Derivative Instruments

3 Months Ended

Mar. 31, 2012

Derivative Instruments

Derivative Instruments

(24) Derivative Instruments

        On March 28, 2012, the Company entered into a contingent forward contract to purchase Canadian dollars ("Cdn") with a notional amount of Cdn$870.0 million to manage the foreign currency exposure with respect to its planned acquisition of Neo Material Technologies Inc. ("Neo"). The Company did not apply hedge accounting to this contingent foreign currency forward contract. As a result, the change in the fair value of this derivative instrument resulted in an unrealized loss of $6.7 million for the quarter ended March 31, 2012, recorded as part of Other expense. This derivative has a maturity of September 4, 2012. The derivative fair value of $6.7 million at March 31, 2012 was recorded in Accrued expenses.

        During the third quarter of 2011, the Company, through its subsidiary, Molycorp Minerals, entered into three derivative forward contracts to manage its foreign currency exposure with respect to Euro denominated purchases of certain equipment. The Company did not apply hedge accounting to these foreign currency forward contracts. Two of these derivatives were settled during the first quarter of 2012 resulting in a realized loss of $0.2 million, the majority of which was previously recorded in the last two quarters of 2011 as unrealized expense under Other expense. The change in the fair value of the third derivative contract not yet settled at March 31, 2012, resulted in an unrealized loss of approximately $40,000, the majority of which was already recorded in the last two quarters of 2011 under Other expense.

        The Company accounts for derivative instruments using the fair value method. GAAP provides for a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability.

        The fair value measurement of the derivative forward contracts outstanding at March 31, 2012, was determined using internally developed discounted cash flow models. The inputs to these models consisted of, or were derived from, observable Level 2 data for substantially the full term of each derivative instrument. The internally determined fair value was then compared to the fair value assessment from the counterparties to these derivative contracts; large or unexpected differences between the Company's internal valuation and the fair value assessment from the counterparties were investigated and reconciled.

        The Company expects that the values to be realized on these derivatives will be based on market conditions at the time of settlement, which will occur at the maturity of each derivative instrument.