DERIVATIVE FINANCIAL INSTRUMENTS

Palmarejo Gold Production Royalty

In January 2009, the Company's subsidiary, Coeur Mexicana, S.A. de C.V. (“Coeur Mexicana”), entered into a gold production royalty agreement with a subsidiary of Franco-Nevada Corporation that covered 50% of the life of mine production from the Palmarejo mine and legacy adjacent properties. The royalty transaction included a minimum obligation of 4,167 gold ounces per month and terminated upon delivery of 400,000 gold ounces, which occurred in July 2016.

The price volatility associated with the minimum royalty obligation was considered an embedded derivative. The Company was required to recognize the change in fair value of the remaining minimum obligation due to changing gold prices. For the three and nine months ended September 30, 2016, the mark-to-market adjustment associated with the change were losses of $0.1 million and $5.9 million, respectively. Payments on the royalty obligation decreased the carrying amount of the minimum obligation and the derivative liability. For the three and nine months ended September 30, 2016, realized losses on settlement of the liabilities were $0.1 million and $5.9 million, respectively. The mark-to-market adjustments and realized losses are included in Fair value adjustments, net.

Provisional Silver and Gold Sales

The Company enters into sales contracts with third-party smelters and refiners which, in some cases, provide for a provisional payment based upon preliminary assays and quoted metal prices. The provisionally priced sales contracts contain an embedded derivative that is required to be separated from the host contract for accounting purposes. The host contract is the receivable recorded 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. Changes in silver and gold prices resulted in provisional pricing mark-to-market losses of $0.1 million and gains of $0.6 million in the three and nine months ended September 30, 2017, respectively, compared to losses of $0.8 million and gains of $0.4 million in the three and nine months ended September 30, 2016, respectively.

At September 30, 2017, the Company had the following provisionally priced sales that settle as follows:



In thousands except average prices and notional ounces	2017		Thereafter

Provisional silver sales contracts	$	3,915	$	—
Average silver price	$	16.86	$	—
Notional ounces	232,200		—

Provisional gold sales contracts	$	33,887	$	—
Average gold price	$	1,299	$	—
Notional ounces	26,087		—

Silver and Gold Options

During the nine months ended September 30, 2016, the Company had realized losses of $1.6 million, from settled option contracts. At September 30, 2017, the Company had no outstanding gold and silver options contracts.

The following summarizes the classification of the fair value of the derivative instruments:



	September 30, 2017
In thousands	Prepaid expenses and other		Accrued liabilities and other		Current portion of royalty obligation		Non-current portion of royalty obligation
Provisional silver and gold sales contracts	$	44	$	255	$	—	$	—



	December 31, 2016
In thousands	Prepaid expenses and other	Accrued liabilities and other	Current portion of royalty obligation	Non-current portion of royalty obligation
Provisional silver and gold sales contracts	—	762	—	—

The following represent mark-to-market gains (losses) on derivative instruments for the three and nine months ended September 30, 2017 and 2016 (in thousands):



		Three months ended September 30,						Nine months ended September 30,
Financial statement line	Derivative	2017			2016			2017		2016
Revenue	Provisional silver and gold sales contracts	$	(45	)	$	(784	)	$	551	$	378
Fair value adjustments, net	Palmarejo gold production royalty	—			(110		)	—		(5,866		)
Fair value adjustments, net	Silver and gold options	—			—			—		(1,582		)
		$	(45	)	$	(894	)	$	551	$	(7,070	)

Credit Risk

The credit risk exposure related to any derivative instrument 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 institutions management deems credit-worthy and limits credit exposure to each institution. The Company does not anticipate non-performance by any of its counterparties.