**UNITED STATES**

#### **SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC  20549**

 

### **FORM 10-Q**

 

**(Mark One)**

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

 

**CommissionFile Number 333-66291**

 

#### **The Doe Run Resources Corporation**

(Exact name of registrantas 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 check markwhether 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** | **ý        No** |
|------------|----------------------------------------------------------|--------------------------------------------------------------|

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).
| ** ** | **o        Yes** | **ý        No** |
|------------|----------------------------------------------------------|--------------------------------------------------------------|

 

Number of sharesoutstanding of each of the issuer’s classes of common stock, as of April 28,2006:

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

 

 

----

 

**THE DOE RUNRESOURCES CORPORATION**

**INDEX TOFORM 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 | 34 |
|       |       |                                                                                        |   |
| Item 3.    |       | Quantitative  and Qualitative Disclosures About Market Risk                                 | 40 |
|       |       |                                                                                        |   |
| Item 4.    |       | Controls and  Procedures                                                                    | 40 |
|       |       |                                                                                        |   |
| ** ** | ** ** | **PART  II – OTHER INFORMATION**                                                       | ** ** |
|       |       |                                                                                        |   |
| Item 1.    |       | Legal Proceedings                                                                           | 42 |
|       |       |                                                                                        |   |
| Item 1A.   |       | Risk Factors                                                                                | 42 |
|       |       |                                                                                        |   |
| Item 2.    |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 42 |
|       |       |                                                                                        |   |
| Item 3.    |       | Defaults  Upon Senior Securities                                                            | 42 |
|       |       |                                                                                        |   |
| Item 4.    |       | Submission  of Matters to a Vote of Security Holders                                        | 42 |
|       |       |                                                                                        |   |
| Item 5.    |       | Other Information                                                                           | 42 |
|       |       |                                                                                        |   |
| Item 6.    |       | Exhibits                                                                                    | 42 |

** **

**2**

----

 

**Item1. Financial Statements.**

 

**THEDOE RUN RESOURCES CORPORATION**

**CondensedConsolidated Balance Sheets**

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

 
| ** **                                                                                                                                                                                                                          | ** ** | **January 31,** | ** ** | **October 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                                                                          | ** ** | **2006**             | ** ** | **2005**             | ** ** |
| ** **                                                                                                                                                                                                                          | ** ** | **(unaudited)**      | ** ** | ** **           | ** ** |
| **ASSETS**                                                                                                                                                                                                                          | ** ** | ** **           | ** ** | ** **           | ** ** |
| Current assets:                                                                                                                                                                                                                     |       |                 |       |                 |       |
| Cash                                                                                                                                                                                                                                |       | $                    | 29,460     |                 | $          | 23,486 |   |
| Trade accounts  receivable, net of allowance for doubtful accounts                                                                                                                                                                  |       | 104,751              |       | 85,740               |       |
| Inventories                                                                                                                                                                                                                         |       | 138,217              |       | 105,634              |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                          |       | 26,516               |       | 20,814               |       |
| Total current  assets                                                                                                                                                                                                               |       | 298,944              |       | 235,674              |       |
| Property, plant  and equipment, net                                                                                                                                                                                                 |       | 260,506              |       | 253,263              |       |
| Other noncurrent  assets, net                                                                                                                                                                                                       |       | 8,779                |       | 5,838                |       |
| Total assets                                                                                                                                                                                                                        |       | $                    | 568,229    |                 | $          | 494,775 |   |
|                                                                                                                                                                                                                                |       |                 |       |                 |       |
| **LIABILITIES AND SHAREHOLDER’S DEFICIT**                                                                                                                                                                                      | ** ** | ** **           | ** ** | ** **           | ** ** |
| Current  liabilities:                                                                                                                                                                                                               |       |                 |       |                 |       |
| Current  maturities of long-term debt                                                                                                                                                                                               |       | $                    | 132,704    |                 | $          | 114,947 |   |
| Accounts payable                                                                                                                                                                                                                    |       | 128,926              |       | 92,275               |       |
| Accrued  liabilities                                                                                                                                                                                                                |       | 79,721               |       | 87,060               |       |
| Total current  liabilities                                                                                                                                                                                                          |       | 341,351              |       | 294,282              |       |
|                                                                                                                                                                                                                                |       |                 |       |                 |       |
| Long-term debt,  less current maturities                                                                                                                                                                                            |       | 271,566              |       | 271,566              |       |
| Other noncurrent  liabilities                                                                                                                                                                                                       |       | 69,179               |       | 68,337               |       |
| Total  liabilities                                                                                                                                                                                                                  |       | 682,096              |       | 634,185              |       |
|                                                                                                                                                                                                                                |       |                 |       |                 |       |
| Series A  redeemable preferred stock, $1,000 par value per share, 5,000 shares  authorized; 2,939 and 2,849 shares issued and outstanding at January 31, 2006  and October 31, 2005, respectively; liquidation and redemption value |       | 29,385               |       | 28,495               |       |
|                                                                                                                                                                                                                                |       |                 |       |                 |       |
| Shareholder’s  deficit:                                                                                                                                                                                                        |       |                 |       |                 |       |
| Common stock,  $.10 par value per share, 1,667 shares authorized; 1,000 shares issued and  outstanding                                                                                                                              |       | —               |       | —               |       |
| Accumulated  deficit                                                                                                                                                                                                                |       | (97,598              | )          | (123,141             | )          |
| Accumulated  preferred stock dividends in excess of paid in capital                                                                                                                                                                 |       | (4,147               | )          | (3,257               | )          |
| Accumulated  other comprehensive losses                                                                                                                                                                                             |       | (41,507              | )          | (41,507              | )          |
| Total  shareholder’s deficit                                                                                                                                                                                                   |       | (143,252             | )          | (167,905             | )          |
| Total  liabilities and shareholder’s deficit                                                                                                                                                                                   |       | $                    | 568,229    |                 | $          | 494,775 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

3

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**THE DOERUN RESOURCES CORPORATION**

**CondensedConsolidated Statements of Operations (unaudited)**

**(Dollarsin thousands)**

 
| ** **                                           | ** ** | **Three Months Ended  January 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
|                                                 |       |                                               |       |   |   |
| Net sales                                            |       | $                                                  | 314,124    |   | $ | 235,982 |   |
|                                                 |       |                                               |       |   |   |
| Costs and  expenses:                                 |       |                                               |       |   |   |
| Cost of sales                                        |       | 263,387                                            |       | 198,003 |   |
| Depreciation,  depletion and amortization            |       | 6,113                                              |       | 6,137 |   |
| Selling, general  and administrative                 |       | 13,107                                             |       | 10,927 |   |
| Unrealized gain  on derivative financial instruments |       | (1,955                                             | )          | (798 | ) |
| Other                                                |       | 1,307                                              |       | 1,837 |   |
| Total costs and  expenses                            |       | 281,959                                            |       | 216,106 |   |
|                                                 |       |                                               |       |   |   |
| Income from  operations                              |       | 32,165                                             |       | 19,876 |   |
|                                                 |       |                                               |       |   |   |
| Other income  (expense):                             |       |                                               |       |   |   |
| Interest  expense, net                               |       | (2,737                                             | )          | (3,441 | ) |
| Other, net                                           |       | (94                                                | )          | 252 |   |
|                                                 |       | (2,831                                             | )          | (3,189 | ) |
|                                                 |       |                                               |       |   |   |
| Income before  income tax expense                    |       | 29,334                                             |       | 16,687 |   |
| Income tax  expense                                  |       | 1,842                                              |       | 0 |   |
|                                                 |       |                                               |       |   |   |
| Net income                                           |       | $                                                  | 27,492     |   | $ | 16,687 |   |
| Preferred stock  dividends                           |       | (890                                               | )          | (792 | ) |
| Net income  allocable to common shares               |       | $                                                  | 26,602     |   | $ | 15,895 |   |
|                                                 |       |                                               |       |   |   |
| Total  comprehensive income                          |       | $                                                  | 27,492     |   | $ | 16,791 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

4

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**THEDOE RUN RESOURCES CORPORATION**

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

**(Dollarsin thousands)**

 
| ** **                                                                         | ** ** | **Three Months Ended  January 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
|                                                                               |       |                                               |       |   |   |
| Cash flows from  operating activities:                                             |       |                                               |       |   |   |
| Net income                                                                         |       | $                                                  | 27,492     |   | $ | 16,687 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                               |       |   |   |
| Depreciation,  depletion and amortization                                          |       | 6,113                                              |       | 6,137 |   |
| Imputed interest  and amortization of deferred financing costs                     |       | 60                                                 |       | 1,346 |   |
| Unrealized gain  on derivative financial instruments                               |       | (1,955                                             | )          | (798 | ) |
| Losses from  impairment and disposal of long-lived assets                          |       | 126                                                |       | 1,210 |   |
| Decrease  resulting from other changes in assets and liabilities                   |       | (30,191                                            | )          | (20,736 | ) |
| Net cash  provided by operating activities                                         |       | 1,645                                              |       | 3,846 |   |
|                                                                               |       |                                               |       |   |   |
| Cash flows from  investing activities:                                             |       |                                               |       |   |   |
| Purchases of  property, plant and equipment                                        |       | (13,264                                            | )          | (16,569 | ) |
| Net cash used in  investing activities                                             |       | (13,264                                            | )          | (16,569 | ) |
|                                                                               |       |                                               |       |   |   |
| Cash flows from  financing activities:                                             |       |                                               |       |   |   |
| Proceeds from  (payments on) revolving loans, net                                  |       | 17,689                                             |       | (2,097 | ) |
| Payments on  long-term debt                                                        |       | (96                                                | )          | (12 | ) |
| Net cash  provided by (used in) financing activities                               |       | 17,593                                             |       | (2,109 | ) |
|                                                                               |       |                                               |       |   |   |
| Net increase  (decrease) in cash                                                   |       | 5,974                                              |       | (14,832 | ) |
|                                                                               |       |                                               |       |   |   |
| Cash at  beginning of period                                                       |       | 23,486                                             |       | 20,318 |   |
| Cash at end of  period                                                             |       | $                                                  | 29,460     |   | $ | 5,486 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

** **

**5**

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**THE DOE RUN RESOURCES CORPORATION**

** **

**Notes to Condensed ConsolidatedFinancial Statements**

**(Dollars in thousands)**

 

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

 

***UnauditedInterim Financial Statements***

 

Theseinterim consolidated financial statements include the accounts of The Doe RunResources Corporation (“Doe Run”) and its subsidiaries, including Doe Run PeruS.R.L. ( “Doe Run Peru,” and on a consolidated basis, the “ Company”). Doe Run’sissued and outstanding common stock is owned by a subsidiary of The RencoGroup, Inc. (“Renco”). In the opinion of management, the interim consolidatedfinancial statements contain all adjustments, consisting of normal recurringaccruals, necessary to present fairly the consolidated financial position as ofJanuary 31, 2006 and the results of operations for the three month periodsended January 31, 2006 and 2005. Interim periods are not necessarily indicativeof results to be expected for the year.

 

***Reclassifications***

 

Certainprior period balances have been reclassified in order to conform to currentpresentation.

 

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

 

The Company is highlyleveraged and has significant commitments both in the U.S. and Peru for environmentalmatters and for Environmental Remediation and Management Program (“PAMA”)expenditures that require it to dedicate a substantial portion of cash flowfrom operations to the payment of these obligations, which will reduce fundsavailable for other business purposes (see Note 7: Asset Retirement andEnvironmental Obligations). These factors also increase the Company’svulnerability to general adverse conditions, limit the Company’s flexibility inplanning for or reacting to changes in its business and industry, and limit theCompany’s ability to obtain financing required to fund working capital andcapital expenditures and for other general corporate purposes. An unfavorableoutcome to certain contingencies, discussed below, would have a further adverseeffect on the Company’s ability to meet its obligations when due. The Company’sability to meet these obligations is also dependent upon future operatingperformance and financial results which are subject to financial, economic,political, competitive and other factors affecting Doe Run, many of which arebeyond the Company’s control.

 

Metalprices have risen dramatically over the past two fiscal years. Lead pricesincreased from a London Metal Exchange (“LME”) settlement monthly average of$911.76 per short metal ton in October 2005 to $1,026.20 per short metal ton inJanuary 2006. The Company has benefited from this price increase in both itslead metal and lead concentrate sales. In response to continued strong metalprices, our primary lead division made significant changes to operations in2005. The lead grade of ore mined was lowered while the tonnage processedincreased. These changes were made in an effort to optimize the return on DoeRun’s ore reserves. Doe Run continued to sell a substantial portion of the leadconcentrates produced from its mines into the open market.

 

Theconsolidated financial statements have been prepared assuming the Company willcontinue as a going concern. Doe Run’s indirect subsidiary, Doe Run Peru,however, has significant capital requirements under environmental commitments, substantialcontingencies related to Peruvian taxes and has significant debt serviceobligations, each of which, if not satisfied, could result in a default underthe Company’s credit agreements and collectively raise substantial doubt aboutthe Company’s ability to continue as a going concern. Management believes thatthe price improvements seen through fiscal year 2005 and the continuingincreases seen in the first quarter of fiscal year 2006, the potential revenuesand cash flow enhancements from the Company’s new ferrite project in Peru andthe anticipated approval by the Peruvian government of the application toextend the PAMA requirement for the construction of the sulfuric acid plants,will enable the Company to continue as a going concern. However, there can beno assurance that these actions will achieve the desired results.

 

TheCompany continues to have substantial cash requirements in the future,including maturities in 2006 of $8,000 for a term note, cash interest paymentson bonds of $25,729 during 2006 and

 

6

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revolving creditfacilities, as described below, and also significant capital requirements underenvironmental commitments (see Note 7: Asset Retirement and EnvironmentalObligation). In addition, there are substantial contingencies related to taxes(see Note 4: Income Taxes) and litigation (see Note 8: Litigation).

 

Net unused availability at January 31, 2006 under theDoe Run Revolving Credit Facility was $23,100. Net unused availability atJanuary 31, 2006 under the Doe Run Peru Revolving Credit Facility wasapproximately $200. In addition to the availability under its revolving creditfacilities, the cash balance at Doe Run was $4,146 at January 31, 2006 and thecash balance at Doe Run Peru was $24,714 at January 31, 2006. Doe Run Peru hasreached and maintained its maximum borrowing level under the Doe Run PeruRevolving Credit Facility due in part to the higher metal prices resulting inhigher outlays for concentrate purchases and higher VAT payments funded by cashfrom operations.

 

The Doe Run Revolving Credit Facility expires onAugust 29, 2008. The Doe Run Peru Revolving Credit Facility expires in thethird quarter of 2006, and will require renegotiation to extend its terms.There can be no assurance that the Company will be successful, or if it issuccessful, that the renewal would be at terms that are favorable to theCompany. The maturity date of the $8,000 term note has been extended to June16, 2006 with an amended repayment schedule. The term note has been paid infull subsequent to January 31, 2006.

 

A default under the requirements of the PAMA couldresult in a default under the Doe Run Peru Revolving 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**

 

Inventories consist ofthe following:

 
| ** **                            | ** ** | **January 31,  2006** | ** ** | **October 31,  2005** | ** ** |
|---------------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                                  |       |                       |       |                       |       |
| Finished metals  and concentrates     |       | $                          | 25,135     |                       | $          | 18,461 |   |
| Metals and  concentrates in process   |       | 80,425                     |       | 55,681                     |       |
| Materials,  supplies and repair parts |       | 32,657                     |       | 31,492                     |       |
|                                  |       | $                          | 138,217    |                       | $          | 105,634 |   |

 

Materials, supplies andrepair parts are stated net of reserves for obsolescence of approximately$5,422 and $5,389 at January 31, 2006 and October 31, 2005, respectively.

 

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

 

DoeRun Peru has received income tax assessments from Peru’s tax authority, (“SUNAT”),for tax years 1998 through 2001. The assessments primarily relate to Doe RunPeru’s income tax treatment of the December 1997 merger of Metaloroya S.A intoDoe Run Peru., which was purchased by Doe Run Peru in October 1997, and itseffects on subsequent years’ taxable income. Under the assessment by SUNAT, thetax basis of Doe Run Peru’s fixed assets acquired would decrease, resulting inlower tax depreciation expense than originally claimed. The assessments ofyears 1999 through 2001 also relate to the disallowance of the deduction ofinterest paid, the offsetting of losses on derivatives executed in the U.S. andsome leaseback and leasing operations. The estimated assessed amount consistingof additional income taxes due, penalties and interest as of January 31, 2006totals approximately $116,200. The Company estimates that the effect of asimilar assessment for tax years after 2001 would be approximately $30,700.Furthermore, Doe Run Peru would also be required to make additional workers’profit sharing payments equal to 8% of the increase in taxable income generatedby the changes discussed above, or approximately $11,300 for calendar years1998 through 2005.

 

7

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Doe Run Peru has alsoreceived Value Added Tax (“VAT”) assessments for the tax years 1999 through2001 and for the period from January through July 2004. The assessmentsprimarily relate to Doe Run Peru’s exports with holding certificates anddifferences in a tax credit application. The total assessment for these periodswas approximately $46,200. SUNAT offset the amount assessed for 2004 ofapproximately $2,300 against Doe Run Peru’s VAT receivable balance from July2004. Future VAT reimbursements cannot be used to offset the assessment bySUNAT. The Company discontinued the use of holding certificates for exports inJune 2004. The Company estimates expected additional assessments related to VATfor tax years 2002 and 2003 to total approximately $21,500 in regard to itsexports with holding certificates.

 

Managementof the Company believes that in each case Doe Run Peru has followed theapplicable Peruvian tax statutes and intends to pursue all availableadministrative and judicial appeals. Doe Run Peru is not required to make anypayments pending the administrative appeal process. If Doe Run Peru is notsuccessful in the administrative appeal processes and were to appeal in thejudicial system, some type of financial assurance would be required. No amountshave been accrued as liabilities related to these actions.

 

TheCompany expects to utilize all of Doe Run Peru's net operating losscarryforwards in the current fiscal year. As a result, Doe Run Peru hasrecorded $1,842 of income tax expense for the first quarter of 2006.

 

Pursuant to the Company’s tax sharing agreement withRenco, dividends payable of $2,333 and $384 were reflected in the Company’sbalance sheets at January 31, 2006 and October 31, 2005, respectively. Thedividend payable at January 31, 2006 is scheduled to be paid in the secondquarter of 2006.

 

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

 

**Defined Benefit Plans**

** **

Net periodic benefit cost is comprised of thefollowing:

 
| ** **                                                | ** ** | **Three Months Ended  January 31,** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
|                                                      |       |                                               |       |   |   |
| Service cost                                              |       | $                                                  | 226        |   | $ | 547 |   |
| Interest cost on  projected benefit obligation            |       | 835                                                |       | 1,655 |   |
| Expected return  on assets                                |       | (740                                               | )          | (1,423 | ) |
| Net amortization  and deferral of unrecognized net losses |       | 524                                                |       | 708 |   |
| Net periodic  benefit cost                                |       | $                                                  | 845        |   | $ | 1,487 |   |

 

TheCompany is required to make total contributions of $10,082 in 2006, of which$2,021 had been paid as of January 31, 2006.

 

***Net Worth Appreciation Agreements***

 

Certain employees are parties to net worth agreementswith Doe Run, pursuant to which, upon termination of each person’s employmentwith Doe Run, they are entitled to receive a fixed percentage of the increasein the net worth of the Company, as defined in such agreement, from a base dateuntil the end of the fiscal quarter preceding the date of his termination. Suchamount is payable without interest in 40 equal quarterly installments, commencingthree months after the termination of each person’s employment, and at threemonth intervals thereafter. The net worth appreciation agreements also providethat, in the event of payment of a dividend, other than a dividend pursuant tothe tax sharing agreement, or a sale of the Company, the active participantswill be entitled to receive a percentage of the dividend or the net proceeds ofthe sale equal to their maximum percentages under the agreements. The Companyrecorded $672 in expense during the first quarter of 2006.

 

8

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

 

TheCompany’s operating segments are separately managed business units that aredistinguished by products, location and production processes. The primary leadsegment includes integrated mining, milling and smelting operations located inMissouri. The recycling operation segment, located in Missouri, recycleslead-bearing materials, primarily spent batteries. The fabricated productssegment produces value-added lead products. Doe Run Peru produces an extensiveproduct mix of non-ferrous and precious metals.

 

*OperatingSegments – Revenues*

 
| ** **                                        | ** ** | **Three Months Ended  January 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| Revenues from  external customers:                |       |                                               |       |   |   |
| Doe Run Peru                                      |       | $                                                  | 202,692    |   | $ | 148,385 |   |
| Primary lead                                      |       | 82,774                                             |       | 63,937 |   |
| Recycling  operation                              |       | 24,088                                             |       | 18,566 |   |
| Fabricated  products                              |       | 3,363                                              |       | 3,815 |   |
| Total                                             |       | 312,917                                            |       | 234,703 |   |
| Revenues from  other operating segments: (1)      |       |                                               |       |   |   |
| Doe Run Peru                                      |       | 6,240                                              |       | 2,724 |   |
| Primary lead                                      |       | 679                                                |       | 502 |   |
| Recycling  operation                              |       | 82                                                 |       | 98 |   |
| Total                                             |       | 7,001                                              |       | 3,324 |   |
| Total reportable  segments                        |       | 319,918                                            |       | 238,027 |   |
| Metal sales not  attributed to operating segments |       | 5,144                                              |       | 2,521 |   |
| Realized losses  on derivative contracts          |       | (3,937                                             | )          | (1,242 | ) |
| Intersegment  eliminations                        |       | (7,001                                             | )          | (3,324 | ) |
| Total revenues                                    |       | $                                                  | 314,124    |   | $ | 235,982 |   |

 

----

(1)   Transactionsbetween segments consist of metal sales recorded based on sales contracts thatare negotiated between segments on terms that management feels are similar tothose that would be negotiated between unrelated parties.

 

Themeasure of segment profit and loss used by the Company is earnings of thesegment before interest, taxes, depletion, depreciation, and amortization (“EBITDA”),as adjusted to exclude losses from impairment and disposal of long-lived assetsand unrealized gains (losses) on derivatives (“Adjusted EBITDA”). ConsolidatedAdjusted EBITDA also excludes accretion expense under Statement of FinancialAccounting Standards No. 143, *AssetRetirement Obligations* (Statement No. 143), adopted November 1, 2002*.*

 

*OperatingSegments – Adjusted EBITDA*

 
| ** **                                                | ** ** | **Three Months Ended  January 31,** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
|                                                      |       |                                               |       |   |   |
| Doe Run Peru                                              |       | $                                                  | 12,124     |   | $ | 8,476 |   |
| Primary lead                                              |       | 31,696                                             |       | 22,246 |   |
| Recycling  operation                                      |       | 4,179                                              |       | 3,601 |   |
| Fabricated  products                                      |       | 305                                                |       | 457 |   |
| Total reportable  segments                                |       | 48,304                                             |       | 34,780 |   |
| Realized losses  on derivatives                           |       | (3,937                                             | )          | (1,242 | ) |
| Other revenues  and expenses (1)                          |       | (962                                               | )          | (350 | ) |
| Corporate  selling, general and administrative expenses   |       | (6,713                                             | )          | (6,255 | ) |
| Intersegment  eliminations                                |       | 41                                                 |       | 25 |   |
| Consolidated  adjusted EBITDA                             |       | 36,733                                             |       | 26,958 |   |
| Depreciation,  depletion and amortization                 |       | (6,113                                             | )          | (6,137 | ) |
| Interest  expense, net                                    |       | (2,737                                             | )          | (3,441 | ) |
| Unrealized gain  on derivatives                           |       | 1,955                                              |       | 798 |   |
| Losses from  impairment and disposal of long-lived assets |       | (125                                               | )          | (1,210 | ) |
| Asset retirement  obligation accretion expense            |       | (379                                               | )          | (374 | ) |
| Other                                                     |       | —                                             |       | 93 |   |
| Income before  income taxes                               |       | $                                                  | 29,334     |   | $ | 16,687 |   |

 

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(1)   Otherrevenues and expenses consists of the profit on metal sales not attributed tooperating segments and expenses not allocated to operating segments, includingenvironmental expenses relating to historic operations of $261 and $0 for thethree months ended January 31, 2006 and 2005, respectively.

 

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

 

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

 

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

 

Asset retirementobligations (“AROs”) are recognized as liabilities when incurred, with theinitial measurement at fair value. These liabilities will be increased to fullvalue over time through charges of accretion to operating expense. In addition,an asset retirement cost is capitalized as part of the related asset’s carryingvalue and will be depreciated over the asset’s useful life. Changes in the AROliability resulting from revisions to the timing or the amount of the originalestimate of undiscounted cash flows shall be recognized as an increase or adecrease in the carrying amount of the liability for an ARO and the relatedasset retirement cost capitalized as part of the carrying amount of the relatedlong-lived asset.

 

DoeRun’s mines and related processing facilities are governed by various agenciesthat have established minimum standards for reclamation. Doe Run’s primarysmelter slag produced by and stored at the primary smelter in Herculaneum,Missouri, is currently exempt from hazardous waste regulation under theResource Conservation and Recovery Act of 1976, as amended (“RCRA”), but issubject to a state closure permit, which requires Doe Run to contain and coverthe pile upon cessation of operations. Doe Run’s mining and milling operationsare subject to Missouri mine waste closure permit requirements and leaseagreements that require Doe Run to reclaim surface areas, including remediationof mining waste disposal areas, and to perform closure activities underground.These activities, which tend to be site specific, generally include costs forearthwork, revegetation, water treatment and demolition. Closure activities maybe performed over time.

 

Doe Run has a RCRA permitaddressing the closure of portions of its recycling operation. The majority ofthe cost will arise from removing hazardous materials from the facility. No AROliability or related asset cost has been recorded because the fair value of theobligation cannot be determined due to the indeterminate timing. The cost ofclosure, based on third party estimates for bonding purposes, is approximately$3,000. The life of the operation is considered indeterminable because there isnot currently a cost-effective alternative to the lead acid batteries and becausebattery manufacturers are required to recycle the batteries.

 

MineClosure Law No. 28090 (“Law”) became effective in Peru as of October 15, 2005.It applies to smelters and mines. The Law establishes the obligations andprocedures that titleholders of mining activities must follow, including afinancial guarantee for environmental issues.   Doe Run Peru mustsubmit a mine closure plan to the Ministry of Energy and Mines by August 17,2006. Doe Run Peru intends to hire a technical mining consultant to prepare themine closure plan to include all the technical and legal requirements. The mineclosure plan must include a description of the remediation measures to be done,along with their cost and timing, and the expected amount of the financialguarantee. Pursuant to the tax stabilization agreement, Doe Run Peru is exempt

 

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from newobligations that could result in a reduction of its cash availability, such asthe guarantee discussed above.  Therefore, Doe Run Peru considers that theestablishment of the corresponding environmental guarantees would be inopposition to the provisions set forth in the tax stabilization agreement. Themining authorities could disagree with our position or there may be futureobligations when our tax stabilization agreement expires on December 31,2006.

 

DoeRun Peru has AROs at its Cobriza mine, related to the costs associated withclosing the mine openings and covering acid rock. Doe Run Peru is alsoresponsible for the eventual covering and revegetation of mixed lead and copperslag also stored in Huanchan, an area a short distance from the La Oroyasmelter where the slag is currently stored.

 

The Company’s totalrecorded liability for AROs was approximately $15,566 and $15,188 as of January31, 2006 and October 31, 2005, respectively.

 

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

 

TheCompany had recorded liabilities of approximately $15,700 and $20,000 relatedto remediation obligations as of January 31, 2006 and October 31, 2005,respectively.

 

Doe Run is subject to anAdministrative Order on Consent (“AOC”), effective May 29, 2001, to study andaddress issues related to the slag pile, plant property, community soilsadjacent to the primary smelter in Herculaneum, Missouri, elevated blood leadlevels in the community and lead releases from the plant. Under this AOC, DoeRun completed additional soil testing in the area within a one-mile radius ofthe smelter and subsequently signed a second AOC with the U.S. EnvironmentalProtection Agency (“ U.S.EPA), on December 21, 2001, which has essentially beencompleted. The May 29, 2001 AOC was modified effective on May 20, 2004. AtJanuary 31, 2006 the estimated remaining cost of remediating these propertieswas approximately $688.

 

Doe Run signed asettlement agreement with the State of Missouri on April 26, 2002, whereby itagreed to offer to purchase approximately 160 residential properties in an areaclose to the smelter if the owner requests such an offer. The offers have expiredexcept for a few with pending closing dates or special arrangements for a totalof $138. As of January 31, 2006, a total of 150 homeowners had requested andwere delivered offers, and 142 of those offers had been accepted. As of January31, 2006, the Company had spent approximately $10,300 under the residentialproperty purchase plan and another $1,700 of offers were not accepted or wereaccepted and have subsequently expired. Doe Run has complied in all materialrespects with the property purchase provisions of the settlement agreement.

 

The Company’s statementsof operations reflect losses from impairment or retirement of long-lived assetsprimarily related to the residential properties owned in Herculaneum, as itcannot be assured that the cost of the properties will be recovered throughfuture cash flows. The Company’s recorded liability for remediation does notinclude the future purchase costs relating to the residential property purchaseplan as these costs are capitalized.

 

Doe Run is subject to aState 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 10 of the last 14 quarters. Once the air quality monitorsreflected two quarters of non-compliance, the permitted annual capacity of theHerculaneum primary smelter decreased from 250,000 to 200,000 tons, which doesnot affect results at current production levels. Further non-compliance couldresult in SIP revisions that could have a material adverse financial impact onthe Company. Management is in discussions with the Missouri Department ofNatural Resources to explore options intended to improve the smelter’s abilityto attain and maintain compliance in the future.

 

Doe Run has receivednotice that it is a potentially responsible party (“PRP”) subject to liabilityunder The Comprehensive Environmental Response, Compensation and Liability Actof 1980, as amended (“CERCLA), at the following sites: six sites in St.Francois County, Missouri, including the Big River Mine

 

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Tailings site, the Bonne Terre site, the Federal site,the National site, the Rivermines site and the Leadwood site; sites comprisingareas along roads in Iron, Dent and Reynolds counties in Missouri; theOronogo-Durenweg site in Jasper County, Missouri; the Cherokee County site inCherokee County, Kansas; the Tar Creek site in Ottawa County, Oklahoma; theBlock “P” site in Cascade County and Judith County, Montana; and the MissouriElectric Works site in Cape Girardeau, Missouri. There are two additional sitesin St. Francois County for which the U.S. EPA has indicated it will issuenotice. CERCLA provides for strict and, in certain circumstances, joint andseveral liability for response costs and natural resource damages. The Company’sestimate of the cost of the remediation of these sites, including the twoadditional sites in St. Francois County, is included in the total liability forremediation obligations, which the Company believes is adequate based on itsinvestigations to date. However, depending upon the types of remediationrequired and certain other factors, additional costs at these sites,individually or collectively, could have a material adverse effect on theresults of operations, financial condition and liquidity of the Company.

 

In addition to beingasked to conduct remediation at these sites, the U.S. EPA may also seekreimbursement from Doe Run for response actions it has conducted at thesesites. The U.S. Government has advised PRP’s at the Tar Creek site, includingDoe Run, that it will seek reimbursement for approximately $125 million of suchcosts. 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.

 

InFebruary 2004 the U.S. Department of Agriculture issued a UnilateralAdministrative Order (“UAO”) ordering certain remediation activities by Doe Runat the Block “P” mill site in Montana. Doe Run has requested that other partiesbe added to the order. Doe Run will seek reimbursement from the U.S. Governmentand these other parties. The final remediation was essentially completed as ofOctober 31, 2005.

 

DoeRun has completed an Engineering Evaluation/Cost Analysis (“EE/CA”) for theBonne Terre site and has signed two AOCs to conduct removal actions on the westand east portions of the site. Work is completed on the west Bonne Terre siteand is nearly finished on the east site with completion expected in mid 2006.

 

DoeRun has completed an EE/CA for the Rivermines site and, while unable to acceptcertain financial assurance provisions of a proposed AOC, has agreed to conducta removal action at the site under a UAO. Work has commenced on the removalaction. The EPA accelerated the timeframe to complete the majority of theremediation effort by the summer of 2006.

 

DoeRun is subject to an AOC with the U.S. EPA to remediate the Big River MineTailings site. The remediation work required by the AOC has been substantiallycompleted and will continue with revegetation and ongoing monitoring andmaintenance activities.

 

Doe Run has also signedAOCs to perform an EE/CA on each of the National and Leadwood sites forremediation of mine waste areas. The National EE/CA was completed by the PRPsand was submitted to the U.S. EPA for approval. The U.S. EPA then prepared twoEE/CA’s, the last of which, is currently open for public discussion. The costof their remedy is higher than that estimated by the EE/CA prepared by Doe Run.The Leadwood EE/CA has been submitted to the U.S. EPA for approval. Inaddition, Doe Run has signed an AOC with the U.S. EPA to conduct a RemedialInvestigation/Feasibility Study (“RI/FS”) to assess potential off-site 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 2002. Doe Run signed an order to conduct interimmeasures, which consisted of blood lead testing of young children, residentialsoil sampling and limited soil remediation as indicated by the testing andsampling results, which was terminated and replaced by an AOC to conductcertain additional soil remediation in the area and has included its bestestimate of these efforts in its recorded liabilities. The Company believes therecorded liabilities related to these sites are adequate. However, shouldremediation goals or areas change, requiring substantially increased measures,there can be no assurance that the recorded liabilities would be adequate.

 

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In March 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 at approximately40 of these houses. Recorded liabilities could change, due to changes inmanagement’s estimates of the number of houses requiring remediation,remediation methods, the costs of remediation and Doe Run’s apportionment ofthe costs. 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.

 

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. After conductingan investigation, Doe Run has determined that it was not involved in operationsat 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 recycling facilityis subject to corrective action requirements under RCRA as a result of astorage 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.

 

OnAugust 25, 2004, the U.S. EPA issued a Notice of Violation to the Companyalleging past violations of the recycling facility’s air permit conditionsregarding production limits for its reverbatory furnace. Management believesthe facility has operated in compliance with state and federal air requirementsand has objected to the Notice of Violation . Consequently, management believesthis issue will not cause a material adverse impact on the Company.

 

The domestic operatingfacilities have wastewater discharge permits issued under the federal CleanWater Act, as amended. Doe Run currently meets the effluent limits under thesepermits, but if compliance is not maintained, additional improvements to itstreatment facilities could be required.

 

#### ***Environmentalremediation - Foreign Operations***

 

DoeRun Peru’s La Oroya operations historically and currently exceed some of theapplicable Ministry of Energy and Mines (“MEM”) maximum permissible limitspertaining to air emissions and wastewater effluent quality. Prior to ouracquisition of La Oroya, Metaloroya S.A., the former owner, a subsidiary ofEmpresa Minera del Centro del Peru S.A., which we refer to as Centromin,received approval from the Peruvian government for a PAMA. The PAMA wasdesigned to achieve compliance with MEM’s air and wastewater limits. Itconsisted of an environmental impact analysis, monitoring plan and data, mitigationmeasures and a closure plan. The PAMA also sets forth the actions andcorresponding annual investments the concession holder agrees to undertake inorder to achieve compliance with the maximum permissible limits prior toexpiration of the PAMA (ten years for smelters, such as Doe Run Peru’soperations in La Oroya, and five years mining operation such as Cobriza). ThePAMA projects, which are more fully discussed below, have been designed toachieve compliance with these requirements. The Peruvian government may, in thefuture, require compliance with additional environmental regulations that couldadversely affect Doe Run Peru’s business, financial condition and results ofoperations. After expiration of the PAMA, the operator must

 

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comply with allapplicable standards and requirements. Because these costs improve the propertyor prevent future environmental contamination, they are capitalized.

 

DoeRun Peru has committed under its current approved PAMA to implement thefollowing projects at its La Oroya smelter through December 31, 2006:

 

•              Constructnew sulfuric acid plants;

•              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.

 

Aninvestment schedule in the PAMA provides a specific plan for achieving theapplicable MEM maximum permissible limits pertaining to air emissions andwastewater effluent quality. The PAMA may be modified and amended as to theactual design and timing of projects to be implemented, provided compliancewith the applicable maximum permissible limits is achieved by December 31,2006. The required estimated spending for the projects approved in the La OroyaPAMA, as amended on January 25, 2002, is $101,000 for calendar 2006.

 

DoeRun Peru expects that it will not be able to comply with the spendingrequirements of La Oroya’s PAMA investment schedule in 2006 with respect to theconstruction of the sulfuric acid plants required by the PAMA and, as a result,could be subject to penalties. Failure to comply with the PAMA could result inthe cessation of operations at the La Oroya smelter, which would adverselyaffect our business, financial condition and results of operations.

 

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 one or more projects within the scope of a PAMA.The Supreme Decree specifies that companies had until December 31, 2005 toapply for an extension. The maximum extension is for three years and the MEMmay authorize an additional year based upon the results of a health risk study.

 

Pursuantto the Supreme Decree, the application for a PAMA extension must be supportedby a health risk study performed by a third party. The application must containan engineering description and funding plan of any project to be extended, adiscussion of how and when environmental emission standards will be met, a planto monitor emissions with the participation of the community, proof that atleast three public workshops were held in various districts to provideinformation on Doe Run Peru’s financial situation and health programs, proofthat two public hearings were held regarding the extension plans, and otherfinancial information. Upon meeting these requirements, Doe Run Peru appliedfor an extension on December 20, 2005. As part of the procedure, the MEM made90 observations to the request of extension, to which Doe Run Peru responded onMarch 20, 2006. MEM has 60 days from the date of Doe Run Peru’s submission toevaluate the application and the responses to its observations and make adecision.

 

In the90 observations made by the MEM, additional requirements have been levied as acondition of the extension. Doe Run Peru has responded to the MEM that itbelieves it can technically comply with the sulfuric acid plants requirementwithin the three year extension. However, no assurance can be given thatimplementation of the PAMA projects is feasible or that their implementationwill achieve compliance with the applicable legal requirements by the end ofthe PAMA period. Furthermore, there can be no assurance that the Peruviangovernment will not in the future require compliance with additional ordifferent environmental obligations that could adversely affect Doe Run Peru’sbusiness, financial condition and results of operations.

 

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TheCobriza mine has a separate PAMA in which Doe Run Peru committed to completeprojects to manage tailings, mine drainage, sewage and garbage. Doe Run Perucompleted its PAMA requirements with respect to Cobriza in June 2004, ceaseddischarging mine waste into the Mantaro River and is in compliance with theemissions standards required by the PAMA.

 

Uponapproval of a modified PAMA, Doe Run Peru would be required to create a trustaccount to administer the receipts and disbursements related to the extendedPAMA. The Supreme Decree requires that receipts from sales be remitted monthlydirectly to the trust account, in an amount sufficient to fund the cashrequirements of the extended PAMA.

 

TheSupreme Decree also requires that Doe Run Peru provide financial security within30 days of the approval of the PAMA extension in an amount equal to 20% of theprojected cost of the project or projects to be extended. The Company currentlyexpects the remaining investment needed to build the sulfuric acid plants to beapproximately $103,000.

 

Toachieve the financial guarantee and the trust contract required by SupremeDecree, the Doe Run Peru has amended the Doe Run Peru Revolving Credit Facilityto allow for those arrangements and has filed a draft of a trust guaranteecontract with a local bank. Additionally, on December 10, 2005 Doe Run Perusigned a Working Capital Financial Facility Agreement for up to $30,000 (namedFerrites Loan) with Servicios Mineros Integrados S.A.C., a Trafigura BeheerB.V. subsidiary and intends to use such funds in the fulfillment of thefinancial security as mentioned above. It is unlikely that Doe Run Peru will beable to utilize the entire facility due to production limitations and other conditionswithin the agreement. As of January 31, 2006, Doe Run Peru has received $10,000from this facility.

 

DoeRun Peru has performed other environmental projects to reduce fugitiveemissions in 2005 including the installation of a second short rotary furnace,enclosing the blast furnace and dross plant, along with other complementarywork. Major projects scheduled 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 PAMAprojects, including the sulfuric acid plant construction, and these projects isapproximately $122,000.

 

Managementbelieves that Doe Run Peru will obtain an approval of an extension to completethe sulfuric acid plants. There is no assurance, however, that Doe Run Peruwill receive an extension, or, if it does, that the project will be completedwithin the time limitation specified by the Supreme Decree.

 

In thefuture, to reduce gas volume while enriching sulfurous gas feed to the coppercircuit sulfuric acid plant, we are planning to replace the oxy-fuelreverberatory furnace with a submergered lanced reactor furnace to smelt copperconcentrates. The anticipated cost is approximately $57 million and the projectwill likely require additional financing.

 

Underthe purchase agreement related to the acquisition of the La Oroya assets inOctober 1997, Centromin, the prior owner of the La Oroya smelter and Cobrizamine, agreed to indemnify Doe Run Peru against environmental liability arisingout of its prior operations and their apportioned share of any other complaintrelated to emissions. Performance of the indemnity has been guaranteed by thePeruvian government through the enactment of the Supreme Decree No. 042-97-PCM.However, there can be no assurance that Centromin will satisfy itsenvironmental obligations and investment requirements, including those in itsPAMA, or that the guarantee will be honored. Any failure by Centromin tosatisfy its environmental obligations could adversely affect Doe Run Peru’sbusiness, financial condition and results of operations.

 

Inaddition to its PAMA obligations, Doe Run Peru is responsible for theremediation costs relating to a zinc ferrite disposal site. The current closureplan provides for encapsulating the ferrite residues in place at Huanchan, anarea a short distance from the smelter where they are currently stored, forwhich an environmental liability of $1,600 has been recorded as of January 31,2006 and October 31, 2005.

 

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***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 in29 lawsuits alleging certain damages stemming from the operations at theHerculaneum primary smelter. Three of these cases are class action lawsuits. Intwo cases, the plaintiffs seek to have certified a class of property owners ina certain section of Herculaneum, alleging that property values have beendamaged due to the operations of the smelter. In another case, plaintiffs seekto have certified a class of children who lived in Herculaneum during a periodof time when they were less than six years old and children born to mothers wholived in Herculaneum during their pregnancies. The remedy sought is medicalmonitoring for the class. Twenty-six of the cases are personal injury actionsby 161 individuals who allege damages from the effects of lead due tooperations at the smelter. Punitive damages also are being sought in each case.Doe Run is also a defendant in a wrongful death action concerning a drowning inthe City of Herculaneum.

 

A resident of Herculaneumhas claimed personal injuries allegedly resulting from exposure to emissionsfrom the smelter. No suit has yet been filed in this matter.

 

Doe Run is a defendant in17 lawsuits alleging certain damages from discontinued mine facilities in St. FrancoisCounty. Four of the cases are class action lawsuits. The first case seeks tohave certified 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 second case plaintiffs seek to have certified aclass of children who lived, went to school or day care in Bonne Terre, orwhose mothers lived in Bonne Terre during their pregnancies. The third andfourth cases are class actions for property damage and medical monitoringconcerning alleged damages caused by chat, tailings and related operations insix areas in St. Francois County. The remainder of the cases allege personalinjury to 28 individuals who were exposed to lead in St. Francois County.

 

DoeRun is a defendant in a lawsuit by the BNSF Railway Company, who has allegedthat Doe Run and other companies associated with lead mining operations inMissouri are responsible for property damage at certain rail yards and forcontribution and indemnity for costs incurred by BNSF associated withsettlement by BNSF of lead exposure cases. Given the early stage of this case,the Company is unable at this time to estimate the expected outcome and anyfinal costs of this action.

 

DoeRun is a defendant in five lawsuits alleging certain damages from pastmining operations in Ottawa County, Oklahoma.  Three of these suits areclass actions alleging personal injury and property damage in Picher andQuapaw, Oklahoma.  One lawsuit, a consolidation of five suits, allegesinjury to seven children living in Picher, Oklahoma.  One lawsuit, aconsolidation of two suits, alleges injury to 42 children living in OttawaCounty.

 

Doe Run, with severalother defendants, has been named in four cases in Maryland but has not yet beenjoined as a defendant in any of these cases. These suits seek damages, allegingpersonal injuries as a result of lead poisoning from exposure to lead paint andtetraethyl lead dust. The suits seek punitive damages. Doe Run was dismissedfrom two similar cases in which it was joined as a defendant. Until Doe Run isactually joined as a defendant in one or more of these cases, materialliability from these cases is considered remote.

 

Doe Run is currently adefendant in three asbestos injury suits filed in Madison County, Illinois,each alleging that a worker was exposed to asbestos at the premises of the St.Joe Minerals Corporation. However, Doe Run has not been properly served in oneof these cases. Doe Run has reached a tentative settlement in another of thesecases prior to going to trial. Doe Run is also a defendant in an asbestos casefiled in

 

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Lawrence County, Pennsylvania. Doe Run was named in anasbestos injury suit in the City of St. Louis, Missouri but that case wassubsequently dismissed.

 

DoeRun is in a commercial dispute with a buyer concerning one ocean shipment oflead concentrates. Buyer is seeking reimbursement of expenses incurred toaddress a large amount of water that appeared during the voyage on top ofconcentrates in the forward holds. This contract dispute is in arbitrationbefore the LME.

 

DoeRun is a defendant in a lawsuit by Korea Zinc Co. and affiliates filed onJanuary 19, 2006 in the Circuit Court of St. Louis County, concerning allegedviolations of an agreement regarding the sale of zinc concentrates. Doe Rundisputes the claim and will seek dismissal because the dispute should besubject to arbitration.

 

Doe Run has been named as a party in various lawsuitsrelating to certain operations of its predecessor. Fluor Corporation, the ownerof Doe Run’s predecessor, retained the obligation for any costs of defense orclaims relating to these lawsuits. Should Fluor Corporation become unable tofulfill its contractual obligation, Doe Run could be liable for any costs orclaims resulting from these lawsuits. There is no reason at this time tobelieve that Fluor Corporation could not fulfill its contractual obligations.

 

DoeRun Peru is currently a defendant in 197 lawsuits in the Lima, Peru laborcourts that allege damage to workers from industrial diseases. Doe Run Peru hasmade claims in most of the cases against Centromin and has also made claimsagainst both governmental agencies and private companies that provide workers’insurance. The average claim is $17. Of 19 previously concluded cases in thiscategory, 18 were dismissed and 1 resulted in an award of $9.

 

DoeRun Peru is also currently a defendant in 156 lawsuits by workers alleging thatthey are owed certain differences in salaries and benefits. (Some of the opencases date to 1991). The average claim is $20. Of 38 previously concluded casesin this category, 29 were dismissed and 9 resulted in awards totaling $19. DoeRun Peru 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.

 

DoeRun Peru is also currently a defendant in 21 lawsuits alleging various laborclaims including indemnification for arbitrary dismissal, nullity of dismissal,moral damage compensation, compensatory damages from work accident andreadmission of worker. The average claim is $7. Of 30 previously concludedcases in this category, 26 were dismissed and 4 resulted in awards totaling$21.

 

Theamount of awards in the various categories of lawsuits referenced aboverepresented total judgments issued by the relevant courts. For certain of theselawsuits, Centromin will pay a portion of the total award.

 

OnJanuary 19, 2005, Doe Run Peru was served with a lawsuit by an association ofmunicipalities of the Junin Region of Peru against Doe Run Peru and two othermining companies. This lawsuit alleges environmental damages to the MantaroRiver basin in the amount of $5 billion. On February 2, 2006, Doe Run Peru wasserved with a lawsuit by the municipality of Jauja. This lawsuit allegesenvironmental damages to the Mantaro River basin in the amount of $5,000.Material liability to Doe Run Peru, in these two actions, is believed to beremote based on the opinion of management and outside counsel for Doe Run Peru.Any potential judgment would be subject to the indemnification obligations ofCentromin, which are guaranteed by the Peruvian government.

 

OnJuly 11, 2005, Doe Run Peru filed an administrative lawsuit against the Yauli –La Oroya Provincial City Hall in order to nullify and void a number of finesfor the amount of $2,800. Doe Run Peru was fined for not having constructionlicenses for the PAMA projects.

 

Sincemost of the above cases are either in the pleading or discovery stages, theCompany is unable at this time to estimate the expected outcome and the finalcosts, except as noted, of these actions. The total legal accrual estimated asof January 31, 2006 was $475.

 

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There can be noassurance that these cases would not have a material adverse effect, bothindividually and in the aggregate, on the results of operations, financialcondition and liquidity of the Company. The Company has and will continue tovigorously defend itself against such claims.

 

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

 

TheGuarantor Subsidiaries (Fabricated Products, Inc. (FPI) and DR Land Holdings,LLC (together, the Domestic Guarantors) Buick Resource Recycling Facility, LLC,Doe Run Cayman Ltd. (Doe Run Cayman) and its subsidiary Doe Run Peru) havejointly and severally, fully, unconditionally and irrevocably guaranteed the11.75% notes of the Company. Doe Run Cayman has no operations separate fromthose of Doe Run Peru. Separate financial statements and other disclosuresconcerning certain Guarantor Subsidiaries and disclosures concerningnon-Guarantor Subsidiaries have not been presented because management hasdetermined that such information is not material to investors. Intercompanytransactions eliminated in consolidation consist of various service and agencyfees between Doe Run and Doe Run Peru and sales of metal to Doe Run by Doe RunPeru and to FPI by Doe Run.

 

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**CondensedConsolidating Balance Sheet (unaudited)**

**Asof January 31, 2006**

**(Amountsin 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                                                                                                  |       | $                    | 4,745      |              | $          | —         |       | $              | 1          |             | $          | 24,714      |       | $ | — |   | $ | 29,460 |   |
| Trade accounts  receivable, net of allowance for doubtful accounts                                    |       | 74,460               |       | —            |       | 1,800          |       | 32,656         |       | (4,165           | )          | 104,751     |       |
| Inventories                                                                                           |       | 37,648               |       | —            |       | 1,272          |       | 99,292         |       | 5                |       | 138,217     |       |
| Prepaid expenses  and other current assets                                                            |       | 6,181                |       | —            |       | 42             |       | 20,293         |       | —           |       | 26,516      |       |
| Due from  subsidiaries                                                                                |       | 151,477              |       | 2,282             |       | —         |       | —         |       | (153,759         | )          | —      |       |
| Total current  assets                                                                                 |       | 274,511              |       | 2,282             |       | 3,115          |       | 176,955        |       | (157,919         | )          | 298,944     |       |
|                                                                                                  |       |                 |       |              |       |           |       |           |       |             |       |        |       |
| Property, plant  and equipment, net                                                                   |       | 75,404               |       | 15,404            |       | 905            |       | 168,793        |       | —           |       | 260,506     |       |
| Due from  subsidiaries                                                                                |       | 13,312               |       | —            |       | —         |       | —         |       | (13,312          | )          | —      |       |
| Other noncurrent  assets, net                                                                         |       | 8,717                |       | —            |       | 62             |       | —         |       | —           |       | 8,779       |       |
| Investment in  subsidiaries                                                                           |       | 14,096               |       | —            |       | —         |       | —         |       | (14,096          | )          | —      |       |
| Total assets                                                                                          |       | $                    | 386,040    |              | $          | 17,686         |       | $              | 4,082      |             | $          | 345,748     |       | $ | (185,327 | ) | $ | 568,229 |   |
|                                                                                                  |       |                 |       |              |       |           |       |           |       |             |       |        |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY (DEFICIT)**                                              | ** ** | ** **           | ** ** | ** **        | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **  | ** ** |
| Current  liabilities:                                                                                 |       |                 |       |              |       |           |       |           |       |             |       |        |       |
|                                                                                                  |       |                 |       |              |       |           |       |           |       |             |       |        |       |
| Current  maturities of long-term debt                                                                 |       | $                    | 82,815     |              | $          | —         |       | $              | —     |             | $          | 49,889      |       | $ | — |   | $ | 132,704 |   |
| Accounts payable                                                                                      |       | 29,137               |       | —            |       | 605            |       | 103,349        |       | (4,165           | )          | 128,926     |       |
| Accrued  liabilities                                                                                  |       | 48,449               |       | —            |       | 735            |       | 30,537         |       | —           |       | 79,721      |       |
| Due to  parent/subsidiaries                                                                           |       | 2,282                |       | —            |       | 8,414          |       | 143,063        |       | (153,759         | )          | —      |       |
| Total current  liabilities                                                                            |       | 162,683              |       | —            |       | 9,754          |       | 326,838        |       | (157,924         | )          | 341,351     |       |
|                                                                                                  |       |                 |       |              |       |           |       |           |       |             |       |        |       |
| Long-term debt,  less current maturities                                                              |       | 271,566              |       | —            |       | —         |       | —         |       | —           |       | 271,566     |       |
| Due to parent                                                                                         |       | —               |       | —            |       | —         |       | 13,312         |       | (13,312          | )          | —      |       |
| Other noncurrent  liabilities                                                                         |       | 65,658               |       | —            |       | 2              |       | 3,519          |       | —           |       | 69,179      |       |
| Total  liabilities                                                                                    |       | 499,907              |       | —            |       | 9,756          |       | 343,669        |       | (171,236         | )          | 682,096     |       |
|                                                                                                  |       |                 |       |              |       |           |       |           |       |             |       |        |       |
| Series A  redeemable preferred stock                                                                  |       | 29,385               |       | —            |       | —         |       | —         |       | —           |       | 29,385      |       |
|                                                                                                  |       |                 |       |              |       |           |       |           |       |             |       |        |       |
| Shareholders’  equity (deficit):                                                                 |       |                 |       |              |       |           |       |           |       |             |       |        |       |
| Common stock,  $.10 par value per share, 1,667 shares authorized, 1000 shares issued and  outstanding |       | —               |       | —            |       | —         |       | —         |       | —           |       | —      |       |
| Common stock, $1  par value per share, 1,000 shares authorized, issued and outstanding                |       | —               |       | —            |       | 1              |       | —         |       | (1               | )          | —      |       |
| Common stock, $1  par value per share, 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                                   |       | (4,147               | )          | —            |       | —         |       | —         |       | —           |       | (4,147      | )          |
| Retained  earnings (accumulated deficit) and accumulated other comprehensive losses                   |       | (139,105             | )          | (5,619            | )          | (6,880         | )          | 74             |       | 12,425           |       | (139,105    | )          |
| Total  shareholders’ equity (deficit)                                                            |       | (143,252             | )          | 17,686            |       | (5,674         | )          | 2,079          |       | (14,091          | )          | (143,252    | )          |
| Total  liabilities and shareholders’ equity (deficit)                                            |       | $                    | 386,040    |              | $          | 17,686         |       | $              | 4,082      |             | $          | 345,748     |       | $ | (185,327 | ) | $ | 568,229 |   |

 

19

----

 

**CondensedConsolidating Balance Sheet**

**Asof October 31, 2005**

**(Amountsin 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 per share, 1,667 shares authorized, 1,000 shares issued and  outstanding |       | —           |       | —                 |       | —         |       | —         |       | —           |       | —      |       |
| Common stock, $1  par value per share, 1,000 shares authorized, issued and outstanding                 |       | —           |       | —                 |       | 1              |       | —         |       | (1               | )          | —      |       |
| Common stock, $1  par value per share, 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

----

 

**CondensedConsolidating Statement of Operations (unaudited)**

**ThreeMonths Ended January 31, 2006**

**(Amountsin thousands)**

 
| ** **                                    | ** ** | **The Company** | ** ** | **Buick**              | ** ** | ** **     | ** ** | ** **          | ** ** | ** **       | ** ** | ** **  | ** ** |
|-----------------------------------------------|------------|----------------------|------------|------------------------|------------|----------------|------------|---------------------|------------|------------------|------------|-------------|------------|
| ** **                                    | ** ** | **Excluding**        | ** ** | **Resource**           | ** ** | ** **     | ** ** | **Doe Run**    | ** ** | ** **       | ** ** | ** **  | ** ** |
| ** **                                    | ** ** | **Guarantor**        | ** ** | **Recycling**          | ** ** | **Domestic**   | ** ** | **Cayman and** | ** ** | ** **       | ** ** | **The**     | ** ** |
| ** **                                    | ** ** | **Subsidiaries**     | ** ** | **Facility, LLC** | ** ** | **Guarantors** | ** ** | **Subsidiary**      | ** ** | **Eliminations** | ** ** | **Company** | ** ** |
|                                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Net  sales                                    |       | $                    | 108,830    |                   | $          | —         |       | $                   | 3,363      |             | $          | 208,932     |       | $ | (7,001 | ) | $ | 314,124 |   |
|                                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Costs  and expenses:                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Cost  of sales                                |       | 77,454               |       | —                 |       | 2,541          |       | 190,434             |       | (7,042           | )          | 263,387     |       |
| Depletion,  depreciation and amortization     |       | 2,324                |       | 680                    |       | 110            |       | 2,999               |       | —           |       | 6,113       |       |
| Selling,  general and administrative          |       | 6,467                |       | —                 |       | 656            |       | 5,984               |       | —           |       | 13,107      |       |
| Unrealized  loss (gain) on derivatives        |       | 315                  |       | —                 |       | —         |       | (2,270              | )          | —           |       | (1,955      | )          |
| Other                                         |       | 1,017                |       | —                 |       | —         |       | 290                 |       | —           |       | 1,307       |       |
| Total  costs and expenses                     |       | 87,577               |       | 680                    |       | 3,307          |       | 197,437             |       | (7,042           | )          | 281,959     |       |
|                                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Income  (loss) from operations                |       | 21,253               |       | (680                   | )          | 56             |       | 11,495              |       | 41               |       | 32,165      |       |
|                                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Other  income (expense):                      |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Interest  expense, net                        |       | (1,153               | )          | —                 |       | (116           | )          | (1,468              | )          | —           |       | (2,737      | )          |
| Other,  net                                   |       | (241                 | )          | 245                    |       | 2              |       | (100                | )          | —           |       | (94         | )          |
| Equity  in earnings of subsidiaries           |       | 7,633                |       | —                 |       | —         |       | —              |       | (7,633           | )          | —      |       |
|                                          |       | 6,239                |       | 245                    |       | (114           | )          | (1,568              | )          | (7,633           | )          | (2,831      | )          |
|                                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Income  (loss) before income tax expense      |       | 27,492               |       | (435                   | )          | (58            | )          | 9,927               |       | (7,592           | )          | 29,334      |       |
| Income  tax expense                           |       | —               |       | —                 |       | —         |       | 1,842               |       | —           |       | 1,842       |       |
|                                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Net  income (loss)                            |       | 27,492               |       | (435                   | )          | (58            | )          | 8,085               |       | (7,592           | )          | 27,492      |       |
| Preferred  stock dividends                    |       | (890                 | )          | —                 |       | —         |       | —              |       | —           |       | (890        | )          |
| Net  income (loss) allocable to common shares |       | $                    | 26,602     |                   | $          | (435           | )          | $                   | (58        | )                | $          | 8,085       |       | $ | (7,592 | ) | $ | 26,602 |   |

 

21

----

 

**CondensedConsolidating Statement of Operations (unaudited)**

**ThreeMonths Ended January 31, 2005**

**(Amountsin thousands)**

 
| ** **                                    | ** ** | **The Company** | ** ** | **Buick**              | ** ** | ** **     | ** ** | ** **          | ** ** | ** **       | ** ** | ** **  | ** ** |
|-----------------------------------------------|------------|----------------------|------------|------------------------|------------|----------------|------------|---------------------|------------|------------------|------------|-------------|------------|
| ** **                                    | ** ** | **Excluding**        | ** ** | **Resource**           | ** ** | ** **     | ** ** | **Doe Run**    | ** ** | ** **       | ** ** | ** **  | ** ** |
| ** **                                    | ** ** | **Guarantor**        | ** ** | **Recycling**          | ** ** | **Domestic**   | ** ** | **Cayman and** | ** ** | ** **       | ** ** | **The**     | ** ** |
| ** **                                    | ** ** | **Subsidiaries**     | ** ** | **Facility, LLC** | ** ** | **Guarantors** | ** ** | **Subsidiary**      | ** ** | **Eliminations** | ** ** | **Company** | ** ** |
|                                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Net  sales                                    |       | $                    | 84,382     |                   | $          | —         |       | $                   | 3,815      |             | $          | 151,109     |       | $ | (3,324 | ) | $ | 235,982 |   |
|                                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Costs  and expenses:                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Cost  of sales                                |       | 60,038               |       | —                 |       | 2,950          |       | 138,364             |       | (3,349           | )          | 198,003     |       |
| Depletion,  depreciation and amortization     |       | 2,028                |       | 854                    |       | 100            |       | 3,155               |       | —           |       | 6,137       |       |
| Selling,  general and administrative          |       | 6,026                |       | —                 |       | 587            |       | 4,314               |       | —           |       | 10,927      |       |
| Unrealized  loss (gain) on derivatives        |       | (1,109               | )          | —                 |       | —         |       | 311                 |       | —           |       | (798        | )          |
| Other                                         |       | 1,521                |       | 29                     |       | 153            |       | 134                 |       | —           |       | 1,837       |       |
| Total  costs and expenses                     |       | 68,504               |       | 883                    |       | 3,790          |       | 146,278             |       | (3,349           | )          | 216,106     |       |
|                                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Income  (loss) from operations                |       | 15,878               |       | (883                   | )          | 25             |       | 4,831               |       | 25               |       | 19,876      |       |
|                                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Other  income (expense):                      |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Interest  expense, net                        |       | (2,679               | )          | —                 |       | (156           | )          | (606                | )          | —           |       | (3,441      | )          |
| Other,  net                                   |       | (50                  | )          | 195                    |       | 2              |       | 105                 |       | —           |       | 252         |       |
| Equity  in earnings of subsidiaries           |       | 3,538                |       | —                 |       | —         |       | —              |       | (3,538           | )          | —      |       |
|                                          |       | 809                  |       | 195                    |       | (154           | )          | (501                | )          | (3,538           | )          | (3,189      | )          |
|                                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Net  income (loss)                            |       | 16,687               |       | (688                   | )          | (129           | )          | 4,330               |       | (3,513           | )          | 16,687      |       |
| Preferred  stock dividends                    |       | (792                 | )          | —                 |       | —         |       | —              |       | —           |       | (792        | )          |
| Net  income (loss) allocable to common shares |       | $                    | 15,895     |                   | $          | (688           | )          | $                   | (129       | )                | $          | 4,330       |       | $ | (3,513 | ) | $ | 15,895 |   |

 

22

----

 

**CondensedConsolidating Statement of Cash Flows (unaudited)**

**ThreeMonths Ended January 31, 2006**

**(Amountsin 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          |       | $                    | (417       | )                      | $          | 1,120          |       | $                   | 634        |             | $          | 10,998      |       | $ | (10,690 | ) | $ | 1,645 |   |
|                                                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Cash  flows from investing activities:                        |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Purchases  of property, plant and equipment                   |       | (3,250               | )          | —                 |       | (2             | )          | (10,012             | )          | —           |       | (13,264     | )          |
| Investment  in subsidiaries                                   |       | (10,690              | )          | —                 |       | —         |       | —              |       | 10,690           |       | —      |       |
| Net  cash used in investing activities                        |       | (13,940              | )          | —                 |       | (2             | )          | (10,012             | )          | 10,690           |       | (13,264     | )          |
|                                                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Cash  flows from financing activities:                        |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Proceeds  from revolving loans and short-term borrowings, net |       | 7,689                |       | —                 |       | —         |       | 10,000              |       | —           |       | 17,689      |       |
| Payments  on long-term debt                                   |       | —               |       | —                 |       | —         |       | (96                 | )          | —           |       | (96         | )          |
| Due  to/due from parent/subsdiaries                           |       | 2,497                |       | (1,120                 | )          | (632           | )          | (745                | )          | —           |       | —      |       |
| Net  cash provided by (used in) financing activities          |       | 10,186               |       | (1,120                 | )          | (632           | )          | 9,159               |       | —           |       | 17,593      |       |
|                                                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Net  increase (decrease) in cash                              |       | (4,171               | )          | —                 |       | —         |       | 10,145              |       | —           |       | 5,974       |       |
|                                                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Cash  at beginning of period                                  |       | 8,916                |       | —                 |       | 1              |       | 14,569              |       | —           |       | 23,486      |       |
| Cash  at end of period                                        |       | $                    | 4,745      |                   | $          | —         |       | $                   | 1          |             | $          | 24,714      |       | $ | — |   | $ | 29,460 |   |

 

23

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**CondensedConsolidating Statement of Cash Flows (unaudited)**

**ThreeMonths Ended January 31, 2005**

**(Amountsin 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          |       | $                    | (854       | )                      | $          | 196            |       | $                   | (175       | )                | $          | 9,133       |       | $ | (4,454 | ) | $ | 3,846 |   |
|                                                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Cash  flows from investing activities:                        |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Purchases  of property, plant and equipment                   |       | (3,816               | )          | —                 |       | (105           | )          | (12,648             | )          | —           |       | (16,569     | )          |
| Investment  in subsidiaries                                   |       | (4,454               | )          | —                 |       | —         |       | —              |       | 4,454            |       | —      |       |
| Net  cash used in investing activities                        |       | (8,270               | )          | —                 |       | (105           | )          | (12,648             | )          | 4,454            |       | (16,569     | )          |
|                                                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Cash  flows from financing activities:                        |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Proceeds  from revolving loans and short-term borrowings, net |       | (2,677               | )          | —                 |       | —         |       | 580                 |       | —           |       | (2,097      | )          |
| Payments  on long-term debt                                   |       | —               |       | —                 |       | —         |       | (12                 | )          | —           |       | (12         | )          |
| Due  to/due from parent/subsdiaries                           |       | (74                  | )          | (196                   | )          | 280            |       | (10                 | )          | —           |       | —      |       |
| Net  cash provided by (used in) financing activities          |       | (2,751               | )          | (196                   | )          | 280            |       | 558                 |       | —           |       | (2,109      | )          |
|                                                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Net  decrease in cash                                         |       | (11,875              | )          | —                 |       | —         |       | (2,957              | )          | —           |       | (14,832     | )          |
|                                                          |       |                 |       |                   |       |           |       |                |       |             |       |        |       |
| Cash  at beginning of period                                  |       | 13,412               |       | —                 |       | 1              |       | 6,905               |       | —           |       | 20,318      |       |
| Cash  at end of period                                        |       | $                    | 1,537      |                   | $          | —         |       | $                   | 1          |             | $          | 3,948       |       | $ | — |   | $ | 5,486 |   |

 

24

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**DOERUN PERU S.R.L.**

**CondensedBalance Sheets**

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

 
| ** **                                                                   | ** ** | **January 31,** | ** ** | **October 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                   | ** ** | **2006**             | ** ** | **2005**             | ** ** |
| ** **                                                                   | ** ** | **(unaudited)**      |       |                 |       |
| **ASSETS**                                                                   | ** ** | ** **           |       |                 |       |
|                                                                         |       |                 |       |                 |       |
| Current  assets:                                                             |       |                 |       |                 |       |
| Cash                                                                         |       | $                    | 24,714     |                 | $          | 14,569 |   |
| Trade  accounts receivable, net of allowance for doubtful accounts           |       | 32,656               |       | 31,637               |       |
| Inventories                                                                  |       | 99,292               |       | 68,756               |       |
| Prepaid  expenses and other current assets                                   |       | 20,293               |       | 16,191               |       |
|                                                                         |       |                 |       |                 |       |
| Total  current assets                                                        |       | 176,955              |       | 131,153              |       |
|                                                                         |       |                 |       |                 |       |
| Property,  plant and equipment, net                                          |       | 168,793              |       | 161,563              |       |
|                                                                         |       |                 |       |                 |       |
| Total  assets                                                                |       | $                    | 345,748    |                 | $          | 292,716 |   |
|                                                                         |       |                 |       |                 |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)**                      |       |                 |       |                 |       |
|                                                                         |       |                 |       |                 |       |
| Current  liabilities:                                                        |       |                 |       |                 |       |
| Current  maturities of long-term debt                                        |       | $                    | 49,889     |                 | $          | 39,821 |   |
| Accounts  payable                                                            |       | 103,349              |       | 67,115               |       |
| Accrued  liabilities                                                         |       | 30,537               |       | 31,200               |       |
| Due  to related parties                                                      |       | 143,063              |       | 143,063              |       |
|                                                                         |       |                 |       |                 |       |
| Total  current liabilities                                                   |       | 326,838              |       | 281,199              |       |
|                                                                         |       |                 |       |                 |       |
| Due  to parent company and related parties                                   |       | 13,312               |       | 14,057               |       |
|                                                                         |       |                 |       |                 |       |
| Other  non current liabilities                                               |       | 3,519                |       | 3,466                |       |
|                                                                         |       |                 |       |                 |       |
| Total  liabilities                                                           |       | 343,669              |       | 298,722              |       |
|                                                                         |       |                 |       |                 |       |
| Shareholders’  equity (deficit):                                        |       |                 |       |                 |       |
| Capital  stock, $0.01 par value per share, 15,912,083,739 shares, fully paid |       | 2,005                |       | 2,005                |       |
| Retained  earnings (deficit) and other comprehensive income (loss)           |       | 74                   |       | (8,011               | )          |
|                                                                         |       |                 |       |                 |       |
| Total  shareholders’ equity (deficit)                                   |       | 2,079                |       | (6,006               | )          |
|                                                                         |       |                 |       |                 |       |
| Total  liabilities and shareholders’ equity (deficit)                   |       | $                    | 345,748    |                 | $          | 292,716 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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

**CondensedStatements of Operations (unaudited)**

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

 
| ** **                                    | ** ** | **Three Months**           | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **Ended January 31,** | ** ** |
| ** **                                    | ** ** | **2006**                        | ** ** | **2005** | ** ** |
|                                          |       |                            |       |   |   |
| Net  sales                                    |       | $                               | 208,932    |   | $ | 151,109 |   |
|                                          |       |                            |       |   |   |
| Costs  and expenses:                          |       |                            |       |   |   |
| Costs  of sales                               |       | 190,434                         |       | 138,364 |   |
| Depletion,  depreciation and amortization     |       | 2,999                           |       | 3,155 |   |
| Selling,  general and administrative expenses |       | 5,984                           |       | 4,314 |   |
| Unrealized  (gain) loss on derivatives        |       | (2,270                          | )          | 311 |   |
| Other                                         |       | 290                             |       | 134 |   |
|                                          |       |                            |       |   |   |
| Total  costs and expenses                     |       | 197,437                         |       | 146,278 |   |
|                                          |       |                            |       |   |   |
| Income  from operations                       |       | 11,495                          |       | 4,831 |   |
|                                          |       |                            |       |   |   |
| Other  income (expense):                      |       |                            |       |   |   |
| Interest  expense, net                        |       | (1,468                          | )          | (606 | ) |
| Other,  net                                   |       | (100                            | )          | 105 |   |
|                                          |       |                            |       |   |   |
|                                          |       | (1,568                          | )          | (501 | ) |
|                                          |       |                            |       |   |   |
| Income  before income tax expense             |       | 9,927                           |       | 4,330 |   |
| Income  tax expense                           |       | 1,842                           |       | 0 |   |
|                                          |       |                            |       |   |   |
| Net  income                                   |       | $                               | 8,085      |   | $ | 4,330 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

26

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

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

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

** **
| ** **                                        | ** ** | **Three Months**  | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **Ended  January 31,** | ** ** |
| ** **                                        | ** ** | **2006**               | ** ** | **2005** | ** ** |
|                                              |       |                   |       |   |   |
| Net  cash provided by operating activities        |       | $                      | 10,998     |   | $ | 9,133 |   |
|                                              |       |                   |       |   |   |
| Cash  flows from investing activities:            |       |                   |       |   |   |
| Purchases  of property, plant and equipment       |       | (10,012                | )          | (12,648 | ) |
|                                              |       |                   |       |   |   |
| Net  cash used in investing activities            |       | (10,012                | )          | (12,648 | ) |
|                                              |       |                   |       |   |   |
| Cash  flows from financing activities:            |       |                   |       |   |   |
| Proceeds  from (payments on) revolving loans, net |       | 10,000                 |       | 580 |   |
| Payments  on long term debt                       |       | (96                    | )          | (12 | ) |
| Decrease  in amount due to related parties        |       | (745                   | )          | (10 | ) |
|                                              |       |                   |       |   |   |
| Net  cash provided by financing activities        |       | 9,159                  |       | 558 |   |
|                                              |       |                   |       |   |   |
| Net  increase (decrease) in cash                  |       | 10,145                 |       | (2,957 | ) |
|                                              |       |                   |       |   |   |
| Cash  at beginning of period                      |       | 14,569                 |       | 6,905 |   |
|                                              |       |                   |       |   |   |
| Cash  at end of period                            |       | $                      | 24,714     |   | $ | 3,948 |   |

 

Theaccompanying notes are integral part of these financial statements.

 

27

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**DOE RUNPERU S.R.L**

**Notes toFinancial Statements**

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

 

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

 

***UnauditedInterim Financial Statements***

 

These interim financial statements include theaccounts of Doe Run Peru S.R.L. (“Doe Run Peru”). In the opinion of management,the interim financial statements contain all adjustments, consisting of normalrecurring accruals, necessary to present fairly the financial position as ofJanuary 31, 2006 and results of operations for the three-month periods endedJanuary 31, 2006 and 2005. All material intercompany balances and transactionshave been eliminated. Interim periods are not necessarily indicative of resultsto be expected for the year.

 

***Reclassifications***

 

Certain prior period balances have been reclassifiedin order to conform to current presentation.

 

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

 

Doe Run Peru is highlyleveraged and has significant commitments for environmental matters and forEnvironmental Remediation and Management Program (“PAMA”) expenditures thatrequire it to dedicate a substantial portion of cash flow from operations tothe payment of these obligations, which will reduce funds available for otherbusiness purposes. (See Note 6: Asset Retirement and EnvironmentalObligations). These factors also increase Doe Run Peru’s vulnerability togeneral adverse conditions, limit Doe Run Peru’s flexibility in planning for orreacting to changes in its business and industry, and limit Doe Run Peru’sability to obtain financing required to fund working capital and capitalexpenditures and for other general corporate purposes. An unfavorable outcometo certain contingencies, discussed below, would have a further adverse effecton Doe Run Peru’s ability to meet its obligations when due. Doe Run Peru’sability to meet these obligations is also dependent upon future operatingperformance and financial results which are subject to financial, economic,political, competitive and other factors affecting Doe Run, many of which arebeyond Doe Run Peru’s control.

 

The effects of highermetal prices over the past two years have been positive. Comparing the firstquarter of 2006 to that of 2005, the value of the metal recovered over paidmetal has increased 25% from $6,927 to $8,684. The values of by-products, too,have improved from $4,997 to $6,437, or 28%. During the first quarter of 2006, DoeRun Peru has benefited from its ferrites floatation plant which was placed inservice at the end of the prior fiscal year. Though the plant has not reachedits full capacity, it still contributed $2,504 to revenues.

 

While conversion costshave risen by $5,549 over the two periods and SG&A has risen $1,570, managementbelieves that Doe Run Peru’s financial condition, as a result of the improvedmarket conditions discussed in the preceding paragraphs, has stabilized. Therestill exists, however, the possibility that concentrate supplies will tightenagain in one or more metals in the near future. In addition, one or more of DoeRun Peru’s significant local suppliers could cease delivery of concentrates.Under these circumstances there is no assurance that we would be able to securesufficient replacement at economically favorable terms. An interruption in thefeed supply would adversely affect production at La Oroya and impair financialcondition and liquidity.

 

Thefinancial statements have been prepared assuming Doe Run Peru will continue asa going concern. Doe Run Peru has significant capital requirements underenvironmental commitments, which, if not met, could result in defaults of DoeRun Peru’s credit agreements; has substantial contingencies related to tax; andhas significant debt service obligations that raise substantial doubt about DoeRun Peru’s ability to continue as a going concern. Management believes that theprice improvements seen through fiscal year 2005 and the continuing increasesseen in the first quarter of fiscal year 2006, the potential revenues and cashflow enhancements from the new ferrite project in Peru and the anticipatedapproval of the application to extend the PAMA requirement for the constructionof the sulfuric acid plants, will enable Doe Run Peru to continue as a goingconcern. However, there can be no assurance that these actions will achieve thedesired results.

 

DoeRun Peru continues to have substantial cash requirements in the future,including the maturity of the revolving credit facility on June 23, 2006and significant capital requirements under environmental commitments (see Note6: Asset Retirement 

 

28

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and EnvironmentalObligation). In addition, there are substantial contingencies related to taxes(see Note 4: Income Taxes) and litigation (see Note 5: Litigation).

 

Net unused availability at January 31, 2006 under theDoe Run Peru Revolving Credit Facility was approximately $200. In addition tothe availability under its revolving credit facilities, the cash balance at DoeRun Peru was $24,714 at January 31, 2006. Doe Run Peru has reached andmaintained its maximum borrowing level under the Doe Run Peru Revolving CreditFacility due in part to the higher metal prices resulting in higher outlays forconcentrate purchases and higher Value-Added Tax (“VAT”) payments funded bycash from operations.

 

The Doe Run Peru Revolving Credit Facility expires inthe third quarter of 2006, and will require renegotiation to extend theirterms. There can be no assurance that Doe Run Peru will be successful, or if itis successful, that the renewal would be at terms that are favorable to Doe RunPeru.

 

A default under the requirements of the PAMA couldresult in a default under the Doe Run Peru Revolving 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 Doe Run 11.75% notes to which Doe Run Peru is a guarantor.

 

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

 

Inventories consist ofthe following:

 
| ** **                            | ** ** | **January 31,** | ** ** | **October 31,** | ** ** |
|---------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                            | ** ** | **2006**             | ** ** | **2005**             | ** ** |
|                                  |       |                 |       |                 |       |
| Finished  metals and concentrates     |       | $                    | 12,744     |                 | $          | 10,397 |   |
| Metals  and concentrates in process   |       | 71,853               |       | 44,668               |       |
| Materials,  supplies and repair parts |       | 14,695               |       | 13,691               |       |
|                                  |       | $                    | 99,292     |                 | $          | 68,756 |   |

 

Materials,supplies and repair parts are stated net of reserves for obsolescence ofapproximately $1,358 and $1,162 at January 31, 2006 and October 31, 2005,respectively.

 

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

 

DoeRun Peru has received income tax assessments from Peru’s tax authority, (“SUNAT”),for tax years 1998 through 2001. The assessments primarily relate to Doe RunPeru’s income tax treatment of the December 1997 merger of Metaloroya S.A. intoDoe Run Peru which was purchased by Doe Run Peru in October 1997, and itseffects on subsequent years’ taxable income. Under the assessment by SUNAT, thetax basis of Doe Run Peru’s fixed assets acquired would decrease, resulting inlower tax depreciation expense than originally claimed. The assessments ofyears 1999 through 2001 also relate to the disallowance of the deduction ofinterest paid, the offsetting of losses on derivatives executed in the U.S. andsome leaseback and leasing operations. The estimated assessed amount consistingof additional income taxes due, penalties and interest as of January 31, 2006totals approximately $116,200. Doe Run Peru estimates that the effect of asimilar assessment for tax years after 2001 would be approximately $30,700.Furthermore, Doe Run Peru would also be required to make additional workers’profit sharing payments equal to 8% of the increase in taxable income generatedby the changes discussed above, or approximately $11,300 for calendar years1998 through 2005.

 

Doe Run Peru has alsoreceived VAT assessments for the tax years 1999 through 2001 and for the periodfrom 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 was approximately $46,200.SUNAT offset the amount assessed for 2004 of approximately $2,300 against DoeRun Peru’s VAT receivable balance from July 2004. Future VAT reimbursementscannot be used to offset the assessment by SUNAT. Doe Run Peru discontinued theuse of holding certificates for exports in June 2004. Doe Run Peru estimatesexpected additional assessments related to VAT for tax years 2002 and 2003 tototal approximately $21,500 in regard to its exports with holding certificates.

 

29

----

 

Management of Doe RunPeru believes that in each case Doe Run Peru has followed the applicablePeruvian tax statutes and intends to pursue all available administrative andjudicial appeals. Doe Run Peru is not required to make any 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.

 

Doe Run Peru expects toutilize all of its net operating loss carryforwards in the current fiscal year.As a result, Doe Run Peru has recorded $1,842 of income tax expense for thefirst quarter of 2006.

 

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

 

All existing and pendinglitigations at the time of the acquisition of Doe Run Peru were retained byCentromin, the prior owner of the La Oroya smelter and Cobriza mine.

 

DoeRun Peru is currently a defendant in 197 lawsuits in the Lima, Peru laborcourts that allege damage to workers from industrial diseases. Doe Run Peru hasmade claims in most of the cases against Centromin and has also made claimsagainst both governmental agencies and private companies that provide workers’insurance. The average claim is $17. Of 19 previously concluded cases in thiscategory, 18 were dismissed and 1 resulted in an award of $9.

 

DoeRun Peru is also currently a defendant in 156 lawsuits by workers alleging thatthey are owed certain differences in salaries and benefits. (Some of the opencases date back to 1991). The average claim is $20. Of 38 previously concludedcases in this category, 29 were dismissed and 9 resulted in awards totaling$19. Doe Run Peru is also a defendant in a lawsuit by the Yauli-La OroyaEmployees Union concerning salaries and benefits. The claims of the 149 workersremaining in the lawsuit have been valued at a total of $218 according to areport by an expert appointed by the court.

 

DoeRun Peru is also currently a defendant in 21 lawsuits alleging various laborclaims including indemnification for arbitrary dismissal, nullity of dismissal,moral damage compensation, compensatory damages from work accident andreadmission of worker. The average claim is $7. Of 30 previously concludedcases in this category, 26 were dismissed and 4 resulted in awards totaling$21.

 

Theamount of awards in the various categories of lawsuits referenced aboverepresented total judgments issued by the relevant courts. For certain of theselawsuits, Centromin will pay a portion of the total award.

 

OnJanuary 19, 2005, Doe Run Peru was served with a lawsuit by an association ofmunicipalities of the Junin Region of Peru against Doe Run Peru and two othermining companies. This lawsuit alleges environmental damages to the MantaroRiver basin in the amount of $5 billion. On February 2, 2006, Doe Run Peru wasserved with a lawsuit by the municipality of Jauja. This lawsuit allegesenvironmental damages to the Mantaro River basin in the amount of $5,000.Material liability to Doe Run Peru, in these two actions, is believed to beremote based on the opinion of management and outside counsel for Doe Run Peru.Any potential judgment would be subject to the indemnification obligations ofCentromin, which are guaranteed by the Peruvian government.

 

OnJuly 11, 2005, Doe Run Peru filed an administrative lawsuit against the Yauli –La Oroya Provincial City Hall in order to nullify and void a number of finesfor the amount of $2,800. Doe Run Peru was fined for not having constructionlicenses for the PAMA projects.

 

Sincemost of the above cases are either in the pleading or discovery stages, Doe RunPeru is unable at this time to estimate the expected outcome and the finalcosts, except as noted, of these actions. No amounts have been accrued asliabilities related to these actions. There can be no assurance that thesecases would not have a material adverse effect, both individually and in theaggregate, on the results of operations, financial condition and liquidity ofDoe Run Peru. Doe Run Peru has and will continue to vigorously defend itselfagainst such claims.

 

30

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

 

#### ***Asset Retirement 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.

 

MineClosure Law No. 28090 (“Law”) became effective in Peru as of October 15, 2005. Itapplies to smelters and mines. The Law establishes the obligations andprocedures that titleholders of mining activities must follow, including afinancial guarantee for environmental issues. Doe Run Peru must submit a mineclosure plan to the Ministry of Energy and Mines by August 17, 2006. Doe RunPeru intends to hire a technical mining consultant to prepare the mine closureplan to include all of the technical and legal requirements. The mine closureplan must include a description of the remediation measures to be done, alongwith their cost and timing, and the expected amount of the financial guarantee.Pursuant to the tax stabilization agreement, Doe Run Peru is exempt from newobligations that could result in a reduction of its cash availability, such asthe guarantee discussed above. Therefore, Doe Run Peru considers that theestablishment of the corresponding environmental guarantees would be inopposition to the provisions set forth in the tax stabilization agreement. Themining authorities could disagree with our position or there may be futureobligations when our tax stabilization agreement expires on December 31,2006.

 

Doe Run Peru has AROs at its Cobriza mine, related tothe costs associated with closing the mine openings and covering acid rock. DoeRun Peru is also responsible for the eventually covering and revegetation ofmixed lead and copper slag also stored in Huanchan, an area a short distancefrom the La Oroya smelter where the slag is currently stored.

 

DoeRun Peru’s total recorded liability for AROs was approximately $1,866 as ofJanuary 31, 2006 and October 31, 2005

 

***EnvironmentalRemediation***

 

DoeRun Peru’s La Oroya operations historically and currently exceed some of theapplicable Ministry of Energy and Mines (“MEM”) maximum permissible limitspertaining to air emissions and wastewater effluent quality. Prior to ouracquisition of La Oroya, Metaloroya S.A., the former owner, a subsidiary ofEmpresa Minera del Centro del Peru S.A., which we refer to as Centomin,received approval from the Peruvian government for a PAMA. The PAMA wasdesigned to achieve compliance with MEM’s air and wastewater limits. Itconsisted of an environmental impact analysis, monitoring plan and data,mitigation measures and a closure plan. The PAMA also sets forth the actionsand corresponding annual investments the concession holder agrees to undertakein order to achieve compliance with the maximum permissible limits prior toexpiration of the PAMA (ten years for smelters, such as Doe Run Peru’soperations in La Oroya, and five years mining operation such as Cobriza). ThePAMA projects, which are more fully discussed below, have been designed toachieve compliance with these requirements. The Peruvian government may, in thefuture, require compliance with additional environmental regulations that couldadversely affect Doe Run Peru’s business, financial condition and results ofoperations. After expiration of the PAMA, the operator must comply with allapplicable standards and requirements. Because these costs improve the propertyor prevent future environmental contamination, they are capitalized.

 

DoeRun Peru has committed under its current approved PAMA to implement thefollowing projects at its La Oroya smelter through December 31, 2006:

 

•      Construct newsulfuric acid plants;

•      Construct atreatment plant for the copper refinery effluent;

•      Construct anindustrial wastewater treatment plant for the smelter and refinery;

•      Improve theslag handling system;

•      ImproveHuanchan lead and copper slag deposits;

•      Construct anarsenic trioxide deposit;

•      Improve thezinc ferrite disposal site;

 

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•      Constructdomestic wastewater treatment and domestic waste disposal; and

•      Construct amonitoring station.

 

Aninvestment schedule in the PAMA provides a specific plan for achieving theapplicable MEM maximum permissible limits pertaining to air emissions andwastewater effluent quality. The PAMA may be modified and amended as to theactual design and timing of projects to be implemented, provided compliancewith the applicable maximum permissible limits is achieved by December 31,2006. The required estimated spending for the projects approved in the La OroyaPAMA, as amended on January 25, 2002, is $101,000 for calendar 2006.

 

DoeRun Peru expects that it will not be able to comply with the spendingrequirements of La Oroya’s PAMA investment schedule in 2006 with respect to theconstruction of the sulfuric acid plants required by the PAMA and, as a result,could be subject to penalties. Failure to comply with the PAMA could result inthe cessation of operations at the La Oroya smelter, which would adverselyaffect our business, financial condition and results of operations.

 

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 one or more projects within the scope of a PAMA.The Supreme Decree specifies that companies had until December 31, 2005 toapply for an extension. The maximum extension is for three years and the MEMmay authorize an additional year based upon the results of a health risk study.

 

Pursuantto the Supreme Decree, the application for a PAMA extension must be supportedby a health risk study performed by a third party. The application must containan engineering description and funding plan of any project to be extended, adiscussion of how and when environmental emission standards will be met, a planto monitor emissions with the participation of the community, proof that atleast three public workshops were held in various districts to provideinformation on Doe Run Peru’s financial situation and health programs, proofthat two public hearings were held regarding the extension plans, and otherfinancial information. Upon meeting these requirements, Doe Run Peru appliedfor an extension on December 20, 2005. As part of the procedure, MEM made 90observations to the request of extension, to which Doe Run Peru responded onMarch 20, 2006. MEM has 60 days from the date of Doe Run Peru’s submission toevaluate the application and the responses to its observations and make adecision.

 

In the90 observations made by the MEM, additional requirements have been levied as acondition of the extension. Doe Run Peru has responded to the MEM that itbelieves it can technically comply with the acid plant requirement within the threeyear extension. However, no assurance can be given that implementation of thePAMA projects is feasible or that their implementation will achieve compliancewith the applicable legal requirements by the end of the PAMA period.Furthermore, there can be no assurance that the Peruvian government will not inthe future require compliance with additional or different environmentalobligations that could adversely affect Doe Run Peru’s business, financialcondition and results of operations.

 

TheCobriza mine has a separate PAMA in which Doe Run Peru committed to completeprojects to manage tailings, mine drainage, sewage and garbage. Doe Run Perucompleted its PAMA requirements with respect to Cobriza in June 2004, ceaseddischarging mine waste into the Mantaro River and is in compliance with theemissions standards required by the PAMA.

 

Uponapproval of a modified PAMA, Doe Run Peru would be required to create a trustaccount to administer the receipts and disbursements related to the extendedPAMA. The Supreme Decree requires that receipts from sales be remitted monthlydirectly to the trust account, in an amount sufficient to fund the cashrequirements of the extended PAMA.

 

TheSupreme Decree also requires that Doe Run Peru provide financial securitywithin 30 days of the approval of the PAMA extension in an amount equal to 20%of the projected cost of the project or projects to be extended. Doe Run Perucurrently expects the remaining investment needed to build the sulfuric acidplants to be approximately $103,000.

 

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Toachieve the financial guarantee and the trust contract required by SupremeDecree, Doe Run Peru has amended the Doe Run Peru Revolving Credit Facility toallow for those arrangements and has filed a draft of a trust guaranteecontract with a local bank. Additionally, on December 10, 2005 Doe Run Perusigned a Working Capital Financial Facility Agreement for up to $30,000 (namedFerrites Loan) with Servicios Mineros Integrados S.A.C., a Trafigura BeheerB.V. subsidiary and intends to use such funds in the fulfillment of thefinancial security as mentioned above. It is unlikely that Doe Run Peru will beable to utilize the entire facility due to production limitations and other conditionswithin the agreement. As of January 31, 2006, Doe Run Peru has received $10,000from this facility.

 

DoeRun Peru has performed other environmental projects to reduce fugitiveemissions in 2005 including the installation of a second short rotary furnace,enclosing the blast furnace and dross plant, along with other complementarywork. Major projects scheduled 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 PAMAprojects, including the sulfuric acid plant construction, and these projects isapproximately $122,000.

 

Managementbelieves that Doe Run Peru will obtain an approval of an extension to completethe sulfuric acid plants. There is no assurance, however, that Doe Run Peruwill receive an extension, or, if it does, that the project will be completedwithin the time limitation specified by the Supreme Decree.

 

In thefuture, to reduce gas volume while enriching sulfurous gas feed to the coppercircuit sulfuric acid plant, we are planning to replace the oxy-fuelreverberatory furnace with a submergered lanced reactor furnace to smelt copperconcentrates. The anticipated cost is approximately $57 million and the projectwill likely require additional financing.

 

Underthe purchase agreement related to the acquisition of the La Oroya assets inOctober 1997, Centromin, the prior owner of the La Oroya smelter and Cobrizamine, agreed to indemnify Doe Run Peru against environmental liability arisingout of its prior operations and their apportioned share of any other complaintrelated to emissions. Performance of the indemnity has been guaranteed by thePeruvian government through the enactment of the Supreme Decree No. 042-97-PCM.However, there can be no assurance that Centromin will satisfy itsenvironmental obligations and investment requirements, including those in itsPAMA, or that the guarantee will be honored. Any failure by Centromin tosatisfy its environmental obligations could adversely affect Doe Run Peru’sbusiness, financial condition and results of operations.

 

Inaddition to its PAMA obligations, Doe Run Peru is responsible for theremediation costs relating to a zinc ferrite disposal site. The current closureplan provides for encapsulating the ferrite residues in place at Huanchan, anarea a short distance from the smelter where they are currently stored, forwhich an environmental liability of $1,600 has been recorded as of January 31,2006 and October 31, 2005.

 

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**Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations.**

 

Thefollowing discussion and analysis should be read in conjunction with thecondensed consolidated financial statements of The Doe Run ResourcesCorporation (“Doe Run” and together with its subsidiaries, the “Company”) andthe notes thereto, and other financial information included herein.

 

***Forward-Looking Statements***

 

*The Private Securities LitigationReform Act of 1995 provides a “safe harbor” for forward-looking statements. TheCompany makes forward-looking statements in this Quarterly Report on Form 10-Q,which represent the Company’s expectations or beliefs about future events andfinancial performance. When used in this report, the words “expect,” “believe,”“anticipate,” “goal,” “plan,” “intend,” “estimate,” “may,” “will” or similarwords are intended to identify forward-looking statements. Theseforward-looking statements are subject to known and unknown risks,uncertainties and assumptions, including those referred to in this QuarterlyReport on Form 10-Q and otherwise described in the Company’s periodic filings.*

 

*All predictions as to future resultscontain a measure of uncertainty, and accordingly, actual results could differmaterially. Among the factors that could cause actual results to differ fromthose contemplated, projected or implied by the forward-looking statements (theorder of which does not necessarily 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 light of these risks,uncertainties and assumptions, the forward-looking events discussed may notoccur. In addition, actual results could differ materially from those suggestedby the forward-looking statements. Accordingly, investors are cautioned not toplace undue reliance on the forward-looking statements. Except as required bylaw, the Company undertakes no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise. Investors should, however, review additional disclosuresmade by the Company from time to time in its periodic filings with theSecurities 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.*

 

***Recent events***

 

On April 6 and 7, 2006 Buick Resource Recycling’shourly production, maintenance and materials handling employees participated ina union election conducted by the National Labor Relations Board to determine

 

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representation by theInternational Union, United Automobile, Aerospace and Agricultural ImplementWorkers of America, AFL-CIO, The majority of the employees voted againstrepresentation by the union.

 

***Results of Operations***

 

*MetalsPricing*

 

The followingtable sets forth average London Metal Exchange prices for lead, copper and zincand the average London Bullion Market Association price for silver for theperiods indicated:

 
| ** **                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **January 31,**             | ** ** |
| **Average Prices**         |       | **2006**                         | ** ** | **2005** | ** ** |
| Lead ($/ton)               |       | $                                | 1,026.20   |   | $ | 875.80 |   |
| Copper ($/ton)             |       | 4,102.20                         |       | 2,853.20 |   |
| Zinc ($/ton)               |       | 1,667.00                         |       | 1,062.80 |   |
| Silver ($/troy ounce) |       | 8.53                             |       | 7.08 |   |
|                                 |            |                                  |            |  |  |  |  |

 

Theseprices reflect the continued tightening in the worldwide metal supply and theeffect of other macroeconomic factors such as exchange rates, interest rates,and oil prices.

 

*Production*

 

All references to “ton” are in shorttons.

 

The following table setsforth the Company’s production statistics for the periods indicated:

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **January 31,**             | ** ** |
| ** **                                 | ** ** | **2006**                         | ** ** | **2005** |   |
| U.S.  Operations                           |       |                             |       |   |   |
| Lead  metal - primary (tons)               |       | 41,935                           |       | 40,416 |   |
| Lead  metal - secondary (tons)             |       | 33,064                           |       | 33,698 |   |
| Lead  concentrates (metal content, tons)   |       | 68,800                           |       | 65,148 |   |
| Ore  grade (lead)                          |       | 5.57                             | %          | 5.36 | % |
|                                       |       |                             |       |   |   |
| Doe  Run Peru Operations                   |       |                             |       |   |   |
| Refined  copper (tons)                     |       | 16,891                           |       | 15,914 |   |
| Refined  lead (tons)                       |       | 32,945                           |       | 31,761 |   |
| Refined  zinc (tons)                       |       | 11,508                           |       | 16,228 |   |
| Refined  silver (thousands of troy ounces) |       | 9,218                            |       | 8,239 |   |
| Refined  gold (thousands of troy ounces)   |       | 18                               |       | 15 |   |
| Copper  concentrates (metal content, tons) |       | 4,450                            |       | 3,772 |   |
| Ore  grade (copper content)                |       | 1.00                             | %          | 0.99 | % |

 

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The 5.6% increase in lead concentrate production atthe Company’s primary lead operation’s mines in the first quarter of 2006 overthe first quarter of 2005 was the result of an increase in ore production of1.1% and an increase in ore grade of almost 4%. The higher volume and grade ofore processed in the first quarter of 2006 was primarily the result of shiftingsome personnel from the low grade 29 mine to the Fletcher mine and increasingproduction from a new high grade development area. Improved equipmentavailability (fixed and mobile equipment) and the growing experience of theworkforce are also contributors to the increased production from the SoutheastMissouri mining and milling division (“Semo”). Approximately a third of theSemo workforce has less than two years experience in our operations. Theworkforce additions are the result of the Company making the decision in 2004,during the period when metal pricing increased to well above its historicaverage, to increase ore production and mine at a lower grade to optimize theearnings on the mineral resources. The tonnage of ore treated in the firstquarter of fiscal 2006 was also slightly greater, 0.3%, than plan for theperiod.

 

We expect development of the drift connecting thesouth end of the Fletcher mine to a new ore body called RC West Fork willcontinue at the planned pace, with ore production expected to begin in the 4thcalendar quarter of 2006.

 

In the first quarter of 2006, the Herculaneum primarysmelter operation’s lead metal production was almost 4% greater than in thefirst quarter of 2005, but 13% below the planned production level for suchquarter. The lower than planned production was due to the necessary replacementof a major component in the acid plant in December instead of as scheduled inMarch. The scheduled March shutdown was reduced substantially as a result ofthe acid plant work that was completed in December, which allowed the smelterto make up some portion of the first quarter production shortfall.

 

Environmentally, the Herculaneum primary smelter didnot meet the ambient air lead standard at the Broad Street monitoring stationin the first calendar quarter of 2006 while all other monitors were inattainment. Additionally, all ambient air monitors at the Herculaneum primarysmelter were in attainment for the fourth calendar quarter in 2005. The companycontinues to work with the community and the regulatory agencies to establish abuffer zone around the smelter and to make improved process modifications thatmanagement expects will allow the facility to continuously meet the ambient airstandard at all monitoring stations.

 

Lead production at the Company’s U.S. recyclingoperation was essentially flat in the first quarter of 2006 compared to 2005,but approximately 10% lower than planned production. The lower than plannedproduction was the result of feed mixes into the plant that contained highlevels of sulfur and negatively impacted furnace operations. Several processchanges have been made to both the plant’s desulphurization circuit and to thefurnace operations in an effort to resolve the sulfur - related problems.

 

A permitto permanently expand the emissions capacity of the recycling operation toallow approximately 175,000 tons of production was granted by the Department ofNatural Resources in January 2005. While production capacity constraints willprevent production at the level allowed by the permit, the permit allows theCompany’s recycling facility to operate at higher levels without obtainingannual approvals.

 

During the first quarter of 2006, Doe Run Peru’scopper and lead metal production increased slightly from the comparable prioryear period. This increase was due in part to certain adverse factors thatoccurred during the first quarter of 2005 that no longer affected operations inthe first quarter of the 2006 fiscal year. These factors were:

 

•      atwo day work stoppage in December 2004;

•      alack of readily available coke at reasonable prices;

•      frequentshut-downs of the oxy-fuel reverberatory furnace for maintenance, affectingcopper production and

•      metallurgicalissues in the lead cells occurring principally during the first quarter of 2005.

 

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The decrease in the 2006 first quarter production ofzinc compared to the 2005 first quarter was due to the cessation of operationsof Doe Run Peru's three New Jersey zinc roasters in January 2005, which werecostly to operate and environmentally inefficient. The decision resulted in areduction of refined zinc production capacity to 50,000 tons per year.

 

Production of copper concentrates (metal content) atDoe Run Peru’s Cobriza mine in the 2006 first quarter was approximately 18%higher than the 2005 first quarter, due primarily to an increase in productionrelated to improved mine preparation and development and correction of minestability problems. This allowed Doe Run Peru to enhance ore grade by increasingthe mining of pillars.

 

*The 2006 FirstQuarter Compared to the 2005 First Quarter*

 

**GrossMargin** on sales (net sales less cost of sales) increased from$38.0 million in the 2005 first quarter to $50.7 million in the 2006 firstquarter. Gross margin on sales for Doe Run’s operations increased from $25.2million in the 2005 first quarter to $32.2 million in the 2006 first quarterwhile gross margin on sales for Doe Run Peru increased from $12.7 million inthe 2005 first quarter to $18.5 million in the 2006 first quarter.

 

A 23.2% increase in theCompany’s realized prices for lead metal, fueled by a 17% increase in LondonMetal Exchange prices and higher premiums achieved over the London MetalExchange, contributed an additional $12.3 million to the Company’s gross marginon sales in the 2006 first quarter compared to the 2005 first quarter. Anincrease in lead concentrate sales volume and a decrease in copper concentratesales volume resulted in an increase in gross margin of $0.4 million and decreaseof $2.0 million, respectively, in the 2006 first quarter over the 2005 firstquarter. Increases in copper and zinc metal prices contributed an additional$5.1 million to gross margin compared to the 2005 first quarter. Theseincreases were offset by higher production costs at Doe Run’s primaryoperations, primarily due to slightly higher production, higher salaries, wagesand employee benefits, maintenance and fuel costs. Increased conversion costsat the recycling operation, due to higher metallurgical coke and propane costs,were offset by improved feed costs per unit of metal produced.

 

The$5.8 million increase in Doe Run Peru’s gross margin from the first quarter2005 to the first quarter 2006 is primarily the result of an improvement in thetreatment charges received for processing concentrates and higher metal prices,offset by a LIFO adjustment

 

**Selling,General and Administrative costs** increased $2.2 million inthe 2006 first quarter over the 2005 first quarter. The increase was dueprimarily to increased salaries and employee benefit costs, legal fees, andprofessional fees related to software implementation.

 

**UnrealizedGains (Losses)** 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 $0.8 million in the 2005 firstquarter to an unrealized gain of $2.0 million is primarily the result of thesettled 2006 first quarter positions. This gain is offset by realized lossesincluded in net sales. Also see “Item 3. Quantitative and QualitativeDisclosures About Market Risk.”

 

**Other Expenses** decreased $0.5million from the 2005 first quarter to the 2006 first quarter. The decrease inexpenses primarily relate to adecrease in the recognition of impairment losses for the value of housespurchased in the town of Herculaneum, Missouri under a residential propertypurchase plan. The 2006 first quarter recognized less impairment losses becausethe program was waning in the 2006 first quarter. As of January 31, 2006, 150homeowners had requested offers, and 142 of 150 delivered offers had beenaccepted, however, due to the terms of the offers, 5 of the offers haveexpired. As of January 31, 2006, the Company spent approximately $10.3 millionunder the residential property purchase plan. Three offers totaling $0.14million are awaiting closing, and another $1.7 million of offers that had notbeen accepted or had been accepted but subsequently expired.

 

**Income TaxExpense**increased $1.8 million in the 2006 first quarterover the 2005 first quarter. The Company expects to utilize all of Doe RunPeru’s net operating loss carryforwards in the current fiscal year. As aresult, Doe Run Peru recorded $1.8 million of income tax expense.

 

The Renco Group, Inc., the parent company of Doe Run’ssole shareholder (referred to as Renco), has elected for the Company to betreated as a qualified subchapter S subsidiary for U.S. federal tax purposes.Most states in which the Company operates will follow similar tax treatment.Subchapter S status requires the ultimate shareholders to include their prorata share of the Company’s income or loss in their individual tax returns. Asa result of the Company’s tax status in the U.S., the Company is not generallysubject to U.S. federal and most state

 

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income taxes, however, under a tax sharing agreementwith Renco, the Company is liable to Renco for pro forma federal and stateincome taxes as defined in the agreement.

 

***Liquidityand 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 capital requirementsunder environmental commitments, which if not met, could result in defaults ofthe Company’s credit agreements; has substantial contingencies related toPeruvian tax; and has significant debt service obligations that raisesubstantial doubt about the Company’s ability to continue as a going concern.These commitments require Doe Run Peru to dedicate a substantial portion ofcash flow from operations to the payment of these obligations, which willreduce funds available for other business purposes. 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.

 

Management believes that high metal prices and otherrevenue enhancements, and the issuance of Supreme Decree No. 046-2004-EM issuedby the Peruvian government allowing the Ministry of Energy and Mines to extend,in its discretion, the Doe Run Peru’s La Oroya smelter PAMA requirement for theconstruction of the sulfuric acid plants, will enable the Company to continueas a going concern. The Company made a timely application for the extension inDecember 2005 and on March 20, 2006 responded to 90 observations about theapplication that came from the Ministry of Energy and Mines. The Ministry has 45days from March 20, 2006 to evaluate the matter and issue its decision.Management believes that it has justified the extension and will receive theextension in due course manner. The Company’s ability to meet obligations after2006 could be affected by future operating performance and financial results,which are subject to financial, economic, political, competitive and otherfactors affecting the Company, many of which are beyond the Company’s control,or an unfavorable outcome to the items noted above, and, accordingly, noassurance can be given that it will be able to meet such obligations.

 

*Capital Resources and DebtInstruments*

 

Net unused availabilityat January 31, 2006 under the Doe Run Revolving Credit Facility wasapproximately $23.1 million, and under the Doe Run Peru Revolving CreditFacility was $0.2 million at January 31, 2006. In addition to the availabilityunder revolving credit facilities, cash balances at Doe Run and Doe Run Peruwere $4.7 million and $24.7 million, respectively, at January 31, 2006. InPeru, continued high metal prices have resulted in outlays for concentratepurchases and value-added tax payments being funded by cash from operations, asDoe Run Peru has reached its maximum borrowing level under the Doe Run PeruRevolving Credit Facility. In response to the lack of borrowing availability,Doe Run Peru extended payments to its suppliers, which in addition to increasedmetal prices, resulted in an increase in accounts payable in the first quarterof 2006.

 

The Company’s outstanding term note of $8 million hasbeen paid off subsequent to the reporting date however, the Company still hassubstantial debt service requirements in the future, including interestpayments of $25.7 million in 2006 for the Company’s 11.75% notes which are duein 2008. At January 31, 2006, the Doe Run Peru revolving credit facility had anexpiration date of June 23, 2006. It will need to be renegotiated and there canbe no assurance that

 

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we will be successful in renewing the agreement, or ifit is successful, that the renewal would be at terms favorable to us.

 

During the period beginning on October 29, 2005 andending on October 29, 2012, the majority warrantholders, pursuant to theWarrant Agreement dated as of October 29, 2002, between Doe Run and StateStreet Bank and Trust Company, as Warrant Agent, will have the right to requireDoe Run to repurchase all, but not less than all, of the warrants and anyoutstanding shares issued upon the exercise thereof at a price equal to thefair market value of the warrants, as determined by a third party appraisal.Management engaged a nationally recognized valuation firm to calculate the fairvalue of the warrants. Management’s estimate of the fair value of the warrantsbased on the valuation is approximately $0.6 million at January 31, 2006.

 

*Tax Commitments*

 

Income tax assessments from Peru’s tax authority,SUNAT, for the tax years 1998 through 2001, show an assessed amount due fromDoe Run Peru, consisting of additional income taxes due, penalties and interestas of January 31, 2006, of approximately $116,200. Value-added tax, referred toas VAT assessments for tax years 1999 through 2001 and for the period fromJanuary through July 2004, show a total assessment amount of approximately$46,200. SUNAT offset the amount assessed for 2004 of approximately $2,300against Doe Run Peru’s VAT receivable balance from July 2004. In addition, theCompany estimates that the effect of similar assessments for periods not yetassessed would be approximately $30,700 and $21,500 for the income tax and VATmatters, respectively. Furthermore, Doe Run Peru would also be required to makeadditional workers’ profit sharing payments equal to 8% of the increase intaxable income generated by the changes discussed above, or approximately$11,300 for calendar years 1998 through 2005.

 

Management of the Company believes that in each caseDoe Run Peru has followed the applicable Peruvian tax statutes and intends topursue all available administrative and judicial appeals. Doe Run Peru is notrequired to make any payments pending the administrative appeal process. If DoeRun Peru is not successful in the administrative appeal processes and were toappeal in the judicial system, some type of financial assurance would berequired, which would have a significant adverse effect on liquidity.

 

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**Item 3. Quantitative and Qualitative Disclosures About MarketRisk.**

 

**CommodityPrice Risk**

 

In the normalcourse of its business, the Company has used in the past, and may use in thefuture, forward sales commitments and commodity put and call option contractsto manage its exposure to fluctuations in the prices of lead, copper, zinc,silver and gold. Contract positions are designed to ensure that the Companywill receive a defined minimum price for certain quantities of its production.None of the aforementioned activities have been entered into for speculativepurposes.

 

The fair market value (gain/(loss)) of the Company’sderivatives was approximately $(2.5) million and $(2.0) million at January 31,2006 and October 31, 2005. These losses, when realized, would be offset byhigher prices on the Company’s sales of physical metal. The majority relates tosold lead futures and sold lead call options related to the U.S. operations. A10% increase in metal prices would result in an additional gain of $3.9million, based on the Company’s open contracts at January 31, 2006.

 

**Interest Rate Risk**

 

The Company is subject to interest rate risk onvariable interest rate obligations. The Doe Run Revolving Credit Facility bearsinterest at the prime rate plus 0.75% per annum and at LIBOR plus 3% per annum.The Doe Run Peru Revolving Credit Facility bears interest at LIBOR (1-month,2-month or 3-month rate, depending on the term of the loan) plus 3.5%, 3.75%and 4.25%, respectively per annum. A material increase in interest rates couldadversely affect the Company’s business, financial condition and results ofoperations. A 1% increase in the interest rate under the Doe Run RevolvingCredit Facility and the Doe Run Peru Revolving Credit Facility would result inadditional annual interest expense of approximately $0.9 million, based on theloan balances outstanding as of January 31, 2006.

 

**Foreign CurrencyRisk**

 

Doe RunPeru’s sales and feed costs are denominated in U.S. dollars. Certain operatingcosts, such as labor, are denominated in Peruvian nuevos soles. While allrevenues and significant costs are denominated in U.S. dollars, a materialweakening of exchange rates could still have an adverse affect on the Company’sbusiness, financial condition and results of operations.

 

**Item 4. Controls and Procedures.**

 

**As of the end of the period covered by this report,an evaluation was performed under the supervision and with the participation ofmanagement, including the Chief Executive Officer and principal executiveofficer and the Chief Financial Officer, the principal financial officer of theCompany, of the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rules 13a-5(e) and 15(d-15(e)promulgated under the Securities and Exchange Act of 1934, as amended (the“Exchange Act”). As of the end of the Company’s last fiscal quarter, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure 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 reported,within 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 timelydecisions regarding required disclosure.**

** **

Inperforming this assessment as of October 31, 2005, management identified amaterial weakness in our internal controls over financial reporting, resultingfrom the untimely reconciliation of broker statements reporting our tradingactivity in derivative financial instruments, to our general ledger at October31, 2005. Although the deficiency did not result in a material change to our2005 interim financial statements, management determined that

 

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the deficiency resulted in more thana remote likelihood that a material misstatement would not be prevented ordetected in the future. As a result, management determined that the deficiencywas a material weakness. We believe the areas most likely to be affected bythis material weakness were accrued liabilities and unrealized gain or loss onderivative financial instruments.

 

As aresult, the Company developed a plan that immediately implemented the followingremediation efforts to address this material weakness. The Company now performstimely reconciliations of the general ledger to the broker statements on amonthly basis that are reviewed by a member of management. The Company alsoperforms an independent review of the transactions entered into on a dailybasis with a monthly review of the hedging results by a hedging committee andby management. In the judgment of management, each of these corrective effortshas strengthened the internal control over the timely reconciliation of brokerstatements so that the related material weakness has been eliminated. Each ofthese corrective actions constitutes a significant change in the Company’sinternal controls. No other significant changes were made in the Company’sinternal controls or in other factors that could significantly affect suchcontrols during the first quarter of fiscal 2006.

 

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**PART II.OTHER INFORMATION**

 

**Item 1.Legal Proceedings.**

 

Nonerequiring disclosure in this Form 10-Q.

 

**Item 1A. Risk Factors.**

 

Nonerequiring disclosure in this Form 10-Q.

 

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

 

None.

 

**Item 3. Defaults Upon SeniorSecurities.**

 

None.

 

**Item 4. Submission of Matters to aVote of Security Holders.**

 

On February 14, 2006 by written consent, in lieu of anannual meeting of the shareholders, DR Acquisition Corp., Doe Run’s soleshareholder, adopted resolutions re-electing Ira Leon Rennert, Chairman, DennisA. Sadlowski and Thomas P. Krasner to Doe Run’s board of Directors.

 

**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. |

 

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###### **SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|   | THE DOE RUN RESOURCES CORPORATION                          |
|--------|------------------------------------------------------------|
|   | (Registrant)                                               |
|   |                                                       |
|   |                                                       |
|   | /s/ David A. Chaput                                        |   |
|   | Date: April 28, 2006                                  | David A. Chaput |
|   | Chief Financial Officer                                    |
|   | (duly authorized officer and principal financial  officer) |
|        |                                                            |  |  |

 

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