Quarterly report pursuant to Section 13 or 15(d)

Derivative Instrument and Hedging Transactions

v3.3.0.814
Derivative Instrument and Hedging Transactions
 3 Months Ended
Sep. 30, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instrument and Hedging Transactions
DERIVATIVE INSTRUMENTS AND HEDGING TRANSACTIONS
The Company is exposed to market risk, such as change in commodity prices, and foreign exchange rates. To manage the volatility relating 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 hedging substantially all of Company's market exposure to precious metals prices, and not for speculation reasons.
Commodity Price Management
The Company manages the value of certain specific assets and liabilities of its trading business, including trading inventories, 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 inventories through the purchase and sale of a variety of derivative instruments, such as, forwards and futures contracts.
The Company's trading inventories and purchase and sale transactions consist primarily of precious metal bearing 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 inventories are subject to market value changes, created by changes in the underlying commodity market prices. Inventories purchased or borrowed by the Company are subject to price changes. Inventories borrowed are considered natural hedges, 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 policy is to substantially hedge its inventory position, net of open sale and purchase commitments that is subject to price risk. The Company regularly enters into precious metals commodity forward and futures contracts with major financial institutions to hedge price changes that would cause changes in the value of its physical metals positions and purchase commitments and sale commitments. The Company has access to all of the precious metals markets, allowing it to place hedges. However, the Company also maintains relationships with major market makers in every major precious metals dealing center.
The Company enters into these derivative transactions solely for the purpose of hedging our 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 Topic 815 of the ASC, 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 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 a derivative asset or liability.
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). Substantially all of these transactions are secured by the underlying metals positions. As such, 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, 2015 and June 30, 2015.
 
 
September 30, 2015
 
June 30, 2015
 
 
 
 
 
in thousands
 
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
 
$
10,624

 
$
(3,116
)
 
$
—

 
$
7,508

 
$
2,815

 
$
(1,093
)
 
$
—

 
$
1,722

Future contracts
 
9,917

 
(7,075
)
 
—

 
2,842

 
11,159

 
(5,796
)
 
—

 
5,363

Forward contracts
 
670

 
(394
)
 
—

 
276

 
4,279

 
—

 
—

 
4,279

 
 
$
21,211

 
$
(10,585
)
 
$
—

 
$
10,626

 
$
18,253

 
$
(6,889
)
 
$
—

 
$
11,364

Nettable derivative liabilities:
Open sale and purchase commitments
 
$
7,562

 
$
(1,379
)
 
$
—

 
$
6,183

 
$
11,723

 
$
(734
)
 
$
—

 
$
10,989

Margin commitments
 
11,436

 
—

 
(5,069
)
 
6,367

 
12,430

 
—

 
(5,522
)
 
6,908

Future contracts
 
—

 
—

 
 
 
—

 
—

 
—

 
 
 
—

Forward contracts
 
348

 
(5
)
 
—

 
343

 
—

 
—

 
—

 
—

 
 
$
19,346

 
$
(1,384
)
 
$
(5,069
)
 
$
12,893

 
$
24,153

 
$
(734
)
 
$
(5,522
)
 
$
17,897


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.
Gain or Loss on Derivative Instruments
The Company records the derivative at the trade date with a corresponding unrealized gain (loss), which is reflected in the cost of sales in the condensed consolidated statements of income. The Company adjusts the derivatives to fair value on a daily basis until the transaction is physically settled. Sales which are physically settled are recognized at the gross amount in the consolidated statements of income. Below, is a summary of the net losses on derivative instruments for the three months ended September 30, 2015 and 2014.
in thousands
 
 
 
 
 
 
 
Three Months Ended
 
 
 
September 30, 2015
 
September 30, 2014
 
Gain (loss) on derivative instruments:
 
Unrealized loss on open future commodity and forward contracts and open sale and purchase commitments, net
 
$
(3,816
)
 
$
1,278

 
Realized loss on future commodity contracts, net
 
(10,592
)
 
(7,634
)
 
Total
 
$
(14,408
)
 
$
(6,356
)
 

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. Futures and forwards contracts open at quarter-end typically settle within 30 days.
Summary of Hedging Activity
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, 2015 and at June 30, 2015.
in thousands
 
 
 
 
 
 
 
September 30, 2015
 
June 30, 2015
 
Inventory
 
$
254,506

 
$
191,501

 
Less unhedgable inventory:
 
 
 
 
 
Commemorative coin inventory, held at lower of cost or market
 
(163
)
 
(1,518
)
 
Premium on metals position
 
(3,529
)
 
(3,255
)
 
Inventory value not hedged
 
(3,692
)
 
(4,773
)
 
 
 
 
 
 
 
Subtotal
 
250,814

 
186,728

 
Commitments at market:
 
 

 
 

 
Open inventory purchase commitments
 
556,388

 
444,023

 
Open inventory sales commitments
 
(477,089
)
 
(249,081
)
 
Margin sale commitments
 
(11,436
)
 
(12,430
)
 
In-transit inventory no longer subject to market risk
 
(16,625
)
 
(13,807
)
 
Unhedgable premiums on open commitment positions
 
6,356

 
528

 
Inventory borrowed from suppliers
 
(4,009
)
 
(9,500
)
 
Product financing obligation
 
(50,030
)
 
(39,425
)
 
Advances on industrial metals
 
3,709

 
3,340

 
Inventory subject to price risk
 
258,078

 
310,376

 
 
 
 
 
 
 
Inventory subject to derivative financial instruments:
 
 
 
 
 
Precious metals forward contracts at market values
 
123,658

 
202,323

 
Precious metals futures contracts at market values
 
134,367

 
107,993

 
Total market value of derivative financial instruments
 
258,025

 
310,316

 
 
 
 
 
 
 
Net inventory subject to commodity price risk
 
$
53

 
$
60

 

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, 2015 and June 30, 2015, the Company had the following outstanding commitments and open forward and future contracts:
in thousands
 
 
 
 
 
 
 
September 30, 2015
 
June 30, 2015
 
Purchase commitments
 
$
556,388

 
$
444,023

 
Sales commitments
 
(477,089
)
 
(249,081
)
 
Margin sales commitments
 
(11,436
)
 
(12,430
)
 
Open forward contracts
 
123,658

 
202,323

 
Open futures contracts
 
134,367

 
107,993

 

The contract amounts (i.e., notional balances) of the Company's forward and futures contracts and the open sales and purchase orders are not reflected in the accompanying condensed consolidated balance sheet; as required, 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. At September 30, 2015, 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 of its sale and purchase transactions. These contracts generally have maturities of less than one week. The accounting treatment of our foreign currency exchange derivative instruments is similar to the accounting treatment of our commodity derivative instruments, that is, the change in the value in the financial instrument is immediately recognized as a component of cost of sales. Unrealized net gains (losses) on foreign exchange derivative instruments shown on the face of the condensed consolidated statements of income totaled $(39,000) and $(9,000) for the three months ended September 30, 2015 and 2014, 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 at September 30, 2015 was $1.2 million and $4.1 million, 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 at June 30, 2015 was $6.2 million and $9.9 million, respectively.