Note 11. Derivative Instruments

9 Months Ended

Sep. 30, 2011

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note 11.    Derivative Instruments

We may use commodity forward sales commitments, commodity swap contracts and commodity put and call option contracts to manage our exposure to fluctuation in the prices of certain metals which we produce. Contract positions are designed to ensure that we will receive a defined minimum price for certain quantities of our production, thereby partially offsetting our exposure to fluctuations in the market. These instruments do, however, expose us to (i) credit risk in the event of non-performance by counterparties for contracts in which the contract price exceeds the spot price of a commodity and (ii) price risk to the extent that the spot price exceeds the contract price for quantities of our production contained under contract positions.

In April 2010, we began utilizing financially-settled forward contracts to sell lead and zinc at fixed prices for settlement at approximately the same time that our provisional concentrate sales contracts will settle.  The settlement of each concentrate lot is based on the average spot price of the metal during the month of settlement, which may differ from the prices used to record the sale when the sale takes place.  The objective of the contracts is to manage the exposure to changes in prices of zinc and lead contained in our concentrate shipments between the time of sale and final settlement.  These contracts do not qualify for hedge accounting and are marked-to-market through earnings each period, and net gains and losses on the contracts are included in sales of products.  The net gains and losses recognized on the contracts offsets price adjustments on our provisional concentrate sales related to changes to lead and zinc prices between the time of sale and final settlement, and are included in the calculation of realized prices.

In addition, in May 2010, we also began utilizing financially-settled forward contracts to manage the exposure of changes in prices of zinc and lead contained in our forecasted future concentrate shipments.  These contracts also do not qualify for hedge accounting and are marked-to-market through earnings each period.  The net gains and losses on these contracts (see the table below) are included as a separate line item under other income (expense), as they relate to forecasted future shipments, as opposed to provisional sales that have already taken place.  The gains recognized during the first nine months of 2011 are the result of a reduction in lead prices and zinc prices during that period.  This program is designed to mitigate the impact of potential future declines in lead and zinc prices from the price levels established in the contracts (see average price information below).

The following table summarizes the fair value asset and liability balances related to the contracts outstanding under the two programs discussed above (in thousands):

	September 30, 2011		December 31, 2010
Other current assets	$	14,341	$	—
Other non-current assets and deferred charges		21,376		—
Current derivative contract liabilities		—		20,016
Other non-current liabilities		—		779
Total fair value assets	$	35,717	$	—
Total fair value liabilities	$	—	$	20,795

We recognized gains and losses related to the forward contracts under the two programs as follows (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2011		2010			2011		2010
Sales of products	$	5,994	$	(5,348	)	$	6,697	$	1,003
Gain (loss) on derivatives contracts		40,382		(13,195	)		38,907		(11,196	)

The following table summarizes the quantities of base metals committed under forward sales contracts at September 30, 2011:

	Metric tonnes under contract				Average price per pound
	Zinc		Lead		Zinc		Lead
Contracts on provisional sales
2011 settlements		5,125		2,800	$	1.03	$	1.00
Contracts on forecasted sales
2011 settlements		2,300		2,275	$	0.99	$	1.05
2012 settlements		26,650		18,000	$	1.11	$	1.11
2013 settlements		8,275		11,150	$	1.14	$	1.17

Our concentrate sales are based on a provisional sales price containing 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 the concentrates at the forward price at the time of the sale. The embedded derivative, which does not qualify for hedge accounting, is adjusted to market through earnings each period prior to final settlement.