Conflict Minerals: How the SEC requirements will affect mining companies
The SEC won’t require mining companies to disclose whether they mined tin and gold in African conflict countries, in a long-awaited ruling released this week. However, manufacturers will have to make such disclosures, and will likely require their suppliers, such as mining companies, to make the same disclosures.
“We do not believe that mining is manufacturing, based on a plain reading of the provision,” from the SEC final ruling. “We do not consider an issuer that mines or contracts to mine conflict minerals to be manufacturing or contracting to manufacture those minerals unless the issuer also engages in manufacturing, whether directly or indirectly through contract, in addition to mining.”
The SEC ruled that mining is not manufacturing, but it does not give mining companies a free pass from the disclosure of conflict mineral requirements. The de facto regulation of mining companies through the supply chain will require a complex analysis of that chain and an audit paper trail to prove to manufacturers that they aren’t supporting the killing of innocents in the Congo and other war-torn African states. Manufacturers of commonly used devices, such as smart phones and electronic notebook pads, use the so-called 3 T’s and G – tin, tantalum, tungsten and gold – in their manufacturing process. They are sensitive to a supply chain tainted by even any possible support of warlords who sell hundreds of millions of dollars of these minerals every year.
The SEC is a year late in implementing rules that were included in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The SEC was directed to establish annual reporting requirements for SEC registrants who manufacture, or contract to manufacture, products that contain conflict minerals that are necessary to the functionality or production of those products. Thomas Quadman, executive director of financial reporting policy of the U.S. Chamber of Commerce, recently wrote in an editorial on The Hill website that, “Congress was wrong to make the SEC a new vehicle to project foreign, social policy.”
According to reporter Peter Schroeder of The Hill, manufacturers unable to determine the source of their minerals will be allowed to describe the minerals as of "undeterminable" origin for two years. Smaller companies will have four years to use that designation.
Manufacturers are serious about not using conflict minerals. Apple pointed out the impact to the mining industry well when it stated in its Apple Supplier Responsibility 2012 Progress Report that, “Apple’s commitment to social responsibility extends to the source of raw materials used in the manufacturing of our products. We require that our suppliers only use materials that have been procured through a conflict-free process and from sources that adhere to our standards of human rights and environmental protection.”
Guidance follows current association guidelines
Based on a small sample of conversations with mining controllers and CFOs, we believe that there is little understanding of this regulation. Several CFOs were unaware of the topic while others were very concerned about what and how they will have to report to their customers. Nonetheless, mining companies will have to live with the politicizing of financial reporting requirements. Here’s how it is likely to work:
Affected companies will be required to disclose descriptions of the products manufactured, or contracted to be manufactured, that are not DRC conflict free; the entities that conducted the independent private sector audits in accordance with the standards established by the Comptroller General; the facilities used to processes the conflict minerals; and the efforts to determine the mines or locations of origin with the greatest possible specificity.
Because the SEC determined that mining is not manufacturing, mining companies publically traded in the U.S. will not be required to report the disclosures required under the Dodd-Frank Act. Still, all mining companies that mine the 3 T’s and G will be indirectly affected by the Dodd-Frank Act through the initiatives that have been undertaken by various manufacturing companies, their respective industry associations, and other organizations, since these mining companies are at the beginning of the supply chain.
Also in its final rules, the SEC decided to allow SEC registrants to follow the Organization for Economic Cooperation and Development’s (OECD’s) Due Diligence Guidance for Supply Chains of Minerals from Conflict-Affected and High-Risk Areas on a ‘safe harbor’ basis. These guidelines were developed through a multi-stakeholder process including the OECD, 11 countries of the International Conference on the Great Lakes Region, industry, civil societies, and the United Nations.
This is good news for SEC registrants in the manufacturing industry, as some of their widely-recognized industry associations have already developed policies and procedures which include, or contain elements of, the OECD guidelines. These include the Electronic Industry Citizenship Coalition’s and Global e-Sustainability Initiative’s Conflict Free Smelter Certification and the Responsible Jewelry Council’s Chain of Custody Certification programs. Additionally, many manufacturing companies have applied their industry association or OECD guidelines into their own internal supply chain policies and procedures. These manufacturing companies include industry giants Apple, Dell, Motorola Solutions, LG, Intel, GE, Boeing and Ford.
How it will work
Because it is the intention of the manufacturing industry to produce products that are conflict-free, more transparency and auditability will be required of every link in the supply chain. For mining companies this will mean providing documents to their customers – primarily smelters and refiners – that prove the minerals or metals remained conflict-free from the mine site to the locations where their customers accepted delivery.
Per the OECD guidance, mining companies should provide the following information to their customers:
(1) All taxes, fees or royalties paid to government for the purposes of extraction, trade, transport and export of minerals.
(2) Any other payments made to governmental officials for the purposes of extraction, trade, transport and export of minerals.
(3) All taxes and any other payments made to public or private security forces or other armed groups at all points in the supply chain from extraction onwards.
(4) The ownership (including beneficial ownership) and corporate structure of the exporter, including the names of corporate officers and directors and the business, government, political or military affiliations of the company and officers.
(5) The mine of mineral origin.
(6) Quantity, dates and method of extraction (artisanal and small-scale or large-scale mining).
(7) Locations where minerals are consolidated, traded, processed or upgraded.
(8) The identification of all upstream intermediaries, consolidators or other actors in the upstream supply chain.
(9) Transportation routes.
Additionally, the OECD recommends in the Supplement on Gold to its due diligence guidelines that gold mining companies should provide/perform the following:
(1) Assign a unique reference number to each output, e.g. bar of gold doré, or container of alluvial gold, and affix and/or imprint that reference number in such a manner that its tampering or removal will be evident.
(2) Adopt physical security practices over gold such as sealed security boxes for shipment in such a manner that tampering or removal of content during transport will be evident. In conflict-affected and high-risk areas, such physical security practices should be verifiable by appropriate and trusted third parties (e.g. customs authorities, independent auditors, Industry Programs or Institutionalized Mechanisms).
(3) Support the implementation of the principles and criteria set forth under the Extractive Industry Transparency Initiative (EITI).
So, even though mining companies publically-traded in the U.S. will not have to make the disclosures required by the Dodd-Frank Act —since mining companies do not ‘manufacture’ the minerals and metals that they extract—compliance by SEC registrants in the manufacturing industry will trickledown such that all mining companies that mine the “3 T’s or G” will have to have the procedures in place to help ‘prove’ to those manufacturing companies that the minerals and metals contained in their products are conflict-free.
About the author
Dan Edwards, CPA, is a manager of business advisory services in the Denver office of Hein & Associates LLP, a full-service public accounting and advisory firm with additional offices in Houston, Dallas and Orange County. He specializes in technical GAAP and SEC advisory services, as well as SOX 404 implementation services, and also leads the firm’s mining practice area. Edwards can be reached at [email protected] or 303.298.9600.