations are in line with Europe and are much stricter than the mainland; one refiner is of the view that small refiners might well struggle to survive under the regulations, however. In China, the government, embracing its role as a UN Security Council Permanent Member, has expressed support for the OECD guidelines. While measures are widely promoted by government authorities, the regulations are not being strictly enforced and implemented within the country.
Little progress to date, reflecting the country’s dependence on imported bars to meet demand, which are largely routed through government-designated banks and nominated agencies. There is a lack of initiative from the government; the OECD has stated its intention to work closely with the government and raise awareness. The market is also changing, with ~30% of domestic supplies now coming through doré. These are undermining small refiners who are finding it difficult to source gold efficiently.
America, Latin America and Africa
Exhibit a wide spectrum of adherence (or lack thereof) to compliance best practice. “Agents” in parts of Africa are not always vetted fully, while some illegal material is coming out of Peru and some registered barrequeros in Colombia appear to be skirting the regulations. There are suggestions that some operators in a number of other Latin American countries are also using questionable practices. Western firms that source for ore or doré in Latin America are subject to stringent codes; companies in the United States, for example, have to ensure all their counterparties sign the AML form that is governed by the USA PATRIOT Act.
Money remains the ruler
One key conclusion is the fact that money remains the ruler here and the playing field is not level. This is a cause of active concern within the refining industry.
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