Term Sheet or Full Form Agreement for Critical Mineral Offtake Agreements?

Offtake Agreements in the Critical Minerals Sector 

An offtake agreement is an agreement where an offtaker agrees to buy a producer’s product prior to their production over a set period.

Offtake agreements are essential to the critical minerals industry, offering long term benefits to both producers and purchasers of critical minerals. For producers, securing offtake agreements with credible counterparties reduces operational and development risks, and is a core bankability requirement. For purchasers, offtake agreements provide security over continuity of supply of the minerals, which is particularly important where there is anticipated scarcity of minerals in the future.

There are two forms through which an offtake agreement can be drafted:

1. a short form term-sheet; or  
2. or a full form agreement.

This article examines the circumstances in which each form is more appropriate.

Term Sheet

Commonly, offtake agreements in the critical minerals industry take the form of a term-sheet. Offtake agreements structured as term-sheets are simple and brief and include only the elements which are fundamental to the sale.

While the agreements are transaction specific, the terms often include:

1. the term length of the Agreement;
2. the expected volume or quantity of the mineral under offtake;
3. the product specifications (typically referencing industry standards);  
4. a product pricing mechanism (commonly referencing market prices) and payment terms;
5. the conditions precedent to the transaction; and
6. any other operational or logistical requirements for the delivery of the product.

Full Form Agreement

Full form agreements are longer in length and include more clauses or more complex versions of the clauses that appear in a term-sheet. Unlike a term-sheet, a full form agreement will include full form common boiler plate clauses.

These additional clauses are transaction dependent, and might include (but are not limited to):

1. complex damages and breach clauses, such as rights of set-off or take-or-pay clauses;
2. detailed termination and suspension of obligations clauses;
3. unforeseen events clauses such as force majeure, sanctions and material adverse change clauses;
4. price review clauses;
5. detailed dispute resolution clauses; and
6. detailed clauses on dealing with government entities and state immunity.

Long or Short Form Considerations

Market Considerations

The utilisation of a term sheet or a full form agreement often depends on the market in which the parties are operating.

Purchasers of critical minerals in Asian markets tend to prefer term sheets over full form agreements as they are simpler and clearer. The historical practice in many Asian markets of purchasing smaller quantities of critical minerals contributes to this preference. Further, certain Asian countries, such as China, utilise a civil law system, which is more prescriptive than common law jurisdictions and due to this may be suited to a term-sheet.

Conversely, purchasers in European markets often prefer full form agreements, favouring security over simplicity. North American purchasers tend to fit in the middle of the two above markets. The nature of American and European law results in more inclusive, rather than exclusive drafting, which also lends itself to a full form agreement over a term sheet.

The location of the operations is also relevant. Operations in Africa are often located in what are considered high-risk jurisdictions. The offtake agreements for these minerals will often require a full arbitration and force majeure clauses, alongside more obligations on both parties due to the risk inherent in mining in the high-risk areas. These additional clauses and need for security favour the use of a full-form agreement.

The introduction of the Inflation Reduction Act in the US and the Green Deal in the EU have also seen significant investment into the development of local processing of critical minerals. As a result, these jurisdictions have seen an increase in new refinery companies. Most of these projects are reliant on third party financing and as a result full-form agreements have been the preferred structure in these markets.

Timing and Alignment

Offtake agreements for critical minerals are often drafted within a short period, and a term-sheet is a quicker document to draft due to its simplicity. The limited number of terms in a term-sheet also makes it quicker and easier for parties to reach alignment during negotiations. In circumstances where timing is of the essence, a term-sheet is often preferable.  

Security

A detailed full form agreement will likely provide greater security for the parties involved. A term-sheet which focusses on the key issues may not provide the degree of certainty that a party requires. For long-term offtake agreements, future risks are harder to predict, and as such parties may prefer the security of a more detailed long form agreement that can cover more potential risks into the future.

Financing

The development of critical minerals projects often relies on third-party financiers. Financiers, especially in European and Australian markets, expect robust supply terms. Offtake agreements are one of the key documents that financiers look to in evaluating the bankability and the risk of a project. A full form agreement is typically more bankable.

Relationship of the Parties

The relationship between the parties is also a relevant consideration. Counterparties who deal with each other regularly, or who are aligned on the fundamentals of their businesses (e.g., counterparties who are both miners), are likely to be more comfortable utilising a term-sheet, especially where that has been their past practice.

Nature of the Transaction

The type of mineral and the maturity of the mine also affect the consideration. If the mine is mature, and the off-take agreement is for a shorter term, it is more common to do a term-sheet.

If the business operations of the seller, the processing of the mineral, or the pricing mechanism is complex, the agreement will be more complicated, and it will be more common to utilise a full form agreement.

Conclusion

Conceptually, offtake agreements are often relatively simple. This means that there is a way to draft a binding term-sheet that is sufficiently detailed to be bankable and to provide the parties with the sufficient level of security. An abbreviated short form term sheet won’t be sufficient. Ultimately the difference between a full form agreement and sufficiently detailed term sheet will be in part form over substance.

A sufficiently detailed term-sheet must include:

 

Term of Agreement	The term length of the agreement.
Commencement Date	The date of commencement.
Commissioning/Performance Tests (if applicable)	Any commissioning or performance tests required before, or throughout the duration of the agreement.
Quantity of Product	The annual quantity of goods, and the periods over which product is supplied across the year.
Delivery/Scheduling Process	The process and dates of supply of the goods.
Quality Requirements	The quality requirements of the goods, often benchmarked against industry standards.
Title and Risk	At what point the title to the commodity, and risk passes from one party to the other.
Price	The price of the commodity, often in reference to an index or another pricing mechanism.
Payment Terms	The time and method of payment, which is commonly a letter of credit.
Liability Regime	The liability of the purchaser for non-delivery or non-purchase for quality issues or as a result of 3rd party events.
Force Majeure	The rights of parties arising as a result of events beyond reasonable control.
Assignment and Change of Control	Any rights to or conditions of assignment or transfer of rights or obligations under the agreement. As well as any rights or obligations arising in the event of a change of control of one of the parties under the agreement.
Compliance	Compliance with relevant laws.