DERIVATIVE INSTRUMENTS

3 Months Ended

Mar. 31, 2012

DERIVATIVE INSTRUMENTS [Text Block]

9. DERIVATIVE INSTRUMENTS

Copper Price Protection Program

In connection with the Credit Agreement dated June 28, 2007 with Nedbank, the Company agreed to implement a price protection program with respect to a specified percentage of copper output from the Johnson Camp Mine. The price protection program consisted of financial derivatives whereby the Company entered into a combination of forward sale and call option contracts for copper quantities based on a portion of the estimated production from the Johnson Camp Mine during the term of the loan. These financial derivatives did not require the physical delivery of copper cathode and were expected to be net cash settled upon maturity and/or settlement of the contracts based upon the average daily London Metal Exchange (LME) cash settlement copper price for the month of settlement. As of December 31, 2011, all of the copper derivative contracts had matured and the outstanding amount due to the settlement of the contracts was recorded in copper derivatives settlement payable on the consolidated balance sheets.

Prior to maturity, these contracts were carried on the consolidated balance sheets at their estimated fair value. As mentioned above, as of December 31, 2011, all of the copper forward and call option contracts have matured.

Effective April 1, 2010, the Company no longer classified its copper derivatives as cash flow hedges. Accordingly, during the three month period ended March 31, 2011 the Company recognized a realized loss of ($2,542,920) on the monthly settlements of a total of 1,322,774 notional pounds of copper for the derivatives now classified as trading securities. The Company also recognized an unrealized gain of $1,486,544, which includes the counterparty credit valuation adjustment of $252,988, related to the mark to market adjustment for the estimated change in market value of the copper derivatives classified as trading securities that occurred during the three month period ended March 31, 2011.

As noted above, as of March 31, 2012, the Company is in default of the related Copper Hedge Agreement as it failed to make the requisite monthly payments (March 31, 2010 through December 31, 2011 settlements) related to the settlement of the derivative contracts. As of March 31, 2012 and December 31 2011, the total amounts owed to Nedbank as a result of these missed payments are $16,106,691.

Interest Rate Swap

In November 2008, the Company entered into an interest rate swap agreement to hedge the interest rate risk exposure on its $25 million Nedbank credit facility expiring between 2009 and 2012. Under the interest rate swap contract terms, the Company receives LIBOR and pays a fixed rate of interest of 2.48% . The program requires no cash margins, collateral or other security from the Company. Under the terms of the interest rate swap, settlements began on March 31, 2009 and occur every three months thereafter until the contract expires on September 28, 2012.

This interest rate swap agreement is carried on the condensed consolidated balance sheets at fair value which was estimated at ($26,215) and ($54,896) as of March 31, 2012 and December 31, 2011, respectively. Until July 1, 2010, this contract was designated as a cash flow hedge with changes in fair value reflected in accumulated other comprehensive income (loss). As noted above, the Company continues to be in default on the Nedbank Credit Facility as it failed to make the requisite debt service payments for the period from March 31, 2010 to March 31, 2012. Accordingly, given that the Company is not performing under the terms of the underlying Nedbank Credit Facility, effective July 1, 2010, the Company de-designated 100% of the interest rate swap previously classified as a cash-flow hedge and reclassified the estimated fair value of the interest rate swap from accumulated other comprehensive income (loss) to other income (expense), recognizing an unrealized loss for the amount.

During the three month periods ended March 31, 2012 and 2011, the Company recognized $24,893 and $65,767, respectively, in interest expense related to the quarterly settlements of the interest rate swap. During the three month periods ended March 31, 2012 and 2011, the Company recognized an unrealized gain of $28,681 and $51,698, respectively, related to changes in the estimated fair value of the interest rate swap.

As of March 31, 2012, the estimated fair value of the interest rate swap includes a counterparty credit valuation adjustment of $668 which is reported in losses on derivatives classified as trading securities within the condensed consolidated statement of operations for the three month period ended March 31, 2012.

Although this estimate is subject to changes in the forward interest rate curve for LIBOR, as of March 31, 2012, the estimated amount of the interest rate swap derivatives that will settle over the next twelve months in accordance with their normal operating terms stated in the contracts is $22,456 ($21,788 after proportionate counterparty credit valuation adjustment).