Off Take Financing in Mining
Mining companies in the global market face challenges such as unpredictable pricing, human resource and technological issues. However, one of the main challenges is finding suitable financing sources for the extraction and processing of mineral resources. Royalty deals, off-take agreements, strategic partnerships and earn-ins are becoming increasingly important for miners of all stages.
Given the lack of cash flow without a securable asset, the most promising methods of financing exploration happen only through providing equity. Since miners require the support of investors who can also buy the resource from them, it then becomes easier to raise financing. It is in this situation that the off-take agreement has become a popular form of financing.
Definition and features:
An off-take agreement is signed between a producer of a resource and a buyer. This happens before the construction of a facility, which can guarantee a market for the future production of a mineral resource. It ensures a market for the miners, especially for a mine prior to its establishment.
The term “off-take agreement” covers a wide variety of contracts for the sale of mineral production from a mine:
- Sale agreements to metals traders, smelters and other end users
- Commodity forward and hedging agreements
- Tolling agreements with refiners
- Take or pay contracts with project sponsors, end users and other parties
The off-take agreements are commonly used in bulk commodities such as coal, iron and limestone. The price and volume make up the bulk of the revenue. It gives the project company stable and secured revenue to pay its project debt obligation, its operation and process costs, and deliver its certain required return to the investors. Miners are provided with pre-production advances of cash in return for future compensation in the form of equity stakes, loans and convertible bonds, exclusive rights to purchase production at a determined price, and take or pay agreements. For example, the Canada Lithium Corp. in November 2012, announced a five-year off-take agreement with Tewoo ERDC (Tianjin Products and Energy Resources Development Co., Ltd., China) for a minimum annual commitment of 12,000 tons of battery-grade lithium carbonate, with an additional 20% off-take in 2014.
Off-take agreements are payment agreements for a determined volume or guaranteed source of demand for the project, which can help to secure other sources of finance. A great example is from a Canadian firm, Avanti Mining Inc., who in April 2014, entered into an off-take agreement with SeAH M&S Corp. The company, SeAH M&S, will purchase, at prices based on the market price, up to 20% of its molybdenum concentrate production from its Kitsault mine over a 13 year period.
Lenders financing a project will generally make long-term sale contracts, which ensure the debt can be adequately serviced. It ensures a market for the future production of the resource. This guarantee increases the chances of acquiring financing from banks and lenders. Also, even start-up miners can get both the loan and the off-take in a single agreement. Loans linked to off-take agreements are another form of non-dilutive financing available to project developers.
Off-take agreements offer an alternative form of financing that allow junior mining companies to finance long-term developments. Of course, a successful agreement only works when both parties have done their due diligence, as well as minimize any risk associated with the extraction and processing of mineral resources.