Derivative Financial Instruments and Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2011

Derivative Financial Instruments and Fair Value of Financial Instruments [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 17 — DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL

INSTRUMENTS

Palmarejo Gold Production Royalty

On January 21, 2009, the Company entered into the gold production royalty transaction with Franco-Nevada Corporation described in Note 12 — Debt and Royalty Obligation, Palmarejo Gold Production Royalty Obligation. The minimum royalty obligation ends when payments have been made on a total of 400,000 ounces of gold. As of December 31, 2011, a total of 256,646 ounces of gold remain outstanding under the minimum royalty obligation. The price volatility associated with the minimum royalty obligation is considered an embedded derivative financial instrument under U.S. GAAP. The fair value of the embedded derivative at December 31, 2011 and December 31, 2010 was a liability of $159.4 million and $162.0 million, respectively. The Franco-Nevada warrant was a contingent option to acquire 316,436 common shares of Franco-Nevada for no additional consideration, once the mine satisfied certain completion tests stipulated in the agreement. On September 19, 2010, the Company exercised these warrants and received the related shares, which were sold for net proceeds to the Company of $10.0 million. The Franco-Nevada warrant was considered a derivative instrument. The fair value of the warrant at December 31, 2009 was $6.3 million. These derivative instruments are recorded in prepaid expenses and other and current or non-current portion of royalty obligation on the balance sheet and are adjusted to fair value through current earnings. During the twelve months ended December 31, 2011, mark-to-market adjustments for the embedded derivative amounted to a gain of $2.6 million. For the same period in 2010, a loss of $84.0 million was recorded for mark-to-market adjustments for the embedded derivative and a gain of $3.5 million was recorded for the warrant. For the twelve months ended December 31, 2011, realized losses on settlement of the liabilities were $42.8 million. For the twelve months ended December 31, 2010, realized losses on settlements of liabilities were $18.2 million. The mark-to-market adjustments and realized losses are included in Fair value adjustments, net in the consolidated statements of operations.

Forward Foreign Exchange Contracts

The Company periodically enters into forward foreign currency contracts to reduce the foreign exchange risk associated with forecasted Mexican peso (“MXP”) operating costs at its Palmarejo mine. At December 31, 2011, the Company had MXP foreign exchange contracts of $25.5 million in U.S. dollars. These contracts require the Company to exchange U.S. dollars for MXP at a weighted average exchange rate of 12.40 MXP to each U.S. dollar and had a fair value of $(3.2) million at December 31, 2011. The Company recorded mark-to-market gains (losses) of $(3.2) million, ($1.3) million, and $1.3 million for the twelve months ended December 31, 2011, 2010, and 2009 respectively, which is reflected in the consolidated statement of operations in Fair value adjustments, net. The Company recorded realized gains of $0.4 million, $1.6 million, and $1.5 million in Production costs applicable to sales during the twelve months ended December 31, 2011, 2010, and 2009 respectively.

Gold Lease Facility

On December 12, 2008, the Company entered into a gold lease facility with Mitsubishi International Corporation (“MIC”). This facility permitted the Company to lease amounts of gold from MIC and obligated the Company to deliver the same amounts back to MIC and to pay specified lease fees to MIC equivalent to interest at market rates on the value of the gold leased. Pursuant to a Second Amended and Restated Collateral Agreement, the Company’s obligations under the facility were secured by certain collateral. The collateral agreement specified the maximum amount of gold the Company was permitted to lease from MIC, as well as the amount and type of collateral.

On December 23, 2010, the Company entered into an Amendment No. 5 to the second Amended and Restated Collateral Agreement, lowering the value of the collateral required to secure its obligations to 30% of the outstanding amount, including lease fees. The Company terminated the facility effective November 11, 2011.

As of December 31, 2011, the company had no gold leased from MIC. As of December 31, 2010, the Company had 10,000 ounces of gold leased from MIC. The Company delivered these ounces of gold to MIC on March 22, 2011. The Company accounted for the gold lease facility as a derivative instrument, which was recorded in accrued liabilities and other in the balance sheet.

As of December 31, 2010 based on the current futures metals prices for each of the delivery dates and using a 3.1% discount rate, the fair value of the instrument was a liability of $14.1 million. The pre-credit risk adjusted fair value of the net derivative liability as of December 31, 2010 was $14.2 million. A credit risk adjustment of $0.1 million to the fair value of the derivative reduced the reported amount of the net derivative liability on the Company’s consolidated balance sheet to $14.1 million. Mark-to-market adjustments for the gold lease facility amounted to a gain of $2.9 million for the twelve months ended December 31, 2010, and a loss of $6.3 million for the twelve months ended December 31, 2009. The Company recorded realized losses of $2.3 million, $10.1 million and $0.2 million for the twelve months ended December 31, 2011, 2010, and 2009, respectively. The mark-to-market adjustments and realized losses are 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 quoted metal prices and 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 derivative, which is the final settlement based on a future price, does not qualify for hedge accounting. These embedded derivatives are recorded as derivative assets (in Prepaid expenses and other), or derivative liabilities (in Accrued liabilities and other), on the balance sheet and are adjusted to fair value through earnings each period until the date of final settlement. At December 31, 2011, the Company had outstanding provisionally priced sales of $22.5 million consisting of 0.2 million ounces of silver and 9,701 ounces of gold, which had a fair value of approximately $21.7 million including the embedded derivative. At December 31, 2010, the Company had outstanding provisionally priced sales of $35.7 million consisting of 0.6 million ounces of silver and 12,758 ounces of gold, which had a fair value of approximately $37.4 million including the embedded derivative.

Commodity Derivatives

During the twelve months 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 2009, the Company purchased silver put options to reduce risk associated with potential decreases in the market price of silver. During the twelve months ended December 31, 2010, outstanding put options allowing the Company to deliver 5.4 million ounces of silver at an average strike price of $9.21 per ounce expired. The Company recorded realized losses of $2.1 million for the twelve months ended December 31, 2010, which are included in Fair value adjustments, net. During the twelve months ended December 31, 2009, the Company recorded realized gains of $0.9 million, which are included in Fair value adjustments, net. There were no put options outstanding under this program at December 31, 2011 and 2010.

In connection with the Kensington Term Facility described in the Note 12 — Debt and Royalty Obligations, at December 31, 2011, the Company had written outstanding call options requiring it to deliver 136,000 ounces of gold at a weighted average strike price of $1,919.83 per ounce if the market price of gold exceeds the strike price. At December 31, 2011, the Company had outstanding put options allowing it to sell 190,000 ounces of gold at a weighted average strike price of $951.93 per ounce if the market price of gold were to fall below the strike price. The contracts will expire over the next five years. As of December 31, 2011, the fair market value of these contracts was a net liability of $17.9 million. During the twelve months ended December 31, 2011, 35,000 ounces of gold call options at a weighted average strike price of $1,772.89 per ounce expired. The Company recorded an unrealized loss of $3.1 million for the twelve months ended December 31, 2011, included in fair value adjustments, net. In addition, 72,750 ounces of gold call options were settled in the twelve months ended December 31, 2011 and the Company recorded a realized loss of $5.3 million related to the transaction. For the twelve months ended December 31, 2011, 53,750 ounces of gold put options at a weighted average strike price of $866.48 per ounce expired.

In connection with the sale of the Cerro Bayo mine to Mandalay Resources Corporation, Coeur received 125,000 ounces of silver to be delivered in six equal quarterly installments commencing in the third quarter of 2011. The first and second installments of 20,833 ounces were received on September 30, 2011 and December 31, 2011 and the Company realized a $0.5 million gain on the settlement. The Company recognized a mark to market loss of $0.8 million associated with this silver in the twelve months ended December 31, 2011. The silver had a fair value of $2.3 million at December 31, 2011 and $3.9 million at December 31, 2010.

As of December 31, 2011, the Company had the following derivative instruments that settle in each of the years indicated in the table (in thousands except average rates, ounces and per share data):

	2012		2013		2014		Thereafter
Palmarejo gold production royalty	$	27,707	$	25,097	$	24,895	$	49,563
Average gold price in excess of minimum contractual deduction	$	496	$	502	$	498	$	492
Notional ounces		55,833		50,004		50,004		100,805
Mexican peso forward purchase contracts	$	25,500		—		—		—
Average rate (MXP/$)	$	12.4		—		—		—
Mexican peso notional amount		316,090		—		—		—
Silver ounces receivable Mandalay	$	1,535		—		—		—
Average silver forward price	$	18.42		—		—		—
Notional ounces		83,333		—		—		—
Silver concentrate sales agreements	$	6,219		—		—		—
Average silver price	$	32.74		—		—		—
Notional ounces		189,975		—		—		—
Gold concentrate sales agreements	$	16,309		—		—		—
Average gold price	$	1,681		—		—		—
Notional ounces		9,701		—		—		—
Gold put options purchased	$	2,880	$	1,800	$	720		—
Average gold strike price	$	923	$	928	$	979	$	1,010
Notional ounces		68,000		45,000		47,000		30,000
Gold call options sold	$	—	$	1,800	$	720		—
Average gold strike price	$	2,000	$	1,827	$	1,934	$	2,000
Notional ounces		14,000		45,000		47,000		30,000

The following summarizes classification of the fair value of the derivative instruments as of December 31, 2011 and 2010:

	As of December 31, 2011
	Prepaid Expenses and Other		Accrued Liabilities  and Other		Other Long- Term Liabilities		Current Portion of Royalty Obligation		Non-Current Portion of Royalty Obligation
Silver ounces receivable Mandalay	$	814	$	—	$	—	$	—	$	—
Forward foreign exchange contracts		—		3,188		—		—		—
Palmarejo gold production royalty		—		—		—		37,206		122,194
Put and call options, net		—		3,183		14,669		—		—
Concentrate sales contracts		—		825		—		—		—
	$	814	$	7,196	$	14,669	$	37,206	$	122,194

	As of December 31, 2010
	Prepaid Expenses and Other		Other Non-Current Assets		Accrued Liabilities  and Other		Other Long Term Liabilities		Current Portion of Royalty Obligation		Non-Current Portion of Royalty Obligation
Gold lease facility	$	—	$	—	$	2,213	$	—	$	—	$	—
Gold forward contract		425		—		—		—		—		—
Silver ounces receivable Mandalay		531		1,063		—		—		—		—
Forward foreign exchange contracts		328		—		323		—		—		—
Palmarejo gold production royalty		—		—		—		—		28,745		133,258
Put and call options, net		—		—		1,471		13,277		—		—
Concentrate sales contracts		1,703		—		23		—		—		—
	$	2,987	$	1,063	$	4,030	$	13,277	$	28,745	$	133,258

The following represent mark-to-market gains (losses) on derivative instruments during the years ended December 31, 2011, 2010, and 2009:

Financial Statement Line	Derivative	Years Ended December 31,
		2011			2010			2009
Sales of metal	Concentrate sales contracts	$	2,505		$	1,636		$	1,191
Production costs applicable to sales	Forward foreign exchange contracts		383			1,638			1,474
Fair value adjustments, net	Gold lease facility		(132	)		2,885			(6,292	)
Fair value adjustments, net	Forward foreign exchange contracts		(3,192	)		(1,330	)		1,335
Fair value adjustments, net	Forward gold contract		34			425			—
Fair value adjustments, net	Silver ounces receivable		(276	)		1,594			—
Fair value adjustments, net	Palmarejo gold royalty		(40,046	)		(83,989	)		(78,014	)
Fair value adjustments, net	Franco-Nevada warrant		—			3,451			3,340
Fair value adjustments, net	Put and call options		(8,438	)		(11,795	)		(2,953	)
		$	(49,162	)	$	(85,485	)	$	(79,919	)

In the years ended December 31, 2011, 2010 and 2009 the Company recorded realized gains (losses) of ($49.5) million, ($28.3) million and $0.4 million, respectively, in fair value adjustments, net and a realized gain of $0.4 million, $1.6 million and $1.5 million, respectively, recorded in production costs applicable to sales related to forward foreign exchange contracts.

Credit Risk

The credit risk exposure related to any potential 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 deals only with a group of large credit-worthy financial institutions 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 positions may need to be revised, the Company deals only in markets that it considers highly liquid.