Towards an LBMA Good Delivery List for Artisanal and Small-Scale Responsibly Mined Gold
4. Addressing the Downstream Obstacles
Earlier in this report, we outlined some daunting downstream obstacles to GDL refiners sourcing more responsibly mined artisanal gold. In this section, we consider how to address these obstacles and, specifically, what the LBMA might do to address these obstacles. The first three obstacles concerned the reputational risk to refiners and the risk to their GDL status in sourcing ASM gold, relating to the environment, traceability and due diligence, and OECD Annex II risks.
Due diligence by downstream actors on their gold supply chains can mitigate ESG, traceability and OECD Annex II risks in sourcing ASM gold, identifying where sites pose risks and where they do not, and pointing to how these risks can be mitigated. As indicated above, the RMI already has a fund to help finance this due diligence. Due diligence, however, is of no use if there are no actual ASGM sites where these risks are either not present or are being effectively mitigated and managed. Happily, such ASGM sites do exist, even if they are not overly common. Making them more so requires sustained, proactive work on the ground in and around artisanal mining sites, not only by local communities but also, ideally, with inputs from NGOs and/or donor and host governments, and/or LSM, and/or processors and intermediate refiners, to develop the conditions required for responsible ASM.
The development by the LBMA of a GDL, not of processors, but of artisanal mining operations, with criteria for inclusion that required that members’ operations did not pose the reputational risks to GDL refiners listed above, can assist both the due diligence process and the spread of responsible mining practices. Inclusion in such a GDL would imply that the LBMA had conducted (or that another organisation had on the LBMA’s behalf conducted), some measure of due diligence on the ASM producers in question. This should mean that less onerous and less expensive due diligence would be required from LBMA GDL refiners looking to source from them, which should be acknowledged in the RGG. This should encourage an improved commitment to source this gold from GDL refiners, which in turn would help the sustainability of what are often short-term, donor-funded projects to encourage responsible ASM mining.
Several elements of caution should be noted. There are projects working on responsible ASGM production and those seeking to secure its access to formal markets, and some are doing excellent work. But most of these focus on miners and mine sites rather than the downstream, and are anyway few and far between. There is a distinct risk that membership of an ASM GDL would be highly elite, with few artisanal producers being eligible and able to demonstrate their eligibility, and with even fewer seeing advantage in doing so. The combined production of ASM GDL members might amount only to kilogrammes, and not tonnes of gold, and would thus not significantly impact the proportion of global ASM gold production refined by LBMA GDL members.
An additional critical issue is that while some GDL refiners have told us they would regard the involvement of an international NGO in an ASGM enterprise as providing them with some assurance that the enterprise’s output could be sourced without reputational risk, this may not be sustainable in the long run. Furthermore, NGOs working on responsible ASM are unwilling to have refiners effectively outsource their due diligence to them for little or no charge.
The establishment of an LBMA GDL for processors and intermediate refiners, as discussed in the previous section, whose members would as a condition of membership conduct due diligence on their supply chains, with particular attention to the risks listed above, and from whom GDL refiners could then source, would also help to address the refiners’ reputational risk concerns. Unlike in the case of NGOs and an ASM GDL, however, these processors could not reasonably object to conducting due diligence that would be of benefit to refiners, since this would be at the very core of their membership of the processors’ GDL. To jump start the process, however, there may be value in exploring the approach taken by the RMI, and creating a fund to finance initial audits and/or upstream due diligence. Were a processors’ GDL to establish itself, our contention is that the additional volumes of responsibly mined ASM gold that could be sourced by GDL refiners would be significantly larger than would be the case with a GDL of artisanal mining operations, and thus more likely to make a significant impact on the proportion of global ASM gold production refined by LBMA GDL refiners.
Higher volumes of responsibly mined artisanal gold are also more likely where LSM operations work with ASM miners on and around their permits to produce responsibly mined gold, gold which could then be sourced by GDL refiners.
The fourth obstacle cited was the insecurity of ASM mining and title rights, the inadequate and ill-adapted nature of legal frameworks, and of regulatory regimes more generally for ASM. This was discussed in the previous section, where it was proposed that LBMA GDL refiners and the LBMA engage with other stakeholders about the necessary legal frameworks and regulatory regimes to increase GDL refiners’ ASM sourcing, and to bring these regimes int being. It was further proposed that this be done, where appropriate, in collaboration with donor governments, such as the UK government and potentially also the Swiss government, which has played a vital, enabling role in the SBG. We have also recommended that the LBMA work with the WGC on the desirable ingredients of regulatory frameworks for ASM on LSM sites that enable and facilitate their responsible coexistence, and which make it more possible for LBMA GDL refiners to source ASM gold from these miners.
The fifth obstacle was the extra cost of securing and transporting responsibly mined ASM gold. Transporting and insuring small amounts of gold can be very expensive, potentially rendering the exercise uneconomic. The best way to mitigate this risk is through economies of scale. In instances where LSM is cooperating with ASM, responsibly mined ASM gold can potentially “piggyback” on the industrial miner’s existing gold transportation system. Gold aggregators, processors and intermediate refiners also provide economies of scale. If GDL refiners sourced their responsibly mined ASM gold via members of a processors and intermediate refiners’ GDL, this would also effectively tackle this obstacle.
The sixth obstacle was the operational difficulties resulting from fluctuations and uncertainty in ASGM supply volumes. Here too, intermediary refiners and processors address the issue, essentially by taking on these difficulties themselves, helping to ensure that when refiners source from them, they have a reliable and ample stock of gold to sell.
The seventh obstacle cited by the LBMA was ASM miners’ lack of access to formal financial structures, leaving them obligated to access finance via less formal structures. This in turn obligates, or at least encourages ASM producers to trade their gold via these networks rather than ones connecting them to GDL refiners.
There has been comment on this point to the effect that debt financing is rare in mining, with equity financing being the more common model. This is correct concerning LSM, where miners typically derive a higher proportion of their working capital from shareholders than from banks and other lenders, but that is not how most ASGM is financed. In instances of ASGM supply chains between DRC and Dubai and India that have been studied independently by the authors, Indian purchasers of gold in Uganda received funds from India which they distributed to buyers in the DRC. These buyers in some instances financed ASGM production in Congolese provinces such as Ituri. From the perspective of the ASGM producers, they had incurred debts which they had to repay by selling gold to these buyers at least equal in value to the money they had previously received from them. Buyers took this gold to their financiers in Uganda, who aggregated it and had the gold refined in Dubai.34
Financing for ASGM will remain a major issue, as there are few instances of formal financial structures having developed and successfully rolled out appropriate and attractive alternative lending products to the ASM sector, and even fewer where downstream supply chain actors have actively co-invested. That said, more transparent relationships between ASM suppliers, processors and refiners, particularly in the GDL structure we have proposed, would give more confidence to both downstream actors to coinvest, and to formal financial institutions to develop and offer affordable financing to ASM operations, such as Solidaridad’s ‘book and claim’ model currently being trialled in Tanzania and Kenya.35
PlanetGold has an access- to-finance component, that seeks to ‘unlock the capital needed for ASGM to become environmentally and socially responsible’ by providing more accurate information to financial service providers and investors, and by helping ASM miners develop and present information ‘in a manner that appeals to investors’.36 In Peru, Dynacor has started providing some pre-financing to trusted ASM suppliers with whom the company says it has well established and enduring relations37. Calibre in Nicaragua use its spare processing capacity to process ASM gold mined on its sites and has also helped finance ASM formalisation. Other informants have told us they have provided small mercury-free semi industrial processing plant finance to ASM mining groups on their companies’ sites but have kept ASM processing separate from industrial processing. This finance depends on the companies in question signing contracts that bind the groups to ESG and due diligence obligations, monitored by the companies. The companies implementing these approaches told us they see them as ways to establish their social license to operate. In eastern DRC, meanwhile, Trust Merchant Bank (TMB) has developed an innovative financial product specifically aimed at ASM operators, which it is looking to roll out over the course of the next couple of years.38 More such initiatives are required, and it is to be hoped that donor agencies will work with banks and microlenders to develop more of such products in the future.
Central banks of ASM producing countries also have a potential role here, providing prefinancing via the commercial banking network for the production of gold that they could subsequently buy to build the countries’ gold reserves, as has occurred in Mongolia.
We added a few more downstream obstacles to the seven listed by the LBMA. Here, we suggest ways in which these obstacles and their impact can be reduced.
The eighth obstacle that we cited was the general one that GDL refiners perceive little commercial value in incurring avoidable reputational risk and avoidable scrutiny from the LBMA, by sourcing ASM gold. An important exception to this, which we have discussed, is PX Precinox, which has mitigated the reputational risk arising from sourcing ASM through its partnership with Dynacor and Earthworm. PX Precinox has also developed a customer base that has an appetite for ASM gold. PX Precinox tells us that a number of the watch makers and jewellery brands it supplies welcome the opportunity to purchase responsibly mined ASM gold and have shown little resistance to paying a 1% premium, which goes to community upliftment. There also appears to be a growing, though still limited, appetite for responsibly mined ASM gold from some Swiss cantonal banks. These banks, apparently, sell small bars of this gold to private investors.39 The banking sector as a whole, however, including LBMA GDL bullion banks, has thus far displayed no discernible appetite for responsibly sourced ASM gold, apparently flinching from the premiums attached, which, in the case of Fairmined gold, for example, run at 10%.
We think that an LBMA GDL for ASM and/or processors and intermediate refiners, from which LBMA GDL refiners could source ASM gold, would lessen the reputational risk to these refiners of sourcing this gold. It would also, presumably, lessen the additional scrutiny imposed by the LBMA itself, since ASM and/or processor GDL members would already have had a measure of due diligence conducted on them through the membership process or via an RMI audit. This would need to be explicitly recognised in the RGG. Some GDL refiners might still judge that buying ASM gold, even from these sources, was an avoidable risk that they should continue to avoid, but our judgement is that the proposed reform would, nonetheless, alter the overall risk/opportunity calculation for LBMA members and would be likely to result in more ASM gold being refined by GDL refiners.
The ninth obstacle that we cited was the additional cost of the enhanced due diligence (EDD) required to meet RGG standards for sourcing ASM gold. As indicated earlier, the RMI has addressed this issue by establishing a dedicated fund to pay for this EDD.
In the spirit of a recent OECD position paper on the costs and value of due diligence in mineral supply chains, which advocates innovative cost-sharing models for due diligence40, the establishment of an LBMA GDL for ASM and/or for processors and intermediate refiners would distribute – though it would not, we accept, eliminate - the burden and cost of due diligence. First, the processors and intermediate refiners would be conducting their own due diligence on their ASGM supply chain and would demonstrate this via their own documentation and a third-party assurance process. Secondly, the LBMA’s oversight of these GDL members’ implementation of their membership criteria would also constitute a measure of due diligence, which would accordingly lessen the extent and cost of the due diligence required from GDL refiners. We also readily admit, however, that it would not eliminate the need for GDL refiners to conduct and pay for their own due diligence. This is likely still to be more complex, and potentially more costly than the due diligence GDL refiners conduct on LSM suppliers. This distribution of the burden and cost of due diligence would, again, need to be explicitly recognised in the RGG.41
Since due diligence will always be more expensive than no due diligence, non-GDL refiners that have few or no due diligence requirements of their supply chain are able and will doubtless continue to source ASM gold in large volumes. It may indeed prove that for some GDL refiners, this extra cost will not be possible to justify, no matter what reforms are implemented along the lines that we have proposed. Even so, we maintain that if the distribution of the cost and burden of due diligence along the supply chain can be achieved, instead of its current concentration at the refiner level alone, this would alter the cost benefit calculations of GDL refiners in deciding whether to source from ASM, and would, we believe, result in more of them sourcing more ASM gold.
A number of interviewees, including some from GDL refiners, have told us that refiners including those on the GDL are already able to access large volumes of ASM gold via the recycled gold market. Version 9 of the RGG has numerous requirements for GDL refiners sourcing recycled gold. The latest version of the RGG requires that their gold traceability systems should include ‘proof of origin’ for recycled gold42, that their due diligence should include the determination of the origin of recycled gold43, that refiners should conduct a risk identification assessment of recycled gold, including by using the KYC questionnaire in the Refiners Toolkit44, that they should then classify the risks of recycled material, with high risks including that it originates from, has transited or has been transported via a ConflictAffected and High Risk Area (CAHRA), or comes from an intermediate refinery or trader with a high-risk supply chain45. The RGG further requires that where the need for EDD is triggered with regards recycled gold, refiners must undertake an onsite investigation at the gold-supplying counterparty office46, and should require an independent assurance report on the intermediate refiner’s responsible sourcing practices.47 The RGG also lists a number of EDD measures for high-risk recycled gold that GDL refiners that have obtained from sources other than intermediate refineries can undertake48, and, finally, requires that refiners’ report to the LBMA on how much recycled gold they are refining, and its origins.49
These are demanding requirements and should in principle mean that LBMA GDL refiners do not accept any recycled gold of questionable origin. In practice, however, the origins of recycled gold can be highly complex and difficult to determine with precision. A bullion bar produced in Dubai, for example, may contain gold from a multitude of sources, including recycled Indian jewellery and a quantity of African doré, or perhaps gold from other bars of gold that themselves are comprised of gold from a variety of sources. In such circumstances, it is simply not possible consistently to obtain a detailed and complete picture of where exactly all the gold in all recycled gold products comes from. Our interviewees told us that this means that, despite the LBMA’s rules, GDL refiners are able to source recycled gold that may contain undeclared ASM material. This seems to us unlikely to change much, no matter how successful or otherwise the reforms proposed in this report might turn out – if implemented – to be. It will remain likely that most ASM gold will continue to enter international markets via the paths of least resistance, which is to say via traders, aggregators, processors and intermediate refiners who impose no significant due diligence requirements. From there, some of this gold is likely to pass through the GDL system as recycled gold.
34 See Mthembu-Salter, Gold Baseline Study One: Musebe Artisanal Mine, Katanga, Democratic Republic of Congo, OECD, 2014; Gold Baseline Study Two: Mukungwe artisanal mine, South Kivu, Democratic Republic of Congo, OECD, 2014; Baseline study Three: Production, trade and export of gold in Orientale Province,Democratic Republic of Congo, OECD, Paris, 2015; Baseline study four: Gold trading and export in Kampala,Uganda, OECD, Paris, 2015.
35 Correspondance with Solidaridad May 2022. https://www.solidaridad.nl/blo...
36 See: https://www.planetgold.org/acc...
37 Interview with Dynacor, June 2022.
38 TMB presentation, African Mining Indaba, Cape Town, May 2022.
39 Interview, Valcambi, June 2022.
40 Tyler Gillard and Rashad Abelson, Costs and Value of Due Diligence in Mineral Supply Chains, OECD, Paris, 2021. The report recommends that “private sector stakeholders and public-private alliances are encouraged to support development of concrete cost-sharing through, for example, levies, premiums, or raising membership dues to finance upstream due diligence, according to whatever mechanism is appropriate to the conditions of the specific mineral supply chain”
41 One GDL refiner, in commenting on an earlier draft of this paper, made the point that unless the RGG was amended, it was doubtful that the establishment of a GDL for processors and crude refiners would distribute the burden and cost of due diligence.
42 LBMA, Responsible Gold Guidance Volume 9, 2021.