Mineral Trading

5. How to mitigate risks

Due diligence

Successful mineral trading governance rests on the reliability of all parties involved in the trade, meaning that proper due diligence will significantly mitigate potential risks. Such risks include those that stem from malicious business practices of certain companies, such as the above outlined profit shifting, but also include scenarios in which a company does not hold up to agreed terms of a trade, e.g. in form of delayed delivery or payment.

Due diligence systems, as a means to investigate certain businesses or individuals, can therefore help governments in many ways along the whole value-chain -- be it in the role of the regulator or even that of a trading partner.

In its simplest, due diligence can be conducted by gathering information about an entity under scrutiny. Usually, such investigations take place before the signing of an agreement with the intention to check the reliability of the counter-party to the deal. Such ad-hoc due diligence therefore includes looking at a company’s track record, financial stability, leverage, credit ratings etc, before then giving green lights to proceed with the deal, or not.

Due diligence can moreover be a stabilizing factor, when it comes to the stability of the trading sector in a particular country as a whole -- and if carried out as a routine procedure or even a legal obligation. Just like it has become standard practice on stock markets, where brokers are expected to do due diligence before offering the stock of any company, governments can also improve the functioning of their country’s trading sector if they require due diligence to be triggered in specific scenarios. Such scenarios can be the purchase of an exploration or production license, shipments of cargoes over a certain size or value, or in the case of asset transfers.

Contract analysis and activating access to information rights

Revenue forecasting and routine financial analysis of contracts represent further means to mitigate governance risks in the trading sector. In particular, such practices can reduce the exposure to price volatility and transfer (mis-)pricing, as well as help governments in resource-dependent countries to improve budget planning.

As outlined above, commodity prices have historically shown a high degree of variance, while at the same time being a key factor in determining how much money a government will receive from its resources. The risks associated to such price movements can therefore be decreased by routinely monitoring changes in spot prices, as well as when a range of different price, production and cost scenarios are taken into account to forecast future government revenues.

To reach maximum accuracy, however, such forecasting will have to take in project-specific factors as well, such as the underlying contract terms that govern profit allocation from resource production. For example, the valuation of commodities is often set in contracts that are particular to a specific project, such as an oil field or a mining site, and can vary from one contract to another. Equally important to look at on the project-level are information on capital expenditure programmes and on operating costs, as they are key inputs to revenue forecasting and have a high impact on the levels of profits that will be achieved by a producing company and that can be taxed.

These resource contracts, however, often state the right for governments to request access to all of such data, including to information on production, capital expenditure and operating costs. Governments can therefore make use of these contract clauses and request companies to disclose all relevant inputs that are required to accurately forecast revenues.

Routine contract analysis and revenue forecasting furthermore comes with two by-products that can be of help to governments to further mitigate risks associated to minerals trading. First, checking on the required inputs to forecasting, and in particular on production and cost data, is helpful also to identify areas of where companies might overstate or undervalue transfer prices. Second, conservative forecasts will allow to reduce exposure to the above outlined boom and bust cycles that are typical to the resource sector.

Transparency initiatives


The Extractive Industries Transparency Initiative (EITI) is a global standard to promote the open and accountable management of extractive resources. It seeks to address the key governance issues in the oil, gas and mining sectors, more recently now including that of trading. As of 2016, the EITI standard is implemented in 51 countries around the world, with each of these countries annually disclosing information on contracts and licenses, production, revenue collection, revenue allocation, and social and economic spending.

As a multi-stakeholder forum, the EITI process allows to facilitate reforms aimed at addressing weaknesses in government systems and improving extractive sector management.

Civil society initiatives

Several civil society organisations, such as the Natural Resource Governance Institute, the Publish What You Pay network, or the Berne Declaration, have repeatedly brought up that physical trading of oil, gas and minerals is currently subject to limited regulation and even fewer reporting requirements. Efforts from these organisations particularly aim for requirements for trading companies to disclose information on transactions with government entities.