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What Is A Supply And Offtake Agreement

The supplier or buyer must be solvent and financially sound in order to minimize the likelihood that they will suffer from a cash flow problem or insolvency event. If a project company is particularly dependent on the capabilities of a distributor, the financiers will likely be involved in verifying the financial health and ongoing participation of that company. Cases of force majeure that exempt the supplier or buyer from their obligations, in particular pay-or-pay-gold obligations, delivery or payment obligations, usage or payment obligations, must be carefully considered. Often, there is a limited extension of the delivery or purchase time. As a general rule, the force majeure provisions would also allow for the resiliating of cases of force majeure. It should be noted that market practices in force majeure will vary from sector to sector. While use or compensation contracts for infrastructure projects generally involve very limited relief of the obligation to pay user capacity, facilities can generally be allowed in the minerals or LNG sector. A project proponent must understand the key contractual risk reductions that can be incorporated into the relevant contracts in order to reduce counterparty risk, which is acceptable and achievable in the relevant market and the trends observed at this stage. The offtake agreements should contain three important statements. The first is whether the contract is a firm buy/sale contract or an option contract.

The purchase/sale clause is important because it guarantees the guarantee of a future economic playing time, unless a party violates the contract. An option contract gives the buyer the opportunity to exercise the contract if the market provides the buyer with a favourable environment for the execution of the purchase. Taketake agreements are important for many companies, but particularly important for those that focus on critical and industrial metals. Many of these metals are not sold on the open market, making it more difficult for producers to unload them. Precious metals have relatively low hedging markets and, while project proponents are willing to take risks with respect to these metals due to the depth of the markets and the relative predictability of future prices, they may insist that some or all of the price risk will end with commodity price hedging, depending on the maturity profile and the size of the project`s debt. On the other hand, metals such as iron ore have a flatter hedging market, on which hedges can only be available for a relatively short period of less than 12 months. This hedging market may grow over time, but this will not be enough to significantly reduce the price risk of a project with an expected lifespan of 20 to 30 years or more. On the other hand, due to the lack of clarity in the market, there can be no hedging for certain metals. At the very least, it is appropriate to ensure that a supplier or buyer does not have the right to assert that a change in market conditions is a force majeure event and that there should be no economic difficulties or equivalent provisions in their favour if a delivery or payment obligation or a made-or-payable commitment is to be terminated.

Where possible, the force majeure provisions should be carefully considered to ensure that any gaps in supply or turnover reduction are filled or identified for compensation. Finally, if companies want to be integrated into the supply chain and wish to have exclusive production over a longer or shorter period, the acquisition agreement remains the strategic financing of projects that corresponds to their priorities. “Project funding was largely approved by the agreement;” A significant portion of future production will be sold in the future for many years to come;¬†Guaranteed income under the agreement for a long period of time;¬†The project company will make a predictable profit in the future for many years to come.