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OEMs move upstream in metals supply chain

Metal Tech News - April 24, 2024

Car and battery manufacturers are getting in on the critical minerals mining business.

There has been an increasing trend of original equipment manufacturers (OEMs) for electric vehicles, and the batteries that power them are moving upstream in the global metals supply chain to secure deals for their own feedstocks of critical minerals – entering into mineral offtake agreements directly with mining companies, investing in mining projects, and joint mining ventures.

Until recently, OEMs specialized in manufacturing products and purchasing processed materials and parts from suppliers. In light of projections of global mineral scarcity, geopolitical rivalry over critical minerals, and a countdown to net zero, OEMs are no longer taking chances on supply availability and are entering the mining space to lock down sources of these vital raw materials for themselves.

This move has shaken up the industry, redefining mining contracts and providing unexpected new partnership opportunities.

New offtake agreements

Offtake agreements typically are entered into between a mining company and a smelter or commodities trader. Today, OEMs entering the space have brought a fresh perspective, which has led to changes and innovations in how these agreements are designed and written.

Manufacturers have tighter requirements than smelter or trading companies, exacting more rigorous guarantees around timing, supply, and mineral specifications.

This has, in turn, elicited new contract clauses designed to strike a balance between certainty of supply and deal with pre-delivery testing and general quality control, as well as new provisions concerning rejection rights.

New climate change requirements are also being built into offtake agreements that surpass those conventionally expected of mining companies.

OEMs now impose CO2 emissions restrictions throughout the supply chain in ways that mining companies are fast becoming accustomed to. This is especially true for minerals critical to the energy transition, with a host of purchase agreements already being made between OEMs and producers of cobalt, copper, graphite, lithium, manganese, and nickel.

The attraction of partnering with OEMs for mining companies is the stability of long-term contracts, providing priceless certainty for mine development and financing.

Stable investment agreements

Beyond direct offtake agreements, automobile and battery manufacturers have become more involved in upstream raw material supply by directly investing in mines, often at the level of individual projects, providing equity project financing or stream financing.

OEMs are providing capital and even becoming part owners of early-stage development projects, obtaining longer-term offtake agreements or commodity purchase options to ensure future supplies.

Investment agreements directly with the automotive sector are atypical to what miners enter into with other more traditional mining investors and financiers. Though some mining companies have resisted these relationships, vehicle and battery manufacturers have provided momentum and delivered security, some or all of which have been in short supply as the energy transition ramps up.

These partnerships are pushing for new or expanded mines and demanding greener and more modern solutions to resource procurement – changes that are tough but necessary in the evolving mining space.

Refocused shareholder agreements

OEMs that have heavily invested in mining projects typically require the protection of shareholder agreements, which in some respects place less focus on mining operations oversight and decision-making.

Offtake agreements and mine investment give OEMs a level of influence and security in the competitive and risky critical minerals space, while partnering with OEMs is attractive to miners as they can provide long-term mitigation of demand risks and steady funding.

These new dealings have disrupted the status quo, but miners have generally welcomed OEMs as important investors in their projects, with the trend expected to continue.

 

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