Companies Turn Awareness to Avoiding Use of Conflict Minerals

Businesses are investigating their mineral supplies so that they don't run afoul of the Securities and Exchange Commission

June 01--Sam Bennardo spends a fair amount of time figuring out where his company gets gold and tin.

The two metals are used in a fraction of the products made in Canonsburg-based Auma Actuators. Still, Bennardo has to know, because Auma is a link in a supply chain for some of the nation's largest companies that, as of June 2, must tell federal regulators whether they use "conflict minerals."

"They come to us, and we have to do our due diligence," said Bennardo, president of Auma, which makes parts for power plants and water treatment facilities. "We have to go to our suppliers and ask them the same questions the big companies are asking us."

Bennardo's experience is shared by hundreds of thousands of small businesses that are investigating their mineral supplies so that the nation's largest firms don't run afoul of the Securities and Exchange Commission.

Part the 2010 Dodd-Frank Act, the conflict mineral rule applies to companies whose products use any of four minerals -- tin, tantalum, tungsten and gold -- tied to armed conflicts around the Democratic Republic of the Congo.

Intended to choke off financing for violent militia groups, the rule stems from concerns among consumers and investors about whether the proceeds from American products are funding violence in Africa.

Experts say it is difficult to know what impact the law will have on global conflicts. But in the near-term, the effects on companies have been far reaching and potentially expensive.

Initial costs of compliance could be between $3 billion and $4 billion, with annual expenses thereafter ranging between $207 million to $609 million, according to the SEC. Those costs will be bourne by an estimated 6,000 SEC-listed companies and 278,000 smaller firms that do business with them.

One of them is Vista Metals.

The 125-employee McKeesport company makes preforms using tungsten carbide. So, when tungsten was included among the "conflict minerals," there was no question Vista would be affected, said Mark Shelleby, Vista's treasurer.

The SEC rules on reporting standards are vague, but companies that use conflict minerals have to make an honest effort, or "reasonable country of origin inquiry," to determine the mineral's source.

For the middle-tier suppliers such as Auma or Vista, it works like this: First, they figure out which of their products contain conflict minerals. Then, they make inquiries with their suppliers to figure out the country of origin.

The supplier, such as Kennametal, provides a statement describing its due diligence to determine whether it buys minerals from "a conflicted area." Then, Auma or Vista completes a written declaration, typically a three-page template, in which they declare the steps taken to verify the mineral's source. That declaration is sent on to customers who request it, who then incorporate it in their documentation for SEC companies.

The template most companies use was developed years ago by the Electronic Industry Citizenship Coalition, a group of electronics companies concerned with social and environmental responsibility in the global supply chain.

Vista collected declarations from six mineral suppliers and fielded documentation requests from about 75 customers, Shelleby said.

The process was a hassle but not a huge expense -- perhaps $5,000. But Shelleby said he still felt the rule was unnecessarily burdensome.

"The intention of the regulation is very good. You want to do the right thing," he said. "But the over-reach has been excessive. It has to be maintained. Any new supplier is going to have to supply that certificate to us."

The SEC rule has helped establish an industry of firms advising manufacturers on how to comply with the law. One is the global audit, tax and advisory firm KPMG.

The complexity of supply chains has made the task of sourcing conflict minerals a significant challenge, said KPMG Advisory Managing Director Charles Riepenhoff Jr.

"Given the breadth and depth of supply chains and the global reach, many companies are struggling to get responses and to verify the information -- including getting to the right person and assessing if the contact reviewing the survey has sufficient knowledge to understand the requirements," Riepenhoff said.

A legal challenge to the law has added to the confusion. In April, the U.S. Court of Appeals for the District of Columbia struck down part of the regulation that forced companies to list their products as "conflict free," or not, which the court said violated companies' First Amendment rights. As a result, companies only have to prove that they investigated their supply chain.

Now, it will be more difficult for investors to figure out which firms might be inadvertently financing conflict in central Africa, and that uncertainty could shake up markets, said Paul Griffin, a professor at the UC Davis Graduate School of Management.

"I think what's going to happen is this new round of disclosures is going to impose additional costs on these (SEC-listed) companies, mostly around the uncertainty of not knowing whether they are involved in these activities in the DRC," Griffin said. "So it's a big mess."

Still, it is a mess that some believe may yield benefits. It could help standardize reporting for corporate social responsibility and be an opportunity for companies that "drive customer loyalty through the morality of their market," said Brett Crawford, a professor at University of Pittsburgh's Katz Graduate School of Business.

Bennardo said the law has had no upside for Auma. Shelleby, at Vista, said the requirement has been burdensome, but it hasn't led to changes in sourcing (neither Auma nor Vista get minerals from the Congo) or the quality of Vista's products.

If there is an advantage, Shelleby said it is in peace of mind.

"There is the benefit of knowing we are being a good corporate citizen in support of sourcing our raw materials from respectable global sources," he said.

Chris Fleisher is a staff writer for Trib Total Media. He can be reached at 412-320-7854 or [email protected].

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