Annual Report 2007 - Antofagasta plc

24 Financial Instruments and Financial Risk Management continuedc) Financial risk management continuedsales and previous sales which remain open as to final pricing. In 2007, sales of copper and molybdenumconcentrate and copper cathodes represented 95.2% of Group turnover and therefore revenues and earningsdepend significantly on LME and realised copper prices.The Group uses futures, min-max instruments and options to manage its exposure to copper prices. Theseinstruments may give rise to accounting volatility due to fluctuations in their fair value prior to the maturity ofthe instruments. Details of those copper and molybdenum concentrate sales and copper cathode sales whichremain open as to final pricing are given in Note 24(d). Details of commodity rate derivatives entered into by theGroup are given in Note 24(e).Commodity price sensitivityThe sensitivity analysis below shows the impact of a movement in the copper price on the financial instrumentsheld as at the reporting date. A movement in the copper forward price as at the reporting date will affect thefinal pricing adjustment to sales which remain open at that date, impacting the trade receivables balance andconsequently the income statement. A movement in the copper forward price will also affect the valuation ofcommodity derivatives, impacting the hedging reserve in equity if the fair value movement relates to aneffective designated cash flow hedge, and impacting the income statement if it does not. The calculationassumes that all other variables, such as currency rates, remain constant.If the copper forward price as at the reporting date had increased by 10 cents, net earnings would haveincreased by US$6.5 million (2006 – US$11.6 million) and there would have been no additional impact on equity.If the copper forward price as at the reporting date had decreased by 10 cents, net earnings would havedecreased by US$6.5 million (2006 – US$10.9 million) and there would have been no additional impact onequity.In addition to the above analysis of the impact of a movement in the forward copper price on the financialinstruments held at the reporting date, a movement in the average copper price during the year would impactrevenue and earnings. A one cent change in the average copper price during the year would affect net earningsby US$5.3 million (2006 – US$5.9 million) and earnings per share by 0.5 cents (2006 – 0.5 cents), based onproduction volumes in 2007, without taking into account the effects of provisional pricing and hedging activity.A one dollar change in the average molybdenum price for the year would affect net earnings by US$10.7 million(2006 – US$10.5 million), and earnings per share by 1.1 cents (2006 – 1.1 cents), based on production volumesin 2007, and without taking into account the effects of provisional pricing.(ii) Currency riskThe Group is exposed to a variety of currencies. The US dollar, however, is the currency in which the majorityof the Group’s sales are denominated. Operating costs are influenced by the countries in which the Group’soperations are based (principally in Chile) as well as those currencies in which the costs of imported equipmentand services are determined. After the US dollar, the Chilean peso is the most important currency influencingcosts and to a lesser extent sales.Given the significance of the US dollar to the Group’s operations, this is the presentational currency of theGroup for internal and external reporting. The US dollar is also the currency for borrowing and holding surpluscash, although a portion of this may be held in other currencies, notably Chilean pesos and sterling, to meetshort term operational and capital commitments and dividend payments.FINANCIAL STATEMENTSAntofagasta plc Annual Report and Financial Statements 2007 115