**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC  20549**

 

### **FORM 10-Q**

 

**(Mark One)**

 
| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                                                                               |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | **For the quarterly period ended January 31,  2005**                                                                                                                                                                                        |
|       |       | **or**                                                                                                                                                                                                                                           |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                                                                              |
| ** ** | ** ** | **For the transition period from                 to                 ** |

 

**CommissionFile Number 333-66291**

 

#### **The Doe Run ResourcesCorporation**

#### **(Exactname of registrant as specified in its charter)**

 
| **New York**                                                    | ** ** | **13-1255630**                     |
|-----------------------------------------------------------------|------------|------------------------------------|
| (State or  other jurisdiction of incorporation or organization) |       | (IRS  Employer Identification No.) |
| ** **                                                      | ** ** | ** **                         |
| **1801  Park 270 Drive, Suite 300  St. Louis, Missouri**        | ** ** | **63146**                          |
| (Address of  principal executive offices)                       |       | (Zip Code)                         |
|                                                            |       |                               |
| **(314)  453-7100**                                             |
| (Registrant’s  telephone number, including area code)      |

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.

 
| ** ** | **o** | ** ** | **Yes** | ** ** | **ý** | ** ** | **No** |
|------------|-------|------------|---------|------------|------------|------------|--------|

 

**Note: The Registrant files pursuantto an indenture, but is not otherwise subject to the reporting requirements of Section 13or 15(d).**

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

 
| ** ** | **o** | ** ** | **Yes** | ** ** | **ý** | ** ** | **No** |
|------------|-------|------------|---------|------------|------------|------------|--------|

 

Number of shares outstanding of each of the issuer’s classes of commonstock, as of April 15, 2005:

 
| **Common stock, $.10 par value** | ** ** | **1,000 shares** |
|----------------------------------|------------|------------------|

 

 

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**THE DOE RUN RESOURCES CORPORATIONINDEX TO FORM 10-Q**

 
| **PART I – FINANCIAL INFORMATION** |
|-----------------------------------------|
|                                    |   |   |
| Item 1.                                 |   | Financial Statements. |
|                                    |   |   |
| Item 2.                                 |   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations. |
|                                    |   |   |
| Item 3.                                 |   | Quantitative and Qualitative Disclosures  About Market Risk. |
|                                    |   |   |
| Item 4.                                 |   | Controls and Procedures. |
|                                    |   |   |
| **PART II – OTHER INFORMATION**    |
|                                    |   |   |
| Item 1.                                 |   | Legal Proceedings. |
|                                    |   |   |
| Item  2.                                |   | Unregistered  Sales of Equity Securities and Use of Proceeds. |
|                                    |   |   |
| Item 3.                                 |   | Defaults Upon Senior Securities. |
|                                    |   |   |
| Item  4.                                |   | Submission  of Matters to a Vote of Security Holders. |
|                                    |   |   |
| Item 5.                                 |   | Other Information. |
|                                    |   |   |
| Item  6.                                |   | Exhibits. |

** **

----

** **

**Item 1. Financial Statements.**

 

**THEDOE RUN RESOURCES CORPORATIONCondensed Consolidated Balance Sheets(Dollars in thousands, except share data)**

 
| ** **                                                                                                                                                        | ** ** | **January 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                        | ** ** | ** **                 | ** ** |
| ** **                                                                                                                                                        | ** ** | **(unaudited)**            | ** ** | ** **                 | ** ** |
| **ASSETS**                                                                                                                                                        | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Current  assets:                                                                                                                                                  |       |                       |       |                       |       |
| Cash                                                                                                                                                              |       | $                          | 5,486      |                       | $          | 20,318 |   |
| Trade  accounts receivable, net of allowance for doubtful accounts                                                                                                |       | 70,433                     |       | 64,219                     |       |
| Inventories                                                                                                                                                       |       | 118,590                    |       | 103,309                    |       |
| Prepaid  expenses and other current assets                                                                                                                        |       | 52,744                     |       | 35,858                     |       |
| Total  current assets                                                                                                                                             |       | 247,253                    |       | 223,704                    |       |
| Property,  plant and equipment, net                                                                                                                               |       | 238,915                    |       | 229,640                    |       |
| Other  noncurrent assets, net                                                                                                                                     |       | 3,862                      |       | 4,075                      |       |
| Total assets                                                                                                                                                      |       | $                          | 490,030    |                       | $          | 457,419 |   |
|                                                                                                                                                              |       |                       |       |                       |       |
| **LIABILITIES  AND SHAREHOLDER’S DEFICIT**                                                                                                                   | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Current  liabilities:                                                                                                                                             |       |                       |       |                       |       |
| Current  maturities of long-term debt                                                                                                                             |       | $                          | 95,785     |                       | $          | 96,767 |   |
| Accounts  payable                                                                                                                                                 |       | 89,977                     |       | 65,855                     |       |
| Accrued  liabilities                                                                                                                                              |       | 77,820                     |       | 83,878                     |       |
| Total  current liabilities                                                                                                                                        |       | 263,582                    |       | 246,500                    |       |
|                                                                                                                                                              |       |                       |       |                       |       |
| Long-term  debt, less current maturities                                                                                                                          |       | 320,585                    |       | 320,561                    |       |
| Other  noncurrent liabilities                                                                                                                                     |       | 74,789                     |       | 75,765                     |       |
| Total  liabilities                                                                                                                                                |       | 658,956                    |       | 642,826                    |       |
|                                                                                                                                                              |       |                       |       |                       |       |
| Series A  redeemable preferred stock, $1,000 par value per share, 5,000 shares authorized;  2,533 shares issued and outstanding; liquidation and redemption value |       | 26,121                     |       | 25,329                     |       |
|                                                                                                                                                              |       |                       |       |                       |       |
| Shareholder’s  deficit:                                                                                                                                      |       |                       |       |                       |       |
| Common  stock, $.10 par value per share, 1,667 shares authorized; 1,000 shares issued  and outstanding                                                            |       | —                     |       | —                     |       |
| Additional  paid-in capital                                                                                                                                       |       | —                     |       | —                     |       |
| Accumulated  deficit                                                                                                                                              |       | (153,115                   | )          | (168,700                   | )          |
| Accumulated  other comprehensive losses                                                                                                                           |       | (41,932                    | )          | (42,036                    | )          |
| Total  shareholder’s deficit                                                                                                                                 |       | (195,047                   | )          | (210,736                   | )          |
| Total  liabilities and shareholder’s deficit                                                                                                                 |       | $                          | 490,030    |                       | $          | 457,419 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

1

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**THEDOE RUN RESOURCES CORPORATIONCondensed Consolidated Statements of Operations (unaudited)(Dollars in thousands)**

 
| ** **                                                  | ** ** | **Three Months Ended  January 31,** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                  | ** ** | ** **                               |
| ** **                                                  | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
|                                                        |       |                                     |       |   |   |
| Net sales                                                   |       | $                                        | 235,659    |   | $ | 190,004 |   |
|                                                        |       |                                     |       |   |   |
| Costs and  expenses:                                        |       |                                     |       |   |   |
| Cost of  sales                                              |       | 198,003                                  |       | 178,411 |   |
| Depreciation,  depletion and amortization                   |       | 6,137                                    |       | 6,465 |   |
| Selling,  general and administrative                        |       | 10,828                                   |       | 9,126 |   |
| Unrealized  (gain) loss on derivative financial instruments |       | (798                                     | )          | 5,024 |   |
| Other                                                       |       | 1,837                                    |       | 1,031 |   |
| Total costs  and expenses                                   |       | 216,007                                  |       | 200,057 |   |
|                                                        |       |                                     |       |   |   |
| Income  (loss) from operations                              |       | 19,652                                   |       | (10,053 | ) |
|                                                        |       |                                     |       |   |   |
| Other income  (expense):                                    |       |                                     |       |   |   |
| Interest expense,  net                                      |       | (3,441                                   | )          | (3,177 | ) |
| Other, net                                                  |       | 476                                      |       | (50 | ) |
|                                                        |       | (2,965                                   | )          | (3,227 | ) |
|                                                        |       |                                     |       |   |   |
| Income  (loss) before income tax expense                    |       | 16,687                                   |       | (13,280 | ) |
|                                                        |       |                                     |       |   |   |
| Income tax  expense                                         |       | —                                   |       | 565 |   |
|                                                        |       |                                     |       |   |   |
| Net income  (loss)                                          |       | $                                        | 16,687     |   | $ | (13,845 | ) |
| Preferred  stock dividends                                  |       | (792                                     | )          | (625 | ) |
| Net income  (loss) allocable to common shares               |       | $                                        | 15,895     |   | $ | (14,470 | ) |
|                                                        |       |                                     |       |   |   |
| Total  comprehensive income (loss)                          |       | $                                        | 16,791     |   | $ | (13,290 | ) |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

2

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**THEDOE RUN RESOURCES CORPORATIONCondensed Consolidated Statements of Cash Flows (unaudited)(Dollars in thousands)**

 
| ** **                                                                                           | ** ** | **Three Months Ended  January 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                           | ** ** | ** **                               |
| ** **                                                                                           | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
|                                                                                                 |       |                                     |       |   |   |
| Cash flows  from operating activities:                                                               |       |                                     |       |   |   |
| Net income  (loss)                                                                                   |       | $                                        | 16,687     |   | $ | (13,845 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                                     |       |   |   |
| Depreciation,  depletion and amortization                                                            |       | 6,137                                    |       | 6,465 |   |
| Imputed  interest and amortization of deferred financing costs                                       |       | 1,346                                    |       | 1,372 |   |
| Unrealized  (gain) loss on derivative financial instruments                                          |       | (798                                     | )          | 5,024 |   |
| Losses from  impairment and disposal of long-lived assets                                            |       | 1,210                                    |       | 708 |   |
| Decrease  resulting from other changes in assets and liabilities                                     |       | (20,736                                  | )          | (2,766 | ) |
| Net cash  provided by (used in) operating activities                                                 |       | 3,846                                    |       | (3,042 | ) |
|                                                                                                 |       |                                     |       |   |   |
| Cash flows  from investing activities:                                                               |       |                                     |       |   |   |
| Purchases of  property, plant and equipment                                                          |       | (16,569                                  | )          | (5,543 | ) |
| Net cash  used in investing activities                                                               |       | (16,569                                  | )          | (5,543 | ) |
|                                                                                                 |       |                                     |       |   |   |
| Cash flows  from financing activities:                                                               |       |                                     |       |   |   |
| Proceeds  from (payments on) revolving loans, net                                                    |       | (2,097                                   | )          | 5,245 |   |
| Payments on  long-term debt                                                                          |       | (12                                      | )          | (1,211 | ) |
| Net cash  provided by (used in) financing activities                                                 |       | (2,109                                   | )          | 4,034 |   |
|                                                                                                 |       |                                     |       |   |   |
| Net decrease  in cash                                                                                |       | (14,832                                  | )          | (4,551 | ) |
|                                                                                                 |       |                                     |       |   |   |
| Cash at  beginning of period                                                                         |       | 20,318                                   |       | 16,794 |   |
| Cash at end  of period                                                                               |       | $                                        | 5,486      |   | $ | 12,243 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

3

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**THE DOE RUN RESOURCES CORPORATIONNotes to Condensed Consolidated Financial Statements(Dollars in thousands)**

 

**(1)****         Summary of SignificantAccounting Policies**

 

***Unaudited Interim FinancialStatements***

 

These interim consolidated financialstatements include the accounts of The Doe Run Resources Corporation (Doe Run)and its subsidiaries (on a consolidated basis, the Company). Doe Run’s issuedand outstanding common stock is owned by a subsidiary of The Renco Group, Inc.(Renco).  In the opinion of management,the interim consolidated financial statements contain all adjustments,consisting of normal recurring accruals, necessary to present fairly theconsolidated financial position as of January 31, 2005 and the results ofoperations for the three month periods ended January 31, 2005 and2004.  Interim periods are notnecessarily indicative of results to be expected for the year.

 

***Reclassifications***

 

Certain prior year balances have beenreclassified in order to conform to current presentation.

 

**(2)****         Financial Condition**

 

For the year ended October 31, 2003 and for several years prior,the Company reported recurring losses, primarily the result of decliningtreatment charges and low metal prices, a condition exacerbated by the Company’ssignificant interest costs prior to a restructuring in October 2002. Theseconditions have resulted in the Company’s net capital deficiency.

 

The Company is highly leveraged and has significant commitments forenvironmental matters and Environmental Remediation and Management Program(PAMA) expenditures that require it to dedicate a substantial portion of cashflow from operations to the payment of these obligations, which will reducefunds available for other business purposes. See Note 7 for further discussionof these obligations. These factors also increase the Company’s vulnerabilityto general adverse conditions, limit the Company’s flexibility in planning foror reacting to changes in its business and industry, and limit the Company’sability to obtain financing required to fund working capital and capitalexpenditures and for other general corporate purposes. An unfavorable outcometo certain contingencies discussed below, would have a further adverse effecton the Company’s ability to meet its obligations when due. The Company’sability to meet these obligations is also dependent upon future operatingperformance and financial results, which are subject to financial, economic,political, competitive and other factors affecting the Company, many of whichare beyond the Company’s control.

 

The Company has substantial debt servicerequirements in the future, including maturities in 2005 of $15,500 for theTerm Note and $7,500 for the Old Notes, and also significant capitalrequirements under environmental commitments in Peru. The Company’s revolvingcredit facilities also expire in the fourth quarter of 2005, and will requirerenegotiation to extend their terms. There can be no assurance that the Companywill be successful, or if it is successful, that the renewal would be at termsthat are favorable to the Company. Discussions have been held with Renco toextend the Term Note, but there can be no assurance that the term will beextended.

 

Management will continue to assess market andoperating conditions at prevailing metal prices to maximize its operatingprofit or limit losses, while allowing the Company to fulfill its environmentalobligations..

 

As discussed in Note 7, Doe Run Peru’sexisting PAMA requires it to perform projects in 2005 and 2006 at a total costof $121,200. Doe Run Peru expects that it will not be able to comply with thespending requirements of the PAMA investment schedule in 2005 and 2006with respect to the construction of a sulfuric acid plant required by the PAMAand, as a result, could be subject to penalties. Failure to comply with thePAMA could result in the cessation of operations at the La Oroya smelter.

 

The Peruvian Government has issued a supremedecree (Supreme Decree), which recognized that exceptional circumstances mayjustify an extension of one or more projects within the scope of a PAMA. DoeRun Peru

 

4

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will submit an application for extension tomodify the requirements of the existing PAMA and extend the term of the PAMA tocomplete the construction of the sulfuric acid plant contemplated by theoriginal PAMA. Doe Run Peru will perform other environmental projects to reducefugitive emissions, including heavy metal dust, to address the health issues ofthe community. As of January 31, 2005, the remaining total cost ofthe  current PAMA projects, including thesulfuric acid plant construction, and these projects is approximately $136,000.If the extension of the PAMA is approved, management expects to fund the PAMAprojects from cash from operations.

 

Upon approval of a modified PAMA, Doe RunPeru would be required to create a trust account. The trust account wouldadminister the receipts and disbursements related to the extended PAMA project.The Supreme Decree requires that receipts from sales be remitted monthlydirectly to the trust account, in an amount sufficient to fund the month’s cashrequirements of the extended PAMA projects,. Such an arrangement is prohibitedby Doe Run Peru’s revolving credit facility (the Doe Run Peru Revolving CreditFacility), which expires on September 23, 2005. Accordingly, arenegotiated Doe Run Peru Revolving Credit Facility will need to comply withthe requirements established by the Supreme Decree, should Doe Run Peru’s PAMAbe extended.

 

The Supreme Decree also requires that, within30 days of the approval of the PAMA extension, the Company provide financialsecurity in an amount equal to 20% of the projected cost of the project orprojects to be extended. The Company currently expects the overall investmentrequired to build the sulfuric acid plant to be approximately $102,000.

 

A default under the requirements of the PAMAcould result in a default under the Doe Run Peru Revolving Credit facility. Adefault under the Doe Run Peru Revolving Credit Facility would result in adefault under the Doe Run Revolving Credit Facility.

 

These issues raise substantial doubt aboutthe Company’s ability to continue as a going concern. Management believes thatDoe Run Peru will obtain an approval of an extension to complete the sulfuricacid plant. There is no assurance, however, that Doe Run Peru will receive anextension, or, if it does, that the project will be completed within the timelimitation specified by the Supreme Decree. Doe Run Peru has developed abusiness plan that identifies several revenue generating and cost reductionactivities. Management believes the plan will enhance liquidity, which isexpected to improve Doe Run Peru’s ability to make the investments under thePAMA, assuming an extension is received. Revenue enhancement and cost reductionprojects include the processing of zinc ferrites and an effort to bring morerecycled feed into the smelter. Cost reduction measures include manpowerreductions through voluntary retirement and decreased power usage in the zinccircuit.

 

Doe Run Peru has received assessments ofincome tax, including penalties and interest, and Value Added Tax (VAT)totaling $102,500 and $41,000, respectively, as discussed in Note 7. Inaddition, the Company estimates that the effect of similar assessments forperiods not yet assessed would be approximately $1,400 and $19,000 for theincome tax and VAT matters, respectively. Furthermore, Doe Run Peru would alsobe required to make additional workers’ profit sharing payments equal to 8% ofthe increase in taxable income generated by the changes discussed above, orapproximately $5,800 for tax years 1998 through 2004.

 

Management of the Company believes that ineach case Doe Run Peru has followed the applicable Peruvian tax statutes andintends to pursue all available administrative and judicial appeals. Doe RunPeru is not required to make any payments pending the administrative appealprocess. If Doe Run Peru is not successful in the administrative appealprocesses and were to appeal in the judicial system, some type of financialassurance would be required, which would have a significant adverse effect onliquidity.

 

Net unused availability at January 31,2005 and October 31, 2004 under the Doe Run Revolving Credit Facility wasapproximately $22.3 million and $22.5 million, respectively and under the DoeRun Peru Revolving Credit Facility was virtually none.  In addition to the availability under itsrevolving credit facilities, cash balances at Doe Run and Doe Run Peru were$1.5 million and $3.9 million, respectively, at January 31, 2005 and $13.4million and $6.9 million, respectively, at October 31, 2004.

 

5

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Management believes that high metal pricesand other revenue enhancements, and the issuance of the Supreme Decree, byallowing an application to extend La Oroya’s PAMA requirement for theconstruction of the sulfuric acid plant, will enable the Company to continue asa going concern through October 31, 2005.

 

**(3)****         Inventories**

 

Inventories consist of the following:

 
| ** **                            | ** ** | **January 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|---------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | ** **                 | ** ** |
|                                  |       |                       |       |                       |       |
| Finished  metals and concentrates     |       | $                          | 19,225     |                       | $          | 16,646 |   |
| Metals and  concentrates in process   |       | 72,493                     |       | 58,664                     |       |
| Materials,  supplies and repair parts |       | 26,872                     |       | 27,999                     |       |
|                                  |       | $                          | 118,590    |                       | $          | 103,309 |   |

 

Materials, supplies and repair parts arestated net of reserves for obsolescence of approximately $4,445 and $5,146 at January 31,2005 and October 31, 2004, respectively.

 

**(4)****         Income Taxes**

 

On December 26,2003, Peru’s tax authority, SUNAT, notified Doe Run Peru of an income taxassessment for the 1998 tax year. On December 23, 2004, assessments werereceived for tax years 1999 through 2001. The assessments primarily relate toDoe Run Peru’s income tax treatment of the December 1997 merger of Doe RunPeru and Metaloroya S.A., which was purchased by Doe Run Peru in October 1997,and its effects on subsequent years’ taxable income. Under the assessment bySUNAT, the tax basis of Doe Run Peru’s fixed assets acquired would decrease,resulting in lower tax depreciation expense than originally claimed. Theassessed amount consisting of additional income taxes due, penalties andinterest totals approximately $102,500.

 

The Companyestimates that the effect of a similar assessment for tax years after 2001would be approximately $1,400.

 

Furthermore, Doe Run Peru would also be required to make additionalworkers’ profit sharing payments equal to 8% of the increase in taxable incomegenerated by the changes discussed above, or approximately $5,800 for tax years1998 through 2004.

 

On November 15,2004, SUNAT notified Doe Run Peru of a Value-Added Tax (VAT) assessment for theperiod from January through July 2004.  On December 23, 2004. Doe Run Perureceived additional VAT assessments for tax years 1999 through 2001.  The assessments primarily relate to Doe RunPeru’s exports with holding certificates and differences in a tax creditapplication. The total assessment for these periods was approximately $41,000.SUNAT offset the amount assessed for 2004 of approximately $2,300 against DoeRun Peru’s VAT receivable balance from July 2004.  Future VAT reimbursements cannot be used tooffset the assessment by SUNAT.  TheCompany estimates expected additional assessments related to VAT for tax years2002 and 2003 to total approximately $19,000 in regard to its exports withholding certificates.

 

Management of the Company believes that ineach case Doe Run Peru has followed the applicable Peruvian tax statutes andintends to pursue all available administrative and judicial appeals. Doe RunPeru is not required to make any payments pending the administrative appealprocess. If Doe Run Peru is not successful in the administrative appealprocesses and were to appeal in the judicial system, some type of financialassurance would be required. No amounts have been accrued as liabilitiesrelated to these actions.

 

Pursuant to the Company’s tax sharingagreement with Renco, a dividend payable of $310 was reflected in the Company’sbalance sheet as of January 31, 2005, and was paid in the second quarterof 2005.

 

6

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**(5)****         Employee Benefits**

 

***Defined Benefit Plans***

** **

Net periodicbenefit cost is comprised of the following:

 
| ** **                                                | ** ** | **Three Months Ended  January 31,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                | ** ** | ** **                               |
| ** **                                                | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
|                                                      |       |                                     |       |   |   |
| Service cost                                              |       | $                                        | 547        |   | $ | 619 |   |
| Interest  cost on projected benefit obligation            |       | 1,655                                    |       | 1,880 |   |
| Expected  return on assets                                |       | (1,423                                   | )          | (1,359 | ) |
| Net  amortization and deferral of unrecognized net losses |       | 708                                      |       | 997 |   |
| Net periodic  benefit cost                                |       | $                                        | 1,487      |   | $ | 2,137 |   |

 

The Company is required to make totalcontributions of $9,025 in 2005, of which $1,677 had been paid as of January 31,2005.

 

**(6)****         Segment Information**

 

The Company’s operating segments are separatelymanaged business units that are distinguished by products, location andproduction processes.  The primary leadsegment includes integrated mining, milling and smelting operations located inMissouri.  The recycling operationsegment, located in Missouri, recycles lead-bearing materials, primarily spentbatteries.  The fabricated productssegment produces value-added lead products. Doe Run Peru produces an extensive product mix of non-ferrous andprecious metals.

 

*Operating Segments – Revenues*

 
| ** **                                   | ** ** | **Three Months Ended  January 31,** | ** ** |
|----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Revenues  from external customers:           |       |                                     |       |   |   |
| Doe Run Peru                                 |       | $                                        | 148,062    |   | $ | 122,973 |   |
| Primary lead                                 |       | 63,937                                   |       | 50,528 |   |
| Recycling  operation                         |       | 18,566                                   |       | 16,069 |   |
| Fabricated  products                         |       | 3,815                                    |       | 2,808 |   |
| Total                                        |       | 234,380                                  |       | 192,378 |   |
| Revenues  from other operating segments: (1) |       |                                     |       |   |   |
| Doe Run Peru                                 |       | 2,724                                    |       | — |   |
| Primary lead                                 |       | 502                                      |       | 264 |   |
| Recycling  operation                         |       | 98                                       |       | 44 |   |
| Fabricated  products                         |       | —                                   |       | — |   |
| Total                                        |       | 3,324                                    |       | 308 |   |
| Total  reportable segments                   |       | 237,704                                  |       | 192,686 |   |
| Other  revenues/gains (losses) (2)           |       | 1,279                                    |       | (2,374 | ) |
| Intersegment  eliminations                   |       | (3,324                                   | )          | (308 | ) |
| Total  revenues                              |       | $                                        | 235,659    |   | $ | 190,004 |   |

 

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(1)          Transactions betweensegments consist of metal sales recorded based on sales contracts that arenegotiated between segments on terms that management feels are similar to thosethat would be negotiated between unrelated parties.

 

7

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(2)          Other revenues/gains(losses) consist of metal sales not attributed to operating segments of $2,521for the three months ended January 31, 2005 and realized gains (losses) onderivative contracts of $(1,242) and $(2,374) for the three months ended January 31,2005 and 2004, respectively.

 

The measure of segment profit and loss usedby the Company is earnings of the segment before interest, taxes, depletion,depreciation, and amortization (EBITDA), as adjusted to exclude losses fromimpairment and disposal of long-lived assets and Doe Run Peru’s expensesrelated to hedging and agency fees under an agreement with Doe Run (AdjustedEBITDA). Consolidated Adjusted EBITDA also excludes accretion expense underStatement of Financial Accounting Standards No. 143, *Asset Retirement Obligations* (Statement No. 143), adopted November 1,2002*.*

 

*Operating Segments – Adjusted EBITDA*

 
| ** **                                                | ** ** | **Three Months Ended  January 31,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
|                                                      |       |                                     |       |   |   |
| Doe Run Peru                                              |       | $                                        | 8,476      |   | $ | 1,414 |   |
| Primary lead                                              |       | 23,082                                   |       | 8,866 |   |
| Recycling  operation                                      |       | 3,827                                    |       | 2,123 |   |
| Fabricated  products                                      |       | 509                                      |       | 248 |   |
| Total  reportable segments                                |       | 35,894                                   |       | 12,651 |   |
| Realized  losses on derivatives                           |       | (1,242                                   | )          | (2,374 | ) |
| Other  revenues and expenses (3)                          |       | (1,464                                   | )          | (2,007 | ) |
| Corporate  selling, general and administrative expenses   |       | (6,255                                   | )          | (5,897 | ) |
| Intersegment  eliminations                                |       | 25                                       |       | 20 |   |
| Consolidated  adjusted EBITDA                             |       | 26,958                                   |       | 2,393 |   |
| Depreciation,  depletion and amortization                 |       | (6,137                                   | )          | (6,465 | ) |
| Interest  expense, net                                    |       | (3,441                                   | )          | (3,177 | ) |
| Unrealized  gain (loss) on derivatives                    |       | 798                                      |       | (5,024 | ) |
| Losses from  impairment and disposal of long-lived assets |       | (1,210                                   | )          | (708 | ) |
| Asset  retirement obligation accretion expense            |       | (374                                     | )          | (401 | ) |
| Other                                                     |       | 93                                       |       | 102 |   |
| Income  (loss) before income taxes                        |       | $                                        | 16,687     |   | $ | (13,280 | ) |

 

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(3)                                  Otherrevenues and expenses consists of the profit on metal sales not attributed tooperating segments and expenses not allocated to operating segments, includingenvironmental expenses relating to historic operations of $1,000 for the threemonths ended January 31, 2004, and adjustments necessary to state theprimary lead and recycling operations’ inventories at LIFO cost of $600 for thethree months ended January 31, 2004.

 

**(7)****         Asset Retirement and Environmental Obligations**

 

The Company is subject tonumerous federal, state and local environmental laws and regulations governing,among other things, air emissions, wastewater discharges, solid and hazardouswaste treatment, storage and disposal and remediation of releases of hazardoussubstances.  The Company’s facilities arelocated on sites that have been used for heavy industrial purposes for decadesand may require remediation.  The Companyhas made and intends to continue making the necessary expenditures forenvironmental remediation and compliance with environmental laws andregulations.  Environmental laws andregulations may become more stringent in the future, which could increase costsof compliance.

 

#### ***AssetRetirement Obligations***

#### ** **

Asset retirement obligations (AROs) arerecognized as liabilities when incurred, with the initial measurement at fairvalue.  These liabilities will beincreased to full value over time through charges of accretion to operatingexpense.  In addition, an assetretirement cost is capitalized as part of the related asset’s carrying valueand will be depreciated over the asset’s useful life.  Changes in the ARO liability resulting from

 

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revisions to the timing or the amount of theoriginal estimate of undiscounted cash flows shall be recognized as an increaseor a decrease in the carrying amount of the liability for an ARO and the relatedasset retirement cost capitalized as part of the carrying amount of the relatedlong-lived asset.

 

The Company’s mines and related processingfacilities are subject to governance by various agencies that have establishedminimum standards for reclamation.  TheCompany’s primary smelter slag produced by and stored at the primary smelter inHerculaneum, Missouri is currently exempt from hazardous waste regulation underthe Resource Conservation and Recovery Act of 1976, as amended (RCRA), but issubject to a state closure permit, which requires activities to contain andcover the pile upon cessation of operations. The Company’s mining and milling operations are subject to Missouri minewaste closure permit requirements and lease agreements which require theCompany to reclaim surface areas, including remediation of mining wastedisposal areas, and to perform closure activities underground.  These activities, which tend to be sitespecific, generally include costs for earthwork, revegetation, water treatmentand demolition.  Closure activities maybe performed over time.

 

The Company has a RCRApermit addressing the closure of portions of its recycling operation.  The majority of the cost will arise fromremoving hazardous materials from the facility. No ARO liability or relatedasset cost has been recorded because the fair value of the obligation cannot bedetermined due to the indeterminate timing. The cost of closure, based on thirdparty estimates for bonding purposes, is approximately $3,000.  The life of the operation is consideredindeterminable because there is not currently a cost-effective alternative tothe lead acid batteries and because battery manufacturers are required torecycle the batteries.

 

Doe Run Peru also hasAROs at its Cobriza mine related to the costs associated with closing the mineopenings and covering acid rock.  Doe RunPeru is also responsible for the covering and revegetation of mixed lead andcopper slag stored in Huanchan, an area a short distance from the smelter wherethe slag is currently stored.

 

The Company’s totalrecorded liability for AROs was approximately $15,000 and $14,600 as of January 31,2005 and October 31, 2004, respectively.

 

#### ***Environmentalremediation - Domestic Operations***

#### ** **

The Company had recorded liabilities ofapproximately $17,800 and $18,800 related to remediation obligations as of January 31,2005 and October 31, 2004, respectively.

 

Doe Run is subject to avoluntary Administrative Order on Consent (AOC), effective May 29, 2001, tostudy and address issues related to the slag pile, plant property, communitysoils adjacent to the primary smelter in Herculaneum, elevated blood leadlevels in the community and lead releases from the plant. Under this AOC DoeRun completed additional soil testing in the area within a mile radius of thesmelter and subsequently signed a second AOC with the U.S. EPA on December 21,2001, which has essentially been completed. The May 29, 2001 AOC was modified effective on May 20, 2004.  At January 31, 2005 the estimatedremaining cost of remediating these properties is approximately $1,360, withapproximately $1,000 to be spent during the remainder of calendar 2005.

 

Doe Run signed a settlement agreement withthe State of Missouri on April 26, 2002 whereby it agreed to offer to purchaseapproximately 160 residential properties in an area close to the smelter if theowner requests such an offer. The homeowners have until June 30, 2005 toaccept any offers made. The amount paid to the homeowners who accept an offeris based on an appraisal of the property’s value at August 31, 2001, plus,if a replacement property is purchased, an amount for owner-occupied residencesrepresenting the lesser of the difference between the appraisal amount and thecost of a similar property in another designated community or the differencebetween the appraisal amount and the replacement property.

 

As of January 31, 2005, a total of 149homeowners had requested offers, and 117 of 142 delivered offers had beenaccepted. As of January 31, 2005, the Company had spent approximately$8,100 under the residential property purchase plan. Another $1,100 of acceptedoffers are awaiting a closing date and $2,000 in outstanding offers have notbeen accepted. Management cannot estimate how many of the remaining homeownerswill accept offers.

 

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Doe Run will attempt torent out certain purchased properties, if approval is received by theregulatory agencies.  The properties mustremain vacant while owned by Doe Run until regulators and the city agree thatre-occupancy is not a risk to human health. Management believes that there is current evidence that no health riskexists as a result of smelter operations, due to soil remediation efforts andlow concentrations of lead in the air in the buyout area, and that othersources of lead contamination could be remedied.  If Doe Run does not comply with the materialproperty purchase provisions of the settlement agreement, Doe Run will be subjectto a $1,000 penalty.

 

The Company’s statementsof operations reflect losses from impairment or retirement of long-lived assetsprimarily related to the properties owned in Herculaneum as it cannot beassured that the cost of the properties will be recovered through future cashflows.  If the cost of the propertiescannot be recovered through future cash flows, additional impairment losseswill be recognized as properties are purchased. The Company’s recordedliability for remediation does not include the future purchase costs relatingto the residential property purchase plan as these costs are capitalized.

 

Doe Run is subject to aplan with the Missouri Department of Natural Resources and the Missouri AirConservation Commission to achieve and maintain compliance with the ambient airquality standard for lead promulgated under the federal Clean Air Act for thecity of Herculaneum.  The plan wasincluded in a consent judgment entered into by Doe Run and has been approved atthe state level and by the U.S. U.S. EPA. The air quality monitors reflectedcompliance from July 2002 through December 2004.

 

Doe Run has received notice that it is apotentially responsible party (PRP) subject to liability under TheComprehensive Environmental Response, Compensation and Liability Act of 1980,as amended (CERCLA), at the following sites: six sites in St. Francois County,Missouri, including the Big River Mine Tailings site, the Bonne Terre site, theFederal site, the National site, the Rivermines site and the Leadwood site; theOronogo-Durenweg site in Jasper County, Missouri; the Cherokee County site inCherokee County, Kansas; the Tar Creek site in Ottawa County, Oklahoma; theBlock “P” site in Cascade County and Judith County, Montana; and the MissouriElectric Works site in Cape Girardeau, Missouri.  There are two additional sites in St.Francois County for which the U.S. EPA has indicated it will issue notice.  CERCLA provides for strict and, in certaincircumstances, joint and several liability for response costs and naturalresource damages.  The Company’s estimateof the cost of the remediation of these sites, including the two additionalsites in St. Francois County, is included in the total liability forremediation obligations, which the Company believes is adequate based on itsinvestigations to date.  However,depending upon the types of remediation required and certain other factors,additional costs at these sites, individually or collectively, could have amaterial adverse effect on the results of operations, financial condition andliquidity of the Company.

 

In February 2004 the U.S. Department ofAgriculture issued a Unilateral Administrative Order (UAO) ordering certainremediation activities by Doe Run at the Block “P” millsite. Doe Run hasrequested that other parties be added to the order.  Doe Run will seek reimbursement from the U.S.Government and these other parties.

 

Doe Run hascompleted an Engineering Evaluation/Cost Analysis (EE/CA) for the Bonne Terresite and has signed two AOCs to conduct removal actions on the west and eastportions of the site.   Work is completedon the west Bonne Terre site and is underway on the east side with completionexpected in 2005.

 

Doe Run hascompleted an EE/CA for the Rivermines site and, while unable to accept certainfinancial assurance provisions of a proposed AOC, has agreed to conduct aremoval action at the site under a UAO. Work will commence upon approval of awork plan.

 

Doe Run is subjectto a voluntary AOC with the U.S. EPA to remediate the Big River Mine Tailingssite.  The remediation work required bythe AOC has been substantially completed, and will continue with revegetationand ongoing monitoring and maintenance activities.

 

Doe Run has also signed AOCs to perform anEE/CA on each of the National and Leadwood sites for remediation of mine wasteareas.  The National EE/CA is completeand the Leadwood EE/CA has been

 

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submitted to the U.S. EPA for approval. Inaddition, Doe Run has signed an AOC with the U.S. EPA to conduct a RemedialInvestigation/Feasibility Study (RI/FS) to assess potential off-site impacts ofthese site operations on and the need for remediation regarding groundwater,residential soils, several creeks and a river. The initial draft of the RI/FS was submitted in early March 2002.  Doe Run signed an order to conduct interimmeasures, which consisted of blood lead testing of young children, residentialsoil sampling and limited soil remediation as indicated by the testing andsampling results, which was terminated and replaced by an AOC to conductcertain additional soil remediation in the area and has included its bestestimate of these efforts in its recorded liabilities.  The Company believes the recorded liabilitiesrelated to these sites are adequate. However, should remediation goals or areas change, requiringsubstantially increased measures, there can be no assurance that the recordedliabilities would be adequate.

 

In March 2004, DoeRun received notice that it is a PRP subject to liability under CERCLA forcontamination along roads in Iron, Dent and Reynolds counties in Missouri,along with a number of mining companies involved in the transportation ofconcentrates. After sampling of 573 houses by the U.S. EPA and the MissouriDNR, approximately 150 houses were identified as potentially requiring somelevel of remediation. Doe Run and four other mining companies have signed anAOC to conduct soil remediation at approximately 40 of these houses. Doe Runexpects that its share of the potential remediation costs will not besignificant, based on management’s estimates of the number of houses requiringremediation, remediation methods and Doe Run’s apportionment of the costs.

 

Doe Run has been advisedthat the U.S. EPA is considering taking certain response actions at a mine sitein Madison County, Missouri known as the Mine LaMotte Site.  Doe Run and the owner of the other 50% shareof stock in the company that mined the site have signed an AOC to conduct anRI/FS at the site.  This site issubstantially smaller than the sites in St. Francois County where the Companyhas been named a PRP, and the potential issues are less complex.  Doe Run has also been advised thatremediation is required at a related small satellite mine site.  After conducting an investigation, Doe Runhas determined that it was not involved in operations at the satellite site,but further review will be required before a determination can be made as towhether it has any liability at the main site. At this time, based on preliminary information and an inspection of thesites, management does not believe that any future action will result in amaterial adverse impact to the results of operations, financial condition orliquidity of the Company.

 

Doe Run’s recyclingfacility is subject to corrective action requirements under RCRA as a result ofa storage permit for certain wastes issued in 1989.  This will involve remediation of solid wastemanagement units at the site and it is expected that the plan for correctiveaction will be approved in fiscal 2005. The Company’s estimate of the cost ofthis corrective action is $2,000.  Thestorage area is also covered under the permit, but management does not believethe cost of closure is significant. While management believes that recorded liabilities are adequate basedon expectations of the closure plan requirements, regulators could require thatadditional measures be included in the finalized plan, which could change theestimate of the costs for corrective action.

 

On August 25, 2004, the U.S. EPA issueda Notice of Violation (NOV) to the Company alleging past violations of therecycling facility’s air permit conditions regarding production limits for itsreverbatory furnace. Management believes the facility has operated incompliance with state and federal air requirements and will contest theNOV.  If the U.S. EPA prevails, there isa reasonable possibility that fines based on this action could have a materialadverse effect on the Company’s liquidity or results of operations.

 

The domestic operatingfacilities have wastewater discharge permits issued under the federal CleanWater Act, as amended.  Doe Run currentlymeets the effluent limits under these permits, but if compliance were notmaintained, additional improvements to its treatment facilities could berequired.

 

#### ***ForeignOperations***

#### ** **

La Oroya’s operations historically andcurrently exceed some of the applicable Ministry of Energy and Mines (MEM)maximum permissible limits pertaining to air emissions and wastewater effluentquality. The Environmental Remediation and Management Program (PAMA) projects,which are more fully discussed below, have been designed to achieve compliancewith these requirements. There can be no assurance that the

 

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Peruvian government will not, in the future,require compliance with additional environmental regulations that couldadversely affect Doe Run Peru’s business, financial condition and results ofoperations.

 

Metaloroya S.A., the former owner of the LaOroya smelter, at the time a subsidiary of Centromin, received approval fromthe Peruvian government for a PAMA that consisted of an environmental impactanalysis, monitoring plan and data, mitigation measures and closure plan. DoeRun Peru assumed the obligations under the PAMA. The PAMA also sets forth theactions and corresponding annual investments the concession holder agrees toundertake in order to achieve compliance with the maximum permissible limitsprior to expiration of the PAMA (ten years for smelters, such as Doe Run Peru’soperations in La Oroya, and five years for any other type of mining ormetallurgical operation like Cobriza). After expiration of the PAMA, theoperator must comply with all applicable standards and requirements. Becausethese costs improve the property or prevent future environmental contamination,they are capitalized.

 

Doe Run Peru has committed under its currentapproved PAMA to implement the following projects at its La Oroya smelterthrough December 31, 2006:

 

•                  New sulfuric acid plants

•                  Treatment plant for the copper refineryeffluent

•                  Industrial wastewater treatment plant forthe smelter and refinery

•                  Improve the slag handling system

•                  Improve Huanchan lead and copper slagdeposits

•                  Build an arsenic trioxide deposit

•                  Improve the zinc ferrite disposal site

•                  Domestic wastewater treatment anddomestic waste disposal

•                  Monitoring station

 

An investment schedule inthe PAMA provides a specific plan for achieving the applicable MEM maximumpermissible limits pertaining to air emissions and wastewater effluent quality.The PAMA may be modified and amended as to the actual design and timing ofprojects to be implemented, provided compliance with the applicable maximumpermissible limits is achieved by December 31, 2006. The requiredestimated annual spending on a calendar year basis for the projects approved inthe La Oroya PAMA, as amended, most recently on January 25, 2002, are asfollows:

 

| **Year** | ** ** | **Estimated  Cost** | ** ** |
|----------|------------|---------------------|------------|
|     |       |                |       |   |
| 2005     |       |                | $          | 53,500 |   |
| 2006     |       |                | 67,700     |   |
|     |       |                | $          | 121,200 |   |

 

Doe Run Peru expects that it will not be ableto comply with the spending requirements of La Oroya’s PAMA investment schedule in2005 and 2006 with respect to the construction of a sulfuric acid plantrequired by the PAMA and, as a result, could be subject to penalties. Failureto comply with the PAMA could result in the cessation of operations at the LaOroya smelter.

 

On December 29, 2004 the PeruvianGovernment issued a Supreme Decree, which recognized that exceptionalcircumstances may justify an extension of one or more projects within the scopeof a PAMA. The Supreme Decree specifies that companies have until December 31,2005 to apply for an extension.  The maximum extension is for three yearsand the MEM may authorize an additional year based upon the results of a healthrisk study.

 

Doe Run intends toapply for an extension to complete the construction of a sulfuric acid plantcontemplated by the original PAMA. The application for a PAMA extension must besupported by a health risk study performed by a third party. The applicationmust contain an engineering description and funding plan of any project to beextended, a discussion of how and when environmental emission standards will bemet, a plan to

 

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monitor emissions withthe participation of the community, proof that at least three public workshopswere held in various districts to provide information on Doe Run Peru’sfinancial situation and health programs, proof that two public hearings wereheld regarding the extension plans, and other financial information. In orderto meet these requirements, the Company does not expect to apply for theextension until the end of 2005.

 

Upon approval of a modified PAMA, Doe RunPeru would be required to create a trust account. The trust account wouldadminister the receipts and disbursements related to the extended PAMA project.The Supreme Decree requires that receipts from sales be remitted monthlydirectly to the trust account, in an amount sufficient to fund the month’s cashrequirements of the extended PAMA projects. Such an arrangement is prohibitedby the Doe Run Peru Revolving Credit Facility, which expires on September 23,2005.  Accordingly, a renegotiated DoeRun Peru credit facility will need to comply with the requirements establishedby the Supreme Decree, should Doe Run Peru’s PAMA be extended.

 

The Supreme Decree also requires that, within30 days of the approval of the PAMA extension, the Company provide financialsecurity in an amount equal to 20% of the projected cost of the project orprojects to be extended. The Company currently expects the overall investmentrequired to build the sulfuric acid plant to be approximately $102,000. TheCompany cannot assure that it will be successful in obtaining the necessary financialsecurity required.

 

Doe Run Peru will perform other environmentalprojects to reduce fugitive emissions, including heavy metal dust, to addressthe health issues of the community. As of January 31, 2005, the remainingtotal cost of the current PAMA projects, including the sulfuric acid plantconstruction, and these projects is approximately $136,000.

 

Management believes that Doe Run Peru willobtain an approval of an extension to complete the sulfuric acid plant. Thereis no assurance, however, that Doe Run Peru will receive an extension, or, ifit does, that the project will be completed within the time limitationspecified by the Supreme Decree.

 

The PAMA projects have been designed toachieve compliance with such requirements prior to the expiration of the PAMA.No assurance can be given that implementation of the PAMA projects is feasibleor that their implementation will achieve compliance with the applicable legalrequirements by the end of the PAMA period. Further, there can be no assurancethat the Peruvian government will not in the future require compliance withadditional or different environmental obligations that could adversely affectDoe Run Peru’s business, financial condition and results of operations.

 

Under the purchase agreement related to theacquisition of the La Oroya assets in October 1997, Centromin, the priorowner of the La Oroya smelter and Cobriza mine, agreed to indemnify Doe RunPeru against environmental liability arising out of its prior operations andtheir apportioned share of any other complaint related to emissions.Performance of the indemnity has been guaranteed by the Peruvian governmentthrough the enactment of the Supreme Decree No. 042-97-PCM. However, there canbe no assurance that Centromin will satisfy its environmental obligations andinvestment requirements, including those in its PAMA, or that the guaranteewill be honored. Any failure by Centromin to satisfy its environmentalobligations could adversely affect Doe Run Peru’s business, financial conditionand results of operations.

 

The Cobriza mine has a separate PAMA in whichDoe Run Peru has committed to complete projects to manage tailings, minedrainage, sewage and garbage. As of June 2004, Doe Run Peru ceaseddischarging mine waste into the Mantaro River and was in compliance with theemissions standards required by the PAMA.

 

Doe Run Peru is responsible for theremediation costs relating to a zinc ferrite disposal site. The current closureplan provides for encapsulating the ferrite residues in place at Huanchan, anarea a short distance from the smelter where they are currently stored, forwhich an environmental liability of $1,600 has been recorded as of January 31,2005 and October 31, 2004.

 

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***Consolidated***

 

The Company believes itsliabilities for domestic and foreign environmental, mine closure andreclamation matters are adequate, based on the information currentlyavailable.  Depending upon the type andextent of activities required, revisions to management’s estimates of costs toperform these activities are reasonably possible in the near term.  Therefore, there can be no assurance thatadditional costs, both individually and in the aggregate, would not have amaterial adverse effect on the results of operations, financial condition andliquidity of the Company.

 

**(8)****         Litigation**

 

Doe Run is a defendant ineight lawsuits alleging certain damages stemming from the operations at theHerculaneum smelter.  Three of thesecases are class action lawsuits.  In twocases, the plaintiffs seek to have certified a class of property owners in acertain section of Herculaneum, alleging that property values have beendamaged due to the operations of the smelter. In another case, plaintiffs seek to have certified a class of childrenwho lived in Herculaneum during a period of time when they were less than sixyears old and children born to mothers who lived in Herculaneum during theirpregnancies.  The remedy sought ismedical monitoring for the class.  Fiveof the cases are personal injury actions by 24 individuals who allege damagesfrom the effects of lead due to operations at the smelter.  Punitive damages also are being sought ineach case.

 

A resident of Herculaneum has claimedpersonal injuries allegedly resulting from exposure to emissions from thesmelter.  No suit has yet been filed inthis matter.

 

Doe Run is a defendant infive lawsuits alleging certain damages from discontinued mine facilities in St.Francois County.  Four of the cases areclass action lawsuits.  The first caseseeks to have certified a class consisting of property owners in Bonne Terre,Missouri, alleging that property values have been damaged due to the tailingsfrom the discontinued operations.  In thesecond case plaintiffs seek to have certified a class of children who lived,went to school or day care in Bonne Terre, or whose mothers lived in BonneTerre during their pregnancies.  Thethird and fourth cases are class actions for property damage and medicalmonitoring concerning alleged damages caused by chat, tailings, and relatedoperations in six areas in St. Francois County. The fifth case alleges personal injury to two children living in St.Francois County.

 

Doe Run has been named in17 suits filed by 116 railway employees against a railroad carrier and multiplelead mining companies alleging personal injury resulting from exposure to leadconcentrates hauled by the railroad carrier. In addition, Doe Run has been named in an action by the spouses of fourrailway workers related to the exposure to lead from the hauling of leadconcentrates by the railroad.  Doe Runhas reached tentative settlement with all but three of the plaintiffs in thesecases.

 

The railroad carrier has also threatened DoeRun and other companies associated with lead mining operations in Missouri withpossible legal action for claims for property damage at certain rail yards andclaims for contribution and indemnity for costs associated with settlement oflead exposure cases.  The demandsindicate that material liability is reasonably possible, but, given thevarious types of claims, the number of potential defendants, the defensesavailable to the Company (including that certain costs are the result of therailroad’s activities for which it plead guilty to a felony and paid a criminalfine), and the fact that no lawsuit has been filed, the Company is unable atthis time to estimate the expected outcome and any final costs of thispotential action.

 

DoeRun is a defendant in lawsuits alleging certain damages from past miningoperations in Ottawa County, Oklahoma.  Ten lawsuits have been filed allegingpersonal injury to 25 children and one adult living in Ottawa County againsteight companies, including Doe Run, who allegedly, either through predecessorsor subsidiaries, mined lead and zinc in Ottawa County or commercially used thechat or tailings in Ottawa County.   Fiveof these suits were dismissed, leaving claims alleged by seven children. Twocases are class action lawsuits for personal injury and property damage inPicher and Quapaw, Ottawa County. An additional class action lawsuit fordamages to natural resources and land owned by members of the Quapaw Tribe wasfiled on December 10, 2003 against seven companies, including DoeRun.  The Company is unable at this timeto estimate the expected outcome and any final costs of this action. Twoadditional cases alleging personal injury to 45 children and three children,respectively, were filed in July 2004.

 

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Doe Run, with severalother defendants, has been named in four cases in Maryland, but has not yetbeen joined as a defendant in any of these cases.  These suits seek damages, alleging personalinjuries as a result of lead poisoning from exposure to lead paint andtetraethyl lead dust.  The suits seekpunitive damages.  Doe Run was dismissedfrom two similar cases in which it was joined as a defendant.  Until Doe Run is actually joined as adefendant in one or more of these cases, material liability from these cases isconsidered remote.

 

Doe Run has been named in an asbestos injurysuit in the City of St. Louis by an individual against numerous companies andpublic entities, alleging that he was exposed to asbestos, including at thepremises of the St. Joe Minerals Corporation (Doe Run’s predecessor).  Doe Run was named in two similar suits filedin Madison County, Illinois, one alleging that a worker was exposed to asbestosat premises of the St. Joe Minerals Corporation, in which Doe Run has not beenproperly served, and the other filed by a person who did laundry for insulationworkers in her family who were allegedly exposed to asbestos at Doe Run’sHerculaneum, Missouri facility.  Doe Runwas served a Writ of Summons in a fourth case filed in Pennsylvania in May 2003but has not yet been served with a complaint, so few details of the case areknown, including the alleged location of the exposure.

 

Doe Run has been named as a party in variouslawsuits relating to certain operations of its predecessor.  Fluor Corporation, the owner of Doe Run’spredecessor, retained the obligation for any costs of defense or claimsrelating to these lawsuits.  Should FluorCorporation become unable to fulfill its contractual obligation, Doe Run couldbe liable for any costs or claims resulting from these lawsuits.  There is no reason at this time to believethat Fluor Corporation could not fulfill its contractual obligations.

 

Doe Run Peru is a defendant in 123 lawsuitsin the Lima, Peru labor courts whereby workers have alleged damages fromindustrial diseases.  Doe Run Peru hasmade claims in most of the cases against Centromin and has also made claimsagainst both governmental agencies and private companies that provide workers’insurance.  The average claim is$18.  Of seven concluded cases in thiscategory, six were dismissed and one resulted in a payment by Doe Run Peru of$9.

 

Doe Run Peru is also a defendant in 136lawsuits by workers alleging that they are owed certain differences in salariesand benefits.  The average claim is$23.  Of 22 concluded cases in thiscategory, 21 were dismissed and one resulted in a payment by Doe Run Peru of$2. Doe Run Peru is also a defendant in a lawsuit by the Yauli-La OroyaEmployees Union concerning salaries and benefits.  The claims ofthe 150 workers remaining in the lawsuit total approximately $660.

 

On January 19, 2005, Doe Run Peru wasserved with a lawsuit by an association of municipalities of the Junin Regionof Peru against Doe Run Peru and two other mining companies.  This lawsuit alleges environmental damages tothe Mantaro River basin in the amount of $5.0 billion.  Material liability to Doe Run Peru isbelieved to be remote because it is the opinion of management and outsidecounsel for Doe Run Peru that the probability under Peruvian law ofthis case proceeding to a conclusion at the favor of the plaintiffs is low. Anypotential judgment would be subject to the indemnification obligations ofCentromin, which are guaranteed by the Peruvian government.

 

Since most of the above cases are either in the pleading or discoverystages, the Company is unable at this time to estimate the expected outcome andthe final costs, except as noted, of these actions.  No amounts have been accrued asliabilities related to these actions.  Therecan be no assurance that these cases would not have a material adverse effect,both individually and in the aggregate, on the results of operations, financialcondition and liquidity of the Company. The Company has and will continue to vigorously defend itself againstsuch claims.

 

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**(9)****         Guarantor Subsidiaries**

 

The Guarantor Subsidiaries (FabricatedProducts, Inc. (FPI) and DR Land Holdings, LLC (together, the DomesticGuarantors) Buick Resource Recycling Facility, LLC, Doe Run Cayman Ltd. (DoeRun Cayman) and its subsidiary Doe Run Peru) have jointly and severally, fully,unconditionally and irrevocably guaranteed the Unsecured Notes, Secured Notesand 11.75% Notes of the Company. Doe Run Cayman has no operations separate fromthose of Doe Run Peru. Separate financial statements and other disclosuresconcerning certain Guarantor Subsidiaries and disclosures concerningnon-Guarantor Subsidiaries have not been presented because management hasdetermined that such information is not material to investors. Intercompanytransactions eliminated in consolidation consist of various service and agencyfees between Doe Run and Doe Run Peru and sales of metal to Doe Run by Doe RunPeru and to FPI by Doe Run.

 

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** **

**(9)****         Guarantor Subsidiaries (Continued)**

 

**CondensedConsolidating Balance Sheet (unaudited)As of January 31, 2005**

 
| ** **                                                                                  | ** ** | **The Company  Excluding  Guarantor  Subsidiaries** | ** ** | **Buick  Resource  Recycling  Facility, LLC** | ** ** | **Other  Domestic  Guarantors** | ** ** | **Doe Run  Cayman and  Subsidiary** | ** ** | **Eliminations** | ** ** | **The  Company** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                  | ** ** | ** **                                          | ** ** | ** **                                    | ** ** | ** **                      | ** ** |
| ** **                                                                                  | ** ** | ** **                                          | ** ** | ** **                                    | ** ** | ** **                      | ** ** |
| ** **                                                                                  | ** ** | ** **                                          | ** ** | ** **                                    | ** ** | ** **                      | ** ** |
|                                                                                        |       |                                                |       |                                          |       |                            |       |                                |       |             |       |             |       |
| **ASSETS**                                                                                  | ** ** |
| Current  assets:                                                                            |       |                                                |       |                                          |       |                            |       |                                |       |             |       |             |       |
| Cash                                                                                        |       | $                                                   | 1,537      |                                          | $          | —                          |       | $                                   | 1          |             | $          | 3,948            |       | $ | — |   | $ | 5,486 |   |
| Trade  accounts receivable, net of allowance for doubtful accounts                          |       | 50,731                                              |       | —                                        |       | 2,299                           |       | 18,703                              |       | (1,300           | )          | 70,433           |       |
| Inventories                                                                                 |       | 41,319                                              |       | —                                        |       | 1,085                           |       | 76,218                              |       | (32              | )          | 118,590          |       |
| Prepaid  expenses and other current assets                                                  |       | 19,995                                              |       | —                                        |       | 51                              |       | 32,698                              |       | —           |       | 52,744           |       |
| Due from subsidiaries                                                                       |       | 152,002                                             |       | 1,358                                         |       | —                          |       | —                              |       | (153,360         | )          | —           |       |
| Total  current assets                                                                       |       | 265,584                                             |       | 1,358                                         |       | 3,436                           |       | 131,567                             |       | (154,692         | )          | 247,253          |       |
| Property,  plant and equipment, net                                                         |       | 73,290                                              |       | 14,116                                        |       | 1,294                           |       | 150,215                             |       | —           |       | 238,915          |       |
| Due from  subsidiaries                                                                      |       | 16,432                                              |       | —                                        |       | —                          |       | —                              |       | (16,432          | )          | —           |       |
| Other  noncurrent assets, net                                                               |       | 3,710                                               |       | —                                        |       | 63                              |       | 89                                  |       | —           |       | 3,862            |       |
| Investment  in subsidiaries                                                                 |       | (8,281                                              | )          | —                                        |       | —                          |       | —                              |       | 8,281            |       | —           |       |
| Total assets                                                                                |       | $                                                   | 350,735    |                                          | $          | 15,474                          |       | $                                   | 4,793      |             | $          | 281,871          |       | $ | (162,843 | ) | $ | 490,030 |   |
|                                                                                        |       |                                                |       |                                          |       |                            |       |                                |       |             |       |             |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY (DEFICIT)**                                    | ** ** |
| Current  liabilities:                                                                       |       |                                                |       |                                          |       |                            |       |                                |       |             |       |             |       |
| Current  maturities of long-term debt                                                       |       | $                                                   | 55,789     |                                          | $          | —                          |       | $                                   | —     |             | $          | 39,996           |       | $ | — |   | $ | 95,785 |   |
| Accounts  payable                                                                           |       | 22,752                                              |       | —                                        |       | 710                             |       | 67,815                              |       | (1,300           | )          | 89,977           |       |
| Accrued liabilities                                                                         |       | 48,363                                              |       | —                                        |       | 824                             |       | 28,633                              |       | —           |       | 77,820           |       |
| Due to  parent/subsidiaries                                                                 |       | 1,358                                               |       | —                                        |       | 7,939                           |       | 144,063                             |       | (153,360         | )          | —           |       |
| Total  current liabilities                                                                  |       | 128,262                                             |       | —                                        |       | 9,473                           |       | 280,507                             |       | (154,660         | )          | 263,582          |       |
|                                                                                        |       |                                                |       |                                          |       |                            |       |                                |       |             |       |             |       |
| Long-term  debt, less current maturities                                                    |       | 320,561                                             |       | —                                        |       | —                          |       | 24                                  |       | —           |       | 320,585          |       |
| Due to  parent                                                                              |       | —                                              |       | —                                        |       | —                          |       | 16,432                              |       | (16,432          | )          | —           |       |
| Other  noncurrent liabilities                                                               |       | 70,838                                              |       | —                                        |       | 491                             |       | 3,460                               |       | —           |       | 74,789           |       |
| Total  liabilities                                                                          |       | 519,661                                             |       | —                                        |       | 9,964                           |       | 300,423                             |       | (171,092         | )          | 658,956          |       |
|                                                                                        |       |                                                |       |                                          |       |                            |       |                                |       |             |       |             |       |
| Series A  redeemable preferred stock                                                        |       | 26,121                                              |       | —                                        |       | —                          |       | —                              |       | —           |       | 26,121           |       |
|                                                                                        |       |                                                |       |                                          |       |                            |       |                                |       |             |       |             |       |
| Shareholders’  equity (deficit):                                                       |       |                                                |       |                                          |       |                            |       |                                |       |             |       |             |       |
| Common  stock, $.10 par value, 1,667 shares authorized, 1000 shares issued and  outstanding |       | —                                              |       | —                                        |       | —                          |       | —                              |       | —           |       | —           |       |
| Common  stock, $1 par value, 1,000 shares authorized, issued and outstanding                |       | —                                              |       | —                                        |       | 1                               |       | —                              |       | (1               | )          | —           |       |
| Common  stock, $1 par value, 2,005,000 shares authorized, issued and outstanding            |       | —                                              |       | —                                        |       | —                          |       | 2,005                               |       | (2,005           | )          | —           |       |
| Additional  paid in capital                                                                 |       | —                                              |       | 19,348                                        |       | 1,205                           |       | —                              |       | (20,553          | )          | —           |       |
| Accumulated  deficit and accumulated other comprehensive losses                             |       | (195,047                                            | )          | (3,874                                        | )          | (6,377                          | )          | (20,557                             | )          | 30,808           |       | (195,047         | )          |
| Total  shareholders’ equity (deficit)                                                  |       | (195,047                                            | )          | 15,474                                        |       | (5,171                          | )          | (18,552                             | )          | 8,249            |       | (195,047         | )          |
| Total  liabilities and shareholders’ equity (deficit)                                  |       | $                                                   | 350,735    |                                          | $          | 15,474                          |       | $                                   | 4,793      |             | $          | 281,871          |       | $ | (162,843 | ) | $ | 490,030 |   |

 

17

----

** **

**(9)****         Guarantor Subsidiaries (Continued)**

 

**Condensed Consolidating Balance SheetAs of October 31, 2004**

 
| ** **                                                                                   | ** ** | **The Company Excluding  Guarantor  Subsidiaries** | ** ** | **Buick  Resource  Recycling  Facility, LLC** | ** ** | **Other  Domestic  Guarantors** | ** ** | **Doe Run  Cayman and  Subsidiary** | ** ** | **Eliminations** | ** ** | **The  Company** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                   | ** ** | ** **                                         | ** ** | ** **                                    | ** ** | ** **                      | ** ** |
| ** **                                                                                   | ** ** | ** **                                         | ** ** | ** **                                    | ** ** | ** **                      | ** ** |
| ** **                                                                                   | ** ** | ** **                                         | ** ** | ** **                                    | ** ** | ** **                      | ** ** |
|                                                                                         |       |                                               |       |                                          |       |                            |       |                                |       |             |       |             |       |
| **ASSETS**                                                                                   | ** ** |
| Current  assets:                                                                             |       |                                               |       |                                          |       |                            |       |                                |       |             |       |             |       |
| Cash                                                                                         |       | $                                                  | 13,412     |                                          | $          | —                          |       | $                                   | 1          |             | $          | 6,905            |       | $ | — |   | 20,318 |   |
| Trade  accounts receivable, net of allowance for doubtful accounts                           |       | 42,269                                             |       | —                                        |       | 1,942                           |       | 22,217                              |       | (2,209           | )          | 64,219           |       |
| Inventories                                                                                  |       | 36,359                                             |       | —                                        |       | 1,130                           |       | 65,876                              |       | (56              | )          | 103,309          |       |
| Prepaid  expenses and other current assets                                                   |       | 19,898                                             |       | —                                        |       | 59                              |       | 15,901                              |       | —           |       | 35,858           |       |
| Due from  subsidiaries                                                                       |       | 11,998                                             |       | 1,162                                         |       | —                          |       | —                              |       | (13,160          | )          | —           |       |
| Total  current assets                                                                        |       | 123,936                                            |       | 1,162                                         |       | 3,132                           |       | 110,899                             |       | (15,425          | )          | 223,704          |       |
| Property,  plant and equipment, net                                                          |       | 72,716                                             |       | 14,739                                        |       | 1,442                           |       | 140,743                             |       | —           |       | 229,640          |       |
| Due from  subsidiaries                                                                       |       | 156,495                                            |       | —                                        |       | —                          |       | —                              |       | (156,495         | )          | —           |       |
| Other  noncurrent assets, net                                                                |       | 3,890                                              |       | —                                        |       | 63                              |       | 122                                 |       | —           |       | 4,075            |       |
| Investment  in subsidiaries                                                                  |       | (12,647                                            | )          | —                                        |       | —                          |       | —                              |       | 12,647           |       | —           |       |
| Total assets                                                                                 |       | $                                                  | 344,390    |                                          | $          | 15,901                          |       | $                                   | 4,637      |             | $          | 251,764          |       | $ | (159,273 | ) | 457,419 |   |
|                                                                                         |       |                                               |       |                                          |       |                            |       |                                |       |             |       |             |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)**                                      | ** ** |
| Current  liabilities:                                                                        |       |                                               |       |                                          |       |                            |       |                                |       |             |       |             |       |
| Current  maturities of long-term debt                                                        |       | $                                                  | 57,367     |                                          | $          | —                          |       | $                                   | —     |             | $          | 39,400           |       | $ | — |   | 96,767 |   |
| Accounts  payable                                                                            |       | 23,310                                             |       | —                                        |       | 662                             |       | 44,092                              |       | (2,209           | )          | 65,855           |       |
| Accrued  liabilities                                                                         |       | 55,625                                             |       | —                                        |       | 1,054                           |       | 27,199                              |       | —           |       | 83,878           |       |
| Due to  parent/subsidiaries                                                                  |       | 1,162                                              |       | —                                        |       | 7,998                           |       | 143,063                             |       | (152,223         | )          | —           |       |
| Total  current liabilities                                                                   |       | 137,464                                            |       | —                                        |       | 9,714                           |       | 253,754                             |       | (154,432         | )          | 246,500          |       |
|                                                                                         |       |                                               |       |                                          |       |                            |       |                                |       |             |       |             |       |
| Long-term  debt, less current maturities                                                     |       | 320,561                                            |       | —                                        |       | —                          |       | —                              |       | —           |       | 320,561          |       |
| Due to  parent                                                                               |       | —                                             |       | —                                        |       | —                          |       | 17,432                              |       | (17,432          | )          | —           |       |
| Other  noncurrent liabilities                                                                |       | 71,772                                             |       | —                                        |       | 533                             |       | 3,460                               |       | —           |       | 75,765           |       |
| Total  liabilities                                                                           |       | 529,797                                            |       | —                                        |       | 10,247                          |       | 274,646                             |       | (171,864         | )          | 642,826          |       |
|                                                                                         |       |                                               |       |                                          |       |                            |       |                                |       |             |       |             |       |
| Series A  redeemable preferred stock                                                         |       | 25,329                                             |       | —                                        |       | —                          |       | —                              |       | —           |       | 25,329           |       |
|                                                                                         |       |                                               |       |                                          |       |                            |       |                                |       |             |       |             |       |
| Shareholders’  equity (deficit):                                                        |       |                                               |       |                                          |       |                            |       |                                |       |             |       |             |       |
| Common  stock, $.10 par value, 1,667 shares authorized, 1,000 shares issued and  outstanding |       | —                                             |       | —                                        |       | —                          |       | —                              |       | —           |       | —           |       |
| Common  stock, $1 par value, 1,000 shares authorized, issued and outstanding                 |       | —                                             |       | —                                        |       | 1                               |       | —                              |       | (1               | )          | —           |       |
| Common  stock, $1 par value, 2,005,000 shares authorized, issued and outstanding             |       | —                                             |       | —                                        |       | —                          |       | 2,005                               |       | (2,005           | )          | —           |       |
| Additional  paid in capital                                                                  |       | —                                             |       | 19,348                                        |       | 1,205                           |       | —                              |       | (20,553          | )          | —           |       |
| Accumulated  deficit and accumulated other comprehensive losses                              |       | (210,736                                           | )          | (3,447                                        | )          | (6,816                          | )          | (24,887                             | )          | 35,150           |       | (210,736         | )          |
| Total  shareholders’ equity (deficit)                                                   |       | (210,736                                           | )          | 15,901                                        |       | (5,610                          | )          | (22,882                             | )          | 12,591           |       | (210,736         | )          |
| Total  liabilities and shareholders’ equity (deficit)                                   |       | $                                                  | 344,390    |                                          | $          | 15,901                          |       | $                                   | 4,637      |             | $          | 251,764          |       | $ | (159,273 | ) | 457,419 |   |

 

18

----

 

**(9)****         Guarantor Subsidiaries (Continued)**

 

**CondensedConsolidating Statement of Operations (unaudited)Three Months Ended January 31, 2005**

 
| ** **                                    | ** ** | **The Company  Excluding  Guarantor  Subsidiaries** | ** ** | **Buick  Resource  Recycling  Facility, LLC** | ** ** | **Domestic  Guarantors** | ** ** | **Doe Run  Cayman and  Subsidiary** | ** ** | **Eliminations** | ** ** | **The  Company** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------|------------|-------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | ** **                                          | ** ** | ** **                                    | ** ** | ** **               | ** ** |
| ** **                                    | ** ** | ** **                                          | ** ** | ** **                                    | ** ** | ** **               | ** ** |
| ** **                                    | ** ** | ** **                                          | ** ** | ** **                                    | ** ** | ** **               | ** ** |
|                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Net sales                                     |       | $                                                   | 84,382     |                                          | $          | —                   |       | $                                   | 3,815      |             | $          | 150,786          |       | $ | (3,324 | ) | $ | 235,659 |   |
|                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Costs and  expenses:                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Cost of  sales                                |       | 60,038                                              |       | —                                        |       | 2,950                    |       | 138,364                             |       | (3,349           | )          | 198,003          |       |
| Depletion,  depreciation and amortization     |       | 2,259                                               |       | 623                                           |       | 100                      |       | 3,155                               |       | —           |       | 6,137            |       |
| Selling,  general and administrative          |       | 6,026                                               |       | —                                        |       | 587                      |       | 4,215                               |       | —           |       | 10,828           |       |
| Unrealized  loss on derivatives               |       | (1,109                                              | )          | —                                        |       | —                   |       | 311                                 |       | —           |       | (798             | )          |
| Other                                         |       | 1,521                                               |       | 29                                            |       | 153                      |       | 134                                 |       | —           |       | 1,837            |       |
| Total costs  and expenses                     |       | 68,735                                              |       | 652                                           |       | 3,790                    |       | 146,179                             |       | (3,349           | )          | 216,007          |       |
|                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Income  (loss) from operations                |       | 15,647                                              |       | (652                                          | )          | 25                       |       | 4,607                               |       | 25               |       | 19,652           |       |
|                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Other income  (expense):                      |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Interest  expense, net                        |       | (2,679                                              | )          | —                                        |       | (156                     | )          | (606                                | )          | —           |       | (3,441           | )          |
| Other, net                                    |       | (79                                                 | )          | 224                                           |       | 2                        |       | 329                                 |       | —           |       | 476              |       |
| Equity in  earnings of subsidiaries           |       | 3,798                                               |       | —                                        |       | —                   |       | —                              |       | (3,798           | )          | —           |       |
|                                          |       | 1,040                                               |       | 224                                           |       | (154                     | )          | (277                                | )          | (3,798           | )          | (2,965           | )          |
|                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Income  (loss) before income tax expense      |       | 16,687                                              |       | (428                                          | )          | (129                     | )          | 4,330                               |       | (3,773           | )          | 16,687           |       |
|                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Income tax  expense                           |       | —                                              |       | —                                        |       | —                   |       | —                              |       | —           |       | —           |       |
| Net income  (loss)                            |       | 16,687                                              |       | (428                                          | )          | (129                     | )          | 4,330                               |       | (3,773           | )          | 16,687           |       |
| Preferred  stock dividends                    |       | (792                                                | )          | —                                        |       | —                   |       | —                              |       | —           |       | (792             | )          |
| Net income  (loss) allocable to common shares |       | $                                                   | 15,895     |                                          | $          | (428                     | )          | $                                   | (129       | )                | $          | 4,330            |       | $ | (3,773 | ) | $ | 15,895 |   |

 

19

----

 

**(9)****         Guarantor Subsidiaries (Continued)**

 

**CondensedConsolidating Statement of Operations (unaudited)Three Months Ended January 31, 2004**

 
| ** **                                    | ** ** | **The Company  Excluding  Guarantor  Subsidiaries** | ** ** | **Buick  Resource  Recycling  Facility, LLC** | ** ** | **Domestic  Guarantors** | ** ** | **Doe Run  Cayman and  Subsidiary** | ** ** | **Eliminations** | ** ** | **The  Company** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------|------------|-------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | ** **                                          | ** ** | ** **                                    | ** ** | ** **               | ** ** |
| ** **                                    | ** ** | ** **                                          | ** ** | ** **                                    | ** ** | ** **               | ** ** |
| ** **                                    | ** ** | ** **                                          | ** ** | ** **                                    | ** ** | ** **               | ** ** |
|                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Net sales                                     |       | $                                                   | 67,187     |                                          | $          | —                   |       | $                                   | 2,808      |             | $          | 122,973          |       | $ | (2,964 | ) | $ | 190,004 |   |
|                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Costs and  expenses:                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Cost of  sales                                |       | 57,984                                              |       | —                                        |       | 2,167                    |       | 118,588                             |       | (328             | )          | 178,411          |       |
| Depletion,  depreciation and amortization     |       | 2,483                                               |       | 854                                           |       | 211                      |       | 2,917                               |       | —           |       | 6,465            |       |
| Selling,  general and administrative          |       | 5,681                                               |       | —                                        |       | 606                      |       | 5,495                               |       | (2,656           | )          | 9,126            |       |
| Unrealized  loss on derivatives               |       | 4,390                                               |       | —                                        |       | —                   |       | 634                                 |       | —           |       | 5,024            |       |
| Other                                         |       | 1,002                                               |       | 29                                            |       | (1                       | )          | 1                                   |       | —           |       | 1,031            |       |
| Total costs  and expenses                     |       | 71,540                                              |       | 883                                           |       | 2,983                    |       | 127,635                             |       | (2,984           | )          | 200,057          |       |
|                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Income  (loss) from operations                |       | (4,353                                              | )          | (883                                          | )          | (175                     | )          | (4,662                              | )          | 20               |       | (10,053          | )          |
|                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Other income  (expense):                      |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Interest  expense, net                        |       | (2,524                                              | )          | —                                        |       | (175                     | )          | (478                                | )          | —           |       | (3,177           | )          |
| Other, net                                    |       | (112                                                | )          | 195                                           |       | (2                       | )          | (131                                | )          | —           |       | (50              | )          |
| Equity in  earnings of subsidiaries           |       | (6,291                                              | )          | —                                        |       | —                   |       | —                              |       | 6,291            |       | —           |       |
|                                          |       | (8,927                                              | )          | 195                                           |       | (177                     | )          | (609                                | )          | 6,291            |       | (3,227           | )          |
|                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Income  (loss) before income tax expense      |       | (13,280                                             | )          | (688                                          | )          | (352                     | )          | (5,271                              | )          | 6,311            |       | (13,280          | )          |
|                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Income tax  expense                           |       | 565                                                 |       | —                                        |       | —                   |       | —                              |       | —           |       | 565              |       |
| Net income  (loss)                            |       | (13,845                                             | )          | (688                                          | )          | (352                     | )          | (5,271                              | )          | 6,311            |       | (13,845          | )          |
| Preferred  stock dividends                    |       | (625                                                | )          | —                                        |       | —                   |       | —                              |       | —           |       | (625             | )          |
| Net income  (loss) allocable to common shares |       | $                                                   | (14,470    | )                                             | $          | (688                     | )          | $                                   | (352       | )                | $          | (5,271           | )          | $ | 6,311 |   | $ | (14,470 | ) |

 

20

----

 

**(9)****         Guarantor Subsidiaries (Continued)**

 

**CondensedConsolidating Statement of Cash Flows (unaudited)Three Months Ended January 31, 2005**

 
| ** **                                                    | ** ** | **The Company  Excluding  Guarantor  Subsidiaries** | ** ** | **Buick  Resource  Recycling  Facility, LLC** | ** ** | **Domestic  Guarantors** | ** ** | **Doe Run  Cayman and  Subsidiary** | ** ** | **Eliminations** | ** ** | **The  Company** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------|------------|-------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    | ** ** | ** **                                          | ** ** | ** **                                    | ** ** | ** **               | ** ** |
| ** **                                                    | ** ** | ** **                                          | ** ** | ** **                                    | ** ** | ** **               | ** ** |
| ** **                                                    | ** ** | ** **                                          | ** ** | ** **                                    | ** ** | ** **               | ** ** |
|                                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Net cash  provided by (used in) operating activities          |       | $                                                   | (844       | )                                             | $          | 196                      |       | $                                   | (175       | )                | $          | 9,123            |       | $ | (4,454 | ) | $ | 3,846 |   |
|                                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Cash flows  from investing activities:                        |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Purchases of  property, plant and equipment                   |       | (3,816                                              | )          | —                                        |       | (105                     | )          | (12,648                             | )          | —           |       | (16,569          | )          |
| Investment  in subsidiaries                                   |       | (4,454                                              | )          | —                                        |       | —                   |       | —                              |       | 4,454            |       | —           |       |
| Net cash  provided by (used in) investing activities          |       | (8,270                                              | )          | —                                        |       | (105                     | )          | (12,648                             | )          | 4,454            |       | (16,569          | )          |
|                                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Cash flows  from financing activities:                        |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Proceeds  from revolving loans and short-term borrowings, net |       | (2,677                                              | )          | —                                        |       | —                   |       | 580                                 |       | —           |       | (2,097           | )          |
| Payments on  long-term debt                                   |       | —                                              |       | —                                        |       | —                   |       | (12                                 | )          | —           |       | (12              | )          |
| Due to/due  from parent/subsdiaries                           |       | (84                                                 | )          | (196                                          | )          | 280                      |       | —                              |       | —           |       | —           |       |
| Net cash  provided by (used in) financing activities          |       | (2,761                                              | )          | (196                                          | )          | 280                      |       | 568                                 |       | —           |       | (2,109           | )          |
|                                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Net decrease  in cash                                         |       | (11,875                                             | )          | —                                        |       | —                   |       | (2,957                              | )          | —           |       | (14,832          | )          |
|                                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Cash at  beginning of period                                  |       | 13,412                                              |       | —                                        |       | 1                        |       | 6,905                               |       | —           |       | 20,318           |       |
| Cash at end  of period                                        |       | $                                                   | 1,537      |                                          | $          | —                   |       | $                                   | 1          |             | $          | 3,948            |       | $ | — |   | $ | 5,486 |   |

 

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**(9)****         Guarantor Subsidiaries (Continued)**

 

**CondensedConsolidating Statement of Cash Flows (unaudited)Three Months Ended January 31, 2004**

 
| ** **                                                    | ** ** | **The Company  Excluding  Guarantor  Subsidiaries** | ** ** | **Buick  Resource  Recycling  Facility, LLC** | ** ** | **Domestic  Guarantors** | ** ** | **Doe Run  Cayman and  Subsidiary** | ** ** | **Eliminations** | ** ** | **The  Company** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------|------------|-------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    | ** ** | ** **                                          | ** ** | ** **                                    | ** ** | ** **               | ** ** |
| ** **                                                    | ** ** | ** **                                          | ** ** | ** **                                    | ** ** | ** **               | ** ** |
| ** **                                                    | ** ** | ** **                                          | ** ** | ** **                                    | ** ** | ** **               | ** ** |
|                                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Net cash  provided by (used in) operating activities          |       | $                                                   | (5,703     | )                                             | $          | 166                      |       | $                                   | (171       | )                | $          | (3,625           | )          | $ | 6,291 |   | $ | (3,042 | ) |
|                                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Cash flows  from investing activities:                        |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Purchases of  property, plant and equipment                   |       | (2,019                                              | )          | —                                        |       | —                   |       | (3,524                              | )          | —           |       | (5,543           | )          |
| Investment  in subsidiaries                                   |       | 6,291                                               |       | —                                        |       | —                   |       | —                              |       | (6,291           | )          | —           |       |
| Net cash  provided by (used in) investing activities          |       | 4,272                                               |       | —                                        |       | —                   |       | (3,524                              | )          | (6,291           | )          | (5,543           | )          |
|                                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Cash flows  from financing activities:                        |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Proceeds  from revolving loans and short-term borrowings, net |       | 4,245                                               |       | —                                        |       | —                   |       | 1,000                               |       | —           |       | 5,245            |       |
| Payments on  long-term debt                                   |       | (28                                                 | )          | —                                        |       | —                   |       | (1,183                              | )          | —           |       | (1,211           | )          |
| Due to/due  from parent/subsdiaries                           |       | (2,786                                              | )          | (166                                          | )          | 171                      |       | 2,781                               |       | —           |       | —           |       |
| Net cash  provided by (used in) financing activities          |       | 1,431                                               |       | (166                                          | )          | 171                      |       | 2,598                               |       | —           |       | 4,034            |       |
|                                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Net decrease  in cash                                         |       | —                                              |       | —                                        |       | —                   |       | (4,551                              | )          | —           |       | (4,551           | )          |
|                                                          |       |                                                |       |                                          |       |                     |       |                                |       |             |       |             |       |
| Cash at  beginning of period                                  |       | —                                              |       | —                                        |       | —                   |       | 16,794                              |       | —           |       | 16,794           |       |
| Cash at end  of period                                        |       | $                                                   | —     |                                          | $          | —                   |       | $                                   | —     |             | $          | 12,243           |       | $ | — |   | $ | 12,243 |   |

 

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**DOE RUN PERU S.R.L.Condensed Balance Sheets(U.S. dollars in thousands, except share data)**

 
| ** **                                                         | ** ** | **January 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                         | ** ** | ** **                 | ** ** |
| ** **                                                         | ** ** | **(unaudited)**            | ** ** | ** **                 | ** ** |
| **ASSETS**                                                         | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Current  assets:                                                   |       |                       |       |                       |       |
| Cash                                                               |       | $                          | 3,948      |                       | $          | 6,905 |   |
| Trade  accounts receivable, net of allowance for doubtful accounts |       | 18,703                     |       | 22,217                     |       |
| Inventories                                                        |       | 76,218                     |       | 65,876                     |       |
| Prepaid  expenses and other current assets                         |       | 32,698                     |       | 15,901                     |       |
| Total  current assets                                              |       | 131,567                    |       | 110,899                    |       |
|                                                               |       |                       |       |                       |       |
| Property,  plant and equipment, net                                |       | 150,215                    |       | 140,743                    |       |
| Other  noncurrent assets, net                                      |       | 89                         |       | 122                        |       |
| Total assets                                                       |       | $                          | 281,871    |                       | $          | 251,764 |   |
|                                                               |       |                       |       |                       |       |
| **LIABILITIES  AND SHAREHOLDERS’ DEFICIT**                    | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Current  liabilities:                                              |       |                       |       |                       |       |
| Current  maturities of long-term debt                              |       | $                          | 39,996     |                       | $          | 39,400 |   |
| Accounts  payable                                                  |       | 67,815                     |       | 44,092                     |       |
| Accrued  liabilities                                               |       | 28,633                     |       | 27,199                     |       |
| Due to  related parties                                            |       | 144,063                    |       | 143,063                    |       |
| Total  current liabilities                                         |       | 280,507                    |       | 253,754                    |       |
|                                                               |       |                       |       |                       |       |
| Long-term  debt, less current maturities                           |       | 24                         |       | —                     |       |
| Due to  parent company and related parties                         |       | 16,432                     |       | 17,432                     |       |
| Other  noncurrent liabilities                                      |       | 3,460                      |       | 3,460                      |       |
| Total liabilities                                                  |       | 300,423                    |       | 274,646                    |       |
|                                                               |       |                       |       |                       |       |
| Shareholders’  deficit:                                       |       |                       |       |                       |       |
| Capital  stock, $0.01 par value, 15,912,083,739 shares, fully paid |       | 2,005                      |       | 2,005                      |       |
| Accumulated  deficit and other comprehensive loss                  |       | (20,557                    | )          | (24,887                    | )          |
| Total  shareholders’ deficit                                  |       | (18,552                    | )          | (22,882                    | )          |
| Total  liabilities and shareholders’ deficit                  |       | $                          | 281,871    |                       | $          | 251,764 |   |

 

The accompanying notes are an integral partof these condensed financial statements.

 

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**DOE RUN PERU S.R.L.Condensed Statements of Operations (unaudited)(U.S. dollars in thousands)**

 
| ** **                                | ** **   | **Three Months  Ended January 31,** | ** **   |
|-------------------------------------------|--------------|------------------------------------------|--------------|
| ** **                                | ** **   | ** **                               |
| ** **                                | ** **   | **2005**                                 | ** **   | **2004** | ** ** |
| *** ***                              | *** *** | *** ***                             | *** *** | *** *** | *** *** |
| Net sales                                 |         | $                                        | 150,786      |   | $ | 122,973 |   |
|                                      |         |                                     |         |   |   |
| Costs and  expenses:                      |         |                                     |         |   |   |
| Cost of  sales                            |         | 138,364                                  |         | 118,588 |   |
| Depletion,  depreciation and amortization |         | 3,155                                    |         | 2,917 |   |
| Selling,  general and administrative      |         | 4,215                                    |         | 5,495 |   |
| Unrealized  loss on derivatives           |         | 311                                      |         | 634 |   |
| Other                                     |         | 134                                      |         | 1 |   |
| Total costs  and expenses                 |         | 146,179                                  |         | 127,635 |   |
|                                      |         |                                     |         |   |   |
| Income  (loss) from operations            |         | 4,607                                    |         | (4,662 | ) |
|                                      |         |                                     |         |   |   |
| Other income  (expense):                  |         |                                     |         |   |   |
| Interest  expense, net                    |         | (606                                     | )            | (478 | ) |
| Other, net                                |         | 329                                      |         | (131 | ) |
|                                      |         | (277                                     | )            | (609 | ) |
| Income  (loss) before income tax expense  |         | 4,330                                    |         | (5,271 | ) |
|                                      |         |                                     |         |   |   |
| Income tax  expense                       |         | —                                   |         | — |   |
|                                      |         |                                     |         |   |   |
| Net income  (loss)                        |         | $                                        | 4,330        |   | $ | (5,271 | ) |

 

The accompanying notes are an integral partof these condensed financial statements.

 

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**DOE RUN PERU S.R.L.Condensed Statements of Cash Flows (unaudited)(U.S. dollars in thousands)**

 
| ** **                                           | ** **   | **Three Months  Ended January 31,** | ** **   |
|------------------------------------------------------|--------------|------------------------------------------|--------------|
| ** **                                           | ** **   | ** **                               |
| ** **                                           | ** **   | **2005**                                 | ** **   | **2004** | ** ** |
| *** ***                                         | *** *** | *** ***                             | *** *** | *** *** | *** *** |
| Net cash  provided by (used in) operating activities |         | $                                        | 9,123        |   | $ | (3,625 | ) |
|                                                 |         |                                     |         |   |   |
| Cash flows  from investing activities:               |         |                                     |         |   |   |
| Purchases of  property, plant and equipment          |         | (12,648                                  | )            | (3,524 | ) |
| Net cash  used in investing activities               |         | (12,648                                  | )            | (3,524 | ) |
|                                                 |         |                                     |         |   |   |
| Cash flows  from financing activities:               |         |                                     |         |   |   |
| Proceeds  from revolving loans, net                  |         | 580                                      |         | 1,000 |   |
| Payments on  long-term debt                          |         | (12                                      | )            | (1,183 | ) |
| Increase in  amount due to related parties           |         | —                                   |         | 2,781 |   |
| Net cash  provided by financing activities           |         | 568                                      |         | 2,598 |   |
|                                                 |         |                                     |         |   |   |
| Net decrease  in cash                                |         | (2,957                                   | )            | (4,551 | ) |
|                                                 |         |                                     |         |   |   |
| Cash at  beginning of period                         |         | 6,905                                    |         | 16,794 |   |
| Cash at end  of period                               |         | $                                        | 3,948        |   | $ | 12,243 |   |

 

The accompanying notes are an integral partof these condensed financial statements.

 

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**DOE RUN PERU S.R.LNotes to Financial Statements(U.S. dollars in thousands)**

 

**(1)****         Summary of SignificantAccounting Policies**

 

***Unaudited Interim FinancialStatements***

 

These interim financialstatements include the accounts of Doe Run Peru S.R.L. (Doe Run Peru or theCompany). In the opinion of management, the interim financial statementscontain all adjustments, consisting of normal recurring accruals, necessary topresent fairly the financial position as of January 31, 2005 and resultsof operations for the three-month periods ended January 31, 2005 and2004.  All material intercompany balancesand transactions have been eliminated. Interim periods are not necessarily indicative of results to be expectedfor the year.

 

**(2)****         Inventories**

 

Inventories consist of the following:

 
| ** **                            | ** ** | **January 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|---------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | ** **                 | ** ** |
|                                  |       |                       |       |                       |       |
| Finished  metals and concentrates     |       | $                          | 9,690      |                       | $          | 8,356 |   |
| Metals and  concentrates in process   |       | 54,853                     |       | 44,523                     |       |
| Materials,  supplies and repair parts |       | 11,675                     |       | 12,997                     |       |
|                                  |       | $                          | 76,218     |                       | $          | 65,876 |   |

 

Materials, supplies and repair parts arestated net of reserves for obsolescence of approximately $791 and $1,436 at January 31,2005 and October 31, 2004, respectively.

 

**(3)****         Income Taxes**

 

On December 26,2003, Peru’s tax authority, SUNAT, notified Doe Run Peru of an income taxassessment for the 1998 tax year. On December 23, 2004, assessments werereceived for tax years 1999 through 2001. The assessments primarily relate toDoe Run Peru’s income tax treatment of the December 1997 merger of Doe RunPeru and Metaloroya S.A., which was purchased by Doe Run Peru in October 1997,and its effects on subsequent years’ taxable income. Under the assessment bySUNAT, the tax basis of Doe Run Peru’s fixed assets acquired would decrease,resulting in lower tax depreciation expense than originally claimed. Theassessed amount consisting of additional income taxes due, penalties andinterest totals approximately $102,500.

 

The Companyestimates that the effect of a similar assessment for tax years after 2001would be approximately $1,400.

 

Furthermore, Doe Run Peru would also be required to make additionalworkers’ profit sharing payments equal to 8% of the increase in taxable incomegenerated by the changes discussed above, or approximately $5,800 for tax years1998 through 2004.

 

On November 15,2004, SUNAT notified Doe Run Peru of a Value-Added Tax (VAT) assessment for theperiod from January through July 2004.  On December 23, 2004. Doe Run Perureceived additional VAT assessments for tax years 1999 through 2001.  The assessments primarily relate to Doe RunPeru’s exports with holding certificates and differences in a tax creditapplication. The total assessment for these periods was approximately $41,000.SUNAT offset the amount assessed for 2004 of approximately $2,300 against DoeRun Peru’s VAT receivable balance from July 2004.  Future VAT reimbursements cannot be used tooffset the assessment by SUNAT.  TheCompany estimates expected additional assessments related to VAT for tax years2002 and 2003 to total approximately $19,000 in regard to its exports withholding certificates.

 

Management of theCompany believes that in each case Doe Run Peru has followed the applicablePeruvian tax statutes and intends to pursue all available administrative andjudicial appeals. Doe Run Peru is not required to make any paymentspending the administrative appeal process. If Doe Run Peru is not successful inthe

 

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administrative appeal processes and were to appeal in the judicialsystem, some type of financial assurance would be required. No amounts have been accrued asliabilities related to these actions.

 

**(4)****         Asset Retirement andEnvironmental Obligations**

 

#### ***AssetRetirement Obligations***

#### ** **

Assetretirement obligations (AROs) are recognized as liabilities when incurred, withthe initial measurement at fair value. These liabilities will be increased to full value over time throughcharges of accretion to operating expense. In addition, an asset retirement cost is capitalized as part of therelated asset’s carrying value and will be depreciated over the asset’s usefullife.  Changes in the ARO liabilityresulting from revisions to the timing or the amount of the original estimateof undiscounted cash flows shall be recognized as an increase or a decrease inthe carrying amount of the liability for an ARO and the related assetretirement cost capitalized as part of the carrying amount of the relatedlong-lived asset.

 

Doe Run Peru hasAROs at its Cobriza mine related to the costs associated with closing the mineopenings and covering acid rock.  Doe RunPeru is also responsible for the covering and revegetation of mixed lead andcopper slag stored in Huanchan, an area a short distance from the smelter wherethe slag is currently stored.

 

The Company’stotal recorded liability for AROs was approximately $1,900 as of January 31,2005 and October 31, 2004.

 

#### ***EnvironmentalRemediation***

#### ** **

La Oroya’soperations historically and currently exceed some of the applicable Ministry ofEnergy and Mines (MEM) maximum permissible limits pertaining to air emissionsand wastewater effluent quality. The Environmental Remediation and ManagementProgram (PAMA) projects, which are more fully discussed below, have beendesigned to achieve compliance with these requirements. There can be noassurance that the Peruvian government will not, in the future, requirecompliance with additional environmental regulations that could adverselyaffect Doe Run Peru’s business, financial condition and results of operations.

 

MetaloroyaS.A., the former owner of the La Oroya smelter, at the time a subsidiary ofCentromin, received approval from the Peruvian government for a PAMA thatconsisted of an environmental impact analysis, monitoring plan and data,mitigation measures and closure plan. Doe Run Peru assumed the obligationsunder the PAMA. The PAMA also sets forth the actions and corresponding annualinvestments the concession holder agrees to undertake in order to achievecompliance with the maximum permissible limits prior to expiration of the PAMA(ten years for smelters, such as Doe Run Peru’s operations in La Oroya, andfive years for any other type of mining or metallurgical operation likeCobriza). After expiration of the PAMA, the operator must comply with allapplicable standards and requirements. Because these costs improve the propertyor prevent future environmental contamination, they are capitalized.

 

Doe Run Peruhas committed under its current approved PAMA to implement the followingprojects at its La Oroya smelter through December 31, 2006:

 

•                  New sulfuric acid plants

•                  Treatment plant for the copper refinery effluent

•                  Industrial wastewater treatment plant for the smelter and refinery

•                  Improve the slag handling system

•                  Improve Huanchan lead and copper slag deposits

•                  Build an arsenic trioxide deposit

•                  Improve the zinc ferrite disposal site

•                  Domestic wastewater treatment and domestic waste disposal

•                  Monitoring station

 

An investment schedule inthe PAMA provides a specific plan for achieving the applicable MEM maximumpermissible limits pertaining to air emissions and wastewater effluent quality.The PAMA may be modified and

 

27

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amended as to the actualdesign and timing of projects to be implemented, provided compliance with theapplicable maximum permissible limits is achieved by December 31, 2006.The required estimated annual spending on a calendar year basis for theprojects approved in the La Oroya PAMA, as amended, most recently on January 25,2002, are as follows:

 

| **Year** | ** ** | **Estimated  Cost** | ** ** |
|----------|------------|---------------------|------------|
|     |       |                |       |
| 2005     |       |                | $          | 53,500 |   |
| 2006     |       |                | 67,700     |   |
|     |       |                | $          | 121,200 |   |

 

Doe Run Peru expects that it will not be ableto comply with the spending requirements of La Oroya’s PAMA investment schedule in2005 and 2006 with respect to the construction of a sulfuric acid plantrequired by the PAMA and, as a result, could be subject to penalties. Failureto comply with the PAMA could result in the cessation of operations at the LaOroya smelter.

 

On December 29, 2004 the PeruvianGovernment issued a Supreme Decree, which recognized that exceptionalcircumstances may justify an extension of one or more projects within the scopeof a PAMA. The Supreme Decree specifies that companies have until December 31,2005 to apply for an extension.  The maximum extension is for three yearsand the MEM may authorize an additional year based upon the results of a healthrisk study.

 

Doe Run intends toapply for an extension to complete the construction of a sulfuric acid plantcontemplated by the original PAMA. The application for a PAMA extension must besupported by a health risk study performed by a third party. The applicationmust contain an engineering description and funding plan of any project to beextended, a discussion of how and when environmental emission standards will bemet, a plan to monitor emissions with the participation of the community, proofthat at least three public workshops were held in various districts to provideinformation on Doe Run Peru’s financial situation and health programs, proofthat two public hearings were held regarding the extension plans, and otherfinancial information. In order to meet these requirements, the Company doesnot expect to apply for the extension until the end of 2005.

 

Upon approval of a modified PAMA, Doe RunPeru would be required to create a trust account. The trust account wouldadminister the receipts and disbursements related to the extended PAMA project.The Supreme Decree requires that receipts from sales be remitted monthlydirectly to the trust account, in an amount sufficient to fund the month’s cashrequirements of the extended PAMA projects. Such an arrangement is prohibitedby the Doe Run Peru Revolving Credit Facility, which expires on September 23,2005.  Accordingly, a renegotiated DoeRun Peru credit facility will need to comply with the requirements establishedby the Supreme Decree, should Doe Run Peru’s PAMA be extended.

 

The Supreme Decree also requires that, within30 days of the approval of the PAMA extension, the Company provide financialsecurity in an amount equal to 20% of the projected cost of the project orprojects to be extended. The Company currently expects the overall investmentrequired to build the sulfuric acid plant to be approximately $102,000. TheCompany cannot assure that it will be successful in obtaining the necessaryfinancial security required.

 

Doe Run Peru will perform other environmentalprojects to reduce fugitive emissions, including heavy metal dust, to addressthe health issues of the community. As of January 31, 2005, the remainingtotal cost of the current PAMA projects, including the sulfuric acid plantconstruction, and these projects is approximately $136,000.

 

Management believes that Doe Run Peru willobtain an approval of an extension to complete the sulfuric acid plant. Thereis no assurance, however, that Doe Run Peru will receive an extension, or, ifit does, that the project will be completed within the time limitationspecified by the Supreme Decree.

 

The PAMA projects have been designed toachieve compliance with such requirements prior to the expiration of the PAMA.No assurance can be given that implementation of the PAMA projects is feasibleor that their

 

28

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implementation will achieve compliance withthe applicable legal requirements by the end of the PAMA period. Further, therecan be no assurance that the Peruvian government will not in the future requirecompliance with additional or different environmental obligations that couldadversely affect Doe Run Peru’s business, financial condition and results ofoperations.

 

Under the purchase agreement related to theacquisition of the La Oroya assets in October 1997, Centromin, the priorowner of the La Oroya smelter and Cobriza mine, agreed to indemnify Doe RunPeru against environmental liability arising out of its prior operations andtheir apportioned share of any other complaint related to emissions.Performance of the indemnity has been guaranteed by the Peruvian governmentthrough the enactment of the Supreme Decree No. 042-97-PCM. However, there canbe no assurance that Centromin will satisfy its environmental obligations andinvestment requirements, including those in its PAMA, or that the guaranteewill be honored. Any failure by Centromin to satisfy its environmentalobligations could adversely affect Doe Run Peru’s business, financial conditionand results of operations.

 

The Cobriza mine has a separate PAMA in whichDoe Run Peru has committed to complete projects to manage tailings, minedrainage, sewage and garbage. As of June 2004, Doe Run Peru ceaseddischarging mine waste into the Mantaro River and was in compliance with theemissions standards required by the PAMA.

 

Doe Run Peru is responsible for theremediation costs relating to a zinc ferrite disposal site. The current closureplan provides for encapsulating the ferrite residues in place at Huanchan, anarea a short distance from the smelter where they are currently stored, forwhich an environmental liability of $1,600 has been recorded as of January 31,2005 and October 31, 2004.

 

**(5)*****        *Litigation**

 

Doe Run Peru is a defendant in 123 lawsuitsin the Lima, Peru labor courts whereby workers have alleged damages fromindustrial diseases.  Doe Run Peru hasmade claims in most of the cases against Centromin and has also made claimsagainst both governmental agencies and private companies that provide workers’insurance.  The average claim is$18.  Of seven concluded cases in thiscategory, six were dismissed and one resulted in a payment by Doe Run Peru of$9.

 

Doe Run Peru is also a defendant in 136lawsuits by workers alleging that they are owed certain differences in salariesand benefits.  The average claim is$23.  Of 22 concluded cases in thiscategory, 21 were dismissed and one resulted in a payment by Doe Run Peru of$2. Doe Run Peru is also a defendant in a lawsuit by the Yauli-La OroyaEmployees Union concerning salaries and benefits.  The claims ofthe 150 workers remaining in the lawsuit total approximately $660.

 

On January 19, 2005, Doe Run Peru wasserved with a lawsuit by an association of municipalities of the Junin Regionof Peru against Doe Run Peru and two other mining companies.  This lawsuit alleges environmental damages tothe Mantaro River basin in the amount of $5.0 billion.  Material liability to Doe Run Peru isbelieved to be remote because it is the opinion of management and outsidecounsel for Doe Run Peru that the probability under Peruvian law ofthis case proceeding to a conclusion at the favor of the plaintiffs is low. Anypotential judgment would be subject to the indemnification obligations ofCentromin, which are guaranteed by the Peruvian government.

 

TheCompany is unable at this time to estimate the expected outcome and the finalcosts, except as noted, of these actions. No amounts have been accrued asliabilities related to these actions. There can be no assurance that thesecases would not have a material adverse effect, both individually and in theaggregate, on the results of operations, financial condition and liquidity ofthe Company. The Company has and will continue to vigorously defend itselfagainst such claims.

 

**(6)****         Financial Condition**

 

For the year ended October 31, 2003 andfor several years prior, Doe Run Peru reported recurring losses, primarily dueto the decline of treatment charges Doe Run Peru received for processing rawmaterials over the prior five years, which had severely impacted Doe Run Peru’sliquidity. The Company has substantial

 

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environmental commitments that will affectthe Company’s liquidity. These issues raise substantial doubt about the Company’sability to continue as a going concern.

 

There wasvirtually no availability under the Doe Run Peru Revolving Credit Facility atJanuary 31, 2005 and October 31, 2004. Continued high metal prices haveresulted in outlays for concentrate purchases and value-added tax (VAT) paymentsbeing funded by cash from operations, as Doe Run Peru has reached its maximumborrowing level under the Doe Run Peru Revolving Credit Facility. VAT depositsto be received by Doe Run Peru increased $13.3 million in the 2005 quarter, dueto a delay in receiving reimbursements and higher metal prices. In response tothe lack of borrowing availability, Doe Run Peru extended payments to itssuppliers, which in addition to increased metal prices, resulted in an increasein accounts payable in the first quarter of 2005.

 

As discussed in Note 4, Doe Run Peru’sexisting PAMA requires it to perform projects in 2005 and 2006 at a total costof $121,200. Doe Run Peru expects that it will not be able to comply with thespending requirements of the PAMA investment schedule in 2005 and 2006with respect to the construction of a sulfuric acid plant required by the PAMAand, as a result, could be subject to penalties. Failure to comply with thePAMA could result in the cessation of operations at the La Oroya smelter.

 

The Peruvian Government has issued theSupreme Decree, which recognized that exceptional circumstances may justify anextension of one or more projects within the scope of a PAMA. Doe Run Peru willsubmit an application for extension to modify the requirements of the existingPAMA and extend the term of the PAMA to complete the construction of thesulfuric acid plant contemplated by the original PAMA. Doe Run Peru willperform other environmental projects to reduce fugitive emissions, includingheavy metal dust, to address the health issues of the community. As of January 31,2005, the remaining total cost of the current PAMA projects, including thesulfuric acid plant construction, and these projects is approximately $136,000.If the extension of the PAMA is approved, management expects to fund the PAMAprojects from cash from operations.

 

Upon approval of a modified PAMA, Doe RunPeru would be required to create a trust account. The trust account wouldadminister the receipts and disbursements related to the extended PAMA project.The Supreme Decree requires that receipts from sales be remitted monthlydirectly to the trust account, in an amount sufficient to fund the month’s cashrequirements of the extended PAMA projects,. Such an arrangement is prohibitedby Doe Run Peru’s revolving credit facility (the Doe Run Peru Revolving CreditFacility), which expires on September 23, 2005. Accordingly, arenegotiated Doe Run Peru Revolving Credit Facility will need to comply withthe requirements established by the Supreme Decree, should Doe Run Peru’s PAMAbe extended.

 

The Supreme Decree also requires that, within30 days of the approval of the PAMA extension, the Company provide financialsecurity in an amount equal to 20% of the projected cost of the project orprojects to be extended. The Company currently expects the overall investmentrequired to build the sulfuric acid plant to be approximately $102,000.

 

Management believes that Doe Run Peru willobtain an approval of an extension to complete the sulfuric acid plant. Thereis no assurance, however, that Doe Run Peru will receive an extension, or, ifit does, that the project will be completed within the time limitationspecified by the Supreme Decree. Doe Run Peru has developed a business planthat identifies several revenue generating and cost reduction activities.Management believes the plan will enhance liquidity, which is expected toimprove Doe Run Peru’s ability to make the investments under the PAMA, assumingan extension is received. Revenue enhancement and cost reduction projectsinclude the processing of zinc ferrites and an effort to bring more recycledfeed into the smelter. Cost reduction measures include manpower reductionsthrough voluntary retirement and decreased power usage in the zinc circuit.

 

Doe Run Peru has received assessments ofincome tax, including penalties and interest, and Value Added Tax (VAT)totaling $102,500 and $41,000, respectively, as discussed in Note 3. Inaddition, the Company estimates that the effect of similar assessments forperiods not yet assessed would be approximately $1,400 and $19,000 for theincome tax and VAT matters, respectively. Furthermore, Doe Run Peru would alsobe required to make additional workers’ profit sharing payments equal to 8% ofthe increase in taxable income generated by the changes discussed above, orapproximately $5,800 for tax years 1998 through 2004.

 

Management of the Company believes that ineach case Doe Run Peru has followed the applicable Peruvian tax statutes andintends to pursue all available administrative and judicial appeals. Doe RunPeru is not required to make any payments pending the administrative appealprocess. If Doe Run Peru is not successful in the administrative appealprocesses and were to appeal in the judicial system, some type of financialassurance would be required, which would have a significant adverse effect onliquidity.

 

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**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

 

The following discussion and analysis should be readin conjunction with the condensed consolidated financial statements of The DoeRun Resources Corporation (Doe Run and together with its subsidiaries, theCompany) and the notes thereto, and other financial information includedherein.

 

***Forward-LookingStatements***

 

*ThePrivate Securities Litigation Reform Act of 1995 provides a “safe harbor” forforward-looking statements. The Company makes forward-looking statements inthis Quarterly Report on Form 10-Q, which represent the Company’s expectationsor beliefs about future events and financial performance. When used in thisreport, the words “expect,” “believe,” “anticipate,” “goal,” “plan,” “intend,” “estimate,”“may,” “will” or similar words are intended to identify forward-lookingstatements. These forward-looking statements are subject to known and unknownrisks, uncertainties and assumptions, including those referred to in thisQuarterly Report on Form 10-Q and otherwise described in the Company’s periodicfilings.*

 

*Allpredictions as to future results contain a measure of uncertainty, andaccordingly, actual results could differ materially. Among the factors thatcould cause actual results to differ from those contemplated, projected orimplied by the forward-looking statements (the order of which does notnecessarily reflect their relative significance) are: general economic andbusiness conditions; increasing industry capacity and levels of imports ofnon-ferrous metals or non-ferrous metals products; industry trends, includingthe price of metals, product pricing; competition; currency fluctuations; theloss of any significant customer or suppliers; availability of raw materials;availability of qualified personnel; effects of future collective bargainingagreements; outcome of litigation; changing environmental requirements andcosts, including the capital requirements in Peru; political uncertainty andterrorism; major equipment failures; changes in accounting principles or newaccounting standards; compliance with laws and regulations and other unforeseencircumstances.*

 

*Inlight of these risks, uncertainties and assumptions, the forward-looking eventsdiscussed may not occur. In addition, actual results could differ materiallyfrom those suggested by the forward-looking statements. Accordingly, investorsare cautioned not to place undue reliance on the forward-looking statements.Except as required by law, the Company undertakes no obligation to publiclyupdate or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise. Investors should, however, reviewadditional disclosures made by the Company from time to time in its periodicfilings with the Securities and Exchange Commission.*

 

*This Quarterly Report on Form 10-Q should be readcompletely and with the understanding that the Company’s actual future resultsmay be materially different from what the Company expects. All forward-lookingstatements made by the Company in this Quarterly Report on Form 10-Q and in theCompany’s other filings with the Securities and Exchange Commission arequalified by these cautionary statements.*

 

***Recent Events***

 

*Doe Run Peru*

 

Doe Run Peru expects that it will not be able to comply with thespending requirements of La Oroya’s PAMA investment schedule in 2005 and2006 with respect to the construction of a sulfuric acid plant required by thePAMA and, as a result, could be subject to penalties.

 

On December 29, 2004the Peruvian Government issued Supreme Decree No. 046-2004-EM (Supreme Decree),which recognized that exceptional circumstances may justify an extension of oneor more projects within the scope of a PAMA.  The Supreme Decree specifiesthat companies have until December 31, 2005 to apply for anextension.  The maximum extension is for three years and the MEM mayauthorize an additional year based upon the results of a health risk study.

 

Doe Run intends to apply for an extension to complete the constructionof the sulfuric acid plant contemplated by the original PAMA.

 

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The applicationfor a PAMA extension must be supported by a health risk study performed by athird party. The application must contain an engineering description andfunding plan of any project to be extended, a discussion of how and whenenvironmental emission standards will be met, a plan to monitor emissions withthe participation of the community, proof that at least three public workshopswere held in various districts to provide information on Doe Run Peru’sfinancial situation and health programs, proof that two public hearings wereheld regarding the extension plans, and other financial information. In orderto meet these requirements, the Company does not expect to apply for theextension until the end of 2005.

 

Upon approval of a modified PAMA, Doe RunPeru would be required to create a trust account. The trust account wouldadminister the receipts and disbursements related to the extended PAMA project.The Supreme Decree requires that receipts from sales be remitted monthlydirectly to the trust account, in an amount sufficient to fund the month’s cashrequirements of the extended PAMA projects. Such an arrangement is prohibitedby the Doe Run Peru Revolving Credit Facility, which expires on September 23,2005. Accordingly, a renegotiated Doe Run Peru Revolving Credit Facility willneed to comply with the requirements established by the Supreme Decree, shouldDoe Run Peru’s PAMA be extended.

 

The Supreme Decree also requires that, within30 days of the approval of the PAMA extension, the Company provide financialsecurity in an amount equal to 20% of the projected cost of the project orprojects to be extended. The Company currently expects the overall investmentrequired to build the sulfuric acid plant to be approximately $102.0 million.The Company cannot assure that it will be successful in obtaining the necessaryfinancial security required.

 

Doe Run Peru will perform other environmentalprojects to reduce fugitive emissions, including heavy metal dust, to addressthe health issues of the community. As of January 31, 2005 the remaining totalcost of the current PAMA projects, including the sulfuric acid plantconstruction, and these projects is approximately $136.0 million.

 

Management believes that Doe Run Peru willobtain an approval of an extension to complete the sulfuric acid plant. Thereis no assurance, however, that Doe Run Peru will receive an extension, or, ifit does, that the project will be completed within the time limitation specifiedby the Supreme Decree.

 

Doe Run Peru has implemented a business plan that identifies severalrevenue generating and cost reduction activities. Management believes the planwill enhance liquidity, which would improve Doe Run Peru’s ability to make theinvestments under the proposed modifications to the PAMA. Revenue enhancementand cost reduction projects include the processing of zinc ferrites and aneffort to bring more recycled feed into the smelter. Cost reduction measuresinclude manpower reductions through voluntary retirement and decreased powerusage in the zinc circuit.

 

Doe Run Peru has received assessments of income tax, includingpenalties and interest, and VAT totaling $102.5 million and $41.0 million,respectively.  The income tax assessmentsprimarily relate to Doe Run Peru’s income tax treatment of the December 1997merger of Doe Run Peru and Metaloroya S.A., which was purchased by Doe Run Peruin October 1997, and its effects on subsequent years’ taxable income.Under the assessment by SUNAT, the tax basis of Doe Run Peru’s fixed assetsacquired would decrease, resulting in lower tax depreciation expense thanoriginally claimed. The VAT assessments primarily relate to Doe Run Peru’sexports with holding certificates and differences in a tax credit application.See further discussion in “*Liquidity andCapital Resources.*” No amounts have been accrued as liabilities related tothese assessments.

 

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***Results of Operations***

 

*Metals Pricing*

 

The following table sets forth average LME prices for lead, copper andzinc and the average London Bullion Market Association (LBMA) price for silverfor the periods indicated:

 

| ** **             | ** ** | **Three Months Ended  January 31,** | ** ** |
|------------------------|------------|------------------------------------------|------------|
| ** **             | ** ** | ** **                               |
| **Average Prices**     | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Lead ($/ton)           |       | $                                        | 875.80     |   | $ | 627.80 |   |
| Copper  ($/ton)        |       | 2,853.20                                 |       | 2,022.40 |   |
| Zinc ($/ton)           |       | 1,062.80                                 |       | 880.40 |   |
| Silver  ($/troy ounce) |       | 7.08                                     |       | 5.71 |   |
|                        |            |                                          |            |  |  |  |  |

 

Theseprices reflect the significant tightening in worldwide metal supply and theweakening of the U.S. dollar. Supply has tightened due to mine closures andcutbacks and slowed development stemming from the low prices from 1998-2003.

 

*Production*

 

All references to “ton” are in short tons.

 

Thefollowing table sets forth the Company’s production statistics for the periodsindicated:

 

| ** **                                 | ** ** | **Three Months Ended  January 31,** | ** ** |
|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                 | ** ** | ** **                               |
| ** **                                 | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| U.S.  Operations                           |       |                                     |       |   |   |
| Lead metal -  primary (tons)               |       | 40,416                                   |       | 49,558 |   |
| Lead metal -  secondary (tons)             |       | 33,698                                   |       | 32,847 |   |
| Lead  concentrates (metal content, tons)   |       | 65,148                                   |       | 62,924 |   |
| Ore grade  (lead)                          |       | 5.36                                     | %          | 5.55 | % |
|                                       |       |                                     |       |   |   |
| Doe Run Peru  Operations                   |       |                                     |       |   |   |
| Refined  copper (tons)                     |       | 15,914                                   |       | 15,775 |   |
| Refined lead  (tons)                       |       | 31,761                                   |       | 32,119 |   |
| Refined zinc  (tons)                       |       | 16,228                                   |       | 20,146 |   |
| Refined  silver (thousands of troy ounces) |       | 8,239                                    |       | 8,491 |   |
| Refined gold  (thousands of troy ounces)   |       | 15                                       |       | 13 |   |
| Copper  concentrates (metal content, tons) |       | 3,772                                    |       | 4,497 |   |
| Ore grade  (copper content)                |       | 0.99                                     | %          | 1.12 | % |

 

The increase in lead concentrate production at the Company’s primarylead operation’s mines in the first quarter of 2005 (the 2005 quarter) over thefirst quarter of 2004 (the 2004 quarter) was the result of an increase in oreproduction of 9%, offset by lower ore grade. A change was made in the secondquarter of 2004 to increase ore production and mine at a lower grade tooptimize the earnings on the mineral resources. Ore production in the 2005quarter was lower than anticipated and lower than the fourth quarter of 2004due to lower production at the Sweetwater and Fletcher mines. Technical changeswere made to the pillar recovery process that allowed the Buick mine to improveits production performance in October 2004, and as a result, the ore gradefor the Buick mine was higher to offset the impact of the lower ore productionand grades from other mines.

 

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The Company also installed a copper pre-float circuit at its Buick millin the first half of 2004 that enabled it to process more high grade copperores from the Viburnum-29 and Viburnum-35 mines and improve copper recoveriesfrom the Buick mill.  As a result, copperconcentrate production increased 2,351 tons in the 2005 quarter to 6,381 overthe 2004 quarter production of 4,030 tons. Equipment was received in the secondquarter of 2005 that should improve performance at the Sweetwater mine.

 

In the 2005 quarter, the primary smelter operations’lead metal production was 18% lower than in the 2004 quarter primarily due tothe indefinite suspension of operations at the Glover smelter in the 2004quarter. The Glover smelter produced approximately 7,000 tons in the 2004quarter.  Production at the Herculaneumsmelter was approximately 42,500 tons for the 2004 quarter.  Planned lower production in the first quarterof 2005 was responsible for the Herculaneum smelter’s decrease from the firstquarter of 2004.

 

The improvement in production of lead from secondary sources at theCompany’s U.S. recycling operations is the result of increased desulfurizationcapacity that was added to the facility during 2004.  Consecutive monthly records were set in September andOctober of 2004 for batteries processed and reverb furnace lead producedas a result of the improvements. Production for the 2005 quarter was slightly lower than the fourthquarter of 2004 due to furnace problems associated with shortages inmetallurgical coke supply and coke quality.

 

A permit to permanently expand the emissions capacityof the recycling operation to allow approximately 175,000 tons of productionwas received in January 2005.  Whileproduction capacity constraints will prevent production at the level allowed bythe permit, the permit allows the Company’s recycling facility to operate athigher levels without receiving annual approvals.

 

For the 2005 quarter Doe Run Peru’s La Oroya smelter (La Oroya) copperand lead metal production was affected by a 2 day work stoppage by workers in December 2004and by the lack of coke availability. The work stoppage resulted from ademonstration in La Oroya in support of Doe Run Peru’s application for anextension of the PAMA. The decrease in the 2005 quarter production of zinccompared to the 2004 quarter was due to the cessation of operations of itsthree New Jersey zinc roasters, which were costly to operate andenvironmentally inefficient. The decision should result in a reduction ofrefined zinc production to 50,000 tons per year, down from the previouscapacity of 88,200. The Company believes that this change will reduce sulfuricacid gas and other gas emissions as well as reduce the disposal of liquid effluents.

 

Production of copperconcentrates (metal content) at Doe Run Peru’s Cobriza mine (Cobriza) in the2005 quarter was approximately 17% lower than the 2004 quarter, due primarilyto the decrease in ore grade.

 

*The 2005 Quarter Compared to the 2004 Quarter*

 

*Gross margin on sales (net sales less cost ofsales)* increased from $11.6 million in the 2004quarter to $37.7 million in the 2005 quarter. Gross margin on sales for Doe Run’soperations increased from $7.2 million in the 2004 quarter to $25.3 million inthe 2005 quarter while gross margin on sales for Doe Run Peru increased from$4.4 million in the 2004 quarter to $12.4 million in the 2005 quarter.

 

A 55% increase in Doe Run’s realized pricesfor lead metal, fueled by a 39% increase in LME prices and higher premiums overthe LME, contributed an additional $16.8 million to Doe Run’s gross margin onsales in the 2005 quarter compared to the 2004 quarter. An increase in lead andcopper concentrate sales volume resulted in an increase in gross margin of $3.7million and $3.1 million, respectively, in the 2005 quarter over the 2004quarter. Increases in copper and zinc metal prices contributed an additional$1.6 million to gross margin compared to the 2004 quarter. These increases wereoffset by higher production costs at the Doe Run’s primary operations,primarily due to lower ore grade, lower metal production, higher salaries,wages and employee benefits, maintenance and metallurgical coke costs.Increased conversion costs at the recycling operation, due to highermetallurgical coke and propane costs, were offset by improved feed costs perunit of metal produced.

 

Theincrease in Doe Run Peru’s gross margins is primarily the result of animprovement in the treatment charges received for processing concentrates.  This contributed approximately an additional$4.0 million to gross

 

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margin in the 2005 quarter compared to the2004 quarter. An additional increase in gross margin resulted from an increaseof $3.1 million in market price-related benefit.

 

*Selling, general and administrative costs*increased $1.7 million in the 2005 quarter over the 2004 quarter. The increasewas due primarily to increased salaries and employee benefit costs, legal fees,and professional fees related to Sarbanes-Oxley compliance.

 

*Unrealized (gains) losses on derivativefinancial instruments*are**related to the change in fairmarket value of derivative financial instruments that are a part of Doe Run’srisk management strategy. The change from an unrealized loss of $5.0 million inthe 2004 quarter to an unrealized gain of $0.8 million in the 2005 quarter isthe result of the substantial increase in the LME price during 2004, whichcaused large unrealized losses to be recognized in the first quarter of 2004.See also “Item 3. Quantitative and Qualitative Disclosures About Market Risk.”

 

*Other*operating expenses increased $0.8 million from the 2004 quarter to the 2005quarter. The expenses primarily relateto the recognition of impairment losses for the value of housespurchased in the town of Herculaneum, Missouri under a residential propertypurchase plan.

 

As of January 31, 2005, 149 homeownershad requested offers, and 117 of 142 delivered offers had been accepted. As of January 31,2005, the Company had spent approximately $8.1 million under the residentialproperty purchase plan. Another $1.1 million of accepted offers are awaiting aclosing date and $2.0 million in outstanding offers have not been accepted.Management cannot estimate how many of the remaining homeowners will acceptoffers.

 

*Income tax expense (benefit)* in the 2004 quarter reflects achange in tax law in Peru. Under a law passed in December 2003, certaintechnical services that Doe Run provided under an agreement with Doe Run Peruwere taxed at 30%. The agreement was canceled on July 1, 2004.

 

Renco has elected for theCompany to be treated as a qualified subchapter S subsidiary (QSSS) for U.S.federal tax purposes.  Most states inwhich the Company operates will follow similar tax treatment. QSSS statusrequires the ultimate shareholders to include their pro rata share of theCompany’s income or loss in their individual tax returns.  As a result of the Company’s tax status inthe U.S., the Company is not generally subject to U.S. federal and most stateincome taxes, however, under a tax sharing agreement with Renco, the Company isliable to Renco for pro forma federal and state income taxes as defined in theagreement.

 

***Liquidity***

 

The Company is highly leveraged and has significantcommitments for environmental matters and PAMA expenditures that require it todedicate a substantial portion of cash flow from operations to the payment ofthese obligations, which will reduce funds available for other businesspurposes. These factors also increase the Company’s vulnerability to generaladverse conditions, limit the Company’s flexibility in planning for or reactingto changes in its business and industry, and limit the Company’s ability toobtain financing required to fund working capital and capital expenditures andfor other general corporate purposes. An unfavorable outcome to lawsuits andtax assessments in Peru would have a further adverse effect on the Company’sability to meet its obligations when due.

 

Net unused availability at January 31,2005 and October 31, 2004 under the Doe Run Revolving Credit Facility wasapproximately $22.3 million and $22.5 million, respectively and under the DoeRun Peru Revolving Credit Facility was virtually none.  In addition to the availability under itsrevolving credit facilities, cash balances at Doe Run and Doe Run Peru were$1.5 million and $3.9 million, respectively, at January 31, 2005 and $13.4million and $6.9 million, respectively, at October 31, 2004. In Peru,continued high metal prices have resulted in outlays for concentrate purchasesand value-added tax (VAT) payments being funded by cash from operations, as DoeRun Peru has reached its maximum borrowing level under the Doe Run PeruRevolving Credit Facility. VAT deposits to be received by Doe Run Peruincreased $13.3 million in the 2005 quarter, due to a delay in receivingreimbursements and higher metal prices. In response to the lack of borrowingavailability, Doe Run Peru extended

 

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payments to its suppliers, which in addition to increased metal prices,resulted in an increase in accounts payable in the first quarter of 2005.

 

The Company’s auditors issued unqualified opinions on the 2004 auditedfinancial statements of the Company and of Doe Run Peru that expressedsubstantial doubt about the Company’s and Doe Run Peru’s ability to continue asgoing concerns due to net capital deficiencies, substantial debt servicerequirements, and significant capital requirements under environmentalcommitments.

 

The Company’s outstanding 11.25% Senior Notesand 11.25% Senior Secured Notes totaling $7.5 million were retired in thesecond quarter of 2005. The Doe Run Revolving Credit Facility and the Doe RunPeru Revolving Credit Facility expire in the fourth quarter of 2005, and willrequire renegotiation to extend their term. Furthermore, a renegotiated Doe RunPeru credit facility will need to comply with the cash assignment requirementsestablished by the Supreme Decree, should Doe Run Peru’s PAMA be extended, asdiscussed in “*Recent Events.*”There can be no assurance that the Company will be successful in renewing theagreements, or if it is successful, that the renewal would be at termsfavorable to the Company. The Company’s term note in the amount of $15.5million (the Term Note) matures in October 2005. Discussions have beenheld with Renco to extend the Term Note, but there can be no assurance that theterm will be extended.

 

During the periodbeginning on October 29, 2005 and ending on October 29, 2012, theMajority Warrantholders will have the right to require Doe Run to repurchaseall, but not less than all, of the Warrants and any outstanding shares issuedupon the exercise thereof at a price equal to the fair market value of theWarrants, as determined by a third party appraisal. Management engaged anationally recognized valuation firm to calculate the fair value of theWarrants. Management’s estimate of the fair value of the Warrants based on thevaluation is approximately $0.6 million at January 31, 2005.

 

Doe Run Peru has receivedassessments of income tax, including penalties and interest, and VAT totaling$102.5 million and $41.0 million, respectively. In addition, the Companyestimates that the effect of similar assessments for periods not yet assessedwould be approximately $1.4 million and $19.0 million for the income tax andVAT matters, respectively.  Furthermore,Doe Run Peru would also be required to make additional workers’ profit sharingpayments equal to 8% of the increase in taxable income generated by the changesdiscussed above, or approximately $5.8 million for tax years 1998 through 2004.

 

Management of the Companybelieves that in each case Doe Run Peru has followed the applicable Peruviantax statutes and intends to pursue all available administrative and judicialappeals. Doe Run Peru is not required to make any payments pending theadministrative appeal process. If Doe Run Peru is not successful in theadministrative appeal processes and were to appeal in the judicial system, sometype of financial assurance would be required, which would have a significantadverse effect on liquidity.

 

Management believes that high metal pricesand other revenue enhancements, and the issuance of the Supreme Decree allowingan application to extend La Oroya’s PAMA requirement for the construction ofthe sulfuric acid plant will enable the Company to continue as a going concern.The Company’s ability to meet obligations after 2005 could be affected by  future operating performance and financialresults, which are subject to financial, economic, political, competitive andother factors affecting the Company, many of which are beyond the Company’scontrol, or an unfavorable outcome to the items noted above, and, accordingly,no assurance can be given that it will be able to meet such obligations.

 

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**Item 3.Quantitative and Qualitative Disclosures About Market Risk.**

 

**Commodity Price Risk**

 

In the normal course of its business, theCompany has used in the past, and may use in the future, forward salescommitments and commodity put and call option contracts to manage its exposureto fluctuations in the prices of lead, copper, zinc, silver and gold. Contractpositions are designed to ensure that the Company will receive a definedminimum price for certain quantities of its production. None of theaforementioned activities have been entered into for speculative purposes.

 

The fair market value (gain/(loss)) of the Company’s derivatives wasapproximately $(7.6) million and $(9.0) million at January 31, 2005 and October 31,2004. These losses, when realized, would be offset by higher prices on theCompany’s sales of physical metal. The majority relates to sold lead futuresand sold lead call options related to the U.S. operations. A 10% increase inmetal prices would not have a significant effect on the Company’s opencontracts at January 31, 2005.

 

**Interest Rate Risk**

 

The Company is subject to interest rate risk on variable interest rateobligations. The Doe Run Revolving Credit Facility bears interest at the primerate plus 1% per annum. The Doe Run Peru Revolving Credit Facility bearsinterest at LIBOR (1-month, 3-month or 6-month rate, depending on the term ofthe loan) plus 3.5% per annum. A material increase in interest rates couldadversely affectthe Company’s business, financial condition and results of operations. A1% increase in the interest rate under the Doe Run Revolving Credit Facilityand the Doe Run Peru Revolving Credit Facility would result in additionalannual interest expense of approximately $0.7 million, based on the loanbalances outstanding as of January 31, 2005.

 

**Foreign Currency Risk**

 

Doe Run Peru’s sales and feed costs are denominated inU.S. dollars. Certain operating costs, such as labor, are denominated inPeruvian nuevos soles. While all revenues and significant costs are denominatedin U.S. dollars, a materialweakening of exchange rates could still have an adverse affect on the Company’s business, financial condition and results ofoperations.

 

**Item 4. Controls and Procedures.**

 

As of the end of the period covered by thisreport, an evaluation was performed under the supervision and with theparticipation of the Company’s management, including the Chief ExecutiveOfficer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectivenessof the design and operation of the Company’s disclosure controls andprocedures. Based on that evaluation, the Company’s management, including theCEO and CFO, concluded the Company’s disclosure controls and procedures as of January 31,2005 were effective in ensuring information required to be disclosed in thisQuarterly Report on Form 10-Q was recorded, processed, summarized and reportedon a timely basis. There have been no changes in the Company’s internal controlover financial reporting that occurred during the period covered by thisQuarterly Report on Form 10-Q that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

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**PART II. OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

 

None requiringdisclosure in this Form 10-Q.

 

**Item 2. Unregistered Sales of EquitySecurities and Use of Proceeds.**

 

None.

 

**Item 3. Defaults Upon Senior Securities.**

 

None.

 

**Item 4. Submission of Matters to a Vote ofSecurity Holders.**

 

At an annualmeeting On February 14, 2005, DR Acquisition Corp. re-elected Ira LeonRennert, Chairman, Dennis A. Sadlowski and Thomas P. Krasner to Doe Run’s boardof Directors.

 

**Item 5. Other Information.**

 

None.

 

**Item6. Exhibits.**

 

31.1                           Certification of ChiefExecutive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

31.2                           Certification of ChiefFinancial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

32.1                           Certification of Chief Executive Officerpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2                           Certification of Chief Financial Officerpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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###### **SIGNATURES**

###### ** **

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| ** **                | ** ** | **THE DOE RUN RESOURCES CORPORATION**                      |
|---------------------------|------------|------------------------------------------------------------|
|                      |       | (Registrant)                                               |
|                      |       |                                                       |
|                      |       |                                                       |
| Date: April 15, 2005 |       | /s/ David A. Chaput                                        |   |
|                      |       | David A. Chaput                                            |
|                      |       | Chief Financial Officer                                    |
|                      |       | (duly authorized officer and principal  financial officer) |

 

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