Commentary: The new US rules for ‘conflict minerals’ and their impact on miners

On Aug. 22, 2012, the U.S. Securities and Exchange Commission adopted a final rule establishing new disclosure and reporting obligations on companies whose products contain so-called “conflict minerals.” This new disclosure requirement will trickle down the supply chain, causing affected companies to demand detailed chain-of-custody information from suppliers, including mining companies.

This final conflict minerals rule comes nearly two years after legislation governing conflict minerals was passed by the U.S. Congress. The law was developed in response to concerns that mining profits in the Democratic Republic of the Congo were being used to finance armed conflict in the DRC and neighbouring countries. With bipartisan support in 2010, Congress passed section 1502 of the Dodd Frank Actdesignating the following as conflict minerals: cassiterite; columbite-tantalite (coltan); wolframite; derivatives of these aforementioned minerals, including tin, tantalum and tungsten; and gold.

The objective of the law is to force public disclosure of audited supply chain information resulting in a description that a product is either DRC conflict-free, or that it has not been found to be DRC conflict-free. While there is no formal SEC sanction for using such minerals, legislators expect that consumer pressure will ensure companies’ supply chains are conflict-mineral free.

Owing to the controversial nature of the law and opposition from some quarters of the business community, the final conflict minerals rule was delayed for nearly two years. In December 2010, a proposed conflict minerals rule was released, and public comments were solicited on the proposed rule. A roundtable discussion was held in October 2011 with industry stakeholders, who provided substantial feedback on the rule.

Contrary to initial fears, U.S.-issuing mining companies are excluded from the disclosure requirements where such companies engage solely in mining, without further manufacturing of the product after extraction. However, where U.S.-issuing mining companies engage in manufacturing activities directly or by contract, they will be fully subject to the disclosure requirements.

Owing to supply chain disclosure obligations, mining companies that are not U.S.-issuers are also likely to be affected by the rule. A company mining conflict minerals in the DRC or neighbouring countries (Tanzania, South Sudan, Rwanda, Burundi, Angola, Uganda, Republic of the Congo, Rwanda and Zambia) will likely be required to provide supply chain information if the mineral finds its way into the supply chain of an affected U.S. issuer.

Conflict minerals are omnipresent in consumer products today. Tin, occurring naturally as cassiterite, is used in tin alloys, tin plating, solders for joining pipes and electronic circuits. Five percent of the world’s tin supply is produced in the DRC. Tantalum, which occurs as coltan, is used in electronic components, including cellphones, computers, video game consoles and digital cameras, as well as an alloy for carbide tools and jet engine components. An estimated 15% to 20% of the world’s tantalum supply is produced in the DRC. Tungsten, which occurs as wolframite, is used in metal wires, electrodes and contacts in lighting, electronic, electrical, heating and welding applications. Gold is used in jewellery, electronic communications and aerospace equipment.

In contrast to the Sarbanes-Oxley legislation, whose impact was confined largely to the financial reporting and IT-aspect operations of companies, the conflict minerals rule will impact a relatively greater number of corporate functions, ranging from product design and development to sourcing and procurement, supply chain relationships, finance and IT.

Issuers are required to file for each calendar year, regardless of the company’s fiscal year. The first disclosure report is due on May 31, 2014, for the 2013 calendar year. U.S. issuers will be required to state in their annual SEC reports whether any conflict minerals in their products originated in the DRC, or an adjoining country. If so, that company will have to file a separate report describing the due diligence measures undertaken on the source and chain of custody of its conflict minerals.

If a company cannot determine whether the product financed or benefited armed groups, the issuer will be obliged to identify the products as “not DRC conflict-free.”

Implementing the reporting requirements may be delayed if issuers have difficulty tracking the supply chain and confirming the origin of the minerals they are using. Such issuers will have the option, for a limited time, of reporting that their products are “conflict undeterminable.” The time period is two years for large companies, and four years for small- and medium-sized entities. There is no small- and medium-sized company exemption.

In some cases, private industry groups have already developed their own voluntary due diligence processes tailored to the characteristics of their respective sectors. Examples include the Electronic Industry Citizenship Coalition (EICC), and Global e-Sustainability Initiative (GeSI) conflict-free smelter program audit protocols for gold, tantalum, tin and tungsten.

Members of the EICC and GeSI include Apple, Cisco, Best Buy, Sony, Toshiba, HP, Xerox, Microsoft, Verizon, RIM and Bell. Other industry groups — such as the Automotive Industry Action Group (including Chrysler, Ford, and GM), and the Aerospace Industry Association — have already contacted their suppliers to provide them with advance notice of the upcoming SEC conflict mineral rule reporting requirements.

Companies mining conflict minerals in the DRC and neighbouring countries should consider taking the following steps to ensure compliance with the rule, either for purposes of SEC disclosure themselves, or to meet requests from their direct or indirect customers in the supply chain: review company management systems and draft compliance policies as necessary; identify and assess risk in the supply chain, prepare supplier certifications and communications and revise standard form contracts as necessary; design and implement a strategy to respond to identified risks; identify proper independent third-party audit of supply chain due diligence; and review reporting procedures, and report on supply chain due diligence.

Whether the SEC conflict minerals rule can play an effective role in ending the DRC conflict remains to be seen. What is certain, however, is that the rule will add significant regulatory compliance costs to both producers and users of conflict minerals in many supply chains.

— Mark Sills and Jennifer Egsgard are partners at Sills Egsgard LLP, a Toronto law firm specializing in international trade and investment, and related regulatory compliance issues. Visit www.lexmercantile.com for more information.