Under an offtake mining agreement, a buyer or offtaker commits to purchase a specified quantity or portion of a seller’s future mining output. Offtake mining agreements run for varying lengths, including spot, short-term, and long-term. Under a spot contract, the purchase price is a one-time price that the buyer and seller agree on. Contract length varies but can be as long as 30 years.
An offtake mining agreement offers various benefits. From a seller’s perspective, it guarantees revenue from the sale of output, which can be a key determinant when trying to acquire project financing. The buyer benefits from the guaranteed receipt of a specific amount of output over a specified time frame. Depending on the agreement’s pricing provisions and contract length, an offtake mining agreement can also benefit a buyer by hedging against future price increases.
Offtake mining agreements also involve risks, including the possibility of a counterparty failing to fulfill its contractual obligations and preclusion of the chance to take advantage of short-term profitable opportunities that
the contracting parties otherwise could in the absence of a contract.
Some of these risks are difficult to predict and can lead to disputes between the contracting parties. Among other factors, disputes in the mining industry commonly arise due to the contracting parties disagreeing on supplied volume, pricing, quality, shipping/delivery, and force majeure (uncontrollable circumstances that can cause the performance of a party’s contractual obligations to become impossible or impracticable).