2007 Financial statements

Note 34 - Financial instruments

Except where stated, the information given below relates to the financial instruments of the parent companies and their subsidiaries and proportionally consolidated units, and excludes those of equity accounted units. The information is grouped in the following sections:

A - Financial assets and liabilities by categories
B - Derivative financial instruments
C - Fair values

(A) Financial assets and liabilities by categories

**At 31 December 2007**
	Total	Loans and receivables US$m	Available for sale securities US$m	Held at fair value US$m	Other financial assets and liabilities US$m
Financial Assets
Cash and cash equivalent assets (note 21)	1,645	1,645	-	-	-
Trade and other receivables (note 17) (a)	6,272	6,272	-	-	-
US Treasury bonds (note 20)	21	-	21	-	-
Equity shares and quoted funds (note 20)	374	-	374	-	-
Other investments, including loans (note 20)	472	472	-	-	-
Other liquid resources (note 20)	6	-	-	-	6
Currency and commodity contracts: designated as hedges (note 20)	134	-	-	-	134
Currency and commodity contracts: not designated as hedges (note 20)	480	-	-	480	-
Derivatives related to net debt (note 20)	39	-	-	39	-
Loans to equity accounted units including quasi equity	746	746	-	-	-
Total financial assets	10,189	9,135	395	519	140
Financial liabilities
Trade and other payables (note 25) (b)	(5,303)	-	-	-	(5,303)
Short term borrowings and bank overdrafts (note 21 and 22)	(8,213)	-	-	-	(8,213)
Medium and long term borrowings (note 22)	(38,614)	-	-	-	(38,614)
Deferred consideration (note 25)	(209)	-	-	-	(209)
Other financial liabilities (note 26)	(1,374)	-	-	(1,374)	-
Total financial liabilities	(53,713)	-	-	(1,374)	(52,339)

**At 31 December 2006**
	Total	Loans and receivables US$m	Available for sale securities US$m	Held at fair value US$m	Other financial assets and liabilities US$m
Financial Assets
Cash and cash equivalent assets (note 21)	736	736	-	-	-
Trade and other receivables (note 17) (a)	2,833	2,833	-	-	-
US Treasury bonds (note 20)	20	-	20	-	-
Equity shares and quoted funds (note 20)	176	-	176	-	-
Other investments, including loans (note 20)	184	184	-	-	-
Other liquid resources (note 20)	6	-	-	-	6
Currency and commodity contracts: designated as hedges (note 20)	78	-	-	-	78
Currency and commodity contracts: not designated as hedges (note 20)	122	-	-	122	-
Derivatives related to net debt (note 20)	355	-	-	355	-
Loans to equity accounted units including quasi equity	379	379	-	-	-
Total financial assets	4,889	4,132	196	477	84
Financial liabilities
Trade and other payables (note 25) (b)	(2,233)	-	-	-	(2,233)
Short term borrowings and bank overdrafts (note 21 and 22)	(1,504)	-	-	-	(1,504)
Medium and long term borrowings (note 22)	(2,007)	-	-	-	(2,007)
Deferred consideration (note 25)	(179)	-	-	-	(179)
Other financial liabilities (note 26)	(426)	-	-	(426)	-
Total financial liabilities	(6,349)	-	-	(426)	(5,923)


Notes	Expand
This excludes pension surpluses, prepayment of tolling charges to jointly controlled entities and other prepayments and accrued income. Trade and other payables includes trade creditors, amounts owed to equity accounted units, other creditors excluding deferred consideration shown separately and accruals.

(B) Derivative financial instruments

The Group's derivatives, including embedded derivatives, as at 31 December 2007, are summarised below:

a) Forward contracts relating to operating transactions: designated as hedges

**Assets (note 20)**
Buy Australian dollar; sell US dollar	Total fair value 2007 US$m	Total fair value 2006 US$m
Less than 1 year	34	26
1 to 5 years	25	36
Total	59	62
Other currency forward contracts	2	-
Total currency forward contracts	61	62

The above currency forward contracts were acquired with companies purchased in 2000 and were entered into by those companies in order to reduce their exposure to the US dollar through forecast sales.

Aluminium forward contracts	Total fair value 2007 US$m	Total fair value 2006 US$m
Less than 1 year	25	-
Total	25	-
Coal forward contracts
Less than 1 year	30	4
1 to 5 years	8	-
Total	38	4
Total commodity forward contracts	63	4
Total assets related to forward contracts designated as hedges	124	66

The above aluminium forward contracts are net metal sales contracts which are primarily hedging cashflow exposures associated with underlying variable third party metal sales contracts. These contracts reduce the Company's exposure to movements in the aluminium price. Coal forward contracts have been entered into in order to reduce exposure to movements in the coal price.

**Liabilities (note26)**
Copper forward contracts	Total fair value 2007 US$m	Total fair value 2006 US$m
Less than 1 year	(153)	(149)
1 to 5 years	(344)	(184)
More than 5 years	(34)	(18)
Total	(531)	(351)
Coal (API#2) forward contracts
Less than 1 year	(83)	(9)
1 to 5 years	(39)	(9)
Total	(122)	(18)
Coal (GC NewC) forward contracts
Less than 1 year	(25)	(2)
1 to 5 years	(9)	(2)
Total	(34)	(4)
Aluminium price exposures embedded in electricity purchase contracts	(26)	-
Other commodity forward contracts	(3)	(3)
Total liabilities related to forward contracts designated as hedges	(716)	(376)

The above copper forward contracts were entered into as a condition of the refinancing of Palabora in 2005, and result in a reduction in the Group's exposure to movements in the copper price. Coal forward contracts have been entered into in order to reduce exposure to movements in the coal price.

Aluminium price exposures are embedded within certain aluminium smelter electricity purchase contracts. These contracts reduce the Company's exposure to movements in the aluminium price.

b) Options relating to operating transactions: designated as hedges

**Assets (note 20)**
Bought A$ call options	Total fair value 2007 US$m	Total fair value 2006 US$m
Less than 1 year	10	8
1 to 5 years	-	4
Total	10	12

The above currency option contracts were acquired with companies purchased in 2000 and were entered into by those companies in order to reduce their exposure to the US dollar through forecast sales.

**Liabilities (note 26)**
Aluminium options embedded in electricity purchase contracts	Total fair value 2007 US$m	Total fair value 2006 US$m
Less than 1 year	(7)	-
1 to 5 years	(50)	-
Total	(57)	-

Embedded options exist within an electricity purchase contract for a smelter. These derivatives reduce the Company's exposure to movements in the aluminium price. A number of put and call options were combined to form synthetic forward contracts that were designated as hedges of variable priced aluminium sales.

**Reconciliation to Balance Sheet categories for derivatives designated as hedges**
	2007 US$m	2006 US$m
- non-current assets (note 20)	34	42
- current assets (note 20)	100	36
- current liabilities (note 26)	(283)	(162)
- non-current liabilities (note 26)	(490)	(214)
Total derivatives designated as hedges, detailed above	(639)	(298)

The hedged forecast transactions denominated in foreign currencies and the hedged commodity purchase or sales contracts are expected to occur in line with the maturity dates of the derivatives hedging these particular exposures. Gains and losses recognised in equity will be recycled into the income statement in the period during which the hedged transaction affects the income statement. Where the hedged transaction relates to capital expenditures, the gain or loss on the derivative will be recognised in the income statement within 'depreciation' as the fixed asset is amortised.

Gains and losses recognised in the hedging reserve in equity, net of tax and outside interests, for the year to 31 December 2007 amounted to losses of US$102 million including equity accounted units (2006: US$124 million) and the amount reclassified from equity and included in the income statement for the period amounted to US$61 million (2006: US$68 million).

The ineffective portion recognised in the profit or loss that arises from cash flow hedges amounts to US$(1) million (2006: nil).

c) Forward and option contracts relating to operating transactions: not designated as hedges

Assets

Forward contracts
Buy New Zealand dollar; sell US dollar	Total fair value 2007 US$m	Total fair value 2006 US$m
Less than 1 year	40	32
1 to 5 years	63	75
Total	103	107

The above currency forward contracts relating to the New Zealand dollar were taken out to manage exposures impacting on operating costs.

Aluminium forward contracts	Total fair value 2007 US$m	Total fair value 2006 US$m
Less than 1 year	225	-
1 to 5 years	17	-
Total	242	-

The above aluminium forward contracts (acquired with Alcan) were taken out to manage exposure to movements in the aluminium price. These contracts are not designated as hedges as they are predominantly offset by other aluminium forward contracts.

	Total fair value 2007 US$m	Total fair value 2006 US$m
Buy EUR; sell USD
Less than 1 year	7	-
Buy GBP; sell USD
Less than 1 year	1	-
Total	8	-

**Option contracts**
Aluminium options embedded in electricity purchase contracts	Total fair value 2007 US$m	Total fair value 2006 US$m
Less than 1 year	11	-
1 to 5 years	56	-
More than 5 years	17	-
Total	84	-

Others:
Embedded derivatives	13	10
Other commodity contracts	5	1
Other currency forward contracts and swaps	5	4
Other option contracts	20	-
Total assets relating to derivatives not designated as hedges (note 20)	480	122

The above aluminium options embedded in electricity purchase contracts reduce exposure to movements in the aluminium price.

Liabilities

Forward contracts
Aluminium forward contracts	Total fair value 2007 US$m	Total fair value 2006 US$m
Less than 1 year	(212)	-
1 to 5 years	(16)	-
Total	(228)	-

The above aluminium forward contracts were taken out to manage exposure to movements in the aluminum price. These contracts are not designated as hedges as they are predominantly offset by other aluminium forward contracts.

**Option contracts**
Aluminium options embedded in electricity purchase contracts	Total fair value 2007 US$m	Total fair value 2006 US$m
Less than 1 year	(39)	-
1 to 5 years	(161)	-
More than 5 years	(59)	-
Total	(259)	-

Others:
Other currency derivative contracts	(5)	-
Other embedded derivatives	(35)	(26)
Other commodity contracts	(5)	(1)
Other derivatives	(5)	-
Total liabilities relating to derivatives not designated as hedges (note 26)	(537)	(27)

The above aluminium options embedded in electricity purchase contracts reduce exposure to movements in the aluminium price.

d) Currency and interest contracts relating to borrowings

**Assets**
	Total fair value 2007 US$m	Total fair value 2006 US$m
Buy Euro: sell US dollars
Less than 1 year	-	338
Buy Sterling: sell US dollars
Less than 1 year	-	6
1 to 5 years	-	3


Liabilities
Buy Japanese yen: sell US dollars
Less than 1 year	(1)	(3)
Other currency swaps	(6)	-
Total currency swaps	(7)	344
- designated as fair value hedges	(7)	341
- not designated as hedges	-	3


Interest contracts relating to borrowings: assets	39	7
Interest contracts relating to borrowings: liabilities	(8)	(19)
Total derivatives related to net debt	24	332

Reconciliation to Balance Sheet categories for currency and interest derivatives	2007 US$m	2006 US$m
- non-current assets (note 20)	-	3
- current assets (note 20)	39	352
- current liabilities (note 26)	(9)	(4)
- non-current liabilities (note 26)	(6)	(19)
Total currency and interest rate contracts, detailed above	24	332

These currency contracts are used to fix the US dollar value of non US dollar denominated external debt. The interest rate contracts are used to convert certain fixed rate obligations to a floating rate.

The ineffective portion recognised in the profit or loss that arises from fair value hedges amounts to US$1 million (2006: nil).

(C) Fair values

The carrying values and the fair values of Rio Tinto's financial instruments, other than trade and other receivables and payables, at 31 December are shown in the following table. The fair values of the Group's cash, short term borrowings and loans to jointly controlled entities and associates approximate to their carrying values, as a result of their short maturity or because they carry floating rates of interest.

	Carrying value US$m	Fair value US$m	Carrying value US$m	Fair value US$m
	2007		2006
Primary financial instruments held or issued to finance the Group's operations:
US Treasury bonds (note 20)	21	21	20	20
Equity shares and quoted funds (note 20)	374	374	176	176
Other investments, including loans (note 20)	472	472	184	184
Cash and cash equivalent assets (note 21)	1,645	1,645	736	736
Other liquid resources (note 20)	6	6	6	6
Short term borrowings and bank overdrafts (notes 21 and 22)	(8,213)	(8,225)	(1,504)	(1,507)
Medium and long term borrowings (note 22)	(38,614)	(38,627)	(2,007)	(2,025)
Loans to equity accounted units including quasi equity	746	746	379	379
Deferred consideration (note 25)	(209)	(209)	(179)	(179)
Other financial liabilities (note 26)	(49)	(49)	-	-
	(43,821)	(43,846)	(2,189)	(2,210)
Derivatives:
Forward contracts: designated as hedges (section B (a) of note 34)	(592)	(592)	(310)	(310)
Option contracts: designated as hedges (section B (b) of note 34)	(47)	(47)	12	12
Forward contracts and option contracts not designated as hedges (section B (c) of note 34)	(57)	(57)	95	95
Currency swaps hedging borrowings (section B (d) of note 34)	(7)	(7)	344	344
Interest rate swap agreements (section B (d) of note 34)	31	31	(12)	(12)
	(44,493)	(44,518)	(2,060)	(2,081)