international briquettes holding and its subsidiaries

International Briquettes Holding and its Subsidiaries (A majority-owned subsidiary of Siderúrgica Venezolana “Sivensa”, S.A.) Report of Independent Accountants and Consolidated Financial Statements in U.S. Dollars, Prepared in Accordance with International Financial Reporting Standards (IFRS) September 30, 2005

Member firm of

Espiñeira, Sheldon y Asociados Avenida Principal de Chuao Edificio Del Río P.O. Box 1789 Caracas 1010-A Venezuela Telephone: 700.66.66 Telecopier: 991.52.10 www.pwc.com

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Report of Independent Accountants To the Shareholders and Board of Directors of International Briquettes Holding We have audited the accompanying consolidated balance sheet of International Briquettes Holding (IBH or the Company) and its subsidiaries at September 30, 2005, and the related statements of operations, shareholders’ equity and cash flows for the year then ended, expressed in U.S. dollars and prepared in conformity with International Financial Reporting Standards (IFRS). The preparation of these financial statements and their notes is the responsibility of IBH management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with international standards on auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As described in Note 5, as of November 5, 2004, IBH has a 51% interest in Orinoco Iron, C.A., subsequently merged in August 2005 into the subsidiary Venezolana de Prerreducidos Caroní “Venprecar,” C.A. Therefore, as from that date, the consolidated financial statements of IBH include the accounts of the aforementioned company on a consolidated basis. In our opinion, based on our audit, the accompanying consolidated financial statements audited by us present fairly, in all material respects, the financial position of International Briquettes Holding (IBH) and its subsidiaries at September 30, 2005, and the results of their operations and their cash flows for the year then ended, in accordance with International Financial Reporting Standards (IFRS). Espiñeira, Sheldon y Asociados

Ana Márquez P. CPC 14448 CNV 140-2004 Caracas - Venezuela November 30, 2005

The accompanying notes are an integral part of the consolidated financial statements

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International Briquettes Holding and its Subsidiaries (A majority-owned subsidiary of Siderúrgica Venezolana “Sivensa”, S.A.) Consolidated Balance Sheet September 30, 2005 and 2004 2005 2005 2004 (Equivalent bolivars, (Thousands of U.S. Note 2-p) dollars) Assets Current assets Cash 54,016,600 25,124 12,426 Restricted cash 11,040,250 5,135 7,107 Accounts receivable (Note 3) 207,195,500 96,370 50,282 Related companies (Notes 5 and 7) 25,135,650 11,691 33,414 Inventories (Note 4) 87,197,550 40,557 4,076 Advances to suppliers 12,087,300 5,622 3,362 Prepaid expenses and other current assets 20,560,450 9,563 1,497

Total current assets 417,233,300 194,062 112,164

Accounts receivable from related companies (Notes 5 and 7) - - 209,241 Property, plant and equipment, net (Notes 5 and 8) 2,210,081,750 1,027,945 138,327 Deferred income tax (Notes 2-g and 12) 34,249,500 15,930 - Other assets 3,190,600 1,484 194

Total assets 2,664,755,150 1,239,421 459,926 Liabilities and Shareholders’ Equity Current liabilities Current portion of long-term loans in process of restructuring (Note 9) 860,000 400 - Short-term portion of provision for contingencies on guarantee granted (Notes 5 and 7) - - 85,000 Accounts payable Suppliers 160,463,100 74,634 8,846 Shareholder and related companies (Notes 5 and 7) 45,670,300 21,242 38,721 Profit sharing, vacation bonus and other personnel accruals 13,884,700 6,458 1,226 Taxes 1,135,200 528 8,945 Other liabilities 2,160,750 1,005 221

Total current liabilities 224,174,050 104,267 142,959

Long-term loan in process of restructuring and other (Notes 2-h and 9) 647,317,700 301,078 30,719 Long-term accounts payable to shareholder (Note 7) 60,114,000 27,960 - Long-term suppliers (Note 10) 17,064,550 7,937 - Accrual for employee termination benefits, net of advances to employees of US$15,317,000 (US$4,088,000 in 2004) 16,563,600 7,704 1,351 Deferred income tax (Notes 2-g and 12) 282,234,800 131,272 30,953 Provision for contingencies on guarantee granted (Notes 5 and 7) - - 105,000 Other long-term liabilities and accruals (Notes 5 and 11) 94,038,850 43,739 21,641

Total liabilities 1,341,507,550 623,957 332,623

Shareholders’ equity (Note 13) 1,323,247,600 615,464 127,303

Total liabilities and shareholders’ equity 2,664,755,150 1,239,421 459,926


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International Briquettes Holding and its Subsidiaries Consolidated Statement of Operations Years ended September 30, 2005 and 2004 2005 2005 2004 (Thousands of U.S. (Equivalent dollars, except weighted bolivars, average of Note 2-p) outstanding shares) Net sales Exports (Note 3) 874,996,250 406,975 109,883 Domestic (Note 7) 66,181,300 30,782 586 Sales of subproducts 703,050 327 464

941,880,600 438,084 110,933

Cost of sales (Notes 7 and 16) (651,013,550) (302,797) (76,476)

Gross income 290,867,050 135,287 34,457

General and administrative expenses (Note 16) (56,854,600) (26,444) (3,657)Other income (expense), net (Note 16) 7,789,450 3,623 149

Operating income 241,801,900 112,466 30,949

Interest income (Note 7) 606,300 282 1,556 Interest expense (Notes 7 and 17) (96,631,750) (44,945) (2,034)Exchange gain, net (Notes 2-b and 18) 63,575,500 29,570 2,979 Adjustment in value of long-term loans with financial institution (Note 9-b) (78,395,450) (36,463) (4,435)Adjustment of excess of cost over value of equity in subsidiary (Note 5) (45,519,800) (21,172) - Provision for investments and accounts receivable from affiliates (Notes 6 and 9) (7,505,650) (3,491) (11,745)

(163,870,850) (76,219) (13,679)

Income before taxes 77,931,050 36,247 17,270

Taxes (Notes 2-g and 12) 38,603,250 17,955 (17,087)

Net income 116,534,300 54,202 183

Attributable to IBH shareholders 90,200 39 IBH shareholders, for 39.14% interest subject to put option (Note 9) 9,859 -

Total IBH shareholders (Note 13) 100,059 39

Minority interests until August 29, 2005 (Note 5) (46,471) 144 Minority interests 614 -

Total minority interests (45,857) 144

54,202 183 Net income per share 2,712 0,009 Weighted average of outstanding shares 19,987,467 19,987,467


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International Briquettes Holding and its Subsidiaries Consolidated Statement of Shareholders’ Equity Years ended September 30, 2005 and 2004 Difference Net effect of between fair combination value and Retained earnings Revaluation (merger) cost of shares Total Capital Share of fixed assets of subsidiaries of subsidiary Legal Unappropriated shareholders’ Minority (Thousands of U.S. dollars) stock premium (Notes 2-e and 6) (Note 6) (Note 9) reserve (deficit) equity interests Total Balances at September 30, 2003 201 228,735 43,105 - - 6,093 (154,695) 123,439 3,712 127,151

Net income for 2004 - - - - - - 39 39 144 183 Change in revaluation - - (1,266) - - - 1,286 20 (51) (31)

Balances at September 30, 2004 201 228,735 41,839 - - 6,093 (153,370) 123,498 3,805 127,303

Net income for 2005 - - - - - - 100,059 100,059 (45,857) 54,202 Change in revaluation - - (582) - - - 582 - - - Fair value of shares in subsidiary less cost of call option (Notes 9 and 10) - - - - 191,784 - - 191,784 (191,784) - Net effect of business combination of subsidiaries (Note 6) - - (6,604) 176,229 - - - 169,625 264,334 433,959

Balances at September 30, 2005 201 228,735 34,653 176,229 191,784 6,093 (52,729) 584,966 30,498 615,464

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International Briquettes Holding and its Subsidiaries Consolidated Statement of Cash Flows Years ended September 30, 2005 and 2004 2005 2005 2004 (Equivalent bolivars, (Thousands of U.S. Note 2-p) dollars) Cash flows from operating activities Net income 116,534,300 54,202 183 Adjustments to reconcile net income to net cash provided by (used in) operating activities Provision for accounts receivable from associates 7,505,650 3,491 11,745 Deferred income tax (34,249,500) (15,930) 8,444 Depreciation 76,610,950 35,633 8,510 Unpaid accrued interest 34,372,050 15,987 - Exchange loss (63,575,500) (29,570) (2,979) Adjustment of excess of cost over value of equity in subsidiary (Note 5) 45,519,800 21,172 - Uncollected insurance claim (38,547,350) (17,929) - Adjustment in value of long-term loans with financial institution (Note 9) 78,395,450 36,463 4,435 Allowance for doubtful accounts receivable and inventories - - 1,813 Net changes in operating accounts Restricted cash 18,079,350 8,409 (6,392) Accounts receivable 47,766,550 22,217 (36,060) Related companies, net (111,514,050) (51,867) (27,926) Inventories 13,633,150 6,341 (253) Prepaid expenses and other assets (17,341,900) (8,066) 340 Accounts payable 3,612,000 1,680 15,186 Employee termination benefits, net 896,550 417 717 Accrued liabilities, other liabilities and personnel benefits and other 7,772,250 3,615 78

Net cash provided by (used in) operating activities 185,469,750 86,265 (22,159)

Net cash used in investing activities Additions to property, plant and equipment, net (39,314,900) (18,286) (859)

Net cash provided by financing activities Loans received 660,353,150 307,141 26,284 Loan repaid (809,911,450) (376,703) -

Net cash provided by (used in) financing activities (149,558,300) (69,562) 26,284

Exchange losses on cash and cash equivalents (840,650) (391) (956)

Cash and cash equivalents (Increase) decrease for the year (4,244,100) (1,974) 2,310

Contributed by new consolidated subsidiaries 31,544,800 14,672 - Balance at the beginning of the year 26,715,900 12,426 10,116

Balance at the end of the year 54,016,600 25,124 12,426 Supplementary information Cash paid for taxes 14,822,100 6,894 1,344

Revaluation of fixed assets, net (1,251,300) (582) (1,266)

Supplementary information on non-cash activities Net effect of movement of net assets/liabilities in the acquisition 215,378,400 100,176 -

International Briquettes Holding and its Subsidiaries Notes to the Consolidated Financial Statements September 30, 2005 and 2004

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1. Incorporation and Activities

International Briquettes Holding (IBH or the Company), a Cayman Islands corporation, was incorporated on October 14, 1997 and its shares are currently traded on the Caracas Stock Exchange. It is therefore subject to the regulations of the Comisión Nacional de Valores (CNV) of the Bolivarian Republic of Venezuela. The business objective of IBH and its subsidiaries (the Group) is the production of high-density reduced-iron briquettes (HBI). Their plants are located in Ciudad Guayana, Venezuela with a total nominal design capacity of 3,020,000 metric tons. At September 30, 2005, the Group has 945 employees. Reorganization of subsidiaries and bank debt in process of restructuring As described in Note 5, on November 5, 2004, BHP-Billiton, owner of 50% of Orinoco Iron’s capital stock, agreed to terminate the Joint Venture with IBH and to assign: 1) 2% of its shares in Orinoco Iron to IBH (representing 1% of that Company’s capital stock), and 2) the remainder of its shares, as well as its creditor rights regarding a loan to Orinoco Iron of approximately US$382 million (subordinated debt) to certain financial creditors of Orinoco Iron. Consequently, as of November 5, 2004, IBH owns 51% of Orinoco Iron’s capital stock. IBH assumed control of Orinoco Iron operations and management. BHP-Billiton also assigned all of its shares in Operaciones RDI, C.A. (ORDI), International Briquette Marketing Services (IBMS) and Brifer to IBH. As a result, IBH now directly or indirectly owns all of the capital stock of these companies. As described in Note 6, the merger by absorption of assets and liabilities of the subsidiary Orinoco Iron into the subsidiary Venprecar became effective in August 2005. On August 18, 2005, prior to the merger process, it was agreed that IBH and Orinoco Iron’s shareholders would contribute a portion of IBH’s equity in Venprecar and all of the shares of Orinoco Iron to a new entity, IBH de Venezuela, C.A. Furthermore, in August 2005 Orinoco Iron received contributions of approximately US$477 million from its shareholder, recorded under Contributions pending capitalization, to offset accrued losses. These transactions increased IBH’s shareholding in Orinoco Iron and reduced IBH’s shareholding in Venprecar (Note 6). As described in Note 9, once negotiations with BHP-Billiton and other agreements were completed and IBH subsidiaries were reorganized, the Group signed an agreement with creditor banks to maintain the current status of bank debt in process of restructuring (Standstill Agreement). This Agreement established new minimum debt repayment requirements including option contracts (put and call) on 39.14% of the shares held by creditor banks in the subsidiary IBH de Venezuela, C.A. Based on the terms of this agreement, the consolidated financial statements of IBH reflect 39.14% of the shares covered under the aforementioned option and recognize the results of the aforementioned subsidiary as from September 1, 2005 (Note 9).

2. Basis of Preparation and Accounting Policies IBH presents its consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) and in U.S. dollars (US$), considered its measurement currency. These financial statements have been prepared under the historic cost convention, adjusted for property, plant and equipment revaluations. The financial statements at September 30, 2005 were approved at a Board of Directors’ Meeting on November 30, 2005.


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IFRS used by the Group are those applicable at September 30, 2005 and exclude early adoption of improvements and reviews that will be mandatory for the Group as from October 1, 2005. a) Consolidation Subsidiaries Subsidiaries are all entities in which the Group has more than a 50% shareholding and over which it has the power to govern the financial and operating policies. Subsidiaries are fully consolidated from the date on which control is transferred to the Group (Note 15). Increases in equity of subsidiaries are accounted for by the purchase method. Cost is measured at fair value at the date of acquisition. Any excess of the cost of acquisition over the fair value of net assets acquired is recorded as goodwill if estimated future cash flows allow recovery of payments in excess made in connection with the investment. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the statement of operations (Note 5). Since the merger between Venprecar and Orinoco Iron, C.A., subsidiaries of IBH, is a business combination between commonly controlled subsidiaries, it was recorded under the economic entity model, which considers book values of subsidiaries at the transaction date (Note 6). The net effect of changes in equity in subsidiaries in 2005 is shown under Net effect of combination (merger) of subsidiaries in shareholders’ equity. In addition, the subsequent increase in equity of the subsidiary IBH de Venezuela, C.A. was recorded at the fair value of net assets at the acquisition date and the difference between book value and cost is shown under Difference between fair value and cost of shares of subsidiary (Note 9-a) in shareholders’ equity. Intercompany transactions, balances and unrealized gains on transactions between group companies are eliminated. Minority interests represent third-party shares in the results and equity of partially owned subsidiaries. Joint Ventures The Group’s interest in jointly controlled entities was accounted for by the equity method until October 31, 2004 (Note 5). When the Group’s share of losses in a controlled associate equals or exceeds the carrying value of the investment, this loss is generally not recognized and the investment is shown at zero value. However, further losses could require provisioning to the extent that IBH has incurred in liabilities or made payments on behalf of the associate to meet the latter’s financial obligations which the Group has otherwise guaranteed or secured. b) Translation into U.S. dollars Measurement and presentation currency The Group has elected to present its consolidated financial statements in U.S. dollars, its measurement and presentation currency. The Group’s main operations and assets are located in Venezuela. Subsidiaries in Venezuela have significant export sales, costs, assets and debts denominated in U.S. dollars; hence, the U.S. dollar is considered their measurement currency.


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Financial statements expressed in bolivars have been translated into U.S. dollars in conformity with International Accounting Standard No. 21 (IAS 21) and Interpretation No. 19 (SIC 19) as applicable to an entity whose measurement and presentation currency are the same. Pursuant to IAS 21 and SIC 19, balances in nominal bolivars have been translated into U.S. dollars as follows: Accounts Exchange rate

Balance sheet Current assets, except inventories and prepaid expenses Year-end Liabilities Year-end Inventories and prepaid expenses Historic Property, plant and equipment Historic Other assets Historic Deferred income tax Historic Shareholders’ equity Historic

Statement of income Net sales Monthly average Cost of sales Historic Depreciation and amortization Historic Materials and supplies used in operations Monthly average General and administrative expenses Monthly average Interest and other income (expense) Monthly average The translation adjustment is included in the results for the year. Exchange gains and losses arise mainly from the effect of exchange rate fluctuations on net monetary items denominated in bolivars (Note 18) and are included in the statement of operations for the year. c) Trade receivables Trade receivables are carried at original invoice amount. The carrying value of trade receivables is reduced to their recoverable amount, determined based on the allowance for doubtful accounts. An allowance for doubtful accounts is determined based on a review of all balances receivable at the year-end closing date and the amount determined is included in the results for the year. Uncollectible accounts are written off as identified. d) Inventories Inventories are stated at the lower of cost and net realizable value. Costs of finished products and raw materials are determined by the average cost method. The cost of finished products includes raw materials, direct labor and other direct production overhead costs, but excludes borrowing costs. Net realizable value is the estimated selling price, less completion costs and selling expenses. Spare parts and supplies are expensed during the period they were purchased. e) Property, plant and equipment Buildings, machinery and equipment and land are shown at amounts determined by independent appraisers in 2003 and 2004, which represent depreciated replacement values of these assets. All other property, plant and equipment is stated at historic cost. Historic cost includes expenses that are directly attributable to the acquisition of these assets. Additions, renewals and improvements are included in the asset’s carrying amount only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of operations during the financial period in which they are incurred. Costs of interest on loans to finance construction of property, plant and equipment, during the time required to complete and repair the asset for programmed used are capitalized.


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The difference between historic cost of assets and revalued amounts is included directly under Revaluation of fixed assets in shareholders’ equity. Decreases that offset previous revaluations of the same asset are charged to this equity account; all other decreases are charged to the statement of operations. Additionally, each year the difference between depreciation based on revalued amounts and that based on historic cost is transferred from Revaluation of fixed assets to Unappropriated earnings, net of deferred income tax. The Group reviews for impairment its long-lived assets whenever events indicate that their carrying amount may not be recoverable. If the recoverable amount of an asset is considered to be lower than its carrying amount, an impairment loss is recognized immediately. Fair value is determined based on net estimated discounted future cash flows. Depreciation of machinery and equipment is calculated based on the units-of-production method according to the estimated future production capacity of the assets. Depreciation of other fixed assets is calculated using the straight-line method over the estimated useful lives of the assets. Useful lives of revalued assets are determined according to appraisals. Below is a breakdown of the estimated useful lives of the assets:

Estimated useful lives (Years)

Buildings 20 years Machinery and equipment production units Other machinery and equipment 7 to 20 years Vehicles 3 years Furniture and fixtures 3 years Land is not depreciated. f) Accrual for employee termination benefits and profit sharing The Group accrues for its liability in respect of employee termination benefits, which are a vested right of employees, based on the provisions of the Venezuelan Labor Law and the prevailing collective labor agreement. This liability is presented net of advances granted to employees. Among other aspects, the Law provides for an indemnity equal to a minimum of 45 days of salary per year (up to a maximum of 90 days, depending on employee seniority), without retroactive adjustments. Venezuelan Labor Law also requires mandatory distribution to employees of a profit-sharing bonus of up to 15% of a company’s pre-tax income. Distribution ranges from a minimum 15-days’ salary to a 120-day maximum. The Group accrued and paid a profit-sharing bonus to its employees of 120 days of salary in 2005 and 2004. The Group does not have a pension plan or other post-retirement benefit programs.


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g) Deferred income tax IBH uses the asset and liability method of accounting for income tax. Under this method, deferred income tax reflects the net effect of the expected future tax consequences of: a) “temporary differences” arising from application of enacted statutory tax rates applicable to future years to differences between the financial statement amounts and the tax bases of existing assets and liabilities, and b) tax credits and tax loss carryforwards. In addition, the effect on deferred taxes of a change in statutory tax rates is recognized. A deferred tax asset is not recognized when a portion of deferred assets is not likely to be realized. For revaluation of assets, the Group recognizes the deferred tax liability, calculated based on the difference between the revalued carrying amount and the tax base of those assets, with a charge to the related equity account (Note 2-e). h) Loans Bank loans are initially recognized at fair value, net of costs incurred for the transaction; they are subsequently shown at amortized cost. Changes in loan terms and conditions are assessed to determine the effects on the accounting treatment given to the loan and the related costs incurred. If changes in conditions are accounted for as an extinguishment, all costs or commissions incurred are recognized as part of any income or loss derived from the extinguishment, if not, all costs or commissions incurred are adjusted at the book value of liabilities to be amortized over the remaining useful life of the modified loan. i) Revenue recognition Sales are recorded as income when goods sold are delivered and accepted by the client. Sales are shown net of discounts. j) Cost of sales For presentation purposes, certain selling expenses, mainly freight and export insurance, are considered an integral part of cost of sales. k) Use of estimates in the preparation of financial statements The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the amounts of assets and liabilities at the balance sheet date, the amounts of income, costs and expenses for the year ended on that date, and the disclosure of contingent assets and liabilities. Actual results may differ from those estimates. l) Basic and diluted net income per share Net income per share is determined by dividing net income for the year by the weighted average of outstanding shares during the year. Basic and diluted income per share is the same for all periods shown as the Group did not have any potentially dilutive instruments. m) Fair value of financial instruments The carrying value of cash and cash equivalents, trade accounts receivable, net of provision, and accounts payable to suppliers approximates their fair value due to the short-term maturities of these instruments. Since the Group’s loans and other financial obligations bear interest at variable, market-sensitive interest rates, management considers their carrying amounts to approximate fair value.


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n) Concentration of credit and foreign exchange risk The financial instruments exposed to concentration of credit risk consist primarily of cash equivalents and accounts receivable. IBH cash is placed with a diversified group of financial institutions and trade accounts receivable are concentrated in a single client. IBH regularly assesses the financial condition of its clients (Note 3). In 2005 and 2004, IBH exported 92.9% and 99.5%, respectively, of its annual sales, which are mainly denominated in U.S. dollars. A portion of its costs and expenses is denominated in bolivars (Note 2-b). As a result, variations between local inflation rates and local currency devaluation could affect the operating margin (Notes 2-b and 18). IBH is also exposed to the risk of steel price fluctuation on international markets, as well as interest rate fluctuations. The main raw materials and services used by IBH (iron ore, electricity and gas) are supplied by Venezuelan state-owned companies (Note 7). o) Accounting for derivative instruments and hedging activities Financial instruments, including derivatives, are recognized in the balance sheet as either assets or liabilities at their respective market values. IBH recognizes transactions with financial instruments at the transaction date. IBH does not currently engage in hedging activities and has identified no derivative instruments in connection with its business transactions. p) Segment reporting A business segment is a group of assets and operations engaged in providing products that are subject to risks and returns that are different from those of other business segments. Management believes that IBH operates in a single industry segment (briquettes) in one country (Venezuela). q) Financial statements translated into bolivars Unless otherwise stated, all financial information included herein is expressed in U.S. dollars. To comply with CNV requirements, amounts in the 2005 consolidated financial statements expressed in U.S. dollars have been translated into bolivars using the official exchange rate of Bs 2,150/US$1 in effect at September 30, 2005 (Note 18). Translation into bolivars using the exchange rate in effect at the date of origin of each transaction could result in bolivar amounts that differ significantly from those reported in the translation for convenience purposes. This convenience purpose translation should not be considered as a representation of the amounts in bolivars that have resulted, could have resulted or will result in the future from effective conversion of balances in U.S. dollars.


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3. Accounts Receivable Accounts receivable at September 30 comprise the following: (Thousands of U.S. dollars) 2005 2004 Trade receivables 27,760 34,674 Value added tax (VAT) (Note 12) 47,672 11,462 Export incentives and import duty drawbacks, net - - Other accounts receivable 3,009 4,146 Insurance claim 17,929 -

96,370 50,282 During the year ended September 30, 2005, 88% (79% in 2004) of export sales of the subsidiaries of IBH went to Stemcor and, at September 30, 2005, trade accounts receivable from this client amount to US$27.3 million (US$31 million at September 30, 2004). At September 30, 2005 and 2004, amounts subject to reimbursement in respect of export incentives and import duty drawbacks established in the Venezuelan Customs Law amount to approximately US$9 million and US$3.4 million, respectively. It is Group policy to set aside provisions for full carrying amounts and recognize income upon collection. During 2005 and 2004, approximately US$2.9 million and US$3.6 million, respectively, were collected in this connection. In October 2004 a claim was made in respect of a gas heating furnace of one of the four production trains at Orinoco Iron’s plant ceasing operations of this train for 166 days. Damages of US$3.6 million and loss of profit of US$20 million were recognized by the plant’s insurance company. At September 30, 2005, accounts receivable in this connection amount to US$17.9 million and were fully collected in October and November 2005. The Group assesses customer creditworthiness on a regular basis and collectibility of other accounts receivable in order to set aside an allowance for doubtful accounts. Total export sales per destination during the years ended September 30 are shown below: (Thousands of U.S. dollars) 2005 2004

United States of America 175,720 75,109 China 85,587 12,469 Spain 57,102 17,244 Italy 29,087 1,040 Korea 27,706 - France 19,148 - Belgium 4,235 - The Netherlands 8,390 - Mexico - 4,021

406,975 109,883


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4. Inventories Inventories at September 30 comprise the following: (Thousands of U.S. dollars) 2005 2004 Finished products 23,686 2,664 Iron ore and raw materials 4,931 808 Materials in transit 11,940 604

40,557 4,076

5. Background of the Joint Venture with BHP-Billiton and Settlement Agreement Background In May 1997 Fior, a shareholder of IBH, transferred: i) most of the assets and agreements related to its briquette plant located in Ciudad Guayana, Venezuela and a portion of the liabilities related to this plant to its subsidiary ORDI; ii) all of the assets and agreements related to the construction of a briquette plant located in Ciudad Guayana, Venezuela, to its subsidiary Orinoco Iron, C.A. (Orinoco Iron), and iii) patents, intellectual property and proprietary rights to the technology involved in improved fluid bed iron-ore fines reduction process (the Improved Fior Process) to its subsidiary Brifer International Ltd. (Brifer). All of the aforementioned transfers were made in exchange for shares in each of these companies. Upon completion of these transactions, Fior contributed all of these shares to IBH. In September 1997 IBH agreed with the Australian company BHP-Billiton to develop, construct and jointly operate the new plant as well as to operate the plant and net assets transferred by Fior to ORDI. Furthermore, at that same date, BHP-Billiton subscribed capital stock increases of ORDI and Orinoco Iron (Fior subsidiaries), giving BHP-Billiton a 50% share in these companies. BHP-Billiton also bought 50% of the shares in Brifer from IBH. In August 2000 Orinoco Iron began partial commercial operations; however, certain equipment failures delayed start-up and production build-up and increased construction and plant start-up costs. Since 2001, Orinoco Iron has been unable to meet its obligations under the agreements originally signed with creditor banks and, hence, the related liability is overdue (default). Furthermore, ORDI incurred recurring operating losses and in March 2001 shut down its plant due to maintenance requirements and unfavorable market conditions. To date, no decision has been made as to how long this plant will be closed. At September 30, 2005, ORDI has assets of US$3 million and a shareholders’ equity deficit of US$5.8 million. During 2002 IBH set aside a provision for loss in value of its investment in companies comprising the Joint Venture with BHP-Billiton, equivalent to total net book value, due to recurrent losses incurred by these companies and Orinoco Iron’s inability to restructure its overdue debt or obtain additional funding required. At September 30, 2004, the net book value of the IBH investment was reduced to zero. Since the shareholders’ equity deficit of the companies comprising the Joint Venture with BHP-Billiton at September 30, 2004 was US$42 million and IBH had guaranteed a portion of Orinoco Iron’s financial debt, IBH set aside an additional provision of US$21 million to recognize its share in the aforementioned deficit. This effect was considered for consolidation purposes of IBH with Orinoco Iron as from November 2004.


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Below is a summary of combined financial information at September 30, 2004 for the companies that until November 2004 comprised the Joint Venture with BHP-Billiton and were accounted for by the equity method: (Thousands of U.S. dollars) Combined balance sheet data at the end of the year Current assets (liabilities), net - negative working capital (779,026)Property, plant and equipment, net 909,880 Total assets 1,120,221 Financial debt 467,175 Debt with BHP-Billiton 382,356 Total liabilities 1,162,654 Shareholders’ equity (deficit) (42,433)

Combined statement of operations data Net sales 139,678 Gross loss (14,067)Operating loss (30,066)Financing costs, net (43,193)Net loss (78,909) Settlement with BHP-Billiton On November 5, 2004, BHP-Billiton, owner of 50% of Orinoco Iron’s capital stock until that date, agreed to terminate the Joint Venture with IBH and to assign: (1) 2% of its shares in Orinoco Iron to IBH (representing 1% of that company’s capital stock), and (2) the remainder of its shares (representing 49% of that company’s capital stock), as well as its creditor rights regarding a loan to Orinoco Iron of approximately US$382 million (subordinated debt) to certain financial creditors of Orinoco Iron. At that date, the outstanding amount of this subordinated financial debt remained unchanged, as well as the net amount and conditions of the outstanding privileged financial debt at that date (senior debt) of US$290 million with Orinoco Iron’s creditor banks, which was overdue. BHP-Billiton also assigned all of its shares in ORDI, International Briquette Marketing Services (IBMS) and Brifer to IBH. As a result, IBH now directly or indirectly owns all of the capital stock of these three companies. As part of this agreement, Orinoco Iron undertook to pay BHP-Billiton a US$30 million settlement to be paid once creditor banks receive payment of principal and interest of US$240 million (henceforth, for every US$0.65 paid to banks, BHP-Billiton will receive US$0.35). In addition, the matter of an outstanding royalty that BHP-Billiton owed Brifer was resolved (Note 14). Consequently, as of November 5, 2004, IBH owns 51% of Orinoco Iron’s capital stock and has assumed control of Orinoco Iron operations and management. Under applicable accounting standards, IBH began to consolidate Orinoco Iron’s results for accounting purposes. At September 30, 2005, based on the aforementioned agreements, Orinoco Iron recorded the following transactions: (i) a debt with BHP-Billiton for the aforementioned amount of US$30 million at its present net estimated value of US$21 million, considering that this liability will be paid between 2008 and 2009, all of which was recorded in the results for 2005, (ii) a contribution to equity of the long-term debt with a financial institution kept on Orinoco Iron’s books amounting to approximately US$477 million recorded under Contributions pending capitalization to offset Orinoco Iron’s accrued losses, the effect of which is shown under Net effect of combination (merger) of subsidiaries in shareholders’ equity.


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Below is the combined financial information of the entities acquired at the acquisition date under the aforementioned agreements: (Thousands of U.S. dollars) Book value Fair value Combined balance sheet data at October 31, 2004 Current assets, net 153,296 153,296 Property, plant and equipment, net 906,801 905,501 Other assets 97,966 97,966 Total assets 1,158,063 1,156,763 Current liabilities, net 768,657 768,657 Financial debt 361,411 361,411 Other liabilities 108,311 108,311 Total liabilities 1,238,379 1,238,379 Shareholders’ equity (deficit) (80,315) (79,015)

6. Changes in Equity in Subsidiaries Merger agreement between Venprecar and Orinoco Iron, C.A. At Special Shareholders’ Meetings of the subsidiaries Orinoco Iron, C.A. and Venprecar on May 24, 2005, the shareholders approved the merger by absorption of the assets and liabilities of Orinoco Iron, C.A. by the surviving company Venprecar. A public announcement was made on May 27, 2005. Prior to the merger process, on August 18, 2005, it was agreed that IBH and the shareholders of Orinoco Iron, C.A. would contribute a portion of IBH’s equity in Venprecar and all of the shares of Orinoco Iron, C.A. to a new entity, IBH de Venezuela, C.A. These transactions gave rise to an increase of IBH’s shareholding in Orinoco Iron, C.A. of 9.86% and a reduction of IBH’s shareholding in Venprecar of 23.17%. Consequently, at that date, direct and indirect shareholdings of IBH in Orinoco Iron, C.A. and Venprecar were 60.86% and 74.67%, respectively. The merger became effective on August 27, 2005 and, after the legal deadlines had been met, was ratified by the Shareholders’ Meeting of the subsidiary Venprecar on August 29, 2005. Consequently, as from that date, the direct and indirect shareholding of IBH in the surviving merged subsidiary Venprecar is 67.75%. As a result of the merger, certain rights of creditor banks originally related to Orinoco Iron are now represented by a golden share of Venprecar. On August 29, 2005, creditor banks, as indirect minority shareholders of the subsidiary IBH de Venezuela, C.A. and IBH and its subsidiaries signed put and call option contracts in respect of the minority shareholder’s shares in the aforementioned subsidiary (Note 9). Since these exchange transactions in the shareholdings of subsidiaries are a combination of commonly controlled entities, they were accounted for using book values at the transaction date. The difference between equity values exchanged is shown under Net effect of combination (merger) of subsidiaries in shareholders’ equity.

7. Balances and Transactions with Shareholders and Related Companies IBH, under various long-term contractual agreements, conducts business with its shareholders and certain associates.


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i) Accounts with related companies comprise the following: (Thousands of U.S. dollars) 2005 2004 Accounts receivable Steel Insurance Company Ltd. 6,931 -Siderúrgica del Turbio “Sidetur”, S.A. 4,724 -Orinoco Iron, C.A. (Note 5) - 33,084Other 36 330

11,691 33,414

Long-term accounts receivable Orinoco Iron, C.A. (Note 5) Loans and other intercompany accounts - 18,401 Reimbursable account receivable on guarantee payable to banks (Notes 5 and 6) - 190,000Operaciones RDI, C.A. (Note 5) - 840

- 209,241

Accounts payable CVG Ferrominera Orinoco, S.A. (indirect shareholder) 17,588 30,216Siderúrgica Venezolana “Sivensa”, S.A. (shareholder) 1,408 1,182Siderúrgica del Turbio “Sidetur”, S.A. 975 263Brifer International, Ltd. (Note 5) - 6,939Other 1,271 121

21,242 38,721

Long-term accounts payable CVG Ferrominera Orinoco, S.A. (indirect shareholder) 27,960 - ii) Significant transactions with shareholder and related companies comprise the following: (Thousands of U.S. dollars) 2005 2004 Sale of HBI Siderúrgica del Turbio “Sidetur”, S.A. 30,782 586

Purchases of iron ore CVG Ferrominera Orinoco, S.A. (indirect shareholder) 98,204 36,400

Cost of electricity and water Siderúrgica del Turbio “Sidetur”, S.A. 2,441 3,054

The iron ore and pellets used by Venprecar and Orinoco Iron to produce iron briquettes is provided by CVG Ferrominera del Orinoco, C.A. (FMO), a Venezuelan state-owned company and the only supplier of this mineral in Venezuela, under agreements entered into in 1988, renewed in 1998 for 20 years (Venprecar) and in 1997 for 20 years (Orinoco Iron). The price of iron ore is fixed annually by reference to prevailing international market prices. Agreements have automatic renewal clauses. During 2003 and 2002, FMO extended its credit terms for billings. The account payable to FMO accrues interest on past due amounts. On May 26, 2005, Orinoco Iron signed an agreement with CVG Ferrominera del Orinoco to restructure its accumulated commercial debt at April 30, 2004. Pursuant to the agreement, the debt was divided into two tranches: i) the first amounts to US$23.3 million; principal bears interest at 90-day LIBOR plus 4% and must be paid 30 days after principal has been paid in full; otherwise, accrued interest will become principal and bear interest. Amortization of principal will be in bolivars at the official exchange rate in effect published by the Central Bank of Venezuela (BCV). The repayment schedule


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depends on the generation of excess cash by Orinoco Iron; ii) the second amounts to Bs 14,607 million; principal bears monthly interest on outstanding principal at the weighted average lending rate agreed upon by the six main banks in the country published by BCV and must be paid 30 days after principal has been paid in full; otherwise, accrued interest will become principal and bear interest. The full principal amount of this tranche denominated in bolivars was paid in June 2005. At that same date, Venprecar also signed an agreement with CVG Ferrominera Orinoco to restructure its accumulated commercial debt at April 30, 2004 of US$18.8 million. Interest on outstanding principal is calculated monthly at 90-day LIBOR plus 4% and must be paid 30 days after principal has been paid in full; otherwise, accrued interest will become principal and bear interest. Amortization of principal is subject to the same conditions as the tranche in U.S. dollars of Orinoco Iron’s aforementioned commercial debt. Electricity, gas and water used by Venprecar are delivered under contracts between service suppliers and Siderúrgica del Turbio “Sidetur”, S.A., a subsidiary of Sivensa. Under these 10-year contracts signed in 1991, with automatic renewal clauses, Venprecar will reimburse Sidetur for the cost of services provided. In addition, Venprecar and Sidetur share certain common expenses. Accounts receivable from Orinoco Iron are mainly in respect of fund transfers to finance its operations. Accounts receivable at September 30, 2004 include US$29.4 million which bear interest at LIBOR plus 2.5% per annum and US$9.7 million at 8% interest per annum. Due to the merger between Orinoco Iron and Venprecar, this account receivable and its related account payable were eliminated (Note 6). Accounts with other related companies are interest-free.

8. Property, Plant and Equipment Property, plant and equipment comprises the following: Buildings, (Thousands of machinery Furniture Work in U.S. dollars) and equipment Vehicles and fixtures progress Land Total Year ended September 30, 2004 Balance at the beginning of the year 144,069 846 206 281 903 146,305 Additions 278 215 366 - - 859 Withdrawals, net (268) - (59) (134) - (461) Depreciation expense (10,412) (168) (175) - - (10,755) Revaluation 2,379 - - - - 2,379

Net balance at the end of the year 136,046 893 338 147 903 138,327 At September 30, 2004 Cost 201,050 2,062 754 147 70 204,083 Accumulated depreciation (120,487) (1,169) (416) - - (122,072) Revaluation 55,483 - - - 833 56,316

Net balance 136,046 893 338 147 903 138,327


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Buildings, (Thousands of machinery Furniture Work in U.S. dollars) and equipment Vehicles and fixtures progress Land Total Year ended September 30, 2005 Balance at the beginning of the year 136,046 893 338 147 903 138,327 Effect of consolidation of new subsidiaries (Note 5) 883,311 939 1,150 3,676 4,279 893,355 Additions 6,310 1,525 482 9,969 - 18,286 Withdrawals, net (1,695) - (6) (1,339) - (3,040) Depreciation expense (35,161) (170) (302) - - (35,633) Revaluation 16,009 - - - 641 16,650

Net balance at the end of the year 1,004,820 3,187 1,662 12,453 5,823 1,027,945 At September 30, 2005 Cost 1,224,157 5,071 3,909 12,453 4,349 1,249,939 Accumulated depreciation (290,829) (1,884) (2,247) - - (294,960) Revaluation 71,492 - - - 1,474 72,966

Net balance 1,004,820 3,187 1,662 12,453 5,823 1,027,945 Depreciation expense for the years ended September 30, 2005 and 2004 was US$35.6 million and US$8.5 million, respectively, which was charged to cost of sales. During the years ended September 30, 2005 and 2004, the Group did not capitalize interest on property, plant and equipment.

9. Long-term Loans in Process of Restructuring and Other a) Financial debt in process of restructuring and Standstill Agreement Background Orinoco Iron received funds of approximately US$613 million (senior debt) in conformity with several lines of credit to finance construction of the Orinoco Iron plant; 50% of this debt is guaranteed by IBH and Venprecar. Lenders share a common security package which comprises: (1) pledges on substantially all of the assets of Orinoco Iron (as borrower) and ORDI (as guarantor); (2) pledges on sales, construction and supply contracts and insurance policies of Orinoco Iron, ORDI and Venprecar; (3) pledges by IBH of its share ownership in the capital stock of Orinoco Iron, ORDI, SVS International Steel Holdings (SVS International) and Venezolana de Prerreducidos Caroní “Venprecar”, C.A.; (4) pledges by SVS International of its share ownership in Siderúrgica del Caroní “Sidecar”, S.A.; (5) pledges by Sidecar of its share ownership in Venprecar; (6) a mortgage on land and civil works owned by Venprecar; (7) a mortgage on Venprecar’s business operations; (8) escrow agreements on two bank accounts of Venprecar, and (9) an unconditional guarantee by ORDI. In May 2001 BHP-Billiton paid creditor banks of Orinoco Iron US$314 million in respect of its percentage (50%) of the secured debt. After this payment, BHP-Billiton became an Orinoco Iron creditor for this amount, subject to the same rights of its initial creditors and subordinated to debt settlement with creditor banks. In November 2004 BHP-Billiton assigned on its rights this debt to Orinoco Iron’s creditor banks. This debt was subject to the settlement agreement with BHP-Billiton (Note 5).


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During 2004 creditor banks began foreclosing certain guarantees set out in the loan agreement. At September 30, 2005, foreclosures includes cash balances of US$26.6 million and accounts receivable of US$458 million (US$23.2 million and US$68.2 million, respectively, until September 30, 2004). At September 30, 2004, these amounts were recorded by Venprecar as accounts receivable from Orinoco Iron (Note 7) and subsequently offset with debts of Venprecar assumed by Orinoco Iron. At that same date, the subsidiary Venprecar had set aside a provision for contingencies, at present value, in respect of the guarantee granted of approximately US$190 million (US$85 million was recorded as short-term) with a corresponding entry as a reimbursable account receivable from Orinoco Iron (Note 7). Since Orinoco Iron consolidates its financial statements with IBH and its subsidiary Venprecar as from November 2004, this account receivable and the provision for contingencies on the guarantee granted described above were eliminated in consolidation (Note 6). At September 30, 2004, Orinoco Iron and IBH were negotiating with creditor banks to restructure debt balances amounting to US$672 million at that date. During 2005 interest payable to banks and BHP-Billiton was calculated at between 10.25% and 6.67% (6.25% and 3.94% at September 30, 2004), including additional interest charges on late payments of 2% beginning May 2001. At September 30, 2005, the balance of unpaid accrued interest is US$16 million. Standstill Agreement In August 2005, upon completion of negotiations and agreements indicated in Notes 5 and 6, and the restructuring agreements in respect of overdue commercial debt with subsidiaries of Corporación Venezolana de Guayana (CVG) mentioned in Notes 7 and 10, creditor banks of Orinoco Iron, C.A. (subsequently merged into Venprecar) and IBH and its subsidiaries signed an agreement to maintain the existing status of the bank debt in process of restructuring (Standstill Agreement). According to this agreement, default conditions in respect of the debt in process of restructuring still exist. Furthermore, the agreement shall not be construed as a waiver of the aforementioned default or as a novation of the debt. Therefore, Venprecar is required to pay at least US$304 million in principal and interest, fees and other amounts to which creditor banks are entitled. Under this agreement, financial institutions maintain all of the rights related to the guarantees originally subscribed in 1997 and creditor banks reserve the right to take any necessary legal action against the responsible parties in case Venprecar defaults on the aforementioned payments. Based on the terms of the agreement and during the standstill period, creditor banks shall forbear from enforcing their rights and/or take any other action in connection with the debt in process of restructuring provided that no new events of default have occurred in connection with the new obligations arising from the agreement as described below, except for action that, at their sole discretion, creditor banks may exercise in respect of accounts receivable from and revenues of Venprecar, ORDI and Orinoco Iron S.C.S. Based on the above, IBH presents the aggregate debt, less estimated payments to be made over the 12-month period subsequent to September 30, 2005, as a long-term liability. In addition, put and call option contracts were signed by IBH or Venprecar in respect of 39.14% of shares in IBH de Venezuela, C.A. (indirectly 30% of Venprecar’s shares) owned by creditor banks. Venprecar will have the necessary resources to conduct normal business operations, including those required for investments in fixed assets. The Standstill Agreement will remain in effect until a financial restructuring agreement is reached, provided that the following conditions are met:


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a) Payment of US$180 million at the minimum LIBOR interest rate plus 4.5%, payable quarterly. The balance at September 30, 2005 is US$132 million and minimum future payments are shown below: (Thousands of U.S. dollars) Years 2006 400 2007 6,300 2008 7,560 2009 and beyond 149,000 b) Payment of US$194 million on October 1, 2014 at 6% interest. Unpaid accrued interest may be capitalized annually. The balance at September 30, 2005 is US$181 million. c) Compliance with debt restructuring agreements with CVG’s subsidiaries described in Notes 7 and 10.

d) Transfer by the subsidiary IBH de Venezuela, C.A. of 3% of Venprecar’s shareholding to CVG, upon approval and request of the latter.

e) Compliance with call option contracts in favor of IBH and/or Venprecar on 39.14% of IBH de Venezuela, C.A. shares. Compliance with the put option in favor of creditor banks. The most significant terms and conditions are summarized below: i) The call option may be exercised once the bank debt balance in process of restructuring reaches

US$187,267,420, provided that no event of default of the terms of the Standstill Agreement has occurred. The call option may not be exercised after October 1, 2014.

ii) The put option may be exercised by creditor banks: a) as of October 1, 2014 at an exercise price of

US$80 million; b) if the bank debt in process of restructuring is paid in full before the agreed-upon date, or c) if an amount equivalent to the exercise price of the put option is available in a trust fund set up for this purpose. The put option may not be exercised after October 1, 2024.

iii) Banks will deposit 20% of funds received in excess of minimum payments in a trust fund to be

used to guarantee any future purchase of IBH de Venezuela, C.A. shares by IBH or one of its subsidiaries.

iv) The exercise price for both put and call options will range from US$34 million to US$80 million,

depending on the exercise date.

v) Put and call options may only be exercised once a year, on the total number of shares or on one or more tenths of the shares covered under the options, at the established price for the periods as specified above. Once the company has bought all of the shares subject to the options, banks will deliver the golden share, which will become a common share.

Considering the terms of the aforementioned agreement and future estimates made by management, at September 30, 2005, IBH recorded a liability of approximately US$22 million under Other long-term liabilities and accruals in respect of the present value of the exercise price of the option, which is expected to be exercised in 2009. Furthermore, IBH has consolidated 39.14% of the shares covered under the aforementioned option, and the results of the subsidiary of IBH de Venezuela, C.A. are fully recognized as from September 1, 2005 even though the aforementioned option has not been legally


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exercised. The difference between the liability recorded in respect of the option and the equity value of the related shareholding is shown under Difference between fair value and cost of shares of the subsidiary in shareholders’ equity. Management believes that expectations regarding possible foreclosure of the put option described herein are reasonable. However, management cannot guarantee future results since they depend on estimates involving known and unknown risks, uncertainties and other factors that may cause future actual results to vary substantially. Approximately US$11 million, in respect of expenses and commissions paid to third parties, directly associated with this agreement, is shown net in the book balance of bank debt in process of restructuring and will be amortized over the term of the loan. b) Other long-term loans Other long-term loans at September 30 comprise the following: (Thousands of U.S. dollars) 2005 2004 Promissory notes with a financial institution Denominated in U.S. dollars and maturing in 2015 - 23,309 Denominated in bolivars and maturing in 2015 - 7,410

- 30,719 Promissory notes denominated in U.S. dollars and bolivars may be settled in bolivars or U.S. dollars at the creditor’s choice. The bolivar equivalent is to be determined at the highest exchange rate under the following three options: (i) the official exchange rate, if applicable; (ii) the free market exchange rate, if applicable, and (iii) a reference rate determined by market values of C.A. Nacional Teléfonos de Venezuela (CANTV) shares and ADRs. At September 30, 2004, these promissory notes are stated at the highest value which resulted from the aforementioned options. The corresponding effect is included in the results for the year. Promissory notes denominated, in either U.S. dollars or bolivars, were issued in September 2004 and mature in 2015, bearing interest per annum at LIBOR plus 4.5%. The first 24 months are interest-free. During 2005 Orinoco Iron, C.A. assumed these debts, offsetting a portion of Venprecar’s account receivable from Orinoco Iron, C.A. as a result of foreclosed guarantees mentioned in Note 9-a. These long-term loans, together with those taken out by the subsidiary Orinoco Iron, C.A. during 2004 and 2005, were part of the equity contribution as Contributions pending capitalization made to Orinoco Iron, C.A. (Note 5).

10. Long-term Suppliers Long-term suppliers at September 30 comprise the following: (Thousands of U.S. dollars) 2005 2004

CVG Electrificación del Caroní, C.A. (EDELCA) 7,937 - On May 26, 2005, Orinoco Iron signed an agreement with EDELCA to restructure its accumulated commercial debt at April 30, 2004. Pursuant to the agreement, the debt was divided into two tranches: i) the first amounts to US$7.1 million; principal bears interest at 90-day LIBOR plus 4% and must be paid 30 days after principal has been paid for in full; otherwise, accrued interest will become principal and bear interest. Amortization of principal will be in bolivars at the official exchange rate in effect


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published by the BCV. The repayment schedule depends on the generation of excess cash by Orinoco Iron; ii) the second amounts to Bs 4,432 million; principal bears monthly interest on outstanding principal at the weighted average lending rate agreed upon by the six main banks in the country published by BCV and must be paid 30 days after principal has been paid in full; otherwise, accrued interest will become principal and bear interest. The full principal amount of this tranche denominated in bolivars was paid in June 2005.

11. Other Long-term Liabilities and Accruals Other long-term liabilities and accruals at September 30 comprise the following:

(Thousands of U.S. dollars) 2005 2004

Broken Hill Proprietary Company Limited (BHP-Billiton) (Note 5) 21,172 - Cost of call option (Note 9-a) 22,567 - Provision for loss in value of investment in associate (Note 5) - 21,641

43,739 21,641

12. Taxes The estimated tax benefit (expense) for the year ended September 30 comprises the following: (Thousands of U.S. dollars) 2005 2004 Income tax, net 2,025 (8,643) Deferred income tax 15,930 (8,444)

Total tax benefit (expense) 17,955 (17,087) Income tax For Venezuelan subsidiaries, the main differences between the amount of income tax computed at the regular 34% statutory tax rate and the effective income tax rates result mainly from inflation adjustments for Venezuelan tax purposes, intercompany transactions, income from foreign sources and requirements that Venezuelan income taxes be based on the underlying bolivar accounts of each Venezuelan company on an individual basis as follows: (Thousands of U.S. dollars, 2005 2004 except percentage) Net financial income 36,329 17,270 Statutory tax rate 34% 34%

Notional income tax expense (12,352) (5,872)

(Increase) decrease of notional income tax expense resulting from Non-deductible provisions (832) (3,993) Effect of variation in tax base cost of fixed assets and inventories (1,651) (5,026) Other, net (mainly effect of declaring taxes based on individual results in bolivars) (40,373) (2,196) Benefit from utilization of tax loss carryforwards from combination of subsidiary (Note 5) 73,163 -

Tax benefit (expense) 17,955 (17,087)


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Venezuelan Income Tax Law requires annual inflation adjustments resulting in an increase or decrease in taxable income for Venezuelan subsidiaries. Under this Law, the new values resulting from inflation adjustments are to be depreciated over the remaining useful lives of the fixed assets. The Law also allows tax losses and investment tax credits to be carried forward for three years to offset taxable income and tax expense, respectively. At September 30, 2005, the subsidiary Venprecar recognized a deferred tax asset in respect of tax loss carryforwards, generated by the merged subsidiary, which may be used until 2007. The components of the deferred income tax assets (liabilities) at September 30 are shown below: (Thousands of U.S. dollars) 2005 2004 Deferred income tax asset 15,930 - Exchange difference taxable when collected (21,339) (19,301) Difference on tax base of fixed assets (109,933) (13,747) Difference on tax base of inventories - 201 Allowances and provisions not deductible until paid - 1,872 Other, net - 22

Deferred income tax liability, net (131,272) (30,953) Value added tax In May 1999 the Venezuelan government enacted the Value Added Tax (VAT) Law. This tax is based on a tax credit system; it is payable based on the value added at each stage of production or sales. The VAT rate is set annually in the Venezuelan Budget Law. The tax rate was set at 14% (15% from September 1, 2004 to July 2005 and 16% during 2004). The Law sets out special zero tax rate for exporters, granting them the right to recover tax credits from the purchase or import of goods and services based on the ratio of export sales to total sales. At September 30, 2005, the subsidiaries of IBH recorded net value added tax credits of approximately US$47.6 million (US$11.4 million in 2004) (Note 3), of which approximately US$43 million (US$5.5 million in 2004) is in respect of recoverable credits arising from export activities. Bank debit tax In March 2002 the Venezuelan government enacted the Bank Debit Tax Law. This tax is levied upon debits or withdrawals made from current and savings accounts, custody deposits, or any other type of demand deposit, liquid asset funds, trust funds and other financial market funds or financial instruments transacted by individuals or corporations with Venezuelan banks and other financial institutions. The bank debit tax rate was set at 0.5% from January 2004 to December 31, 2006 (0.75% from December 31, 2003 to January 2004). During the years ended September 30, 2005 and 2004, IBH recorded bank debit tax expense of approximately US$1.5 million and US$0.5 million, respectively. Transfer pricing Venezuelan Income Tax Law includes transfer-pricing regulations. According to these regulations, taxpayers that conduct transactions with related parties abroad are required to calculate income, costs and deductions applying the methodology set out in the Law. For the year ended September 30, 2004, management of IBH subsidiaries made the transfer-pricing study to prepare all the documentation needed to file a transfer-pricing return for information purposes. The results of this study determined that computation of transfer prices had no significant effect on taxable income. The study for 2005 is in process.


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13. Shareholders’ Equity Capital stock Authorized capital stock is represented by 20,115,000 common shares, with a par value of US$0.01 each, of which 19,897,467 are subscribed and fully paid. Dividends The Capital Markets Law requires companies with publicly traded shares to distribute among their shareholders at least 50% of their net profit (in bolivars) after income tax and appropriation to legal reserves. In addition, at least one-half of this dividend must be paid in cash. In conformity with the rules and instructions of the Venezuelan Comisión Nacional de Valores (CNV), the basis for distribution of dividends and statutory equity does not include equity in the results of subsidiaries. At September 30, 2005 and 2004, IBH has accumulated deficit. Under IBH’s bylaws, dividends may be paid out of profits, subject to certain legal restrictions, or the share premium account. As a holding company, IBH will mainly rely on dividends from its subsidiaries and associates for payment of dividends to its shareholders. The loan agreement referred to in Note 9 sets out certain restrictions for dividend declaration and payment. IBH consolidated 39.14% of IBH de Venezuela, C.A. shares covered under the put option even though the aforementioned option has not been legally exercised (Note 9).

14. Royalties Brifer and VAI entered into an agreement to market the Finmet process (iron-ore direct reduction process) giving Brifer and VAI exclusive promotion and selling rights on the Finmet process and its improvements in certain countries. Under this agreement, Brifer is entitled to receive from VAI a minimum amount of US$6 per metric ton on the nominal design capacity of any new Finmet plant built within VAI jurisdiction. Brifer, or a subsidiary of Brifer, will receive 50% of this royalty once assembly of electromechanical installations begins. The remaining 50% shall be paid on the date of the provisional acceptance of the plant. As of 2002 between 75% and 85% of royalties will be payable 30 days following signature of the agreement, and the remaining amount will be payable following provisional acceptance of the plant. Finmet process patents and rights are jointly owned by Brifer and VAI. In 1996 the Australian company BHP-Billiton began assembly of the electromechanical installations of a plant in Port Hedland, Australia, with a designed annual capacity of 2 million metric tons, representing total royalties of US$12 million for Fior. Brifer (a wholly owned subsidiary of Fior at that date earned US$6 million in 1996 in income from royalties paid on this process. In 1999 plant capacity was determined to be higher than originally estimated; therefore, Brifer recognized US$1 million in additional income from royalties during 1999. The remaining US$6 million payable to Brifer and recognized as income upon provisional acceptance of the plant was negotiated by IBH and BHP-Billiton (Note 5); it was agreed that BHP-Billiton does not owe Brifer in this connection.


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15. Main Subsidiaries Subsidiaries with the most significant transactions are the following:

Participation Name % Country Activity

Venezolana de Prerreducidos Caroní “Venprecar”, C.A. 95.92 Venezuela Briquette plant (Note 5) IBH de Venezuela, C.A. (incorporated in May 2005) 100 Venezuela Holder of shares of subsidiaries (Note 5) Orinoco Iron, S.C.S. (incorporated in 2005) (Note 5) 95.92 Venezuela Briquette plant Operaciones RDI, (ORDI) (Note 5) 100 Venezuela Briquette plant (inactive) Brifer International Ltd. (Brifer) (Note 5) 100 Barbados Owner of Finmet property rights Siderúrgica del Caroní “Sidecar”, S.A. 100 Venezuela Holder of shares International Briquette Marketing Services (IBMS) 100 United States Marketing services SDP International Corporation 100 United States Purchase of spare parts Participation percentage of Venprecar, IBH de Venezuela, C.A. and Orinoco Iron S.C.S. includes future acquisitions once one of the put or call option contracts becomes effective (Note 9-a). Venprecar’s exchange offer In November 1997 Sivensa, the direct and indirect owner of 71.9% of outstanding Venprecar common shares and Class “B” shares of Venprecar through its wholly owned subsidiary Siderúrgica del Caroní “Sidecar”, S.A., transferred its shares in Venprecar to IBH in exchange for new shares of IBH and an additional amount of new shares of IBH as compensation for certain costs and expenses incurred by Sivensa in respect of the exchange offer and Joint Venture formation with BHP-Billiton to build the Orinoco Iron plant. Share exchange was accomplished by Sivensa’s contribution to IBH of all outstanding shares of SVS International Steel Holdings (SVS). Venprecar share exchange by most of the minority shareholders of Venprecar (26.5% of total shares) for new shares of IBH was accounted for separately and treated as a purchase transaction. The excess of the acquisition cost over the book value of net assets acquired allocated to minority interest amounted to US$9.9 million and includes US$2.7 million in related acquisition costs. This excess was allocated to property, plant and equipment (based on an independent appraisal) and is being amortized over the estimated useful lives of Venprecar’s plant and equipment.


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16. Expenses by Nature Expenses by nature for the year ended September 30 comprise the following: (Thousands of U.S. dollars) 2005 2004 Expenses by nature Raw materials 93,167 40,156 Materials 12,413 1,353 Spare parts 24,130 5,299 Depreciation 36,584 7,783 Labor 24,150 5,155 Electricity, gas and water 66,752 5,868 Personnel 13,686 2,054 Exports 11,908 4,068 Shutdowns 23,963 1,038 Insurance settlements (Note 3) (23,608) - Municipal taxes 1,319 122 Professional fees 5,860 305 Net gain on sale of securities (5,367) - Other 40,661 6,783

Total cost of sales, general, administrative, and other operating expenses 325,618 79,984

17. Interest Expense Interest expense for the year ended September 30 comprises the following:

(Thousands of U.S. dollars) 2005 2004 Loans (30,821) - Suppliers (11,860) (2,034) Other expenses and commissions on loans (2,039) - Other (225) -

(44,945) (2,034)

18. Foreign Currency The Group has the following monetary balances in bolivars at September 30:

(Thousands of bolivars) 2005 2004 Assets Cash 8,340,246 7,023,181 Accounts receivable 104,503,647 30,680,270 Other monetary assets 27,307,457 1,984,442

Total monetary assets 140,151,350 39,687,893

Liabilities Accounts payable (203,690,814) (30,537,731)Other long-term loans - (14,226,482)Other monetary liabilities (31,712,440) (24,324,633)

Total monetary liabilities (235,403,254) (69,088,846)

Total net monetary liabilities in bolivars (95,251,904) (29,400,953)

Total net monetary liabilities equivalent in thousands of U.S. dollars (US$44,303) (US$15,313)


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The Group does not engage in hedging activities in connection with its balances and transactions in bolivars. The year-end exchange rate, the average exchange rates for each year and increases in the Consumer Price Index (CPI) published by the BCV were as follows: 2005 2004 Year-end exchange rate (Bs/US$1) 2,150 1,920 Average exchange rate for the year (Bs/US$1) 2,035 1,813 Increase in the Consumer Price Index (%) 15% 21% On January 21, 2003, the Venezuelan government announced the closure of the foreign exchange market and, on February 5, 2003, the Ministry of Finance and BCV began to publish the legal instruments regulating the exchange control regime, one of which established initial official exchange rates of Bs 1,596/US$1 (purchase) and Bs 1,600/US$1 (sale). On that same date, the government created the Commission for the Administration of Foreign Currency (CADIVI) with the task of establishing the detailed rules and regulations and generally administering the exchange control regime. Among other things, the first of these legal instruments requires the sale of all incoming currency to BCV and temporarily suspends all purchases and sales in local currency of securities issued by the Venezuelan government in foreign currency. BCV now centralizes all currency purchases and sales in the country. CADIVI has subsequently issued resolutions on a number of requirements in connection with the administration of the exchange control regime, such as user registration, guidelines for importers and exporters, and the registration of private-sector foreign debt at January 22, 2003. On March 2, 2005, the Ministry of Finance and BCV established new official exchange rates, as from that date, of Bs 2,144.60/US$1 (Bs 1,915.20/US$1 in 2004) (purchase) and Bs 2,150/US$1 (Bs 1,920/US$1 in 2004) (sale). IBH subsidiaries have complied with requirements set out in regulations issued by CADIVI in connection with user registration. Until September 30, 2005, IBH has received approximately US$24.5 million from CADIVI through BCV. At that date, approximately US$0.9 million has been approved by CADIVI and is pending settlement by BCV. Orinoco Iron (currently merged with Venprecar) complied with requirements set out in regulations issued by CADIVI for registration of its foreign debt of US$728 million at January 22, 2003. At September 30, 2005, the foreign debt balance amounts to US$313 million. Registration of US$147 million has been already been approved by CADIVI. Registration of the remaining amount is still pending approval. As described in Notes 5 and 7, Venprecar guaranteed a long-term loan in foreign currency received by Orinoco Iron, considered overdue by creditor banks since Orinoco Iron has defaulted on payments and certain covenants set out in the loan agreement. During 2004 Orinoco Iron’s creditor banks began foreclosing certain guarantees, including Venprecar’s cash balances in U.S. dollars and accounts receivable denominated in U.S. dollars (Notes 5 and 7). Under the merger, on August 29, 2005 Venprecar assumed these debts (Note 6).


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19. Commitments and Contingencies To date, Group management is not aware of any litigation, additional tax assessments, civil or mercantile claims that could have a material adverse effect on the financial position of IBH and its subsidiaries, except for an arbitration request filed against Orinoco Iron, C.A. by the owners of the MV-YTHAN vessel that sank in February 2004 with its Finmet cargo. In addition, the vessel’s owners filed a petition for an attachment on Orinoco Iron’s assets in the U.S. and England of approximately US$20 million to guarantee the outcome of the arbitration process. Orinoco Iron opposed preventive measures agreed to by the Royal London Court; a ruling in September 2004 went in favor of Orinoco Iron. In September 2004 an Ohio Court (U.S.) issued a ruling for release of the attachment against Orinoco Iron issued in June 2004. Vessel owners appealed the above decision in September 2004, which was denied by the court. In mid-2005, the owners of the vessel MV-YTHAN proposed a mediation process between all disputing parties. The Company accepted as agreed in writing in November 2005. The parties are currently preparing an information exchange in connection with the mediation process expected by mid-2006. At the date of this report, management is not aware of any decision regarding any other attachment. Based on the opinion of external legal advisors, it is not possible to anticipate the outcome of this claim; therefore, Company management has not set aside a provision in this connection. Venprecar and ORDI are subject to Venezuelan environmental laws and regulations. These companies are not involved in any environmental-related claims with Venezuelan environmental and health regulatory authorities and are not aware of any claims or conditions expected to result in claims in respect of environmental violations that could, in the opinion of management, have a material adverse effect on the consolidated financial position or results of operations of IBH.

international briquettes holding and its subsidiaries

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