Note 10 - Derivative Instruments

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note

10:

Derivative Instruments

Foreign Currency

Our wholly-owned subsidiaries owning the Casa Berardi and San Sebastian mines are USD-functional entities which routinely incur expenses denominated in CAD and MXN, and such expenses expose us to exchange rate fluctuations between the USD and CAD and MXN. In

April

2016,

we initiated a program to manage our exposure to fluctuations in the exchange rate between the USD and CAD and the impact on our future operating costs denominated in CAD. In

October

2016,

we also initiated a program to manage our exposure to the impact of fluctuations in the exchange rate between the USD and MXN on our future operating costs denominated in MXN. The programs utilize forward contracts to sell CAD and MXN, and each contract is designated as a cash flow hedge. As of

December

 

31,

2016,

we have

130

forward contracts outstanding to sell

CAD$290.1

million having a notional amount of

US$222.9

million, and

24

forward contracts outstanding to sell

MXN$202.5

million having a notional amount of

US$10.3

million. The CAD contracts represent between

21%

and

75%

of our annual forecasted cash operating costs at Casa Berardi from

2017

through

2020

and have CAD-to-USD exchange rates ranging between

1.2787

and

1.3380.

The MXN contracts represent

75%

of our forecasted cash operating costs at San Sebastian for

2017

and have MXN-to-USD exchange rates ranging between

18.9975

and

21.000.

Our risk management policy allows for up to

75%

of our planned cost exposure for

five

years into the future to be hedged under such programs, and for potential additional programs to manage other foreign currency-related exposure areas.

As of

December

 

31,

2016,

we recorded the following balances for the fair value of the contracts:

•      a non-current asset of

$27

thousand, which is included in other non-current assets;

•      a current liability of

$2.8

million, which is included in other current liabilities, and

•      a non-current liability of

$2.4

million, which is included in other non-current liabilities.

Net unrealized losses of approximately

$5.2

million related to the effective portion of the hedges were included in accumulated other comprehensive income as of

December

 

31,

2016,

and are net of related deferred taxes. Unrealized gains and losses will be transferred from accumulated other comprehensive loss to current earnings as the underlying operating expenses are recognized. We estimate approximately

$3.0

million in net unrealized losses included in accumulated other comprehensive income as of

December

 

31,

2016

would be reclassified to current earnings in the next

twelve

months. Net unrealized losses of approximately

$2

thousand related to ineffectiveness of the hedges were included in gain (loss) on derivatives contracts on our consolidated statements of operations and comprehensive income (loss) for the year ended

December

 

31,

2016.

Metals Prices

At times, 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. Our risk management policy allows for up to

75%

of our planned metals price exposure for

five

years into the future, with certain other limitations, to be hedged under such programs. 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 covered under contract positions.

We are currently using financially-settled forward contracts to manage the exposure to changes in prices of silver, gold, zinc and lead contained in our concentrate shipments between the time of shipment and final settlement. In addition, we currently use financially-settled forward contracts to manage the exposure to changes in prices of zinc and lead (but not silver and gold) contained in our forecasted future concentrate shipments. These contracts are not designated as hedges and are marked-to-market through earnings each period.  At

December

 

31,

2016,

we recorded a current asset of

$2.8

million, which is included in other current assets and is net of

$0.7

million for contracts in a fair value current liability position. In addition, we recorded a non-current asset of

$2.5

million at

December

 

31,

2016

which is included in other non-current assets.

We recognized a

$14.2

million net loss during

2016

on the contracts utilized to manage exposure to prices of metals in our concentrate shipments, which is included in sales of products.  The net loss recognized on the contracts offsets gains related to price adjustments on our provisional concentrate sales due to changes to silver, gold, lead and zinc prices between the time of sale and final settlement.

We recognized a

$4.4

million net gain during

2016

on the contracts utilized to manage exposure to prices for forecasted future concentrate shipments. The net gain on these contracts is 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 as discussed in the preceding paragraph.  The net gain for

2016

is the result of decreasing zinc and lead prices. This program, when utilized, 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 tables summarize the quantities of metals committed under forward sales contracts at

December

 

31,

2016

and

2015:

December 31, 2016	Ounces/pounds under contract (in 000's)								Average price per ounce/pound
	Silver		Gold		Zinc		Lead		Silver		Gold		Zinc		Lead
	(ounces)		(ounces)		(pounds)		(pounds)		(ounces)		(ounces)		(pounds)		(pounds)
Contracts on provisional sales
2017 settlements		1,295		4		19,070		7,441	$	16.29	$	1,172	$	1.18	$	0.97
Contracts on forecasted sales
2017 settlements		—		—		35,384		17,637		N/A		N/A	$	1.19	$	1.03
2018 settlements		—		—		13,779		5,732		N/A		N/A	$	1.21	$	1.05

December 31, 2015

Ounces/pounds under contract (in 000's)

Average price per ounce/pound

Silver

Gold

Zinc

Lead

Silver

Gold

Zinc

Lead

(ounces)

(ounces)

(pounds)

(pounds)

(ounces)

(ounces)

(pounds)

(pounds)

Contracts on provisional sales

2016 settlements

1,368

5

23,755

8,433

14.12

1,076

$

0.71

$

0.77

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.

Credit-risk-related Contingent Features

We have agreements with certain counterparties that contain a provision whereby we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. As of

December

 

31,

2016,

we have not posted any collateral related to these agreements. The fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was

$6.4

million as of

December

 

31,

2016.

If we had breached any of these provisions at

December

 

31,

2016,

we could have been required to settle our obligations under the agreements at their termination value of

$6.4

million.