This article was featured in our 2023 Mining Arbitration Report, which is part of a series of industry-focused arbitration reports edited by Jus Mundi and Jus Connect.
This issue explores the mining industry and presents a goldmine of information based on data available on Jus Mundi and Jus Connect as of February 2023. Discover updated insights into mining arbitration and exclusive statistics & rankings, as well as in-depth global and regional perspectives on mining projects, disputes, & arbitration from leading lawyers, arbitrators, experts, and in-house counsel.
THE AUTHORS:
Tiago Duarte-Silva, Vice President at Charles River Associates
Zawadi Lemayian, Principal at Charles River Associates
David Persampieri, Vice President at Charles River Associates
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 be- tween 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).
Supplied Volume Disputes
The contractual volume that a buyer purchases in an offtake mining agreement can either be a specified amount (e.g., 8 million metric tons of copper per year), a percentage of a mine’s production (e.g., 50% of the silver mined, extracted, removed, produced, or otherwise recovered), or a minimum quantity with the option to purchase more (e.g., the offtaker agrees to procure at least 90% of the mined gold).
Supplied volume disputes can occur for various reasons, including but not limited to pricing volatility, regulatory changes, quantity and quality shortfalls, and unsuitability of supplied output for intended use. During periods marked by price volatility, there is the risk of possible manipulation of contractually agreed upon amounts either by the buyer or seller. When prices decrease, for example, a seller may be tempted to reduce the volume supplied to the buyer in an attempt to minimize the quantity of output sold at an unfavorable price. Alternatively, when prices increase, a buyer may try to reduce the contractually required purchase amount, for example, by advancing the view that the contract terms provided for the purchase of a smaller amount.
Forced government shutdowns such as those that were seen during the recent COVID-19 pandemic or other regulatory changes can make it expensive or impossible for a seller to provide contractually agreed upon volumes. A seller may be unable to achieve anticipated production capacity (production shortfall) or produce output that falls short of the required quality. Finally, the seller’s output may not be suitable for the offtaker’s intended use due to quality issues or changes in technology.
Considerations Related to Contractual Provisions and Counterparty Choice
The following considerations related to including contractual provisions (take-or-pay and deliver-or-pay clauses, change-in-law clauses, contract length, and remedies for failure to supply or purchase) and performing due diligence on a counterparty are examples that may be useful to contracting parties in mitigating counterparty risk and/or pursuing enforceable contractual remedies in offtake mining agreement disputes.
Buyers and sellers can mitigate counterparty risk through the inclusion of take-or-pay and deliver-or-pay clauses in offtake mining agreements.
A take-or-pay clause protects the seller by requiring the buyer to satisfy its contractual obligation by either (i) taking and paying the contract price for a specified supplied volume, or (ii) paying the seller a specified contract amount for the portion of the volume it fails to take. With such a provision, the buyer is not in breach of the contract if it elects not to take delivery of the specified volume.
A deliver-or-pay clause protects the buyer by requiring the seller to satisfy its contractual obligation by either (a) delivering the specified volume, or (b) paying the buyer a specified contract amount for the portion of the volume it fails to deliver. A seller is not considered to be in breach of the contract if it elects not to deliver the specified volume.
When compliance with an offtake mining agreement can be affected by regulatory and other government policy changes, it is beneficial for the contracting parties to include change-in-law clauses that clearly specify which party is responsible for such risk.
Buyers and sellers that would like to be able to take advantage of short- term profitable opportunities when they arise or those with uncertain demand and supply projections may find it beneficial to use spot and short-term contracts, while those with a preference for supply and demand stability and certainty may opt for long-term contracts.
Contracting parties may also find it helpful to agree in advance on the remedy for failure to supply or purchase. For example, the supplier may be required to procure replacement volumes or secure alternate sources of supply.
Aside from contractual provisions, contracting parties may also benefit from evaluating various attributes that can influence a counterparty’s ability to fulfill its contractual obligations. For example, a buyer that is concerned about a seller’s ability to deliver specified volumes due to the uncertainty associated with one or more of the mines (e.g., due to volatile supply costs or unstable geopolitical environment) may benefit from choosing a seller with access to alternate sources via a geographically diverse portfolio and/or relationships with other suppliers.
Summary Conclusion
Supplied volume disputes in offtake mining agreements occur for various reasons related to pricing volatility, regulatory changes, quantity and quality shortfalls, and unsuitability of supplied output for intended use. Contracting parties can mitigate the risks associated with offtake mining agreements and/or increase the likelihood of successful outcomes in disputes from the breach or default of contract by including certain contractual provisions and performing due diligence on their counterparties.
ABOUT THE AUTHORS:
Tiago Duarte-Silva, PhD is a testifying expert with 25 years of experience in disputes and advice to corporate and institutional investors. He has applied his professional experience and PhD-level expertise in finance and accounting to over 130 disputes across six continents and multiple industries. He is also on the faculty of Boston College, where he teaches valuation to graduate and MBA students. His opinions have been used in domestic and international arbitrations, in litigation, and before the US Department of Commerce.
Zawadi Lemayian, PhD is a principal with experience in proceedings in arbitration, securities litigation, and policy making. She has worked on a wide range of matters, including the calculation of economic damages, evaluation of antitrust claims related to rates of return, business valuation in failed mergers, analysis of cross border tax strategies, and assessment of joint venture exits and terminations. Her work spans various industries including natural resources, manufacturing, healthcare, telecommunications, banking, transportation, and film.
David Persampieri leads CRA’s Metals & Mining practice. He has over thirty years of experience in helping clients across the metals, mining and related industries deal with critical business issues, including corporate and business unit strategy, competitive analysis, and market planning and entry strategy. He also provides expert advice and testimony in disputes in the metals and mining industries. His experience encompasses raw materials, steel, aluminum, precious metals, and other ferrous and non-ferrous metals.
Find more data-backed insights in our 2023 Mining Arbitration Report
