What is an Offtake Agreement?

An offtake agreement is a contract in which one company agrees to purchase a producer's future product.

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An offtake agreement is between a producer and a buyer of a certain resource; it formalizes the intention of the buyer to purchase a certain amount of the producer’s future output. Generally, offtake agreements are negotiated prior to the construction of a mine as they provide producers with assurance that there is indeed a market for the project’s future output.

Offtake agreements are important for some companies, particularly those focused on more specialized or industrial metals. They indicate the viability of a project to both lenders and investors. When it comes to lenders, having an offtake agreement tends to make it easier for companies to secure the necessary financing to move forward with their mine construction. The third-party investment is just another way of boosting investor confidence.

It is important to note, however, that companies can back out of an offtake agreement, though it requires negotiations with the other party and the payment of a fee of some kind. Companies are also subject to certain requirements in order for the offtake agreement to remain, those requirements can be in the form of timing, purity of product and volume.

Recent offtake agreements

To further explore what an offtake agreement is and what it means for resource companies, there is a look at such agreements that have taken place recently in the sector below. In each case, it is worth noting the offtake agreement has significantly advanced the producers in question toward their goal of beginning to operate a productive mining project. Indeed, some cases show a single offtake agreement can help start production all on its own, while others make a company’s creditworthiness more evident to financiers and investors.

Galaxy Resources (ASX:GXY)

Galaxy Resources and its partner, General Mining (ASX:GMM), entered into a binding spodumene concrete supply agreement with two Chinese buyers in March.  On top of the sale, worth $36 million, has the companies delivering 120,000 tonnes of lithium to the buyers, with a price to be determined in the fourth quarter of 2016.  In May, the final offtake documents were signed and a $9 million pre-payment was received by General Mining on behalf of Galaxy.

Gensource Potash (TSXV:GSP

Back in April, Gensource Potash announced that they had  signed an asset purchase agreement and term sheet for an offtake agreement with Yancoal Canada Resources.  The agreement sets out terms for two potash exploration permits that are conditional upon conversion into mineral production leases for a total purchase price of $2,480,000, payable in two installments.

Mike Ferguson, president and CEO,  told the Investing News Network (INN) that the potential offtake agreement is exciting.

In the press release, Ferguson commented,”The APA and Term Sheet announced today fit Gensource’s business plan perfectly. The assets being purchased, if the conditions are satisfied, are two Leases where significant geological data has already been collected by YCR through recent and professionally executed drilling and seismic programs. The geological data collected may be the foundation for a future formal resource definition on the Lease(s).”

The assets to be purchased comprise of two Saskatchewan potash exploration permits totaling approximately 64,800 acres of land.

Fortis (TSX:FTS)

Most recently, Fortis signed a 20-year agreement with Hawaiian Electric Company to ship 800,000 metric tonnes of liquefied natural gas (LNG) from BC to Hawaii.

The LNG will come from Fortis’ LNG plant in Delta, which is currently undergoing a $400 million expansion. The first shipments are expected to start in 2012.

Barry Perry, president and CEO of Fortis Inc., commented, “FortisBC is uniquely positioned to capitalize on the strong market demand for clean-burning B.C. natural gas as a bridge fuel in the transition to renewable energy production. Our small-scale Tilbury facility fits well with the needs of customers like Hawaiian Electric and shipping from Canada’s West Coast costs less than from other locations, including the U.S.”

Don’t forget to follow us @INN_Resource for real-time news updates!

Securities Disclosure: I, Jocelyn Aspa, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure:  Galaxy Resources and Gensource Potash are clients of the Investing News Network. This article is not paid-for content. 

This article is an updated version of an article published on the Investing News Network on April 14 2011.

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