Derivative Financial Instruments

3 Months Ended

Mar. 31, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

Palmarejo Gold Production Royalty

On January 21, 2009, the Company entered into a gold production royalty transaction with Franco-Nevada Corporation. The royalty covers 50% of the life of mine production from the Palmarejo mine and adjacent properties. The royalty transaction includes a minimum obligation of 4,167 ounces per month that ends when payments have been made on a total of 400,000 ounces of gold. At March 31, 2014, a total of 124,103 ounces of gold remain outstanding under the minimum royalty obligation.

The price volatility associated with the minimum royalty obligation is considered an embedded derivative. The Company is required to recognize the change in fair value of the remaining minimum obligation due to changing gold prices. Unrealized gains are recognized in periods when the gold price has decreased from the previous period and unrealized losses are recognized in periods when the gold price increases. The fair value of the embedded derivative is reflected net of the Company's current credit adjusted risk free rate, which was 6.1% and 4.2% at March 31, 2014 and 2013, respectively. The fair value of the embedded derivative at March 31, 2014 and December 31, 2013 was a liability of $44.4 million and $40.3 million, respectively. During the three months endedMarch 31, 2014 and 2013, the mark-to-market adjustments for this embedded derivative amounted to losses of $4.0 million and gains of $23.5 million, respectively.

Payments on the royalty obligation decrease the carrying amount of the minimum obligation and the derivative liability. Each monthly payment is an amount equal to the greater of the minimum of 4,167 ounces of gold or 50% of the actual gold production per month multiplied by the excess of the monthly average market price of gold above $408 per ounce, subject to a 1% annual inflation adjustment. For the three months endedMarch 31, 2014 and 2013, realized losses on settlement of the liabilities were $6.2 million and $9.1 million, respectively. The mark-to-market adjustments and realized losses are included in Fair value adjustments, net in the Condensed Consolidated Statements of Comprehensive Income (Loss).

Foreign Exchange Hedges

The Company periodically enters into foreign currency derivative contracts to reduce the foreign exchange risk associated with Mexican peso (“MXN”) operating costs at its Palmarejo mine. At March 31, 2014, the Company had outstanding call and put option contracts, or collars, on $35.0 million with a weighted-average strike price of 12.56 MXN for the floor and 14.98 MXN for the ceiling. The fair value of these contracts was $0.1 million at March 31, 2014. At December 31, 2013, the Company had MXN foreign exchange forward contracts on $12.0 million in U.S. dollars. These contracts required the Company to exchange U.S. dollars for MXN at a weighted average exchange rate of 12.21 MXN to each U.S. dollar and the fair value of those contracts was a liability of $0.9 million at December 31, 2013. In addition, at December 31, 2013, the Company had outstanding collars on $45.0 million with a weighted-average strike price of 12.60 MXN for the floor and 14.80 MXN for the ceiling. The fair value of these contracts was nil at December 31, 2013.

The Company recorded mark-to-market gains of $1.0 million and gains of $0.7 million for the three months ended March 31, 2014 and 2013, respectively, on the MXN forward contracts and collars. These mark-to-market adjustments are reflected in Fair value adjustments, net in the Condensed Consolidated Statements of Comprehensive Income (Loss). The Company recorded realized losses of $0.9 million and realized gains of $0.6 million in Costs applicable to sales during the three months ended March 31, 2014 and 2013, respectively.

Concentrate Sales Contracts

The Company's concentrate sales to third-party smelters, in general, provide for a provisional payment based upon preliminary assays and forward metal prices. The provisionally priced sales contain an embedded derivative that is required to be separated from the host contract for accounting purposes. The host contract is the receivable from the sale of concentrates at the forward price at the time of sale. The embedded derivatives do not qualify for hedge accounting and are marked to market through earnings each period until final settlement. At March 31, 2014, the Company had outstanding provisionally priced sales of 0.1 million ounces of silver and 18,471 ounces of gold at prices of $20.47 and $1,310, respectively. At December 31, 2013, the Company had outstanding provisionally priced sales consisting of 0.2 million ounces of silver and 30,780 ounces of gold at prices of $20.98 and $1,259, respectively.

Commodity Derivatives

At March 31, 2014, the Company purchased outstanding put options allowing it to net cash settle 50,000 ounces of gold and 2,500,000 ounces of silver at weighted average strike prices of $1,200 per ounce and $18.00 per ounce, respectively, if the market price of gold or silver were to average less than the strike price during the contract period. In addition, the Company sold outstanding put options requiring it to net cash settle 50,000 ounces of gold and 2,500,000 ounces of silver at weighted average strike prices of $1,050 and $16.00 per ounce, respectively, if the market price of gold or silver were to average less than the strike price during the contract period. These contracts expire during the second and third quarters of 2014. At March 31, 2014, the fair market value of these contracts was a net asset of $0.8 million.

At December 31, 2013, the Company had outstanding put options allowing it to net settle 25,000 ounces of gold and 1,250,000 ounces of silver at weighted average prices of $1,150 per ounce and $17.00 per ounce, respectively, if the market price of gold or silver were to average less than the strike price during the contract period. At December 31, 2013, the fair market value of these contracts was a net asset of $0.1 million.

During the three months ended March 31, 2014 and 2013, the Company recorded unrealized losses of $1.5 million and unrealized gains of $4.8 million, respectively, related to outstanding options which was included in Fair value adjustments, net in the Condensed Consolidated Statements of Comprehensive Income (Loss). The Company also recognized a realized gain of $0.3 million and a realized loss of $0.5 million resulting from expiring contracts during the three months endedMarch 31, 2014 and 2013, respectively.

At March 31, 2014, the Company had the following derivative instruments that settle in each of the years indicated (in thousands except average prices and notional ounces):

	2014			2015		2016		Thereafter
Palmarejo gold production royalty	$	21,708		$	24,764	$	14,860	$	—
Average gold price in excess of minimum contractual deduction	$	498		$	494	$	490	$	—
Notional ounces	43,602			50,153		30,348		—
Mexican peso put options purchased	$	35,000		$	—	$	—	$	—
Average rate (MXN/$)	14.98			—		—		—
Mexican peso notional amount	524,300			—		—		—
Mexican peso call options sold	$	35,000		$	—	$	—	$	—
Average rate (MXN/$)	12.56			—		—		—
Mexican peso notional amount	439,600			—		—		—
Silver concentrate sales agreements	$	3,041		$	—	$	—	$	—
Average silver price	$	20.47		$	—	$	—	$	—
Notional ounces	148,594			—		—		—
Gold concentrate sales agreements	$	24,204		$	—	$	—	$	—
Average gold price	$	1,310		$	—	$	—	$	—
Notional ounces	18,471			—		—		—
Gold put options purchased	$	60,000		$	—	$	—	$	—
Average gold strike price	$	1,200		$	—	$	—	$	—
Notional ounces	50,000			—		—		—
Silver put options purchased	$	45,000		$	—	$	—	$	—
Average silver strike price	$	18.00		$	—	$	—	$	—
Notional ounces	2,500,000			—		—		—
Gold put options sold	$	(52,500	)	$	—	$	—	$	—
Average gold strike price	$	1,050		$	—	$	—	$	—
Notional ounces	50,000			—		—		—
Silver put options sold	$	(40,000	)	$	—	$	—	$	—
Average silver strike price	$	16.00		$	—	$	—	$	—
Notional ounces	2,500,000			—		—		—

The following summarizes the classification of the fair value of the derivative instruments (in thousands):

	March 31, 2014
	Prepaid expenses and other		Accrued liabilities and other		Current portion of royalty obligation		Non-current portion of royalty obligation
Foreign exchange contracts, peso	$	67	$	7	$	—	$	—
Palmarejo gold production royalty	—		—		20,747		23,610
Gold and silver put options	992		226		—		—
Concentrate sales contracts	533		335		—		—
	$	1,592	$	568	$	20,747	$	23,610

	December 31, 2013
	Prepaid expenses and other		Accrued liabilities and other		Current portion of royalty obligation		Non-current portion of royalty obligation
Foreign exchange contracts, peso	$	38	$	947	$	—	$	—
Palmarejo gold production royalty	—		—		17,650		22,688
Gold and silver put options, net	135		—		—		—
Concentrate sales contracts	11		693		—		—
	$	184	$	1,640	$	17,650	$	22,688

The following represent mark-to-market gains (losses) on derivative instruments for the three months ended March 31, 2014, and 2013 (in thousands):

		Three months ended March 31,
Financial statement line	Derivative	2014			2013
Sales of metal	Concentrate sales contracts	$	879		$	(1,755	)
Costs applicable to sales	Foreign exchange contracts	(924		)	627
Fair value adjustments, net	Foreign exchange contracts (MXN)	968			738
Fair value adjustments, net	Foreign exchange contracts (CDN)	—			(1,598		)
Fair value adjustments, net	Palmarejo gold royalty	(10,237		)	14,429
Fair value adjustments, net	Put and call options	(1,494		)	4,228
		$	(10,808	)	$	16,669

Credit Risk

The credit risk exposure related to any derivative instruments is limited to the unrealized gains, if any, on outstanding contracts based on current market prices. To reduce counter-party credit exposure, the Company enters into contracts with financial institutions management deems credit worthy and limits credit exposure to each. The Company does not anticipate non-performance by any of its counterparties. In addition, to allow for situations where derivative positions may need to be revised, the Company deals only in markets that management considers highly liquid.