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Companies & Organisations · 6 min read
What an offtake agreement commits each side to
How a future mine's output is sold before the mine exists: the terms an offtake fixes, why lenders ask to see it, and what an ASX-listed company is generally expected to say when it signs one.
Reviewed by Peter Uppal
The short version
An offtake agreement is a contract under which a buyer agrees to purchase a producer's product before that product has been made. A 2024 law-firm practice note on critical-mineral offtakes says the terms vary by deal but often cover volume, product specifications, a pricing mechanism and payment terms, conditions precedent, and delivery requirements. The same 2024 law-firm practice note describes offtake agreements as one of the key documents financiers look to when judging whether a project is bankable.
A sale agreed before there is anything to sell
The practice note from Herbert Smith Freehills Kramer defines it as an agreement in which an offtaker agrees to buy a producer's product before that product is produced. Two parties sign. One is a company that intends to produce a mineral product; the other is a buyer prepared to commit to taking it.
What each side gets is different. For the producer, the note says, securing offtake agreements with credible counterparties reduces operational and development risks. For the buyer the commitment can cut the other way. A project-finance overview by two Milbank lawyers observes that minimum-volume commitments can be particularly burdensome on the buyer, who may later look for a way out of the deal.
What the paper fixes
The practice note is careful to say that the agreements are transaction specific; their terms often cover volume, product specifications, a pricing mechanism and payment terms, conditions precedent, and delivery requirements. Volume is set out in a particular way: a term sheet detailed enough to be bankable sets out the annual quantity and the periods over which product is supplied across the year.
A mineral-sands example shows each of those terms filled in. In January 2024 VHM announced a binding offtake with Shenghe Resources (Singapore) for its Goschen Project. It covered up to 6,400 tonnes a year of rare earth mineral concentrate and up to 100,000 tonnes a year of zircon-titania heavy mineral concentrate, each about 60% of forecast production, VHM said. The term was an initial three-year term, running from the completion of the ramp-up period, the time a new plant takes to build up to full output.
Quality was described rather than left open. VHM described the products as a rare earth concentrate above 58% total rare earth oxide and a zircon-titania concentrate of high-grade zircon, rutile, leucoxene and ilmenite.
Price was set as a mechanism, not a number. VHM's summary gives a floating price for the heavy mineral concentrate based on a publicly available zircon index, and for the rare earth concentrate on publicly available monazite pricing.
The conditions precedent, the things that must happen before the agreement takes full effect, were listed as well. VHM named, as conditions in its own favour, the Goschen Project Phase 1 final investment decision and ministerial and regulatory approvals, along with other customary conditions.
A buyer signing an offtake is promising to buy something that does not yet exist.
Take or pay, and what it shifts
Take-or-pay sets what the buyer owes if it does not take the product. In VHM's case, the company said Shenghe must take or pay for all the contracted tonnage once the plant reaches 90% of nameplate capacity, the output the plant is designed for. The contracted tonnage is the share set out above, not the whole of the plant's output.
The Milbank overview places such clauses at the centre of most major project financings, not mining alone. It describes long-term take-or-pay or similar contracts, which in all their permutations "underpin most major projects", with the purchaser agreeing to take a minimum level of output at a price based on some form of set formula. The effect, it says, is that the project is insulated, at least to some degree, from long-term market conditions, the thing it can least control. The same overview notes that whether to include price re-openers for huge, unanticipated market shifts can also be contested; a re-opener lets the parties renegotiate the price.
Length adds its own difficulty. For long-term offtake agreements, future risks are harder to predict, the practice note says.
How binding is binding
An offtake can be signed as a term sheet or as a full-form agreement, and the difference matters to a lender. The practice note's view is that a binding term sheet can be drafted in enough detail to be bankable, but an abbreviated short-form term sheet won't be sufficient. It adds that a full form agreement is typically more bankable.
A full agreement carries more of the machinery. According to the note, full-form agreements may add detailed termination and suspension clauses and price review clauses; even a bankable term sheet should address the buyer's liability for non-purchase on quality grounds.
Why a lender asks to see it
The note's explanation is that offtakes are one of the key documents that financiers look to in evaluating the bankability of a project. VHM says the same of its own contract. It said a binding offtake for first production provides a favourable influence on the bankability for the Project.
Sheffield Resources made the connection to debt explicit. In a presentation released in September 2018, it told investors that its binding offtake met a condition precedent contemplated for its debt financing. In 2018 Sheffield said all Stage 1 premium zircon and zircon concentrate was under binding contracts, with Stage 2 production unallocated from 2024.
What a listed company is expected to say about one
On the Australian Securities Exchange, a material offtake can be a disclosure matter. ASX's guidance on continuous disclosure lists the entry into, variation or termination of a material agreement among examples of information that could be market sensitive.
For a contract with a customer, ASX would generally expect the announcement, depending on the circumstances, to cover the term of the contract, any material conditions to be satisfied before the customer is legally bound, and the contract's significance to the entity. Where an entity does not lodge the agreement itself, the announcement should contain a fair and balanced summary of the material terms. A statement about the projected revenue from a customer contract is forward-looking and must be based on reasonable grounds. The guidance also flags failures to disclose when a previously announced material customer contract does not proceed or is terminated.
Before signing, the position is different. Under the Listing Rule 3.1A exceptions, information that concerns an incomplete proposal or negotiation may be withheld while it is confidential, provided every limb of the exception is met. On this publication's reading, that carve-out is one reason an offtake may reach the market only once it is signed.
Related
- Mining Companies
- Commodity Prices
- Market Developments
- Supply & Demand
- Government Agencies
Sources
- SECONDARYHerbert Smith Freehills Kramer (Leary, J. and Marsh, E.), 'Term Sheet or Full Form Agreement for Critical Mineral Offtake Agreements?', practice note, 24 October 2024. Definition of an offtake agreement; terms often included; term-sheet table (annual quantity and supply periods; purchaser's liability for non-purchase for quality issues); full-form clauses; bankability; producer risk; long-term risk.
- PRIMARYVHM Limited (ASX: VHM), ASX announcement 'VHM Signs Binding Offtake Agreement', 31 January 2024 (Goschen Project offtake with Shenghe Resources (Singapore)). p. 1: volumes, initial three-year term, product description, statement on bankability. p. 3: term from completion of ramp-up; floating pricing basis; take-or-pay from 90% of plant nameplate capacity; conditions precedent in favour of VHM.
- PRIMARYSheffield Resources Limited (ASX: SFX), investor presentation to the Zircon Industry Association conference, released to ASX 6 September 2018 (the cover reads September 2017; the contents date it to September 2018). p. 10: binding offtake and the condition precedent contemplated for debt financing. p. 24: Stage 1 premium zircon and zircon concentrate under binding contracts; Stage 2 production unallocated from 2024.
- PRIMARYASX Limited, ASX Listing Rules Guidance Note 8: Continuous Disclosure: Listing Rules 3.1 to 3.1B, as amended 5 June 2021. Section 1 (Listing Rule 3.1A exceptions); section 4.1 (examples of information that could be market sensitive); section 4.15 (announcements of customer contracts; forward-looking statements; summary of material terms); footnote 110.
- SECONDARYFletcher, P. and Marsh, C. (Milbank, Tweed, Hadley & McCloy), 'The Art of Getting a Project Finance Deal Through', in Getting the Deal Through: Project Finance 2014, p. 4. Take-or-pay and similar long-term contracts; minimum volume commitments; price re-openers. A general project-finance overview, not specific to mining.
- ANALYSISANALYSIS: the reading that the Listing Rule 3.1A carve-out for incomplete, confidential negotiations is one reason an offtake may reach the market only once it is signed is this publication's.Non-public document · no public URL
