An interesting conflict - Conflict Minerals Rule reports due

Materials World magazine
9 Apr 2013

The US Government’s Conflict Minerals Rule, issued in August 2012, will have an inevitable effect on the supply of these materials. With the first deadline for filing Conflict Minerals Reports just over a year away, affected companies must consider their position now. Dynda Thomas, partner at Squire Sanders, reports.

On 22 August 2012, the US Securities and Exchange Commission (SEC) issued the long-awaited Conflict Minerals Rule. Stemming from section 1502 of the Dodd-Frank Wall Street Reform and Consumer Act, the Rule is intended to highlight the use of minerals sourced from countries where extraction and sale often finances extraordinary violence, for example in the Democratic Republic of Congo (DRC) and surrounding countries.

The Conflict Minerals Rule requires any US reporting company to publicly disclose its use of any conflict minerals that are necessary to the functionality or production of a product it manufactures or contracts to be manufactured. At the very least, if a company has necessary conflict minerals, it will be required to disclose whether those conflict minerals originated in a Covered Country (see table, bottom), whether those conflict minerals came from recycled or scrap sources, and the activities the company performed to reach those conclusions. The disclosure must be made on a new form that the SEC developed for this purpose and must be posted on the reporting company’s website for one year.

If the company’s necessary conflict minerals are sourced from a Covered Country, the company is required to carry out a more extensive review of the source of these minerals and provide more complete disclosure in a full Conflict Minerals Report. Disclosures that are required by the Rule must be made by reporting companies on a new Form SD, which is due for every reporting company on a calendar year basis (regardless of the company’s fiscal year). Form SD must be filed with the SEC by 31 May of the following year. The first reports are due on 31 May 2014 for the current 2013 calendar year.

The three-step analysis
The Rule requires a reporting company to undertake a three-step analysis of the use and origin of its conflict minerals. The results of that analysis determine what the company is required to report and the diligence it needs to perform to make those disclosures.

Step one: Does the Rule apply to us?

A reporting company that has conflict minerals that are necessary to the functionality or production of a product it manufactures or contracts to be manufactured is subject to the Rule.

The SEC did not provide much guidance as to the meanings of the terms included in the Rule, believing that the terms it uses are well understood. However, as companies are working to implement the Rule many practical questions have arisen about these terms, including questions about whether the conflict minerals in products are necessary. Here we will focus on the impact of the Rule on materials, but there are a number of other areas that require careful analysis and interpretation.

An SEC release that accompanied the Rule provides helpful guidance on determining whether certain minerals are conflict minerals for purposes of the Rule:

1. The SEC had the opportunity to include additional derivatives in the definition of conflict minerals, but it chose to designate tantalum, tin, tungsten and gold as the only derivatives that are subject to the Rule. These four were the materials viewed as the most involved in the financing of armed groups in the Covered Countries and were recognised as the only economically significant derivatives of the conflict minerals. For example, tungsten is the only derivative of wolframite that is subject to the Rule, while oxygen and iron are not designated derivatives. Although certain comments to the proposed rule called for niobium to be a designated derivative of columbite-tantalite, the SEC chose not to designate this element.

2. To be considered necessary, a conflict mineral used in a manufacturing process must be intentionally added into the process.

3. A conflict mineral that is a naturally occurring by-product of the manufacturing process is not considered to be necessary for purposes of the Rule.

4. A conflict mineral that is used as a catalyst or in a similar manner in a production process but is used up or consumed completely in that process is not contained in that product. However, if any amount (even a trace) of the conflict mineral remains in the product after the process is completed, that conflict mineral is covered by the Rule and must be analysed and disclosed.

Step two: Do our conflict minerals come from the Covered Countries?
If the reporting company has necessary conflict minerals, the Rule requires it to disclose whether those conflict minerals originated in the Covered Countries. To make that disclosure, the reporting company must conduct a reasonable country of origin inquiry performed in good faith to determine whether its conflict minerals originated in the Covered Countries or are from recycled or scrap sources.

Step three: Do our conflict minerals benefit or finance armed groups in the Covered Countries?
If, after completing its reasonable country of origin inquiry, the reporting company:

• knows or has reason to believe that its conflict minerals originated in the Covered Countries


• knows or has reason to believe that its conflict minerals are not from recycled or scrap sources


• cannot determine the source of its conflict minerals

then the reporting company must perform more detailed due diligence on the source and chain of custody of its conflict minerals, and indicate if they finance or benefit armed groups in the Covered Countries. If the company is required to perform that additional diligence, the resulting information must be filed with the SEC in a Conflict Minerals Report that, under most circumstances, is subject to a private sector audit, which adds to the total cost of compliance.

Compliance regime
As described above, the Rule itself does not prohibit or limit the use of conflict minerals in products. Instead, it requires public disclosure about how the conflict minerals are used by the reporting company and from which countries those conflict minerals are sourced. Of course, as a result of that disclosure, or even independent of it, the company’s customers might impose their own requirements on their supplier. In addition, the public’s reactions to disclosures could drive changes in a company’s policies regarding the use of conflict minerals.

Non-reporting companies must be concerned about the Rule as well. For example, a materials supplier will likely be asked by its customers to provide information about its necessary conflict minerals. To provide that information, a non-reporting company supplier will need to perform its own diligence even though it is not required to file a report with the SEC.

In the long run
The long-term consequences of the Rule remain to be seen. It may have the desired effect of eliminating key sources of financing for armed groups. But it is also possible that the impact on those armed groups may be limited, as companies not facing SEC or customer requirements purchase from those same sources. Either way, it is clear that the Rule is already impacting the purchasing practices of US reporting companies. Many are taking the position that they will not (or will make every effort not to) purchase conflict minerals from any Covered Country. And in order to be sure of that, some may institute near-embargoes on any materials coming from anywhere in central Africa. If that is the only consequence of the Rule, its goals may not be achieved.

On the other hand, there has already been a concerted effort to certify smelters and refiners as conflict-free. When a sufficient number of smelters are certified as conflict-free, and when the diligence processes and the required disclosures become more standardised, companies may decide again to purchase conflict minerals from the Covered Countries if they are known to be conflict-free. In addition, the methods of tracking and identifying sources and chains of custody of the conflict minerals may improve. Such improvements could allow the sourcing of conflict-free minerals from Covered Countries without significantly increasing diligence burdens. But, in the meantime, some companies will avoid purchases from the Covered Countries altogether, leaving other companies not facing requirements or public pressure to fill the void.

Key terms
‘Conflict minerals’ are columbite-tantalite, cassiterite, wolframite, gold and their derivatives, which are limited to tantalum (derived from columbite-tantalite), tin (derived from cassiterite), and tungsten (derived from wolframite). This group of minerals is often referred to as the 3Ts and G. The Rule also provides that in the future, the US Secretary of State may expand the list of conflict minerals if additional derivatives are determined to be financing conflict in the Covered Countries (defined below).

Conflict minerals that are from ‘recycled or scrap sources’ are deemed to be DRC conflict-free for purposes of the Rule and require disclosure only about the inquiry that led the reporting company to conclude that they were from recycled or scrap sources.

Covered Countries are the Democratic Republic of Congo, Zambia, Angola, Republic of the Congo, Central African Republic, South Sudan, Uganda, Rwanda, Burundi and Tanzania.

A ‘reporting company’ is any entity that files reports with the SEC under Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (ie, Forms 10-Q, 10-K, 20-F and 6-F). There is no exemption from the Rule for foreign private issuers, emerging growth companies or smaller reporting companies.




 Ore  Element  Uses Approximate % of world supply from Covered Countries (2010)
 Cassiterite  Tin  Alloys, tin plating, solders, solderable coatings, corrosion-resistant
coatings, bronze alloys, glass additive, flame retardants, biocides,
chemicals, electric circuits
 Wolframite  Tungsten  High-temperature applications (lamp and electron microscope filaments,
engines, lubricants), metal wires, electrodes, welding applications,
hard alloys (eg turbine blades), tungsten carbide drill bits, munitions,
radiation-shielding metal coatings on ceramics, semiconductors
 Columbite-tantalite (coltan)  Tantalum  Tantalum capacitors, electronic components, high refractive index glass,
power resistors, hightemperature alloys, corrosion resistance, mobile
phones, computers, video game consoles, digital cameras, cutting tools,
jet aircraft parts
 Various  Gold  Wire bonding, plating, electric contacts and connectors, coinage, jewellery, ornamentation  2.1%

(Source: US Geological Survey, 2011 Minerals Yearbook [Advance Releases], December 2012.)