

9. FINANCIAL INSTRUMENTS


a)	Financial assets and liabilities by categories



December 31, 2019	Amortized cost		FVTPL		FVTOCI		Total
Financial Assets:
Cash and cash equivalents	$	120,564	$	—	$	—	$	120,564
Trade receivables from provisional concentrates sales ⁽¹⁾	—		48,767		—		48,767
Receivable not arising from sale of metal concentrates ⁽¹⁾	116,596		—		—		116,596
Short-term investments, equity securities	—		117,776		—		117,776
Short-term investments, other than equity securities	—		—		—		—
Derivative financial assets	—		1,272		—		1,272
	$	237,160	$	167,815	$	—	$	404,975
Financial Liabilities:
Derivative financial liabilities	$	—	$	—	$	—	$	—
	$	—	$	—	$	—	$	—


(1)	Included in Trade and other receivables.



December 31, 2018	Amortized cost		FVTPL		FVTOCI		Total
Financial Assets:
Cash and cash equivalents	$	138,510	$	—	$	—	$	138,510
Trade receivables from provisional concentrates sales ⁽¹⁾	—		40,803		—		40,803
Receivable not arising from sale of metal concentrates ⁽¹⁾	40,918		—		—		40,918
Short-term investments, equity securities	—		19,178		—		19,178
Short-term investments, other than equity securities	—		—		54,826		54,826
Derivative financial assets	—		640		—		640
	$	179,428	$	60,621	$	54,826	$	294,875
Financial Liabilities:
Derivative financial liabilities	$	—	$	51	$	—	$	51
	$	—	$	51	$	—	$	51


(1)	Included in Trade and other receivables.


b)	Short-term investments in equity securities recorded at FVTPL

The Company’s short-term investments in equity securities are recorded at FVTPL for the year ended December 31, 2019 and 2018. Net gains (losses) on short-term investments recorded at FVTPL were as follows:



	2019		2018
Unrealized net gains (losses) on short-term investments, equity securities	$	83,705	$	(3,298	)
Realized net losses on short-term investments, equity securities	—		(49		)
	$	83,705	$	(3,347	)


c)	Financial assets recorded at FVTOCI

The Company’s short-term investments other than equity securities are recorded at FVTOCI. The unrealized gains from short-term investments other than equity securities for the year ended December 31, 2019 and 2018 were as follows:



	2019			2018
Unrealized net gains on short-term investments, other than equity securities	$	—		$	993
Reclassification adjustment for realized gains on short-term investments, other than equity securities	(208		)	(788		)
	$	(208	)	$	205


d)	Derivative instruments

The Company's derivative financial instruments are comprised of foreign currency and commodity contracts. The net gains (losses) on derivatives for the year ended December 31, 2019 and 2018 were comprised of the following:



	2019			2018
Gains on foreign currency and commodity contracts:
Realized gains on foreign currency and commodity contracts	$	2,669		$	2,449
Unrealized gains on foreign currency and commodity contracts	646			2,481
	$	3,315		$	4,930
Loss on derivatives:
Loss on warrants	$	(14	)	$	(1,078	)
	$	(14	)	$	(1,078	)


e)	Fair value information

i)Fair Value Measurement

The categories of the fair value hierarchy that reflect the inputs to valuation techniques used to measure fair value are as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities;

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

Level 3: Inputs for the asset or liability based on unobservable market data

The levels in the fair value hierarchy into which the Company’s financial assets and liabilities that are measured and recognized on the Consolidated Statements of Financial Position at fair value on a recurring basis were categorized as follows:



	At December 31, 2019				At December 31, 2018
	Level 1		Level 2		Level 1		Level 2
Assets and Liabilities:
Short-term investments	$	117,776	$	—	$	74,004	$	—
Trade receivables from provisional concentrate sales	—		48,767		—		40,803
Derivative financial assets	—		1,272		—		640
Derivative financial liabilities	—		—		—		(51		)
	$	117,776	$	50,039	$	74,004	$	41,392

There were no transfers between Level 1 and Level 2 during the year ended December 31, 2019. The methodology and assessment of inputs for determining the fair value of financial assets and liabilities as well as the levels of hierarchy for the Company’s financial assets and liabilities measured at fair value remains unchanged from that at December 31, 2018.

ii)Valuation Techniques

Short-term investments and other investments

The Company’s short-term investments and other investments are valued using quoted market prices in active markets and as such are classified within Level 1 of the fair value hierarchy and are primarily money market securities and U.S. Treasury securities. The fair value of the investment securities is calculated as the quoted market price of the investment and in the case of equity securities, the quoted market price multiplied by the quantity of shares held by the Company.

Derivative assets and liabilities

The Company’s derivative assets and liabilities were comprised of investments in warrants, commodity swaps and foreign currency contracts. The fair value of the warrants is calculated using an option pricing model which utilizes a combination of quoted prices and market-derived inputs. The Company's commodity swaps and foreign currency contracts are valued using observable market prices. Derivative instruments are classified within Level 2 of the fair value hierarchy.

Receivables from Provisional Concentrate Sales

A portion of the Company’s trade receivables arose from provisional concentrate sales and are valued using quoted market prices based on the forward London Metal Exchange for copper, zinc and lead and the London Bullion Market Association P.M. fix for gold and silver.


f)	Financial Instruments and related risks

The Company has exposure to risks of varying degrees of significance which could affect its ability to achieve its strategic objectives for growth and shareholder returns. The principle financial risks to which the Company is exposed are:


i)	Credit risk


ii)	Liquidity risk


iii)	Market risk

1. Currency risk

2. Interest rate risk

3. Price risk

The Company’s Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework and reviews the Company’s policies on an ongoing basis.

i)Credit Risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s trade receivables. The carrying value of trade receivables represents the maximum credit exposure.

The Company has long-term concentrate contracts to sell the zinc, lead and copper concentrates produced by the Huaron, Morococha, San Vicente and La Colorada mines. Concentrate contracts are common business practice in the mining industry. The terms of the concentrate contracts may require the Company to deliver concentrate that has a value greater than the payment received at the time of delivery, thereby introducing the Company to credit risk of the buyers of concentrates. Should any of these counterparties not honour supply arrangements, or should any of them become insolvent, the Company may incur losses for products already shipped and be forced to sell its concentrates on the spot market or it may not have a market for its concentrates and therefore its future operating results may be materially adversely impacted. At December 31, 2019, the Company had receivable balances associated with buyers of its concentrates of $48.8 million (2018 - $40.8 million) and receivable balances associated with buyers of its doré of $17.5 million (2018 - $nil). The vast majority of the Company’s concentrate is sold to six well-known concentrate buyers.

Doré production from Shahuindo, La Arena, Timmins, La Colorada, Dolores and Manantial Espejo is refined under long term agreements with fixed refining terms at three separate refineries worldwide. The Company generally retains the risk and title to the precious metals throughout the process of refining and therefore is exposed to the risk that the refineries will not be able to perform in accordance with the refining contract and that the Company may not be able to fully recover precious metals in such circumstances. At December 31, 2019, the Company had approximately $58.2 million (2018 - $19.7 million) of value contained in precious metal inventory at refineries. The Company maintains insurance coverage against the loss of precious metals at the Company’s mine sites, in-transit to refineries and whilst at the refineries.

The Company maintains trading facilities with several banks and bullion dealers for the purposes of transacting the Company’s trading activities. None of these facilities are subject to margin arrangements. The Company’s trading activities can expose the Company to the credit risk of its counterparties to the extent that the trading positions have a positive mark-to-market value. However, the Company minimizes this risk by ensuring there is no excessive concentration of credit risk with any single counterparty, by active credit management and monitoring.

Refined silver and gold are sold in the spot market to various bullion traders and banks. Credit risk may arise from this activity if the Company is not paid for metal at the time it is delivered, as required by spot sale contracts.

Supplier advances for products and services yet to be provided are a common practice in some jurisdictions in which the Company operates. These advances represent a credit risk to the Company to the extent that suppliers do not deliver products or perform services as expected. As at December 31, 2019, the Company had made $3.4 million (2018 - $14.4 million) of supplier advances, which are reflected in “Trade and other receivables” on the Company’s consolidated statement of financial position.

Management constantly monitors and assesses the credit risk resulting from its refining arrangements, concentrate sales and commodity contracts with its refiners, trading counterparties and customers. Furthermore, management carefully considers credit risk when allocating prospective sales and refining business to counterparties. In making allocation decisions, management attempts to avoid unacceptable concentration of credit risk to any single counterparty.

At December 31, 2019, the Company has recorded a loss allowance for expected credit losses in the amount of $7.6 million (2018 – $7.6 million) which relates to trade receivables from Doe Run Peru (“DRP”), one of the buyers of concentrates from the Company’s Peruvian operations, for deliveries of concentrates that occurred in early 2009. At December 31, 2019, the Company has also recorded a loss allowance for expected credit losses in the amount of $4.7 million (2018 - $4.7 million) which relates to amounts owning from Republic Metals, one of the buyers of doré, for deliveries that occurred in 2018.

Cash and cash equivalents, trade accounts receivable and other receivables that represent the maximum credit risk to the Company consist of the following:



	December 31, 2019		December 31, 2018
Cash and cash equivalents	$	120,564	$	138,510
Trade accounts receivable ⁽¹⁾	66,230		40,803
Supplier advances	3,391		14,370
Royalty receivable ⁽¹⁾	121		105
Employee loans ⁽¹⁾	392		312


(1)	Included in Trade and other receivables.

The Company invests its cash and cash equivalents, which also has credit risk, with the objective of maintaining safety of principal and providing adequate liquidity to meet all current payment obligations.

ii)Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company manages its liquidity risk by continuously monitoring forecasted and actual cash flows. The Company has in place a rigorous planning and budgeting process to help determine the funds required to support the Company’s normal operating requirements on an ongoing basis and its expansion plans. The Company strives to maintain sufficient liquidity to meet its short-term business requirements, taking into account its anticipated cash flows from operations, its holdings of cash and short-term investments, and its committed loan facilities.

In the normal course of business, the Company enters into contracts that give rise to commitments for future minimum payments. The following table summarizes the remaining contractual maturities of the Company's financial and non-financial liabilities, shown in contractual undiscounted cash flow:



Payments due by period 2019
	Within 1 year		2 - 3 years		4- 5 years		After 5 years		Total
Financial liabilities
Accounts payable and accrued liabilities other than:	$	221,488	$	—	$	—	$	—	$	221,488
Severance accrual	994		5,967		772		109		7,842
Employee compensation	2,848		—		—		—		2,848
Total accounts payable and accrued liabilities	225,330		5,967		772		109		232,178
Debt
Credit facility	—		—		275,000		—		275,000
Interest	12,952		27,040		—		—		39,992
Provisions⁽¹⁾⁽²⁾	3,979		633		1,350		967		6,929
Income taxes payable	24,770		—		—		—		24,770
Lease obligations	16,221		15,906		7,193		21,675		60,995
Future employee compensation	1,444		8,711		—		—		10,155
Total contractual obligations⁽²⁾	$	284,696	$	58,257	$	284,315	$	22,751	$	650,019



Payments due by period 2018
	Within 1 year		2 - 3 years		4- 5 years		After 5 years		Total
Financial liabilities
Accounts payable and accrued liabilities other than:	$	128,486	$	—	$	—	$	—	$	128,486
Severance accrual	1,791		3,763		534		112		6,200
Employee compensation	1,466		—		—		—		1,466
Total accounts payable and accrued liabilities	131,743		3,763		534		112		136,152
Debt
Interest	1,200		350		—		—		1,550
Loss on commodity contracts	51		—		—		—		51
Provisions⁽¹⁾⁽²⁾	3,123		547		720		178		4,568
Income taxes payable	8,306		—		—		—		8,306
Capital and operating expenditure commitments	7,947		7,898		2,885		530		19,260
Future employee compensation	1,530		4,911		—		—		6,441
Total contractual obligations⁽²⁾	$	153,900	$	17,469	$	4,139	$	820	$	176,328


(1)	Total litigation provision (Note 17).

(2)

Amounts above do not include payments related to the Company’s anticipated closure and decommissioning obligation (current $3.4 million, long-term $185.1 million) discussed in Note 17 (2018 - current $1.9 million, long-term $68.6 million), the deferred credit arising from the Aquiline acquisition ($20.8 million) (2018 - $20.8 million) discussed in Note 20, and deferred tax liabilities of $176.8 million (2018 - $148.8 million).

The increase in the Company's exposure to liquidity risk during the year ended December 31, 2019 were due primarily to the draw on the credit facility to finance the Tahoe Acquisition (Note 8) and the obligations acquired.

iii)Market Risk

1.Currency Risk

The Company reports its financial statements in USD; however, the Company operates in jurisdictions that utilize other currencies. As a consequence, the financial results of the Company’s operations as reported in USD are subject to changes in the value of the USD relative to local currencies. Since the Company’s sales are denominated in USD and a portion of the Company’s operating costs and capital spending are in local currencies, the Company is negatively impacted by strengthening local currencies relative to the USD and positively impacted by the inverse.

As at December 31, 2019, Pan American had outstanding positions on $12.0 million in foreign currency exposure of Mexican peso ("MXN") purchases, $60.0 million of Peruvian sol ("PEN") purchases, and $30.0 million of Canadian dollar ("CAD") purchases. MXN purchases had put rates of 19.50 and call rates ranging from $20.82 to $21.59 expiring between January 2020 and December 2020. PEN purchases had put rates of $3.35 and call rates ranging from $3.40 to $3.55 expiring between January 2020 and December 2020. And, CAD purchases had put rates of $1.30 and call rates of $1.37 expiring between January 2020 and December 2020.

For the year ended December 31, 2019, the Company recorded gains of $1.0 million (2018 - gains of $0.7 million), $0.7 million (2018 - $nil), and $0.3 million (2018 - $nil) on MXN, PEN, and CAD derivative contracts, respectively.

The Company’s net earnings are affected by the revaluation of its monetary assets and monetary liabilities at each balance sheet date. The Company has reviewed its monetary assets and monetary liabilities and is exposed to foreign exchange risk through financial assets and liabilities and deferred income tax liabilities denominated in currencies other than USD, as shown in the table below. The Company estimates that a 10% change in the exchange rate of the foreign currencies in which its December 31, 2019 non-USD net monetary liabilities were denominated would result in an income before taxes change of about $5.1 million (2018 - $14.3 million).

The Company is exposed to currency risk through the following financial assets and liabilities, and deferred income tax assets and liabilities denominated in foreign currencies:



At December 31, 2019	Cash and short-term investments		Other current and non-current assets		Income taxes receivable (payable), current and non- current			Accounts payable and accrued liabilities and non- current liabilities			Deferred tax assets and liabilities
Canadian Dollar	$	123,391	$	3,897	$	2,045		$	(23,387	)	$	23,640
Mexican Peso	5,222		14,215		7,645			(64,589		)	(73,938		)
Argentine Peso	3,652		18,511		13,737			(16,143		)	—
Bolivian Boliviano	3,447		221		1,524			(8,749		)	(9,925		)
European Euro	3		—		—			—			—
Peruvian Sol	2,406		55,851		(14,660		)	(39,884		)	(80,138		)
Guatemala quetzal	353		1,482		(238		)	(669		)	1
	$	138,474	$	94,177	$	10,053		$	(153,421	)	$	(140,360	)



At December 31, 2018	Cash and short-term investments		Other current and non-current assets		Income taxes receivable (payable), current and non- current			Accounts payable and accrued liabilities and non- current liabilities			Deferred tax assets and liabilities
Canadian Dollar	$	22,514	$	1,793	$	—		$	(851	)	$	—
Mexican Peso	2,724		18,873		7,240			(31,909		)	(106,383		)
Argentine Peso	2,677		15,038		1,134			(18,739		)	—
Bolivian Boliviano	285		532		(6,068		)	(12,167		)	(9,372		)
European Euro	127		—		(332		)	—			—
Peruvian Sol	1,268		2,324		2,640			(13,134		)	(23,004		)
	$	29,595	$	38,560	$	4,614		$	(76,800	)	$	(138,759	)

2.Interest Rate Risk

Interest rate risk is the risk that the fair values and future cash flows of the Company will fluctuate because of changes in market interest rates. The average interest rate earned by the Company during the year ended December 31, 2019 on its cash and short-term investments was 0.6% (2018 - 0.9%). A 10% increase or decrease in the interest earned from financial institutions on cash and short-term investments would result in a $0.1 million increase or decrease in the Company’s before tax earnings (2018 – $0.2 million).

At December 31, 2019, the Company has $275.0 million in amounts drawn on its secured revolving credit facility (the "Credit Facility"), which had an average interest rate of 4.3%. There were no amounts drawn on the Credit Facility in 2018.

At December 31, 2019, the Company has $41.2 million in lease obligations (2018 - $6.7 million), that are subject to an annualized interest rate of 9.7% (2018 - 2.2%).

3.Price Risk

Metal price risk is the risk that changes in metal prices will affect the Company’s income or the value of its related financial instruments. The Company derives its revenue from the sale of silver, gold, lead, copper, and zinc. The Company’s sales are directly dependent on metal prices that have shown significant volatility and are beyond the Company’s control. Consistent with the Company’s mission to provide equity investors with exposure to changes in precious metal prices, the Company’s current policy is to not hedge the price of precious metal.

A 10% increase in all metal prices as at December 31, 2019, would result in an increase of approximately $139.1 million (2018 – $81.2 million) in the Company’s revenues. A 10% decrease in all metal prices as at the same period would result in a decrease of approximately $140.1 million (2018 - $82.7 million) in the Company’s revenues. The Company also enters into provisional concentrate contracts to sell the zinc, lead and copper concentrates. We have provisionally priced sales for which price finalization, referenced to the relevant zinc, lead, copper and silver index, is outstanding at the balance sheet date. A 10% increase in metals prices on open positions of zinc, lead, copper and silver for provisional concentrate contracts for the year ended December 31, 2019 would result in an increase of approximately $6.4 million (2018 - $6.2 million) in the Company’s before tax earnings, which would be reflected in 2019 results. A 10% decrease in metal prices for the same period would result in a decrease of approximately $6.4 million (2018 - $6.2 million) in the Company’s before tax earnings.

The Company mitigates the price risk associated with its base metal production by committing some of its forecasted base metal production from time to time under forward sales and option contracts. The Board of Directors continually assesses the Company’s strategy towards its base metal exposure, depending on market conditions. At December 31, 2019, the Company had no outstanding contracts to sell base metals production.