DOE RUN RESOURCES CORP - 10-Q Quarterly Report

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THE DOE RUN RESOURCES CORPORATION INDEX TO FORM 10-Q

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 July 31, 2003
Or
o	Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to

Commission File Number 333-66291

The Doe Run Resources Corporation
(Exact name of registrant as specified in its charter)

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

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

Number of shares outstanding of each of the issuer's classes of common stock, as of June 4, 2004:

Common stock, $.10 par value

1,000 shares

THE DOE RUN RESOURCES CORPORATION
INDEX TO FORM 10-Q

Part I
	Item 1.	Financial Statements
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Legal Proceedings
	Item 4.	Controls and Procedures
Part II
	Item 1.	Legal Proceedings
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 6.	Exhibits and Reports on Form 8-K

Item 1. Financial Statements

THE DOE RUN RESOURCES CORPORATION
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)

			July 31, 2003			April 30, 2003			January 31, 2003			October 31, 2002
			*(unaudited)*			*(unaudited)*			*(unaudited)*
ASSETS
Current assets:
	Cash		$	8,024		$	3,742		$	8,209		$	7,018
	Trade accounts receivable, net of allowance for doubtful accounts			60,121			65,559			60,665			64,778
	Inventories			109,336			110,893			111,473			103,346
	Prepaid expenses and other current assets			22,463			18,647			23,008			19,593

		Total current assets		199,944			198,841			203,355			194,735
Property, plant and equipment, net				235,497			239,017			244,932			249,667
Other noncurrent assets, net				4,020			4,654			5,120			5,794

		Total assets	$	439,461		$	442,512		$	453,407		$	450,196

LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
	Short-term borrowings and current maturities of long-term debt		$	46,976		$	48,692		$	35,088		$	16,342
	Accounts payable			47,599			45,409			51,524			48,876
	Accrued liabilities			57,851			49,966			48,909			55,068

		Total current liabilities		152,426			144,067			135,521			120,286
Long-term debt, less current maturities				367,786			367,621			382,688			385,876
Other noncurrent liabilities				72,893			72,432			72,816			71,205

		Total liabilities		593,105			584,120			591,025			577,367
Series A redeemable preferred stock, $1,000 par value, 5,000 shares authorized, 2,000 shares issued and outstanding; liquidation and redemption value				21,889			21,264			20,639			20,000
Shareholder's deficit:
	Common stock, $.10 par value, 1,667 shares authorized, 1,000 shares issued and outstanding			—			—			—			—
	Additional paid-in capital			3,350			3,975			4,599			5,238
	Accumulated deficit and other comprehensive losses			(178,883	)		(166,847	)		(162,856	)		(152,409	)

		Total shareholder's deficit		(175,533	)		(162,872	)		(158,257	)		(147,171	)

		Total liabilities and shareholder's deficit	$	439,461		$	442,512		$	453,407		$	450,196

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

THE DOE RUN RESOURCES CORPORATION
Condensed Consolidated Statements of Operations (unaudited)
(Dollars in thousands, except per share amounts)

					Nine Months Ended July 31,						Three Months Ended July 31,						Six Months Ended April 30,						Three Months Ended April 30,						Three Months Ended January 31,
					2003			2002			2003			2002			2003			2002			2003			2002			2003			2002
Net sales					$	492,325		$	489,388		$	169,204		$	172,012		$	323,121		$	317,376		$	164,110		$	160,840		$	159,011		$	156,536
Costs and expenses:
	Cost of sales					457,737			445,683			159,560			161,304			298,177			284,379			151,343			146,898			146,834			137,481
	Depreciation, depletion and amortization					23,546			22,790			7,605			7,642			15,941			15,148			7,994			7,646			7,947			7,502
	Selling, general and administrative					20,603			20,388			7,857			7,365			12,746			13,023			5,558			6,770			7,188			6,253
	Other					1,634			765			770			304			864			461			582			262			282			199
	Unrealized (gain)/loss on derivative financial instruments					1,013			(1,404	)		1,599			235			(586	)		(1,639	)		(489	)		(253	)		(97	)		(1,386	)

		Total costs and expenses				504,533			488,222			177,391			176,850			327,142			311,372			164,988			161,323			162,154			150,049

		Income (loss) from operations				(12,208	)		1,166			(8,187	)		(4,838	)		(4,021	)		6,004			(878	)		(483	)		(3,143	)		6,487
Other income (expense):
	Interest expense					(9,790	)		(42,685	)		(3,239	)		(14,514	)		(6,551	)		(28,171	)		(3,486	)		(14,201	)		(3,065	)		(13,970	)
	Interest income					23			10,619			7			3,552			16			7,067			5			3,528			11			3,539
	Other, net					(460	)		(2,237	)		(520	)		(1,423	)		60			(814	)		369			(606	)		(309	)		(208	)

						(10,227	)		(34,303	)		(3,752	)		(12,385	)		(6,475	)		(21,918	)		(3,112	)		(11,279	)		(3,363	)		(10,639	)
			Loss before income tax expense			(22,435	)		(33,137	)		(11,939	)		(17,223	)		(10,496	)		(15,914	)		(3,990	)		(11,762	)		(6,506	)		(4,152	)
Income tax expense (benefit)						—			—			—			—			—			—			—			(539	)		—			539

		Loss before cumulative effect of change in accounting principle				(22,435	)		(33,137	)		(11,939	)		(17,223	)		(10,496	)		(15,914	)		(3,990	)		(11,223	)		(6,506	)		(4,691	)
		Cumulative effect of change in accounting principle, net of income tax benefit				(3,940	)		—			—			—			(3,940	)		—			—			—			(3,940	)		—

				Net loss		(26,375	)		(33,137	)		(11,939	)		(17,223	)		(14,436	)		(15,914	)		(3,990	)		(11,223	)		(10,446	)		(4,691	)
				Cumulative preferred stock dividends		(1,889	)		—			(625	)		—			(1,264	)		—			(625	)		—			(639	)		—

				Net loss allocable to common shares	$	(28,264	)	$	(33,137	)	$	(12,564	)	$	(17,223	)	$	(15,700	)	$	(15,914	)	$	(4,615	)	$	(11,223	)	$	(11,085	)	$	(4,691	)

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

THE DOE RUN RESOURCES CORPORATION
Condensed Consolidated Statements of Cash Flows (unaudited)
(Dollars in thousands)

			Nine Months Ended July 31,						Six Months Ended April 30,						Three Months Ended January 31,
			2003			2002			2003			2002			2003			2002
Cash flows from operating activities:
	Net loss		$	(26,375	)	$	(33,137	)	$	(14,436	)	$	(15,914	)	$	(10,446	)	$	(4,691	)
	Cumulative effect of change in accounting principle			3,940			—			3,940			—			3,940			—
	Adjustments to reconcile net loss to net cash provided by operating activities:
		Depreciation, depletion and amortization		23,546			22,790			15,941			15,148			7,947			7,502
		Imputed interest and amortization of deferred financing costs		1,803			2,707			469			1,811			1,062			896
		Unrealized gain on derivative financial instruments		1,013			(1,404	)		(586	)		(1,639	)		(97	)		(1,386	)
		Increase/(decrease) resulting from other changes in assets and liabilities		(1,410	)		20,768			(14,388	)		4,470			(10,529	)		(358	)

		Net cash provided by (used in) operating activities		2,517			11,724			(9,060	)		3,876			(8,123	)		1,963
Cash flows from investing activities:
	Purchases of property, plant and equipment			(12,343	)		(16,581	)		(7,828	)		(12,303	)		(5,342	)		(4,745	)

		Net cash used in investing activities		(12,343	)		(16,581	)		(7,828	)		(12,303	)		(5,342	)		(4,745	)
Cash flows from financing activities:
	Proceeds from revolving loans and short term borrowings, net			17,705			14,414			19,207			6,665			15,738			3,688
	Payments on long-term debt			(6,391	)		(3,156	)		(5,257	)		(2,131	)		(1,082	)		(1,093	)
	Payment of financing costs			(482	)		(119	)		(338	)		(119	)		—			(100	)

		Net cash provided by financing activities		10,832			11,139			13,612			4,415			14,656			2,495

		Net increase (decrease) in cash	$	1,006		$	6,282		$	(3,276	)	$	(4,012	)	$	1,191		$	(287	)

Cash at beginning of period			$	7,018		$	6,263		$	7,018		$	6,263		$	7,018		$	6,263

Cash at end of period			$	8,024		$	12,545		$	3,742		$	2,251		$	8,209		$	5,976

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

THE DOE RUN RESOURCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands)

(1) Summary of Significant Accounting Policies

Unaudited Interim Financial Statements

These interim consolidated financial statements include the accounts of The Doe Run Resources Corporation (Doe Run) and its subsidiaries (on a consolidated basis, the Company). Doe Run's issued and outstanding common stock is owned by a subsidiary of The Renco Group, Inc. (Renco). In the opinion of management, the interim consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the consolidated financial position as of January 31, 2003, April, 30, 2003 and July 31, 2003 and results of operations for the three-month period ended January 31, 2003 and 2002, the three and six-month periods ended April 30, 2003 and 2002 and the three and nine-month periods ended July 31, 2003 and 2002. All material intercompany balances and transactions have been eliminated. Interim periods are not necessarily indicative of results to be expected for the year.

Reclassifications

Certain balances have been reclassified from their previous presentation in order to conform to the current year presentation.

(2) Financial Condition

The Company has had recurring losses over several years, primarily the result of the declining treatment charges discussed below and low metal prices, a condition exacerbated by the Company's significant interest costs prior to the restructuring of the Company's public debt in 2002. Doe Run's liquidity has been affected by these factors, as well as by Doe Run Peru's liquidity. As noted in Note 4, the Company has failed to meet certain financial covenant requirements contained in Doe Run's revolving credit agreement and a term note (the Term Note) during the first nine months of fiscal 2003, and failed a financial covenant in Doe Run Peru's revolving credit facility subsequent to the end of the third quarter. As discussed in Notes 6 and 7, the Company has uncertainties related to environmental and litigation matters. These issues combined raise substantial doubt about the Company's ability to continue as a going concern.

Doe Run Peru's results of operations and liquidity have been severely impacted by declining treatment charges that Doe Run Peru receives for processing raw materials resulting from a shortage in the global supply of concentrates. The effects of low metals prices for the past several years have also caused some of Doe Run Peru's current suppliers of concentrates to suffer financial distress, which has affected the availability of concentrate feed. During 2003, deliveries of lead and zinc concentrates to La Oroya from a major Peruvian supplier were below contracted amounts. While Doe Run Peru was able to replace a portion of this shortfall with concentrates from other suppliers, total concentrate receipts were less than expected and the resulting changes in concentrate mix and interruptions in delivery schedules adversely affected Doe Run Peru's metal production and results of operations. If one or more of Doe Run Peru's significant local suppliers were to cease delivery of concentrates, there could be no assurance La Oroya would be able to secure sufficient replacement feedstock at economically acceptable terms. If such shortages resulted in a significant interruption in feed supply, a material reduction in the production of metals from La Oroya or an interruption of production in the lead and zinc circuits could result, which could have a significant adverse effect on the Company's results of operations, financial condition and liquidity.

As discussed in Note 6, Doe Run Peru is proceeding with efforts to identify alternative methods of achieving compliance with environmental requirements. These efforts include, but are not limited to, reducing or curtailing production from a portion of the plant thus eliminating the need for the equipment presently contemplated and replacing it with another alternative. These efforts must take into consideration the impacts on profitability and liquidity, as well as other economic impacts. Doe Run Peru intends to submit a request in 2004 to modify its existing requirements. There can be no assurance that the alternatives will be approved by the Peruvian government or that they will achieve compliance in the timeframe required. If the La Oroya smelter does not operate within the required limits after December 31, 2006, Doe Run Peru could be forced to cease operations at the La Oroya smelter.

Doe Run Peru implemented cost savings during fiscal 2003 and accelerated cash receipts, as well as other measures, to improve its liquidity. In addition, the retirement of Doe Run Peru's loan from a foreign bank reduced Doe Run Peru's interest payments by approximately $14,000 per year. These changes improved Doe Run Peru's cash flow and availability of borrowings under the revolving credit agreement in the first nine months of 2003.

Doe Run Peru's ability to pay fees to Doe Run is currently limited by Doe Run Peru's revolving credit facility, unless Doe Run Peru meets an excess cash flow test. Due to Doe Run Peru's lack of liquidity, no payments for fees were made during the first nine months of 2003, although payments of $4,000 annually were allowed for 2003 under Doe Run Peru's revolving credit facility. In addition, beginning in 2003, Doe Run will not receive approximately $14,000 per year in interest income from a deposit that was surrendered to retire Doe Run Peru's loan from a foreign bank. The deposit, plus unpaid interest, was replaced in September 2002 by an intercompany note that does not bear interest during the term of Doe Run Peru's revolving credit facility. These factors along with nearly five years of low metals prices have affected Doe Run's liquidity.

Doe Run has implemented cost savings measures over the last several years to mitigate the impact of lower metal prices, including: reductions of production levels, changes in mine plans and the elimination of hourly and salaried positions. These efforts succeeded in reducing Doe Run's costs over the last several years. Management will continue to assess market and operating conditions to maximize its operating profit or limit losses, while allowing Doe Run to fulfill its environmental obligations.

(3) Inventories

Inventories consist of the following:

	July 31, 2003		April 30, 2003		January 31, 2003		October 31, 2002
Finished metals and concentrates	$	22,186	$	17,885	$	18,849	$	14,660
Metals and concentrates in process		59,901		65,424		64,285		59,814
Materials, supplies and repair parts		27,249		27,584		28,339		28,872

	$	109,336	$	110,893	$	111,473	$	103,346

Materials, supplies and repair parts are stated net of reserves for obsolescence of approximately $4,475, $5,246, $5,192 and $5,157 at July 31, 2003, April 30, 2003, January 31, 2003 and October 31, 2002, respectively.

(4) Debt

Effective March 27, 2003, Doe Run entered into an amendment to the loan agreement governing Doe Run's revolving credit facility which reduced the consolidated net worth measurement that the Company is required to maintain and waived certain events of default. Pursuant to the amendment the

lenders waived events of default at that time resulting from the failure of Doe Run to maintain financial covenants and waived the event of default resulting from the failure of Doe Run to deliver timely financial reports.

Effective March 21, 2003 Renco and the lenders of the Term Note entered into an Assignment and Acceptance Agreement whereby Renco purchased all of the rights of the agent and lenders under the Term Note. Accordingly, Renco became the agent and lender under the Term Note with the identical rights to payment of interest, principal and fees and to the same collateral, as had the previous lenders. On March 27, 2003 Renco, in its capacity as agent and lender under the Term Note, waived existing and impending defaults, including, among other things, Doe Run's failure to provide the lender with certain reports and Doe Run's failure to comply with financial covenants.

Subsequent to the waivers and amendments discussed above, certain financial and reporting covenant requirements contained in Doe Run's revolving credit agreement and the Term Note were not met. Subsequent to July 31, 2003, Doe Run Peru defaulted on its net worth covenant contained in its revolving credit agreement. These defaults continued until the agreements were amended in the second quarter of fiscal 2004. See discussion in Note 8 regarding amendments to these agreements.

(5) Segment Information

The Company's operating segments are separately managed business units that are distinguished by products, location and production processes. The primary lead segment includes integrated mining, milling and smelting operations located in Missouri. The secondary lead segment, also located in Missouri, recycles lead-bearing feed materials, primarily spent batteries. The fabricated products segment produces value-added lead products. Doe Run Peru produces an extensive product mix of non-ferrous and precious metals.

The accounting policies of the segments are the same as those of the Company, except that the primary lead, secondary lead and fabricated products segments value finished metals and concentrates, work in process and raw materials inventories at FIFO cost. Certain functions are performed at the Company's corporate office for the primary lead and secondary lead segments, such as sales and billing, as well as the general administration of the Company. Related accounts receivable and corporate overhead expenses are not allocated to operating segments.