Conflict mineral readiness: what companies need to know

Canadian mining and metals companies’ corporate social responsibility is about to get a lot more interesting as an uptake in regulations and frameworks for due diligence on mineral supply chains in conflict-affected and high-risk areas emerge around the world. The goal of these newly introduced regulations and frameworks is to ensure responsible supply chain management so that so-called “conflict minerals” do not directly or indirectly contribute to regional conflicts in areas where armed aggression can lead to severe human rights abuses against workers and local people.

In an attempt to prevent mined minerals from fuelling conflict in the Democratic Republic of Congo (DRC), the US introduced a conflict mineral requirement in the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010. Section 1502 of the Dodd-Frank Act requires all US Securities and Exchange Commission (SEC) registrants – including any Canadian company listed on a US stock exchange – to disclose whether the minerals they source contribute to armed conflict.

By requiring companies using conflict minerals in their products to disclose their source, Section 1502 of the Dodd-Frank Act aims to dissuade companies from doing business with or sourcing minerals from illegitimate sources. In December 2011, the SEC completed its final phase of adopting the proposed disclosure policies outlined in Section 1502. Compliance is no longer an option. Companies must now disclose the use of conflict minerals annually, beginning no later than 260 days after the official enactment of Section 1502.

According to the Dodd-Frank Act, conflict minerals include any minerals containing cassiterite, gold, columbite-tantalite and wolframite and their derivatives from mining operations in the DRC and adjoining countries. The SEC estimates that upwards of 5,500 issuers currently use conflict minerals. Approximately 1,200 of these companies will need to prepare and file a conflict minerals report. In addition, thousands of companies known as conflict mineral consumers in the industrial, aerospace, healthcare, automotive, technology, retail and jewellery industries will be subject to this new regulation.

Earlier this year, the US State Department also endorsed the Organisation for Economic Co-operation and Development’s Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas as an acceptable set of guidelines by which companies can ensure to manage conflict minerals responsibly. The OECD guideline is a five-step risk-based due diligence regime for use by any company to assist them with mining and metals purchasing decisions and procedures. An OECD Supplement on Gold has been drafted and is anticipated for release in 2012.

The World Gold Council’s (WGC) World Gold Council Standard: Conflict-Free Gold is another mechanism by which mining and metals companies who are part of this member-driven association can assess whether their gold operations contribute to conflict; the standard is accompanied by a “Conflict-Free Gold” Chain of Custody scheme to ensure companies that are producing, transporting and refining gold meet standards that declare their product conflict-free gold. To be certified in conformance with the standard, gold companies will be required to undergo an independent third party audit. The WGC is also currently developing and pilot testing an “auditable framework” for the standards, which upon release will be a significant “must know” for CSR practitioners and corporate supply chain managers alike.

Companies operating in at-risk areas are advised to begin now to prepare for regulatory and industry conflict mineral standards. First steps include undertaking a conflict minerals readiness audit in order to assess supply chain risk as well as to assess internal controls and measures to effectively manage conflict mineral due diligence.

For mining companies whose production of these minerals comes from discrete projects, identifying and disclosing the use of conflict minerals should be straightforward. But for companies that mine minerals in one location and process them in another, disclosure becomes more complex. In these cases, identifying conflict minerals requires full supply chain traceability and record-keeping.

Conflict mineral due diligence isn’t just about meeting regulatory and market requirements; it’s about going beyond compliance to bringing about positive change in impoverished and conflict-stricken regions. And leading companies will be those who commit themselves to creating lasting social and economic legacies that encourage investment – rather than diverting investment in these high-risk areas.