Case Study 9: Precious Metals Sales
Background
At the request of the Secretary of Energy, the Office of Policy conducted the first-ever complex-wide inventory of Departmental assets. That baseline effort identified large inventories of materials and other assets that exceeded declining mission needs, including more than 10,000 pounds of gold, silver, platinum, and other precious metals. The inventory did not count precious metals in weapons scheduled for dismantlement or consider what DOE’s nonweapon precious metals are worth—about $52 million.1
During the same time, the Department’s Inspector General reviewed the management of precious metals throughout DOE and concluded that a large portion of the precious metals inventory was potentially surplus to current missions. As a result of the inventory and the Inspector General’s report, the first sale focused on the disposition of surplus precious metals. DOE field organizations were asked to identify surplus materials within their inventories. Their response was the basis of Secretary O’Leary’s announcement in May 1995 that the Department would conduct its first sale of surplus precious metals.
Tiny gold microshells on a U.S. quarter
The Effort
In preparation for the sale, the Oak Ridge Precious Metals Business Center explored whether the amount of precious metals identified in the May 1995 announcement was still available for sale and determined the materials’ condition. The Oak Ridge Precious Metals Business Center found that, in the interim, the amount had decreased somewhat due to new requirements and that about half the amount needed additional refining before it was marketable. However, the Center also determined that a significant amount of precious metals could be made available from other sources within the Department. Thus, the sale was split into three phases. The first phase focused on the precious metals that were already on consignment with precious metals brokers and thus were available for immediate sale. The second phase focused on inventory that needed to be refined prior to sale. The third phase will involve materials now identified as “in use” and, therefore, will require additional coordination and a determination of need prior to sale.
Current Status
The sale under phase 1 was announced in the Commerce Business Daily (CBD) and consummated in November 1995. The Department obtained more than $3 million in net proceeds from the sale.
The second phase of the sale commenced in March 1996. A contract for precious metals refining was awarded by the M&O contractor for the Precious Metals Business Center, to the Engelhard Corporation. Under this contract, approximately 1,900 troy ounces were recovered, most of which was platinum. The remainder included gold, iridium, rhodium, ruthenium, and palladium. In addition, 1,700 troy ounces of mostly gold was recovered from Pantex’s weapon disassembly efforts (discussed later in this case study).
In planning the sale of these recovered metals, DOE coordinated with the Department of Defense (DOD) since the fiscal year 1996 National Defense Authorization Act requires DOE to transfer certain precious metals for disposition to DOD, unless DOD determines they are not suitable for DOD stockpile disposition activities. By letter of June 17, 1996, DOD concurred with a DOE sale of the gold and silver. The platinum was not sold, but rather used to fill a request from DOE’s own National Ignition Facility. A CBD announcement for the gold and silver was issued by DOE in June 1996. Although DOE received three bids on the metals, none was near market value and the sale was not consummated. DOE is currently analyzing why the bids were low.
The third phase of the sale involves metals that are in the “in use” inventory and as such allows the Center to focus on long-range management issues. In February 1996, the Center issued a request throughout the Department for annual forecasts ofwithdrawals and returns to the Precious Metals Pool. The request covered the 1996–1998 period to allow for management planning. Initial responses were received from 17 DOE sites. Additional responses are still being received as sites identify metals being released from program use.
The third sale will be of precious metals recovered from the material identified as surplus by these 17 sites. Approximately 7,500 troy ounces of material containing precious metals is included. This is about twice as much material as was sent to the refining contractor in preparation for the second sale. Although material composition will vary, it appears that the precious metals recovered after refining will be considerably larger than the amount recovered in the earlier effort.
Lessons Learned
A number of institutional barriers were identified during phase 1. The first was the lack of a formalized process for determining what assets were excess throughout the Department. The inventory available for the sale was identified by querying the DOE field offices rather than through a more formal mechanism. Although adequate for this relatively small sale, this informal process would not suffice for larger volumes or more complex sale efforts. A complete inventory should assist the Department’s planners in determining what assets are needed to meet mission goals.
Other institutional barriers involved internal accounting concerns. Precious metals purchased through programmatic funding were required to be maintained on that particular program office’s accounting records. To make the precious metals available for sale, the accounting system would have required that the Oak Ridge Precious Metals Business Center purchase this inventory from the other DOE field components. This approach would require the Materials and Asset Management Program to obtain large-scale funding prior to any sale. This issue was resolved for the first sale by directing field components to transfer surplus precious metal inventories to the Center for subsequent sale. Long-term resolution will require accounting changes to provide incentives for future sales. DOE plans to seek specific authority in the fiscal year 1998 appropriations process for specified pilot projects that will allow for reinvestment of derived proceeds into efforts designed to reduce the cost of maintaining DOE assets.
A second accounting concern involved recording receipts from the sale. In keeping with the deficit-reduction goals of the Administration, these proceeds are slated for return to the Federal Treasury. This step, however, required the creation of a new accounting mechanism within both the Treasury Department and DOE to accept the receipts. (See related discussion under Financial Accounting Issues in this chapter).
The lessons learned from the November 1995 sale are significant, particularly in the context of the total potential precious metals available for sale in the future. Starting in February 1996, the Department of Energy started “mining” precious metals from dismantled nuclear weapons. Published reports cited by the DOE Inspector General estimate that the U.S. nuclear weapon inventory will be reduced from an excess of 25,000 weapons to less than 5,000 weapons. The precious metals include primarily gold and silver and are contained in electronic nonnuclear and other components of nuclear weapons. There are about 1,000 tons of precious metal-bearing scrap projected to be generated from weapon dismantlement over the next 10 years with a potential value estimated by DOE’s Inspector General at $36 million.
The goal of the “mining” program for precious metals from nuclear weapons is to return money from precious metal sales to the U.S. Treasury and to avoid hazardous-waste regulatory costs. The effort is succeeding. The first of many anticipated shipments to the precious metal refinery have already returned more than 1,300 troy ounces of gold and 1,400 troy ounces of silver. The cost to DOE to dispose of these materials was estimated to be approximately $180,000. The cost to DOE to recover the metals was $120,000. The striking result from these efforts is that the metal from this first shipment is valued at over a half million dollars and will be included in follow-on sales by the Precious Metals Business Center.
1U.S. Department of Energy Office of Inspector General. Audit of Department of Energy’s Administration of Precious Metals. DOE/IG–0375. June 20, 1995.
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