Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Transactions

v3.22.2.2
Derivative Instruments and Hedging Transactions
3 Months Ended
Sep. 30, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Transactions

12. DERIVATIVE INSTRUMENTS AND HEDGING TRANSACTIONS

The Company is exposed to market risk, such as changes in commodity prices and foreign exchange rates. To manage the volatility related to these exposures, the Company enters into various derivative products, such as forwards and futures contracts. By policy, the Company historically has entered into derivative financial instruments for the purpose of hedging substantially all of Company's market exposure to precious metals prices, and not for speculative purposes. The Company’s gains (losses) on derivative instruments are substantially offset by the changes in the fair market value of the underlying precious metals inventory, both of which are recorded in cost of sales in the condensed consolidated statements of income.

Commodity Price Management

The Company manages the value of certain assets and liabilities of its trading business, including trading inventory, by employing a variety of hedging strategies. These strategies include the management of exposure to changes in the market values of the Company's trading inventory through the purchase and sale of a variety of derivative instruments, such as forwards and futures contracts.

The Company enters into derivative transactions solely for the purpose of hedging its inventory subject to price risk, and not for speculative market purposes. Due to the nature of the Company's global hedging strategy, the Company is not using hedge accounting as defined under ASC 815, whereby the gains or losses would be deferred and included as a component of other comprehensive income. Instead, gains or losses resulting from the Company's futures and forward contracts and open sale and purchase commitments are reported in the condensed consolidated statements of income as unrealized gains or losses on commodity contracts (a component of cost of sales) with the related unrealized amounts due from or to counterparties reflected as derivative assets or liabilities on the condensed consolidated balance sheets.

The Company's trading inventory and purchase and sale transactions consist primarily of precious metal products. The value of these assets and liabilities are marked-to-market daily to the prevailing closing price of the underlying precious metals. The Company's precious metals inventory is subject to fluctuations in market value, resulting from changes in the underlying commodity prices. Inventory purchased or borrowed by the Company is subject to price changes. Inventory borrowed is considered a natural hedge, since changes in value of the metal held are offset by the obligation to return the metal to the supplier.

Open sale and purchase commitments are subject to changes in value between the date the purchase or sale price is fixed (the trade date) and the date the metal is received or delivered (the settlement date). The Company seeks to minimize the effect of price changes of the underlying commodity through the use of forward and futures contracts. The Company’s open sale and purchase commitments typically settle within 2 business days, and for those commitments that do not have stated settlement dates, the Company has the right to settle the positions upon demand.

The Company's policy is to substantially hedge its inventory position, net of open sale and purchase commitments that are subject to price risk, and regularly enters into precious metals commodity forward and futures contracts with financial institutions to hedge against this risk. The Company uses futures contracts, which typically settle within 30 days, for its shorter-term hedge positions, and forward contracts, which may remain open for up to 6 months, for its longer-term hedge positions. The Company has access to all of the precious metals markets, allowing it to place hedges. The Company also maintains relationships with major market makers in every major precious metal dealing center.

The Company’s management sets credit and position risk limits. These limits include gross position limits for counterparties engaged in sales and purchase transactions with the Company. They also include collateral limits for different types of sale and purchase transactions that counterparties may engage in from time to time.

Derivative Assets and Liabilities

The Company's derivative assets and liabilities represent the net fair value of the difference (or intrinsic value) between market values and trade values at the trade date for open precious metals sale and purchase contracts, as adjusted on a daily basis for changes in market values of the underlying metals, until settled. The Company's derivative assets and liabilities represent the net fair value of open precious metals forwards and futures contracts. The precious metals forwards and futures contracts are settled at the contract settlement date.

All of our commodity derivative contracts are under master netting arrangements and include both asset and liability positions (i.e., offsetting derivative instruments). As such, for the Company's derivative contracts with the same counterparty, the receivables and payables have been netted on the condensed consolidated balance sheets. Such derivative contracts include open sale and purchase commitments, futures, forwards and margin accounts. In the table below, the aggregate gross and net derivative receivables and payables balances are presented by contract type and type of hedge, as of September 30, 2022 and June 30, 2022.

 

in thousands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2022

 

 

June 30, 2022

 

 

 

Gross
Derivative

 

 

Amounts
Netted

 

 

Cash
Collateral
Pledge

 

 

Net
Derivative

 

 

Gross
Derivative

 

 

Amounts
Netted

 

 

Cash
Collateral
Pledge

 

 

Net
Derivative

 

Nettable derivative assets:

 

 

 

Open sale and purchase commitments

 

$

29,534

 

 

$

(5,204

)

 

$

 

 

$

24,330

 

 

$

34,821

 

 

$

(7,398

)

 

$

 

 

$

27,423

 

Future contracts

 

 

1,774

 

 

 

 

 

 

 

 

 

1,774

 

 

 

20,245

 

 

 

 

 

 

 

 

 

20,245

 

Forward contracts

 

 

6,403

 

 

 

 

 

 

 

 

 

6,403

 

 

 

44,075

 

 

 

 

 

 

 

 

 

44,075

 

 

 

$

37,711

 

 

$

(5,204

)

 

$

 

 

$

32,507

 

 

$

99,141

 

 

$

(7,398

)

 

$

 

 

$

91,743

 

Nettable derivative liabilities:

 

 

 

Open sale and purchase commitments

 

$

82,825

 

 

$

(2,372

)

 

$

 

 

$

80,453

 

 

$

72,937

 

 

$

(2,373

)

 

$

 

 

$

70,564

 

Margin accounts

 

 

23,878

 

 

 

 

 

 

(19,416

)

 

 

4,462

 

 

 

26,984

 

 

 

 

 

 

(22,298

)

 

 

4,686

 

Future contracts

 

 

25

 

 

 

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward contracts

 

 

4,959

 

 

 

 

 

 

 

 

 

4,959

 

 

 

530

 

 

 

 

 

 

 

 

 

530

 

 

 

$

111,687

 

 

$

(2,372

)

 

$

(19,416

)

 

$

89,899

 

 

$

100,451

 

 

$

(2,373

)

 

$

(22,298

)

 

$

75,780

 

 

Gains or Losses on Derivative Instruments

The Company records the derivative at the trade date with a corresponding unrealized gains or losses, shown as a component of cost of sales in the condensed consolidated statements of income. The Company adjusts the derivatives to fair value on a daily basis until the transactions are settled. When these contracts are net settled, the unrealized gains and losses are reversed and the realized gains and losses for forward contracts are recorded in revenue and cost of sales, and the net realized gains and losses for futures and option contracts are recorded in cost of sales.

Below is a summary of the net gains (losses) on derivative instruments for the three months ended September 30, 2022 and 2021.

 

in thousands

 

 

 

 

 

 

Three Months Ended

 

 

September 30,
2022

 

 

September 30,
2021

 

Gains (losses) on derivative instruments:

 

 

Unrealized losses on open future commodity and forward contracts and open sale and purchase commitments, net

$

(73,557

)

 

$

(38,072

)

Realized gains on future commodity contracts, net

 

43,401

 

 

 

41,181

 

 

$

(30,156

)

 

$

3,109

 

 

The Company’s net gains (losses) on derivative instruments, as shown in the table above, were substantially offset by the changes in the fair market value of the underlying precious metals inventory and open sale and purchase commitments, which were also recorded in cost of sales in the condensed consolidated statements of income.

Summary of Hedging Positions

In a hedging relationship, the change in the value of the derivative financial instrument is offset to a great extent by the change in the value of the underlying hedged item. The following table summarizes the results of our hedging activities, which shows the precious metal commodity inventory position, net of open sale and purchase commitments, that is subject to price risk as of September 30, 2022 and June 30, 2022.

 

in thousands

 

 

 

 

 

 

 

 

September 30,
2022

 

 

June 30,
2022

 

Inventories

 

$

625,496

 

 

$

741,018

 

Precious metals held under financing arrangements

 

 

49,327

 

 

 

79,766

 

 

 

 

674,823

 

 

 

820,784

 

Less unhedgeable inventories:

 

 

 

 

 

 

Commemorative coin inventory, held at lower of cost or net realizable value

 

 

(1,546

)

 

 

(1,434

)

Premium on metals position

 

 

(27,588

)

 

 

(27,059

)

Precious metal value not hedged

 

 

(29,134

)

 

 

(28,493

)

 

 

 

 

 

 

 

 

 

 

645,689

 

 

 

792,291

 

 

 

 

 

 

 

 

Commitments at market:

 

 

 

 

 

 

Open inventory purchase commitments

 

 

766,209

 

 

 

681,835

 

Open inventory sales commitments

 

 

(605,583

)

 

 

(497,949

)

Margin sale commitments

 

 

(23,878

)

 

 

(26,984

)

In-transit inventory no longer subject to market risk

 

 

(18,265

)

 

 

(13,164

)

Unhedgeable premiums on open commitment positions

 

 

8,829

 

 

 

12,933

 

Borrowed precious metals

 

 

(55,909

)

 

 

(59,417

)

Product financing arrangements

 

 

(167,009

)

 

 

(282,671

)

Advances on industrial metals

 

 

816

 

 

 

768

 

 

 

 

(94,790

)

 

 

(184,649

)

 

 

 

 

 

 

 

Precious metal subject to price risk

 

 

550,899

 

 

 

607,642

 

 

 

 

 

 

 

 

Precious metal subject to derivative financial instruments:

 

 

 

 

 

 

Precious metals forward contracts at market values

 

 

484,585

 

 

 

278,326

 

Precious metals futures contracts at market values

 

 

59,070

 

 

 

326,713

 

Total market value of derivative financial instruments

 

 

543,655

 

 

 

605,039

 

 

 

 

 

 

 

 

Net precious metals subject to commodity price risk

 

$

7,244

 

 

$

2,603

 

 

Notional Balances of Derivatives

The notional balances of the Company's derivative instruments, consisting of contractual metal quantities, are expressed at current spot prices of the underlying precious metal commodity. As of September 30, 2022 and June 30, 2022, the Company had the following outstanding commitments and open forward and future contracts:

 

in thousands

 

 

 

 

 

 

 

 

September 30,
2022

 

 

June 30,
2022

 

Purchase commitments

 

$

766,209

 

 

$

681,835

 

Sales commitments

 

$

(605,583

)

 

$

(497,949

)

Margin sales commitments

 

$

(23,878

)

 

$

(26,984

)

Open forward contracts

 

$

484,585

 

 

$

278,326

 

Open futures contracts

 

$

59,070

 

 

$

326,713

 

 

The contract amounts (i.e., notional balances) of the Company's forward and futures contracts and the open sales and purchase commitments are not reflected in the accompanying condensed consolidated balance sheet. The Company records the difference between the market price of the underlying metal or contract and the trade amount at fair value.

The Company is exposed to the risk of failure of the counterparties to its derivative contracts. Significant judgment is applied by the Company when evaluating the fair value implications. The Company regularly reviews the creditworthiness of its major counterparties and monitors its exposure to concentrations. On September 30, 2022, the Company believes its risk of counterparty default is mitigated as a result of such evaluation and the short-term duration of these arrangements.

Foreign Currency Exchange Rate Management

The Company utilizes foreign currency forward contracts to manage the effect of foreign currency exchange fluctuations on its sale and purchase transactions. These contracts generally have maturities of less than one week.

Unrealized gains (losses) on foreign exchange derivative instruments related to open trades are shown on the face of the condensed consolidated statements of income and totaled $0.21 million and ($0.22) million for the three months ended September 30, 2022 and 2021, respectively. The market values (fair values) of the Company’s foreign exchange forward contracts and the net open sale and purchase commitment transactions, denominated in foreign currencies, outstanding are as follows:

 

in thousands

 

 

 

 

 

 

 

 

September 30,
2022

 

 

June 30,
2022

 

Foreign exchange forward contracts

 

$

10,767

 

 

$

9,738

 

Open sale and purchase commitment transactions, net

 

$

7,061

 

 

$

10,371