Conflict Minerals Update

The Securities and Exchange Commission (SEC) recently updated its implementation timeline for new rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). One of the rules, disclosure related to “conflict minerals”, is now tentatively scheduled to be finalized sometime between January and June of 2012. The proposed rule was released in December of 2010 with the intention of finalizing the rule in 2011. The legislation called for a final rule no later than 270 days after enactment, or April 15, 2011. The impact could be far reaching considering the potential number of companies that may fall under the rule and has precipitated a significant amount of comment letters from various parties including associations representing manufacturing, mining, electronics and other interests; accounting firms; governmental organizations, non-governmental organizations and activist groups.There have been over 200 memoranda written by law firms and accounting firms on conflict minerals disclosure since the introduction of the legislation.Based on the proposed rule (http://www.sec.gov/rules/proposed/2010/34-63547.pdf), Section 1502 of Dodd-Frank requires disclosure by “issuers who file reports with the Commission under Exchange Act Sections 13(a) or 15(d) and for which conflict minerals are “necessary to the functionality or production of a product manufactured” or contracted to be manufactured by such issuer.” The conflict minerals are gold and the underlying metal ores for tantalum, tin and tungsten. These issuers must disclose in the body of their annual reports whether any of the conflict minerals originated in the Democratic Republic of the Congo or adjoining countries (DRC countries) and the process used in making this determination, or the “reasonable country of origin inquiry process”. The Form 10-K would have a new item 4(a), the Form 20-F a new item 16 and the Form 40-F a new paragraph 16 to General Instruction B, all entitled Conflict Minerals Disclosure. Issuers would also have to disclose that the determination is available on its Internet website and the Internet address.Issuers that determine the conflicts minerals did originate in a DRC country, are unable to determine that the conflict minerals did not originate in a DRC country or that the conflict minerals came from recycled or scrap sources must furnish (not file) a Conflict Minerals Report as exhibit 96 to the annual report. The report should contain “measures taken by the registrant to exercise due diligence on the source and chain of custody of the conflict minerals … a certified independent private sector audit of the Conflict Minerals Report … certification by the registrant that it obtained such an independent private sector audit … a description of any of the registrant’s products manufactured or contracted to be manufactured containing conflict minerals that are not “DRC conflict free” … the audit report prepared by the independent private sector auditor, which identifies the entity that conducted the audit.” The issuers must also disclose within the body of the annual report that a Conflict Minerals Report has been furnished as an exhibit along with the Internet address for the report and the certified independent private sector audit report on the issuer’s Internet website.

The legislation also tasks the U.S. Department of State, the Comptroller General of the United States and other federal agencies, besides the SEC, with various aspects of implementation. The Department of State is required to produce a map identifying “mineral rich zones, trade routes, and areas under the control of armed groups in the Democratic Republic of the Congo and adjoining countries” or “Conflict Minerals Map”(¬ http://www.oesa.org/Doc-Vault/Industry-Information-Analysis/Conflict-Minerals/State-Department-Map-of-the-Congo.pdf). On July 15, 2011 the Department of State released a Statement Concerning Implementation of Section 1502 of the Dodd-Frank Legislation Concerning Conflict Minerals Due Diligence (http://www.state.gov/documents/organization/168851.pdf) urging issuers to begin their due diligence investigations immediately and endorsing the guidance issued by the Organization for Economic Cooperation and Development (OECD)(¬ http://www.oecd.org/dataoecd/62/30/46740847.pdf) for implementing due diligence practices. The Comptroller General of the United States will establish the standards for the independent audit.

Several companies have made disclosures regarding conflict minerals within risk factors and as parts of material agreements. The SEC has even commented on it as part of the filing review process. Cree Inc., a North Carolina based manufacturer of LED lighting, described the potential cost increase from a compliance standpoint as well as acquisition of raw materials along with a possible reputational risk in the following risk factor in their January 19, 2012 10-Q:

  • New regulations related to conflict-free minerals may force us to incur additional expenses

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of minerals originating from the conflict zones of the Democratic Republic of Congo (DRC) and adjoining countries. As a result, the SEC is required to establish new annual disclosure and reporting requirements for those companies who use “conflict” minerals mined from the DRC and adjoining countries in their products. When these new requirements are implemented, they could affect the sourcing and availability of minerals used in the manufacture of our products. As a result, we cannot ensure that we will be able to obtain minerals at competitive prices and there may be additional costs associated with complying with the new due diligence procedures as required by the SEC. In addition, as our supply chain is complex, we may face reputational challenges with our customers and other stakeholders if we are unable to sufficiently verify the origins of all minerals used in our products through the due diligence procedures that we implement.

Other companies such as Kirschner Medical Corp., Biomet Inc., Enphase Energy Inc., Nvidia Corp.,¬†Advanced Micro Devices, and Sprint Nextel have included disclosure about the proposed regulation in their risk factors over the past 90 days. Companies have also begun to disclose that they do not use conflict minerals from the DRC countries, though not in the manner outlined in the proposed rule. China Direct Industries, Inc., a Florida based producer and distributor of industrial products, disclosed the following in the Management’s Discussion and Analysis (MD&A) portion of their December 23, 2011 10-K:

  • As of September 30, 2011, our Magnesium segment represents our largest segment by assets and revenues. We manufacture and sell pure magnesium and related by-products sourced and produced in China. We also purchase and resell magnesium products sourced and produced in China by third parties. We do not engage in the use of “conflict minerals,” which are not necessary to the functionality or production of our magnesium products, nor do we manufacture or contract to manufacture our products from Democratic Republic of the Congo or adjoining countries.

Cabot Corp., a Massachusetts based producer of specialty chemicals and performance materials, reported the following under the description of business portion of their November 29, 2011 10-K:

  • Tantalum ore is the principal raw material used in this Business. The Business has not purchased or sourced any material containing tantalum, including coltan, from the Democratic Republic of the Congo. An independent audit conducted by a third party auditor assigned by the Electronics Industry Citizenship Coalition and Global e-Sustainability Initiative (as part of the Conflict-Free Smelter Validation Program) confirmed that our tantalum supply chain is free of conflict minerals. As part of the audit, we demonstrated that we have a documented conflict minerals policy, a mechanism in place for tracing material back to the mine of origin, and documentation demonstrating that 100% of purchased materials are from non-conflict sources.

Kemet Corp., a South Carolina based manufacturer of capacitors, announced in a press release attached to their January 13, 2012 8-K that they were implementing a conflict free tantalum sourcing plan and included the following:

  • Over the past year the company has taken multiple actions and developed a more comprehensive plan whereby tantalum ore is sourced directly from the conflict free Katanga Province of the DRC and delivered it to CFS certified smelters for processing in a closed-pipe system. The closed-pipe system for the sourcing and transit of tantalum ore is being managed consistent with both the Organization for Economic Cooperation and Development (OECD) due diligence guidance for responsible supply chains of conflict minerals as well as the current understanding of the yet to be promulgated Dodd-Frank 1502 legislation relating to the same issue. To date enough ore has been mined and shipped to produce one-to-two months’ supply of capacitor grade tantalum powder. It is anticipated that over time the mine will produce enough tantalum ore to satisfy over approximately two-thirds of KEMET’s tantalum powder and wire requirements, as well as additional ore for the general market.

Some issuers have even begun to include a conflict mineral clause within their material agreements. MetroPCS Communications, Inc., included the following clause in the Amendment No. 1 to Master Procurement Agreement with Ericsson, Inc. attached to the August 3, 2011 10-Q:

  • 2.4¬†Section 15.12.5, Conflict Minerals. The following new Section 15.12.5 is added to the Agreement immediately following Section 15.12.4 of the Agreement:

15.12.5 Conflict Minerals.¬†Supplier represents and warrants that it is in full compliance with the Conflict Minerals Law. Upon MetroPCS’ written request, Supplier shall provide MetroPCS with a written copy of any audits, disclosures or reports filed with or submitted to the Securities and Exchange Commission by Supplier as required by the Conflict Minerals Law including, at a minimum, (a) the disclosures made by the Supplier to the Securities and Exchange Commission and (b) any independent private sector audit submitted through the Securities and Exchange Commission, each (a) and (b) in accordance with subsection (p) of Section 13 of the Securities and Exchange Act of 1934 and the Conflict Minerals Law. Without any further consideration, Supplier shall provide such further cooperation as MetroPCS may reasonably require in order to meet any obligations it may have under the Conflict Minerals Law.

 

The SEC has also commented on the inclusion of conflict minerals disclosure. In a September 16, 2010 letter to Rangold Resources Ltd. Regarding their March 31, 2010 20-F asking the following:

  • We note you operations in the Democratic Republic of the Congo (DRC) produce gold which is defined as a conflict mineral in the recent Doff-Frank Wall Street Reform and Consumer Protection Act.With a view toward possible disclosure, tell us whether or not you mining operations acquire or purchase gold and/or other conflict minerals from local mining companies and/or artisanal miners.

Rangold Resources Ltd., responded on October 8, 2010:

  • The Company respectfully advises the Staff that the Company’s Kibali Project in the Democratic Republic of the Congo is a development project which is currently at the feasibility stage, and consequently is not yet an operating mine and does not produce any gold. Furthermore, the Company does not purchase gold or other conflict minerals from any local mining companies and/or artisanal miners.

Intelligize will continue to follow this issue as the final rule is released to determine what changes have been incorporate, if any, the inclusion of a phase-in period and what new disclosures are being reported.

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Written by Intelligize Staff