1BEBFOH*OEVTUSZ 1VCMJD$PNQBOZ-JNJUFE "OOVBM3FQPSU Contents Message from the Board of Directors 2 Analysis of financial status and operating Highlights for the year 2006 4 performance 22 Key figures and ratios 5 Risk factors 24 The year in review 6 2006 Board of Directors, Strategic Committee, ë Industry conditions Audit Committee and the Nomination ë Operations and Remuneration Committee 27 ë Mineral resources and exploration Management Committee 30 Sustainable development 16 Audit Committeeûs statement 31 ë Environment and safety Financial statements 32 ë Overview of the environmental performance Corporate governance 65 indicators Shareholders and management 69 ë Environmental aspects in Mae Tao basin - update ë Personnel ë Community relations Vision PDI will be a low cost producer of high quality zinc, able to compete in its markets with world class producers, providing valued services to customers and giving great importance to the environment. Background Padaeng Industry was established on April 10, 1981 with the original registered capital of Bt 20 million invested by Thai public (Ministry of Finance) and private investors and private company from Belgium. The company has since engaged in mining and refinery business with the objective to produce zinc metal and zinc alloys to serve the demand of our customers. The companyûs mine is located in Mae Sot district, Tak province, the zinc smelter is located in Muang district of the same province and the roaster plant is located in Rayong. The company also has engaged in zinc ore exploration programs both in Thailand and in neighboring countries. The company was listed on the Stock Exchange of Thailand on July 21, 1987 and was converted into a public company limited on February 4, 1994. In 1996, the company increased its registered capital to Bt 2,260 million which was fully paid in 2000. 2 Mr. Arsa Sarasin Mr. Bernard Tonnon Chairman of the Board Managing Director Padaeng Industry Public Company Limited Message from the Board of Directors After the excellent profit booked in 2005, we are proud to book once again a very good result for 2006, a year that will remain in the company history as one of the best ever. In 2006, the sustained demand for zinc largely exceeded metal production as producers were unable to increase production partly due to mine capacity restrictions. This structural deficit raised the interest of the financial world and the zinc price rose to historical levels. The company benefited greatly from those rather unexpected market conditions even though the margin was unfortunately limited from the start by a shortage of raw materials and by the forward sales locked in at a time that the zinc price growth was still uncertain. We believe that although the structural deficit of zinc will partially ease in the near future and the volatility of the price will remain, the prospects for the zinc business remain very good for the coming year. The increased focus of investors on the metal sector, the volatility and the lack of clarity of the metal price evolution have clearly increased the need for a better understanding of the drivers of our business. To meet that expectation, the company has reviewed all communication channels and will continue to improve them to offer frequent, open and clear 3 information to shareholders, investors and the society as a whole We did not fail to notice that, in the last quarter of 2006, the zinc price had reached levels where it affected the customers who were not always able to bear the increased cost. The company took care of accommodating the difficult situation of its customers while coping at the same time with a further reduction in import duty that passed almost unnoticed due to the metal price hike. On the social side, having a commitment to the community as core company value, we cannot ignore the problems faced by the communities close to our facilities. Finding an alternative to rice growing in the valleys close to the mine of Mae Sot remained a permanent concern in 2006. The company linked with all local stakeholders to study sustainable alternatives and eventually decided to invest directly in an industrial joint venture that will produce ethanol from locally produced sugar cane. We are confident that this project will benefit the communities around Mae Sot long after the mine depletion. Last but not least, we entered in the practical phase of the renewal process of the main mining lease of the Mae Sot mine. This long and complex administrative process is due to be completed by end of 2007. We are now looking forward to a positive conclusion that will allow us to focus all our energy on the further growth of the company. In the meantime, the mine resources have been reassessed and confirmed. Reserves are being reviewed as well but should be sufficient for another 8 years of operation giving us the time to bank on the intensive exploration program the company has launched in both Thailand and Laos in order to develop other supply lines for the smelter. Overall, 2006 has been a very intense year on many aspects and was crowned by a remarkable profit that gives us the financial strength to prepare for future developments without any hurdle. On behalf of the Board of Directors, we wish to thank our shareholders, for their continued support and to extend our gratitude to all the employees of the company for their commitment. Annual Report 2006 Highlights for the year 2006 ë Average zinc price in 2006 rose ë Total sales of 94,823 tons. ë Calcine plant won the outstanding significantly to US$ 3,275 per ton, energy conservation award in an 137% increase compared to ë Metal production of 96,469 tons. the Thailand Energy awards the previous year. contest from Department of 4 ë Padaeng Industry (Laos) Company Alternative Energy Development ë The company turnover amounted Limited, a 100% subsidiary of and Efficiency of the Ministry Bt 10,305 million, an increase of Padaeng, has obtained permission of Energy. Bt 4,154 million or 68% despite from the Government of Laos PDR to lower sale volumes and reduction explore zinc in the area of 800 ë Calcine plant received the award of import duty from 5.5 to 3.25%. square kilometer in Kasi, Vientiane. for outstanding health and safety at work in 2006 for the second year ë Net profit of Bt 1,765 million ë Zinc smelter achieved ISO 9001 from the Ministry of Labour. compared with a 2005 net profit recertification for quality management of Bt 561 million. YTD ROCE of system, ISO 14001 certification for ë Mae Sot mine received the award 42%. environmental management system, for good performing aggregate TIS 18001 and OHSAS 18001 plant from Department of Primary ë Net earning per share of Bt 7.81 recertification for management Industries and Mines, Ministry of versus Bt 2.48 in 2005. of occupation health and safety Industry. standards. ë Dividend per share of Bt 5.20 versus Bt 1.10 in 2005. Padaeng Industry Public Company Limited Key figures and ratios Consolidated End of year 2006 2005* 2004 Total revenues (Million Baht) 10,442 6,180 5,715 5 Gross profit (Million Baht) 2,683 1,297 769 Net profit (loss) (Million Baht) 1,765 561 217 Net profit (loss) per share (Baht) 7.81 2.48 0.96 Net profit (loss) per total revenue (%) 16.90 9.08 3.80 Total assets (Million Baht) 7,741 5,172 4,905 Total liabilities (Million Baht) 2,720 1,655 1,903 Shareholdersû equity (Million Baht) 5,021 3,517 3,002 Return on assets (%) 27.34 11.14 4.33 Return on equity (%) 41.35 17.22 7.11 Return on capital employed (%) 41.85 16.01 6.70 Debt to equity ratio (Times) 0.54 0.47 0.61 Book value per share (Baht) 22.22 15.56 13.29 Dividend per share (Baht) 5.20 1.10 0.40 * Restated Annual Report 2006 The year in review Industry conditions The world demand for zinc metal increased by 4% from 2005 to 11.06 million tons in 2006. Demand rose, especially in China, which turned to be an importer of zinc, as well as in India and Europe. It is expected that the sustaining consumption from these three areas would drive the world zinc demand in 2007 reaching 11.35 million tons, an increase of 2.6%. The LME zinc price has seen continuous growth from 2005 to its peak at US$ 4,619 per ton during the fourth quarter of 2006, hitting a 16-year record high. Average zinc price stood at US$ 3,275 per ton, an increase of US$ 1,893 6 from 2005 as a result of falling metal stock, shortage of concentrates forcing some refineries to reduce production, and increasing interest in commodities by investment funds and speculators. Zinc sales volumes The local economy could be characterized as gloomy, hit by several negative factors including rising oil price and interest rate, higher raw material cost, political issues, flooding, loss of foreign investors after new measures of Bank of Thailand, export loss from strong Thai Baht, and the violence in the South. As a result, zinc related industries, i.e. sheet galvanizing, pipe galvanizing and brass showed a slowdown in growth as well. After a good start in the first quarter the local zinc consumption slowed down to collapse in last quarter amidst a booming demand everywhere else in the world. On a year basis the local consumption increased a mere 1.6% from 2005 to approximately 114,971 tons.