Note

11.

Derivative Instruments

Foreign Currency

Our wholly-owned subsidiaries owning the Casa Berardi and San Sebastian mines are U.S. dollar ("USD")-functional entities which routinely incur expenses denominated in Canadian dollars ("CAD") and Mexican pesos ("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 buy CAD and MXN, and each contract is designated as a cash flow hedge. As of

June

30,

2018,

we have

107

forward contracts outstanding to buy

CAD$256.0

million having a notational amount of

US$198.0

million, and

forward contracts outstanding to buy

MXN$226.3

million having a notional amount of

USD$11.3

million. The CAD contracts are related to forecasted cash operating costs at Casa Berardi to be incurred from

2018

through

2021

and have USD-to-CAD exchange rates ranging between

1.2729

and

1.3335.

The MXN contracts are related to forecasted cash operating costs at San Sebastian for

2018

through

2020

and have MXN-to-USD exchange rates ranging between

19.4000

and

20.8550.

Our risk management policy provides 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

June

30,

2018,

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

•

a current asset of

$0.1

million, which is included in other current assets;

•

a non-current asset of

$0.1

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

•

a current liability of

$1.4

million, which is included in other current liabilities; and

•

a non-current liability of

$1.0

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

Net unrealized losses of approximately

$2.2

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

June

30,

2018,

and are net of 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

$1.3

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

June

30,

2018

would be reclassified to current earnings in the next

twelve

months. Net realized gains of approximately

$0.4

million on contracts related to underlying expenses which have been recognized were transferred from accumulated other comprehensive loss and included in cost of sales and other direct production costs for the

six

months ended

June

30,

2018.

Net unrealized gains of approximately

$10

thousand related to ineffectiveness of the hedges were included in current earnings for the

six

months ended

June

30,

2018.

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 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 form 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.

As of

June

30,

2018,

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

•

a current asset of

$2.4

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

$1.2

million for contracts in a fair value current liability position; and

•

a non-current asset of

$12.3

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

$0.2

million for contracts in a fair value non-current liability position.

We recognized a

$3.3

million net gain during the

first

six

months of

2018

on the contracts utilized to manage exposure to prices of metals in our concentrate shipments, which is included in sales of products. The net gain recognized on the contracts offsets losses 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

$20.8

million net gain during the

first

half of

2018

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 the

first

half of

2018

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). When those prices increase compared to the contracts, we incur losses on the contracts.

The following tables summarize the quantities of metals committed under forward sales contracts at

June

30,

2018

and

December

31,

2017:

June 30, 2018	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
2018 settlements		1,114		5		20,889		4,960	$	16.50	$	1,298	$	1.38	$	1.07
Contracts on forecasted sales
2018 settlements		—		—		9,039		5,787		N/A		N/A	$	1.34	$	1.09
2019 settlements		—		—		48,502		20,283		N/A		N/A	$	1.40	$	1.10
2020 settlements		—		—		42,329		19,401		N/A		N/A	$	1.40	$	1.13
2021 settlements		—		—		—		4,409		N/A		N/A		N/A	$	1.07

December 31, 2017	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
2018 settlements		1,447		5		21,550		4,740	$	16.64	$	1,279	$	1.45	$	1.11
Contracts on forecasted sales
2018 settlements		—		—		32,187		16,645		N/A		N/A	$	1.29	$	1.06
2019 settlements		—		—		23,589		18,078		N/A		N/A	$	1.33	$	1.09
2020 settlements		—		—		3,307		2,866		N/A		N/A	$	1.27	$	1.08

Credit-risk-related Contingent Features

Certain of our derivative contracts contain cross default provisions which provide that a default under our revolving credit agreement would cause a default under the derivative contract. As of

June

30,

2018,

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

$3.7

million as of

June

30,

2018.

If we were in breach of any of these provisions at

June

30,

2018,

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

$3.7

million.