Note 10 - Derivative Instruments

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note 10: Derivative Instruments

General

Our current risk management policy provides that up to 75% of:

• our future foreign currency-related operating and capital cost exposure for five years into the future may be hedged and for potential additional programs to manage other foreign currency-related exposure areas;

• our planned lead and zinc metals price exposure for five years into the future, with certain other limitations, may be covered under derivatives programs that would establish prices to be realized on future metals sales; and

• our planned silver and gold metals price exposure for five years into the future, with certain other limitations, may be covered under derivatives programs that would establish a floor, but not a ceiling, for prices to be realized on future metals sales. We currently do not utilize this program.

In addition, our risk management policy provides that price exposure between the time of shipment and final settlement on silver, gold, lead and zinc contained in our concentrate shipments may be covered under derivatives programs that would establish prices to be realized on those sales.

These instruments 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 the hedged commodity or foreign currency and (ii) price risk to the extent that the spot price exceeds the contract price for quantities of our production and/or forecasted costs covered under contract positions.

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, respectively, and such expenses expose us to exchange rate fluctuations between the USD and CAD and MXN. We utilize 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 November 2021, initiated a program related to future development costs denominated in CAD, and have used a similar program, on a limited basis, related to interest payments on our IQ Notes (see Note 9). The programs utilize forward contracts to buy CAD. Each contract related to operating costs is designated as a cash flow hedge, while contracts related to development and interest costs have not been designated as hedges as of December 31, 2021. As of December 31, 2021, we had 166 forward contracts outstanding to buy a total of CAD$318.8 million having a notional amount of US$245.3 million. The CAD contracts are related to forecasted cash operating costs at Casa Berardi forecasted to be incurred from 2022 through 2025 and have USD-to-CAD exchange rates ranging between 1.2702 and 1.3753.

As of December 31, 2021 and 2020, we recorded the following balances for the fair value of the contracts (in millions):

	December 31,
Balance sheet line item:	2021		2020
Other current assets	$	2.7	$	3.5
Other non-current assets		2.5		4.2

Net unrealized gains of approximately $5.2 million related to the effective portion of the hedges were included in accumulated other comprehensive loss as of December 31, 2021. 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 $2.7 million in net unrealized gains included in accumulated other comprehensive loss as of December 31, 2021 would be reclassified to current earnings in the next twelve months. Net realized gains of approximately $4.7 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 year ended December 31, 2021. Net unrealized losses of approximately $0.2 million related to contracts not designated as hedges and no net unrealized gains or losses related to ineffectiveness of the hedges were included in fair value adjustments, net on our consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2021.

Metals Prices

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; and

• 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 December 31, 2021 and 2020:

December 31, 2021	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
2022 settlements		1,814		6		13,371		4,575	$	23.02	$	1,812	$	1.39	$	0.96
Contracts on forecasted sales
2022 settlements		—		—		57,706		59,194		N/A		N/A	$	1.28	$	0.98
2023 settlements		—		—		76,280		71,650		N/A		N/A	$	1.29	$	1.00

December 31, 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
2022 settlements		1,282		4		23,314		4,905	$	25.00	$	1,858	$	1.19	$	0.90
Contracts on forecasted sales
2022 settlements		—		—		41,577		30,876		N/A		N/A	$	1.17	$	0.88
2023 settlements		N/A		N/A		18,519		—		N/A		N/A	$	1.28		N/A

Effective November 1, 2021, we designated the contracts for lead and zinc contained in our forecasted future shipments as hedges for accounting purposes, with gains and losses deferred to accumulated other comprehensive loss until the hedged product ships. Prior to November 1, 2021, these contracts did not qualify for hedge accounting and were therefore marked-to-market through earnings each period. The forward contracts for silver and gold contained in our concentrate shipments have not been designated as hedges and are marked-to-market through earnings each period.

At December 31, 2021 and 2020, we recorded the following balances for the fair value of forward and put option contracts held at that time (in millions):

	December 31, 2021								December 31, 2020
Balance sheet line item:	Contracts in an asset position		Contracts in a liability position			Net asset (liability)			Contracts in an asset position		Contracts in a liability position			Net asset (liability)
Other current assets	$	—	$	—		$	—		$	0.2	$	(0.2	)	$	—
Other non-current assets		—		—			—			0.5		(0.1	)		0.4
Current derivatives liability		0.7		(20.1	)		(19.4	)		0.1		(11.8	)		(11.7	)
Non-current derivatives liability		0.4		(18.9	)		(18.5	)		—		—			—

Net unrealized losses of approximately $14.6 million related to the effective portion of the contracts designated as hedges were included in accumulated other comprehensive loss as of December 31, 2021, 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 $3.4 million in net unrealized losses included in accumulated other comprehensive loss as of December 31, 2021 would be reclassified to current earnings in the next twelve months. We recognized a $0.5 million net loss during 2021 on the contracts utilized to manage exposure to changes in 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 $32.9 million net loss during 2021 on the contracts utilized to manage exposure to changes in prices for forecasted future sales prior to their hedge designation. The net loss on these contracts is included in the fair value adjustments, net 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 2021 is the result of increasing silver, gold, zinc and lead prices. During the third quarter of 2019 we settled, prior to their maturity date, contracts in a gain position for cash proceeds to us of approximately $6.7 million, with no such early settlements in 2021 or 2020. These programs, when utilized and the contracts are not settled prior to their maturity, 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 December 31, 2021, we have not posted any collateral related to these contracts. The fair value of derivatives in a net liability position related to these arrangements was $39.1 million as of December 31, 2021, and includes accrued interest but excludes any adjustment for nonperformance risk. If we were in breach of any of these provisions at December 31, 2021, we could have been required to settle our obligations under the agreements at their termination value of $39.1 million.