DERIVATIVE FINANCIAL INSTRUMENTS

Palmarejo Gold Production Royalty

On January 21, 2009, the Company's subsidiary, Coeur Mexicana S.A. de C.V. ("Coeur Mexicana") entered into a gold production royalty transaction with a subsidiary of Franco-Nevada Corporation. The royalty covers 50% of the life of mine production from the Palmarejo mine and adjacent properties. The royalty transaction includes 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 June 30, 2014, a total of 110,240 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 6.1% and 4.2% at June 30, 2014 and December 31, 2013, respectively. The fair value of the embedded derivative at June 30, 2014 and December 31, 2013 was a liability of $44.0 million and $40.3 million, respectively. For the three months ended June 30, 2014 and 2013, the mark-to-market adjustments were losses of $5.1 million and gains of $61.1 million, respectively. For the six months ended June 30, 2014 and 2013, the mark-to-market adjustments were losses of $15.3 million and gains of $75.5 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 $408 per ounce, subject to a 1% annual inflation adjustment. For the three months ended June 30, 2014 and 2013, realized losses on settlement of the liabilities were $5.5 million and $8.1 million, respectively. For the six months ended June 30, 2014 and 2013, realized losses on settlement of the liabilities were $11.7 million and $17.2 million, respectively. The mark-to-market adjustments and realized losses are included in Fair value adjustments, net.

Foreign Exchange Contracts

The Company periodically enters into foreign currency derivative contracts to reduce the foreign exchange risk associated with Mexican peso (“MXN”) operating costs at its Palmarejo mine. At June 30, 2014, the Company had outstanding call and put option contracts, or collars, on $23.0 million with a weighted-average strike price of 12.60 MXN for the floor and 14.97 MXN for the ceiling. The fair value of these contracts was nil at June 30, 2014. At December 31, 2013, the Company had MXN foreign exchange forward contracts on $12.0 million in U.S. dollars. These contracts required 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 fair value of those contracts was a liability of $0.9 million at December 31, 2013. In addition, at December 31, 2013, the Company had outstanding collars on $45.0 million with a weighted-average strike price of 12.60 MXN for the floor and 14.80 MXN for the ceiling. The fair value of these contracts was nil at December 31, 2013.

The Company recorded no mark-to-market adjustments for the three months ended June 30, 2014 and mark-to-market losses of $0.7 million for the three months ended June 30, 2013 on the MXN forward contracts and collars. For the six months ended June 30, 2014 and 2013, the Company recorded mark-to-market gains of $1.0 million and losses of $1.5 million, respectively, on MXN forward contracts and collars. These mark-to-market adjustments are reflected in Fair value adjustments, net.

The Company recorded no realized gains or losses and realized gains of $0.2 million in Costs applicable to sales during the three months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014 and 2013, the Company recorded realized losses of $0.9 million and realized gains of $0.8 million in Costs applicable to sales.

Concentrate Sales Contracts

The Company's concentrate sales to third-party smelters, in general, provide for a provisional payment based upon preliminary 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 marked to market through earnings each period until final settlement. Changes in silver and gold prices resulted in no provisional pricing mark-to-market adjustments in the three months ended June 30, 2014 and mark-to-market gains of $0.9 million in the six months ended June 30, 2014, compared to mark-to-market losses of $0.7 million and $2.4 million in the three and six months ended June 30, 2013. At June 30, 2014, the Company had outstanding provisionally priced sales of 0.2 million ounces of silver and 11,559 ounces of gold at prices of $19.99 and $1,286, respectively.

Silver and Gold Options

At June 30, 2014, the Company has outstanding put spread contracts on 3,750,000 ounces of silver and 74,000 ounces of gold. The weighted average high and low strike prices on the silver put spreads are $18.00 per ounce and $16.00 per ounce, respectively. The weighted average high and low strike prices on the gold put spreads are $1,200 and $1,050, respectively.

If the market price of silver and gold were to average less than the high strike price but more than the low strike price during the contract period, the Company would receive the difference between the average market price and the high strike price for the contracted volume over the contract period. If the market price of silver and gold were to average less than the low strike price during the contract period, the Company would receive the difference between the average market price and the high strike price for the contracted volume over the contract period, and the Company would be required to pay the difference between the average market price and the low strike price for the contracted volume over the contract period.

The put spread contracts are generally net cash settled and expire during the remainder of 2014 and the first quarter of 2015. At June 30, 2014, the fair market value of the put spreads was a net asset of $1.0 million.

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 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. At December 31, 2013, the fair market value of these contracts was a net asset of $0.1 million.

During the three months ended June 30, 2014 and 2013, the Company recorded unrealized losses of $1.4 million and unrealized gains of $6.4 million, respectively, related to outstanding options which was included in Fair value adjustments, net. The Company also recognized a realized loss of $0.7 million and $0.2 million resulting from expiring contracts during the three months ended June 30, 2014 and 2013, respectively.

During the six months ended June 30, 2014 and 2013, the Company recorded unrealized losses of $2.9 million and unrealized gains of $10.6 million, respectively, related to outstanding options which was included in Fair value adjustments, net. The Company also recognized a realized loss of $0.4 million and a realized loss of $1.1 million resulting from expiring contracts during the six months ended June 30, 2014 and 2013, respectively.

At June 30, 2014, 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	$	27,334		$	46,078		$	27,741	$	—
Average gold price in excess of minimum contractual deduction	$	913		$	919		$	920	$	—
Notional ounces	29,920			50,153			30,168		—

Mexican peso put options purchased	$	23,000		$	—		$	—	$	—
Average rate (MXN/$)	14.97			—			—		—
Mexican peso notional amount	344,310			—			—		—

Mexican peso call options sold	$	23,000		$	—		$	—	$	—
Average rate (MXN/$)	12.60			—			—		—
Mexican peso notional amount	289,800			—			—		—

Silver concentrate sales contracts	$	3,253		$	—		$	—	$	—
Average silver price	$	19.99		$	—		$	—	$	—
Notional ounces	162,724			—			—		—

Gold concentrate sales contracts	$	14,865		$	—		$	—	$	—
Average gold price	$	1,286		$	—		$	—	$	—
Notional ounces	11,559			—			—		—

Gold put options purchased	$	60,000		$	28,800		$	—	$	—
Average gold strike price	$	1,200		$	1,200		$	—	$	—
Notional ounces	50,000			24,000			—		—

Silver put options purchased	$	45,000		$	22,500		$	—	$	—
Average silver strike price	$	18.00		$	18.00		$	—	$	—
Notional ounces	2,500,000			1,250,000			—		—

Gold put options sold	$	(52,500	)	$	(25,200	)	$	—	$	—
Average gold strike price	$	1,050		$	1,050		$	—	$	—
Notional ounces	50,000			24,000			—		—

Silver put options sold	$	(40,000	)	$	(20,000	)	$	—	$	—
Average silver strike price	$	16.00		$	16.00		$	—	$	—
Notional ounces	2,500,000			1,250,000			—		—

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



	June 30, 2014
	Prepaid expenses and other		Accrued liabilities and other		Current portion of royalty obligation		Non-current portion of royalty obligation
Foreign exchange contracts, peso	$	49	$	—	$	—	$	—
Palmarejo gold production royalty	—		—		22,393		21,567
Silver and gold options	1,298		291		—		—
Concentrate sales contracts	192		1		—		—
	$	1,539	$	292	$	22,393	$	21,567



	December 31, 2013
	Prepaid expenses and other		Accrued liabilities and other		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
Silver and gold options	135		—		—		—
Concentrate sales contracts	11		693		—		—
	$	184	$	1,640	$	17,650	$	22,688

The following represent mark-to-market gains (losses) on derivative instruments for the three and six months ended June 30, 2014, and 2013 (in thousands):



		Three months ended June 30,						Six months ended June 30,
Financial statement line	Derivative	2014			2013			2014			2013
Sales of metal	Concentrate sales contracts	$	7		$	(667	)	$	872		$	(2,422	)
Costs applicable to sales	Foreign exchange contracts	—			203			(924		)	830
Fair value adjustments, net	Foreign exchange contracts (MXN)	(10		)	(2,260		)	957			(1,522		)
Fair value adjustments, net	Foreign exchange contracts (CDN)	—			1,598			—			—
Fair value adjustments, net	Palmarejo gold royalty	(5,061		)	61,066			(15,296		)	75,495
Fair value adjustments, net	Silver and gold options	(1,374		)	6,350			(2,868		)	10,577
		$	(6,438	)	$	66,290		$	(17,259	)	$	82,958

Credit Risk

The credit risk exposure related to any derivative instrument 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 institution. 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 transacts only in markets that management considers highly liquid.