Offtake Agreement for Rare Earth Supply
Example of an offtake agreement to secure supply of rare earth elements from a Southern African project
Context
Experience from a case like Angola highlights how offtake agreements can help unlock critical mineral value chains needed for the energy transition. In this example, a rare earth miner in Angola and a Japanese trading company signed an offtake agreement covering 20,000 tonnes per year of mixed rare earth carbonate (MREC) from the Longonjo project. Once in full production, the project is expected to supply ~5% of global neodymium and praseodymium output. The agreement is designed to strengthen supply chains for magnet metal materials used in electric and fuel cell vehicles and includes provisions for financial support from the Japanese partner.[i]
Challenge
In the absence of detailed agreements, critical mineral supply faces several challenges:
- Demand volatility: Rapid shifts in global demand, driven by technologies like electric vehicles, have created imbalances in the supply of rare earth elements such as neodymium and praseodymium.
- Market access: Smaller mining companies struggle to secure access to international markets, which limits their ability to scale operations and attract investment.
- Financial constraints: Mining projects require significant upfront capital, but investors hesitate when future demand is uncertain.
- Supply chain vulnerability: Heavy reliance on a few dominant suppliers exposes vulnerabilities in global supply, highlighting the need for diversification and resilience.
Solution
The two companies entered a non-binding Memorandum of Understanding (MoU) that secures offtake for 20,000 tonnes of MREC annually, creating stability for both sides[ii]:
- Financial support: The Japanese partner considered providing funding to support project development and expansion
- Strategic cooperation: The agreement included provisions for marketing and distribution of MREC, integrating it into the global supply chain for magnet metal materials
- Value chain investment: The Japanese partner explored opportunities to invest both upstream and downstream to build a low-carbon magnet metal supply chain
- ESG compliance: The agreement also supported adherence to international ESG standards, strengthening the project’s attractiveness globally
Conditions
The agreement was enabled by several factors[iii]:
- Stakeholder support: Consideration of financial backing from governments helped enable project progress
- Strategic location: Proximity to the Lobito Corridor supported efficient transportation and export of rare earths
- Market demand: Growth in electric vehicles and renewable energy technologies created favorable conditions
- Technical expertise: Access to experienced consultants and engineers ensured industry standards were met
- Cost competitiveness: The project’s upfront capital cost of US$217 million was among the lowest in its peer group, strengthening its competitiveness[iv]
Observed Impact
The agreement is expected to deliver lasting benefits:
- Stable revenue: A predictable revenue stream reduces financial uncertainty.
- De-risking: Secured market access enhances investment attractiveness.
- Production capacity: The project aims to produce 20,000 tonnes per year of MREC in 2026, expanding to twice that by 2029[v].
- Economic development: Job creation in the Huambo region contributes to local economic growth.
What’s Next for the Southern African Region
As demand volatility persists, Southern African stakeholders can draw lessons from this case to pursue:
- Strategic partnerships: Helping smaller miners access global markets, technical expertise, and financing.
- Innovative financial structuring: Embedding financial support mechanisms such as convertible loan facilities.
- ESG compliance: Meeting international standards to secure green financing opportunities.
[i] https://pensana.co.uk/wp-content/uploads/2024/09/Offtake-and-Co-operation-Agreement-with-Hanwa.pdf
[ii] https://pensana.co.uk/wp-content/uploads/2024/09/Offtake-and-Co-operation-Agreement-with-Hanwa.pdf
[iii] https://pensana.co.uk/wp-content/uploads/2024/09/Offtake-and-Co-operation-Agreement-with-Hanwa.pdf
OTHER SOURCES
https://www.seaisi.org/details/25366?type=news-rooms