LBMA Assaying and Refining Seminar 2005

Ladies and gentlemen, it is a great pleasure to welcome you all here to London and to this, the first LBMA Assaying Seminar. As to whether this turns out also to be the last LBMA Assaying Seminar, this will very much depend on what happens today and tomorrow. Although we have accumulated a lot of information about assaying, arising out of the work that we have done in the past three years prior to launching proactive monitoring of the Good Delivery List, the LBMA does not, in itself, have any specialist knowledge of the subject. Thus, I would like to stress that this is your meeting and the LBMA’s role here is essentially to facilitate an exchange of information between you, the experts in the field of assaying precious metals, in part by allowing you to meet each other face-to-face.

I am sure that during the coffee breaks, the lunch and the reception this evening, you will take advantage of the chance to meet your colleagues from other countries. In order to help with this networking, we have a notice board at our registration desk which you can use in order to contact other delegates who are here today. If you want to meet anyone, please put a note addressed to them on the notice board and at the end of each session I will read out the names of those to whom such notes are addressed. My colleagues on the desk will be pleased to help you get in touch with other delegates.

On the delegate list I can see that we have delegates from 53 companies and 24 countries, including 34 Good Delivery refiners. For the majority of you, English is not your first language and I am sorry that we cannot provide interpretation into some of the main languages represented here today. However, we have put together and distributed the available documentation in either text or PowerPoint presentations which we hope will facilitate understanding of the various speeches.

But as with any conference, the success of this event will depend to a large extent on the audience as much as the speakers. We have left plenty of time in the programme for discussion and particularly for the people who do not speak English as their mother tongue, I hope you will not feel inhibited when it comes to the question and answer sessions.

Reading the papers as they have arrived over the last week or two, I am very conscious of the debt that we owe to the speakers for the time, effort and expertise that they have devoted to preparing their presentations.

This is the first time that the LBMA has organised a technical meeting on the subject of assaying, although previously we have had various meetings with Good Delivery refiners (usually at the time of our annual Precious Metals Conference in recent years). The purpose of these meetings was to help us fine-tune the proactive monitoring system which we introduced last year. I think it is worth just briefly reviewing the reasons for us having introduced proactive monitoring and the approach which we follow. Later on this morning other speakers will give more details of what is involved and what has been achieved so far.

Proactive monitoring was introduced in the second quarter of last year. The reason for doing this was that the LBMA had previously received complaints from a government mint about the quality of certain gold bars, which proved to assay significantly below the marked value of 999.9. After considering various options about how to respond, the LBMA decided in late 2001 to introduce a system of proactive monitoring of refiners on the List. The goals were to ensure the integrity and further enhance the reputation of the List and also of the refiners on it. Thus we also see this system as providing a valuable input to the refiners being monitored by showing them whether their assaying is up to the standards that they would themselves like to achieve. Until last year, refiners on the Good Delivery List were not in general, re-tested after their initial accreditation but going forward they will be subject to monitoring once every three years.

In the two years following the decision to bring in monitoring, extensive consultation with Good Delivery refiners took place to ensure that the system introduced could achieve the goals mentioned above without proving onerous for the refiners being monitored.

During these discussions, a method of monitoring was developed that involved the refiner submitting a dip sample from a normal production melt for testing by the LBMA’s Good Delivery referees. The sampling operation is witnessed by one of the LBMA’s approved supervising companies.

For gold refiners which produce and sell only gold of four nines fineness, the LBMA allows them to elect for a different form of monitoring, whereby the LBMA provides the refiner with a set of 6 reference samples in the range of fineness above 995 for the refiner to assay using fire assay. The LBMA considers that all refiners on the Good Delivery Gold List must be able to assay across the full range of Good Delivery alloys (namely a fineness range from 995.0 to 999.9) most of which can only be accurately assayed using the method of corrected fire assay. At the top end of this range, on the other hand, spectrographic methods can provide assays of the necessary precision and accuracy. In that these high-gold alloys can be thus assayed without requiring the use of fire assaying, they cannot be used to demonstrate that the refiner is able to assay over the full range of Good Delivery alloys. For refiners where the production technology (as well as the products marketed) only involve gold of fineness 999.9 and above, it is recognised that it would be disruptive and onerous for them to have to produce a special low gold content alloy for the purposes of LBMA monitoring. A refiner which, for the reasons described above, is unable to provide a gold dip sample with a fineness of less than 999.0, may instead opt to have the alternative form of monitoring.

An important aspect of the new system is that it necessitates a greater involvement on the part of the LBMA’s panel of referees and it was decided at the outset to expand the panel from the existing two members at that time to approximately six in order to cope with the increased workload, and for other reasons that I will mention later.

Returning to the goal of today’s seminar, this is very different from our previous discussions with refiners about the proactive monitoring system. Today our agenda is focused rather narrowly on the technical aspects of assaying gold and silver and it is worth mentioning again that the LBMA itself has no technical expertise when it comes to questions of assaying. The nearest we have to technical knowledge on the staff happens to the fact that I qualified as a metallurgist many years ago but most of my limited knowledge of assaying from my university days disappeared years ago. So nowadays, the LBMA’s expertise in this area resides largely in our technical consultant, Tony Evans, who will be speaking to us tomorrow on the subject of the direct determination of silver and also in our five referees. It is in fact a common misconception on the part of applicants for our Good Delivery List that there must be a technical department within the LBMA (since we need to test very thoroughly the bars which they submit). But as those of you who have read our Good Delivery rules will understand, the main part of this testing is carried out on our behalf by the referees. The same applies to the preparation of reference samples which is an integral part of the testing process for Good Delivery applicants and also in many cases for refiners whose assaying capabilities are being checked during the process of proactive monitoring.

On the other hand in the process of accrediting the new referees and of developing and proving up the reference samples, the LBMA Executive obtained some extremely interesting information provided by each of the referees which allowed us to see exactly what the various methods of assaying were capable of. This information has never been revealed to anyone outside the Executive and I will of course maintain this degree of confidentiality in my presentation later this morning. However, I will be able to describe for you some general indicators of the kind of precision and accuracy that the referees were able to demonstrate and which, I believe, should be regarded as targets by all precious metal assayers. In fact, the main reason that we are having this seminar is that we would like to share with other refiners and assayers the information we now have about the capabilities of the various methods of assaying high quality gold and silver alloys, and especially of alloys within the Good Delivery range (this is a fineness of 999 and above for silver and 995 and above for gold).

When I say “we” I mean not just the LBMA Executive but also and more importantly, the referees which were involved in the accreditation process. It was their willingness to share very sensitive data about their assaying abilities via the LBMA Executive (normally on an anonymous basis) that allowed us to make the progress that we have done over the past three years.

I mentioned at the outset that the question of whether we will have future events will depend on you the audience as well as the speakers. I would suggest that particularly during our panel discussions at the end of each day, you will have an opportunity to show whether you feel there is scope for the LBMA organising further events in the area of assaying or perhaps going beyond that to discuss other refining questions. Similarly, if you feel that you wish to provide us with some feedback about the seminar when you get back to your offices we would of course be delighted to hear from you.

Finally, I hope all of you will enjoy your stay in London and derive real benefit from our seminar.

Thank you for your kind attention.

It is now my pleasure to introduce an old friend of mine, Peter Smith of JPMorgan Chase, who is well known to many of you. Peter is in charge of the marketing and precious metal operations at JPMorgan Chase. He is a man of great experience: he has been the chairman of the LBMA Physical Committee for as long as most of us can remember - in fact, since 1992 - and he has been on the committee since it was formed in 1987. He is also the Chairman of London Precious Metals Clearing Ltd. I now look forward, with you, to hearing from Peter about the commercial significance and role of the Good Delivery system.

On behalf of the Physical Committee of the LBMA, may I welcome you all to London and say how delighted we are to see such good attendance at this seminar.

As many of you realise, the precious metals business has been conducted in London for over 300 years. In fact, Mocatta and Goldsmith, which is now part of Bank of Nova Scotia, was established in 1671, a few years before the Bank of England. The market that subsequently developed introduced many innovations that have led to London becoming the fulcrum of the global market. Thus, just after the First World War, around 1919, when the London gold-fixing was being developed by the fixing members, they realised that there was a necessity not only to create a price benchmark, but also a quality benchmark. That is basically how the London Good Delivery List was created, by establishing which bars would be successful in an exchange mechanism at the quoted price. I think that this is important, because when a professional trader in London sells gold or silver, he is trading for a given quantity and a given quality, and it is imperative that you understand that, if you are selling 4,000 ounces of gold, you are essentially selling title to ten large bars of approximately 400 troy ounces gold with a minimum fineness of 995 which have been produced by an accredited gold refiner.

The key fact in this is that if you have gold or silver bars that are not produced by an accredited refiner, they are, if you like, an impaired asset. They may be fine in all other respects, but the quality has not been determined by the LBMA as being satisfactory for ongoing trade. I think it is important to point out that many of the governments and central banks that hold gold, but in some cases, also silver, as part of their reserve assets, have those reserve assets designated as either Good Delivery reserve assets, or non-Good Delivery; i.e. impaired assets. This is very important in relation to the sales programmes which several central banks have been undertaking in recent years, as I am sure you have all read about in the press.

These banks are now putting into the market bars that may have been in vaults for several decades - in some cases, 80 or more years - and it is only the Good Delivery bars that are actually getting onto the market at the full price. The non-Good Delivery bars are now being sent to Good Delivery refiners to be re-melted (or re-refined) and re-assayed. If you do not have Good Delivery gold or silver, you are at a disadvantage. Particularly with the work that the LBMA’s Physical Committee has been doing in developing the proactive monitoring system in the past several years, it has become increasingly clear that being accredited on the Good Delivery List represents a de facto world accreditation and this is exemplified by the way in which the LBMA List has been adopted by some of the newly emerging exchanges. The Istanbul Gold Exchange is a good example, and the same can be said for new exchanges which have been set up in India and Shanghai. Similarly, the gold exchange currently being established in Dubai is looking to use, as part of its accreditation, the LBMA List.

Another interesting aspect of the market is the new wave of interest in exchange-traded funds (or “ETFs”) which the World Gold Council and others have launched over the last 12-18 months. You will see that all of those Exchange Traded Funds - and a new one was announced yesterday for silver - are going to require that the metal held for the fund is Good Delivery London standard bars. I think the point that we should take home today is that those refiners, particularly many of you represented here today that are accredited as London Good Delivery, are ultimately in a premier division of the business; you are the first tier of the market. It represents a standard that refiners should aspire to and you will see from the papers that are being presented during this seminar that the LBMA has spent considerable amounts of time and effort to ensure that these standards continue to be met by all refiners on the List.

Thank you for being here. I hope you derive real benefit from the presentations and that you will participate in the ensuing discussions. This should not just be ‘you listen to a few people speaking’; we want your ideas, your opinions, your views, and that will make this a much more proactive seminar, and, I think, something that we can all derive genuine value from.

Introduction
Following the decision to introduce proactive monitoring in late 2001, a number of refiners on the Good Delivery List were invited to apply for consideration as referees to the Good Delivery System. Only refiners which had become LBMA Associates and which were on both the gold and the silver lists were invited.

The basic requirement for an LBMA referee is that it must be able to demonstrate the very highest standards of precision and accuracy in the assaying of gold and silver. It must also be able to manufacture sets of reference samples which are free from detectable inhomogeneity and whose assay values are established to very high levels of accuracy.

Following a two-year process, the LBMA announced the members of the expanded panel of referees in January, 2004, namely Argor Heraeus, Metalor, Pamp, Rand Refinery and Tanaka.

Good Delivery Applications
Before looking at the process by which the expanded panel was accredited, it is worth reviewing the method by which applicants for the Good Delivery List were previously assessed. Prior to 2003, the LBMA’s two Good Delivery referees were for historical reasons both UK-based refiners (Johnson Matthey in Royston and Engelhard-CLAL in Chessington) in both cases reflecting the LBMA’s UK location and the advantage of the referees being located within a short distance of the London vaults (which acted as facilitators of applications for listing. Each of the two referees had in earlier years produced a stock of gold and silver reference samples which had been carefully cross-check assayed to the highest possible standards of accuracy and homogeneity. This work had been done on a bilateral basis (ie without direct involvement of the LBMA in the process). Any samples which did not give virtually identical assays in the two referees’ laboratories were rejected. The gold samples were produced by preparing an homogenised melt and then chill casting bars of cross-sectional area approximately 2 sq cm in “finger” moulds. 10 gram samples were then cut from the cast bars to send to applicants for the Good Delivery List. A similar approach was used for silver except that the samples were rolled in order to produce larger area with sample weights of approximately 30 grams.

The assay test for applicants for listing consisted of it being sent a set of these reference samples (24 for gold and 10 for silver) and the assay reports were subsequently sent to the referees who assessed the results and gave (independently) their views on whether the applicant had met the criteria laid down by the LBMA.

The same two referees were also responsible for the testing of bars submitted by applicants for Listing. At the time, an applicant was required to submit 10 marked bars for testing. Again, the referees would, after testing the bars according to the LBMA’s specifications, provide independent reports on whether the bars had met the LBMA standards.

The reports on the applicant’s assaying and the bars were then considered by the LBMA’s Physical Committee, which took the decision on whether to accept an application and hence include the applicant refinery on the Good Delivery List, indicating that its bars would be regarded as Good Delivery by the London market.

A New Approach
This system worked well and the LBMA was totally satisfied that the referees were maintaining the highest standards in relation to the preparation of samples and the testing of applicants’ bars. However, when it was decided to expand the referees’ panel, the LBMA also decided to change the system to make it demonstrably free from any bias or collusion. This involved the adoption of the “double-blind” concept which is widely used in testing pharmaceuticals. In the case of the Good Delivery system, it means that neither the refiner being tested nor the referee doing the testing knows the identity of the other party. It is felt that this double-blind approach is particularly valuable in demonstrating to the outside world the integrity and objectivity of the system

Another aspect of the expansion of the referees panel is that was important, given the internationalisation of the LBMA over the last five years, to be able to show that the referees are no longer confined to UK-based refiners.

In the context of the Good Delivery System, “double-blind” applies to three different processes:

• the manufacture and cross-checking by the referees of the reference samples;
• the provision of reference samples to applicants (or to refiners being monitored) and the assessment of the assaying results of such refiners; and
• the testing of applicants’ bars (which are now submitted to the vault for testing with marks which do not identify the name or location of the applicant refinery).

Applying these principles does involve additional costs but having a system based on double-blind methodology does provide the best possible guarantee against bias when testing both new applicants and monitoring the refiners already on the list.

As to how the process of referee accreditation was carried out on the basis of these ideas, it was decided to ask each aspirant referee to produce a set of 16 sample bars for gold and 8 for silver, each bar to weigh around 1 kg with the set covering the full range of Good Delivery alloys. The method of ensuring and checking the homogeneity of the cast bars was left to the referees. The assaying methods for silver were left to the referees whereas fire assaying had to be used for gold (possibly supplemented at very high gold contents – of around 999.5 and above – by spectrographic testing. Each aspirant then submitted two samples from each sample bar to the LBMA which were then sent to two other referees in the group (including the existing referees) on a double blind basis for cross-checking. The aim was to establish new samples as acceptable for Good Delivery purposes – ie, those where the three sets of assays matched to a high degree of accuracy. The sample manufacturers and the cross- checkers were required to submit detailed results of all trials to the LBMA.

The results of this comparison were frankly disappointing, especially for gold. An analysis of the results suggested that there were two problems:

• the differing sample preparation methodologies used did not guarantee an absence of detectable inhomogeneity; and
• the precision of the fire assaying used varied considerably between the aspirant referees. By precision is meant the reproducibility of results as reflected in a low standard deviation for a set of trials carried out on the same sample.

The conclusion of this analysis was that before a further attempt at establishing a new set of reference samples (and in the process assessing the assaying ability of the referees) it would be necessary to develop a standard method of preparing demonstrably homogeneous samples. As any metallurgist knows, homogeneity is not the natural state of affairs for metals. Given half a chance, alloying elements in a homogeneous melt will redistribute themselves during the solidification process. There are in addition risks of surface contamination (eg during casting or rolling). It took some time to develop, agree and put into practice a new method for making the gold samples. However, this time also allowed some of the laboratories involved to increase the precision of their fire assaying.

The result was that after the second set of samples had been manufactured, the homogeneity reports produced by each sample manufacturer demonstrated a great improvement compared with the first round. More importantly, when the second set of samples were cross-checked as before, the great majority of them were considered by the LBMA to be acceptable for Good Delivery purposes on the basis of the low divergences between the three sets of assays. Any samples that were considered to be borderline will be subject to further double blind cross-checking before being either accepted or rejected.

In the case of silver (where the minimum Good Delivery fineness is 999) spectrographic testing did in general produce good matches whereas in many cases, the method of direct determination used could produce only rather poor precision.

Lessons from the Referee Accreditation Process
As previously mentioned, the detailed data on assaying performance submitted by individual referees is treated as confidential. However, some general conclusions concerning the assaying of Good Delivery alloys can be drawn from what has been learned.

• The manufacture of homogeneous samples requires a very carefully thought-out method.
• Assaying of gold by fire assay using the most rigorous approach can give results which are virtually free from systematic bias and with a high precision (as indicated by a standard deviation on a set of say 10 trials on a homogeneous sample of better than 0.05 in fineness terms).
• Fire assaying of gold will produce just as good results at the highest fineness levels (eg 999.9) though spectrographic analysis of impurities at levels of above 999.5 can be a useful adjunct to fire assay testing.
• For silver above the 999 level, the LBMA now recommends the use of spectrographic methods of assaying.
• For silver, direct determination by variations of the basic Gay Lussac method can produce results with good precision (this will be the subject of the paper by the LBMA’s technical consultant at the seminar) whereas the basic method often produces results of poor precision.