Do OEM offtakes need careful structuring? Voltaire Minerals' Brocas thinks so

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According to Brocas, previously the head of cobaltat commodities marketer and miner Glencore, OEMs are attempting to secure reliable and compliant materials for the best possible price terms.

“This creates a potential conflict between the interests of shareholders and other investors in those mining companies, and reconciling these conflicting interests is an art,” Brocas said.

In an interview with Fastmarkets, Brocas said: “For any mining company, signing a funding deal with an OEM is attractive because it gives an instant validation of the flow sheet and a recognition of the role which the material plays in the energy transition as well as a lot of positive publicity. Sometimes, it even bumps up the valuation [of the mining company].”

But the key, Brocas said, is to understand the terms of the offtake agreement, such as pricing, duration, quantities, and so on.

“A badly structured deal can undermine the equity value and impede the ability to raise any more capital, which puts the project’s viability at risk. Why would anyone invest alongside an OEM if the terms of the offtake agreement appear to be massively skewed in the OEM’s favor?” Brocas said.

The move by OEMs to mitigate risk in their supply chains and transform the purchasing strategy of their businesses is particularly evident in the automotive sector, where firms are scrambling to secure the lithium, cobalt and nickel they need for electric vehicles (EV) they are targeting to roll off production lines.

“It’s the role of large miners to deploy capital into mining development projects to enable them to move into production. After all, they have the technical expertise, not the OEMs,” Brocas said. “Because they’ve partly disengaged from exploration activities and essentially outsourced the task to juniors, large miners should naturally do so to continue growing their portfolios. But good projects are scarce.”

OEMs have expressed frustration at the situation, Brocas noted, calling on miners to slow down dividend payments and deploy their capital into projects instead.

Brocas left Glencore in July 2022 and set up Voltaire with Paul Smith, former Glencore head of strategy, in October. To date, the Swiss-based advisory firm has been working to provide sourcing and marketing strategies across the commodities supply chain, from miners through refiners, recyclers, processors and product manufacturers.

While there is a natural focus on the critical minerals essential to the energy transition, the company is agnostic on the products it advises on, Brocas said.

The creation of the firm arose from the founders’ strong belief that the critical minerals for the energy transition will benefit from an increase in liquidity and financially tradable products for investment and hedging. The growth in liquidity in the cobalt contract is one example, Brocas said, noting that this process was developed over time with banks building up teams and starting to quote over-the-counter (OTC) swaps.

“Cobalt contract liquidity is exploding, with daily pricing assisting in narrowing the spread and allowing banks to quote OTC swaps more easily. Some banks even started physical trading,” Brocas told Fastmarkets.

“The switch from fossil fuels to battery metals will generate the same need for financial instruments to manage price risk on cobalt, lithium and other critical minerals that oil and gas needed,” Brocas added.

The rise and fall of cobalt metal prices in 2022 highlighted the effectiveness of having effective risk management strategies in place. The standard grade cobalt metal price ended the year down by 51% from highs in early May.

In January, cobalt forward contracts on the Chicago Mercantile Exchange (CME) hit new highs for volume and open interest.

Fastmarkets assessed cobalt standard grade, in-whs Rotterdam at $15.15-17 per lb on Friday, March 3, down by 1.67% from the previous day.

Brocas said that his confidence that there was room in the industry for a company like Voltaire Minerals was further affirmed after a series of conversations with investors who were looking to deploy capital into critical minerals. Due to the highly specialized nature of those markets, however, the investors realized their efforts would be better spent financially backing another organization to do it on their behalf instead.

“Investors are looking for diversification opportunities [away from oil and gas] and they cannot ignore the critical minerals theme any longer, so they are interested in companies like Voltaire Minerals, which are offering solutions for those minerals supply chains,” Brocas said, adding that investors could directly deploy capital to trade futures on metals exchanges, but they are concerned about liquidity. They’re more interested in partially-hedged solutions and structured products that directly benefit customers.”

Similar growth in liquidity will eventually follow in lithium, which also had record open interest in January, Brocas told Fastmarkets.

Fastmarkets assessed lithium hydroxide monohydrate LiOH.H2O 56.5% LiOH min, battery grade, spot price cif China, Japan & Korea at $70-75 per kg on Thursday, March 2, down by 1.36% from $72-75 per kg a day earlier.

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