** **

**UNITED STATES**

#### **SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC  20549**

** **

### **FORM10-Q**

**(Mark One)**
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                      |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                        |
| ** ** | ** ** | **For the  quarterly period ended April 30, 2006**                                                                                                                |
| ** ** | ** ** | ** **                                                                                                                                                        |
| **or**     |
| ** ** |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                     |
| ** ** | ** ** | ** **                                                                                                                                                        |
| ** ** | ** ** | **For the  transition period from                        to** |

** **

**Commission File Number 333-66291**

** **

**The Doe Run Resources Corporation**(Exact name 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 telephonenumber, including area code)

 

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

**o****    YES        ****x****    No**

** **

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

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):

 
| ** ****o****   Larger  accelerated filer** | ** ** | **o****   Accelerated  filer** | ** ** | **x****    Non-accelerated filer** |
|-----------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

 

**o****    YES        ****x****    No**

** **

Number of shares outstandingof each of the issuer’s classes of common stock, as of August 7, 2006:

 

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

 

 

----

 

**THE DOE RUN RESOURCES CORPORATION**

**INDEX TO FORM 10-Q**

 
| **PART I — FINANCIAL INFORMATION** |       |                                                                                        |       |
|-----------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | ** **                                                                                  | ** ** | ** ** | ** ** |
| Item 1.                                 |       | Financial  Statements                                                                       |       | 3 |   |
|                                    |       |                                                                                        |       |   |   |
| Item 2.                                 |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 37 |   |
|                                    |       |                                                                                        |       |   |   |
| Item 3.                                 |       | Quantitative  and Qualitative Disclosures About Market Risk                                 |       | 45 |   |
|                                    |       |                                                                                        |       |   |   |
| Item 4.                                 |       | Controls and  Procedures                                                                    |       | 46 |   |
|                                    |       |                                                                                        |       |   |   |
| **PART II — OTHER INFORMATION**    | ** ** | ** **                                                                                  | ** ** |
|                                    |       |                                                                                        |       |   |   |
| Item 1.                                 |       | Legal Proceedings                                                                           |       | 47 |   |
|                                    |       |                                                                                        |       |   |   |
| Item 1A.                                |       | Risk Factors                                                                                |       | 47 |   |
|                                    |       |                                                                                        |       |   |   |
| Item 2.                                 |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       | 47 |   |
|                                    |       |                                                                                        |       |   |   |
| Item 3.                                 |       | Defaults Upon  Senior Securities                                                            |       | 47 |   |
|                                    |       |                                                                                        |       |   |   |
| Item 4.                                 |       | Submission of  Matters to a Vote of Security Holders                                        |       | 47 |   |
|                                    |       |                                                                                        |       |   |   |
| Item 5.                                 |       | Other Information                                                                           |       | 47 |   |
|                                    |       |                                                                                        |       |   |   |
| Item 6.                                 |       | Exhibits                                                                                    |       | 47 |   |

** **

** **

**2**

----

** **

**Item 1. Financial Statements. **

** **

**THE DOE RUN RESOURCESCORPORATION  Condensed Consolidated Balance Sheets  (Dollars in thousands, except share and per share data)**

** **
| ** **                                                                                                                                                                                                  | ** ** | **April 30,**   | ** ** | **October 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|-----------------|------------|
| ** **                                                                                                                                                                                                  | ** ** | **2006**        | ** ** | **2005**        | ** ** |
| ** **                                                                                                                                                                                                  | ** ** | **(unaudited)** | ** ** | ** **      | ** ** |
| **ASSETS**                                                                                                                                                                                                  | ** ** | ** **      | ** ** | ** **      | ** ** |
| Current assets:                                                                                                                                                                                             |       |            |       |            |       |
| Cash                                                                                                                                                                                                        |       | $               | 23,913     |            | $          | 23,486 |   |
| Trade accounts receivable, net of allowance for doubtful accounts                                                                                                                                           |       | 135,748         |       | 85,740          |       |
| Inventories                                                                                                                                                                                                 |       | 167,496         |       | 105,634         |       |
| Prepaid expenses and other current assets                                                                                                                                                                   |       | 27,588          |       | 20,814          |       |
| Total current assets                                                                                                                                                                                        |       | 354,745         |       | 235,674         |       |
| Property, plant and  equipment, net                                                                                                                                                                         |       | 262,715         |       | 253,263         |       |
| Other noncurrent assets,  net                                                                                                                                                                               |       | 8,633           |       | 5,838           |       |
| Total assets                                                                                                                                                                                                |       | $               | 626,093    |            | $          | 494,775 |   |
|                                                                                                                                                                                                        |       |            |       |            |       |
| **LIABILITIES AND SHAREHOLDER’S DEFICIT**                                                                                                                                                              | ** ** | ** **      | ** ** | ** **      | ** ** |
| Current liabilities:                                                                                                                                                                                        |       |            |       |            |       |
| Current maturities of long-term debt                                                                                                                                                                        |       | $               | 113,587    |            | $          | 114,947 |   |
| Accounts payable                                                                                                                                                                                            |       | 158,154         |       | 92,275          |       |
| Accrued liabilities                                                                                                                                                                                         |       | 106,749         |       | 87,060          |       |
| Total current liabilities                                                                                                                                                                                   |       | 378,490         |       | 294,282         |       |
|                                                                                                                                                                                                        |       |            |       |            |       |
| Long-term debt, less current  maturities                                                                                                                                                                    |       | 262,639         |       | 271,566         |       |
| Other noncurrent  liabilities                                                                                                                                                                               |       | 66,877          |       | 68,337          |       |
| Total liabilities                                                                                                                                                                                           |       | 708,006         |       | 634,185         |       |
|                                                                                                                                                                                                        |       |            |       |            |       |
| Series A redeemable preferred stock, $1,000 par value per share,  5,000 shares authorized; 2,849 shares issued and outstanding as of April 30,  2006 and October 31, 2005, liquidation and redemption value |       | 30,276          |       | 28,495          |       |
|                                                                                                                                                                                                        |       |            |       |            |       |
| Shareholder’s deficit:                                                                                                                                                                                 |       |            |       |            |       |
| Common stock, $.10 par value per share, 1,667 shares authorized; 1,000  shares issued and outstanding                                                                                                       |       | —          |       | —          |       |
| Accumulated deficit                                                                                                                                                                                         |       | (65,644         | )          | (123,141        | )          |
| Accumulated preferred stock dividends in excess of paid in capital                                                                                                                                          |       | (5,038          | )          | (3,257          | )          |
| Accumulated other comprehensive losses                                                                                                                                                                      |       | (41,507         | )          | (41,507         | )          |
| Total shareholder’s deficit                                                                                                                                                                            |       | (112,189        | )          | (167,905        | )          |
| Total liabilities and shareholder’s deficit                                                                                                                                                            |       | $               | 626,093    |            | $          | 494,775 |   |
|                                                                                                                                                                                                        |       |            |       |            |       |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

3

----

 

**THE DOE RUN RESOURCES CORPORATION  Condensed Consolidated Statements of Operations (unaudited)   (Dollars in thousands)**

 
| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                          | ** ** | **April 30,**          | ** ** | **April 30,**        | ** ** |
| ** **                                          | ** ** | **2006**               | ** ** | **2005**             | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Net sales                                           |       | $                      | 380,221    |                 | $          | 247,716 |   | $ | 694,345 |   | $ | 483,698 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Costs and expenses:                                 |       |                   |       |                 |       |   |   |   |   |
| Cost of sales                                       |       | 306,960                |       | 219,328              |       | 570,347 |   | 417,331 |   |
| Depreciation, depletion and amortization            |       | 7,015                  |       | 5,764                |       | 13,128 |   | 11,901 |   |
| Selling, general and administrative                 |       | 15,461                 |       | 11,759               |       | 28,568 |   | 22,686 |   |
| Unrealized gain on derivative financial instruments |       | (2,301                 | )          | (463                 | )          | (4,256 | ) | (1,261 | ) |
| Other                                               |       | 1,808                  |       | 1,321                |       | 3,115 |   | 3,158 |   |
| Total costs and expenses                            |       | 328,943                |       | 237,790              |       | 610,902 |   | 453,815 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Income from operations                              |       | 51,278                 |       | 10,007               |       | 83,443 |   | 29,883 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Other income (expense):                             |       |                   |       |                 |       |   |   |   |   |
| Interest expense, net                               |       | (988                   | )          | (3,314               | )          | (3,725 | ) | (6,755 | ) |
| Other, net                                          |       | 579                    |       | (27                  | )          | 485 |   | 225 |   |
|                                                |       | (409                   | )          | (3,341               | )          | (3,240 | ) | (6,530 | ) |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Income before income tax expense                    |       | 50,869                 |       | 6,666                |       | 80,203 |   | 23,353 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Income tax expense                                  |       | 3,428                  |       | —               |       | 5,270 |   | — |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Net income                                          |       | $                      | 47,441     |                 | $          | 6,666 |   | $ | 74,933 |   | $ | 23,353 |   |
| Preferred stock dividends                           |       | (891                   | )          | (791                 | )          | (1,781 | ) | (1,583 | ) |
| Net income allocable to common shares               |       | $                      | 46,550     |                 | $          | 5,875 |   | $ | 73,152 |   | $ | 21,770 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Total comprehensive income                          |       | $                      | 46,550     |                 | $          | 6,696 |   | $ | 73,152 |   | $ | 23,487 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

4

----

 

 

**THE DOERUN RESOURCES CORPORATION**

**CondensedConsolidated Statements of Cash Flows (unaudited)**

**(Dollarsin thousands)**

 
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | **April 30,**        | ** ** |
| ** **                                                                         | ** ** | **2006**             | ** ** | **2005** | ** ** |
|                                                                               |       |                 |       |   |   |
| Cash flows from operating activities:                                              |       |                 |       |   |   |
| Net income                                                                         |       | $                    | 74,933     |   | $ | 23,353 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                 |       |   |   |
| Depreciation, depletion and amortization                                           |       | 13,128               |       | 11,901 |   |
| Imputed interest and amortization of deferred financing costs                      |       | 307                  |       | 346 |   |
| Unrealized gain on derivative financial instruments                                |       | (4,256               | )          | (1,261 | ) |
| Losses from impairment and disposal of long-lived assets                           |       | 793                  |       | 1,989 |   |
| Net decrease resulting from other changes in assets and liabilities                |       | (47,554              | )          | (9,126 | ) |
| Net cash provided by operating activities                                          |       | 37,351               |       | 27,202 |   |
|                                                                               |       |                 |       |   |   |
| Cash flows from investing activities:                                              |       |                 |       |   |   |
| Purchases of property, plant and equipment                                         |       | (23,131              | )          | (26,614 | ) |
| Net proceeds from sale of investments                                              |       | —               |       | 333 |   |
| Net cash used in investing activities                                              |       | (23,131              | )          | (26,281 | ) |
|                                                                               |       |                 |       |   |   |
| Cash flows from financing activities:                                              |       |                 |       |   |   |
| Proceeds from revolving loans and short-term borrowings, net                       |       | 455                  |       | 5,335 |   |
| Proceeds from long-term debt                                                       |       | 10,000               |       | — |   |
| Payments on long-term debt                                                         |       | (20,990              | )          | (14,638 | ) |
| Payments of financing costs                                                        |       | (925                 | )          | — |   |
| Payments of tax dividends                                                          |       | (2,333               | )          | (310 | ) |
| Net cash used in financing activities                                              |       | (13,793              | )          | (9,613 | ) |
|                                                                               |       |                 |       |   |   |
| Net increase (decrease in cash)                                                    |       | 427                  |       | (8,692 | ) |
|                                                                               |       |                 |       |   |   |
| Cash at beginning of period                                                        |       | 23,486               |       | 20,318 |   |
| Cash at end of period                                                              |       | $                    | 23,913     |   | $ | 11,626 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

5

----

** **

**THE DOE RUN RESOURCES CORPORATION**

 

**Notes toCondensed Consolidated Financial Statements**

**(Dollars in thousands)**

 

**(1)****                     Summary ofSignificant Accounting Policies**

 

***Unaudited Interim FinancialStatements***

 

These interimconsolidated financial statements include the accounts of The Doe Run ResourcesCorporation (“Doe Run”) and its subsidiaries, including Doe Run Peru S.R.L. (“DoeRun Peru”, and together with Doe Run on a consolidated basis, the “ Company”).Doe Run’s issued and outstanding common stock is owned by a subsidiary of TheRenco Group, Inc. (“Renco”).  In theopinion of management, the interim consolidated financial statements containall adjustments, consisting of normal recurring accruals, necessary to presentfairly the consolidated financial position as of April 30, 2006 and the resultsof operations for the three and six-month periods ended April 30, 2006 and2005.  Interim periods are notnecessarily indicative of results to be expected for the year.

 

***Reclassifications***

 

Certain prior periodbalances have been reclassified in order to conform to the currentpresentation.

 

**(2)****                     FinancialCondition**

 

 The Company ishighly leveraged and has significant commitments both in the U.S. and Peru forenvironmental matters and for Environmental Remediation and Management Program(“PAMA”) expenditures, including the financial guarantee, 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 (see Note 7: Asset Retirement and Environmental Obligations). Thesefactors also increase the Company’s vulnerability to general adverseconditions, limit the Company’s flexibility in planning for, or reacting to,changes in its business and industry, and limit the Company’s ability to obtainfinancing required to fund working capital and capital expenditures and forother general corporate purposes.  Anunfavorable outcome to certain contingencies, discussed below, would have afurther adverse effect on the Company’s ability to meet its obligations whendue.  The Company’s ability to meet theseobligations is also dependent upon future operating performance and financialresults which are subject to financial, economic, political, competitive andother factors affecting Doe Run, many of which are beyond the Company’scontrol.

 

Metal prices have risendramatically over the past two fiscal years. Lead prices increased from aLondon Metal Exchange (“LME”) settlement monthly average of $911.40 per shortmetal ton in October 2005 to $1,061.80 per short metal ton in April 2006.  The Company has benefited from this priceincrease in both its lead metal and lead concentrate sales.

 

The consolidatedfinancial statements have been prepared assuming the Company will continue as agoing concern.  Doe Run Peru however hassignificant capital requirements under environmental commitments andsubstantial contingencies related to Peruvian taxes and has significant debtservice obligations, each of which, if not satisfied, could result in a defaultunder the Company’s credit agreements and collectively raise substantial doubtabout the Company’s ability to continue as a going concern. Management believesthat the price improvements seen through fiscal year 2005 and in the first twoquarters of fiscal year 2006, the potential revenues and cash flow enhancementsfrom the Company’s new ferrite project in Peru and the approval by the Peruviangovernment of the application to extend the PAMA requirement for theconstruction of the sulfuric acid plants, will enable the Company to continueas a going concern.  However, there canbe no assurance that these actions will achieve the desired results.

 

Netunused availability at April 30, 2006 under the Doe Run Revolving CreditFacility was $34,689.  Net unusedavailability at April 30, 2006 under the Doe Run Peru Revolving Credit Facilitywas approximately $200.  In addition tothe availability under its revolving credit facilities, the cash balance of DoeRun was $1,073 at April 30, 2006.  Thecash balance of Doe Run Peru was $22,840 at April 30, 2006.  Doe Run Peru has reached and maintained itsmaximum borrowing level under the Doe Run Peru Revolving Credit Facility due inpart to the higher metal prices resulting in higher outlays for concentratepurchases and higher VAT payments funded by cash from operations.

 

 

6

----

 

TheDoe Run Revolving Credit Facility expires on August 29, 2008.  The Doe Run Peru Revolving Credit Facilityexpires on September 22, 2006 and will require negotiations to extend itsterms. There can be no assurance that the Company will be successful inextending the existing credit agreement or negotiating a new credit agreement,or if it is successful, that the extended or new credit agreement would be atterms that are favorable to the Company.

 

Anydefault under the requirements of the PAMA could result in a default under theDoe Run Peru Revolving Credit Facility. A default under the requirements of the Doe Run Peru Revolving CreditFacility results in defaults under the Doe Run Revolving Credit Facility andthe indenture governing the bonds.

 

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

 

Inventories consist ofthe following:

 

| ** **                           | ** ** | **April 30,** | ** ** | **October 31,** | ** ** |
|--------------------------------------|------------|---------------|------------|-----------------|------------|
| ** **                           | ** ** | **2006**      | ** ** | **2005**        | ** ** |
|                                 |       |          |       |            |       |
| Finished metals and concentrates     |       | $             | 32,066     |            | $          | 18,461 |   |
| Metals and concentrates in process   |       | 101,843       |       | 55,681          |       |
| Materials, supplies and repair parts |       | 33,587        |       | 31,492          |       |
|                                 |       | $             | 167,496    |            | $          | 105,634 |   |

 

Materials, supplies andrepair parts are stated net of reserves for obsolescence of approximately$4,999 and $5,389 at April 30, 2006 and October 31, 2005, respectively.

 

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

 

Doe Run Cayman issubject to the regulations of the Cayman Islands, which currently have nocorporate income or capital gains tax. Doe Run Cayman’s subsidiaries located inPeru are subject to Peruvian taxation. The statutory income tax rate in Peru is30%. Doe Run Peru has obtained a ten-year tax stabilization agreement with thePeruvian government, which provides for Peruvian taxation based on tax statutesand regulations prevailing on November 6, 1997, beginning with thePeruvian tax year ending on December 31, 1997 through December 31, 2006.

 

On December 30, 1997, DoeRun Peru signed a Contract of Guarantees and Measures to Promote Investments (“Contract”)with the government of Peru.  The Contract, which has been modifiedvarious times through 2006, committed Doe Run Peru to making certaininvestments related to the improvements of its facilities in order to receivecertain tax benefits.  The Contract provided that if the investments werecompleted according to the schedule by December 31, 2006, Doe Run Peru wouldreceive an additional tax stability agreement covering the period beginningJanuary 1, 2007 and ending December 31, 2021.  Doe Run Peru will be unableto complete the required investments and, therefore, requested an extension ofthe time, from the Ministry of Energy and Mines (“MEM”), for these investmentsthat would coincide with the extended period of compliance for the PAMA. MEMdenied the request.  As a result, Doe RunPeru will not receive the benefits of the additional tax stabilizationagreement.

 

7

----

 

Doe Run Peru hasreceived income tax assessments from Peru’s tax authority (“SUNAT”) for taxyears 1998 through 2001.  The assessmentsprimarily relate to Doe Run Peru’s income tax treatment of the December 1997merger of Metaloroya S.A. into Doe Run Peru, which was purchased by Doe RunPeru in October 1997, and its effects on subsequent years’ taxable income.  Under the assessment by SUNAT, the tax basisof Doe Run Peru’s fixed assets acquired would decrease, resulting in lower taxdepreciation expense than originally claimed. The assessments of years 1999through 2001 also relate to the disallowance of the deduction of interest paid,the offsetting of losses on derivatives executed in the U.S. and some leasebackand leasing operations. The estimated assessed amount consisting of additionalincome taxes due, penalties and interest as of April 30, 2006 totalsapproximately $121,100.  The Companyestimates that the effect of a similar assessment for tax years after 2001would be approximately $32,900. 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 $11,300, forcalendar years 1998 through 2005.

 

Doe Run Peru has alsoreceived Value Added Tax (“VAT”) assessments for the tax years 1999 through 2001and for the period from January through July 2004.  The assessments primarily relate to Doe RunPeru’s exports with holding certificates and differences in a tax creditapplication. The total assessment for these periods, calculated with penaltiesand interest as of April 30, 2006 was approximately $48,100. SUNAT offset theamount assessed for 2004 of approximately $2,300 against Doe Run Peru’s VATreceivable balance from July of 2004. Future VAT reimbursements cannot be used to offset the assessment bySUNAT. The Company discontinued the use of holding certificates for exports inJune of 2004. The Company estimates expected additional assessments related toVAT for tax years 2002 and 2003, calculated with penalties and interest as ofApril 30, 2006 to total approximately $22,400 in regard to its exports withholding certificates.

 

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. No amounts have been accrued asliabilities related to these actions.

 

Forthe past several years, Doe Run Peru has generated net losses from operationsthat according to tax law may be used to offset taxable income in thefuture.  The Company expects to utilizeall of Doe Run Peru’s net operating loss carryforwards in the current fiscalyear.  As a result, Doe Run Peru hasrecorded $5,270 of income tax expense for the first two quarters of 2006.

 

Pursuantto the Company’s tax sharing agreement with Renco, a tax dividend is payable toRenco for federal and state income taxes that would be assessed if the Companywas a C corporation.  Tax dividendspayable to Renco of $15,487 and $384 were reflected in the Company’s balancesheets at April 30, 2006 and October 31, 2005, respectively.  The dividend payable at October 31, 2005 of$384 was paid in the second quarter of 2006 along with the tax dividend for thefirst quarter of 2006 of $1,949. The Company paid $12,842 of the dividendpayable at April 30, 2006 in the third quarter of 2006 and the remaining $2,645to be paid during the fourth quarter of 2006.

 

 

 

**(5)****                     EmployeeBenefits**

*** ***

***Defined Benefit Plans***

 

Net periodicbenefit cost is comprised of the following:

 

| ** **                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                | ** ** | **April 30,**          | ** ** | **April 30,**        | ** ** |
| ** **                                                | ** ** | **2006**               | ** ** | **2005**             | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                      |       |                   |       |                 |       |   |   |   |   |
| Service cost                                              |       | $                      | (226       | )                    | $          | 551 |   | $ | — |   | $ | 1,097 |   |
| Interest cost on  projected benefit obligation            |       | 2,577                  |       | 1,670                |       | 3,412 |   | 3,325 |   |
| Expected return  on assets                                |       | (2,426                 | )          | (1,435               | )          | (3,166 | ) | (2,858 | ) |
| Net amortization  and deferral of unrecognized net losses |       | 142                    |       | 714                  |       | 666 |   | 1,422 |   |
| Net periodic  benefit cost                                |       | $                      | 67         |                 | $          | 1,500 |   | $ | 912 |   | $ | 2,986 |   |

 

 

8

----

 

 

The Company is requiredto make total contributions of $10,082 in 2006, of which $4,317 had been paidas of April 30, 2006.

 

***Net Worth Appreciation Agreements***

 

Certain current and former employees are parties tonet worth agreements with Doe Run, pursuant to which, upon termination of eachperson’s employment with Doe Run, they are entitled to receive a fixedpercentage of the increase in the net worth of the Company, as defined in suchagreement, from a base date until the end of the fiscal quarter preceding thedate of his termination or in accordance with the terms of the individualagreements. Such amounts are payable without interest in 40 equal quarterlyinstallments, commencing three months after the termination of each person’semployment or in accordance with the terms of the individual agreements, and atthree month intervals thereafter. The net worth appreciation agreements alsoprovide that, in the event of payment of a dividend, other than tax dividendspaid in accordance with the Company’s tax sharing agreement, or sale of theCompany, the active participants will be entitled to receive a percentage ofthe dividend or the net proceeds of the sale equal to their maximum percentagesunder the agreements. The Company recorded $2,503 inexpense during the first two quarters of 2006.

 

 

** (6)****                  SegmentInformation**

 

The Company’s operatingsegments are separately managed business units that are distinguished byproducts, location and production processes. The primary lead segment includes integrated mining, milling andsmelting operations located in Missouri. The recycling operation segment, located in Missouri, recycleslead-bearing materials, primarily spent batteries.  The fabricated products segment, located inWashington and Arizona, produces value-added lead products.  Doe Run Peru produces an extensive productmix of non-ferrous and precious metals.

 

*Operating Segments — Revenues*

| ** **                                       | ** ** | **Three Months Ended  April 30,** | ** ** | **Six Months Ended  April 30,** | ** ** |
|--------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **2006**                          | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues from external customers:                |       |                              |       |                            |       |   |   |   |   |
| Doe Run Peru                                     |       | $                                 | 247,673    |                            | $          | 158,316 |   | $ | 450,365 |   | $ | 306,701 |   |
| Primary lead                                     |       | 101,094                           |       | 65,143                          |       | 183,868 |   | 129,080 |   |
| Recycling  operation                             |       | 22,672                            |       | 22,432                          |       | 46,760 |   | 40,998 |   |
| Fabricated  products                             |       | 4,030                             |       | 3,386                           |       | 7,393 |   | 7,201 |   |
| Total                                            |       | 375,469                           |       | 249,277                         |       | 688,386 |   | 483,980 |   |
| Revenues from other operating segments: (1)      |       |                              |       |                            |       |   |   |   |   |
| Doe Run Peru                                     |       | 6,091                             |       | —                          |       | 12,331 |   | 2,724 |   |
| Primary lead                                     |       | 397                               |       | 209                             |       | 1,076 |   | 711 |   |
| Recycling  operation                             |       | 100                               |       | 82                              |       | 182 |   | 180 |   |
| Total                                            |       | 6,588                             |       | 291                             |       | 13,589 |   | 3,615 |   |
| Total reportable segments                        |       | 382,057                           |       | 249,568                         |       | 701,975 |   | 487,595 |   |
| Metal sales not attributed to operating segments |       | 6,982                             |       | (1                              | )          | 12,126 |   | 2,520 |   |
| Realized losses on derivative contracts          |       | (2,230                            | )          | (1,560                          | )          | (6,167 | ) | (2,802 | ) |
| Intersegment eliminations                        |       | (6,588                            | )          | (291                            | )          | (13,589 | ) | (3,615 | ) |
| Total revenues                                   |       | $                                 | 380,221    |                            | $          | 247,716 |   | $ | 694,345 |   | $ | 483,698 |   |

 

(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.

 

 

9

----

 

 

The measure of segmentprofit and loss used by the Company is earnings of the segment before interest,taxes, depletion, depreciation and amortization (“EBITDA”), as adjusted toexclude losses from impairment and disposal of long-lived assets and  unrealized gains (losses) on derivatives (“AdjustedEBITDA”). Consolidated Adjusted EBITDA also excludes accretion expense underStatement of Financial Accounting Standards No. 143, *Asset Retirement Obligations* adopted November 1, 2002*.*

 

*Operating Segments — AdjustedEBITDA*

| ** **                                                | ** ** | **Three Months Ended  April 30,** | ** ** | **Six Months Ended  April 30,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **2006**                          | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                      |       |                              |       |                            |       |   |   |   |   |
| Doe Run Peru                                              |       | $                                 | 21,483     |                            | $          | 7,238 |   | $ | 33,607 |   | $ | 15,714 |   |
| Primary lead                                              |       | 44,797                            |       | 15,168                          |       | 76,493 |   | 37,686 |   |
| Recycling  operation                                      |       | 3,328                             |       | 3,957                           |       | 7,507 |   | 7,629 |   |
| Fabricated  products                                      |       | 836                               |       | 676                             |       | 1,141 |   | 1,149 |   |
| Total reportable  segments                                |       | 70,444                            |       | 27,039                          |       | 118,748 |   | 62,178 |   |
| Realized losses  on derivatives                           |       | (2,230                            | )          | (1,560                          | )          | (6,167 | ) | (2,802 | ) |
| Other revenues  and expenses (1)                          |       | (1,229                            | )          | (2,084                          | )          | (2,191 | ) | (2,793 | ) |
| Corporate  selling, general and administrative expenses   |       | (9,298                            | )          | (6,856                          | )          | (16,011 | ) | (13,111 | ) |
| Intersegment  eliminations                                |       | (44                               | )          | (12                             | )          | (3 | ) | 13 |   |
| Consolidated  adjusted EBITDA                             |       | 57,643                            |       | 16,527                          |       | 94,376 |   | 43,485 |   |
| Depreciation,  depletion and amortization                 |       | (7,015                            | )          | (5,764                          | )          | (13,128 | ) | (11,901 | ) |
| Interest  expense, net                                    |       | (988                              | )          | (3,314                          | )          | (3,725 | ) | (6,755 | ) |
| Unrealized gain  on derivatives                           |       | 2,301                             |       | 463                             |       | 4,256 |   | 1,261 |   |
| Losses from  impairment and disposal of long-lived assets |       | (668                              | )          | (779                            | )          | (793 | ) | (1,989 | ) |
| Asset retirement obligation accretion expense             |       | (404                              | )          | (374                            | )          | (783 | ) | (748 | ) |
| Other                                                     |       | —                            |       | (93                             | )          | — |   | — |   |
| Income before  income taxes                               |       | $                                 | 50,869     |                            | $          | 6,666 |   | $ | 80,203 |   | $ | 23,353 |   |

 

(1)          Other revenues andexpenses consist of the profit on metal sales not attributed to operatingsegments and expenses not allocated to operating segments, includingenvironmental expenses relating to historic operations of $542 and $803 for thethree and six months ended April 30, 2006, respectively and  $2,877 for the three and six months endedApril 30, 2005.

 

 

**(7)****                     AssetRetirement and EnvironmentalObligations**

 

The Company is subject to numerous federal,state,  local and other governmentenvironmental laws and regulations governing, among other things, airemissions, wastewater discharges, solid and hazardous waste treatment, storageand disposal and remediation of releases of hazardous substances. The Company’sfacilities are located on sites that have been used for heavy industrialpurposes for decades and may require remediation. The Company has made andintends to continue making the necessary expenditures for environmentalremediation and compliance with environmental laws and regulations.Environmental laws and regulations may become more stringent in the future,which could increase costs of compliance.

#### ***Asset RetirementObligations***

Assetretirement obligations (“AROs”) are recognized as liabilities when incurred,with the initial measurement at fair value. These liabilities will be increasedto full value over time through charges of accretion to operating expense. Inaddition, an asset retirement cost is capitalized as part of the related asset’scarrying value and will be depreciated over the asset’s useful life. Changes inthe ARO liability resulting from 

 

10

----

 

revisions to thetiming or the amount of the original estimate of undiscounted cash flows shallbe recognized as an increase or a decrease in the carrying amount of theliability for an ARO and the related asset retirement cost capitalized as partof the carrying amount of the related long-lived asset.

Doe Run’s mines and related processing facilities aregoverned by various agencies that have established minimum standards forreclamation. Doe Run’s primary smelter slag produced by and stored at theprimary smelter in Herculaneum, Missouri, is currently exempt from hazardouswaste regulation under the Resource Conservation and Recovery Act of 1976, asamended (“RCRA”), but is subject to a state closure permit, which requires DoeRun to contain and cover the pile upon cessation of operations. Doe Run’smining and milling operations are subject to Missouri mine waste closure permitrequirements and lease agreements that require Doe Run to reclaim surfaceareas, including remediation of mining waste disposal areas, and to performclosure activities underground. These activities, which tend to be sitespecific, generally include costs for earthwork, revegetation, water treatmentand demolition. Closure activities may be performed over time.

Doe Run has a RCRA permit addressing the closure ofportions 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 $3,200. The life of theoperation is considered indeterminable because there is not currently acost-effective alternative to the lead acid batteries and because batterymanufacturers are required to recycle the batteries.

Mine Closure Law No.28090 (“Law”) became effective in Peru as of October 15, 2005.  It applies to smelters and mines. The Lawestablishes the obligations and procedures that titleholders of miningactivities must follow, including a financial guarantee for environmentalissues.   Doe Run Peru must submit a mine closure plan to the MEM byAugust 17, 2006 which must include a description of the remediation measures tobe done, along with their cost and timing, and the expected amount of thefinancial guarantee. Doe Run Peru has hired a technical mining consultant toprepare the mine closure plans for Cobriza and La Oroya to insure that theywill comply with the technical and legal requirements. The financial guaranteewill not be known until the final mine closure plan is approved therefore, theguarantee is estimated to be established in January of 2007.

 

Doe Run Peru has AROs atits Cobriza mine related to the costs associated with closing the mine openingsand covering acid rock.  Doe Run Peru isalso responsible for the eventual covering and revegetation of mixed lead andcopper slag also stored in Huanchan, an area a short distance from the La Oroyasmelter where the slag is currently stored.

 

The Company’s total recorded liabilities for AROs were approximately$15,945 and $15,188 as of April 30, 2006 and October 31, 2005, respectively.

 

#### ***EnvironmentalRemediation - Domestic Operations***

 

The Company had recordedliabilities of approximately $15,000 and $20,000 related to remediationobligations as of April 30, 2006 and October 31, 2005, respectively.

 

Doe Run is subject to anAdministrative Order on Consent (“AOC”) with the U.S. Environmental ProtectionAgency (“U.S. EPA”), effective May 29, 2001, to study and address issuesrelated to the slag pile, plant property, community soils adjacent to theprimary smelter in Herculaneum, Missouri, elevated blood lead levels in thecommunity and lead releases from the plant. This AOC was modified effective onMay 20, 2004 which addressed the technical requirements concerning the slagpile design and construction along with adjustments to the remediationschedule. At April 30, 2006 the estimated remaining cost of remediating thesoils of this community was approximately $434.

Doe Run signed a settlement agreement with the Stateof 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. Offers totaling $10,300 have been accepted andclosed.  The remaining offers have 

 

11

----

 

expired except for a few with pending closing dates orspecial arrangements for a total of $138. The formal program under the agreement is now essentially completed.

The Company’s statementsof operations reflect losses from impairment or retirement of long-lived assetsprimarily related to the residential properties owned in Herculaneum, as it isprobable that the cost of the properties will not be recovered through futurecash flows.

Doe Run has received notice that it is a potentiallyresponsible party (“PRP”) subject to liability under The ComprehensiveEnvironmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”),at the following sites: six sites in St. Francois County, Missouri, includingthe Big River Mine Tailings site, the Bonne Terre site, the Federal site, theNational site, the Rivermines site and the Leadwood site; sites comprisingareas along roads in Iron, Dent and Reynolds counties in Missouri; the Oronogo-Durenwegsite in Jasper County, Missouri; the Cherokee County site in Cherokee County,Kansas; the Tar Creek site in Ottawa County, Oklahoma; the Block “P” site inCascade County and Judith County, Montana; and the Missouri Electric Works sitein Cape Girardeau, Missouri. There are two additional sites in St. FrancoisCounty for which the U.S. EPA has indicated it will issue notice. CERCLAprovides for strict and, in certain circumstances, joint and several liabilityfor response costs and natural resource damages. The Company’s estimate of thecost of the remediation of these sites, including the two additional sites inSt. Francois County, is included in the total liability for remediationobligations, which the Company believes is adequate based on its investigationsto date. However, depending upon the types of remediation required and certainother factors, additional costs at these sites, individually or collectively,could have a material adverse effect on the results of operations, financialcondition and liquidity of the Company.

In addition to being asked to conduct remediation atthe above sites, the U.S. EPA may also seek reimbursement from Doe Run forresponse actions it has conducted at these sites.  The U.S. Government has advised PRP’s at theTar Creek site, including Doe Run, that it will seek reimbursement forapproximately $125 million of such costs. Given legal issues about Doe Run’s responsibility for activities of aformer subsidiary, the fact that the former subsidiary’s activities at the sitewere localized and small (less than 1% of the waste), and the major involvementat the site of the U.S. Government through the Bureau of Land Management’s andthe Bureau of Indian Affairs’ management of mineral leasing at the site, theCompany is unable to estimate the expected outcome of any such potential claim.

In February 2004 the U.S.Department of Agriculture issued a Unilateral Administrative Order (“UAO”)ordering certain remediation activities by Doe Run at the Block “P” mill sitein Montana. Doe Run has requested that other parties be added to the order. DoeRun will seek reimbursement from the U.S. Government and these other parties.The final remediation was essentially completed as of October 31, 2005.

Doe Run has completed anEngineering Evaluation/Cost Analysis (“EE/CA”) for the Bonne Terre site and hassigned two AOCs to conduct removal actions on the west and east portions of thesite. Work is completed on the west Bonne Terre site and is nearly finished onthe east site with completion expected in the summer of 2006.

Doe Run has completed anEE/CA for the Rivermines site and, while unable to accept certain financialassurance provisions of a proposed AOC, has agreed to conduct a removal actionat the site under a UAO. Work has commenced on the removal action. The EPAaccelerated the timeframe to complete the majority of the remediation effort bythe summer of 2006.

Doe Run is subject to anAOC with the U.S. EPA to remediate the Big River Mine Tailings site. Theremediation work required by the AOC has been substantially completed and willcontinue with revegetation and ongoing monitoring and maintenance activities.

Doe Run has also signed AOCs to perform an EE/CA oneach of the National and Leadwood sites for remediation of mine waste areas.The National EE/CA was completed by the PRPs and was submitted to the U.S. EPAfor approval. The U.S. EPA then had two EE/CA’s prepared, the last of which wasaccepted by them. The cost of their remedy is higher than that estimated by theEE/CA prepared by Doe Run. On July 6, 2006, the U.S. EPA issued a unilateraladministrative order to four parties, the generating company and threelandowners including Doe Run. Doe Run is negotiating its share with thegenerating PRP. The Leadwood EE/CA has been modified and submitted to the U.S.EPA for approval and it is contemplated that a unilateral order will be issuedduring the fiscal year to conduct the work. We would utilize Doe Run’s internalworkforce which is about to complete work at Elvins-Rivermines. In addition,Doe Run has signed an 

 

12

----

 

AOC with the U.S. EPA to conduct a RemedialInvestigation/Feasibility Study (“RI/FS”) to assess potential off-site impactsof these site operations on groundwater, residential soils, several creeks anda river and the need for related remediation. The initial draft of the RI/FSwas submitted in early March of 2002. Doe Run signed an order to conductinterim measures, which consisted of blood lead testing of young children,residential soil sampling and limited soil remediation as indicated by thetesting and sampling results, which was terminated and replaced by an AOC toconduct certain additional soil remediation in the area and has included itsbest estimate of these efforts in its recorded liabilities. The Companybelieves the recorded liabilities related to these sites are adequate. However,should remediation goals or areas change, requiring substantially increasedmeasures, there can be no assurance that the recorded liabilities would beadequate.

In March of 2004, Doe Runreceived 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 approximately 750 houses by the U.S. EPA and theMissouri Department of Natural Resources, approximately 150 houses wereidentified as potentially requiring some level of remediation. Doe Run and fourother mining companies have signed an AOC to conduct soil remediation atapproximately 40 of these houses. The five companies have completed a mediationsession concerning the allocation of costs and, subject to resolving certainoutstanding issues, expect to modify the agreement between them resolving theallocation of the completed work. They are also expected to sign an agreementto resolve the management and expenditures regarding future work on thisproject. Also, in regard to potential contamination from transportationactivities in and near the City of Viburnum, Doe Run has signed an AOC toconduct sampling and prepare a Preliminary Assessment/Site Inspection report.The draft of that work has been completed and submitted.

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 theowner of the other 50% share of stock in the company that mined the site havesigned an AOC to conduct an RI/FS at the site. This site is substantiallysmaller than the sites in St. Francois County where the Company has been nameda PRP, and the potential issues are less complex. Doe Run has also been advisedthat remediation is required at a related small satellite mine site. Afterconducting an investigation, Doe Run has determined that it was not involved inoperations at the satellite site, but further review will be required before adetermination can be made as to whether it has any liability at the main site.At this time, based on preliminary information and an inspection of the sites,management does not believe that any future action will result in a materialadverse impact to the results of operations, financial condition or liquidityof the Company.

Doe Run’s recyclingfacility is subject to corrective action requirements under RCRA as a result ofa storage permit for certain wastes initially issued in 1989. This will involveremediation of solid waste management units at the site, and it is expectedthat the plan for corrective action will be approved in fiscal 2006. TheCompany’s estimate of the cost of this corrective action is $1,000. Whilemanagement believes that recorded liabilities are adequate based onexpectations 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.

 

13

----

 

#### ***Environmental Remediation- Foreign Operations***

Doe Run Peru’s La Oroyaoperations historically and currently exceed some of the applicable maximumpermissible limits established by MEM pertaining to air emissions andwastewater effluents quality. Prior to our acquisition of La Oroya, MetaloroyaS.A., the former owner, a subsidiary of Empresa Minera del Centro del PeruS.A., which we refer to as Centromin, received approval from the PeruvianGovernment for a PAMA. The PAMA was designed to achieve compliance with MEM’sair and wastewater limits. It consisted of an environmental impact analysis,monitoring plan and data mitigation measures and a closure plan. The PAMA alsoset forth the actions and corresponding annual investments a company 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 mining operations, such as Cobriza).The PAMA projects, which are more fully discussed below, were designed toachieve compliance with these requirements.

 

OnDecember 29, 2004, the Peruvian Government issued a Supreme Decree No.046-2004-EM (“Supreme Decree”), which recognized that exceptional circumstancesmay justify an extension of the time to complete one or more projects withinthe scope of a PAMA. Since Doe Run Peru expected that it would not be able tocomply with the spending requirements of La Oroya’s PAMA investment schedule bythe end of calendar year 2006 with respect to certain projects, Doe Run Peruapplied for an extension on December 20, 2005.

 

On May29, 2006, MEM approved the extension of certain PAMA projects through October31, 2009 (the “Modified PAMA”). Pursuant to the terms of the Modified PAMA, DoeRun Peru is now required to complete the acid plant projects for the leadcircuit and the copper circuit by September 30, 2008 and October 31, 2009,respectively and Doe Run Peru remains obligated under the original PAMA toimplement the following projects at its La Oroya smelter by December 31, 2006:

 

•        Upgradethe acid plant for the zinc circuit;

•        Constructa treatment plant for the copper refinery effluent;

•        Constructan industrial wastewater treatment plant for the smelter and refinery;

•        Improvethe slag handling system;

•        ImproveHuanchan lead and copper slag deposits;

•        Constructan arsenic trioxide deposit;

•        Improvethe zinc ferrite disposal site;

•        Constructdomestic wastewater treatment and domestic waste disposal; and

•        Constructa monitoring station.

 

TheModified PAMA also requires Doe Run Peru to comply with certain specialmeasures not previously required. These measures include, but are not limitedto, implementation of projects to reduce stack and fugitive emissions which aredesigned to meet certain air quality objectives, a continuing improvementprovision that provides for additional pollution controls to address theshortfalls in meeting objectives or to further reduce risks and certainmeasures regarding protection of public health, including, among others, actions for the reduction of lead in bloodlevels and special health programs for children and expectant women.

 

MEMhas also required that the cost of a planned replacement of the oxy-fuelreverberatory furnace with a submerged lanced reactor furnace that will reducegas volume while enriching sulfurous gas feed to the copper circuit sulfuricacid plant be included as part of the cost of the Modified PAMA acid plantprojects. The estimated cost of this reactor furnace is $57,000, which bringsthe total remaining investment needed to build the sulfuric acid plants toapproximately $152,590.

 

AdditionalPAMA projects required for fiscal year 2006 include an upgrade of theventilation system in the Sinter plant, completion of the enclosure work aroundthe lead and dross furnace, the enclosure of the anode residue plant along withthe elimination of its nitrous gases, and the reduction of fugitive emissionsfrom the copper and lead beds. The total cost of the currently remaining 

 

14

----

 

Modified PAMAprojects as of April 30, 2006 was approximately $175,000 of which $31,500remains to be spent in the 2006 calendar year.

 

DoeRun Peru’s ability to complete the required projects by the specific deadlinesdepends in large part upon the availability of sufficient funds. Doe Run Perubelieves that sufficient funds will be available on a timely basis, but theavailability of sufficient funds is largely dependent upon the results of itsbusiness operations and the possibility of additional financing; therefore,there can be no assurance that sufficient funds will be available for theseprojects.

 

Consistentwith the requirements of the Supreme Decree providing for the possibility ofPAMA extensions, in addition to other terms and conditions, the Modified PAMAcontains two separate financial security arrangements to ensure that Doe RunPeru fulfills its statutory obligation to complete the Modified PAMA projects.

 

First,Doe Run Peru has established an environmental trust account with ScotiabankPeru into which receipts from sales are required to be remitted directly in anamount to have cash available sufficient to pay the expenditures estimated tobe incurred in each subsequent month by Doe Run Peru in complying with theModified PAMA. Second, Doe Run Peru has provided to MEM a bank letter ofguarantee in the amount of $28,641 (an amount estimated to be 20% of theprojected cost of the Modified PAMA projects to be spent after 2006). Doe RunPeru deposited such amount with Standard Chartered Bank which has in turnprovided for the issuance to MEM of the necessary bank letter of guaranteerelying solely upon the funds so deposited. Doe Run Peru has amended the DoeRun Peru Revolving Credit Facility to allow for these arrangements.

 

Althoughnot contemplated by the Supreme Decree providing for the possibility of PAMAextensions, as a condition of granting the Modified PAMA, MEM has provided thatDoe Run Peru could lose the benefit of the extension if Doe Run Peru makes anypayments to any shareholder or affiliate, which could affect the full andsatisfactory compliance with the Modified PAMA obligations. This provision hasnot been agreed to by Doe Run or Doe Run Peru but was imposed under applicablelaw over their objection. Doe Run Peru was required, however, to provide a bankletter of guarantee in the amount of $4,000 which may be drawn upon to fundModified PAMA projects if Doe Run Peru makes any payments to any shareholder oraffiliate. Doe Run Peru satisfied this requirement by depositing such amountwith Standard Chartered Bank which has in turn provided for the issuance to MEMof the necessary bank letter of guarantee relying solely upon the funds sodeposited.

 

Separately,Renco has confirmed to MEM that Renco understands that Doe Run Peru could losethe benefit of the extension if Doe Run Peru makes any payments to anyshareholder or affiliate which could affect the full and satisfactorycompliance with Doe Run Peru’s Modified PAMA obligations and Renco has statedthat Renco has no intention of causing, and will not do anything to cause, DoeRun Peru to make any such payment.

 

Inconnection with its negotiations with MEM regarding the Modified PAMA, Doe Runvoluntarily agreed to extend the maturity of Doe Run Peru’s $139,063intercompany note payable to Doe Run until such time as the Modified PAMA hasbeen completed.

 

Noassurance can be given that implementation of the projects under the ModifiedPAMA is feasible or that their implementation will achieve compliance with theapplicable legal requirements by the end of the Modified PAMA period. ThePeruvian Government may, in the future, require compliance with additionalenvironmental regulations that could adversely affect Doe Run Peru’s business,financial condition and results of operations, as well as their ability tocomply with the Modified PAMA. After expiration of the Modified PAMA, Doe RunPeru must comply with all applicable standards and requirements.

 

The Cobriza mine has aseparate PAMA in which Doe Run Peru committed to complete projects to managetailings, mine drainage, sewage and garbage. Doe Run Peru completed its own 

 

15

----

 

PAMA requirements withrespect to Cobriza in June of 2004 and is in compliance with emissionsstandards required by this PAMA.

 

In addition to its PAMAobligations, Doe Run Peru is responsible for the remediation costs relating tothe zinc ferrite disposal site at La Oroya. The current closure plan providesfor encapsulating the ferrite residues in place in Huanchan, an area a shortdistance from the smelter where they are currently stored, for which anenvironmental liability of $1,600 has been recorded as of April 30, 2006 andOctober 31, 2005.

 

Under the purchaseagreement related to the acquisition of the La Oroya assets in October of 1997,Centromin, the prior owner of the La Oroya smelter and Cobriza mine, agreed toindemnify Doe Run Peru against environmental liability arising out of its prioroperations and their apportioned share of any complaint related to emissions. Performanceof the indemnity has been guaranteed by the Peruvian Government through theenactment of the Supreme Decree No. 042-97-PCM. However, there can be noassurance that Centromin will satisfy its environmental obligation andinvestment requirements or that the guarantee will be honored. Any failure byCentromin to satisfy its environmental obligations could adversely affect DoeRun Peru’s business, financial condition and results of operations.

 

***Environmental Remediation -******Consolidated***

The Company believes itsreserves for domestic and foreign environmental, mine closure and reclamationmatters are adequate, based on the information currently available. Dependingupon the type and extent of activities required, revisions to management’sestimates of costs to perform these activities are reasonably possible in thenear term. Therefore, there can be no assurance that additional costs, bothindividually and in the aggregate, would not have a material adverse effect onthe results of operations, financial condition and liquidity of the Company.

 

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

 

Doe Run is a defendant in 29 lawsuits alleging certaindamages stemming from the operations at the Herculaneum primary smelter.  Three of these cases are class actionlawsuits.  In two cases, the plaintiffsseek to have certified a class of property owners in a certain section ofHerculaneum, alleging that property values have been damaged due to theoperations of the smelter.  In anothercase, plaintiffs seek to have certified a class of children who lived inHerculaneum during a period of time when they were less than six years old andchildren born to mothers who lived in Herculaneum during theirpregnancies.  The remedy sought ismedical monitoring for the class. Twenty-six of the cases are personal injury actions by 161 individualswho allege damages from the effects of lead due to operations at thesmelter.  Punitive damages also are beingsought in each case.  Doe Run is also adefendant in a wrongful death action concerning a drowning in the City ofHerculaneum.

 

16

----

 

Aresident of Herculaneum has claimed personal injuries allegedly resulting fromexposure to emissions from the smelter. No suit has yet been filed in this matter.

Doe Run is a defendant in 17 lawsuits alleging certaindamages from discontinued mine facilities in St. Francois County.  Four of the cases are class actionlawsuits.  The first case seeks to havecertified a class consisting of property owners in Bonne Terre, Missouri,alleging that property values have been damaged due to the tailings from thediscontinued operations.  In the secondcase plaintiffs seek to have certified a class of children who lived, went toschool or day care in Bonne Terre, or whose mothers lived in Bonne Terre duringtheir pregnancies.  The third and fourthcases are class actions for property damage and medical monitoring concerningalleged damages caused by chat, tailings and related operations in six areas inSt. Francois County.  The remainder ofthe cases allege personal injury to 28 individuals who were exposed to lead inSt. Francois County.

Doe Run is a defendant in a lawsuit by the BNSFRailway Company, who has alleged that Doe Run and other companies associatedwith lead mining operations in Missouri are responsible for property damage atcertain rail yards and for contribution and indemnity for costs incurred byBNSF associated with settlement by BNSF of lead exposure cases.  Given the early stage of this case, theCompany is unable at this time to estimate the expected outcome and any finalcosts of this action.

Doe Run is a defendantin five lawsuits alleging certain damages from past mining operations inOttawa County, Oklahoma.  Three of these suits are class actions allegingpersonal injury and property damage in Picher and Quapaw, Oklahoma.  Onelawsuit, a consolidation of five suits, alleges injury to seven children livingin Picher, Oklahoma.  One lawsuit, a consolidation of two suits, allegesinjury to 42 children living in Ottawa County.

Doe Run, with several other defendants, has been namedin four cases in Maryland but has not yet been joined as a defendant in any ofthese cases.  These suits seek damages,alleging personal injuries as a result of lead poisoning from exposure to leadpaint and tetraethyl lead dust.  Thesuits seek punitive damages.  Doe Run wasdismissed from 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.

DoeRun is currently a defendant in three asbestos injury suits filed in MadisonCounty, Illinois, each alleging that a worker was exposed to asbestos at thepremises of the St. Joe Minerals Corporation. However, Doe Run has not been properly served in one of these cases. DoeRun has reached a tentative settlement in another of these cases prior to goingto trial.  Doe Run is also a defendant inan asbestos case filed in Lawrence County, Pennsylvania

Doe Run is in acommercial dispute with a buyer concerning one ocean shipment of leadconcentrates.  Buyer is seekingreimbursement of expenses incurred to address a large amount of water thatappeared during the voyage on top of concentrates in the forward holds.  This contract dispute is in arbitrationbefore the LME.

 

Doe Run is a defendant ina lawsuit by Korea Zinc Co. and affiliates filed on January 19, 2006 in theCircuit Court of St. Louis County, concerning alleged violations of anagreement regarding the sale of zinc concentrates.  Doe Run disputes the claim and will seekdismissal because the dispute should be subject to arbitration.

 

Doe Run is a defendant inlawsuit filed by Nadist, LLC in U.S. District Court for the Eastern District ofMissouri on June 23, 2006 concerning the Sweetwater Mine and Mill. The lawsuitpurports to constitute a citizen suit alleging violations of certain U.S.environmental laws and includes certain state law allegations.

 

Doe Run has been named as a party in various lawsuitsrelating 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 currentlya defendant in 207 lawsuits in the Lima, Peru labor courts that allege damageto workers from industrial diseases. Doe Run Peru has made claims in most ofthe cases against Centromin and has also made claims against both governmentalagencies and private companies that provide workers’ 

 

17

----

 

insurance. The averageclaim is $17. Of 19 previously concluded cases in this category, 18 weredismissed and 1 resulted in an award of $9.

 

Doe Run Peru is alsocurrently a defendant in 164 lawsuits by workers alleging that they are owedcertain differences in salaries and benefits. The average claim is $20. Of 38previously concluded cases in this category, 29 were dismissed and 9 resultedin awards totaling $19. Doe Run Peru is also a defendant in a lawsuit by theYauli-La Oroya Employees Union concerning salaries and benefits. The claims ofthe 149 workers remaining in the lawsuit have been valued at a total of $218according to a report by an expert appointed by the court.

 

Doe Run Peru is alsocurrently a defendant in 22 lawsuits alleging various labor claims includingindemnification for arbitrary dismissal, nullity of dismissal, moral damagecompensation, compensatory damages from work accident and readmission ofworker. The average claim is $7. Of 30 previously concluded cases in thiscategory, 26 were dismissed and 4 resulted in awards totaling $21.

 

The amount of awards inthe various categories of lawsuits referenced above represented total judgmentsissued by the relevant courts. For certain of these lawsuits, Centromin willpay a portion of the total award.

 

On January 19, 2005, DoeRun Peru was served with a lawsuit by an association of municipalities of theJunin Region of Peru against Doe Run Peru and two other mining companies. Thislawsuit alleges environmental damages to the Mantaro River basin in the amountof $5 billion. On February 2, 2006, Doe Run Peru was served with a lawsuit bythe municipality of Jauja. This lawsuit alleges environmental damages to theMantaro River basin in the amount of $5,000. Material liability to Doe Run Peru, in these two actions, is believed tobe remote based on the opinion of management and outside counsel for Doe RunPeru. Any potential judgment would be subject to the indemnificationobligations of Centromin, which are guaranteed by the Peruvian government.

 

On December 3, 2003, DoeRun Peru filed an administrative lawsuit against the Yauli — La OroyaProvincial City Hall in order to nullify and void a number of fines for theamount of $2,800. Doe Run Peru was fined for not having construction licensesfor the PAMA projects.

 

Since most of the above cases are either in thepleading or discovery stages, the Company is unable at this time to estimatethe expected outcome and the final costs, except as noted, of these actions. Noamounts have been accrued as liabilities related to these actions.  There can be no assurance that these caseswould 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.

 

**(9)****                  GuarantorSubsidiaries**

 

The Guarantor Subsidiaries (Fabricated Products, Inc.(“FPI”) and DR Land Holdings, LLC (together with FPI, the “Domestic Guarantors”)Buick Resource Recycling Facility, LLC, Doe Run Cayman Ltd. (“Doe Run Cayman”)and its subsidiary Doe Run Peru) have jointly and severally, fully,unconditionally and irrevocably guaranteed the 11.75% notes of theCompany.  Doe Run Cayman has nooperations separate from those of Doe Run Peru. Separate financial statements and other disclosures concerning certainGuarantor Subsidiaries and disclosures concerning non-Guarantor Subsidiarieshave not been presented because management has determined that such informationis not material to investors. Intercompany transactions eliminated in consolidation consist of variousservice and agency fees between Doe Run and Doe Run Peru and sales of metal toDoe Run by Doe Run Peru and to FPI by Doe Run.

 

18

----

 

** **

**CondensedConsolidating Balance Sheet (unaudited)**

**As ofApril 30, 2006**

**(Dollarsin thousands, except share and per share data)**

 
| ** **                                                                                 | ** ** | **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                                                                                       |       | $                                                    | 1,072      |                                          | $          | —                          |       | $                                   | 1          |             | $          | 22,840           |       | $ | — |   | $ | 23,913 |   |
| Trade accounts  receivable, net of allowance for doubtful accounts                         |       | 84,869                                               |       | —                                        |       | 2,565                           |       | 55,677                              |       | (7,363           | )          | 135,748          |       |
| Inventories                                                                                |       | 42,495                                               |       | —                                        |       | 1,605                           |       | 123,436                             |       | (40              | )          | 167,496          |       |
| Prepaid expenses  and other current assets                                                 |       | 4,776                                                |       | —                                        |       | 40                              |       | 22,772                              |       | —           |       | 27,588           |       |
| Due from  subsidiaries/parent                                                              |       | 9,023                                                |       | 2,512                                         |       | —                          |       | —                              |       | (11,535          | )          | —           |       |
| Total current  assets                                                                      |       | 142,235                                              |       | 2,512                                         |       | 4,211                           |       | 224,725                             |       | (18,938          | )          | 354,745          |       |
| Property, plant  and equipment, net                                                        |       | 75,477                                               |       | 14,720                                        |       | 805                             |       | 171,713                             |       | —           |       | 262,715          |       |
| Due from  subsidiaries                                                                     |       | 156,753                                              |       | —                                        |       | —                          |       | —                              |       | (156,753         | )          | —           |       |
| Other noncurrent  assets, net                                                              |       | 8,300                                                |       | —                                        |       | 63                              |       | 270                                 |       | —           |       | 8,633            |       |
| Investment in  subsidiaries                                                                |       | 27,984                                               |       | —                                        |       | —                          |       | —                              |       | (27,984          | )          | —           |       |
| Total assets                                                                               |       | $                                                    | 410,749    |                                          | $          | 17,232                          |       | $                                   | 5,079      |             | $          | 396,708          |       | $ | (203,675 | ) | $ | 626,093 |   |
|                                                                                       |       |                                                 |       |                                          |       |                            |       |                                |       |             |       |             |       |
| **LIABILITIES  AND SHAREHOLDERS' EQUITY (DEFICIT)**                                        |       |
| Current  liabilities:                                                                      |       |                                                 |       |                                          |       |                            |       |                                |       |             |       |             |       |
|                                                                                       |       |                                                 |       |                                          |       |                            |       |                                |       |             |       |             |       |
| Current  maturities of long-term debt                                                      |       | $                                                    | 67,581     |                                          | $          | —                          |       | $                                   | —     |             | $          | 46,006           |       | $ | — |   | $ | 113,587 |   |
| Accounts payable                                                                           |       | 31,864                                               |       | —                                        |       | 434                             |       | 133,219                             |       | (7,363           | )          | 158,154          |       |
| Accrued  liabilities                                                                       |       | 68,587                                               |       | —                                        |       | 604                             |       | 37,558                              |       | —           |       | 106,749          |       |
| Due to  parent/subsidiaries                                                                |       | 2,512                                                |       | —                                        |       | 9,023                           |       | —                              |       | (11,535          | )          | —           |       |
| Total current  liabilities                                                                 |       | 170,544                                              |       | —                                        |       | 10,061                          |       | 216,783                             |       | (18,898          | )          | 378,490          |       |
|                                                                                       |       |                                                 |       |                                          |       |                            |       |                                |       |             |       |             |       |
| Long-term debt,  less current maturities                                                   |       | 258,704                                              |       | —                                        |       | —                          |       | 3,935                               |       | —           |       | 262,639          |       |
| Due to parent                                                                              |       | —                                               |       | —                                        |       | —                          |       | 156,753                             |       | (156,753         | )          | —           |       |
| Other noncurrent  liabilities                                                              |       | 63,414                                               |       | —                                        |       | 3                               |       | 3,460                               |       | —           |       | 66,877           |       |
| Total liabilities                                                                          |       | 492,662                                              |       | —                                        |       | 10,064                          |       | 380,931                             |       | (175,651         | )          | 708,006          |       |
|                                                                                       |       |                                                 |       |                                          |       |                            |       |                                |       |             |       |             |       |
| Series A redeemable  preferred stock                                                       |       | 30,276                                               |       | —                                        |       | —                          |       | —                              |       | —           |       | 30,276           |       |
|                                                                                       |       |                                                 |       |                                          |       |                            |       |                                |       |             |       |             |       |
| 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                                                                |       | —                                               |       | 23,305                                        |       | 1,205                           |       | —                              |       | (24,510          | )          | —           |       |
| Accumulated  preferred stock dividends in excess of paid in capital                        |       | (5,038                                               | )          | —                                        |       | —                          |       | —                              |       | —           |       | (5,038           | )          |
| Retained earnings  (accumulated deficit and accumulated) other comprehensive losses        |       | (107,151                                             | )          | (6,073                                        | )          | (6,191                          | )          | 13,772                              |       | (1,508           | )          | (107,151         | )          |
| Total  shareholders’ equity (deficit)                                                 |       | (112,189                                             | )          | 17,232                                        |       | (4,985                          | )          | 15,777                              |       | (28,024          | )          | (112,189         | )          |
| Total liabilities  and shareholders’ equity (deficit)                                 |       | $                                                    | 410,749    |                                          | $          | 17,232                          |       | $                                   | 5,079      |             | $          | 396,708          |       | $ | (203,675 | ) | $ | 626,093 |   |

 

 

19

----

 

**Condensed Consolidating Balance SheetAs of October 31, 2005****(Dollars in thousands, except share and per share data)**

 
| ** **                                                                                  | ** ** | **The  Company** | ** ** | **Buick**          | ** ** | ** **     | ** ** | ** **      | ** ** | ** **       | ** ** | ** **  | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------|------------|--------------------|------------|----------------|------------|-----------------|------------|------------------|------------|-------------|------------|
| ** **                                                                                  | ** ** | **Excluding**    | ** ** | **Resource**       | ** ** | **Other**      | ** ** | **Doe Run**     | ** ** | ** **       | ** ** | ** **  | ** ** |
| ** **                                                                                  | ** ** | **Guarantor**    | ** ** | **Recycling**      | ** ** | **Domestic**   | ** ** | **Cayman  and** | ** ** | ** **       | ** ** | **The**     | ** ** |
| ** **                                                                                  | ** ** | **Subsidiaries** | ** ** | **Facility,  LLC** | ** ** | **Guarantors** | ** ** | **Subsidiary**  | ** ** | **Eliminations** | ** ** | **Company** | ** ** |
|                                                                                        |       |             |       |               |       |           |       |            |       |             |       |        |       |
| **ASSETS**                                                                                  | ** ** |
| Current assets:                                                                             |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Cash                                                                                        |       | $                | 8,916      |               | $          | —         |       | $               | 1          |             | $          | 14,569      |       | $ | — |   | $ | 23,486 |   |
| Trade accounts  receivable, net of allowance for doubtful accounts                          |       | 56,454           |       | —             |       | 2,202          |       | 31,637          |       | (4,553           | )          | 85,740      |       |
| Inventories                                                                                 |       | 35,613           |       | —             |       | 1,301          |       | 68,756          |       | (36              | )          | 105,634     |       |
| Prepaid expenses  and other current assets                                                  |       | 4,564            |       | —             |       | 59             |       | 16,191          |       | —           |       | 20,814      |       |
| Due from  subsidiaries                                                                      |       | 151,617          |       | 2,037              |       | —         |       | —          |       | (153,654         | )          | —      |       |
| Total current  assets                                                                       |       | 257,164          |       | 2,037              |       | 3,563          |       | 131,153         |       | (158,243         | )          | 235,674     |       |
|                                                                                        |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Property, plant  and equipment, net                                                         |       | 74,604           |       | 16,083             |       | 1,013          |       | 161,563         |       | —           |       | 253,263     |       |
| Due from  subsidiaries                                                                      |       | 14,057           |       | —             |       | —         |       | —          |       | (14,057          | )          | —      |       |
| Other noncurrent  assets, net                                                               |       | 5,775            |       | —             |       | 63             |       | —          |       | —           |       | 5,838       |       |
| Investment in  subsidiaries                                                                 |       | 6,708            |       | —             |       | —         |       | —          |       | (6,708           | )          | —      |       |
| Total assets                                                                                |       | $                | 358,308    |               | $          | 18,120         |       | $               | 4,639      |             | $          | 292,716     |       | $ | (179,008 | ) | $ | 494,775 |   |
|                                                                                        |       |             |       |               |       |           |       |            |       |             |       |        |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY (DEFICIT)**                                    | ** ** |
| Current  liabilities:                                                                       |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Current  maturities of long-term debt                                                       |       | $                | 75,126     |               | $          | —         |       | —          |       | $                | 39,821     |        | $          | — |   | $ | 114,947 |   |
| Accounts payable                                                                            |       | 29,007           |       | —             |       | 706            |       | 67,115          |       | (4,553           | )          | 92,275      |       |
| Accrued  liabilities                                                                        |       | 55,392           |       | —             |       | 468            |       | 31,200          |       | —           |       | 87,060      |       |
| Due to  parent/subsidiaries                                                                 |       | 2,037            |       | —             |       | 8,554          |       | 143,063         |       | (153,654         | )          | —      |       |
| Total current  liabilities                                                                  |       | 161,562          |       | —             |       | 9,728          |       | 281,199         |       | (158,207         | )          | 294,282     |       |
|                                                                                        |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Long-term debt,  less current maturities                                                    |       | 271,566          |       | —             |       | —         |       | —          |       | —           |       | 271,566     |       |
| Due to parent                                                                               |       | —           |       | —             |       | —         |       | 14,057          |       | (14,057          | )          | —      |       |
| Other noncurrent  liabilities                                                               |       | 64,590           |       | —             |       | 281            |       | 3,466           |       | —           |       | 68,337      |       |
| Total liabilities                                                                           |       | 497,718          |       | —             |       | 10,009         |       | 298,722         |       | (172,264         | )          | 634,185     |       |
|                                                                                        |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Series A  redeemable preferred stock                                                        |       | 28,495           |       | —             |       | —         |       | —          |       | —           |       | 28,495      |       |
|                                                                                        |       |             |       |               |       |           |       |            |       |             |       |        |       |
| 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                                                                 |       | —           |       | 23,305             |       | 1,205          |       | —          |       | (24,510          | )          | —      |       |
| Accumulated  preferred stock dividends in excess of paid in capital                         |       | (3,257           | )          | —             |       | —         |       | —          |       | —           |       | (3,257      | )          |
| Accumulated  deficit and accumulated other comprehensive losses                             |       | (164,648         | )          | (5,185             | )          | (6,576         | )          | (8,011          | )          | 19,772           |       | (164,648    | )          |
| Total  shareholders’ equity (deficit)                                                  |       | (167,905         | )          | 18,120             |       | (5,370         | )          | (6,006          | )          | (6,744           | )          | (167,905    | )          |
| Total liabilities  and shareholders’ equity (deficit)                                  |       | $                | 358,308    |               | $          | 18,120         |       | $               | 4,639      |             | $          | 292,716     |       | $ | (179,008 | ) | $ | 494,775 |   |

 

 

20

----

 

**Condensed Consolidating Statement of Operations (unaudited)Six Months Ended April 30, 2006****(Dollars in thousands)**

 
| ** **                                           | ** ** | **The  Company** | ** ** | **Buick**          | ** ** | ** **     | ** ** | ** **      | ** ** | ** **       | ** ** | ** **  | ** ** |
|------------------------------------------------------|------------|------------------|------------|--------------------|------------|----------------|------------|-----------------|------------|------------------|------------|-------------|------------|
| ** **                                           | ** ** | **Excluding**    | ** ** | **Resource**       | ** ** | ** **     | ** ** | **Doe Run**     | ** ** | ** **       | ** ** | ** **  | ** ** |
| ** **                                           | ** ** | **Guarantor**    | ** ** | **Recycling**      | ** ** | **Domestic**   | ** ** | **Cayman  and** | ** ** | ** **       | ** ** | **The**     | ** ** |
| ** **                                           | ** ** | **Subsidiaries** | ** ** | **Facility,  LLC** | ** ** | **Guarantors** | ** ** | **Subsidiary**  | ** ** | **Eliminations** | ** ** | **Company** | ** ** |
|                                                 |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Net sales                                            |       | $                | 237,845    |               | $          | —         |       | $               | 7,393      |             | $          | 462,696     |       | $ | (13,589 | ) | $ | 694,345 |   |
|                                                 |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Costs and expenses:                                  |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Cost of sales                                        |       | 161,435          |       | —             |       | 5,248          |       | 417,249         |       | (13,585          | )          | 570,347     |       |
| Depletion,  depreciation and amortization            |       | 4,771            |       | 1,364              |       | 219            |       | 6,774           |       | —           |       | 13,128      |       |
| Selling, general  and administrative                 |       | 15,425           |       | —             |       | 1,327          |       | 11,816          |       | —           |       | 28,568      |       |
| Unrealized gain  on derivative financial instruments |       | (1,963           | )          | —             |       | —         |       | (2,293          | )          | —           |       | (4,256      | )          |
| Other                                                |       | 2,028            |       | —             |       | —         |       | 1,087           |       | —           |       | 3,115       |       |
| Total costs and  expenses                            |       | 181,696          |       | 1,364              |       | 6,794          |       | 434,633         |       | (13,585          | )          | 610,902     |       |
|                                                 |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Income (loss)  from operations                       |       | 56,149           |       | (1,364             | )          | 599            |       | 28,063          |       | (4               | )          | 83,443      |       |
|                                                 |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Other income (expense):                              |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Interest expense,  net                               |       | (2,004           | )          | —             |       | (217           | )          | (1,504          | )          | —           |       | (3,725      | )          |
| Other, net                                           |       | (487             | )          | 475                |       | 3              |       | 494             |       | —           |       | 485         |       |
| Equity in  earnings of subsidiaries                  |       | 21,275           |       | —             |       | —         |       | —          |       | (21,275          | )          | —      |       |
|                                                 |       | 18,784           |       | 475                |       | (214           | )          | (1,010          | )          | (21,275          | )          | (3,240      | )          |
|                                                 |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Income (loss)  before income tax expense             |       | 74,933           |       | (889               | )          | 385            |       | 27,053          |       | (21,279          | )          | 80,203      |       |
|                                                 |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Income tax  expense                                  |       | —           |       | —             |       | —         |       | 5,270           |       | —           |       | 5,270       |       |
| Net income (loss)                                    |       | 74,933           |       | (889               | )          | 385            |       | 21,783          |       | (21,279          | )          | 74,933      |       |
| Preferred stock  dividends                           |       | (1,781           | )          | —             |       | —         |       | —          |       | —           |       | (1,781      | )          |
| Net income (loss)  allocable to common shares        |       | $                | 73,152     |               | $          | (889           | )          | $               | 385        |             | $          | 21,783      |       | $ | (21,279 | ) | $ | 73,152 |   |
|                                                      |            |                  |            |                    |            |                |            |                 |            |                  |            |             |            |  |  |  |  |  |  |  |

 

 

21

----

 

**Condensed Consolidating Statement of Operations (unaudited)Three Months Ended April 30, 2006****(Dollars in thousands)**

 
| ** **                                           | ** ** | **The  Company** | ** ** | **Buick**          | ** ** | ** **     | ** ** | ** **      | ** ** | ** **       | ** ** | ** **  | ** ** |
|------------------------------------------------------|------------|------------------|------------|--------------------|------------|----------------|------------|-----------------|------------|------------------|------------|-------------|------------|
| ** **                                           | ** ** | **Excluding**    | ** ** | **Resource**       | ** ** | ** **     | ** ** | **Doe Run**     | ** ** | ** **       | ** ** | ** **  | ** ** |
| ** **                                           | ** ** | **Guarantor**    | ** ** | **Recycling**      | ** ** | **Domestic**   | ** ** | **Cayman  and** | ** ** | ** **       | ** ** | **The**     | ** ** |
| ** **                                           | ** ** | **Subsidiaries** | ** ** | **Facility,  LLC** | ** ** | **Guarantors** | ** ** | **Subsidiary**  | ** ** | **Eliminations** | ** ** | **Company** | ** ** |
|                                                 |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Net sales                                            |       | $                | 129,015    |               | $          | —         |       | $               | 4,030      |             | $          | 253,764     |       | $ | (6,588 | ) | $ | 380,221 |   |
|                                                 |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Costs and expenses:                                  |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Cost of sales                                        |       | 83,981           |       | —             |       | 2,707          |       | 226,815         |       | (6,543           | )          | 306,960     |       |
| Depletion,  depreciation and amortization            |       | 2,447            |       | 684                |       | 109            |       | 3,775           |       | —           |       | 7,015       |       |
| Selling, general  and administrative                 |       | 8,958            |       | —             |       | 671            |       | 5,832           |       | —           |       | 15,461      |       |
| Unrealized gain  on derivative financial instruments |       | (2,278           | )          | —             |       | —         |       | (23             | )          | —           |       | (2,301      | )          |
| Other                                                |       | 1,011            |       | —             |       | —         |       | 797             |       | —           |       | 1,808       |       |
| Total costs and  expenses                            |       | 94,119           |       | 684                |       | 3,487          |       | 237,196         |       | (6,543           | )          | 328,943     |       |
|                                                 |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Income (loss)  from operations                       |       | 34,896           |       | (684               | )          | 543            |       | 16,568          |       | (45              | )          | 51,278      |       |
|                                                 |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Other income (expense):                              |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Interest expense,  net                               |       | (851             | )          | —             |       | (101           | )          | (36             | )          | —           |       | (988        | )          |
| Other, net                                           |       | (246             | )          | 230                |       | 1              |       | 594             |       | —           |       | 579         |       |
| Equity in  earnings of subsidiaries                  |       | 13,642           |       | —             |       | —         |       | —          |       | (13,642          | )          | —      |       |
|                                                 |       | 12,545           |       | 230                |       | (100           | )          | (558            | )          | (13,642          | )          | (409        | )          |
|                                                 |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Income (loss)  before income tax expense             |       | 47,441           |       | (454               | )          | 443            |       | 17,126          |       | (13,687          | )          | 50,869      |       |
|                                                 |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Income tax  expense                                  |       | —           |       | —             |       | —         |       | 3,428           |       | —           |       | 3,428       |       |
| Net income (loss)                                    |       | 47,441           |       | (454               | )          | 443            |       | 13,698          |       | (13,687          | )          | 47,441      |       |
| Preferred stock  dividends                           |       | (891             | )          | —             |       | —         |       | —          |       | —           |       | (891        | )          |
| Net income (loss)  allocable to common shares        |       | $                | 46,550     |               | $          | (454           | )          | $               | 443        |             | $          | 13,698      |       | $ | (13,687 | ) | $ | 46,550 |   |

 

 

22

----

 

**Condensed Consolidating Statement of Operations (unaudited)Six Months Ended April 30, 2005****(Dollars in thousands)**

 
| ** **                                                  | ** ** | **The Company**  | ** ** | **Buick**          | ** ** | ** **     | ** ** | ** **      | ** ** | ** **       | ** ** | ** **  | ** ** |
|-------------------------------------------------------------|------------|------------------|------------|--------------------|------------|----------------|------------|-----------------|------------|------------------|------------|-------------|------------|
| ** **                                                  | ** ** | **Excluding**    | ** ** | **Resource**       | ** ** | ** **     | ** ** | **Doe Run**     | ** ** | ** **       | ** ** | ** **  | ** ** |
| ** **                                                  | ** ** | **Guarantor**    | ** ** | **Recycling**      | ** ** | **Domestic**   | ** ** | **Cayman  and** | ** ** | ** **       | ** ** | **The**     | ** ** |
| ** **                                                  | ** ** | **Subsidiaries** | ** ** | **Facility,  LLC** | ** ** | **Guarantors** | ** ** | **Subsidiary**  | ** ** | **Eliminations** | ** ** | **Company** | ** ** |
|                                                        |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Net sales                                                   |       | $                | 170,687    |               | $          | —         |       | $               | 7,201      |             | $          | 309,425     |       | $ | (3,615 | ) | $ | 483,698 |   |
|                                                        |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Costs and expenses:                                         |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Cost of sales                                               |       | 130,709          |       | —             |       | 5,240          |       | 285,010         |       | (3,628           | )          | 417,331     |       |
| Depletion,  depreciation and amortization                   |       | 4,533            |       | 1,256              |       | 209            |       | 5,903           |       | —           |       | 11,901      |       |
| Selling, general  and administrative                        |       | 12,631           |       | —             |       | 1,202          |       | 8,853           |       | —           |       | 22,686      |       |
| Unrealized (gain)  loss on derivative financial instruments |       | (1,492           | )          | —             |       | —         |       | 231             |       | —           |       | (1,261      | )          |
| Other                                                       |       | 2,840            |       | 29                 |       | 152            |       | 137             |       | —           |       | 3,158       |       |
| Total costs and  expenses                                   |       | 149,221          |       | 1,285              |       | 6,803          |       | 300,134         |       | (3,628           | )          | 453,815     |       |
|                                                        |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Income (loss)  from operations                              |       | 21,466           |       | (1,285             | )          | 398            |       | 9,291           |       | 13               |       | 29,883      |       |
|                                                        |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Other income (expense):                                     |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Interest expense,  net                                      |       | (5,207           | )          | —             |       | (314           | )          | (1,234          | )          | —           |       | (6,755      | )          |
| Other, net                                                  |       | (438             | )          | 446                |       | 2              |       | 215             |       | —           |       | 225         |       |
| Equity in  earnings of subsidiaries                         |       | 7,532            |       | —             |       | —         |       | —          |       | (7,532           | )          | —      |       |
|                                                        |       | 1,887            |       | 446                |       | (312           | )          | (1,019          | )          | (7,532           | )          | (6,530      | )          |
|                                                        |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Income (loss)  before income tax expense                    |       | 23,353           |       | (839               | )          | 86             |       | 8,272           |       | (7,519           | )          | 23,353      |       |
|                                                        |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Income tax  expense                                         |       | —           |       | —             |       | —         |       | —          |       | —           |       | —      |       |
| Net income (loss)                                           |       | 23,353           |       | (839               | )          | 86             |       | 8,272           |       | (7,519           | )          | 23,353      |       |
| Preferred stock  dividends                                  |       | (1,583           | )          | —             |       | —         |       | —          |       | —           |       | (1,583      | )          |
| Net income (loss)  allocable to common shares               |       | $                | 21,770     |               | $          | (839           | )          | $               | 86         |             | $          | 8,272       |       | $ | (7,519 | ) | $ | 21,770 |   |

 

 

 

23

----

 

 

**Condensed Consolidating Statement of Operations (unaudited)Three Months Ended April 30, 2005****(Dollars in thousands)**

 
| ** **                                           | ** ** | **The  Company** | ** ** | **Buick**          | ** ** | ** **     | ** ** | ** **      | ** ** | ** **       | ** ** | ** **  | ** ** |
|------------------------------------------------------|------------|------------------|------------|--------------------|------------|----------------|------------|-----------------|------------|------------------|------------|-------------|------------|
| ** **                                           | ** ** | **Excluding**    | ** ** | **Resource**       | ** ** | ** **     | ** ** | **Doe Run**     | ** ** | ** **       | ** ** | ** **  | ** ** |
| ** **                                           | ** ** | **Guarantor**    | ** ** | **Recycling**      | ** ** | **Domestic**   | ** ** | **Cayman  and** | ** ** | ** **       | ** ** | **The**     | ** ** |
| ** **                                           | ** ** | **Subsidiaries** | ** ** | **Facility,  LLC** | ** ** | **Guarantors** | ** ** | **Subsidiary**  | ** ** | **Eliminations** | ** ** | **Company** | ** ** |
|                                                 |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Net sales                                            |       | $                | 86,305     |               | $          | —         |       | $               | 3,386      |             | $          | 158,316     |       | $ | (291 | ) | $ | 247,716 |   |
|                                                 |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Costs and expenses:                                  |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Cost of sales                                        |       | 70,671           |       | —             |       | 2,290          |       | 146,646         |       | (279             | )          | 219,328     |       |
| Depletion,  depreciation and amortization            |       | 2,274            |       | 633                |       | 109            |       | 2,748           |       | —           |       | 5,764       |       |
| Selling, general  and administrative                 |       | 6,605            |       | —             |       | 615            |       | 4,539           |       | —           |       | 11,759      |       |
| Unrealized gain  on derivative financial instruments |       | (383             | )          | —             |       | —         |       | (80             | )          | —           |       | (463        | )          |
| Other                                                |       | 1,319            |       | —             |       | (1             | )          | 3               |       | —           |       | 1,321       |       |
| Total costs and  expenses                            |       | 80,486           |       | 633                |       | 3,013          |       | 153,856         |       | (279             | )          | 237,709     |       |
|                                                 |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Income (loss)  from operations                       |       | 5,819            |       | (633               | )          | 373            |       | 4,460           |       | (12              | )          | 10,007      |       |
|                                                 |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Other income (expense):                              |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Interest expense,  net                               |       | (2,528           | )          | —             |       | (158           | )          | (628            | )          | —           |       | (3,314      | )          |
| Other, net                                           |       | (359             | )          | 222                |       | —         |       | 110             |       | —           |       | (27         | )          |
| Equity in  earnings of subsidiaries                  |       | 3,734            |       | —             |       | —         |       | —          |       | (3,734           | )          | —      |       |
|                                                 |       | 847              |       | 222                |       | (158           | )          | (518            | )          | (3,734           | )          | (3,341      | )          |
|                                                 |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Income (loss)  before income tax expense             |       | 6,666            |       | (411               | )          | 215            |       | 3,942           |       | (3,746           | )          | 6,666       |       |
|                                                 |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Income tax  expense                                  |       | —           |       | —             |       | —         |       | —          |       | —           |       | —      |       |
| Net income (loss)                                    |       | 6,666            |       | (411               | )          | 215            |       | 3,942           |       | (3,746           | )          | 6,666       |       |
| Preferred stock  dividends                           |       | (791             | )          | —             |       | —         |       | —          |       | —           |       | (791        | )          |
| Net income (loss)  allocable to common shares        |       | $                | 5,875      |               | $          | (411           | )          | $               | 215        |             | $          | 3,942       |       | $ | (3,746 | ) | $ | 5,875 |   |
|                                                      |            |                  |            |                    |            |                |            |                 |            |                  |            |             |            |  |  |  |  |  |  |  |

 

 

24

----

 

 

**Condensed Consolidating Statement of Cash Flows (unaudited)  Six Months Ended April 30, 2006****(Dollars in thousands)**

 
| ** **                                                    | ** ** | **The  Company** | ** ** | **Buick**          | ** ** | ** **     | ** ** | ** **      | ** ** | ** **       | ** ** | ** **  | ** ** |
|---------------------------------------------------------------|------------|------------------|------------|--------------------|------------|----------------|------------|-----------------|------------|------------------|------------|-------------|------------|
| ** **                                                    | ** ** | **Excluding**    | ** ** | **Resource**       | ** ** | ** **     | ** ** | **Doe Run**     | ** ** | ** **       | ** ** | ** **  | ** ** |
| ** **                                                    | ** ** | **Guarantor**    | ** ** | **Recycling**      | ** ** | **Domestic**   | ** ** | **Cayman  and** | ** ** | ** **       | ** ** | **The**     | ** ** |
| ** **                                                    | ** ** | **Subsidiaries** | ** ** | **Facility,  LLC** | ** ** | **Guarantors** | ** ** | **Subsidiary**  | ** ** | **Eliminations** | ** ** | **Company** | ** ** |
|                                                          |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Net cash provided  by operating activities                    |       | $                | 41,081     |               | $          | 475            |       | $               | 129        |             | $          | 16,941      |       | $ | (21,275 | ) | $ | 37,351 |   |
|                                                          |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Cash flows from investing activities:                         |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Purchases of  property, plant and equipment                   |       | (5,869           | )          | —             |       | (12            | )          | (17,250         | )          | —           |       | (23,131     | )          |
| Net proceeds from  sales of investments                       |       | —           |       | —             |       | —         |       | —          |       | —           |       | —      |       |
| Investment in  subsidiaries                                   |       | (21,275          | )          | —             |       | —         |       | —          |       | 21,275           |       | —      |       |
| Net cash used in  investing activities                        |       | (27,144          | )          | —             |       | (12            | )          | (17,250         | )          | 21,275           |       | (23,131     | )          |
|                                                          |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Cash flows from  financing activities:                        |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Proceeds from  revolving loans and short-term borrowings, net |       | 455              |       | —             |       | —         |       | —          |       | —           |       | 455         |       |
| Proceeds from  long-term debt                                 |       | —           |       | —             |       | —         |       | 10,000          |       | —           |       | 10,000      |       |
| Payments on  long-term debt                                   |       | (20,862          | )          | —             |       | —         |       | (128            | )          | —           |       | (20,990     | )          |
| Payment of  financing costs                                   |       | —           |       | —             |       | —         |       | (925            | )          |             |       | (925        | )          |
| Payments of  dividends                                        |       | (2,333           | )          | —             |       | —         |       | —          |       | —           |       | (2,333      | )          |
| Change in due  to/due from parent/subsdiaries                 |       | 959              |       | (475               | )          | (117           | )          | (367            | )          | —           |       | —      |       |
| Net cash provided  by (used in) financing activities          |       | (21,781          | )          | (475               | )          | (117           | )          | 8,580           |       | —           |       | (13,793     | )          |
|                                                          |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Net increase  (decrease) in cash                              |       | (7,844           | )          | —             |       | —         |       | 8,271           |       | —           |       | 427         |       |
|                                                          |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Cash at beginning of period                                   |       | 8,916            |       | —             |       | 1              |       | 14,569          |       | —           |       | 23,486      |       |
| Cash at end of period                                         |       | $                | 1,072      |               | $          | —         |       | $               | 1          |             | $          | 22,840      |       | $ | — |   | $ | 23,913 |   |

 

 

25

----

 

 

**Condensed Consolidating Statement of Cash Flows (unaudited)  Six Months Ended April 30, 2005****(Dollars in thousands)**

 
| ** **                                                    | ** ** | **The  Company** | ** ** | **Buick**          | ** ** | ** **     | ** ** | ** **      | ** ** | ** **       | ** ** | ** **  | ** ** |
|---------------------------------------------------------------|------------|------------------|------------|--------------------|------------|----------------|------------|-----------------|------------|------------------|------------|-------------|------------|
| ** **                                                    | ** ** | **Excluding**    | ** ** | **Resource**       | ** ** | ** **     | ** ** | **Doe Run**     | ** ** | ** **       | ** ** | ** **  | ** ** |
| ** **                                                    | ** ** | **Guarantor**    | ** ** | **Recycling**      | ** ** | **Domestic**   | ** ** | **Cayman  and** | ** ** | ** **       | ** ** | **The**     | ** ** |
| ** **                                                    | ** ** | **Subsidiaries** | ** ** | **Facility,  LLC** | ** ** | **Guarantors** | ** ** | **Subsidiary**  | ** ** | **Eliminations** | ** ** | **Company** | ** ** |
|                                                          |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Net cash provided  by (used in) operating activities          |       | $                | 13,758     |               | $          | 417            |       | $               | (709       | )                | $          | 22,587      |       | $ | (8,851 | ) | $ | 27,202 |   |
|                                                          |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Cash flows from investing activities:                         |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Purchases of  property, plant and equipment                   |       | (8,387           | )          | —             |       | (130           | )          | (18,097         | )          | —           |       | (26,614     | )          |
| Net proceeds from  sales of investments                       |       | 333              |       | —             |       | —         |       | —          |       | —           |       | 333         |       |
| Investment in  subsidiaries                                   |       | (8,851           | )          | —             |       | —         |       | —          |       | 8,851            |       | —      |       |
| Net cash used in  investing activities                        |       | (16,905          | )          | —             |       | (130           | )          | (18,097         | )          | 8,851            |       | (26,281     | )          |
|                                                          |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Cash flows from financing activities:                         |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Proceeds from  revolving loans and short-term borrowings, net |       | 10,535           |       | —             |       | —         |       | (5,200          | )          | —           |       | 5,335       |       |
| Payments on  long-term debt                                   |       | (14,621          | )          | —             |       | —         |       | (17             | )          | —           |       | (14,638     | )          |
| Payments of  dividends                                        |       | (310             | )          | —             |       | —         |       | —          |       | —           |       | (310        | )          |
| Change in due  to/due from parent/subsdiaries                 |       | 1,575            |       | (417               | )          | 839            |       | (1,997          | )          | —           |       | —      |       |
| Net cash provided  by (used in) financing activities          |       | (2,821           | )          | (417               | )          | 839            |       | (7,214          | )          | —           |       | (9,613      | )          |
|                                                          |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Net decrease in  cash                                         |       | (5,968           | )          | —             |       | —         |       | (2,724          | )          | —           |       | (8,692      | )          |
|                                                          |       |             |       |               |       |           |       |            |       |             |       |        |       |
| Cash at beginning of period                                   |       | 13,412           |       | —             |       | 1              |       | 6,905           |       | —           |       | 20,318      |       |
| Cash at end of period                                         |       | $                | 7,444      |               | $          | —         |       | $               | 1          |             | $          | 4,181       |       | $ | — |   | $ | 11,626 |   |

 

 

26

----

 

**DOE RUNPERU S.R.L.**

**CondensedBalance Sheets**

**(U.S.dollars in thousands, except share and per share data)**

 
| ** **                                                        | ** ** | **April 30,**   | ** ** | **October 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------|------------|-----------------|------------|
| ** **                                                        | ** ** | **2006**        | ** ** | **2005**        | ** ** |
| ** **                                                        | ** ** | **(unaudited)** | ** ** | ** **      | ** ** |
| **ASSETS**                                                        | ** ** | ** **      | ** ** | ** **      | ** ** |
| Current assets:                                                   |       |            |       |            |       |
| Cash                                                              |       | $               | 22,840     |            | $          | 14,569 |   |
| Trade accounts receivable, net of allowance for doubtful accounts |       | 55,677          |       | 31,637          |       |
| Inventories                                                       |       | 123,436         |       | 68,756          |       |
| Prepaid expenses and other current assets                         |       | 22,772          |       | 16,191          |       |
| Total current assets                                              |       | 224,725         |       | 131,153         |       |
|                                                              |       |            |       |            |       |
| Property, plant and  equipment, net                               |       | 171,713         |       | 161,563         |       |
| Other noncurrent assets,  net                                     |       | 270             |       | —          |       |
| Total assets                                                      |       | $               | 396,708    |            | $          | 292,716 |   |
|                                                              |       |            |       |            |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)**           | ** ** | ** **      | ** ** | ** **      | ** ** |
| Current liabilities:                                              |       |            |       |            |       |
| Current maturities of long-term debt                              |       | $               | 46,006     |            | $          | 39,821 |   |
| Accounts payable                                                  |       | 133,219         |       | 67,115          |       |
| Accrued liabilities                                               |       | 37,558          |       | 31,200          |       |
| Due to related parties                                            |       | —          |       | 143,063         |       |
| Total current liabilities                                         |       | 216,783         |       | 281,199         |       |
|                                                              |       |            |       |            |       |
| Long-term debt, less  current maturities                          |       | 3,935           |       | —          |       |
| Due to parent company and  related parties                        |       | 156,753         |       | 14,057          |       |
| Other noncurrent  liabilities                                     |       | 3,460           |       | 3,466           |       |
| Total liabilities                                                 |       | 380,931         |       | 298,722         |       |
|                                                              |       |            |       |            |       |
| Shareholders’ equity  (deficit):                             |       |            |       |            |       |
| Capital stock, $0.01 par value, 15,912,083,739 shares, fully paid |       | 2,005           |       | 2,005           |       |
| Retained earnings (deficit) and comprehensive income (loss)       |       | 13,772          |       | (8,011          | )          |
| Total shareholders’ equity (deficit)                         |       | 15,777          |       | (6,006          | )          |
| Total liabilities and shareholders’ equity (deficit)         |       | $               | 396,708    |            | $          | 292,716 |   |
|                                                              |       |            |       |            |       |

 

Theaccompanying notes are an integral part of these condensed financialstatements.

 

27

----

 

**DOE RUNPERU S.R.L.**

**CondensedStatements of Operations (unaudited)**

**(U.S.dollars in thousands)**

 
| ** **                                          | ** ** | **Three Months**    | ** ** | **Six Months**      | ** ** |
|-----------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                          | ** ** | **Ended April 30,** | ** ** | **Ended April 30,** | ** ** |
| ** **                                          | ** ** | **2006**            | ** ** | **2005**            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                |       |                |       |                |       |   |   |   |   |
| Net sales                                           |       | $                   | 253,764    |                | $          | 158,316 |   | $ | 462,696 |   | $ | 309,425 |   |
|                                                |       |                |       |                |       |   |   |   |   |
| Costs and expenses:                                 |       |                |       |                |       |   |   |   |   |
| Cost of sales                                       |       | 226,815             |       | 146,646             |       | 417,249 |   | 285,010 |   |
| Depletion, depreciation and amortization            |       | 3,775               |       | 2,748               |       | 6,774 |   | 5,903 |   |
| Selling, general and administrative                 |       | 5,832               |       | 4,539               |       | 11,816 |   | 8,853 |   |
| Unrealized gain on derivative financial instruments |       | (23                 | )          | (80                 | )          | (2,293 | ) | 231 |   |
| Other                                               |       | 797                 |       | 3                   |       | 1,087 |   | 137 |   |
| Total costs and expenses                            |       | 237,196             |       | 153,856             |       | 434,633 |   | 300,134 |   |
|                                                |       |                |       |                |       |   |   |   |   |
| Income from operations                              |       | 16,568              |       | 4,460               |       | 28,063 |   | 9,291 |   |
|                                                |       |                |       |                |       |   |   |   |   |
| Other income (expense):                             |       |                |       |                |       |   |   |   |   |
| Interest expense, net                               |       | (36                 | )          | (628                | )          | (1,504 | ) | (1,234 | ) |
| Other, net                                          |       | 594                 |       | 110                 |       | 494 |   | 215 |   |
|                                                |       | (558                | )          | (518                | )          | (1,010 | ) | (1,019 | ) |
| Income before income tax expense                    |       | 17,126              |       | 3,942               |       | 27,053 |   | 8,272 |   |
|                                                |       |                |       |                |       |   |   |   |   |
| Income tax expense                                  |       | 3,428               |       | —              |       | 5,270 |   | — |   |
|                                                |       |                |       |                |       |   |   |   |   |
| Net income                                          |       | $                   | 13,698     |                | $          | 3,942 |   | $ | 21,783 |   | $ | 8,272 |   |
|                                                |       |                |       |                |       |   |   |   |   |

 

Theaccompanying notes are an integral part of these condensed financialstatements.

 

28

----

 

 

**DOE RUNPERU S.R.L**

**CondesnedStatements of Cash Flows (unaudited)**

**(U.S.dollars in thousands)**

 
| ** **                                                                  | ** ** | **Six Months**      | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                                  | ** ** | **Ended April 30,** | ** ** |
| ** **                                                                  | ** ** | **2006**            | ** ** | **2005** | ** ** |
|                                                                        |       |                |       |   |   |
| Net cash provided by  operating activities                                  |       | $                   | 16,941     |   | $ | 22,587 |   |
|                                                                        |       |                |       |   |   |
| Cash flows from investing  activities:                                      |       |                |       |   |   |
| Purchases of property, plant and equipment                                  |       | (17,250             | )          | (18,097 | ) |
| Net cash used in investing activities                                       |       | (17,250             | )          | (18,097 | ) |
|                                                                        |       |                |       |   |   |
| Cash flows from financing  activities:                                      |       |                |       |   |   |
| Proceeds from (payments on) revolving loans and short-term borrowings,  net |       | —              |       | (5,200 | ) |
| Proceeds from long-term debt                                                |       | 10,000              |       | — |   |
| Payments on long-term debt                                                  |       | (128                | )          | (17 | ) |
| Payments of financing costs                                                 |       | (925                | )          | — |   |
| Change in amount due to/due from related parties                            |       | (367                | )          | (1,997 | ) |
|                                                                        |       |                |       |   |   |
| Net cash provided by (used in) financing activities                         |       | 8,580               |       | (7,214 | ) |
|                                                                        |       |                |       |   |   |
| Net increase (decrease) in cash                                             |       | 8,271               |       | (2,724 | ) |
|                                                                        |       |                |       |   |   |
| Cash at beginning of  period                                                |       | 14,569              |       | 6,905 |   |
| Cash at end of period                                                       |       | $                   | 22,840     |   | $ | 4,181 |   |

 

Theaccompanying notes are an integral part of these condensed financialstatements.

 

29

----

 

 

**DOE RUN PERU S.R.L**

 

**Notes toFinancial Statements**

**(U.S. dollars in thousands)**

 

 

**(1)****                     Summaryof Significant Accounting Policies**

 

***Unaudited Interim Financial Statements***

 

These interim financialstatements include the accounts of Doe Run Peru S.R.L. (“Doe Run Peru”). In theopinion of management, the interim financial statements contain alladjustments, consisting of normal recurring accruals, necessary to presentfairly the financial position as of April 30, 2006 and results of operationsfor the three and six-month periods ended April 30, 2006 and 2005.  All material intercompany balances andtransactions have been eliminated. Interim periods are not necessarily indicative of results to be expectedfor the year.

 

***Reclassifications***

 

Certain prior periodbalances have been reclassified in order to conform to the currentpresentation.

 

**(2)****                     FinancialCondition**

 

 Doe Run Peru ishighly leveraged and has significant commitments for environmental matters andfor Environmental Remediation and Management Program (“PAMA”) expenditures includingthe financial guarantees that require it to dedicate a substantial portion ofcash flow from operations to the payment of these obligations, which willreduce funds available for other business purposes.  (See Note 6: Asset Retirement andEnvironmental Obligations). These factors also increase Doe Run Peru’svulnerability to general adverse conditions, limit Doe Run Peru’s flexibilityin planning for or reacting to changes in its business and industry, and limitDoe Run Peru’s ability to obtain financing required to fund working capital andcapital expenditures and for other general corporate purposes.  An unfavorable outcome to certaincontingencies, discussed below, would have a further adverse effect on Doe RunPeru’s ability to meet its obligations when due. Doe Run Peru’s ability to meetthese obligations is also dependent upon future operating performance andfinancial results which are subject to financial, economic, political,competitive and other factors affecting Doe Run Peru, many of which are beyondDoe Run Peru’s control.

 

The effects ofhigher metal prices over the past two years have been positive. Comparing thefirst two quarters of 2006 to that of 2005, the value of the metal recoveredover the amount paid for the metal has increased 33% from $13,967 to $18,608.The values of by-products have also improved from $10,568 to $13,663 or29%.  During the first two quarters of2006, Doe Run Peru has benefited from its ferrites floatation plant which wasplaced in service at the end of the prior fiscal year. Though the plant has notreached its full capacity, it still contributed $6,033 to revenues.

 

While conversioncosts have risen by $10,832 over the two periods and SG&A has risen $2,870,management believes that Doe Run Peru’s financial condition, as a result of theimproved market conditions discussed in the preceding paragraphs, isstabilizing.  There still exists,however, the possibility that concentrate supplies will tighten again in one ormore metals in the near future or that one or more of Doe Run Peru’ssignificant local suppliers could cease delivery of concentrates. Under thesecircumstances there is no assurance that we would be able to secure sufficientreplacement at economically favorable terms. An interruption in the feed supplywould adversely affect production at La Oroya and impair financial conditionand liquidity.

 

The financial statementshave been prepared assuming Doe Run Peru will continue as a going concern.  Doe Run Peru has significant capital requirementsunder environmental commitments and guarantees and substantial contingenciesrelated to taxes and has significant debt service obligations under therevolving credit facility, each of which, if not satisfied, could result in adefault under Doe Run Peru’s credit agreement and collectively raisesubstantial doubt about Doe Run Peru’s ability to continue as a going concern.Management believes that the price improvements seen through fiscal year 2005and in the first two quarters of fiscal year 2006, the potential revenues andcash flow enhancements from the new ferrite project and the approval obtainedon May 29, 2006 to extend certain PAMA projects, will enable Doe Run Peru tocontinue as a going concern.  However,there can be no assurance that these actions will achieve the desired results.

 

 

30

----

 

Doe Run Peru continues tohave substantial cash requirements in the future, including the maturity of therevolving credit facility on September 22, 2006 and significant capitalrequirements under environmental commitments. (see Note 6: Asset Retirement andEnvironmental Obligation).  In addition,there are substantial contingencies related to taxes (see Note 4: Income Taxes)and litigation (see Note 5: Litigation).

 

Net unused availabilityat April 30, 2006 under the Doe Run Peru Revolving Credit Facility wasapproximately $200.  In addition to theavailability under its revolving credit facility, the cash balance of Doe RunPeru was $22,840 at April 30, 2006.  DoeRun Peru has reached and maintained its maximum borrowing level under the DoeRun Peru Revolving Credit Facility due in part to the higher metal pricesresulting in higher outlays for concentrate purchases and higher Value-AddedTax (“VAT”) payments funded by cash from operations.

 

The Doe Run PeruRevolving Credit Facility expires on September 22, 2006 and will requirenegotiations to extend its terms. There can be no assurance that Doe Run Peruwill be successful in extending the existing credit agreement or negotiating anew agreement, or if it is successful, that the extended or new creditagreement would be at terms that are favorable to Doe Run Peru.

 

Any default under therequirements of the PAMA could result in a default under the Doe Run PeruRevolving Credit Facility.  A defaultunder the requirements of the Doe Run Peru Revolving Credit Facility results indefaults under the Doe Run Revolving Credit Facility and the indenturegoverning the bonds.

 

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

 

Inventoriesconsist of the following:

 

| ** **                           | ** ** | **April 30,** | ** ** | **October 31,** | ** ** |
|--------------------------------------|------------|---------------|------------|-----------------|------------|
| ** **                           | ** ** | **2006**      | ** ** | **2005**        | ** ** |
|                                 |       |          |       |            |       |
| Finished metals and concentrates     |       | $             | 17,489     |            | $          | 10,397 |   |
| Metals and concentrates in process   |       | 90,528        |       | 44,668          |       |
| Materials, supplies and repair parts |       | 15,419        |       | 13,691          |       |
|                                 |       | $             | 123,436    |            | $          | 68,756 |   |

 

Materials, supplies and repair parts are stated net ofreserves for obsolescence of approximately $1,357 and $1,162 at April 30, 2006and October 31, 2005, respectively.

 

**(4)****                     IncomeTaxes**

 

Doe Run Cayman is subject to the regulations of theCayman Islands, which currently have no corporate income or capital gains tax.Doe Run Cayman’s subsidiaries located in Peru are subject to Peruvian taxation.The statutory income tax rate in Peru is 30%. Doe Run Peru has obtained aten-year tax stabilization agreement with the Peruvian government, whichprovides for Peruvian taxation based on tax statutes and regulations prevailingon November 6, 1997, beginning with the Peruvian tax year ending onDecember 31, 1997 through December 31, 2006.

 

On December 30, 1997, Doe Run Peru signed a Contractof Guarantees and Measures to Promote Investments (“Contract”) with thegovernment of Peru.  The Contract, which has been modified various times 

 

31

----

 

through 2006,committed Doe Run Peru to making certain investments related to theimprovements of its facilities in order to receive certain tax benefits. The Contract provided that if the investments were completed according to theschedule by December 31, 2006, Doe Run Peru would receive an additional taxstability agreement covering the period beginning January 1, 2007 and endingDecember 31, 2021.  Doe Run Peru will be unable to complete the requiredinvestments and, therefore, requested an extension of the time, from the Ministryof Energy and Mines (“MEM”) for these investments that would coincide with theextended period of compliance for the PAMA. MEM denied the request.  As a result, Doe Run Peru will not receivethe benefits of the additional tax stabilization agreement.

 

Doe Run Peru hasreceived income tax assessments from Peru’s tax authority (“SUNAT”) for taxyears 1998 through 2001.  The assessmentsprimarily relate to Doe Run Peru’s income tax treatment of the December 1997merger of Metaloroya S.A. into Doe Run Peru which was purchased by Doe Run Peruin October 1997, and its effects on subsequent years’ taxable income.  Under the assessment by SUNAT, the tax basisof Doe Run Peru’s fixed assets acquired would decrease, resulting in lower taxdepreciation expense than originally claimed. The assessments of years 1999 through 2001 also relate to thedisallowance of the deduction of interest paid, the offsetting of losses onderivatives executed in the U.S. and some leaseback and leasing operations. Theestimated assessed amount consisting of additional income taxes due, penaltiesand interest as of April 30, 2006 totals approximately $121,100.  Doe Run Peru estimates that the effect of asimilar assessment for tax years after 2001 would be approximately$32,900.  Furthermore, Doe Run Peru wouldalso be required to make additional workers’ profit sharing payments equal to8% of the increase in taxable income generated by the changes discussed above,or approximately $11,300, for calendar years 1998 through 2005.

 

Doe Run Peru has alsoreceived VAT assessments for the tax years 1999 through 2001 and for the periodfrom January through July 2004.  Theassessments primarily relate to Doe Run Peru’s exports with holdingcertificates and differences in a tax credit application. The total assessmentfor these periods, calculated with penalties and interest as of April 30, 2006,was approximately $48,100. SUNAT offset the amount assessed for 2004 ofapproximately $2,300 against Doe Run Peru’s VAT receivable balance from July of2004.  Future VAT reimbursements cannotbe used to offset the assessment by SUNAT. Doe Run Peru discontinued the use of holding certificates for exports inJune 2004. Doe Run Peru estimates expected additional assessments related toVAT for tax years 2002 and 2003, calculated with penalties and interest as ofApril 30, 2006, to total approximately $22,400 in regard to its exports withholding certificates.

 

Management of Doe RunPeru believes 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. No amounts have been accrued asliabilities related to these actions.

 

For the past severalyears, Doe Run Peru has generated net losses from operations that according totax law may be used to offset taxable income in the future.  Doe Run Peru expects to utilize all of itsnet operating loss carryforwards in the current fiscal year.  As a result, Doe Run Peru has recorded $5,270of income tax expense for the first two quarters of 2006.

 

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

 

All existing andpending litigations at the time of the acquisition of Doe Run Peru wereretained by Centromin, the prior owner of the La Oroya smelter and Cobrizamine.

 

Doe Run Peru is currently a defendant in 207 lawsuitsin the Lima, Peru labor courts that allege damage to workers from industrialdiseases. Doe Run Peru has made claims in most of the cases against Centrominand has also made claims against both governmental agencies and privatecompanies that provide workers’ insurance. The average claim is $17. Of 19previously concluded cases in this category, 18 were dismissed and 1 resultedin an award of $9.

 

32

----

 

Doe Run Peru is also currently a defendant in 164lawsuits by workers alleging that they are owed certain differences in salariesand benefits. The average claim is $20. Of 38 previously concluded cases inthis category, 29 were dismissed and 9 resulted in awards totaling $19. Doe RunPeru is also a defendant in a lawsuit by the Yauli-La Oroya Employees Unionconcerning salaries and benefits. The claims of the 149 workers remaining inthe lawsuit have been valued at a total of $218 according to a report by anexpert appointed by the court.

 

Doe Run Peru is also currently a defendant in 22lawsuits alleging various labor claims including indemnification for arbitrarydismissal, nullity of dismissal, moral damage compensation, compensatorydamages from work accident and readmission of worker. The average claim is $7.Of 30 previously concluded cases in this category, 26 were dismissed and 4resulted in awards totaling $21.

 

The amount of awards in the various categories oflawsuits referenced above represented total judgments issued by the relevantcourts. For certain of these lawsuits, Centromin will pay a portion of thetotal award.

 

On January 19, 2005, Doe Run Peru was served with alawsuit by an association of municipalities of the Junin Region of Peru againstDoe Run Peru and two other mining companies. This lawsuit alleges environmentaldamages to the Mantaro River basin in the amount of $5 billion. On February 2,2006, Doe Run Peru was served with a lawsuit by the municipality of Jauja. Thislawsuit alleges environmental damages to the Mantaro River basin in the amountof $5,000. Material liability to Doe Run Peru, in these two actions, isbelieved to be remote based on the opinion of management and outside counselfor Doe Run Peru. Any potential judgment would be subject to theindemnification obligations of Centromin, which are guaranteed by the Peruviangovernment.

 

On December 3, 2003, Doe Run Peru filed anadministrative lawsuit against the Yauli - La Oroya Provincial City Hall inorder to nullify and void a number of fines for the amount of $2,800. Doe RunPeru was fined for not having construction licenses for the PAMA projects.

 

Since most of theabove cases are either in the pleading or discovery stages, Doe Run Peru isunable at this time to estimate the expected outcome and the final costs, exceptas noted, of these actions. No amounts have been accrued as liabilities relatedto these actions. There can be no assurance that these cases would not have amaterial adverse effect, both individually and in the aggregate, on the resultsof operations, financial condition and liquidity of Doe Run Peru. Doe Run Peruhas and will continue to vigorously defend itself against such claims.

 

**(6)****                     AssetRetirement and Environmental Obligations**

 

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

 

Asset retirement obligations (“AROs”) are recognizedas liabilities when incurred, with the initial measurement at fair value. Theseliabilities will be increased to full value over time through charges ofaccretion to operating expense. In addition, an asset retirement cost iscapitalized as part of the related asset’s carrying value and will bedepreciated over the asset’s useful life. 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.

 

Mine Closure Law No. 28090 (“Law”) became effective inPeru as of October 15, 2005.  It appliesto smelters and mines. The Law establishes the obligations and procedures thattitleholders of mining activities must follow, including a financial guaranteefor environmental issues.  Doe Run Peru must submit a mine closureplan to the MEM by August 17, 2006 which must include a description of theremediation measures to be done, along with their cost and timing, and theexpected amount of the financial guarantee. Doe Run Peru has hired a technicalmining consultant to prepare the mine closure plans for Cobriza and La Oroya toinsure that they will comply with all the technical and legal requirements. Thefinancial guarantee will not be known until the final mine closure plan isapproved therefore, the guarantee is estimated to be established in January of2007.

 

33

----

 

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 eventual covering and revegetation of mixedlead and copper slag also stored in Huanchan, an area a short distance from theLa Oroya smelter, where the slag is currently stored.

 

Doe Run Peru’s total recorded liability for AROs wasapproximately $1,866 as of April 30, 2006 and October 31, 2005.

 

***Environmental Remediation***

 

Doe Run Peru’s La Oroyaoperations historically and currently exceed some of the applicable maximumpermissible limits established by MEM pertaining to air emissions andwastewater effluents quality. Prior to our acquisition of La Oroya, MetaloroyaS.A., the former owner, a subsidiary of Empresa Minera del Centro del PeruS.A., which we refer to as Centromin, received approval from the PeruvianGovernment for a PAMA. The PAMA was designed to achieve compliance with MEM’sair and wastewater limits. It consisted of an environmental impact analysis,monitoring plan and data mitigation measures and a closure plan. The PAMA alsoset forth the actions and corresponding annual investments a company 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 mining operations, such as Cobriza).The PAMA projects, which are more fully discussed below, were designed toachieve compliance with these requirements.

 

OnDecember 29, 2004, the Peruvian Government issued a Supreme Decree No.046-2004-EM (“Supreme Decree”), which recognized that exceptional circumstancesmay justify an extension of the time to complete one or more projects withinthe scope of a PAMA. Since Doe Run Peru expected that it would not be able tocomply with the spending requirements of La Oroya’s PAMA investment schedule bythe end of calendar year 2006 with respect to certain projects, Doe Run Peruapplied for an extension on December 20, 2005.

 

On May29, 2006, MEM approved the extension of certain PAMA projects through October31, 2009 (the “Modified PAMA”). Pursuant to the terms of the Modified PAMA, DoeRun Peru is now required to complete the acid plant projects for the leadcircuit and the copper circuit by September 30, 2008 and October 31, 2009,respectively and Doe Run Peru remains obligated under the original PAMA to implementthe following projects at its La Oroya smelter by December 31, 2006:

 

•        Upgradethe acid plant for the zinc circuit;

•        Constructa treatment plant for the copper refinery effluent;

•        Constructan industrial wastewater treatment plant for the smelter and refinery;

•        Improvethe slag handling system;

•        ImproveHuanchan lead and copper slag deposits;

•        Constructan arsenic trioxide deposit;

•        Improvethe zinc ferrite disposal site;

•        Constructdomestic wastewater treatment and domestic waste disposal; and

•        Constructa monitoring station.

 

TheModified PAMA also requires Doe Run Peru to comply with certain specialmeasures not previously required. These measures include, but are not limitedto, implementation of projects to reduce stack and fugitive emissions which aredesigned to meet certain air quality objectives, a continuing improvementprovision that provides for additional pollution controls to address theshortfalls in meeting objectives or to further reduce risks and certainmeasures regarding protection of public health, including, among others, actions for the reduction of lead in bloodlevels and special health programs for children and expectant women.

 

MEMhas also required that the cost of a planned replacement of the oxy-fuelreverberatory furnace with a submerged lanced reactor furnace that will reducegas volume while enriching sulfurous gas feed to the copper circuit sulfuricacid plant be included as part of the cost of the Modified PAMA acid plantprojects. The estimated cost of this reactor furnace is $57,000, which bringsthe total remaining investment needed to build the sulfuric acid plants toapproximately $152,590.

 

AdditionalPAMA projects required for fiscal year 2006 include an upgrade of theventilation system in the Sinter plant, completion of the enclosure work aroundthe lead and dross furnace, the enclosure of the anode residue plant along withthe elimination of its nitrous gases, and the reduction of fugitive emissionsfrom the copper and lead beds. The total cost of the currently remaining

 

34

----

 

Modified PAMAprojects as of April 30, 2006 was approximately $175,000 of which $31,500remains to be spent in the 2006 calendar year.

 

DoeRun Peru’s ability to complete the required projects by the specific deadlinesdepends in large part upon the availability of sufficient funds. Doe Run Perubelieves that sufficient funds will be available on a timely basis, but theavailability of sufficient funds is largely dependent upon the results of itsbusiness operations and the possibility of additional financing; therefore,there can be no assurance that sufficient funds will be available for theseprojects.

 

Consistentwith the requirements of the Supreme Decree providing for the possibility ofPAMA extensions, in addition to other terms and conditions, the Modified PAMAcontains two separate financial security arrangements to ensure that Doe RunPeru fulfills its statutory obligation to complete the Modified PAMA projects.

 

First,Doe Run Peru has established an environmental trust account with ScotiabankPeru into which receipts from sales are required to be remitted directly in anamount to have cash available sufficient to pay the expenditures estimated tobe incurred in each subsequent month by Doe Run Peru in complying with theModified PAMA. Second, Doe Run Peru has provided to MEM a bank letter ofguarantee in the amount of $28,641 (an amount estimated to be 20% of theprojected cost of the Modified PAMA projects to be spent after 2006). Doe RunPeru deposited such amount with Standard Chartered Bank which has in turnprovided for the issuance to MEM of the necessary bank letter of guaranteerelying solely upon the funds so deposited. Doe Run Peru has amended the DoeRun Peru Revolving Credit Facility to allow for these arrangements.

 

Althoughnot contemplated by the Supreme Decree providing for the possibility of PAMAextensions, as a condition of granting the Modified PAMA, MEM has provided thatDoe Run Peru could lose the benefit of the extension if Doe Run Peru makes anypayments to any shareholder or affiliate, which could affect the full andsatisfactory compliance with the Modified PAMA obligations. This provision hasnot been agreed to by Doe Run or Doe Run Peru but was imposed under applicablelaw over their objection. Doe Run Peru was required, however, to provide a bankletter of guarantee in the amount of $4,000 which may be drawn upon to fundModified PAMA projects if Doe Run Peru makes any payments to any shareholder oraffiliate. Doe Run Peru satisfied this requirement by depositing such amountwith Standard Chartered Bank which has in turn provided for the issuance to MEMof the necessary bank letter of guarantee relying solely upon the funds sodeposited.

 

Separately,Renco has confirmed to MEM that Renco understands that Doe Run Peru could losethe benefit of the extension if Doe Run Peru makes any payments to anyshareholder or affiliate which could affect the full and satisfactorycompliance with Doe Run Peru’s Modified PAMA obligations and Renco has statedthat Renco has no intention of causing, and will not do anything to cause, DoeRun Peru to make any such payment.

 

Inconnection with its negotiations with MEM regarding the Modified PAMA, Doe Runvoluntarily agreed to extend the maturity of Doe Run Peru’s $139,063intercompany note payable to Doe Run until such time as the Modified PAMA hasbeen completed.

 

Noassurance can be given that implementation of the projects under the ModifiedPAMA is feasible or that their implementation will achieve compliance with theapplicable legal requirements by the end of the Modified PAMA period. ThePeruvian Government may, in the future, require compliance with additionalenvironmental regulations that could adversely affect Doe Run Peru’s business,financial condition and results of operations, as well as their ability tocomply with the Modified PAMA. After expiration of the Modified PAMA, Doe RunPeru must comply with all applicable standards and requirements.

 

The Cobriza mine has aseparate PAMA in which Doe Run Peru committed to complete projects to managetailings, mine drainage, sewage and garbage. Doe Run Peru completed its own

 

35

----

 

PAMA requirements withrespect to Cobriza in June of 2004 and is in compliance with emissionsstandards required by this PAMA.

 

In addition to its PAMAobligations, Doe Run Peru is responsible for the remediation costs relating tothe zinc ferrite disposal site at La Oroya. The current closure plan providesfor encapsulating the ferrite residues in place in Huanchan, an area a shortdistance from the smelter where they are currently stored, for which anenvironmental liability of $1,600 has been recorded as of April 30, 2006 andOctober 31, 2005.

 

Under the purchaseagreement related to the acquisition of the La Oroya assets in October of 1997,Centromin, the prior owner of the La Oroya smelter and Cobriza mine, agreed toindemnify Doe Run Peru against environmental liability arising out of its prioroperations and their apportioned share of any 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 obligation andinvestment requirements or that the guarantee will be honored. Any failure byCentromin to satisfy its environmental obligations could adversely affect DoeRun Peru’s business, financial condition and results of operations.

 

36

----

 

**Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

 

The following discussion andanalysis of the three-months and the six-months ended April 30, 2006 comparedto the three-months and the six-months ended April 30, 2005 should be read inconjunction with the condensed consolidated financial statements of The Doe RunResources Corporation (“Doe Run” and together with its subsidiaries, the “Company”)and the notes thereto, and other financial information included herein.

 

***Forward-Looking Statements***

 

*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 and businessconditions;*

•                  *increasing industry capacity andlevels of imports of non-ferrous metals or non-ferrous metals products;*

•                  *industry trends, including the priceof metals and product pricing;*

•                  *competition;*

•                  *currency fluctuations;*

•                  *the loss of any significant customeror supplier;*

•                  *availability of raw materials;*

•                  *availability of qualified personnel;*

•                  *effects of future collectivebargaining agreements;*

•                  *outcome of litigation;*

•                  *historical environmentalliabilities;*

•                  *changing environmental requirementsand costs, including the capital requirements in Peru;*

•                  *political uncertainty and terrorism;*

•                  *major equipment failures;*

•                  *changes in accounting principles ornew accounting standards; and*

•                  *compliance with laws and regulationsand other unforeseen circumstances.*

*In lightof 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. Exceptas required by law, the Company undertakes no obligation to publicly update orrevise any forward-looking statements, whether as a result of new information,future events or otherwise. Investors should, however, review additionaldisclosures made by the Company from time to time in its periodic filings withthe Securities and Exchange Commission.*

 

*ThisQuarterly Report on Form 10-Q should be read completely and with theunderstanding that the Company’s actual future results may be materiallydifferent from what the Company expects. All forward-looking statements made bythe Company in this Quarterly Report on Form 10-Q and in the Company’s otherfilings with the Securities and Exchange Commission are qualified by thesecautionary statements.*

 

37

----

 

***Recent events***

 

On May 29, 2006, MEMapproved the extension of certain PAMA projects through October 31, 2009 (the“Modified PAMA”). Pursuant to the terms of the Modified PAMA, Doe Run Peru isnow required to complete the acid plant projects for the lead circuit and thecopper circuit by September 30, 2008 and October 31, 2009, respectively and DoeRun Peru remains obligated under the original PAMA to implement the followingprojects at its La Oroya smelter by December 31, 2006:

 

•            Upgradethe acid plant for the zinc circuit;

•            Constructa treatment plant for the copper refinery effluent;

•            Constructan industrial wastewater treatment plant for the smelter and refinery;

•            Improvethe slag handling system;

•            ImproveHuanchan lead and copper slag deposits;

•            Constructan arsenic trioxide deposit;

•            Improvethe zinc ferrite disposal site;

•            Constructdomestic wastewater treatment and domestic waste disposal; and

•            Constructa monitoring station.

 

The Modified PAMA also requiresDoe Run Peru to comply with certain special measures not previously required.These measures include, but are not limited to, implementation of projects toreduce stack and fugitive emissions which are designed to meet certain airquality objectives, a continuing improvement provision that provides foradditional pollution controls to address the shortfalls in meeting objectivesor to further reduce risks and certain measures regarding protection of publichealth, including, among others, actionsfor the reduction of lead in blood levels and special health programs forchildren and expectant women.

 

MEM has also requiredthat the cost of a planned replacement of the oxy-fuel reverberatory furnacewith a submerged lanced reactor furnace that will reduce gas volume whileenriching sulfurous gas feed to the copper circuit sulfuric acid plant beincluded as part of the cost of the Modified PAMA acid plant projects. Theestimated cost of this reactor furnace is $57,000, which brings the totalremaining investment needed to build the sulfuric acid plants to approximately$152,590.

 

Additional PAMA projectsrequired for fiscal year 2006 include an upgrade of the ventilation system inthe Sinter plant, completion of the enclosure work around the lead and drossfurnace, the enclosure of the anode residue plant along with the elimination ofits nitrous gases, and the reduction of fugitive emissions from the copper andlead beds. The total cost of the currently remaining Modified PAMA projects asof April 30, 2006 was approximately $175,000 of which $31,500 remains tobe spent in the 2006 calendar year.

 

Doe Run Peru’s ability tocomplete the required projects by the specific deadlines depends in large partupon the availability of sufficient funds. Doe Run Peru believes thatsufficient funds will be available on a timely basis, but the availability ofsufficient funds is largely dependent upon the results of its businessoperations and the possibility of additional financing; therefore, there can beno assurance that sufficient funds will be available for these projects.

 

Consistent with therequirements of the Supreme Decree providing for the possibility of PAMAextensions, in addition to other terms and conditions, the Modified PAMAcontains two separate financial security arrangements to ensure that Doe RunPeru fulfills its statutory obligation to complete the Modified PAMA projects.

 

First, Doe Run Peru hasestablished an environmental trust account with Scotiabank Peru into whichreceipts from sales are required to be remitted directly in an amount to havecash available sufficient to pay the expenditures estimated to be incurred ineach subsequent month by Doe Run Peru in complying with the Modified PAMA.Second, Doe Run Peru has provided to MEM a bank letter of guarantee in theamount of $28,641 (an amount estimated to be 20% of the projected cost of theModified PAMA projects to be spent after 2006). Doe Run Peru deposited suchamount with Standard Chartered Bank which has in turn provided for the issuanceto MEM of the necessary bank letter of guarantee relying solely upon the fundsso deposited. Doe Run Peru has amended the Doe Run Peru Revolving CreditFacility to allow for these arrangements.

 

38

----

 

Although not contemplatedby the Supreme Decree providing for the possibility of PAMA extensions, as acondition of granting the Modified PAMA, MEM has provided that Doe Run Perucould lose the benefit of the extension if Doe Run Peru makes any payments toany shareholder or affiliate, which could affect the full and satisfactorycompliance with the Modified PAMA obligations. This provision has not beenagreed to by Doe Run or Doe Run Peru but was imposed under applicable law overtheir objection. Doe Run Peru was required, however, to provide a bank letterof guarantee in the amount of $4,000 which may be drawn upon to fund ModifiedPAMA projects if Doe Run Peru makes any payments to any shareholder oraffiliate. Doe Run Peru satisfied this requirement by depositing such amountwith Standard Chartered Bank which has in turn provided for the issuance to MEMof the necessary bank letter of guarantee relying solely upon the funds sodeposited.

 

Separately, Renco hasconfirmed to MEM that Renco understands that Doe Run Peru could lose thebenefit of the extension if Doe Run Peru makes any payments to any shareholderor affiliate which could affect the full and satisfactory compliance with DoeRun Peru’s Modified PAMA obligations and Renco has stated that Renco has no intentionof causing, and will not do anything to cause, Doe Run Peru to make any suchpayment.

 

In connection with itsnegotiations with MEM regarding the Modified PAMA, Doe Run voluntarily agreedto extend the maturity of Doe Run Peru’s $139,063 intercompany note payable toDoe Run until such time as the Modified PAMA has been completed.

 

No assurance can be giventhat implementation of the projects under the Modified PAMA is feasible or thattheir implementation will achieve compliance with the applicable legalrequirements by the end of the Modified PAMA period. The Peruvian Governmentmay, in the future, require compliance with additional environmentalregulations that could adversely affect Doe Run Peru’s business, financialcondition and results of operations, as well as their ability to comply withthe Modified PAMA. After expiration of the Modified PAMA, Doe Run Peru mustcomply with all applicable standards and requirements.

 

Doe Run Peru had obtaineda ten-year tax stabilization agreement with the Peruvian government, whichprovides for Peruvian taxation based on tax statutes and regulations prevailingon November 6, 1997, beginning with the Peruvian tax year ending onDecember 31, 1997 through December 31, 2006. On December 30, 1997, Doe RunPeru signed a Contract of Guarantees and Measures to Promote Investments withthe government of Peru.  This contract, which has been modified varioustimes through 2006, committed Doe Run Peru to making certain investmentsrelated to the improvements of its facilities in order to receive certain taxbenefits.  This contract provided that if the investments were completedaccording to the schedule by December 31, 2006, Doe Run Peru would receive anadditional tax stability agreement covering the period beginning January 1,2007 and ending December 31, 2021.  Doe Run Peru will be unable tocomplete the required investments and as a result Doe Run Peru will not receivethe benefits of the additional tax stabilization agreement through 2021.

 

Doe Run received a noticefrom the U.S Environmental Protection Agency of a potential unilateral orderconcerning transportation matters under the Resource Conservation and RecoveryAct of 1976, section 7003 on July 5, 2006. It included an offer to negotiatethe terms to a voluntary agreement. The Company is evaluating the issuespresented in the letter and has arranged to meet with the agency to explore thematter. It is too early to understand any impact such an agreement will have.

 

OnJune 19, 2006 Doe Run Peru, the Ministry of Health and the Regional Governmentof Junin signed a cooperation agreement for the implementation of the plan toreduce contamination at La Oroya. This agreement is an extension of a previousone signed between Doe Run Peru and the Ministry of Health in 2003. In theagreement Doe Run Peru commits to support the Ministry of Health’senvironmental health clinic, supplemental educational program, familyenvironmental health training, and community cleaning programs. Doe Run Peruwill continue to make certain building space and equipment available andprovide specified professional and support personnel.

 

39

----

 

On July 31, 2006, themajority warrantholders exercised their right to require Doe Run to repurchaseall of the warrants as promptly as practicable in the manner specified by theWarrant Agreement dated October 29, 2002 between Doe Run and State Street Bankand Trust, as Warrant Agent. Doe Run is in the process of engaging an appraiserto value the warrants.

 

40

----

 

***Results ofOperations***

 

*Metals Pricing*

 

The following table sets forth average London MetalExchange prices for lead, copper and zinc and the average London Bullion MarketAssociation price for silver for the periods indicated:

 

| ** **            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------|------------|------------------------|------------|----------------------|------------|
| ** **            | ** ** | **April 30,**          | ** ** | **April 30,**        | ** ** |
| **Average Prices**    | ** ** | **2006**               | ** ** | **2005**             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Lead ($/ton)          |       | $                      | 1,100.80   |                 | $          | 898.00 |   | $ | 1,062.80 |   | $ | 886.80 |   |
| Copper ($/ton)        |       | 4,937.20               |       | 3,033.60             |       | 4,513.00 |   | 2,942.60 |   |
| Zinc ($/ton)          |       | 2,312.60               |       | 1,210.80             |       | 1,984.60 |   | 1,136.20 |   |
| Silver ($/troy ounce) |       | 10.76                  |       | 7.13                 |       | 9.63 |   | 7.11 |   |
|                       |            |                        |            |                      |            |  |  |  |  |  |  |  |  |

 

These prices reflect the continued tightening in theworldwide metal supply and the effect of other macroeconomic factors such asexchange rates, interest rates, and oil prices.

* *

*Production*

 

All references to “ton” are in short tons.

 

The following table sets forth the Company’s production statistics forthe periods indicated:

 

 

| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                 | ** ** | **April 30,**          | ** ** | **April 30,**        | ** ** |
| ** **                                 | ** ** | **2006**               | ** ** | **2005**             | ** ** | **2006** | ** ** | **2005** | ** ** |
| U.S. Operations                            |       |                   |       |                 |       |   |   |   |   |
| Lead metal -  primary (tons)               |       | 39,158                 |       | 39,943               |       | 81,093 |   | 80,359 |   |
| Lead metal -  secondary (tons)             |       | 34,008                 |       | 32,812               |       | 67,072 |   | 66,510 |   |
| Lead  concentrates (metal content, tons)   |       | 67,841                 |       | 71,497               |       | 136,641 |   | 136,645 |   |
| Ore grade (lead)                           |       | 5.20                   | %          | 5.40                 | %          | 5.38 | % | 5.38 | % |
|                                       |       |                   |       |                 |       |   |   |   |   |
| Doe Run Peru Operations                    |       |                   |       |                 |       |   |   |   |   |
| Refined copper  (tons)                     |       | 16,657                 |       | 15,594               |       | 33,548 |   | 31,508 |   |
| Refined lead  (tons)                       |       | 33,126                 |       | 33,135               |       | 66,070 |   | 64,895 |   |
| Refined zinc  (tons)                       |       | 11,122                 |       | 11,088               |       | 22,630 |   | 27,316 |   |
| Refined silver  (thousands of troy ounces) |       | 9,200                  |       | 8,727                |       | 18,418 |   | 16,966 |   |
| Refined gold  (thousands of troy ounces)   |       | 18                     |       | 15                   |       | 36 |   | 30 |   |
| Copper  concentrates (metal content, tons) |       | 4,649                  |       | 3,607                |       | 9,098 |   | 7,379 |   |
| Ore grade  (copper content)                |       | 1.05                   | %          | 0.96                 | %          | 1.03 | % | 0.98 | % |

 

The metalcontained in lead concentrates produced at the Company’s primary lead operation’smines in the 2006 second quarter was 5% lower than the 2005 second quarter, butwas the same production when comparing the 2006 six-month period with the 2005six-month period.  The lower 2006 secondquarter lead concentrate production was due to the ore grade being about 4%lower than the corresponding 2005 second quarter, but the ore grade for the2006 six-month period was identical to the 2005 six-month period.  The volume of ore processed for the 2006second quarter and 2006 six month period were essentially at plan.

 

Development of thedrift connecting the south end of the Fletcher mine to a new ore body called RCWest Fork is continuing at the planned pace, with ore production expected tobegin in the fourth calendar quarter of 2006.

 

In the 2006 secondquarter, the Herculaneum primary smelter operation’s lead metal production wasabout 2% lower than in the 2005 second quarter, but the 2006 six-month periodwas 1% higher than the 2005 six-month period. Lead metal production was at plan for the 2006 second quarter, but 7%below plan for the 2006 six-month period due to the necessary replacement of amajor component in the acid plant in December.

 

Doe Run is subjectto a State Implementation Plan (“SIP”) with the Missouri Department of NaturalResources and the Missouri Air Conservation Commission to attain and maintaincompliance with the ambient air quality standard for lead promulgated under thefederal Clean Air Act for the city of Herculaneum. The plan was included in aconsent judgment entered into by Doe Run and has been approved at the statelevel and by the U.S. EPA. The air quality monitors reflected attainment of thelead standard for 11 of the last 15 quarters including the second quarter ofthe 2006 calendar year. However, once the air quality monitors reflected twoquarters of non-compliance, the permitted annual capacity of the Herculaneumprimary smelter decreased from 250,000 to 200,000 tons. This decrease inpermitted capacity does not affect results at current production levels.Further non-compliance could result in SIP revisions that could have a materialadverse financial impact on the Company. Management is in discussions with theMissouri Department of Natural Resources to explore options intended to improvethe smelter’s ability to attain and maintain compliance in the future.

Lead production atthe Company’s U.S. recycling operation was almost 4% and 1% higher in the 2006second quarter and 2006 six-month period, respectively, than in the 2005 secondquarter and 2006 six-month period, but 

 

41

----

 

was 8% lower thanplanned for the 2006 six-month period. The production increases are the result of process changes made to thedesulphurization circuit and to the furnace operations to allow the facility tohandle feeds with higher levels of sulfur in an effort to further increaseproduction regardless of the sulfur content of available feed.  The recycling operation continues to makeother adjustments to the processes in an effort to further increase productionwith the high sulfur feeds.

 

During the 2006 secondquarter, Doe Run Peru’s copper, silver and gold production increased 6.8%, 5.4%and 17.6%, respectively, compared to the 2005 second quarter. These increaseswere due, principally, to factors that occurred during the 2005 second quarterthat no longer affected operations in the 2006 second quarter. These factorsincluded:

 

•                    maintenanceon the oxy-fuel furnace that limited the availability of blister copper for thecopper refinery which had lead to a reduction in copper slimes from whichprecious metal products, including silver and gold ore, are derived; and

 

•                    goldcontent in copper concentrates acquired in the 2006 second quarter exceeded thecontent in the 2005 second  quarter.

 

The metal content in thecopper concentrates produced at Doe Run Peru’s Cobriza mine in the 2006 secondquarter was approximately 29% higher than the 2005 second quarter due to thecorrection of mine stability problems, improved mine preparation anddevelopment, and increased recoveries from pillars and sills. Production oflead remained essentially unchanged from the 2005 quarter to the 2006 quarter.

 

*Results of Operations*

 

**Gross Margin** onsales (net sales less cost of sales) increased from $28.4 million in the 2005second quarter to $73.3 million in the 2006 second quarter and from $66.4million in the 2005 six-month period to $124.0 million in the 2006 six-monthperiod. Gross margin on sales for Doe Run’s operations increased from $16.7million in the 2005 second quarter to $46.3 million in the 2006 second quarterand $42.0 million in the 2005 six-month period to $78.6 million in the 2006six-month period while gross margin on sales for Doe Run Peru increased from$11.7 million in the 2005 second quarter to $26.9 million in the 2006 secondquarter and $24.4 million in the 2005 six-month period to $45.4 million in the2006 six-month period.

 

A 14.7% and 18.6%increase in the Company’s realized prices for lead metal, fueled by a 22.6% and19.8% increase in London Metal Exchange prices and higher premiums achievedover the London Metal Exchange, contributed an additional $7.4 million and$19.7 to the Company’s gross margin on sales in the 2006 second quarter and2006 six-month period compared to the 2005 second quarter and 2005 six-monthperiod, respectively. An increase in lead concentrate sales volume and adecrease in copper concentrate sales volume resulted in an increase in netsales of $2.6 million and decrease of $1.9 million, respectively, in the 2006six-month period over the 2005 six-month period. Increases in copper and zincmetal prices contributed an additional $21.0 million to net sales compared tothe 2005 six-month period. These increases were offset by higher productioncosts at Doe Run’s primary operations, primarily due to slightly higherproduction, higher salaries, wages and employee benefits and maintenance and fuelcosts. Increased conversion costs at the recycling operation, due to highermetallurgical coke and propane costs, were partially offset by improved feedcosts per unit of metal produced.

 

The $15.2 million increasein Doe Run Peru’s gross margin from the 2005 second quarter to the 2006 secondquarter and the $21.0 million increase in Doe Run Peru’s gross margin from the2005 six-month period to the 2006 six-month period were primarily the result ofan improvement in the treatment charges received for processing concentratesand higher metal prices, offset by a LIFO inventory adjustment.

 

**Selling, General and Administrative costs**increased $3.7 million in the 2006 second quarter over the 2005 second quarterand $5.9 million in the 2006 six-month period over the 2005 six-month period.The increase was due primarily to increased salaries and employee benefitcosts, legal fees, and professional fees related to software implementation.

 

 

42

----

** **

**Unrealized Gains** on derivative financial instruments**are**related to the change in fair market value of derivativefinancial instruments that are a part of the Company’s risk managementstrategy. The change from an unrealized gain of $1.3 million in the 2005six-month period to an unrealized gain of $4.3 million in the 2006six-month  period and the increase from $0.5 million to $2.3 million inthe 2006 second quarter versus 2005 second quarter is primarily theresult of the settled 2006  positions. These gains were overcome by realized losses included in net sales.   Also see “Item 3. Quantitative andQualitative Disclosures About Market Risk.”

 

**Other****Expenses** increased$0.5 million from the 2005 second quarter to the 2006 second quarter andremained essentially unchanged from the 2005 six-month period to the 2006six-month period.

 

The Renco Group,Inc., the parent company of Doe Run’s sole shareholder (referred to as Renco),has elected for the Company to be treated as a qualified subchapter Ssubsidiary for U.S. federal tax purposes. Most states in which the Company operates will follow similar taxtreatment. Subchapter S status requires the ultimate shareholders to includetheir pro rata share of the Company’s income or loss in their individual taxreturns.  As a result of the Company’stax status in the U.S., the Company is not generally subject to U.S. federaland most state income taxes, however, under a tax sharing agreement with Renco,the Company is liable to Renco for pro forma federal and state income taxes asdefined in the agreement and our costs are shown as tax dividends.

 

***Liquidity and Capital Resources***

 

*Overview*

 

Our auditors issuedunqualified opinions on the 2005 audited consolidated financial statements ofthe Company and the 2005 audited financial statements of Doe Run Peru thatexpressed substantial doubt about the Company’s and Doe Run Peru’s ability tocontinue as  going concerns.  Doe Run Peru has significant capitalrequirements under environmental commitments, substantial contingencies relatedto Peruvian taxes and has significant debt service obligations, each of which,if not satisfied, could result in a default under the Company’s creditagreements and collectively raise substantial doubt about the Company’s abilityto continue as a going concern. These commitments require Doe Run Peru todedicate a substantial portion of cash flow from operations to the payment ofthese obligations which includes future expenditures of approximately $175million under the terms of the Modified PAMA. These commitments will reduce funds available for other businesspurposes.  In addition, the Company ishighly leveraged. These factors also increase the Company’s vulnerability togeneral adverse conditions, limit our 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.

The period forDoe Run Peru’s compliance with the PAMA requiring the construction of sulfuricacid plants at its La Oroya smelter was due to expire on December 31,2006.  On May 29, 2006, the PeruvianMinistry of Energy and Mines issued a resolution, pursuant to Supreme DecreeNo. 046-2004-EM, extending the completion dates of certain PAMA projects toOctober 31, 2009. The sulfuric acid plant projects for the zinc circuit, thelead circuit and the copper circuit are required to be completed by December31, 2006, September 30, 2008 and October 31, 2009, respectively.  They were all originally required to becompleted by December 31, 2006. Management believes the Modified PAMAcompliance period, in addition to high metal prices and other revenueenhancements will enable the Company to continue as a going concern.  The Company’s ability to meet obligationsafter 2006 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.

 

43

----

* *

*CapitalResources and Debt Instruments*

 

Net unusedavailability at April 30, 2006 under the Doe Run Revolving Credit Facility wasapproximately $34.7 million and under the Doe Run Peru Revolving CreditFacility was $0.2 million at April 30, 2006. In addition to the availability under these revolving credit facilities,cash balances at Doe Run and Doe Run Peru were $1.1 million and $22.8 million,respectively, at April 30, 2006. In Peru, continued high metal prices haveresulted in outlays for concentrate purchases and value-added tax paymentsbeing funded by cash from operations, as Doe Run Peru has reached its maximumborrowing level under the Doe Run Peru Revolving Credit Facility.  Accounts payable have increased during the2006 six-month period due, in part, to the high metal prices for materials and,in part, to Doe Run Peru extending its payment terms with certain suppliers in responseto the lack of borrowing availability.

The Company’s term note of $8 million hasbeen paid, however, the Company still has substantial debt service requirementsin the future, including interest payments of $12.9 million in October of 2006for the Company’s 11.75% notes which are due in 2008. The Doe Run PeruRevolving Credit Facility expires on September 22, 2006 and will requirenegotiations to extend its terms. There can be no assurance that the Companywill be successful in extending the existing credit agreement or negotiating anew credit agreement, or if it is successful, that the extended or new creditagreement would be at terms that are favorable to the Company.

During theperiod beginning on October 29, 2005 and ending on October 29, 2012, themajority warrantholders, pursuant to the Warrant Agreement dated as of October29, 2002 between Doe Run and State Street Bank and Trust Company, as WarrantAgent, will have the right to require Doe Run to repurchase all, but not lessthan all, of the warrants and any outstanding shares issued upon the exercisethereof at a price equal to the fair market value of the warrants, asdetermined by a third party appraisal. Management engaged a nationallyrecognized valuation firm to calculate the fair value of the warrants.Management’s estimate of the fair value of the warrants based on the valuationis approximately $0.6 million at April 30, 2006.

 

*Tax Commitments*

 

Income taxassessments from Peru’s tax authority, SUNAT, for the tax years 1998 through2001, show an assessed amount due from Doe Run Peru, consisting of additionalincome taxes due, penalties and interest as of April 30, 2006, of approximately$121,100.  Value-added tax, referred toas VAT, assessments for tax years 1999 through 2001 and for the period fromJanuary through July 2004, calculated with penalties and interest as of April30, 2006, show a total assessment amount of approximately $48,100. SUNAT offsetthe amount assessed for 2004 of approximately $2,300 against Doe Run Peru’s VATreceivable balance from July 2004.  Inaddition, the Company estimates that the effect of similar assessments forperiods not yet assessed would be approximately $32,900 and $22,400 for theincome tax and VAT matters, respectively. 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 $11,300 for calendaryears 1998 through 2005.

 

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 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.

 

44

----

 

**Item 3. Quantitative and QualitativeDisclosures About Market Risk.**

 

**Commodity Price Risk**

 

In the normal course of itsbusiness, the Company has used in the past, and may use in the future, forwardsales commitments and commodity put and call option contracts to manage itsexposure to fluctuations in the prices of lead, copper, zinc, silver and gold.Contract positions are designed to ensure that the Company will receive adefined minimum price for certain quantities of its production. None of theaforementioned activities have been entered into for speculative purposes.

 

The fairmarket value (gain/(loss)) of the Company’s derivatives was approximately$(0.2) million at April 30, 2006 . These losses, when realized, would be offsetby higher prices on the Company’s sales of physical metal. The majority relatesto sold lead futures and sold lead call options related to the U.S. operations.A 10% change in metal prices would not have a significant effect on theCompany’s open contracts at April 30, 2006.

 

**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 0.75% per annum and at LIBOR plus 3% per annum. The Doe Run PeruRevolving Credit Facility bears interest at LIBOR (1-month, 2-month or 3-monthrate, depending on the term of the loan) plus 3.5%, 3.75% and 4.25%,respectively, per annum. A material increase in interest rates could adversely affect the Company’s business, financialcondition and results of operations. A 1% increase in the interest rate under both the Doe Run RevolvingCredit Facility and the Doe Run Peru Revolving Credit Facility would result inadditional annual interest expense of approximately $0.8 million, based on theloan balances outstanding as of April 30, 2006.

 

**ForeignTax Risk**

 

On December 30, 1997, Doe Run Peru signed a Contract of Guarantees andMeasures to Promote Investments with the government of Peru.  Thiscontract, which has been modified various times through 2006, committed Doe RunPeru to making certain investments related to the improvements of itsfacilities in order to receive certain tax benefits.  This contractprovided that if the investments were completed according to the schedule byDecember 31, 2006, Doe Run Peru would receive an additional tax stabilityagreement covering the period beginning January 1, 2007 and ending December 31,2021.  Doe Run Peru will be unable to complete the required investmentsand, therefore, requested an extension of the time, from the Ministry of Energyand Mines, for these investments that would coincide with the extended periodof compliance for the PAMA. The Ministry of Energy and Mines denied therequest.  As a result, Doe Run Peru willnot receive the benefits of the additional tax stabilization agreement and thecurrent tax stability agreement will expire on December 31, 2006. The Companywill be subject to tax risk on any future changes to taxes or guaranteesrequired by the Peruvian government. Any significant change could have anadverse affect on the Company’s business, financial condition and results ofoperations.

 

 

**Foreign Currency Risk**

 

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

 

 

45

----

 

**Item 4. Controls and Procedures.**

 

Asof the end of the period covered by this report, an evaluation was performed byour management,  under the supervisionand with the participation of our Chief Executive Officer, the principalexecutive officer, and Chief Financial Officer, the principal financialofficer, of the effectiveness of the design and operation of our disclosure controlsand procedures (as defined in Rules 13a-5(e) and 15(d-15(e) promulgated underthe Securities and Exchange Act of 1934, as amended (the “Exchange Act”).  Based upon, and as of the date of thisevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat such disclosure controls and  procedures  are designed to ensure that informationrequired to be disclosed by the Company in the reports that it files or submitsunder the Exchange Act is (a) recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commission’srules and forms and (b) is accumulated and communicated to the Company’smanagement, including its principal executive and principal financial officers,or persons performing similar functions, as appropriate to allow timely decisionsregarding required disclosure.

 

No change in our internal control over financial reporting occurredduring the period covered by this report that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

46

----

 

 

**PART II.  OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

Nadist, LLC v. The Doe Run Resources Corporation, et al.was filed on June 23, 2006 in the U.S. District Court for the Eastern Districtof Missouri. This suit alleges violations of U.S. environmental laws and claimsdamages to property allegedly due to contamination.

 

**Item 1A. Risk Factors.**

 

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.**

 

None.

 

**Item 5. Other Information.**

 

None.

 

**Item 6. Exhibits.**

 

| 31.1 |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. |
|------|--------|-------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. |
| 32.1 |   | Certification of Chief Executive Officer pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.  |
| 32.2 |   | Certification of Chief Financial Officer pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.  |

###### ** **

######  

 

47

----

 

###### **SIGNATURES**

 

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

 

 
|                 | THE DOE RUN  RESOURCES CORPORATION                         |
|----------------------|------------------------------------------------------------|
|                 | (Registrant)                                               |
|                 |                                                       |
| Date: August 7, 2006 | /s/ David A. Chaput                                        |
|                 | David A. Chaput                                            |
|                 | Chief Financial Officer                                    |
|                 | (duly authorized officer and principal  financial officer) |

 

 

48

----