What are Offtake Agreements?
An offtake agreement is where a producer of a resource and a buyer of a resource agree to purchase/sell portions of the producer’s future production. In the mining industry, there are several metals that are not openly traded on exchanges and that are dependent on individual long-term purchase contracts between buyers and sellers, such examples include graphite, tungsten, vanadium and lithium.
An offtake agreement is normally negotiated prior to the construction of a mine to secure a market for the future output of the facility. If lenders can see the company will have a purchaser of its production, it makes it easier to obtain financing to construct a facility.
Offtake agreements are advantageous for both the buyers and sellers. In addition to providing a guaranteed market and source of revenue for its product, the seller can guarantee a minimum level of profit regarding their investment.
Since offtake agreements often help secure funds for facility creation or expansion, the seller can negotiate a price that secures a minimum level of return on the associated goods, lowering the risk associated with the investment.
Offtake agreements can provide a benefit to buyers, functioning to secure a price before production. This can function as a hedge against future price changes if demand outweighs supply. It also provides a guarantee that the requested assets will be delivered, as the delivery is considered an obligation on the part of the seller.
Golden Dragon Capital Limited assists companies in entering China looking to sign an offtake agreement, which have been increasing in frequency between development stage mining companies and financing parties looking to invest in the project over the past couple of years.