What is an Offtake Agreement
An offtake agreement is an agreement between a producer of a resource and a buyer of a resource to purchase or sell portions of the producer's future production. An offtake agreement is normally negotiated prior to the construction of a facility such as a mine, in order to secure a market for the future output of the facility. If lenders can see the company has a purchaser of its production, it makes it easier to obtain financing to construct a facility.
BREAKING DOWN Offtake Agreement
Offtake agreements are frequently used in natural resource development, in which the capital costs to extract the resource is significant and the company wants a guarantee that some of its product will be sold. Companies can usually back out of an offtake agreement through negotiations with the other party and with the payment of a fee.
Offtake agreements are legally binding agreements related to transactions between buyers and sellers. The agreements are reached prior to the actual goods being produced, such as with futures. Often, these agreements can help the selling company acquiring financing for future construction or expansion projects through the promise of future income and proof of an existing market.
Benefits to Sellers and Benefits to Buyers
In addition to providing a guaranteed market and source of revenue for its product, the seller can guarantee a minimum level of profit in regards to 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 as a way to secure a particular 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.
Offtake Agreements and Force Majeure Clauses
Offtake agreements occur frequently within the natural resource sector and energy production industries. This is due to the cost associated with extractions and the consistent demand on the products. Most offtake agreements include force majeure clauses. These clauses allow the buyer or the seller to cancel the contract if certain events occur that are deemed outside the control of the buyer or seller, and if they put unnecessary hardship on either party. Often, this provides protection against the negative impact of certain acts of nature, such as flooding or wildfires.