Annual report pursuant to Section 13 and 15(d)

Derivative Instruments and Hedging Transactions

v3.24.2.u1
Derivative Instruments and Hedging Transactions
12 Months Ended
Jun. 30, 2024
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 forward 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 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 forward 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 forward and futures contracts and open sale and purchase commitments are reported in the 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 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 also include the net fair value of open precious metals forward and futures contracts. The precious metals forward 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 consolidated balance sheets. Such derivative contracts include open sale and purchase commitments, futures, forward and margin accounts. The aggregate gross and net derivative receivables and payables balances by contract type and type of hedge, were as follows (in thousands):

 

 

 

June 30, 2024

 

 

June 30, 2023

 

 

 

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

 

$

102,091

 

 

$

(4,079

)

 

$

 

 

$

98,012

 

 

$

53,924

 

 

$

(15,967

)

 

$

 

 

$

37,957

 

Futures contracts

 

 

1,557

 

 

 

 

 

 

 

 

 

1,557

 

 

 

832

 

 

 

 

 

 

 

 

 

832

 

Forward contracts

 

 

15,151

 

 

 

 

 

 

 

 

 

15,151

 

 

 

39,092

 

 

 

 

 

 

 

 

 

39,092

 

 

$

118,799

 

 

$

(4,079

)

 

$

 

 

$

114,720

 

 

$

93,848

 

 

$

(15,967

)

 

$

 

 

$

77,881

 

Nettable derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Open sale and purchase commitments

 

$

8,724

 

 

$

(1,034

)

 

$

 

 

$

7,690

 

 

$

2,271

 

 

$

(1,418

)

 

$

 

 

$

853

 

Margin accounts

 

 

22,316

 

 

 

 

 

 

(17,550

)

 

 

4,766

 

 

 

17,681

 

 

 

 

 

 

(13,240

)

 

 

4,441

 

Futures contracts

 

 

39

 

 

 

 

 

 

 

 

 

39

 

 

 

1,161

 

 

 

 

 

 

 

 

 

1,161

 

Forward contracts

 

 

14,256

 

 

 

 

 

 

 

 

 

14,256

 

 

 

1,621

 

 

 

 

 

 

 

 

 

1,621

 

 

$

45,335

 

 

$

(1,034

)

 

$

(17,550

)

 

$

26,751

 

 

$

22,734

 

 

$

(1,418

)

 

$

(13,240

)

 

$

8,076

 

 

Gains or Losses on Derivative Instruments

The Company records the derivative at the trade date with corresponding unrealized gains or losses shown as a component of cost of sales in the 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 contracts are recorded in cost of sales.

Below is a summary of the net gains (losses) on derivative instruments (in thousands):

 

 

 

Year Ended June 30,

 

 

 

2024

 

 

2023

 

 

2022

 

Gains (losses) on derivative instruments:

 

 

 

 

 

 

Unrealized gains (losses) on open futures commodity and forward contracts and open sale and purchase commitments, net

 

$

18,225

 

 

$

53,453

 

 

$

(18,799

)

Realized (losses) gains on futures commodity contracts, net

 

 

(16,563

)

 

 

43,630

 

 

 

66,624

 

 

 

$

1,662

 

 

$

97,083

 

 

$

47,825

 

 

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, which were also recorded in cost of sales in the 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 was subject to price risk (in thousands):

 

 

 

June 30, 2024

 

 

June 30, 2023

 

Inventories

 

$

1,097,144

 

 

$

981,643

 

Precious metals held under financing arrangements

 

 

22,066

 

 

 

25,530

 

 

 

1,119,210

 

 

 

1,007,173

 

Less unhedgeable inventories:

 

 

 

 

 

 

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

 

 

(3,236

)

 

 

(948

)

Premium on metals position

 

 

(34,175

)

 

 

(29,358

)

Precious metal value not hedged

 

 

(37,411

)

 

 

(30,306

)

 

 

 

 

 

 

Commitments at market:

 

 

 

 

 

 

Open inventory purchase commitments

 

 

817,900

 

 

 

921,108

 

Open inventory sales commitments

 

 

(388,184

)

 

 

(587,392

)

Margin sale commitments

 

 

(22,316

)

 

 

(17,682

)

In-transit inventory no longer subject to market risk

 

 

(21,715

)

 

 

(5,505

)

Unhedgeable premiums on open commitment positions

 

 

10,986

 

 

 

11,224

 

Borrowed precious metals

 

 

(31,993

)

 

 

(21,642

)

Product financing arrangements

 

 

(517,744

)

 

 

(335,831

)

Advances on industrial metals

 

 

394

 

 

 

698

 

 

 

(152,672

)

 

 

(35,022

)

 

 

 

 

 

 

Precious metal subject to price risk

 

 

929,127

 

 

 

941,845

 

 

 

 

 

 

 

Precious metal subject to derivative financial instruments:

 

 

 

 

 

 

Precious metals forward contracts at market values

 

 

843,439

 

 

 

767,767

 

Precious metals futures contracts at market values

 

 

83,214

 

 

 

170,466

 

Total market value of derivative financial instruments

 

 

926,653

 

 

 

938,233

 

 

 

 

 

 

 

Net precious metals subject to commodity price risk

 

$

2,474

 

 

$

3,612

 

 

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 June 30, 2024 and June 30, 2023, the Company had the following outstanding commitments and open forward and futures contracts (in thousands):

 

 

 

June 30, 2024

 

 

June 30, 2023

 

Purchase commitments

 

$

817,900

 

 

$

921,108

 

Sales commitments

 

$

(388,184

)

 

$

(587,392

)

Margin sales commitments

 

$

(22,316

)

 

$

(17,682

)

Open forward contracts

 

$

843,439

 

 

$

767,767

 

Open futures contracts

 

$

83,214

 

 

$

170,466

 

 

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 consolidated balance sheets. 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. As of June 30, 2024, 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. 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 were as follows (in thousands):

 

 

 

June 30, 2024

 

 

June 30, 2023

 

Foreign exchange forward contracts

 

$

4,793

 

 

$

7,101

 

Open sale and purchase commitment transactions, net

 

$

4,705

 

 

$

5,611