Note 11. Derivative Instruments

9 Months Ended

Sep. 30, 2012

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note 11.    Derivative Instruments

At times, we use commodity forward sales commitments and commodity swap contracts to manage our exposure to fluctuation in the prices of base 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 other risks, including the amount by which the contract price exceeds the spot price of a commodity, and nonperformance by the counterparties to these agreements.

We use financially-settled forward contracts to sell lead and zinc at fixed prices for settlement at approximately the same time that our unsettled concentrate sales contracts will settle.  The settlement of each concentrate contract 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.  At September 30, 2012, we recorded a current liability of $1.8 million for the fair value of open contracts under this program, which includes approximately $1.9 million for contracts  that were in a fair value liability position and $0.1 million for contracts in a fair value asset position. The current liability related to these contracts is netted against the current asset related to the fair value of open contracts under the program for forecasted shipments discussed below and included in other current assets.  We recognized $1.8 million and $1.9 million net losses on the contracts during the third quarter and first nine months of 2012, respectively, which are included in sales of products.  The net losses recognized on the contracts offset price adjustments on our provisional concentrate sales related to changes to lead and zinc prices between the time of sale and final settlement.

In addition, we use 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.  At September 30, 2012, we recorded a current asset of $9.4 million, which is included in other current assets, a non-current asset of $0.5 million, which is included in other non-current assets, and a non-current liability of $0.2 million, which is included in other non-current liabilities, for the fair value of the contracts.  The current and non-current asset balances, respectively, are net of approximately $0.5 million and $0.1 million for contracts that were in a fair value liability position at September 30, 2012. We recognized a $9.1 million net loss on the contracts for the third quarter of 2012, which includes $4.3 million in gains realized on settled contracts and $13.4 million in unrealized losses for mark-to-market adjustments on unsettled contracts.  For the first nine months of 2012, we recognized an $8.1 million net loss on the contracts, which includes $14.5 million in gains realized on settled contracts and $22.6 million in unrealized losses for mark-to-market adjustments on unsettled contracts. The net losses on these contracts are included as a separate line item under other income (expense), as they relate to forecasted future shipments, as opposed to sales that have already taken place but are subject to final pricing.  The losses recognized during the third quarter and first nine months of 2012 are the result of increasing lead and zinc prices during the end of September 2012.  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).

As further discussed in Note 6, production at the Lucky Friday mine is temporarily suspended due to the requirement to remove material from the Silver Shaft.  As a result, during the first quarter of 2012, we liquidated forward contracts related to previously forecasted Lucky Friday base metal sales for total net proceeds of $3.1 million.

The following tables summarize the quantities of base metals committed under forward sales contracts at September 30, 2012 and December 31, 2011:

September 30, 2012	Metric tonnes under contract				Average price per pound
	Zinc		Lead		Zinc		Lead
Contracts on provisional sales
2012 settlements		8,525		3,400	$	0.88	$	0.96
2013 settlements		2,200		—	$	0.97		N/A
Contracts on forecasted sales
2012 settlements		—		600		N/A	$	1.12
2013 settlements		10,250		16,850	$	1.06	$	1.12

December 31, 2011	Metric tonnes under  contract				Average price per pound
	Zinc		Lead		Zinc		Lead
Contracts on provisional sales
2012 settlements		9,600		2,600	$	0.86	$	0.89
Contracts on forecasted sales
2012 settlements		20,500		15,900	$	1.12	$	1.12
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.