Derivative Financial Instruments

12 Months Ended

Dec. 31, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

Palmarejo Gold Production Royalty

On January 21, 2009, the Company entered into a gold production royalty transaction with Franco-Nevada Corporation. The royalty covers 50% of the life of mine production from the Palmarejo mine and adjacent properties. The royalty transaction included a minimum obligation of 4,167 ounces per month that ends when payments have been made on a total of 400,000 ounces of gold. At December 31, 2013, a total of 140,931 ounces of gold remain outstanding under the minimum royalty obligation.

The price volatility associated with the minimum royalty obligation is considered an embedded derivative. The Company is required to recognize the change in fair value of the remaining minimum obligation due to changing gold prices. Unrealized gains are recognized in periods when the gold price has decreased from the previous period and unrealized losses are recognized in periods when the gold price increases. The fair value of the embedded derivative is reflected net of the Company's current credit adjusted risk free rate, which was 5.7% and 4.2% at December 31, 2013 and 2012, respectively. The fair value of the embedded derivative at December 31, 2013 and 2012 was a liability of $40.3 million and $145.1 million, respectively. During the years ended December 31, 2013, 2012, and 2011, the mark-to-market adjustments for this embedded derivative amounted to gains of $104.8 million, losses of $14.3 million, and losses of $2.6 million, respectively.

Payments on the royalty obligation decrease the carrying amount of the minimum obligation and the derivative liability. Each monthly payment is an amount equal to the greater of the minimum of 4,167 ounces of gold or 50% of the actual gold production per month multiplied by the excess of the monthly average market price of gold above $400 per ounce, which is subject to a 1% annual inflation compounding adjustment beginning on January 21, 2013). For the years ended December 31, 2013, 2012, and 2011 realized losses on settlement of the liabilities were $28.7 million, $45.4 million, and $42.8 million, respectively. The mark-to-market adjustments and realized losses are included in Fair value adjustments, net in the Consolidated Statement of Comprehensive Income (Loss).

Foreign Exchange Contracts and Hedges

The Company periodically enters into forward foreign currency contracts to reduce the foreign exchange risk associated with forecasted Mexican peso (“MXN”) operating costs at its Palmarejo mine. At December 31, 2013, the Company had MXN foreign exchange forward contracts with a notional amount of $12.0 million. These contracts require the Company to exchange U.S. dollars for MXN at a weighted average exchange rate of 12.21 MXN to each U.S. dollar, and the Company had a liability related to these contracts with a fair value of $0.9 million at December 31, 2013. In addition, at December 31, 2013, the Company had outstanding call options requiring it to sell $45.0 million in U.S. dollars in exchange for MXN at a weighted average strike price of 14.80 MXN to each U.S. dollar if the foreign exchange rate exceeds the strike price. Further, at December 31, 2013, the Company had outstanding put options allowing it to buy $45.0 million in U.S. dollars in exchange for MXN at a weighted average strike price of 12.60 MXN to each U.S. dollar if the foreign exchange rate exceeds the strike price. The Company had a liability related to these contracts with an insignificant fair value at December 31, 2013. The Company recorded a mark-to-market loss on its MXN contracts of $1.0 million for the twelve months ended December 31, 2013.

At December 31, 2012, the Company had MXN foreign exchange forward contracts on $26.1 million in U.S. dollars. These contracts required the Company to exchange U.S. dollars for MXN at a weighted average exchange rate of 13.11 MXN to each U.S. dollar and the Company had a liability with a fair value of $0.1 million at December 31, 2012. The Company recorded mark-to-market gains of $3.3 million and losses of $3.2 million for the years ended December 31, 2012 and 2011, respectively. These mark-to-market adjustments are reflected in fair value adjustments, net. The Company recorded realized gains of $0.6 million, realized losses of $1.6 million, and realized gains of $0.4 million in production costs applicable to sales during the years ended December 31, 2013, 2012, and 2011, respectively.

Gold Lease Facility

On December 12, 2008, the Company entered into a gold lease facility with Mitsubishi International Corporation (“MIC”). This gold lease facility was terminated in 2011. The Company recorded realized losses of $2.3 million for the year ended December 31, 2011, included in fair value adjustments, net.

Concentrate Sales Contracts

The Company enters into concentrate sales contracts with third-party smelters. The contracts, in general, provide for a provisional payment based upon provisional assays and forward metal prices. The provisionally priced sales contain an embedded derivative that is required to be separated from the host contract for accounting purposes. The host contract is the receivable from the sale of concentrates at the forward price at the time of sale. The embedded derivatives do not qualify for hedge accounting and are adjusted to fair value through earnings each period until the date of final settlement. At December 31, 2013, the Company had outstanding provisionally priced sales of $42.4 million, consisting of 0.2 million ounces of silver and 30,780 ounces of gold. At December 31, 2012, the Company had outstanding provisionally priced sales of $33.2 million consisting of 0.4 million ounces of silver and 11,957 ounces of gold.

Commodity Derivatives

At December 31, 2013, the Company had outstanding put options allowing it to net settle 25,000 ounces of gold and 1,250,000 ounces of silver at weighted average strike prices of $1,150 per ounce and $17.00 per ounce, respectively, if the market price of gold or silver were to average less than the strike price during the contract period. The contracts expire during the first quarter of 2014. At December 31, 2013, the fair market value of these contracts was a net asset of $0.1 million.

At December 31, 2012, the Company had written outstanding call options requiring it to deliver 97,000 ounces of gold at a weighted average price of $1,968 per ounce if the market price of gold exceeds that price. At December 31, 2012, the Company had outstanding put options allowing it to sell 122,000 ounces of gold at a weighted average price of $968 per ounce if the market price of gold were to fall below that price. At December 31, 2012, the fair market value of these contracts was a net liability of $9.3 million. During the year ended December 31, 2013, the Company settled the remaining 97,000 ounces of gold put options and 84,500 ounces of gold call options for a net realized gain of $0.4 million.

During the year ended December 31, 2011, the Company settled an outstanding forward gold contract of 10,000 ounces at a fixed price of $1,380 per ounce, which resulted in a realized gain of $0.5 million.

During the year ended December 31, 2013, 2012, and 2011, the Company recorded unrealized gains of $8.9 million, unrealized gains of $8.6 million, and unrealized losses of $3.1 million, respectively, related to the outstanding options which was included in fair value adjustments, net.

In connection with the sale of the Cerro Bayo mine to Mandalay Resources Corporation, the Company received the right to 125,000 ounces of silver to be delivered in six equal quarterly installments commencing in the third quarter of 2011. The Company recognized mark-to-market losses of $0.6 million for the year ended December 31, 2012 and mark-to-market gains of $0.8 million for the year ended December 31, 2011 associated with this silver.

At December 31, 2013, the Company had the following derivative instruments that settle in each of the years indicated (in thousands except average prices and notional ounces):

	2014		2015		2016		Thereafter
Palmarejo gold production royalty	$	29,831	$	24,764	$	15,141	$	—
Average gold price in excess of minimum contractual deduction	498		494		490		—
Notional ounces	59,856		50,153		30,922		—
Mexican peso forward purchase contracts	$	12,000	$	—	$	—	$	—
Average rate (MXN/$)	12.21		—		—		—
Mexican peso notional amount	146,460		—		—		—
Mexican peso put options purchased	$	45,000	$	—	$	—	$	—
Average rate (MXN/$)	12.60		—		—		—
Mexican peso notional amount	567,150		—		—		—
Mexican peso call options sold	$	45,000	$	—	$	—	$	—
Average rate (MXN/$)	14.80		—		—		—
Mexican peso notional amount	666,075		—		—		—
Silver concentrate sales agreements	$	3,645	$	—	$	—	$	—
Average silver price	$	20.98	$	—	$	—	$	—
Notional ounces	173,752		—		—		—
Gold concentrate sales agreements	$	38,760	$	—	$	—	$	—
Average gold price	$	1,259	$	—	$	—	$	—
Notional ounces	30,780		—		—		—
Gold put options purchased	$	274	$	—	$	—	$	—
Average gold strike price	$	1,150	$	—	$	—	$	—
Notional ounces	25,000		—		—		—
Silver put options purchased	$	238	$	—	$	—	$	—
Average silver strike price	$	17.00	$	—	$	—	$	—
Notional ounces	1,250,000		—		—		—

The following summarizes the classification of the fair value of the derivative instruments (in thousands):

	December 31, 2013
	Prepaid expenses and other		Accrued liabilities and other		Other long- term liabilities		Current portion of royalty obligation		Non-current portion of royalty obligation
Foreign exchange contracts, peso	$	38	$	947	$	—	$	—	$	—
Palmarejo gold production royalty	—		—		—		17,650		22,688
Gold and silver put options	135		—		—		—		—
Concentrate sales contracts	11		693		—		—		—
	$	184	$	1,640	$	—	$	17,650	$	22,688

	December 31, 2012
	Prepaid expenses and other		Accrued liabilities and other		Other long- term Liabilities		Current portion of royalty obligation		Non-current portion of royalty obligation
Foreign exchange contracts, peso	$	376	$	300	$	—	$	—	$	—
Palmarejo gold production royalty	—		—		—		41,146		103,952
Gold and silver put options, net	—		2,025		7,274		—		—
Concentrate sales contracts	1,030		163		—		—		—
	$	1,406	$	2,488	$	7,274	$	41,146	$	103,952

The following represent mark-to-market gains (losses) on derivative instruments for the years ended December 31, 2013, 2012, and 2011 (in thousands):

		Year ended December 31,
Financial statement line	Derivative	2013			2012			2011
Sales of metal	Concentrate sales contracts	$	(1,995	)	$	1,682		$	2,505
Production costs applicable to sales	Forward foreign exchange contracts	589			(1,621		)	383
Fair value adjustments, net	Gold lease facility	—			—			(132		)
Fair value adjustments, net	Forward foreign exchange contracts	(985		)	3,264			(3,192		)
Fair value adjustments, net	Forward gold contract	—			—			34
Fair value adjustments, net	Silver ounces receivable	—			213			(276		)
Fair value adjustments, net	Palmarejo gold royalty	76,200			(31,053		)	(40,046		)
Fair value adjustments, net	Put and call options	7,119			4,089			(8,438		)
		$	80,928		$	(23,426	)	$	(49,162	)

Credit Risk

The credit risk exposure related to any derivative instruments is limited to the unrealized gains, if any, on outstanding contracts based on current market prices. To reduce counter-party credit exposure, the Company enters into contracts with financial institutions management deems credit worthy and limits credit exposure to each. The Company does not anticipate non-performance by any of its counterparties. In addition, to allow for situations where derivative positions may need to be revised, the Company deals only in markets that management considers highly liquid.