Project Finance/Physical Commodity Trading lexicon

ado88's picture
Rank: Senior Chimp | 23

I am supposed to be updating my firm's website and am having trouble wording one of our activities.

Does anyone know what the technical term would be for the following transaction;

Say you are a commodity trading firm.
A mine operator wants to invest in a new mine.
Rather than taking out a loan, they pledge to supply you with X amount of tonnes of product at a discount (say some CME coal contract minus 2 dollars) for the next three years, in exchange for the cash to carry out their investments now.

Likewise, does anyone know what the technical term for the following, simpler, transaction would be?

Commodity trading firm lends cash to mine operator, mine operator pledges to supply trader with X amount of tonnes for FREE for the following 3 years.

Any ideas?

Also, I am not sure if this is the appropriate forum, so any advice as to where I should post this instead would be very much appreciated/...

Comments (6)

Sep 20, 2010

I know what you are talking about but I'm not sure if there is an exact word for it. My guess below.

Asset backed leveraging?

Jul 21, 2014

Offtake agreement

Apr 12, 2017

Offtake agreement

This is correct.

Apr 12, 2017

Prepaid swap or VPP depending whether secured or not

Best Response
Apr 12, 2017

This is the correct answer - also just referred to as a "prepay". VPP = volumetric production payment. These arrangements can be part of an offtake agreement, but not all offtake agreements involve a financing component. For example if I am a trading house and agree to buy X tons of commodity from a producer at a fixed differential to some benchmark price, that's an offtake arrangement with no financing. If I pay them in advance and build in an interest margin, it's still an offtake arrangement and can be called a prepay swap / VPP depending on the price structure (fixed vs. floating, etc). These are contracts negotiated between two parties and are not exactly standardized.

    • 4
Apr 12, 2017