Striking gold: Partnerships for sustainable small-scale mining

13 May 2014

Small-scale miners in developing countries have sought to profit from increased gold prices on international markets. But ensuring sustainable social and environmental conditions will require concerted efforts and partnership from actors across the supply chain. 

The rising price in gold has prompted a dramatic increase in artisanal and small-scale mining activities (ASM) in developing countries in the last few years. Nowadays, ASM is carried out by an estimated number of 15 million miners worldwide, indirectly provides around 100 million people with a living, and accounts for about 20 percent of global gold production. This “gold rush” has accentuated a wide range of environmental, social, and economic problems, including deforestation, mercury emissions, contamination of water, child labour, health and safety, war financed through conflict minerals as well as links to terrorist activity, increasing informality, informal trade structures, and money laundering. Public and political awareness of such problems in the minerals supply chain is growing. Particularly as concerns ASM, informal trade structures are identified as part of the problem. An increasing number of consumers want to be assured that their gold was produced in a sustainable way. Brands and retailers are looking for solutions to respond to the increasing demand for sustainably produced gold.

The political and market environment of mineral production and trade has changed. In the past mining production was simply delivered against payment, nowadays consumers, retailers, and industry increasingly request documented evidence of compliance with ethical and legal standards of production and traceability along the supply chain. A legislation to address these demands has been put in place in the US – the Dodd-Frank Act – and similar efforts to regulate conflict minerals trade are currently being discussed in the EU. In 2012, the Organisation for Economic Cooperation and Development (OECD) developed a multi-stakeholder process, the Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas and its Supplement on Gold, which includes a special appendix for the artisanal and small-scale gold sector.

Gold plays an important role in the Swiss economy, given that the country hosts around 50 percent of the world’s gold refining capacity, is a major centre for banking and bullion trading, and is home to a number of leading watch and jewellery brands. In order to respond to the various challenges presented by the gold supply chain, different stakeholders from the Swiss gold and jeweller supply chain have founded a non-profit organisation called “Swiss Better Gold Association” (SBGA). A recent national public-private partnership between the SBGA and the Swiss State Secretariat for Economic Affairs, dubbed the Better Gold Initiative (BGI), aims to support the implementation of the OECD Due Diligence Guidance by creating a direct mine to market path for sustainably produced ASM gold.

Peru has been selected as a pilot country for BGI, implemented through the Ministry of the Environment. According to estimates, some 100,000 illegal and informal miners are producing a value of around US$2900 million of gold each year in the country, also implying a significant loss in annual tax revenue. Alarmed by this situation and the related severe environmental and socio-economic consequences, during the first quarter of 2012 the Peruvian government took action and put in place a legal package of laws and decrees to start controlling the sector. These include, among others, the definition of illegal and informal mining, definition and timeframe for a formalisation process, mechanisms for environmental control, control of trade and use of chemicals like mercury and cyanide, and new penal laws for illegal mining related confiscation of property, money laundering, and organised crime.

From sustainable mine to market

After nearly two years of planning, including through various multi-stakeholder meetings in Switzerland and Peru, the BGI started its activities in March 2013. ASM gold mining is a motor for better livelihoods and sustainable development. The BGI’s overall objective is to build simple market mechanisms that honour a producer’s compliance with standards on traceability, accountability, labour conditions, and environmental, social, governance, and community relations performance. Consistent with the established objectives, an implementation strategy at a systemic level has been designed, which aims at generating a “mine to market” sustainable gold value chain. In order to accomplish this, the project is structured around four complementary components along the value chain, as illustrated in Figure 1. According to this framework, the BGI works to (i) strengthen the capacities of artisanal miners, in technical, organisational, environmental and social terms, (ii) facilitate the certification of responsible mining operations, (iii) collaborate with the Peruvian government to generate incentives for responsible mining, and (iv) generate the conditions to bring the Swiss demand for better gold closer to certified and strengthened producers. This takes advantage of a market opportunity and facilitates sustainable development through international trade.

Producers

The objective of this component is to assure that the existing supply of sustainably produced gold can be sold under favourable terms and that the supply increases gradually. A project management unit is responsible for setting-up, organisation, and implementation of the first component through a Business Service Platform (BSP) for ASM. The BSP is the mechanism that ensures that ASM can access services that allow them to move towards formalisation and meet standards for future certification. The BSP requires co-financing from the mining operations, which should also provide human resources, investments, facilities, etc. The project focuses primarily on aspects of technical assistance, training, audits, and certification.

Institutions

Instead of developing a new standard, BGI decided to build upon existing standards. To ensure compliance with standards the BGI is built around three certification schemes; the Fairtrade Standard and Fairmined Gold Standard, both newly revised for gold applicable to artisanal and cooperative structured mines, as well as the complementary standards of the Responsible Jewellery Council (RJC) certification system for industrialised small and medium scale miners. These certification systems ensure the buyer that the gold extraction and production is carried out in a socially and environmentally responsible manner. The objective of this component is to strengthen the Fairtrade, Fairmined, and the Responsible Jewellery Council standards and their corresponding certification systems in order to broaden their impact.

Policy

The objective of this component is twofold. First, to support the Peruvian government in the implementation of the new ASM legal framework, and secondly to share lessons learned from the BGI in the international arena, including with regard to extension options. With regard to the latter, feasibility evaluations are being conducted in Bolivia, Colombia, Ghana, and Mongolia. The BGI maintains a close relationship with all important stakeholders. These include governmental organisations, mining companies, as well as the Sociedad Nacional de Minería, Petroleo y Energía (SNMPE), the Peruvian society for mining, hydrocarbon and energy, non-state actors, donors, other projects, interested traders, and consultants. These stakeholders have been involved in the planning of the BGI in Peru and are now actively engaged in an ongoing policy discussion. These include, public policies for ASM formalisation, together with promotion and regional dialogue around the topic, and discussion in relation to mercury, namely to create a strategic plan in the context of the Minamata Mercury Convention. The recently signed Minamata Convention on Mercury aims at minimising global mercury emissions. The ASM sector is one of the most important global sources of mercury contamination and the BGI will help to address this issue by supporting miners in efforts to minimise mercury emissions during the gold production process and thus contribute to the successful implementation of the Minamata Convention.

Demand

The Swiss Better Gold Association (SBGA) is responsible for the implementation of the fourth component, which aims at strengthening the SBGA as a multi-stakeholder platform to advance sustainable development in the gold value chain. The SBGA was founded in April 2013 in Geneva. It encourages the demand for better gold among industry stakeholders, thus targeting those higher up the value chain, namely the watchmakers and jewellery brands, as well as investors. Members are committed to buying the full amount of gold produced by participating mines and reinvesting a contribution of US$1 per gram of better gold purchased back into a Corporate Social Responsibility (CSR) Fund, which supports social and environmental projects in ASMs that are certified or in the process of certification.

Future benefits and lessons learned

After one year of implementation the BGI system is fully operational. A first entire BGI gold supply chain from the Peruvian SOTRAMI mine, an association of 160 miners, has been implemented. Between September 2013 and April 2014, around 150kg of gold was delivered to Switzerland through this supply chain. Reflecting on this pilot project, certain evaluations could be made regarding the future benefit miners and communities will derive from the BGI. These include the payment of high gold prices guaranteed by Swiss refiners, as well as guaranteed purchase of miner’s entire gold production. The system also facilitates the recovery of VAT.

Sustainable solutions require common efforts between producer, industry, government, and civil society, and multi-stakeholder processes are a useful instrument in this respect. 

After nearly two years of planning and the first months of implementation it is also possible to draw some initial general conclusions and lessons learned about BGI. Importantly, a high gold price does not generate sustainable development in mining communities; contrarily, more mining produces more problems, especially from an environmental and social perspective. Therefore, sustainable solutions require common efforts between producer, industry, government, and civil society, and multi-stakeholder processes are a useful instrument in this respect. It is worth specifying that certification itself is not the objective, but rather demand for certified production has to be created and matched with production. Certification and sustainable production will be increasingly important to keep ASM in the formal supply chain, although certification must be coupled with good governance capacities in the mining regions. Certification schemes must also be integrated into national strategies, policies, and legal frameworks.

The price tag for certification and labelling can be very high, due to premium, labelling, management, and transaction costs for separate handling through the supply chain, so it is very important to find ways to control these to raise market acceptance. It is also important to include services such as transformation, logistics, transport, security, etc. The inclusion of partners with capacity to immediately scale-up finance or pre-finance is crucial, as ASM requires immediate payments.

Overall, for mining operations it is much better to have a continuous demand for the whole production; a small amount of gold demand is not attractive for miners. It is, however, very important to maintain a balance between available certified supply and the existing demand. After the first positive example with SOTRAMI, the market interest and demand seemed to grow much faster than the potential certified supply, as it takes a long time for mining operations to achieve certification. BGI may have to consider re-evaluating its sourcing options. Too much focus on Fairtrade and/or Fairmined certification may not adequately fulfil better gold demand in the future. With this in mind it will also be important to focus attention on the third standard mentioned above; RJC certification for small and/or medium sized industrialised mining operations.

BGI is now looking to African countries to meet the demand for responsibly produced gold. A large number of African countries have artisanal and small-scale gold mining, but not all have the necessary conditions for responsible production. Countries with a diverse gold mining sector, including a stable – as opposed to a gold rush based production – formalised and organised ASM sector, good governance and functioning institutions in the extractive sector on all levels – national, regional, local – transparent and competitive mineral and trading politics, as well as safe and peaceful environments, are some of the important conditions required for a successful future BGI intervention in new countries. 

[Photo attribution] Rob Lavinsky, iRocks.com – CC-BY-SA-3.0 [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

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