DERIVATIVE FINANCIAL INSTRUMENTS

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 $0.3 million and $20 thousand in the three and six months ended June 30, 2018, respectively.

Zinc Options

At June 30, 2018, the Company has outstanding Asian (or average value) put and call option contracts in net-zero-cost collar arrangements on a volume of 300 metric tons of zinc per month commencing in April 2018 and ending in December 2018. The weighted average strike prices on the put and call contracts are $3,000 and $4,050 per metric ton, respectively. The contracts are generally net cash settled and, if the price of zinc at the time of the expiration is between the put and call prices, would expire at no cost to the Company. At June 30, 2018, the fair market value of the put and call zero cost collar contracts was a net asset of $0.4 million.

During the six months ended June 30, 2018, the Company had recorded unrealized gains of $0.4 million related to outstanding options which were included in Fair value adjustments, net. At June 30, 2017, the Company had no outstanding options contracts.

Interest Rate Swap

The Company is a party to an interest rate swap contract in which it will receive variable-rate interest and pay fixed-rate interest. The Company uses this instrument to manage its exposure to changes in interest rates related to its Revolving Credit Facility (see Note 18 -- Debt). The interest rate swap derivative instrument is not designated as a hedge from an accounting standpoint and hedge accounting is not applied. The notional amount is used to measure interest to be paid or received. The interest rate swap derivative instrument is effective June 2018 with a contractual term of twelve months and net settles monthly.

At June 30, 2018, the Company had the following derivative instruments that settle as follows:



In thousands except average prices and notional ounces	2018			Thereafter

Provisional gold sales contracts	$	46,485		$	—
Average gold price per ounce	$	1,299		$	—
Notional ounces	35,787			—

Zinc put options purchased	$	5,400		$	—
Average zinc strike price per metric ton	$	3,000		$	—
Notional metric tons	1,800			—

Zinc call options sold	$	(7,290	)	$	—
Average zinc strike price per metric ton	$	4,050		$	—
Notional metric tons	1,800			—

Fixed interest rate swap payable	$	(1,281	)	$	—
Fixed Interest rate	2.46		%	—
Notional dollars	$	50,000		$	—

Variable interest rate swap receivable	$	1,088		$	—
Average variable interest rate	2.09		%	$	—
Notional dollars	$	50,000		$	—

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



	June 30, 2018
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	$	123	$	114	$	—	$	—
Zinc options	363		—		—		—
Interest rate swaps	—		188		—		—
	$	486	$	302	$	—	$	—



	December 31, 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	$	251	$	222	$	—	$	—

The following represent mark-to-market gains (losses) on derivative instruments for the three and six months ended June 30, 2018, respectively (in thousands):



		Three months ended June 30,						Six months ended June 30,
Financial statement line	Derivative	2018			2017			2018			2017
Revenue	Provisional silver and gold sales contracts	$	(273	)	$	(763	)	$	(20	)	$	449
Fair value adjustments, net	Zinc options	219			—			363			—
Fair value adjustments, net	Interest rate swaps	(188		)	—			(188		)	—
		$	(242	)	$	(763	)	$	155		$	449

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.