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Note 11 - Derivative Instruments

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Text Block]

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"), respectively, 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 similar program with respect to MXN, which was not in use as of September 30, 2020. When in use, the programs utilize forward contracts to buy CAD and MXN, and each contract is designated as a cash flow hedge. As of September 30, 2020, we had 143 forward contracts outstanding to buy a total of CAD$310.3 million having a notional amount of US$235.9 million. The CAD contracts are related to cash operating costs at Casa Berardi forecasted to be incurred from 2020 through 2024 and have CAD-to-USD exchange rates ranging between 1.2702 and 1.3785. There were no outstanding contracts for MXN as of September 30, 2020. 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 September 30, 2020, we recorded the following balances for the fair value of the contracts:

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a current asset of $0.5 million, which is included in other current assets;

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a non-current asset of $0.5 million, which is included in other non-current assets;

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a current liability of $2.0 million, which is included in current derivatives liabilities; and

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a non-current liability of $2.1 million, which is included in other non-current liabilities.

Net unrealized losses of approximately $3.1 million related to the effective portion of the hedges were included in accumulated other comprehensive loss as of September 30, 2020. 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 $1.4 million in net unrealized losses included in accumulated other comprehensive loss as of September 30, 2020 would be reclassified to current earnings in the next twelve months. Net realized losses of approximately $2.8 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 nine months ended September 30, 2020. No net unrealized gains or losses related to ineffectiveness of the hedges were included in current earnings for the nine months ended September 30, 2020.

Metals Prices

We may at times 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 market prices. 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 covered under such programs that would establish a ceiling for prices to be realized on future metals sales. 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 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. The following tables summarize the quantities of metals committed under forward sales contracts at September 30, 2020 and December 31, 2019:

September 30, 2020	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
2020 settlements		910		2		23,975		5,512	$	23.53	$	1,948	$	1.02	$	0.84
2021 settlements		—		—		6,945		—		N/A		N/A	$	1.12		N/A
Contracts on forecasted sales
2020 settlements		—		—		827		8,543		N/A		N/A	$	0.94	$	0.81
2021 settlements		—		—		27,448		12,136		N/A		N/A	$	1.06	$	0.86

December 31, 2019	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
2020 settlements		2,556		10		21,550		5,159	$	17.20	$	1,481	$	1.04	$	0.88

Contracts on forecasted sales
2020 settlements		—		—		441		11,740		N/A		N/A	$	1.13	$	0.98

In June 2019, we began using financially-settled put option contracts to manage the exposure of our forecasted future gold and silver sales to potential declines in market prices for those metals. These put contracts give us the option, but not the obligation, to realize established prices on quantities of silver and gold to be sold in the future. The put contracts establish the minimum ("floor") prices we would expect to be able to realize, without limiting our ability to realized higher prices when market prices exceed the put exercise prices at the time the metals are sold. As of September 30, 2020, we had put contracts that provide average floor prices of $16.13 per ounce for silver and $1,625 per ounce for gold for a total of 3.9 million silver ounces and 50,511 gold ounces, with settlement dates in the fourth quarter of 2020 and first quarter of 2021.

These forward and put option contracts are not designated as hedges and are marked-to-market through earnings each period.

As of September 30, 2020, we recorded the following balances for the fair value of the forward and put option contracts held at that time:

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a current liability of $10.2 million, which is included in current derivatives liabilities and is net of $1.8 million for contracts in a fair value current asset position; and

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a non-current liability of $45 thousand, which is included in other current liabilities.

We recognized a $12.9 million net loss during the first nine months of 2020 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 $12.8 million net loss during the first nine months of 2020 on the contracts utilized to manage exposure to prices for forecasted future sales. The net loss on these contracts is included as a separate line item under other income (expense), as they relate to forecasted future sales, as opposed to sales that have already taken place but are subject to final pricing as discussed in the preceding paragraph. The net loss for the first nine months of 2020 is the result of increasing silver, gold and zinc prices, partially offset by decreasing lead prices. During the third quarter of 2019, we settled, prior to their maturity date, forward contracts in a gain position for cash proceeds to us of approximately $6.7 million, with no such early settlements in 2020. These programs, when utilized and the contracts are not settled prior to their maturity dates, are designed to mitigate the impact of potential future declines in silver, gold, lead and zinc prices from the price levels established in the contracts (see average price information above). When those prices increase compared to the contracts, we incur losses on the contracts.

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 September 30, 2020, we have not posted any collateral related to these contracts. The fair value of derivatives in a net liability position related to these agreements was $16.2 million as of September 30, 2020, which includes accrued interest but excludes any adjustment for nonperformance risk. If we were in breach of any of these provisions at September 30, 2020, we could have been required to settle our obligations under the agreements at their termination value of $16.2 million.