Responsible Sourcing Newsletter: November 2024
Tue Nov 05 2024
For over a thousand years, from the Inca times to today, gold has been synonymous with Peru. Peru is one of seven countries shortlisted by LBMA’s ASM Taskforce for its potential to provide Good Delivery List (GDL) Refiners with responsibly sourced gold from artisanal and small-scale mines.
LBMA has travelled around Peru as part of a due diligence assessment of the country’s ASM sector, with the purpose of evaluating the state of government formalisation efforts, identifying potential suppliers to the GDL and examining the extent of their due diligence practices.
Below is a snapshot of some of the observations and findings that came out of the visit. In the coming weeks, a longer report will be shared with members of LBMA’s ASM Taskforce.
Letter from Peru
he rugged landscape is both beautiful and harsh. Miles after miles of inhospitable granite and dust. The mountains cannot quite be described as the foothills of the Andes. They are higher than that. Vertical peaks jutting
straight up as much as 2500 metres.
We drive mostly beside the almost dry riverbed that flows to the Pacific Ocean
far in the distance behind us. The river will be swollen again with water come
January and February when the rainwater floods from the higher
peaks.
Villages lie in the bowls of the mountains or on the occasional flat space
safely above the high-water mark of the nearby river. Terraced lines of simple
concrete houses, some painted different pastel colours, sit scuffed and faded
by the unrelenting sun and dust.
The riverbeds - lush and green - offer a stark contrast from the grey and sand
that otherwise dominates the landscape. Locals plant their crops there,
benefitting from the close proximity to perhaps something almost as rare as
gold: water. The plots are full of mango and olive trees, rows of corn and
pisco, the grapes used to make Peru’s signature cocktail, the Pisco Sour.
We are here - myself and LBMA’s ASM consultant Gregory Mthembu-Salter - to assess the potential of responsibly sourced ASM material. Peru is one of seven ASM producing countries shortlisted under the LBMA’s
ASM initiative. Our visit offers us the opportunity to meet directly with high-level government officials, industry stakeholders, and ASM suppliers - miners, aggregators and intermediate refiners - identified as offering the most potential to meet LBMA’s due diligence and sourcing requirements.
Over the course of two weeks, we visited several mines associated with the
Swiss Better Gold Association (SBGA), as well as the operations of two
aggregators and intermediate refiners currently supplying GDL Refiners - Minera
Titan del Peru (MTP) and Dynacor. While in Lima, we also met with senior
officials in the ministry of mines and energy and the trade association
representing domestic processors (Amplaben).
Peru offers a unique case study as a country with which GDL Refiners can engage
and find a steady supply of responsibly sourced ASM gold.
The violence and insurgencies by the Shining Path, a guerrilla organisation
active in the 1970s and 80s, is a thing of the past. Peru is the biggest
producer of gold in Latin America, and the sixth largest in the world, with
estimated gold production of 125 tonnes per year. Almost a third of this
production - approximately 39 tonnes - comes from the ASM sector. It is
important to note that this is a conservative estimate as authorities and
independent analysts are aware that many more tonnes are smuggled across the
border to neighbouring Bolivia and Ecuador.
The mining sector plays an oversized role in the economy, with copper, silver and gold accounting for the three biggest export earners for the country. While a few thousand people work in large scale mining (LSM), more than half a million people are directly and indirectly linked to ASM. In light of this the government launched a formalisation process for ASM actors in 2012 that, while imperfect (more on this in a minute), represents one of the most significant efforts by any government to legalise the sector.
For a long time, Peru was like many ASM producer countries. The economy is
overwhelmingly informal. The government had no coordinated plan or interest in
the ASM sector, consciously or otherwise, acquiescing the space and control to
the informal miners, and the often criminal elements operating in the sidelines
ready to offer pre-financing, mercury, and a way to launder their gold into
international supply chains. The result was chaotic, volatile and combative,
and reinforced a position of avoidance by GDL Refiners.
But the uniqueness of the Peruvian context comes into focus in San Juan de
Chorunga, a mining town a seven-hour drive west from the provincial town of
Arequipa. We are here to visit the Orex mine, a supplier of material to the
SBGA, that partners with GDL Refiners and luxury jewellery brands to promote
responsibly mined ASM gold. Last year, SBGA-affiliated miners, spread across
several Latin American countries, exported approximately 4 tonnes of dore to
Switzerland.
Orex is a medium-sized mine with extensive underground operations. They are
somewhat of an anomaly in the Peruvian mining sector. Instead of fuelling a
conflictual relationship with the artisanal miners operating illegally on their
concession, Orex buys and processes their material on condition they meet
certain requirements. These include that suppliers be licensed with REINFO (the
agency overseeing the formalisation process), pass their internal due diligence
process, and mine in agreed areas. The company also made it a policy to only
source from miners that were related to mine staff or have ties to the local
area.
The reason for this is because Venezuelan gangs - easily identifiable by their
distinctive Spanish dialect - have infiltrated several mining areas, causing
societal grief and increasing the sphere of illicit influences. By having their
suppliers locally vouched for provides Orex with additional confidence in their
supply chain.
Orex also operates as an aggregator and processing plant, converting the mined
material to carbonated ore powder that is later exported. ASM material accounts
for half of its daily production, the other half coming from the company’s
industrial mine next door.
This model demonstrates that co-existence and collaboration between ASM and LSM
actors is not only possible under the right conditions, but a template for
others to follow. Orex has built goodwill and loyalty among the miners by
deftly offering a range of incentives, including providing water, a delivery
truck to bring their ore to the processing plant, and pre-financing with which
to buy mining equipment like compressors and generators. With the mine located
among arid mountains, the water is undoubtedly one of the biggest incentives
offered. With the help of SBGA, Orex launched an emergency brigade last
November to support ASM miners in the event of any accident. The mine, as part
of its onboarding with SBGA, recently became one of the first ASM providers to
use LBMA’s ASM Toolkit.
Because of the high levels of distrust and concern by miners about being taken advantage of, Orex is transparent with miners about how their ore gets processed, allowing them to watch the material at all times as it goes through the conversion process to carbonised powdered ore. They are also provided a sample bag to get a second opinion if they disagree with the lab grading of the material. This process is consistent with what we later witnessed during our visits to Dynacor and Minera Titan del Peru (MTP), two intermediate refiners and LBMA members who go the additional step of producing dore for GDL Refiners. In all three cases, material is processed without the use of mercury.
Peru’s formalisation process is not perfect. It is widely criticised for having
no end date, with successive governments of different political persuasions
adding extension after extension to the REINFO process. Only 2% of those who
have begun the process have completed it, largely due to insignificant
government resources to approve all the applications. There are ample examples
of legally registered miners operating on concessions or land they aren’t
entitled to, opening up the potential for conflictual relations with companies
and landowners. The approach is part compromise and part practical, driven by a
belief that it is better to bring as many into the formalisation stream as
possible, registering the various actors with tax authorities so that at least
they know where people are mining and that taxes are paid on the ore that is
mined.
And this is where there is an unlikely hero in the Peruvian formalisation
process: Sunat, the country’s tax authority. The taxman is one of the most
feared entities in Peru. “They are like a monkey with a machine gun,” one
industry member complains.
In Peru, the formalisation process begins with registering with REINFO, which
gives applicants a tax number. Most often, those registering are small
companies comprised of either a mine owner with employees or a collection of
miners that work collectively. Material received by processors or intermediate
refiners must be charged 18% VAT, which they can then claim back from the tax
authority once all documentation is verified at the point of export. This
system offers a lever by which to ensure all entities along the formal value chain
have paid the relevant taxes.
While
it doesn’t stop the illicit market entirely, it serves as a foundational step
in the right direction. Tax regimes are usually one of the biggest motivators
for the illicit trade. If a government applies a too onerous burden, the
material invariably leaks to neighbouring countries. In Peru, authorities have
capitalised on a desire by many miners to obtain the credibility that comes
with being legally recognised to secure their participation and compliance in
the tax system. It is still a work in progress, and the informal market is
still strong. However, it represents one way for GDL Refiners to identify the
legitimate sources of ASM material.
Collectively, Gregory and I have over 30 years’ experience working in and around
artisanal mining on the African continent. Never once, anywhere, have we seen a
miner pay a legal tax; never mind encounter a government able to figure out a
system capable of working. It’s a good example of progressive improvement at
work. Incrementally moving the dial toward better.
Peru was the second ASM target country for LBMA to
visit after a similar trip to Ghana in June, recently covered in the Alchemist and also in the new Alchemist Bitesize digital content stream launched in October. Such
visits are critical to better understanding the local nuances and challenges of
each country’s ASM sector. In the coming weeks, a more detailed report will be
shared with the ASM Taskforce highlighting the insights gleaned from the trip
and how those learnings can be integrated into the broader engagement LBMA and
GDL Refiners have with ASM suppliers in the future—not just in the current
target countries but around the globe.
Our Responsible Sourcing team will be hosting two virtual drop-in sessions to give guidance to Compliance Officers at GDL Refiners regarding what is expected from them when preparing and submitting a Compliance Report.
The drop-in sessions will take place on Wednesday, 13 November at 09:00 GMT for those based in Asia/Australia/Europe, and on Tuesday, 19 November at 15:00 GMT for those based in the Americas.
The sessions will cover report submissions, including the new submission process for 2025 via the Gold Bar Integrity (GBI) Database, common issues identified with FY2023 compliance reports, along with best practice examples. There will also be an opportunity for Compliance Officers to ask and discuss any questions.
Source: https://www.lbma.org.uk/