DERIVATIVE INSTRUMENTS

9 Months Ended

Sep. 30, 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 condensed consolidated balance sheets.

Prior to maturity, these contracts were carried on the condensed 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 and nine month periods ended September 30, 2011 the Company recognized realized losses of ($2,532,928) and ($7,648,288), respectively, on the monthly settlements of a total of 1,322,774 and 3,968,322 notional pounds of copper for the derivatives classified as trading securities. The Company also recognized unrealized gains of $3,087,021 and $6,720,450, which include the counterparty credit valuation adjustment of $25,320, related to the mark to market adjustment for the estimated change in fair value of the copper derivatives classified as trading securities that occurred during the three and nine month periods ended September 30, 2011, respectively.

As noted above, as of September 30, 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 September 30, 2012 and December 31 2011, the total amounts owed to Nedbank as a result of these missed payments are $16,106,691, plus accrued interest thereon.