XML 57 R21.htm IDEA: XBRL DOCUMENT  v2.3.0.11
Derivative Financial Instruments and Fair Value of Financial Instruments
 6 Months Ended
Jun. 30, 2011
Derivative Financial Instruments and Fair Value of Financial Instruments [Abstract]  
DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
NOTE 15 — DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Palmarejo Gold Production Royalty
     On January 21, 2009, the Company entered into the gold production royalty transaction with Franco-Nevada Corporation described in Note 10, Long-Term Debt and Capital Lease Obligations, Palmarejo Gold Production Royalty Obligation. The minimum royalty obligation ends when payments have been made on a total of 400,000 ounces of gold. As of June 30, 2011, a total of 288,836 ounces of gold remain outstanding under the minimum royalty obligation. The price volatility associated with the minimum royalty obligation is considered an embedded derivative financial instrument under U.S. GAAP. The fair value of the embedded derivative at June 30, 2011 and December 31, 2010 was a liability of $164.9 million and $162.0 million, respectively. The Franco-Nevada warrants were contingent options to acquire 316,436 common shares of Franco-Nevada for no additional consideration, once the mine satisfied certain completion tests stipulated in the agreement. During the three and six months ended June 30, 2011, mark-to-market adjustments for this embedded derivative amounted to a loss of $4.0 million and $2.9 million, respectively. On September 19, 2010, the Company exercised these warrants and received the related shares, which were sold for net proceeds to the Company of $10.0 million. The Franco-Nevada warrants were considered a derivative instruments. During the three and six months ended June 30, 2010, mark-to-market adjustments for this embedded derivative and warrants amounted to a loss of $30.0 million and a gain of $1.0 million, respectively. For the three months ended June 30, 2011 and 2010, realized losses on settlement of the liabilities were $9.7 million and $3.7 million, respectively, and for the six months ended June 30, 2011 and 2010, realized losses on settlement of the liabilities were $17.2 million and $6.8 million, respectively. The mark-to-market adjustments and realized losses are included in fair value adjustments, net in the consolidated statement of operations.
Forward Foreign Exchange Contracts
     The Company periodically enters into forward foreign currency contracts to reduce the foreign exchange risk associated with forecasted Mexican peso (“MXP”) operating costs at its Palmarejo mine. At June 30, 2011, the Company had MXP foreign exchange contracts of $32.4 million in U.S. dollars. These contracts require the Company to exchange U.S. dollars for MXP at a weighted average exchange rate of 12.08 MXP to each U.S. dollar and had a fair value of $0.3 million at June 30, 2011. The Company recorded mark-to-market gains (losses) of ($0.7) million and $0.3 million for the three and six months ended June 30, 2011, respectively, and $(1.6) million and $(1.2) million for the three and six months ended June 30, 2010, respectively, which is reflected in fair value adjustments, net. The Company recorded realized gains of $0.9 million and $1.1 million in Production costs applicable to sales during the three and six months ended June 30, 2011, respectively, and $0.5 million and $0.5 million during the three and six months ended June 30, 2010, respectively.
Gold Lease Facility
     As of June 30, 2011, the Company had no gold leased from Mitsubishi International Corporation (“MIC”). At December 31, 2010, the Company had 10,000 ounces of gold leased from MIC, which it delivered to MIC on March 22, 2011. The Company accounted for the gold lease facility as a derivative instrument, which was recorded in accrued liabilities and other on the balance sheet.
     On December 12, 2008, the Company entered into the gold lease facility with MIC. Pursuant to this facility, the Company may lease amounts of gold from MIC and is obligated to deliver the same amounts back to MIC and to pay specified lease fees to MIC that are equivalent to interest at current market rates on the value of the gold leased. Pursuant to a Second Amended and Restated Collateral Agreement, the Company’s obligations under the facility are secured by certain collateral. The collateral agreement specifies the maximum amount of gold the Company may lease from MIC, as well as the amount and type of collateral.
Concentrate Sales Contracts
     The Company enters into concentrate sales contracts with third-party smelters. The contracts, in general, provide for a provisional payment based upon provisional assays and quoted 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 derivative, which is the final settlement price based on a future price, does not qualify for hedge accounting. These embedded derivatives are recorded as derivative assets (in Prepaid expenses and other) or derivative liabilities (in Accrued liabilities and other) on the balance sheet and are adjusted to fair value through earnings each period until the date of final settlement. At June 30, 2011, the Company had outstanding provisionally priced sales of $24.8 million, consisting of 341,058 ounces of silver and 7,471 ounces of gold, which had a fair value of $23.6 million including the embedded derivative. At December 31, 2010, the Company had outstanding provisionally priced sales of $35.7 million consisting of 647,711 ounces of silver and 12,758 ounces of gold, which had a fair value of approximately $37.4 million including the embedded derivative.
Commodity Derivatives
     At December 31, 2010, the Company had one outstanding forward gold contract of 10,000 ounces at a fixed price of $1,380 per ounce, which was settled on March 22, 2011 for a gain of $0.5 million.
     As of June 30, 2011, in connection with the Kensington term facility described in Note 10, Long-Term Debt and Capital Lease Obligations, Kensington term facility, the Company had outstanding call options requiring it to deliver 220,000 ounces of gold at a weighted average strike price of $1,858.41 per ounce if the market price of gold exceeds the strike price. At June 30, 2011, the Company had outstanding put options allowing it to sell 220,000 ounces of gold at a weighted average strike price of $943.09 per ounce if the market price of gold were to fall below the strike price. The contracts will expire over the next five years. As of June 30, 2011, the fair market value of these contracts was a net liability of $13.1 million. During the six months ended June 30, 2011, 23,750 ounces of gold call options at a weighted average strike price of $1,737.68 per ounce expired. The Company recorded unrealized gains of $2.4 million and $1.7 million for the three and six months ended June 30, 2011, respectively, included in fair value adjustments, net. During the three and six months ended June 30, 2010, the Company recorded unrealized losses of $6.1 million and $6.6 million, respectively, included in fair value adjustments, net.
     In connection with the sale of the Cerro Bayo mine to Mandalay Resources Corporation, the Company received 125,000 ounces of silver to be delivered in six equal quarterly installments commencing in the third quarter of 2011. The Company recognized a mark to market loss of $0.4 million associated with this silver in the three months ended June 30, 2011. The Company recognized a mark to market gain of $0.5 million associated with this silver in the six months ended June 30, 2011. The silver had a fair value of $4.3 million at June 30, 2011, and a fair value of $3.9 million at December 31, 2010.
     As of June 30, 2011, the Company had the following derivative instruments that settle in each of the years indicated in the table (in thousands except average rates, ounces and per share data):
                                 
    2011     2012     2013     Thereafter  
Palmarejo gold production royalty
  $ 14,712     $ 24,865     $ 25,097     $ 78,140  
Average gold price in excess of minimum contractual deduction
  $ 483     $ 497     $ 502     $ 493  
Notional ounces
    30,435       50,004       50,004       158,393  
 
                               
Mexican peso forward purchase contracts
  $ 15,600     $ 16,800     $ —     $ —  
Average rate (MXP/$)
  $ 12.49     $ 11.70     $ —     $ —  
Mexican peso notional amount
    194,771       196,568       —       —  
 
                               
Silver ounces receivable from Mandalay
  $ 764     $ 1,535     $ —     $ —  
Average silver forward price
  $ 18.33     $ 18.42     $ —     $ —  
Notional ounces
    41,667       83,333       —       —  
 
                               
Silver concentrate sales agreements
  $ 13,398     $ —     $ —     $ —  
Average silver price
  $ 39.28     $ —     $ —     $ —  
Notional ounces
    341,058       —       —       —  
 
                               
Gold concentrates sales agreements
  $ 11,384     $ —     $ —     $ —  
Average gold price
  $ 1,524     $ —     $ —     $ —  
Notional ounces
    7,471       —       —       —  
 
                               
Gold put options purchased
  $ 1,800     $ 2,880     $ 1,800     $ 720  
Average gold strike price
  $ 887     $ 923     $ 928     $ 991  
Notional ounces
    30,000       68,000       45,000       77,000  
 
                               
Gold call options sold
  $ 1,800     $ 2,880     $ 1,800     $ 720  
Average gold strike price
  $ 1,740     $ 1,817     $ 1,827     $ 1,960  
Notional ounces
    30,000       68,000       45,000       77,000  
     The following summarizes the classification of the fair value of the derivative instruments as of June 30, 2011 and December 31, 2010 (in thousands):
                                                 
    June 30, 2011  
                                    Current     Non-current  
    Prepaid     Other non-     Accrued     Other long-     portion of     portion of  
    expenses and     current     liabilities and     term     royalty     royalty  
    other     assets     other     liabilities     obligation     obligation  
Silver ounces receivable from
                                               
Mandalay
  $ 1,378     $ 680     $ —     $ —     $ —     $ —  
Forward foreign exchange contracts
    830       —       527       —       —       —  
Palmarejo gold production royalty
    —       —       —       —       33,425       131,466  
Put and call options, net
    —       —       1,449       11,623       —       —  
Concentrate sales contracts
    30       —       1,223       —       —       —  
 
                                   
 
  $ 2,238     $ 680     $ 3,199     $ 11,623     $ 33,425     $ 131,466  
 
                                   
 
                                               
                                                 
    December 31, 2010  
                                    Current     Non-current  
    Prepaid     Other non-     Accrued     Other long-     portion of     portion of  
    expenses and     current     liabilities and     term     royalty     royalty  
    other     Assets     other     Liabilities     obligation     obligation  
Gold lease facility
  $ —     $ —     $ 2,213     $ —     $ —     $ —  
Gold forward contract
    425       —       —       —       —       —  
Silver ounces receivable from Mandalay
    531       1,063       —       —       —       —  
Forward foreign exchange contracts
    328       —       323       —       —       —  
Palmarejo gold production royalty
    —       —       —       —       28,745       133,258  
Put and call options, net
    —       —       1,471       13,277       —       —  
Concentrate sales contracts
    1,703       —       23       —       —       —  
 
                                   
 
  $ 2,987     $ 1,063     $ 4,030     $ 13,277     $ 28,745     $ 133,258  
 
                                   
     The following represent mark-to-market gains (losses) on derivative instruments for the three and six months ended June 30, 2011 and 2010 (in thousands):
                                         
            Three months ended     Six months ended  
            June 30,     June 30,  
Financial statement line   Derivative     2011     2010     2011     2010  
Sales of metal
  Concentrate sales contracts   $ (1,515 )   $ (536 )   $ (2,873 )   $ 51  
Production costs applicable to sales
  Forward foreign exchange contracts     859       489       1,111       40  
Fair value adjustments, net
  Gold lease facility     —       (2,137 )     (132 )     (2,729 )
Fair value adjustments, net
  Forward foreign exchange contracts     (707 )     (1,649 )     298       (1,192 )
Fair value adjustments, net
  Forward gold contract     —       —       35       —  
Fair value adjustments, net
  Silver ounces receivable     (368 )     —       464       —  
Fair value adjustments, net
  Palmarejo gold royalty     (13,731 )     (33,663 )     (20,041 )     (38,512 )
Fair value adjustments, net
  Franco-Nevada warrant     —       1,030       —       2,333  
Fair value adjustments, net
  Put and call options     2,374       (6,097 )     1,676       (6,674 )
 
                               
 
          $ (13,088 )   $ (42,563 )   $ (19,462 )   $ (46,683 )
 
                               
Credit Risk
     The credit risk exposure related to any potential 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 deals 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 positions may need to be revised, the Company deals only in markets that management considers highly liquid.