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COSP, FTMP and Premium Levels for Fairtrade/Fairmined Gold

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Annex Background Information on Fairtrade Minimum Price setting for Gold1


Some basics on mineral occurrences
Any part of the earth rust and in parti ular any mineral o urren e is made up of different minerals! "n ase of gold #and other pre ious metal$ o urren es, gold is ontained or in rusted %ithin or &et%een these minerals, or in ase of alluvial deposits dispersed in the gravel! Simplified, at mi ros opi s ale, a ertain parti le an &e either gold or not gold' if &eing gold, the parti le onsists of ())* gold, if it is some other mineral, it ontains ) * gold! At +ooming out to the si+e of one shovel of gold &earing ro , or gravel, this sample %ill ontain some parti les of gold! This an &e e-pressed as the grade of the mineral! As the gold grade is very lo%, it is usually e-pressed in ppm #parts per million$ %hi h is e.uivalent to grams per ton! "n alluvial o urren es, the grade is usually e-pressed in grams per u&i meter! "t is easy to imagine, that ea h shovel %e ta,e, %ill have a different grade, a ording to the amount of gold parti les in it, and that the larger the shovel is, the less the grade &et%een t%o shovels %ill vary! Thus, a larger sample %ill have a grade loser to the statisti al average! /ooming out at the entire gold o urren e, %e %ill additionally find out, that different parts of it have different average grades! 0esides of mapping the grade distri&ution of an area, any gold o urren e an &e hara teri+ed &y its grade1tonnage relation, %hi h follo%s usually a log1normal distri&ution!2

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3ithin the entire te-t 4gold5 refers to gold and asso iated pre ious metals #silver and platinum$! The shape of the urve depends further on the si+e of the 4shovel5, or 6 s ientifi ally spea,ing on the &lo , si+e! Artisanal mining is a&le to %or, very sele tively and thus on a very small &lo , si+e! As this is only marginally relevant for the present analysis, it is not dis ussed in depth!

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A7M Standards Coordinator, 8uly 2))9

COSP, FTMP and Premium Levels for Fairtrade/Fairmined Gold

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For some o urren es, %here the gold is dispersed in the host ro ,, %e annot even easily say %here the o urren e ends, as the surrounding host ro , also ontains gold! "n an e-aggerated %ay the entire earth is a gold o urren e, as any ro , ontains some tra es of gold!

So, w at makes a mineral de!osit "or a gold de!osit in !articular#$


First of all, 5ore: #or 5gold ore: in our ase$ is the result of an e onomi definition! For miners, any mineral that an &e e onomi ally mined is alled 5ore:, %hile any mineral that is not e onomi is ;ust 5ro ,:! Conse.uently, the definition of a mineral deposit is also an e onomi a umulation of e onomi ally minea&le ore is alled a mineral 5deposit:! one! Only an

"n ase of a gold o urren e, the delimitation of the gold deposit depends on the gold grade in the ro ,s! <very shovel that has enough gold in it to &e e onomi is ore' all the rest is ;ust ro ,! And every part of the o urren e %here a shovel of mineral is usually 5ore: is the deposit! "n summary, the average grade of all shovels that %ill go into mineral pro essing must allo% for an e onomi operation of the mine! The ne essary average ore grade that is re.uired to over the ost of mining and pro essing, and to ma,e some profit depends therefore on the pri e of the gold! The lo%est grade, %hi h allo%s in luding a shovel into the material to &e sent to the pro essing plant, results therefore from the statisti al grade1tonnage relation and is alled 5 ut1off grade:!

ROCK

ORE

"n onventional mining ut1off al ulation is a highly sophisti issue, often in luded in mine design optimi+ation soft%are and lin,ed to geologi deposit model data&ases %ith data from e-tensive e-ploration! Grade ontrol is one of the ,ey tas,s of running a mine!

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A7M Standards Coordinator, 8uly 2))9

COSP, FTMP and Premium Levels for Fairtrade/Fairmined Gold

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Artisanal and small1s ale miners do usually not have any geologi data from e-ploration %or,s, nor do they have geologists or mineral1e onomists to operate su h high1te h soft%are! 0ut as the underlying e onomi s are e-a tly the same, artisanal and small1s ale miners do e-a tly the same &y empiri al ut1off grade optimi+ation= they ;ust mine all ore that is e onomi ally minea&le for them!

Production costs
Mining onsists of t%o main pro esses= #a$ Mineral Extraction from the deposit #mining in a narro%er sense$ and #&$ Mineral Processing of the ore! 0oth pro esses have related osts= mining osts and pro essing osts, respe tively! Mining osts depend on the shape and geologi hara teristi s of the deposit, as %ell as on the applied te hnology! <-tra ting one ton of ore has a ertain, learly al ula&le ost! This ost also in ludes the e-tra tion of %aste ro , or over&urden if this is te hni ally ne essary! The ost of e-tra ting one ton of ore is ho%ever a&solutely not related to its gold ontent 6 it osts the same to e-tra t one ton of ore as to e-tra t one ton of %aste ro , %ith not enough gold in it to &e e onomi ally mined! "n general the same applies for mineral pro essing! To mill, %ash and to pro ess one ton of mineral osts mainly the same %hether it is ore or %aste ro ,!> 3hat %e see, is that mining and pro essing osts an &e learly determined at the &asis of osts in MO?<@/TO? or MO?<@/CA0"C M<T<7! Bo%ever, the ton or the u&i meter of ore is not a trada&le produ t! The trada&le produ t is the gold ontent %ithin that ton or u&i meter that an &e determined a ording to the formula= Content C Mass D Grade or Content C Eolume D Grade

Ben e, the produ tion osts in MO?<@/GOLF depend almost entirely on the grade of the ore! Ander the same onditions and %ith same produ tion osts in MO?<@/TO?, osts e-pressed in MO?<@/GOLF an &e astronomi ally high if the ore ontains no gold, or an &e e-tremely lo% if grades are e-tremely high! As the grade of the ore depends itself on the ut1off de ision, %hi h is a de ision &ased on the gold pri eG, it omes learly, that produ tion osts in MO?<@/GOLF depend on the gold pri e and are the result of an iterative optimi+ation pro ess!
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3ithout going deeper into ut1off grade theories, it should only &e mentioned here that this leads to further e onomi de isions # al ulated or empiri $ on 5mill ut1off grades:! On e mineral is already e-tra ted #e!g! in ase of lo%1grade %aste ro ,$ pro essing of this mineral %hi h %as not mined as 5ore: may &e e onomi , as it had to &e e-tra ted due to te hni al reasons and its mining osts are overed &y the 5mine ut1off grade:!
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As gold is traded %orld%ide during 2G hours and the spot pri e varies every se ond, the international referen e pri e is the Gold Fi-ing of the London 0ullion Mar,et Asso iation #,no%n as 4L0MA Fi-5$! This pri e #%hi h is reported daily &y all ne%spapers and ne%s agen ies$ allo%s trading partners to refer e-a tly to a third part set gold pri e #L0MA Fi-$ at a ertain day!

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A7M Standards Coordinator, 8uly 2))9

COSP, FTMP and Premium Levels for Fairtrade/Fairmined Gold

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This sounds ompli ated, &ut in pra ti e this is done either &y omputer soft%are for onventional mining or &y a .uite reasona&le empiri approa h &y artisanal miners! Pri e variations have thus mainly an effe t on the si+e of the deposit #the minea&le reserves$, &y elevating or lo%ering the ut1off grade and thus de reasing or in reasing the minea&le reserves!

ROCK

ORE

Lo% pri e= elevate ut1off grade

Bigh pri e= lo%er ut1off grade

ROCK

ORE

ROCK

ORE

"n onventional large1s ale mining operations, pra ti es li,e 5high grading: are in some ases reported, in order to in rease the net present value #?PE$ and there&y the shareholder value! This has never &een o&served in artisanal and small1s ale mining, as for artisanal miners the over1proportional ostly effort to o&tain a mining on ession and &e ome formali+ed needs to &e ompensated &y e-tra ting the deposit as omplete as possi&le! "n any ase, artisanal and small1s ale miners al%ays ad;ust the ut1off grade in a %ay, that the revenues over mining and pro essing osts #in MO?<@/TO?$ and generate a sustaina&le in ome!

Inter!retation of Production 'osts of A(M !ilots)


As an &e seen from the %idely varying results #e-pressed in MO?<@/GOLF$ from the A7M pilot pro;e ts, produ tion osts vary &et%een 2H) and IH) ASF/o+ #ASF / Troy oun eJ$!
O&viously the ut1off grade is not ad;usted on a daily &asis, &ut it is not unusual to ad;ust short1term ut1off grades for ea h ampaign or for ea h onsignment! J ( troy oun e C >(,( gr

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A7M Standards Coordinator, 8uly 2))9

COSP, FTMP and Premium Levels for Fairtrade/Fairmined Gold

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This %ide variation is in fa t the result of ad;usting the ut1off grade in ea h ase a ording to the lo al onditions! As the &aseline studies, arried out &y A7M simultaneously to the appli ation of the ost1of1produ tion tool and other independent investigations H demonstrate, individual in ome and livelihood situations for miners do not vary %idely among the different pilot sites! A further aspe t to onsider is that all A7M pilot sites are not 5ne%: artisanal and small1s ale mining operations! All of them e-isted already in the early 2)))Ks, %hen the international gold pri e hit its histori lo% of &elo% >)) ASF/o+! At that time their produ tion osts must have &een in the range of (J) ASF/o+, other%ise they %ould not have &een a&le to e-ist! Bo%ever, as the gold pri e %ent up, many of them started to lo%er their ut1off grade, in urring in higher produ tion osts and allo%ing them to e-tra t no% parts of their deposits that %ere not minea&le %hen the gold pri e %as lo%!

'+,'-.SI+,
(! "n ase of gold, determining a Cost of Sustaina&le Produ tion #COSP$ is not possi&le! Mining and pro essing osts are related to the volume or tonnage of mineral and not to the gold ontent of the mineral! Mineral is ho%ever not a trada&le produ t! There e-ist high grade deposits that allo% for high produ tion osts and lo% grade deposits that demand lo% produ tion osts in MO?<@/M"?<7AL! Produ tion osts in MO?<@/GOLF are mainly defined &y the ut1off grade %hi h #i$ depends re ursively on the pri e, and #ii$ an &e freely hosen &y the miners %ithin a %ide range! Produ tion osts in MO?<@/GOLF do not refle t or dire tly influen e the minerKs in ome! 2! As a COSP an not &e determined, a Fairtrade Minimum Pri e #FTMP$ an not &e set as a floor pri e li,e for other Fairtrade produ ts! <ven %orse, a floor pri e %ould not have an effe t on the minersK in ome, &ut %ould lead to infle-i&ility at ad;usting ut1off grades! Cut1off grades disarti ulated from real %orld %ould lead to unsustaina&le de isions in mine planning and mine operation L and ma,e produ ers ompletely dependent from Fairtrade! As gold is traded 2G hours a day, the 5L0MA Fi-: #T%i e a day announ ed pri es of the London 0ullion Mar,et Asso iation$ is the %orld%ide referen e pri e in gold trading! A FTMP for Gold is therefore &est set as a minimum per entage of the L0MA Fi-!

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0o&adillo, P! et al= ?osotros ha emos los pue&los! Proye to GAMA, Lima/Peru 2))I! Operating at a too lo% ut1off grade a mine that ould &e run e onomi ally %ill &e ome une onomi and %ill only &e a&le to sell to su&sidi+ing &uyers %ho aused the ut1off grade to &e set at unsustaina&le levels!

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A7M Standards Coordinator, 8uly 2))9

COSP, FTMP and Premium Levels for Fairtrade/Fairmined Gold

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Background Information on Fairtrade Premium setting for Gold0

Gold refers to gold and associated silver and platinum.

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A7M Standards Coordinator, 8uly 2))9

COSP, FTMP and Premium Levels for Fairtrade/Fairmined Gold

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Fairtrade Premium is proposed to &e initially set at H* #of the L0MA Fi- for the pure ontent$ for Fairtrade Gold9 plus an additional < ologi al Premium of 9* #of the L0MA Fifor pure ontent, (J* in total$ for Fairtrade < ologi al Premium Gold()!

(ationale
The O7O1E<7F<M fair trade program in Colom&ia inspired A7M to develop its STA?FA7F /<7O as the first glo&al ertifi ation s heme for responsi&le artisanal and small1s ale gold mining! O7O1E<7F<M ertified miners, %ho also parti ipate in A7MKs pilot pro;e ts, produ e and trade gold %ith e.uivalent hara teristi s as Fairtrade < ologi al Premium Gold! O7O1E<7F<M operates urrently at a Premium of (J*! The proposal to set the Premium for Fairtrade Gold initially at H* #N9* for Fairtrade < ologi al Premium Gold$ %as agreed in the A7M Te hni al Committee Meeting in O to&er 2))I &et%een produ ers and &uyers &ased on the follo%ing onsiderations= (! A (J* total Premium for Fairtrade < ologi al Premium Gold is in1line %ith the urrent mar,et for O7O1E<7F<M Gold! Setting the Premium at the same level avoids onfli ts &et%een O7O1E<7F<M and Fairtrade < ologi al Premium Gold, and allo%s for a transition, if desired &y O7O1E<7F<M miners! 2! "f the Premium differential &et%een ordinary and e ologi al gold is lo%, onsumers %ill pro&a&ly prefer #at almost the same onsumer produ t (( pri e$ Fairtrade < ologi al Premium Gold, limiting the mar,et potential for Fairtrade Gold and therefore limiting the development opportunities for the ma;ority of ertified miners %ho are not yet a&le to produ e Fairtrade < ologi al Premium Gold! >! "f the Premium differential &et%een ordinary and e ologi al gold is high, onsumers %ill pro&a&ly opt for onsumer produ ts made %ith a signifi antly heaper Fairtrade Gold, limiting the mar,et potential for Fairtrade < ologi al Premium Gold and therefore limiting the development opportunities for miners %ho are a&le and %illing to produ e Fairtrade < ologi al Premium Gold! G! 0ased on trading tests, it %as estimated, that an initial Premium differential of 9* has the &est han es to mat h supply and demand for Fairtrade and Fairtrade < ologi al Premium Gold in a &alan ed %ay! J! As real1mar,et1s ale data an only &e o&tained after mar,et introdu tion of Fairtrade Gold, it %as further agreed to revise the Premium levels during the first year every > months on demand of any produ er or &uyer! An ade.uate Premium differential shall assure &alan ed demand and supply for &oth types of Fairtrade Gold!

Fairtrade Gold (also called in this text ordinary gold for distinguishing it from ecological gold) refers to FAIR RA!"# and FAIR$I%"!# Gold& 'ilver or (latinum. () Fairtrade "cological Gold refers to FAIR RA!"# and FAIR$I%"!# "cological (remium Gold& 'ilver or (latinum. (( )e*ellery& commemorative coins and ingots& medals and trophies
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A7M Standards Coordinator, 8uly 2))9