Annual Report 2007 - Antofagasta plc

Notes to the Financial Statements continued24 Financial Instruments and Financial Risk Management continuedc) Financial risk management continuedWhen considered appropriate, the Group uses forward exchange contracts and currency swaps to limit theeffects of movements in exchange rates in foreign currency denominated assets and liabilities. The Group mayalso use these instruments to reduce currency exposure on future transactions and cash flows. Details of anyexchange rate derivatives entered by the Group in the year are given in Note 24(e).The currency exposure of the Group’s cash and cash equivalents is given in Note 21, and the currency exposureof the Group’s borrowings is given in Note 22. The effect of exchange gains and losses included in the incomestatement is given in Note 6. Exchange differences on translation of the net assets of entities with a functionalcurrency other than the US dollar (the most material of which is Aguas de Antofagasta S.A.) are taken to thecurrency translation reserve and are disclosed in the Consolidated Statement of Changes in Equity on page 81.Currency sensitivityThe sensitivity analysis below shows the impact of a movement in the US dollar / Chilean peso exchange rateon the financial instruments held as at the reporting date.The impact on profit or loss is as a result of the retranslation of monetary financial instruments (including cash,trade receivables, trade payables and borrowings). The impact on equity is as a result of changes in the fairvalue of derivative instruments which are effective designated cash flow hedges, and changes in the fair valueof available for sale equity investments. The calculation assumes that all other variables, such as interest rates,remain constant.If the US dollar had strengthened by 10% against the Chilean peso as at the reporting date, net earnings wouldhave decreased by US$3.2 million (2006 – US$6.0 million); there would have been no additional impact onequity. If the US dollar had weakened by 10% against the Chilean Peso as at the reporting date, net earningswould have increased by US$3.9 million (2006 – US$7.4 million); there would have been no additional impacton equity.(iii) Interest rate riskThe Group’s policy is generally to borrow and invest cash at floating rates. Fluctuations in interest rates mayimpact the Group’s net finance income or cost, and to a lesser extent on the value of financial assets andliabilities. The Group occasionally uses interest rate swaps and collars to manage interest rate exposures ona portion of its existing borrowings. Details of any interest rate derivatives entered into by the Group are givenin Note 24(e).The interest rate exposure of the Group’s cash and cash equivalents is given in Note 21, and the interest rateexposure of the Group’s borrowings is given in Note 22.FINANCIAL STATEMENTSInterest rate sensitivityThe sensitivity analysis below shows the impact of a movement in interest rates in relation to the financialinstruments held as at the reporting date. The impact on profit or loss is as a result of the effect on interestexpense in respect of floating rate borrowings, and interest income in respect of cash and cash equivalents.The impact on equity is as a result of changes in the fair value of derivative instruments which are effectivedesignated cash flow hedges. The calculation assumes that all other variables, such as currency rates,remain constant.If the interest rate increased by 1%, based on the financial instruments held as at the reporting date, netearnings would have increased by US$15.1 million (2006 – US$11.2 million). There would have been noadditional impact on equity.116Antofagasta plc Annual Report and Financial Statements 2007