Car makers and electric vehicle battery makers (often referred to as “OEMs,” or original equipment manufacturers) are increasingly moving upstream in the global metals supply chain to secure units of critical minerals. OEMs do this by entering into direct mineral offtake agreements with mining companies, investing directly in mining projects, and entering into joint ventures with mining companies. This is especially a trend for securing raw materials for lithium-ion batteries. Through their upstream deals, OEMs are getting ever closer to the business of mining.

This is a notable trend because resource extraction is not a core competency of OEMs. In the past, OEMs generally contented themselves with purchasing processed materials and parts from suppliers and showed no interest in purchasing unprocessed or semi-processed raw materials or in investing in the mining business. But in the face of predictions about mineral scarcity, and in a world of geopolitical rivalry over critical minerals, automakers and battery makers are not taking chances on supply availability, and they are moving to lock up sources of these vital raw materials for themselves.

As OEMs have entered the mining space, they have shaken up the industry, providing unexpected new partnership opportunities for miners, while also challenging often longstanding norms regarding how mining industry contracts are structured and drafted.

Offtake Agreements

OEMs have entered into a number of offtake agreements and similar mineral purchase agreements with lithium, nickel, cobalt, copper, manganese and graphite producers, which are all key minerals for the production of electric vehicles and their batteries.

Mine offtake agreements -- typically entered into between a mining company and a smelter operator or a mining company and a commodities trader -- were traditionally among the most standardized agreements in mining.  However, as OEMs have entered this space, they have brought a manufacturing procurement lens to these agreements, which has led to changes and innovations in how these agreements are designed and written.

Car and battery makers care much more than smelter or trading companies typically do about ensuring rigorous guarantees around timing and mineral supplies. They are focused on making sure that deliveries match their manufacturing plans. This has led to new types of contract clauses, which are designed to strike a balance between giving certainty of supply to the OEMs and safeguarding mining companies from liability for inevitable discrepancies between mining plans and actual output (especially if the relevant mine is not yet operating). 

OEMs are also typically much more demanding than traditional mineral buyers when it comes to mineral specifications. Whereas smelter and trading clients can often find ways to use or sell mineral products with varying compositions and specifications, OEMs are much more focused on ensuring exact specifications are met in terms of narrow parameters for the contained minerals in products. This has led to the development of new styles of contract clauses in offtake agreements to deal with issues such as pre-delivery testing and general quality control, as well as new provisions concerning rejection rights.

OEMs have also imported climate change requirements into offtake agreements that surpass the requirements that are normally imposed on mining companies by smelter and trading companies. OEMs often, for example, impose CO² emissions limitations across their supply chains in ways that other businesses do not -- and that many mining companies are unaccustomed to. This trend, too, has led to innovations in how offtake agreements, especially for critical minerals, are prepared.

Although OEMs can be demanding customers, partnering with OEMs is typically attractive to mining companies, as they are often prepared to enter into very stable long-term contracts, providing certainty for mine development and financing.

Investment Agreements

In light of competitive pressures, geopolitical concerns, and other factors affecting supply chains, an increasing number of OEMs have recently gone beyond direct offtake agreements with miners, and have sought to become even more involved in upstream raw material supply by making direct investments in mines. They have often done so at the level of individual projects, providing, in effect, equity project financing, or, in some cases, stream financing for critical minerals.

OEMs have, in the last couple of years, provided capital for, and become part owners of, a number of early-stage development projects. They have usually, at the same time, obtained long-term offtake agreements, or commodity purchase options, to further secure their future supplies of materials.

The investment agreements entered into by OEMs and miners are frequently quite dissimilar to the investment agreements that miners enter into with other more traditional mining investors and financiers. The OEMs' investment agreements often put procurement issues front and centre, and are less focused on other considerations.

As the OEMs have waded into the industry, they have begun to subtly shift what is “market” for mining investment or financing agreements.

Although miners have sometimes resisted the novel approaches taken by OEMs, OEMs have provided valuable capital at a time when certain other sources of capital (especially capital through the traditional equity markets) are in short supply. 

Shareholder Agreements

OEMs that have made major investments in mining projects typically require the protection of shareholder agreements, in which their rights and obligations are balanced with those of the mining companies with which they partner. These agreements often import some, but not all, of the concepts, principles and contract clauses used in traditional mining joint venture agreements. In some respects, OEMs place less focus than other industry players on gaining oversight over mining operations and decisions. However, car and battery makers tend to bring a procurement-centric focus and sustainability considerations to bear in negotiating these shareholder agreements, in a manner that goes beyond what is typical in mining.

These new-style contracts have sometimes surprised miners, but miners generally prize having OEMs as important investors in their projects, and both miners and OEMs have rapidly become more sophisticated in dealing with each other.

Key Takeaways

OEMs are working their way up the global metals supply chain as a result of the competitive dynamics affecting critical minerals. Direct offtake agreements with miners, as well as investments in mines, give OEMs a level of influence in the mining industry that, until very recently, they lacked. Partnering with OEMs is attractive to mining companies, as OEMs can provide long-term mitigation of any demand risk faced by miners, as well as offering a welcome source of funding. This trend is expected to continue in the coming years.

As OEMs have entered the industry, they have upturned longstanding norms regarding how common industry contracts are structured and drafted, giving rise to innovative new agreements and deals.

Our firm has worked on a number of offtake, investment and shareholder agreements between mining companies and OEMs. We have substantial familiarity with emerging deal-making trends in this space.