Derivative Instruments and Hedging Activities Disclosure

12 Months Ended

Dec. 31, 2011

Text Block Abstract

Derivative Instruments And Hedging Activities Disclosure Text Block

Note 14 – Derivative Instruments

H&H’s precious metal inventory is subject to market price fluctuations.  H&H enters into commodity futures and forwards contracts on its precious metal inventory that is not subject to fixed-price contracts with its customers in order to economically hedge against price fluctuations.  As of December 31, 2011, the Company had entered into forward and future contracts for gold with a total value of $1.5 million and for silver with a total value of $2.6 million.

The forward contracts, in the amount of $3.1 million, were made with a counter party rated A by Standard & Poors, and the future contracts are exchange traded contracts through a third party broker.  Accordingly, the Company has determined that there is minimal credit risk of default.  The Company estimates the fair value of its derivative contracts through use of market quotes or broker valuations when market information is not available.

As these derivatives are not designated as accounting hedges under GAAP, they are accounted for as derivatives with no hedge designation.  The derivatives are marked to market and both realized and unrealized gains and losses are recorded in current period earnings in the Company's consolidated statement of operations.  The Company’s hedging strategy is designed to protect it against normal volatility; therefore, abnormal price increases in these commodities or markets could negatively impact H&H’s costs.  The twelve month periods ended December 2011 and December 2010 include a loss of $1.2 million and $5.6 million, respectively, on precious metal contracts.

As of December 31, 2011, the Company had the following outstanding forward and future contracts with settlement dates ranging from February 2012 to March 2012.

Commodity	Amount
Silver	90,000	ounces
Gold	1,000	ounces

The Company maintains collateral on account with the third-party broker.  Such collateral consists of both cash that varies in amount depending on the value of open futures contracts, as well as ounces of precious metal held on account by the broker.  

In addition, the Company’s Subordinated Notes issued in October 2010 have call premiums as well as Warrants associated with them. The Company has treated the fair value of these features together as both a discount and a derivative liability at inception of the loan agreement, valued at $4.7 million. The discount is being amortized over the life of the notes as an adjustment to interest expense, and the derivative liability is marked to market at each balance sheet date. The embedded derivative features of the Subordinated Notes and related Warrants are considered Level 3 measurements of fair value.

Effect of Derivative Instruments on the Consolidated Statements of Operations
		Years Ended December 31,
Derivative	Statement of Operations Line	2011	2010
		(in thousands)
Commodity contracts	Realized and unrealized (gain) loss on derivatives	$ 1,236	$ 5,571
Derivative features of Subordinated Notes	Realized and unrealized (gain) loss on derivatives	$ (1,654)	$ 412
Total derivatives not designated as hedging instruments		$ (418)	$ 5,983
Total derivatives		$ (418)	$ 5,983

GAAP requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet.  

Fair Value of Derivative Instruments in the Consolidated Balance Sheets
		December 31,	December 31,
Derivative	Balance Sheet Location	2011	2010
		(in thousands)
Commodity contracts	Other current liabilities	$ (229)	$ (40)
Derivative features of Subordinated Notes	Long-term debt & Long term debt-related party	(1,314)	(5,096)
Total derivatives not designated as hedging instruments		$ (1,543)	$ (5,136)
Total derivatives		$ (1,543)	$ (5,136)