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Financial instruments and risk management
 12 Months Ended
Dec. 31, 2020
Disclosure of detailed information about financial instruments [abstract]  
Financial instruments and risk management
29 Financial instruments and risk management
In this note, except where stated, the information relates to the financial instruments of the parent companies and their subsidiaries and joint operations, and excludes those of equity accounted units. We have grouped the information in the following sections:
A – Financial assets and liabilities by categories
B – Derivative financial instruments
C – Fair values
A (a) Financial assets and liabilities by categories
At 31 December 2020NoteTotal
US$m		Amortised
cost
US$m		Fair value through other
comprehensive
income
US$m		Fair value
through
profit and
loss
US$m
Financial assets
Cash and cash equivalents
20 10,381 3,970 — 6,411 
Trade and other financial receivables(a)(b)
18 3,286 1,479 — 1,807 
Equity shares and quoted funds
19 75 — 64 11 
Other investments, including loans(c)
19 2,899 138 — 2,761 
Derivatives related to net debt: designated as hedges(d)
19, 23388 — — 388 
Derivatives and embedded derivatives not related to net debt: not designated as hedges(d)
19 204 — — 204 
Embedded derivatives not related to net debt: designated as hedges(d)
19 73 — — 73 
Loans to equity accounted units including quasi equity loans
153 153 — — 
Total financial assets
17,459 5,740 64 11,655 

Financial liabilities
Trade and other financial payables(e)
24 (5,847)(5,817)(30)
Short-term borrowings and bank overdrafts
21 (584)(584)— 
Medium-term and long-term borrowings
21 (13,247)(13,247)— 
Derivatives related to net debt: designated as hedges(d)
21, 23(140)— (140)
Derivatives and embedded derivatives not related to net debt: not designated as hedges(d)
21 (24)— (24)
Embedded derivatives not related to net debt: designated as hedges(d)
21 (20)— (20)
Other financial liabilities
21 — — — 
Total financial liabilities
(19,862)(19,648)(214)

At 31 December 2019NoteTotal
US$m		Amortised
cost
US$m		Fair value
through other
comprehensive
income
US$m		Fair value
through
profit and
loss
US$m
Financial assets
Cash and cash equivalents
20 8,027 2,707 — 5,320 
Trade and other financial receivables(a)(b)
18 2,938 1,801 — 1,137 
Equity shares and quoted funds
19 61 — 50 11 
Other investments, including loans(c)
19 2,839 21 — 2,818 
Derivatives related to net debt: designated as hedges(d)
19, 23151 — — 151 
Derivatives and embedded derivatives not related to net debt: not designated as hedges(d)
19 149 — — 149 
Embedded derivatives not related to net debt: designated as hedges(d)
19 66 — — 66 
Loans to equity accounted units including quasi equity loans
152 152 — — 
Total financial assets
14,383 4,681 50 9,652 

Financial liabilities
Trade and other financial payables(e)
24 (5,398)(5,341)(57)
Short-term borrowings and bank overdrafts
21 (1,022)(1,022)— 
Medium-term and long-term borrowings
21 (13,093)(13,093)— 
Derivatives related to net debt: designated as hedges(d)
21, 23(298)— (298)
Derivatives and embedded derivatives not related to net debt: not designated as hedges(d)
21 (29)— (29)
Embedded derivatives not related to net debt: designated as hedges(d)
21 (24)— (24)
Other financial liabilities
21 (247)(247)— 
Total financial liabilities
(20,111)(19,703)(408)
(a)Trade and other financial receivables comprise trade receivables, other financial receivables, receivables relating to net investments in finance leases and amounts due from equity accounted units within note 18.
(b)Provisionally priced receivables are fair valued.
(c)Other investments, including loans, include US$2,538 million (2019: US$2,584 million) of highly liquid financial assets in managed investment funds classified as held for trading.
(d)These financial assets and liabilities in aggregate agree to the total derivative financial instruments disclosed in notes 19 and 21.
(e)Trade and other financial payables comprise trade payables, other financial payables, accruals and amounts due to equity accounted units within note 24. The trade and other payables held at fair value are valued using Level 2 inputs.
29 Financial instruments and risk management continued
A (b) Financial risk management
Objectives and policy
Our financial risk management objectives are:

–to have in place a robust capital structure to manage the organisation through the commodity cycle; and
–to allow our financial exposures to float with the market.
Any exceptions to these require formal approval by the Board.
The Group operates a floating prices and rates policy for the management of our key economic exposure to commodity price, foreign exchange and interest rates risks. We do not seek to hedge this floating exposure and will re-float, where possible, any material price or rates that are fixed. Where this is impossible (or sub-optimal) any non-floating price risks are managed within defined market risk tolerances. Derivatives are used as and when required in order to manage our exposure in accordance with this underlying financial risk management principle.
In the paragraphs below, we summarise the risks that we are exposed to, and outline how our Treasury and Commercial teams manage these risks in accordance with agreed policies. These teams operate under a strong control environment, within approved limits. Our Board reviews and approves limits at least annually.
(i) Capital and liquidity risk
Our overriding objective when managing capital and liquidity is to safeguard the business as a going concern. Capital is allocated in a consistent and disciplined manner, prioritising sustaining capital expenditure, followed by the ordinary dividend and then an iterative allocation between investing in compelling growth opportunities, maintaining balance sheet strength and delivering further returns to shareholders.
Our Board and senior management regularly review the capital structure and liquidity of the Group. They take into account our strategic priorities, the economic and business conditions, and any identified investment opportunities, along with the expected returns to shareholders. We expect total cash returns to shareholders over the longer term to be in a range of 40–60% of underlying earnings in aggregate through the commodity cycle.
We consider various financial metrics when managing our risk, including net debt, gearing, the overall level of borrowings and their maturity profile, liquidity levels, total capital, future cash flows, underlying EBITDA and interest cover ratios.
Our total capital as at 31 December was:
Total capital

Note
2020
US$m
2019
US$m
Equity attributable to owners of Rio Tinto (see Group balance sheet)
47,054 40,532 
Equity attributable to non-controlling interests (see Group balance sheet)
4,849 4,710 
Net debt23664 3,651 
Total capital
52,567 48,893 
Our net debt decreased to US$0.7 billion at 31 December 2020 from US$3.7 billion at 31 December 2019. This was driven by operating cash inflows, partially offset by capital expenditure and cash returns to shareholders during the year. At 31 December 2020 net gearing was 1% (2019: 7%) and interest cover was 39 times (2019: 28 times).
We have access to various forms of financing including our US Shelf Programme, European Debt Issuance Programme, Commercial Paper and credit facilities. We did not issue any debt in 2020 or 2019 under these programmes.
We have US$7.5 billion fully committed Revolving Credit Facilities, which were extended in 2020 to November 2023 and remained undrawn throughout the year. The funds available can be used for general corporate purposes. Advances under these revolving facilities bear an interest rate per annum based on LIBOR (or EURIBOR, CDOR or BBSW in relation to any euro, Canadian dollar or Australian dollar loans respectively) plus a margin (which is dependent on our long-term credit rating as determined by Moody’s and Standard & Poor’s and the level of drawdown). The facility agreements contain no financial covenants.
Our credit ratings, as provided by Standard & Poor’s and Moody’s investor services, as at 31 December were:

20202019
Long-term rating
A/A2A/A2
Short-term rating
A-1/P-1A-1/P-1
Outlook
Stable/StableStable/Stable
Our unified credit status is maintained through cross guarantees, which mean the contractual obligations of Rio Tinto plc and Rio Tinto Limited are automatically guaranteed by the other.
In the table below, we summarise the maturity profile of our financial liabilities based on contractual undiscounted payments, which will therefore not necessarily agree with the amounts disclosed in the balance sheet.
Financial liability analysis
At 31 December 2020
(Outflows)/Inflows
Within 1
year or on
demand
US$m		Between
1 and 2
years
US$m		Between
2 and 3
years
US$m		Between
3 and 4
years
US$m		Between
4 and 5
years
US$m		After
5 years
US$m		Total
US$m
Non-derivative financial liabilities
Trade and other financial payables(a)
(5,251)(53)(15)(34)(19)(394)(5,766)
Expected lease liability payments(271)(231)(155)(101)(84)(724)(1,566)
Borrowings before swaps(351)(667)(743)(1,256)(1,892)(7,477)(12,386)
Expected future interest payments(a)
(525)(522)(495)(469)(427)(2,999)(5,437)
Derivative financial liabilities(b)
Derivatives related to net debt – net settled
— — — — — — — 
Derivatives related to net debt – gross settled(a):
– gross inflows27 27 27 27 27 790 925 
– gross outflows(34)(34)(34)(34)(34)(943)(1,113)
Derivatives not related to net debt – net settled
(20)(7)(2)(2)(2)(9)(42)
Derivatives not related to net debt – gross settled:
– gross inflows290 — — — — — 290 
– gross outflows(291)— — — — — (291)
Total
(6,426)(1,487)(1,417)(1,869)(2,431)(11,756)(25,386)

At 31 December 2019
(Outflows)/Inflows		Within 1
year or on
demand
US$m		Between
1 and 2
years
US$m		Between
2 and 3
years
US$m		Between
3 and 4
years
US$m		Between
4 and 5
years
US$m		After
5 years
US$m		Total
US$m
Non-derivative financial liabilities
Trade and other financial payables(a)
(4,841)(45)(12)(14)(15)(380)(5,307)
Expected lease liability payments(349)(267)(157)(133)(93)(671)(1,670)
Borrowings before swaps
(723)(171)(665)(741)(1,209)(9,320)(12,829)
Expected future interest payments(a)
(607)(594)(590)(551)(514)(3,518)(6,374)
Other financial liabilities(247)— — — — — (247)
Derivative financial liabilities(b)
Derivatives related to net debt – net settled
(16)(16)(16)9 (3)3 (39)
Derivatives related to net debt – gross settled(a):
– gross inflows
495 40 40 40 507 788 1,910 
– gross outflows
(588)(53)(53)(53)(599)(977)(2,323)
Derivatives not related to net debt – net settled
(31)— — (2)(4)(23)(60)
Derivatives not related to net debt – gross settled:
– gross inflows
699 — — — — — 699 
– gross outflows
(703)— — — — — (703)
Total
(6,911)(1,106)(1,453)(1,445)(1,930)(14,098)(26,943)
(a)The interest payable at year end was removed from trade and other financial payables and is shown within expected future interest payments. Interest payments have been projected using interest rates applicable at the end of the applicable financial year. Where debt is subject to variable interest rates, future interest payments are subject to change in line with market rates.
(b)The maturity grouping is based on the earliest payment date.

Offsetting and enforceable master netting agreements
When we have a legally enforceable right to offset our financial assets and liabilities and an intention to settle on a net basis, or realise the asset and settle the liability simultaneously, we report the net amount in the consolidated balance sheet. Agreements with derivative counterparties are based on the International Swaps and Derivatives Association master netting agreements that do not meet the criteria for offsetting, but allow for the related amounts to be set-off in certain circumstances. During the year, there were no material amounts offset in the balance sheet.
(ii) Commodity price risk
Our broad commodity base means our exposure to commodity prices is diversified. Our normal policy is to sell our products at prevailing market prices. Exceptions to this rule are subject to strict limits laid down by the Board, and to defined market risk tolerances and internal controls.
We sell our products to customers under contracts which vary in tenure and pricing mechanisms, including some volumes sold in the spot market. Sales revenue may be subject to adjustment if product specifications do not conform to the terms specified in a sales contract.
Pricing for iron ore is on a range of terms, the majority being either monthly or quarterly average pricing mechanisms. We sell a smaller proportion of iron ore volumes on the spot market.
29 Financial instruments and risk management continued
(ii) Commodity price risk (continued)
We generally sell copper and aluminium under contracts which vary in tenure and pricing mechanisms, with some volumes sold in the spot market. The prices are determined by reference to prevailing market prices on terminal markets, such as the London Metal Exchange (LME) and the Commodities Exchange (COMEX) in New York. Prices fluctuate widely in response to changing levels of supply and demand but, in the long run, prices are related to the marginal cost of supply. Gold is also priced in an active market in which prices respond to daily changes in quantities offered and sought. Newly mined gold is only one source of supply; investment and disinvestment can be important elements of supply and demand.
At the date revenue is recognised, certain of our products are provisionally priced, based on the amount we expect to receive in the future. After initial recognition of revenue, we record any change in revenue relating to market prices separately in "Other revenue" (refer to note 3). Substantially all iron ore and aluminium sales are reflected at final prices at each reporting period. Final prices for copper concentrate, however, are normally determined between 30 and 180 days after delivery to our customer.
At 31 December 2020, we had 261 million pounds of copper sales, including share of equity accounted unit (31 December 2019: 220 million pounds), that were provisionally priced at US 336 cents per pound (2019: US 271 cents per pound). The final price of these sales will be determined during the first half of 2021. A 10% change in the price of copper realised on the provisionally priced sales, all other factors held constant, would increase or reduce net earnings by US$58 million (2019: US$38 million).
For some products, particularly aluminium, we are also exposed to fluctuations in power prices.
Hedging strategy
We do not generally consider that using derivatives to fix commodity prices would provide a long-term benefit to our shareholders. However, for certain physical commodity transactions for which the price was fixed at the contract date, we enter into derivatives to achieve the prevailing market prices at the point of revenue recognition.
To mitigate our exposure to changes in the relationship between aluminium prices and power prices, we have a number of electricity purchase contracts which are directly linked to the daily official LME cash ask price for high grade aluminium (“LME price”) and to the US Midwest Transaction Premium (“Midwest premium”).
In accordance with IFRS 9, we apply hedge accounting to two embedded derivatives within our power contracts. The embedded derivatives (notional aluminium forward sales) have been designated as the hedging instrument. The forecasted aluminium sales, priced using the LME price and the Midwest premium, represent the hedged item.
The hedging ratio is 1:1, as the quantity of sales designated as being hedged matches the notional amount of the hedging instrument. The hedging instrument’s notional amount, expressed in equivalent metric tonnes of aluminium, is derived from our expected electricity consumption under the power contracts as well as other relevant contract parameters.
When we designate such embedded derivatives as the hedging instrument in a cash flow hedge, we recognise the effective portion of the change in the fair value of the hedging instrument in other comprehensive income, and it is accumulated in the cash flow hedge reserve. The amount that is recognised in other comprehensive income is limited to the lesser of the cumulative change in the fair value of the hedging instrument and the cumulative change in the fair value of the hedged item, in absolute terms.
We recognise any ineffectiveness relating to the hedging relationship immediately in the income statement.
Sources of ineffectiveness include: differences in the timing of the cash flows between the hedged item and the hedging instrument, non-zero initial fair value of the hedging instrument, the existence of a cap on the Midwest premium in the hedging instrument and counterparty credit risk.
We held the following notional aluminium forward sales contracts embedded in the power contracts:
At 31 December 2020
Total
Within 1 year
Between 1 and 5 years
Between 5 and 10 years
After 10 years
Notional amount (in tonnes)640,963 72,548 287,587 280,828 — 
Notional amount (in US$ millions)1,522 159 663 701 — 
Average hedged rate (in US$ per tonne)2,375 2,189 2,305 2,495 — 

At 31 December 2019
Total
Within 1 year
Between 1
and 5 years		Between 5
and 10 years
After 10 years
Notional amount (in tonnes)
704,370 65,226 286,617 352,527 — 
Notional amount (in US$ millions)
1,656 138 647 871 — 
Average hedged rate (in US$ per tonne)
2,351 2,114 2,257 2,471 — 
The impact on our financial statements of these hedging instruments and hedging items are:

Aluminium embedded derivatives separated from the power contract
(Hedging instrument)(a)
Highly probable forecast aluminium sales (Hedged item)

Nominal
US$m		Carrying amount
US$m		Change in fair value in the period
US$m
Cash flow hedge reserve(b)
US$m
Change in fair value in
the period
US$m		Total hedging
gain/(loss) recognised
in reserves
US$m
Hedge ineffective-ness in the period(c)
US$m
Amount reclassified from reserves to income statement(d)
US$m
20201,522 46 23 184 (49)27 (4)40 
20191,656 42 29 196 (50)36 (7)19 
(a)Aluminium embedded derivatives (forward contracts and options) are contained within certain aluminium smelter electricity purchase contracts. US$66 million (2019: US$66 million) of the carrying value is shown within "Other financial assets" and US$20 million (2019: US$24 million) shown within "Other financial liabilities".
(b)The difference between this amount and the total cash flow hedge reserve of the Group (shown in note 28) relates to our cash flow hedge on the sterling bond (refer to interest rate risk section).
(c)Hedge ineffectiveness is included in net operating costs (raw materials, consumables, repairs and maintenance) in the income statement.
(d)On realisation of the hedge, realised amounts are reclassified from reserves to consolidated sales revenue in the income statement.

There was no cost of hedging recognised in 2020 or 2019 relating to this hedge relationship.
We set out details of our commodity derivatives that are not designated as hedges in section B.
Sensitivities
Our commodity derivatives are impacted by changes in market prices. The table below summarises the impact that changes in aluminium market prices have on aluminium forward and option contracts embedded in power supply agreements outstanding at 31 December 2020. Any change in price will result in an offsetting change in our future earnings.

Change in
market prices
2020
US$m
2019
US$m
Effect on net earnings
+10 %(19)(28)
(10)%19 27 
Effect on equity
+10 %(98)(97)
(10)%100 101 
We exclude our “own use contracts” from this sensitivity analysis as they are outside the scope of IFRS 9. Our business units continue to hold these types of contracts to satisfy their expected purchase, sale or usage requirements.
(iii) Credit risk
We are exposed to credit risk in our operating activities (primarily from customer trade receivables); and from our investing activities (primarily investments in separately managed funds). We are also exposed to credit risk arising from our deposits in treasury and liquidity funds, deposits with banks and financial institutions and from our interest rate and currency derivative contracts.
Credit risks related to receivables
Our Commercial team manages customer credit risk subject to our established policy, procedures and controls. The team establishes credit limits for all of our customers. Where customers are rated by an independent credit rating agency, these ratings are used as a guide to set credit limits. Where there are no independent credit ratings available, we assess the credit quality of the customer through a credit rating model and assign appropriate credit limit. The Commercial team monitors outstanding customer receivables regularly and highlights any credit concerns to senior management. Receivables to high risk customers are often secured by letters of credit or other forms of credit enhancement.
The expected credit loss on our trade receivable portfolio is insignificant (see note 18).
Credit risk related to financial instruments and cash deposits
Our Treasury team manages credit risk from investments in government securities (primarily US Government), corporate and asset-backed securities, reverse re-purchase agreements, money market funds, and balances with banks and financial institutions in accordance with a Board-approved credit risk framework which sets the risk appetite. Our Board reviews this annually. We make investments of surplus funds only with approved investment grade (BBB- and above) counterparties who have been assigned specific credit limits. The limits are set to minimise the concentration of credit risk and therefore mitigate the potential for financial loss through counterparty failure.
29 Financial instruments and risk management continued
The maximum credit risk exposure arising on our financial assets at the balance sheet date is as follows:


Note
2020
US$m
2019
US$m
Cash and cash equivalents
2010,381 8,027 
Trade and other financial receivables
183,286 2,938 
Investments
192,899 2,839 
Derivative assets
19665 366 
Loans to equity accounted units
41 39 
Total
17,272 14,209 
(iv) Foreign exchange risk
The broad geographic spread of our sales and operations means that our earnings, cash flows and shareholders’ equity are influenced by a wide variety of currencies.
The majority of our sales are denominated in the US dollar.
Our operating costs are influenced by the currencies of those countries where our mines and processing plants are located, and by those currencies in which we buy imported equipment and services. The US dollar, the Australian dollar and the Canadian dollar are the most important currencies influencing our costs. In any particular year, currency fluctuations may have a significant impact on our financial results. A strengthening of the US dollar against the currencies in which our costs are partly denominated has a positive effect on our underlying earnings. However, a strengthening of the US dollar reduces the value of non-US dollar denominated net assets, and therefore total equity.
Our external borrowings and cash are mainly denominated in US dollars, either directly or through the use of derivatives, as we consider the US dollar the most appropriate currency for financing our operations.
In most cases our debt and other financial assets and liabilities, including intragroup balances, is held in the functional currency of the relevant subsidiary. There are instances where these balances are held in currencies other than the functional currency of the relevant subsidiary. This means we recognise exchange gains and losses in our income statement (except where they can be taken to equity) as these balances are translated into the functional currency of the relevant subsidiary. Our income statement also includes exchange gains and losses arising on US dollar net debt and intragroup balances. On consolidation, these balances are retranslated to our US dollar presentation currency and there is a corresponding and offsetting exchange difference recognised directly in the currency translation reserve. There is no impact on total equity.
The table below summarises, by currency, our net debt, after taking into account relevant cross currency interest rate swaps and foreign exchange contracts:
Net debt by currencyTotal
borrowings
excluding
overdrafts
US$m		Lease liabilities
US$m		Derivatives
related to net
debt
US$m		Cash and
cash
equivalents
US$m		Other
investments
US$m		Net debt
2020
US$m		Net debt
2019
US$m
US dollar
(12,102)(342)248 9,517 2,538 (141)(2,843)
Australian dollar
(375)(350)— 439 — (286)(561)
Euro
(4)(25)— 43 — 14 10 
South African rand
— (1)— 141 — 140 171 
Canadian dollar
(170)(199)— 36 — (333)(322)
Other
(2)(261)— 205 — (58)(106)
Total
(12,653)(1,178)248 10,381 2,538 (664)(3,651)

Hedging strategy
Under normal market conditions, we do not consider that active currency hedging of transactions would provide long-term benefits to shareholders. We review our exposure on a regular basis and will undertake hedging if deemed appropriate. We may deem currency protection measures appropriate in specific commercial circumstances. Capital expenditures and other significant financial items such as acquisitions, disposals, tax and dividend cash flows may be economically hedged subject to strict limits laid down by the Board. Details of the cross-currency interest rate swaps and the currency forward contracts used to manage our currency risk exposures at 31 December 2020 are in section B.
Sensitivities
The table below shows the estimated retranslation effect on financial assets and financial liabilities, including intragroup balances, of a 10% strengthening in the closing exchange rate of the US dollar against significant currencies. We deem 10% to be the annual exchange rate movement that is reasonably probable (on an annual basis over the long run) for any of our significant currencies and therefore an appropriate representation.
We calculate sensitivities in relation to the functional currencies of our individual entities. We translate the impact of these on net earnings and underlying earnings into US dollars at the exchange rates on which the sensitivities are based. The impact to net earnings associated with a 10% weakening of a particular currency, shown below, is broadly offset within equity through movements in the currency translation reserve and therefore generally has no impact on our net assets. The impact is expressed in terms of the effect on net earnings, underlying earnings, and equity, assuming that each exchange rate moves in isolation. The sensitivities are based on financial assets and financial liabilities held at 31 December 2020, where balances are not denominated in the functional currency of the subsidiary or joint operation, and exclude financial assets and liabilities held by equity accounted units. These balances will not remain constant throughout 2021, and therefore the following information should be used with care.
At 31 December 2020
Gains/(losses) associated with 10% strengthening of the US dollar
Currency exposure
Closing
exchange
rate
US cents		Effect on
net
earnings
US$m		Of which
amount
impacting
underlying
earnings
US$m		Impact
directly
on equity
US$m
Australian dollar
77 625 (11)(1,105)
Canadian dollar
78 (167)6 — 
Euro
123 139 3 — 
At 31 December 2019
Gains/(losses) associated with 10% strengthening of the US dollar
Currency exposure
Closing
exchange
rate
US cents		Effect on
net
earnings
US$m		Of which
amount
impacting
underlying
earnings
US$m		Impact
directly
on equity
US$m
Australian dollar
70 453 (4)(1,002)
Canadian dollar
77 (143)7 — 
Euro
112 178 4 — 

(v) Interest rate risk
Our interest rate management policy is generally to borrow and invest at floating interest rates. This approach is based on the historically lower cost of borrowing at floating rates, and the historical correlation between interest rates and commodity prices. It does mean, however, that movements in market interest rates impact our earnings. In certain circumstances, we may elect to maintain a higher proportion of fixed-rate funding.
Hedging strategy
Because we aim to borrow and invest at floating interest rates, we enter into interest rate swaps and review these positions on a regular basis. During 2020, we entered into US$1.5 billion of interest rate swaps to convert the remaining fixed Alcan debt to floating interest rates. This is in accordance with our floating interest rate policy. We have put these swaps into fair value hedge relationships with the respective tranches of debt.
At 31 December 2020, US$5.9 billion (2019: US$4.5 billion) US dollar notional fixed-rate US dollar borrowings continue to be swapped to floating US dollar rates and €417 million (2019: €818 million) euro notional fixed-rate borrowings continue to be fully swapped to floating US dollar interest rates at an effective exchange rate of 1.3105. These swaps are in fair value hedge relationships.
Since 2012, we have also held cross-currency interest rate swaps to convert the principal and annual interest coupons of the Rio Tinto Finance plc £500m Sterling Bond to a US dollar notional with fixed US dollar annual interest coupons. We applied cash flow hedge accounting to this relationship to limit our US dollar cash flow exposure on the principal and interest payments. The hedge was fully effective in the 2020 and 2019 financial years as the notional amount, maturity, payment and reset dates match.
20202019
Nominal amount
of the bond		Nominal amount
of the hedging instrument		MaturityEffective
exchange rate		Gain in fair value of the interest component of the hedged item
US$m		Loss in fair value of the interest component of the hedging instrument
US$m		Loss in fair value of the interest component of the hedged item
US$m		Gain in fair value of the interest component of the hedging instrument
US$m
£500  millionUS$807  millionNovember 20291.6132 7 (7)(24)24 
In 2019, we swapped the resulting fixed US dollar annual interest coupon payments to floating rates. Fair value hedge accounting has been applied to this relationship in addition to the pre-existing cash flow hedge.
29 Financial instruments and risk management continued
The effective interest rates of our borrowings, impacted by swaps, are summarised below. All nominal values are fully hedged unless otherwise stated:
Borrowings in a hedge relationshipNominal value
US$m		Weighted average
interest rate
after swaps
Swap maturity
Carrying value
2020
US$m		Carrying value
2019
US$m
Rio Tinto Finance plc Euro Bonds 2.0% due 2020(a)
5263 month LIBOR +1.35%2020— 455 
Rio Tinto Finance plc Euro Bonds 2.875% due 20245463 month LIBOR +1.64%2024555 508 
Rio Tinto Finance (USA) Limited Bonds 3.75% 20251,2003 month LIBOR +1.39%20251,299 1,229 
Rio Tinto Finance (USA) Limited Bonds 7.125% 20287503 month LIBOR +3.27%20281,005 958 
Alcan Inc. Debentures 7.25% due 20281003 month LIBOR +5.43%2024109 104 
Rio Tinto Finance plc Sterling Bonds 4.0% due 20298073 month LIBOR +2.65%2024717 647 
Alcan Inc. US$400m Debentures 7.25% due 2031(b)
4003 month LIBOR +5.72%2025438 — 
Alcan Inc. US$750m Global Notes 6.125% due 2033(b)
7503 month LIBOR +5.67%2025744 — 
Alcan Inc. US$300m Global Notes 5.75% due 2035(b)
3003 month LIBOR +5.18%2025292 — 
Rio Tinto Finance (USA) Limited Bonds 5.2% 20401,1503 month LIBOR +3.79%20221,173 1,137 
Rio Tinto Finance (USA) plc Bonds 4.75% 20425003 month LIBOR +3.42%2023501 483 
Rio Tinto Finance (USA) plc Bonds 4.125% 20427503 month LIBOR +2.83%2023743 716 

(a)On 11 May 2020 we repaid, in full, the nominal amount of the Rio Tinto Finance plc Euro Bonds 2% due 2020.
(b)In 2020 we entered into new swaps to convert the interest payable in relation to these bonds from fixed to floating rates.

The fair value of interest rate and cross currency interest rate swaps at 31 December 2020 was US$388 million (2019: US$151 million) asset and US$140 million (2019: US$298 million) liability, respectively. These are included within “Other financial assets” and “Other financial liabilities” in the balance sheet.
The main sources of ineffectiveness of the fair value hedges include changes in the timing of the cash flows of the hedging instrument compared to the underlying hedged item, and changes in the credit risk of parties to the hedging relationships. Refer to Note 8 for the changes in fair value of the bonds and the swaps as well as the ineffectiveness recognised in the period. Refer to Note 1 "New standards Issued not yet effective" for the impacts of IBOR reform.
Taking into account the interest and currency interest rate swaps, at 31 December 2020, US$11.7 billion (2019: US$10.8 billion) of our adjusted gross borrowings were at floating rates. This has resulted in a floating to fixed debt ratio of 86% floating to 14% fixed (2019: 76% floating to 24% fixed). Our weighted average debt maturity was approximately 9 years (2019: 10 years) based on current interest rates and the carrying value of gross borrowings at the year end.
Sensitivities
Based on our floating rate financial instruments outstanding at 31 December 2020, the effect on our net earnings of a 100 basis point increase in US dollar LIBOR interest rates, with all other variables held constant, would be an expense of US$7 million (2019: expense of US$20 million), reflecting the lower net debt position in 2020 compared to 2019. We have an exposure to interest rate volatility within shareholders’ equity arising from fair value movements on derivatives in the cash flow hedge reserve. These derivatives have an underlying exposure to sterling and US dollars. With all factors remaining constant, and based on the composition of derivatives impacting the cash flow reserve at 31 December 2020, the sensitivity of a 100 basis point increase in interest rates in each of the currencies in isolation would impact equity, before tax, by a charge of US$68 million (2019: US$68 million charge) for sterling and a credit of US$78 million (2019: US$78 million credit) for US dollars. A 100 basis point decrease would have broadly the same impact in the opposite direction.
B Derivative financial instruments
In the table below we summarise our derivatives, including embedded derivatives, as at 31 December.

Total fair value

20202019
Asset
US$m		Liability
US$m		Asset
US$m		Liability
US$m
Derivatives designated as hedges
Interest rate swaps(a)
386 (1)151 (38)
Cross-currency interest rate swaps(b)
2 (139)— (260)
Aluminium embedded derivatives(c)
66 (20)66 (24)
Currency forward contracts7 — — — 
Total derivatives designated as hedges461 (160)217 (322)

Derivatives not designated as hedges
Currency forward contracts and swaps
63 (1)13 (5)
Aluminium embedded derivatives(c)
80 — 96 — 
Other embedded derivatives
28 (16)14 — 
Other commodity contracts(d)
33 (7)26 (24)
Total derivatives not designated as hedges
204 (24)149 (29)
Total derivative instruments
665 (184)366 (351)

Analysed by maturity:
Less than 1 year
134 (23)58 (103)
Between 1 and 5 years
330 (14)96 (86)
More than 5 years
201 (147)212 (162)
Total
665 (184)366 (351)
Total net derivative instruments
481 15 

Reconciliation to balance sheet

Note
2020
US$m
2019
US$m
Non-current assets
19531 308 
Current assets
19134 58 
Current liabilities
21(23)(103)
Non-current liabilities
21(161)(248)
Total net derivative instruments
481 15 
(a)The interest rate swaps are used to convert certain fixed rate borrowings to a floating rate.
(b)The cross-currency interest rate swaps are used to convert non-US dollar denominated borrowings to either fixed or floating US dollar borrowings.
(c)Aluminium embedded derivatives (forward contracts and options) are contained within certain aluminium smelter electricity purchase contracts. These contracts reduce our margin exposure to movements in the aluminium price.
(d)Other commodity derivatives mainly relate to forward contracts which we have entered into to swap some of our fixed priced product sales to prevailing market prices at the point of revenue recognition. None of these derivatives is in a hedge relationship.

C Fair values
The following table shows the carrying amounts and fair values of our borrowings including those which are not carried at an amount which approximates their fair value at 31 December 2020 and 31 December 2019. The fair values of our cash equivalents, loans to equity accounted units and other financial liabilities approximate their carrying values because of their short maturity, or because they carry floating rates of interest.

20202019

NoteCarrying
value
US$m		Fair
value
US$m		Carrying
value
US$m		Fair
value
US$m
Borrowings2112,653 15,076 12,806 14,678 
Total borrowings with a carrying value of US$7.6 billion (2019: US$7.7 billion) relate to listed bonds with a fair value of US$9.5 billion (2019: US$9.1 billion) and are categorised as level 1 in the fair value hierarchy.
Borrowings with a carrying value of US$4.2 billion (2019: US$4.2 billion) relate to project finance drawn down by Oyu Tolgoi, with a fair value of US$4.7 billion (2019: US$4.7 billion) and are categorised as level 3 in the fair value hierarchy. We use different valuation inputs for the pre-and post-completion phases to reflect Rio Tinto’s completion support guarantee during the pre-completion phase. To measure the fair value of the project finance pre-completion our valuation input includes market yield over the pre-completion period, the variability of which we consider a reasonable indicator of fair value movements on amounts outstanding under the project finance facility. Post-completion, we estimate the fair value with reference to the annual interest rate on each tranche of the facility, and after considering factors that could indicate a change in the credit assessment of Oyu Tolgoi LLC as a counterparty to project finance. These factors include in-country risk relating to the Oyu Tolgoi project, and the assumed date of transition from pre-completion to post-completion. These valuation inputs are considered to be level 3. Transition from pre-completion to post-completion is determined by a set of tests for both completion of physical infrastructure and the ability to extract and process ore of defined grades over a defined period.
29 Financial instruments and risk management continued
Our remaining borrowings have a fair value measured by discounting estimated cash flows with an applicable market quoted yield, and are categorised as level 2 in the fair value hierarchy.
C (a) Valuation hierarchy
The tables below show the financial instruments by valuation method in accordance with IFRS 9 at 31 December 2020 and 31 December 2019.

Held at fair value
At 31 December 2020


Note
Total
US$m
Level 1(a)
US$m
Level 2(b)
US$m
Level 3(c)
US$m
Held at
amortised cost
US$m
Assets
Cash and cash equivalents(d)
10,381 6,411 — — 3,970 
Investments in equity shares and funds
75 35 — 40 — 
Other investments, including loans(e)
19 2,899 2,563 — 198 138 
Trade and other financial receivables(f)
18 3,286 5 1,802 — 1,479 

Derivatives (net)
Forward contracts and option contracts: designated as hedges(g) (Section B)
53 — 7 46 — 
Forward contracts and option contracts, not designated as hedges(g) (Section B)
180 — 69 111 — 
Derivatives related to net debt(h) (Section B)
248 — 248 — — 

Liabilities
Trade and other financial payables
24 (5,847)— (30)— (5,817)
Total
11,275 9,014 2,096 395 (230)


Held at fair value
At 31 December 2019


Note
Total
US$m
Level 1(a)
US$m
Level 2(b)
US$m
Level 3(c)
US$m
Held at
amortised costs
US$m
Assets
Cash and cash equivalents(d)
8,027 5,320 — — 2,707 
Investments in equity shares and funds
61 26 — 35 — 
Other investments, including loans(e)
192,839 2,607 — 211 21 
Trade and other financial receivables(f)
18 2,938 15 1,122 — 1,801 

Derivatives (net)
Forward contracts and option contracts: designated as hedges(g) (Section B)
42 — — 42 — 
Forward contracts and option contracts, not designated as hedges(g) (Section B)
120 — 25 95 — 
Derivatives related to net debt(h) (Section B)
(147)— (147)— — 

Liabilities
Trade and other financial payables
24 (5,398)— (57)— (5,341)
Total
8,482 7,968 943 383 (812)
(a)Valuation is based on unadjusted quoted prices in active markets for identical financial instruments. This category includes listed equity shares and other quoted funds.
(b)Valuation is based on inputs that are observable for the financial instruments; which include quoted prices for similar instruments or identical instruments in markets which are not considered to be active, or inputs, either directly or indirectly based on observable market data.
(c)Valuation is based on inputs that are not based on observable market data (unobservable inputs).
(d)Cash and cash equivalents include money market funds which are treated as fair value through profit or loss (FVPL) under IFRS 9 with the fair value movements going into finance income.
(e)Other investments, including loans, comprise: cash deposits in rehabilitation funds, government bonds, managed investment funds and royalty receivables. The royalty receivables are valued based on future expected output as well as forward commodity prices.
(f)Trade receivables include provisionally priced invoices. The related revenue is initially based on forward market selling prices for the quotation periods stipulated in the contracts with changes between the provisional price and the final price recorded separately within "Other revenue". The selling price can be measured reliably for the Group's products, as it operates in active and freely traded commodity markets. At 31 December 2020, US$1,671 million (31 December 2019: US$1,040 million) of provisionally priced receivables were recognised.
(g)Level 3 derivatives consist of derivatives embedded in electricity purchase contracts linked to the LME with terms expiring between 2025 and 2029 (2019: 2025 and 2030). The embedded derivatives are measured using discounted cash flows and option model valuation techniques.
(h)Interest rate and currency interest rate swaps are valued using applicable market quoted swap yield curves adjusted for relevant basis and credit default spreads. Currency interest rate swap valuations also use market quoted foreign exchange rates. A discounted cash flow approach is used to derive fair value from these inputs to the underlying cash flows.

There were no material transfers between level 1 and level 2, or between level 2 and level 3 in the year ended 31 December 2020 or in the year ended 31 December 2019.
C (b) Level 3 financial assets and financial liabilities
The table below shows the summary of changes in the fair value of the Group's level 3 financial assets and financial liabilities.

2020
Level 3
financial assets
and financial
liabilities
US$m
2019
Level 3
financial assets
and financial
liabilities
US$m
Opening balance
383 637 
Currency translation adjustments
16 (1)
Total realised gains/(losses) included in:
– consolidated sales revenue
11 — 
– net operating costs
(39)(7)
Total unrealised (losses)/gains included in:
– net operating costs
24 (254)
Total unrealised gains transferred into other comprehensive income through cash flow hedges
26 28 
Additions
1 1 
Disposals/maturity of financial instruments
(27)(21)
Closing balance
395 383 
Net losses for the year included in the income statement for assets and liabilities held at year end(a)
— (263)
(a)In 2020 gains and losses included in the income statement offset each other to the extent that the net result is less than US$1 million.

Sensitivity analysis in respect of level 3 derivatives
Forward contracts and options whose fair value is determined using unobservable inputs are calculated using appropriate discounted cash flow and option model valuation techniques.
To value the long-term aluminium embedded derivatives, we use unobservable inputs when the term of the derivative extends beyond observable market prices. In 2020 and 2019, changing the level 3 inputs to reasonably possible alternative assumptions does not change the fair value significantly, taking into account the expected remaining term of contracts. The fair value of the long-term aluminium embedded derivatives is US$126 million at 31 December 2020 (2019: US$120 million).
We also have royalty receivables, with a carrying value of US$113 million (2019: US$124 million), arising from the sale of our coal assets in prior periods. These are classified as "Other investments", including loans within "Other financial assets". The fair values are determined using level 3 unobservable inputs.
The main unobservable input is the long-term coal price used over the life of the royalty receivable. A 15% increase in the coal spot price would result in a US$198 million increase (2019: US$214 million increase) in the carrying value. A 15% decrease in the coal spot price would result in a US$46 million decrease (2019: US$57 million decrease) in the carrying value. We have used a 15% assumption to calculate our exposure as it represents the annual coal price movement that we deem to be reasonably probable (on an annual basis over the long run).