Fair Value Measurements

6 Months Ended

Jun. 30, 2016



	Three months ended June 30,					Six months ended June 30,
In thousands	2016			2015		2016			2015
Palmarejo royalty obligation embedded derivative	$	(878	)	$	385	$	(5,756	)	$	(1,160	)
Rochester net smelter returns ("NSR") royalty obligation	(2,687		)	1,137		(4,936		)	(1,155		)
Silver and gold options	(14		)	1,232		(1,582		)	185
Fair value adjustments, net	$	(3,579	)	$	2,754	$	(12,274	)	$	(2,130	)

Accounting standards establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1), secondary priority to quoted prices in inactive markets or observable inputs (Level 2), and the lowest priority to unobservable inputs (Level 3).

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis (at least annually) by level within the fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:



	Fair Value at June 30, 2016
In thousands	Total		Level 1		Level 2		Level 3
Assets:
Equity securities	$	11,250	$	11,243	$	—	$	7
Other derivative instruments, net	655		—		655		—
	$	11,905	$	11,243	$	655	$	7
Liabilities:
Palmarejo royalty obligation embedded derivative	$	3,317	$	—	$	—	$	3,317
Rochester NSR royalty obligation	12,559		—		—		12,559
	$	15,876	$	—	$	—	$	15,876



	Fair Value at December 31, 2015
In thousands	Total		Level 1		Level 2		Level 3
Assets:
Equity securities	$	2,766	$	2,756	$	—	$	10
Liabilities:
Palmarejo royalty obligation embedded derivative	$	4,957	$	—	$	—	$	4,957
Rochester NSR royalty obligation	9,593		—		—		9,593
Other derivative instruments, net	508		—		508		—
	$	15,058	$	—	$	508	$	14,550

The Company’s investments in equity securities are recorded at fair market value in the financial statements based primarily on quoted market prices. Such instruments are classified within Level 1 of the fair value hierarchy. Quoted market prices are not available for certain equity securities; these securities are valued using pricing models, which require the use of observable and unobservable inputs, and are classified within Level 3 of the fair value hierarchy.

The Company’s silver and gold options and other derivative instruments, net, which relate to concentrate and certain doré sales contracts and foreign exchange contracts, are valued using pricing models, which require inputs that are derived from observable market data, including contractual terms, forward market prices, yield curves, credit spreads, and other unobservable inputs. The model inputs can generally be verified and do not involve significant management judgment. Such instruments are classified within Level 2 of the fair value hierarchy.

The fair values of the Palmarejo royalty obligation embedded derivative and Rochester NSR royalty obligation were estimated based on observable market data including contractual terms, forward silver and gold prices, yield curves, and credit spreads, as well as the Company’s current mine plan which is considered a significant unobservable input. Therefore, the Company has classified these obligations as Level 3 financial liabilities. Based on current mine plans, 2.1 years was used to estimate the fair value of the Rochester NSR royalty obligation at June 30, 2016.

No assets or liabilities were transferred between fair value levels in the six months ended June 30, 2016.

The following tables present the changes in the fair value of the Company's Level 3 financial assets and liabilities for the three and six months ended June 30, 2016:



	Three Months Ended June 30, 2016
In thousands	Balance at the beginning of the period		Revaluation		Settlements			Balance at the end of the period
Assets:
Equity securities	$	7	$	—	$	—		$	7
Liabilities:
Palmarejo royalty obligation embedded derivative	$	6,827	$	878	$	(4,388	)	$	3,317
Rochester NSR royalty obligation	$	10,877	$	2,687	$	(1,005	)	$	12,559



	Six Months Ended June 30, 2016
In thousands	Balance at the beginning of the period		Revaluation		Settlements			Balance at the end of the period
Assets:
Equity securities	$	10	$	—	$	(3	)	$	7
Liabilities:
Palmarejo royalty obligation embedded derivative	$	4,957	$	5,756	$	(7,396	)	$	3,317
Rochester NSR royalty obligation	$	9,593	$	4,936	$	(1,970	)	$	12,559

The fair value of financial assets and liabilities carried at book value in the financial statements at June 30, 2016 and December 31, 2015 is presented in the following table:



	June 30, 2016
In thousands	Book Value		Fair Value		Level 1		Level 2		Level 3
Liabilities:
3.25% Convertible Senior Notes due 2028	$	712	$	706	$	—	$	706	$	—
7.875% Senior Notes due 2021⁽¹⁾	373,957		362,650		—		362,650		—
Term Loan due 2020⁽²⁾	94,545		94,545		—		94,545		—
Palmarejo gold production royalty obligation	4,108		4,144		—		—		4,144


(1)	Net of unamortized debt issuance costs and premium received of $4.8 million.


(2)	Net of unamortized debt issuance costs of $4.5 million.



	December 31, 2015
In thousands	Book Value		Fair Value		Level 1		Level 2		Level 3
Liabilities:
3.25% Convertible Senior Notes due 2028	$	712	$	693	$	—	$	693	$	—
7.875% Senior Notes due 2021⁽¹⁾	373,433		227,487		—		227,487		—
Term Loan due 2020⁽²⁾	94,489		99,500		—		99,500		—
San Bartolomé Lines of Credit	4,571		4,571		—		4,571		—
Palmarejo gold production royalty obligation	15,207		15,580		—		—		15,580


(1)	Net of unamortized debt issuance costs and premium received of $5.3 million.


(2)	Net of unamortized debt issuance costs of $5.0 million.

The fair values of the Convertible Notes and 7.875% Senior Notes due 2021 (the "Senior Notes") outstanding were estimated using quoted market prices. The fair value of the Term Loan due 2020 (the "Term Loan") approximates book value (excluding unamortized debt issuance costs) as the liability is secured, has a variable interest rate, and lacks significant credit concerns. The fair value of the San Bartolomé line of credit approximates book value due to the short-term nature of the liability and absence of significant interest rate or credit concerns. The fair value of the Palmarejo gold production royalty obligation is estimated based on observable market data including contractual terms, forward silver and gold prices, yield curves, and credit spreads, as well as the Company’s current mine plan which is considered a significant unobservable input.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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