RETURN TORETURN TO ~~~~~~~~~~RE S T R I C T E D REPORTS DESK| R e p o r t No. TO-285a WITHIN rILECOPY ONE WEEK Public Disclosure Authorized This reportwas prepared for use within the Bank. It may not be published nor mayit be quotedas ropresentingthe Bank'sviews. The Bankaccepts no responsibilityfor the accuracyor completenessof the contentsof the report.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized

APPRAISAL OF THE

DEAD SEA WORKS, LTD.

POTASH PROJECT

ISRAEL Public Disclosure Authorized

June 7, 1961 Public Disclosure Authorized

Department of Technical Operations APPRAISALOF THE

DEADSEA WORKS.LTD.

POTASHPROJECT (Israel)

SUMMARYAND CONCLUSIONS i. The Dead Sea Works,Ltd. (DSW)is the successorof PalestinePotash Conmpany,Ltd. which from 1931 through1947 producedpotash and brominefrom Dead Sea brine. In 1947 productionamounted to about103,000 tons from two plants,one at the north and one at the south end of the Dead Sea. After the war only the southernplant was in Israeland it was damagedand isolated, sinceaccess to it had been by sea from the northernplant (paras. 5-7). ii. In 1952, afterthe shareholdersof PalestinePotash had been unable to securefinancing to resumeoperations, the Governmentof Israelmade a settlementwith the shareholders,and took over the assetsof the companyin Israel,forming the Dead Sea Works,Ltd. (paras.7; 11-12). iii. The first years of reconstruction were difficult; large sums had to be expended for road construction, flood protection, power supply, fresh water wells and housing. Changes in the potash market required the develop- ment of a new refining process. Considerable effort was required to re-enter the international markets (para. 8). iv. Lack of propermanagement hampered the reconstructionuntil 1955, when a new GeneralManager was appointed.Since then progresshas been rapid and in the 1960/61fiscal year the DSW had potashproduction and salesof 136,000tons (paras.8-10; 20-21). v. Despitethe successin overcomingoperating problems and increasing production,the financialrecord has been poor sincethe DSW had to make largeinvestments in non-productivefacilities in orderto commenceand main- tain operations.Expenditures to date have been financedlargely from Govern- ment sources(paras. 13-19). vi. The DSWcannot expand beyond a levelof about190,000 tons per year unless it undertakes a project to close off a portion of the Dead Sea itself. Technicalconsiderations preclude undertaking this projectin smallsteps and the!DSW must eitherincrease its capacitythreefold or stop its growthat a capacityof about190,000 tons (para.27). APPRAISAL OF THE

DEADSEA WORKS, LTD.

POTASHPROJECT (Israel)

TABLEOF CONTENTS Paragraphs

SUMMARYAND CONCLUSIONS...... i - xvi

I. INTRODUCTION...... 1 - 4

II. THE COMPANY...... 5 - 21 A. History . . *...... 5-10 B. Ownership ...... 11 - 12 C. Financial Record ...... 13 - 19 D. Management and Staff ...... 20 - 21

III. THEPROJECT ...... 22 -51 A. General ...... 22 - 24 B. Concession . . . . * . . . . 25-26 C. Features of the Project...... 27 - 39 1) Potash ...... 27 - 29 2) Bromine and Bromine Compounds . . . . 30 - 32 3) Dead Burned Magnesia ...... 33 4) Table Salt ...... 34 5) Other Construction ...... 35 6) General Services ...... 36 - 39 D. Labor ...... 40 - 41 E. Present Status of the Project ...... 42 - 44 F. ConstructionCost Estimates ...... 45 - 48 G. ConstructionSchedule ...... 49 - 50 H. Procurement. . . . . 51

IV. MARKETS AND IARKETING...... 52 -65 A. The Market for Potash ...... 52- 57 B. The Market for Bromine and Bromine Compounds 58 - 61 C. Table Salt ...... 62 D. Magnesite ...... G...... 63 E. Marketing ...... 64 - 65

V. FINANCING PLAN AND FINANCIAL PROSPECTS . . 66 - 89 A. General ...... 66-70 B. Proposed Capital Structure ...... 71 - 72 C. Organizationand Management ...... 73 D. Financing Plan ...... 74 - SO E. Financial Prospects ...... 81 - 89

VI. PROTECTIVEARRANGEIENTS ...... 90 -91

VII. CONCLUSION ...... 92 -93 TABLE OF CONTENTS (Cont'd.)

ANNEXES

1 Palestine Potash Limited (Profitand Loss Accounts)

2 The Market for Potash

3 The Dead Sea Works, Ltd. (IncomeForecasts)

4 The Dead Sea Works, Ltd. (Cash Flow Forecasts)

5 The Dead Sea Works, Ltd. (BalanceSheet Forecasts)

6 Assumptionsfor Financial Forecasts

Map 1 - ISRAEL

Map 2 - The Dead Sea Works, Ltd. - Present and ProspectiveLayout of Pan Area - ii - vii. The DSW proposes to build about 47 kms. of dikes to enclose 100 sq. kms. of sea area to be used as evaporatingpans. Productioncapacity would be increasedby about 400,000 tons per year. Later, and at a rela- tively small additional cost, another 300,000 tons annual capacity could be obtained, making the ultimate annual capacity of the works about 900,000 tons. In addition, it is proposed to expand bromine and ethylene dibromidecapacity from 2,900 and 1,500 tons to 10,000 and 6,000 tons respectivelyand to add facilitiesfor the productionof other bromine compounds,75,000 tons of dead-burnedmagnesia and 20,000 tons of table salt (paras.27-44). viii. The project is estimatedto cost $72 million equivalent,including start-up expenses,working capital, interest during constructionand other miscellaneousconstruction works. The plans for the project are technically sound and cost estimateshave been calculated on a conservativebasis. A market study indicates that the DSW should be able to market its products at a profit (paras.45-65). ix. Because of the magnitude of the project, the DSW cannot generate all the necessary funds and it has been apparent from the first that a finan- cial reorganizationwould be required to establish a financial structurewhich would permit the company to raise new equity and loan funds. A basic objec- tive has been to turn the company back to private control. During the past year discussionshave centered on how this objective could best oe accomplished (paras.66-67). x. In consideringthe conversionof the company'sdebt to the Govern- ment, the Governmenthas agreed that it would not hold more than 45% of the shares and that it would not have more than 35% of the voting rights. The Government also stated its policy to encourageprivate investment in industry. In order to facilitatethe raising of IL 27 million by a public share issue, it was agreed, on the advice of the underwriters,that the new shares should bear a fixed rate of interest during the constructionperiod. Within this framework it was then possible to work out a detailed plan for the recapi- talization of the company (paras.68-70). xi. Agreement has been reached among the interested parties on the details of the plan. The company has taken the necessary steps to amend its Articles of Associationand to carry out the other steps in the plan (paras. 71-73). xii. During the constructionperiod, the total financial requirements are estimatedat $79.3 million equivalent for the project, includingworking capital and interest during the constructionperiod, repayment of medium- term debt, replacementsand renewals of equipment in the present plant and interest payments on the new Ordinary Shares. It has been assumed that these requirementswould be met, in addition to company-generatedfunds of $21.1 million equivalent,by the sale of $15 million equivalentof Ordinary Shares5 long-term borrowings of $35 million equivalentand $8.2 million equivalent from other sources (paras.74-8O). - iii - xiii. On the basis of these and other assumptionsincluded in Annex 6, the long-term debt/equityratio would not rise above 54:46 in the last year of construction. The liquidityposition would be poor in the last two years of constructionbut should improverapidly thereafter. After capacity opera- tions are reached, expected in 1967, net income after taxes, should amount to 16% on the shareholders'average equity or 20% on share capital. These should increase to 19% and 32% respectivelyon the assumptionthat the ex- pansion to the 900,000 ton level is completed in 1969. Income before interest and taxes would amount to about 15% on the net investment in 1967 arid24% in 1970 (paras. 81-85). xiv. Total debt service coverage is adequate. After 1967 when capacity operations of the Project are expected,the DSW could maintain service on its total long-term debt if sales revenues were to decline by 28% or operating costs were to increase by 44% (paras. 86-89). xv. Contractual arrangements provide for a restriction on borrowings, a restriction on investments in other than the Project and the achievement and maintenance of a current ratio (paras. 90-91). xvi. The Project is soundly conceived technically and the market prospects are favorable. The management of the company is good. The profitability prospects are good after the completion of the Project and should be more favorable when the second stage expansion is completed. The financing plan, although it may be tight during the last two years, is, on the whole, satis- factory. Subject to the successful completion of the public share issue, the Project is a suitable basis for a Bank loan of $25 million equivalent for a term of 15 years, including a 5-year grace period. I. INTRODUCTION

1. Late in 1959 the Government of Israel asked the Bank to assist in financing development projects of high priority. The Bank agreed to consider this request and asked that details be submitted on a number of projects. After a preliminary examination of the data, it was decided that a project to expand potash production should be examined in more detail in Israel.

2. A mission made a detailed field study of the Dead Sea Works, Ltd. program for the expansion of potash production and other related products during March and April 1960. The mission concluded that the expansion pro- gram was sound but that the company could not carry out the work unless it could raise a substantial amount of new equity capital.

3. Throughout the remainder of 1960, and early 1961, discussions con- tinued with the company, the Government, and financial groups in order to arrive at a financing plan by which the company could undertake the expansion program. Such a plan has been developed and the expansion pr6gran can now be considered for a proposed loan from the Bank.

4. This report is based on the results of the field study and on in- formation submitted by the company and by the Government of Israel. The investment cost estimates and market prospects were checked for the Government by the firm of Arthur D. Little, Inc.

II. THE COMPANY

A. History

5. The Dead Sea Works Ltd. is the successor of Palestine Potash Company Ltd. formed in 1930. The late Mr. Moshe Novomeysky, the founder of the origi- nal company, began experiments in 1911 to determine whether the salts present in the Dead Sea, principally potassium chloride (potash) and bromine, could be recovered commercially. In 1920 Mr. Novomeysky applied for a concession but it was not until 1929, after long and difficult negotiations that he ob- tained the concession. The concession was transferred to the Palestine Potash Comparny Ltd. on January 1, 1930. Production of bromine started in 1931 and production of potash in 1932 at a plant constructed at the north end of the Dead Sea; in 1937, potash production was started at a second plant at the south end of the Sea. In 1947 total production of potash amounted to about 103,000 tons, of which about 58,000 tons were produced at the southern plant.

6. Although the complete records of the early years are not available, Palestine Potash had earnings from 1937 through 1947, the last year of opera- tiois, and made dividend payments on preference shares from 1938 through 1947 inc'Luding the payment of arrears in 1940 (see Annex 1). After 1943, the capital consisted of I,390,000 6% preference shares and fl610,000 ordinary shares. In 1946, the company paid its first dividend of 5% on the ordinary shares and in 1947 a 24% interim dividend on the ordinary shares. At the end of 1947 the company had an accumulated depreciation reserve of 3; 604,000 and net assets of I; 774,000. - 2-

7. Productionstopped with the onset of the war in 1948. At the end of the war, the northern plant in Jordan was destroyed. The southern plant, near Sdomn,in Israel,9was damaged and isolated since access to it had been by sea from the northern plant (see Map 1). In 1952, after the share- holders of Palestine Potash Company Ltd. had been unable to secure financing to r-esumeoperations, the Governmentof Israel made a settlementwith the shar-eholdersand took over the assets in Israel, forming the Dead Sea Works Ltd. (DSW). Palestine Potash Co. Ltd. received 1.22 million shares (If, 1.0 par value, Founders FIBI?) in the DSWplus I12 390,000 (If, 1.0 each) of 5%deben- tures due in Decem2ber 2002. The debentures were tied to the pound sterling. Palestine Potash Ltd. in turn distributedthe debenturesand 390,000 DSW shar-es to its shareholders.

8. ~Thefirst years of reconstructionwere difficult;large sums had to be expended for non-productivepurposes such as road construction,flood protection, power supply, fresh water wells and housing. Changes in the potash markcetrequired developm~entof a new refining process since the old plant coul-6 not produce a product of the desired quality. In addition, considerableeffort had to be expended in re-enteringthe internationalmarkets. Lack of coordina- tioniof the work hampered the reconstructionunti'l 1955, when a new General Manager was appointed. Since 1955, the capacity of the plant has been tripled.

9. Potash productionand sales have expanded rapidly since fiscal 1956/ 57, increasingfrom 41,000 tons in that year to 88,600 tons in 1957/58, 105,100 tons in 1958/59, 115,000 tons in 1959/60 and 136.,000tons in 1960/61.

10. Although.Palestine Potash had produced both potash and bromine, DSW set up a small wholly-ownedbromine subsidiarywhich, in 19159/60,had a pro- duction of bromine and bromine compounds equivalentto 2,050 tons of elemen- tal bromine and in 1960/61, an equivalentof 2,900 tons of elementalbromine.

B. Owesi

11. On March 31,,1961, DSW had outstanding3,660,001 shares of 1121.0 par-value stock, denominatedand held as follows:

Class Held bNI~umber Votel%

Fo-unders"Allf Governmentof Israel 1 51 Fo-unders"B" Palestine Potash Co. Ltd. 830,000 Individuals (PPL Shareholders) 390,000 1,220,000 16 Ordinary "All Solel Boneh 310,000 Governmentof Israel 300.000 610,0008-j

Ordinary "B"t Governmentof Israel 610,000 81 Ordlinary'IC" Governmentof Israel 610,000 OrdiinaryI'D" Governmentof Israel 61,0

3,660,00C1 So-LelBoneh is an Israeli constructioncompany. - 3 -

12. Each class of shares is entitled to the fixed percentageof the total votes, as shown above; within its class each share has one vote.

C. Financial Record

13. The DSW has been burdened with large investmentsin non-productive facilitieswhich were necessary for the company to start operations. Despite the progress in eliminating operating problems and increasing production, the earnings record is poor. The financialrequirements of the two companies have been met entirely from Government sources. With the present facilities, the prospects are that DSWwould be able to cover only a modest interest rate on the total debt to the Government.

14. Condensedcomparative DSW income statementssupplied by the company and balance sheets are shown below (It 1000):

Year ended March 31, 1959 1960 1961

Net Sales 6,975 6,997 7,689 Other Income 2L 114 833 2 Total 6,999 7,111 8,522

ManufacturingCost 3,741 3,853 3,558 General Expense 903 665 690 Depreciation 1,692 1,957 2,390

Operating Income 663 636 1,884

Interest: 5% Debentures(due 2002) 98 98 98 Government 123 - 1,050 Other 141 204 42

Net Income 301 334 309

1/ Representsamount transferredfrom ContingencyReserve. 2/ Interest on long-term Governmentloan for which DSW did not charge any interest in its income accounts in previous years. -4-

As at March 31, 1959 1960 1961

ASSETS

Current Assetsl/ 3,067 4,722 5,463 Stock of Stores, Spare Parts, Tools, etc. 1,255 1,477 1,772 Investment in Bromine Co. 550 550 550 Other Investments 245 299 346 Fixed Assets 32,086 39,437 2/ 45,033 Less: Depreciation 2,004 _63817 1 Net Fixed Assets 30,082 35,620 38,952 Development Expenses on Existing Plant 4,658 4,538 4,419 Intangibles _ 767 829 529 Total Assets LO2624 48,035 331

LIABILITIES

Current Liabilities 5,722 7,586 9,832 Medium-term Debt 1,500 404 1,375 Lonig-term Debt: 5% Debentures (due 2002) 390 1,966 1,966 Mortgages 71 57 112 Government 29,281 34,362 35,077 Reserves - - 309 Share Capital 3,660 3,660 3,660 Total Liabilities & Equity LOt624 48_035 5I L

71/Current Assets include the following amounts due from the DSB: 1959 - If 334,000; 1960 - If 844,046; and 1961 - IS 1,326,161. 2/ Includes a write-up of If 1,973,000 on 5% Debentures (due 2002) and loan from GovernmentForeign Loan Department.

15. In the period prior to March 31, 1958 the company capitalized If 4,777,000 of developmentexpenses which normally would have been charged to profits. During the same period the company charged less than IS 500,000 for depreciationbut charged to operationssome items for replacerentsand renewals which normally would be capitalized. In 1959/60 the DSIiwrote up the value of ite net fixed assets by IL 1,973,000 in connectionwith the wr.Ltingup of its 5% Debentures (due 2002) and loan fror the Foreign Loan Department. What the combined effect of these opposing factors may be makes it difficult to say whether the valuation of fixed assets, as shown on the most recent balance sheet, is realistic. In view of the size of the proposed Project, over-valuation,if any, will be rclativelyuninportant on completion of construction. 16. Manufacturingcosts in 1959/60and 1960/61have includedamounts which representpreliminary expenditures on the new expansionprogram and ordinarilywould be capitalized.Depreciation charges in theseyears are based on generallyaccepted rates.

17. The long-termdebt to the Governmentat March 31, 1961 includes:

a) From DevelopmentBudget IS 31,614,508 b) From ForeignLoan Department 3,819,521 c) Accruedinterest on (b) 605,923 d) CompanyRegistration Fees (Secured) 36,700

TotalIt 35.076,652

18. The brominesubsidiary is not included in the foregoingfigures. Condensedcomparative income statements and balancesheets for the Dead Sea BromineCo., Ltd. are shownbelow (IS '000):

Year endedMarch 31, 1959 1960 1961

Net Sales 1,318 1,532 2,637

ManufacturingCosts 1,272 1,377 1,899 GeneralExpenses 143 94 220 Depreciation - - 285 Interest: Government - / - / 144 Other 108 61 4

Net Income(Loss) (205) 8 85

1/ Due to the lack of earnings,depreciation and intereston Governmentdebt were not charged and interestwas not paid. -6-

As at March 31, 1959 1960 1961 ASSETS

CurrentAssets 1,041 870 1,137 Stores, Spare Parts, etc. - 653 1,164 Fixed Assets 3,298 3,559 4,398 Less: Depreciation - - 285 Net Fixed Assets 3,298 3,559 4,113 Intanigibles 313 772 868 TotalAssets A.652 5,860 7.282

LIABILITIES

CurrentLiabilities 1,419 2,335 2,815 Long-termDebt: Government 3,103 3,250 3,658 Other - - 448 Mortgages 16 12 12 Reserves (141) - - Capital(Paid in by DSW) 550 550 550 Surplus(Loss) (295) (287) (201)

Total Liabilitiesand Equity 4.652 5____ 7,282

19. The accountsare auditedby independentauditors, in accordancewith Israelilaw. D. Managementand Staff

20. The DSW was fortunatein being able to rehirea numberof key people who had been with the old PalestinePotash Company. However,the rapidpro- gress in increasingproduction during the last few years has been due largely to the organizationalabilities of the ManagingDirector, General M. Makleff, who was appointedin 1955, and to his successin buildingup an outstanding technicalstaff, both for operationsand research. Productionfacilities are now operatingsmoothly and it appearsthat the difficultrehabilitation period is over. The DSW has an aggressivesales policy. The presentsales manager was salesmanager for PalestinePotash Co. Ltd. and is well acquaintedwith the potashand brominemarkets.

21. The managementis capableand shouldbe able to supervisethe con- structionof the projectand operatethe expandedplant withoutdifficulty. Additionaltop technicalstaff have been added in preparationfor the project but the DSW intendsto add seniorstaff to assistwith long-rangefinancial planning. III. THE PROJECT

A. General

22. The purpose of the proposed project is to increase the production of potash and bromine from the Dead Sea brine and to add new facilities in order to recover as by-productsmagnesia and table salt from a portion of the spent brine. The Dead Sea covers an area of about 880 sq. kms. and is about 400 metres below sea level. The brine contains a number of salts:

Magnesium chloride - 130.0 gr. per litre Sodium chloride - 87.0 " ? it Calcium chloride - 37.0 " t' " Potassium chloride - 11.5 " " " M4agnesium 'oromide - " U" Calcium sulfate - 1.0 " " "

It has been estimated that the Dead Sea contains two billion tons of potassium chloride (potash).

23. The productionof potash is divided into two main stages:

a) concentrationof the brine in ponds by solar energy to precipitatefirst the sodium chloride and finally carnallite. The carnalliteis recovered by small suction dredgers and pumped to the refinery for final processing;

b) at the refinery, decomposition of the carnallite results in the co-precipitationof sodium chloride and potassium chloride. The mixture is being separatedby flotation in the present plant but another method, the hot leach and crystallizationprocess, is to be adopted for the project.

24. From the spent carnallite brines, DSW plans to recover increased amounts of bromine, to increase the production of bromine compounds and to initiate production of dead burned magnesia and table salt.

B. Concession

25. As noted in para. 5, Palestine Potash Company, Ltd. had a concession for the production of potash and other products from the Dead Sea. A royalty of about 5% of the fob plant sales prices were paid to the Palestineand Jordanian Governmentsuntil productionwas stopped by war. However, the DSW has been operatingwithout a concessionand to date has not made any royalty payments to the Government. - 8 -

26. In preparationfor financing the project, the DSW recently applied for a concession. The Dead Sca ConcossionLaw was approved by the Kr.esset on Hiay 31, 1961. The principal provisionsare:

i) the concession will run until 1999;

ii) royalties will be payablc on products made after April 1, 1964;

iii) royalty payments will be at the rate of 5% of the ex-works sales prices as defined in the concession.

C. Features of the Project

1) Potash

27. The most important and most costly part of the project concerns the expansion of potash production. The DSW has now used almost all of the landl area suitable for the construction of evaporating and crystallizing pans. Capacity cannot be increased beyond 190,000 tons annually without using the Dead Sea itself. It is now proposed to do this by building about 47 1ms. of dikes to enclose 100 sq. kms. of sea area for use as concentrating pans (see Map 2).

28. The project provides for an increase in production capacity of 400,000 tons annually. Technical considerations preclude expansion in smaller steps. The company must either embark on a project of more than twice the capacity of its present works or remain at its present size. Later, and at a relatively small additional cost, an additional 300,000 tons per year could be obtained, making the ultimate annual capacity of the works about 900,000 tons.

29. A new refinery, based on the hot leach and crystallizationmethod would be built for the project. The present refinery, using the flotation method, would continue to process carnallite from the existing pans.

2) Bromine and Bromine Compounds

30. The DSB, a wholly-ownedsubsidiary of DSW, now has an annual pro- duction capacity of about 4,500 tons of elementalbromine and 3,000 tons of ethylene dibromide. Production capacity was expanded from 2,900 tons of bromine and 1,500 tons ethylene dibromide during 1960/61. Capacity would be increased to 10,000 tons of bromine and 6,000 tons of ethylene dibromide annually.

31. A subsidiary company of DSB, Bromine Compounds Company Ltd. (BCC), has been established recently together with two well-known foreign companies, one British and one U.S., to produce various bromine compounds. The main products involved would be methyl bromide, (900 tons per annum) and ethyl-, butyl-, and propyl- bromides, ammonium-, sodium- and potassium-bromides and various bromates. Consumptionof bromine for these products is expected to be 2,000 tons by 1963/64. The new company is owned 50% by DSB and 25% by each of the other two partners. 32. Chlorine,which is necessary for the production of bromine, is now obtained from Haifa at a high cost because of the freight charges for shipping high-pressurecontainers. The productionof chlorine at the DSW is under study but this is not included in the project.

3) Dead Burned Magnesia

33. The DSW plans to install facilitiesfor the productionof 75,000 tons annually of dead burned magnesia (Magnesite). End brines from potash production containinga high percentageof magnesium chloride would be treated with lime to precipitatemagnesium hydroxide,which after filtering and washing would be calcined. Dolomite has been found within a few kilo- meters of the plant. Some further experimentalwork remains before a final decision is made to proceed with the constructionof the magnesite plant. However, for the purposes of this report, the magnesite facilitiesare in- cluded in the project and in the financialforecasts. For this portion of the project, a new subsidiary,Dead Sea Magnesite Co. (DSM) would be formed, in which two well-known U.S. companiesshare a half interest. Magnesite would be marketed to basic refractoryproducers by one of the partners and its European subsidiaries.

4) Table Salt

34. The DSW also plans to install facilitiesfor the production of 20,000 tons table salt annually. Salt of 99.5% purity can be produced by the!recrystallization of waste salt from the potash productionunit. The advantage of the process is that it does not require evaporationof the brine to induce crystallizationand the only fuel requirementis for drying of the final preduct.

5) Other Construction

35. In addition to the main part of the project, the DSW plans to com- plete a number of minor works. These items include completion of an evapora- ting pan to increase potash capacity from 165,000 to 190,000 tons annually, related expansionand improvementof plant installationsand pumping stations (If 6.8 million); drilling of additionalfresh water wells (It 2.2 million); a warehouse at Eilat (If 750,000);and an office building at Beersheba, laboratoriesand pilot plants (IL 1.25 million). Some of this work was started during 1960/61. The remainderwould be completed during 1961/62 andL1962/63.

6) General Services

36. Fuel requirementsuntil recentlywere met by imported oil, but a pipeline has been laid from the newly discoveredZohar gas field, about 30 kilometers from the plant. Gas will be used for all heating and drying pur- poses. In addition, it might be possible to convert the diesel stand-by power plant tooperateon gas.

37. Power is now supplied from the Israeli network by a line from Dimona designed to carry 4,000 KW, but which can be operated at an overload with higher line losses. The total operating load, after the completion of the proposed project, would be about 14,000 KW. The project would include the installation of a back-pressure turbo-generator for the production - 10 - of 10,000 KW of by-productpower, giving a total power supply of 14,000 KW. In order to supply peak loads and stand-by when the turbo-generatoris being serviced, an additionalline from the Israeli network will be required. The cost of this connectionis not included in the project on the expectation that it would be built as a part of the national grid. The existing 3,000 KW diesel stationwould be used as an emergencystand-by. The turbo-generator would also supply steam for bromine production.

38. Available sources of water will be sufficientfor the project. The DSW has drilled a number of wells which are adequate for present requirements. During the last year extensivedrilling has been successfullycarried out to provide a safety margin as well. In order to complete the system, further work will be carried out in 1961/62.

39. The finished potash and bromine is transportedfrom the plant by truck, under contract with a private firm, to the port of Eilat or the rail terminus at Beersheba. Products destined for Europe and Latin America are transshippedby rail from Beersheba to Haifa. Products going to the Far East and the east coast of Africa are shipped through Eilat which will presently be connected to Sdom by a new and shorter asphalted road now under construc- tion. The extension of the railway from Beersheba to Dimona and the increase in tonnage because of the project are expected to reduce domestic transport costs substantially. Improvementof port facilitiesat Eilat, in the near future, and at Ashdod in the more distant future, should allow further savings in unit handling and loading costs.

D. Labor

40. The DSW employs a total labor force of about 550, includingabout 400 skilled and unskilled laborers. The project will require the addition of about 300 workers. No difficultiesare expected in obtaining the necessary additionalpersonnel.

41. The labor force has a low turnover rate. This has not always been the case as labor turnover was a major problem in restartingthe plant. This problem was solved by developinga housing program for the workers at Dimona instead of at the Dead Sea. Although Dimona is about 40 kilometersfrom the plant and the DSW has to pay for transport,it is above sea level and climatic conditionsare more pleasant than those at the plant. The DSW enjoys good labor-management relationships.

E. Present Status of the Project

42. Preliminary designs and cost estimates for the dike system were pre- pared by ConstructionAggregates Corporation, Chicago. These estimateswere reviewed and modified to a minor extent by the Rijkswaterstaat(Government Water Authority) of Holland, by the RijksinstituutVoor Drinkwatervoorziening (GovernmentInstitute for Water Supply), and by the LaboratoriumVoor Grondmechanica(Delft Soil Mechanics Laboratory). The detailed design - 11 -

and specificationsof the dike systemare beingprepared by J. van Hasselten de KoningEngineering Co., Holland. This companyis also preparingall docu- men-tsnecessary for internationalbidding and would superviseconstruction. It is expectedthat bids for the dike systemwould be calledabout August 1961 in order that constructioncould start by the end of 1961.

43. Designsand cost estimatesfor the potashrefinery were prepared by -theStearns-Roger Corporation, Denver. This companyis now in the last stage of preparingthe detailedengineering estimates for this plant,which are expectedto be ready by mid June 1961. Stearns-Rogeralso will prepare the detaileddesigns and specificationsand will superviseconstruction. Designsand estimatesfor the by-productfacilities have been preparedby companyengineers with the assistanceof PfaudlerCo., Rochester,for the bromineexpansion, F. W. Berk & Co. for the bromidesproduction and of Harbison-Walker Refractories Company and Stearns-Roger for the magnesite project.

44. The arrangements for engineering and construction supervision are satisfactory.

F. Construction Cost Estimates

45. The estimated investment cost of the project is as follows (IfS '000 equivalent): Foreign Local Exchange Currency Total Potash: Pans 27,350 21,408 48,758 Refinery 16.370 10.919 27,289 Sub-total Potash 43,720 32,327 76,047

Table Salt 230 406 636 Bromineand Derivatives 2,240 1,690 3,930 Sub-total 46,190 34,423 80,613

Other Construction 5,500 5,500 11,000 SteLrt-up Expenses - 226 226 Working Capital 2,410 13,407 15,817 Int;erest during Construction 9,788 - 9,78 ,ub-total 63,888 53,556 117,444

Investment in B.C.C. - 540 540 Investmentin D.S.M. 7,110 4.590 11,700

Total 70,998 58,686 229%684

Total - $ '000Equivalent 39,443 32,603 72,046 - 12 -

46. The estimateof the civilworks for the evaporatingpans is based on extensivefield data and engineeringdesigns as statedabove. Detailedconstruction drawings are expectedto be readyby the beginning of July,1961. The estimatefor the refineryis based on U.S. prices cur- rent in Yarch, 1961. Stearns-Roger have designed several similar plants in the United States during the last few years. Purchase of the equipment in.Europe might reducethe refinerycost somewhat. Detaileddesigns for the bromineexpansion and salt plant are completed.Detailed designs for the magnesiteplant have not been startedalthough the presentesti- mates have been made on a soundbasis. The companyhas only recently completedbromine and ethylenedibromide facilities, thus the cost of these is known. All the estimates contain at least a 10% contingency allowance, some contain 15%--20%. The total. allowance should be adequate to coverphysical contingencies and reasonable increases in cost levels duringthe constructionperiod.

47. On the basis of the work completed,an amountof IL 129.7million (;,72.0million equivalent) is a realisticestimate of the cost of the pro- ject,including working capital and interestcapitalized during construction. 48. It is planned,in the future,to expandpotash production by an additional300,000 tons per year with an incrementalinvestment of $]33-$15 millionequivalent; a cost of about$50 per annualton compared to about 105 per annualton for the presentproject.

G. Construction Schedule

49. The construction time of the dikes and pans is estimated at 42 months; the refinery at 36 months. This schedule includes time for the importand assemblyof necessaryheavy constructionequipment for the dikes. The plant will be operatedbefore final completionof the dike system,to utilizeraw materialproduced at intermediatestages, duringthe constructionperiod. The DSW wishesto let contractsby November1961 to assurethat the pans will be ready for operationin April 1965, at the beginningof an evaporationseason.

5C). The bromineand ethylenedibromide plants are expectedto be completedby December1961, and the brominecompounds plant by April 1962. The magnesiteplant is expectedto be completedby October1963.

H. Procurement

5-L. The DSW intends to procure goods and services on an international competitive basis to the fullestpracticable extent. Invitationsto bid on certain chemical process equipmentmay be limited necessarilyto manufacturers w:Lthspecialized experience. - 13 -

IV. MARKETSAND MARKETING

A. The Market for Potash

52. Potash is one of the three major chemical fertilizer materials. Although it ranks behind phosphates and nitrogen in quantity consumed, its consumptionhas increasedmore rapidly than that of phosphatesand only a little less rapidly than that of nitrogen in the last 20 years. Sustained high crop yields require properly balanced applicationof all three ferti- lizer materials; increased consumptionof one has been accompaniedor followed by increased consumptionof the other two.

53. Consumptionof potash in countries outside the Soviet Bloc amounted to about 6 million tons K20 in 1958/59.1 On the basis of reasonably conser- vative assumptions,it is estimated that it could reach 8.7 million tons K20 by 1966/67 when the Dead Sea project is expected to be in full operation. This assumes a lower rate of growth than has occurred in recent years, except in India. The Third Five Year Plan calls for a very substantialincrease in fertilizer consumption,and although it seems unlikely that the targets will be reached, it is assumed that the planned levels will be approached.

54., Potash is produced in a small number of countries: in 1958/59 5.5 million tons K20 out of total world output estimatedat 8.3 million tons K20 were accounted for by West Germany, France, Spain and the United States and 2.6 million tons by the U.S.S.R. and East Germany. This has facilitateda tight control over marketing which has survived the disappearancein the second World War of an organized internationalsyndicate.

55. It is estimated that by 1966/67, production capacity in the coun- tries outside the Soviet Bloc could amount to 8.4-9.1 million tons K20. This takes account of additionsto capacity in Western Europe and the U.S. to 1960, and of the followingfurther additions: 600,000-1.2million tons K20 in Canada; two mines with a capacity of 600,000 tons K20 whose completionhas been long delayed by water problems are now expected to be completed by 1962. If it develops that the cost of sinking water-free shafts is not unreasonably higrhand demand justifies it, additional projects may bring Canadian produc- tion to the higher figure by 1966/67; 700,000 tons in the United States, from a new large mine being developed by Texas Gulf Sulphur at Moab, Utah and two smaller projects nearing completion. It is assumed that any further expansion would be balanced by cutbacks at Carlsbad where a reductionin production is needed to extend the useful life of the area; 200-300,000tons K20 in Sicil: from three projects being financed by the IBRD; 250-350,000tons K20 in West Ger t France and Spain; and 280,000 tons K20 in Israel. Because of the limited number of potash producers and their past record of concern for orderly marketing, expansions other than those already firmly planned seems unlikely, unless justified by demand. The assumptionof expansion in Western Europe, outside of Sicily, is not based on firm plans, but the Western

1/ In previous paragraphs,tonnage figures have referred to potash or potassium chloride. In this section, the data refers to K20 content. Potash materials vary in K20 content but DSW potash contains about 60-62% K20. - 14 -

European producers may make such modest expansionsas has been assumed to keep abreast of rising Western European demand. The Soviet Bloc has plans for a substantial increase in capacity but there is no way of appraising their realism. In any case, there is room for considerableexpansion of consumptionby the Soviet Bloc's lagging agriculture. It is assumed, there- fore, that Soviet Bloc exports to other countrieswill remain urchanged.

56. As a result of the large planned expansionin North America, its exportable surpluswill grow. Until now, U.S. exports have gone mainly to Canada, Latin America, Japan and other Far Eastern countries, South Africa and Oceania. It may be expected that U.S. exports to these markets will grow both as a result of growth in their demand and at the expense of the Western European exporters. Western Europe's exportable surplus will remain at best unchanged and the Western European producers will be able to continue exporting on the present scale only if Western Europe continues its present imports from the Soviet Bloc and, to a minor extent, Israel. Western European producers may choose to permit their exports to Latin America, Japan and other Far Eastern countries, South Africa and Oceania to decline in order to keep step with growing demand in their present profitablemarket on the east coast of the United States. Even in that case, there may be room for additional exports from Israel to Western Europe. Israel's exports to Italy, now its largest market in Western Europe, are likely to decline once Italian produc- tion is established,but Israel has also establishedmarkets in the United Kingdom, the Netherlandsand Sweden. In the growing markets of Asia, outside of the Far East, Africa, other than South Africa, it would have a decided freight advantage over the U.S. as well as Western Europe, which, in any case, would have only limited quantities for sale.

57. After declining from 1951 to 1959, the price of U.S. potash was increased by 3¢ per unit for the 1959/60 season (from 34.50 to 37.50 per unit of K20 for standard muriate in bulk at Carlsbad).1/ A further increase of 20 per unit K20 has been annQunced for the 1960/61 season by several leading producers, but it is not yet certain that this increase will become general. U.S. export prices firmed last year; the U.S. producersare reported to have asked for and obtained a price equivalent to the domestic price for the first time in several years. Although these price increaseswere attributableto the improvementin the market situation, it seems unlikely that prices will fall below the level reached prior to the recent increases. Real prices of U.S'.potash declined from 1951 to 1959 and even after the increase proposed for 1960/61 would be below the 1957 level. Even in Canada, the cost of bringing in new capacity could preclude any further decline. The DSW has based its forecastson a price of $33 per ton of fertilizer fob Israeli port for the next few years declining to $30 thereafter.The current price is above $33. The company's estimate is consistentwith the conclusionsof the Banik'sstudy and has been accepted as the basis for the financial forecasts. A more detailed analysis of the market and price prospects is contained in Annex 2.

/ One unit equals 1% of K20 contained in one ton of potash. One tor of potash with a K20 content of 60% contains 60 units. - 15 -

B. The Market for Bromine and Bromine Compounds

58. The DSB expects to produce 10,000 tons of bromine of which it plans to sell some 2,400 tons as elementalbromine for export, 2,000 tons to the BroraineCompounds Co. Ltd. and to use the balance to produce ethylene dlbro- mide. Proposed salesof eler-entalbromine are o4ly slightlygreater than pre- sent sales. At present the DSB supplies about 80% o-5the bromine imported into Europe and it should be able to retain this share. Western Germany and France are the only European producers exporting small quantities of bromine. The demand for Israeli bromine is very strong at present.

59. Of the productionof 6,000 tons of ethylene dibromide (EDB), all but about 200 tons annually would be exported. The DSB has long-term contracts with European consumers for the sale of the bulk of its output.

60. EDB is used mainly as a gasoline additive along with tetraethyllead. Although consumptionhas declined in the United States in the past few years, as Et result of changes in refining techniquesand the introductionof jet air- craft on a large scale, in Europe and Asia where DSB will be selling most of its output, the growth of demand for gasoline, coupled with an expected im- provrementin quality, should result in an increase in the now small EDB con- sumption. EDB is also used as a crop fumigant and insecticidealthough the toxicity of the residue limits its applicationon certain crops. In view of the relatively small tonnage of EDB to be produced, the DSB should be able to dispose of its output at a reasonable price.

61. In addition to EDB, the DSB expects to produce some 600 tons, of 1p 2, Dibromo-3 - Chloro Propane, a fumigant and insecticide which is less toxic than Methyl Bromide. Methyl Bromide to be produced by Bromine Compounds Co. Ltd. is a grain and soil fumigant and insecticidewith a low toxicity. Methyl Bromide has been particularlyeffective in the fumigationof tobacco seed beds and as a coffee insecticideand the DSB has been quite active in developing the African markets for the bromine compounds. The other bromine compounds to be produced are intended for use in the pharmaceutical, photo- graphical and textile and other industries.

C. Table Salt

62. The DSW expects to sell 20,000 tons of refined salt to the African market. This market is now supplied by high-cost imports or poor quality local production. The company has made an extensive study of the market for table salt and is consideringthe possibilityof setting up a packagingplant with local capital in West Africa.

D. Magnesite

63. Magnesia or syntheticmagnesite is widely used to make high tempera- ture refractoriesfor the metallurgicalindustries. The DSW has reached an agreement that the total production of the plant would be sold through S.A. Des Minerais, Luxembourg,a subsidiaryof the ContinentalOre Corporation, New York. - 16 -

E. Marketing

64. Aside from the long-term sales agreementsunder considerationfor EDB and magnesite, sales of potash, bromine and bromine compounds are made on an annual and, in some cases, a spot basis. The company has had no diffi- culty in selling all of the potash and bromine it has been able to produce. The company also offers technical services to its customers.

65. Lack of adequate supplies of potash has prevented the development of the Asian and African markets but as production increases the DSW will concentrateon the developmentof its natural market area in these locations. - 17 -

V. FINANCINGPLAN AND FINANCIAL PROSPECTS

A. General

66. The DSW is now operating smoothly and the expansionplans are sound, from both the technicaland marketaspects. However,because of the magnitude of the project,the DSW cannotgenerate all the necessaryfunds and it must look to outsidefinancial assistance. It has been apparentfrom the firstthat a financialreorganization of the DSW would be requiredto establisha financial structure which would permit the company to raise new equity and loan funds.

67. The Governmentof Israel,as the controllingshareholder with 79.8% of the voting power and holding over 98% of the long-termdebt, would be most affectedby any reorganization.Although the DSW has been able to operate without undue Government interference in operations, it neverthelesshad to be consideredas a Government-ownedorganization. A basic objectivehas been to turn the company back to privatecontrol and, duringthe past year, many of the discussionshave centeredon how this objectivecould best be accomplished. One particular problem, in order to prepare for raising new private equity funds,was the treatmentof the oustandingdebt to the Government.

68. The Government has agreed with the Bank that it would not hold more than 45% of the shares and that it would not have more than 35% of the voting rights. Government shares in excess of 35% of the total outstanding would be held by a Trustee and would have voting rights only when sold to private in- vestors. The Government has stated its policy to encourage private investment in industry. In line with this policy, the Government, in the future, could considerselling some of its sharesto privateinvestors.

69. One other major problem concerned the terms of the public share issue in Israel. The share issue of If, 27.0 million is large in relation to the Israeli market. Therefore, on the advice of the underwriters, it was agreed that the new shares should bear a fixed rate of interest (5%) duringthe con- structionperiod.

70. Within this framework it was then possible to work out a detailed plan for the recapitalization of the company.

B. Proposed Capital Structure 71. Agreement has been reached among the interested parties on the details of the plan and the company has taken necessary steps to amend its Articles of Association.The essentialfeatures of the plan are outlinedbelow: - 18 -

1) The Dead Sea Bromine Co. will remain a wholly-owned subsidiaryof DSW; 2) The BromineCompounds Company has been organizedand the Dead Sea MagnesiteCo. will be organizedin which the DSB and DSW will own 50<-of the share capitalrespectively; 3) The DSW is increasingits sharecapital from IL 3,660,001 to It 57.6 million,composed of It 30.6 million"A" shares and IS 27.0 millionOrdinary shares. All presentclasses of sharesare to be convertedto "A" shares;

4) The DSB debt of IL 3,641,096to the Governmenthas been transferredto the DSW. The combineddebt of the DSW and DSB to the Government of Israelamounted to IL 38,717,748 as at March 31, 1961. This is being converted into IL 26,939,999 of "A" shares and IS 11,777,749 of Junior Debentures(see tab'le on followingpage); 5) Non-governmentshareholders had certainpre-emptive rights. In order to obtainagreement to a publicissue, private holdersof Founders"B" and Ordinary"A" shareswere offered and have accepted to receive from the Government certain of its "A" shares and Junior Debentures obtained from the debt conversion above. Founders "B" shareholders will receive It 2.806 million "A" shares and It 610,000 Junior Debentures; Ordinary "A" shareholders It 344,000 of "A" shares and It 360,000 Junior Debentures. Total share holdings will increase from If 1.220 million to IL 4.026 million and from If 310,000 to It 654,000 for the Fcunders "B" and Ordinary "A" shareholders, respectively (see table on following page); 6) The IE 27.0 millionOrdinary shares are to be sold by a publicissue in Israelto yield not less than par to DSW. The issue is to be underwrittenby a consortiumof Israeli banks under the leadershipof Bank Leumi Le IsraelLtd. and is to be sold only to privateinvestors, including institu- tionalinvestors other than Governmentpension funds. In order to make possiblethe sale of such a large issuein Israelthe companywill pay 5% intereston the Ordinary sharesuntil the end of the constructionperiod but not later than March 31, 1965;

7) The paymentof interest at 5% and principalon the Junior Debentures is subordinate to existing secured loans and to the new foreign loans to be contractedfor the project. Redemptionof the debentureswould startSeptember 30, 1971 and would be in 10 equalannual instalments; - 19 -

8) Dividends on the "A" shares are to be paid out of earnings after March 31, 1961 and are limited to the extent that interest and dividends are paid on the Ordinary shares. To the extent dividends on the "A" shares are not paid during the construction period, they are cumulative. The accumulationis to be paid off after the construction period at a rate not to exceed 1% of the paid-up share capital or 10% of the accumulation,whichever would be the larger. Any remaining profits distributed would be paid equally on Ordinary and "Allshares. After the constructionperiod and after payment of any accumulation, the "A" shares will be converted into Ordinary shares.

72. On completionof the reorganizationand the new share issue, the Government of Israel will hold 45% (IL 25.92 million) of the share capital as shown below (see para. 11 for original structure):

Proposed Capital Structure (IS)

% Junior _Acquired from Held by Shares Shares Debentures

Debt Conversion Government 26,939,999 11,777,749

Less Transfers to: Palestine Potash Ltd. 1,909,000 415,000 PPL Shareholders 897,000 195,000 Solel Boneh 344,000 360,000 Net Government 23,789,999 10,807,749

Conversionof old Shares Government 2,130,001- - Total Government 25,920,000 45.0 10,807,749

Conversionof old shares Palestine Potash Ltd. 830,000 -

Transfers from Government Palestine Potash Ltd. 1,909,000 415,000

Conversionof old Shares PPL Shareholders 390,000 - TransfeXrs from Government PPL Shareholders 897,000 195,000 Total PPL and Shareholders 4,026,000 7.0 610,000

Conversionof old Shares Solel Boneh 310,000 Transfers from Government Solel Boneh 344,000 360,000 Total Solel Boneh 654,000 1.1 360,000 sub-t;otal 30,600,000 53.1 11,777.749

CirainaryShare Issue Public 27.000,000 46.9 - Total 57 600 000 100,0 11L77§49 - 20 -

C. Organizationand Management

73. The DSW will now have 15 directors,14 elected by the shareholders plus the General Manager. Five directorswould be appointed by the Government so long as it holds 35% of the shares. In the past the Chairman has been appointed by the Governmentbut) in the future, he would be elected by the Board of Directors. This change is not expected to bring about any change in the plant nanagenent (see para. 20).

D. Financing Plan

74. Financial projectionsare attached showing the expected incore of the company (Annex 3), the cash flow (Annex4) and the balance sheets (Annex 5) for the constructionperiod and the first five years of operations. The assumptionson which these forecasts are based are listed in Annex 6.

75. The estimated cost of the Project is IS 129.7 million ($72.0mil- lion equivalent) (see para. 45). This includes interest capitalizedduring the constructionperiod, working capital for the Project and existing opera- tions. During the constructionperiod, the DSW would also spend IL 2.0 mil- lion for equipment replacementand renewals and It 5.06 million for interest on the new Ordinary shares. At the beginning of the constructionperiod the company would also reduce its short and medium-termloans by If,5.9 million, most of which were contractedin 1960 to start construction on certain por- tions of the Project. Thus, for the constructionperiod, the total financial requirementswould be: $ '000 IS '000 Equivalent

Project 129,684 72,047 Replacementsand Renewals 2,000 1,111 Interest on Ordinary Shares 5,063 2,813 Amortizationof Mortgages 22 12 Reduction of Short and Medium-term Debt 5,900 3,278

Total 142,669 79,261

76. Against these requirements,it has been assumed the followingre- sources would be available during the constructionperiod: - 21 -

$ 1000 IL 1000 Equivalent

Internally GeneratedFundsa/ 38,026 21,125 Proceeds of Share Issue 27,000 15,000 IBRD Loan 45,000 25,000 Bank of America 18,000 10,000 Interest Income on Deposits 2,369 1,316 Interest and Repayment on Loan to DSM 1,492 829 Proceeds of Short and Medium-termLoansa/ 8,661 4,812 Proceeds of Long-term Loans from Government 2,160 1,200

Total 142,708 79,282

2/ Includes IL 2.675 million of depreciation for year ended March 31, 1961. 2/ Includes It 3.411 million borrowed in the year ended March 31, 1961 for use on project.

77. Partners in the Bromine Compounds Ltd. will supply 50% of the in- vestment requirements(IL 540,000) and partners in the Dead Sea Magnesite Company will supply 50% of the equity investment (IE 2.7 million). However, the operations of these companieswere not included in the forecasts excopt for the DSW's investment requirementsin the new companies and expected dividends from them.

78. Since the holders of the new Ordinary Shares are to receive interest during the constructionperiod, the DSW wishes to give the "A" shareholders equal treatment and to pay a 5% dividend if the earnings permit. Such divi- dends would amount to In 5.7 million for the construction period. Payment of this amount would not be possible under the financingplan above.

79. The Government has agreed to relend the interest received on its Junior Debentures with repayment to start in 1970. This is shown in the financing plan as proceeds of long-term loans from Government.

80. It is clear that the financingplan is tight. On the other hand, the constructionand operating cost estimates contain adequate contingency allowances and provision has been made for necessaryworking capital. The degree of tightnessis indicated in that short-term borrowingsmay increase by IE 5.25 million increasing total short-term debt to IE 8 rillion at the end of the construction period. There is no firm conritment for this increase but DSW has arrangementswith commercial banks under which it can borrow against export orders. - 22 -

E. Financial Prospects

81. Sales during the constructionperiod from the present plant have beenaassumed at prices somewhat below current prices. Sales from the new plant, and for total sales after 1966, have been assumed at prices about 13% below current prices. Productioncosts have been estimated conservatively, and contingencieshave been included to cover possible increasesin local costs. 82. On the basis of these and the other assumptionsincluded in Annex 6, the income forecasts indicate that the net income of the DSW should increase at a rapid rate as the new facilitiesare brought into production. Net income after taxes should increase from 10% of the shareholders'average equity on completionof constructionin 1965 to 16.0% in 1967 when the capacity opera- tions are expected to be reached, correspondingto 11% and 20% respectively on share capital. 83. On the assumptionthat expansion to a 900,000 ton level and provision of necessary additionalworking capital is financed wholly from retained earnings,and that the DSW would be able to produce and sell this amount in 1970, comparablefigures would be 19.1% (32% on share capital). 84. Income before interest and taxes would amount to 14.7% on the net investmentin 1967 and 24.3% in 1970. 85. During the last two years of constructionthe projected current ratios would be poor. However, improvementwould be rapid after completion of construction and the DSW should be able to virtually eliminate its short- term debt by 1967 and still pay a reasonable dividend (assumed at a rate of 8% for the purposes of the forecasts).

86. Interest coverage and debt service coverage are adequate. Both would improve substantially on completion of the expansion to the 900,000 torLlevel.

87. The long-term debt/equity ratio reaches a maximum of 54:46 at the end of constructionand improves to 46:54 by March 31, 1967 when the DSW7assumes it would begin the planned expansion which would increase potash capacity by an additional 300,000 tons per year at an estimated cost of IE 26.3 million. The cash flow indicates that the expansion could be financed in 1968 and 1969 entirely from self-generatedfunds if no dividends were paid on 1968 earnings. - 23 -

88. Depreciationcharges alone are more than sufficientto coveramor- tizationpayments on all long-termdebt. After 1967,whencapacity operations of the Project are expected to be reached, the DSWcould maintain service on its total long-term debt if sales revenues were to decline by 28% or operating costs were to increase by 44%. These "break-even points" should be even more favorable on completion of the expansion to the 900,000 ton level.

89. It will be noted in the incomeforecasts (Annex 3) that a consider- able portionof the total revenues would come from an exportpremium and it has been assumedthat the presentsystem would be continued. The question was consideredwhat the effecton the companywould be if at some futuretime these premiums were replaced with a uniform rate of exchange at a par value above the present rate. Indications are that the financial prospects of the company would not be affected unfavorably. - 24 -

VI. PROTECTIVEARRANGEMENTS

90. The contractualarrangements for the proposedBank loan contain provisions to the following effect:

a) Dividendswould be payable only from earnings accumulated afterMarch 31, 1961;

b) Duringthe constructionperiod, the companywould not incur,without the Bankts consent,any additional long- term debt. After the completionof constructionthe companycould contractadditional long-term debt so long as the amountof debt did not exceedequity (sharecapital plus surplus);

c) The companywould use its best effortsto achievea positionby March 31, 1968 wherebycurrent assets would exceedcurrent liabilities in a ratio of 1.25-1;

d) Pricr to the corploticn of the Project, the company would not make any investment for other than tho Project which would cost more than 5250,000 equivalent, except in accordance with a financial plan approved by the Bank.

91. These arrangements should be adequate to ensure that the company could meet its financial obligations without jeopardizing its liquidity or running short of working capital.

VII. CONTCLUSION

92. The DSWwould be embarking on a Project which is very large in re- lation to existingfacilities. However, the Projectis soundlyconceived technicallyand the marketprospects are favorable.The managementof the companyis good. On completionof constructionthe profitabilityprospects of the Projectare favorable.Profits should be furtherincreased when the secondstage expansionis completed.The financingplan, althoughit may be tightduring the last two years of constructionis, on the whole, satis- factory.

93. Subjectto the successfulcompletion of the publicshare issue, the Projectis a suitablebasis for a Bank loan of $25 millionequivalent for a term of 15 years, including 5-year grace period. The loan would be guaranteedby the State of Israel.

June 3, 1961. PALESTINE POTASHLINITED

Profit and Loss Accounts (E Sterling)

Production Profits Year ended metric Issued Gross Directors' Before Dividends December 31 tons Capital Income Interest Fees Depreciation Taxes Royalties Taxes Balance Gross

1937 ? 746,031 51,969 2,137 2,000 30,000 17,832 ? ? 17,832 7

1938 t 746,031 74,013 4,739 2,000 42,000 25,274 7 ? 25,274 20,707

1939 58,410 746,031 199,458 5,096 2,083 60,000 132,279 17,025 35,000 80,254 20,707

1940 7 745,961 291,999 4,686 4,500 60,000 222,813 27,039 180,000 15,774 66,730

1941 7 745,961 245,719 6,206 4,700 56,375 178,438 26,315 140,000 12,123 20,635

1942 7 745,961 294,401 10,237 4,700 56,370 / 223,094 34,778 177,000 11,316 20,635

1943 78,305 745,961 194,915 18,031 2,200 56,533 118,151 34,015 73,000 11,136 20,635

1944 87,341 1,000,000 170,363 21,363 2,200 55,000 91,270 37,163 30,000 24,107 23,400

1945 78,020 1,000,000 156,886 5,005 1,800 60,734 89,347 38,750 23,000 27,597 23,400

1946 75,476 1,000,000 163,049 ! 1,071 1,800 54,260 105,918 26,766 3,000 76,152 53,900

1947 102,635 1,000,000 415,101 3,224 - 147,281 s 264,596 55,964 72,000 136,632 38,650

a includes small amounts of capital expenditure written off

!/ includes L21,297 adjustment relating to previous years

£1 includes E75,461 for Deferred Repairs ANNEX 2 Page 1

Market Prospectsfor Dead Sea Potash

Introduction

The Dead Sea Works project has as its aim an increase in potash productionfrom 135,000 tons in the fiscal year 1960/61 to 590,000 tons in 1966/67 (in terms of K20, from about 80,000 tons to about 360,000 tons). Productionwould continue to be mainly for export. Western Europe is ex- pected to remain an important market, in spite of the expected large in- crease in potash productionin Italy, which is now the largest Western European purchaserof Israeli potash, but in addition, the Dead Sea Works expects to increase sales to Africa, Asia and Australasiaas consumption in these regions rises from present low levels.

The proposed increase in Dead Sea potash output (280,000tons K20) is roughly equal to the average annual increase in consumptionin countries outside the Soviet Bloc during the last half dozen years. Present capacity outside the Soviet Bloc is little in excess of present production, and expansion possibilities in Western Europe and in the Carlsbadarea of the U.S. which accounts for 90% of current U.S. production are limited. However, a substantialincrease in capacity is expected in the next few years in North kAerica, both in Canada where long delayed projects are ex- pected to come into productionand at a new large mine in Utah. The pros- pects of the potash industry and of the Dead Sea Works depend upon how the total increases in capacity--boththose firmly in prospect in Canada, the U.S., Italy and Israel and potential increases from older workings in the U.S., West Germany, France and Spain and in East Germany and the U.S.S.R.- will compare with increasesin demand over the next half dozen years. That question is explored below.

The Potash Market

Potash productionis concentratedin a very limited number of countries. In the fertilizer year 1958/59,when world production of fer- tilizer potash V/(includingestimates for the U.S.S.R. and East Germany) amounted to about 8.3 million tons K20, about 38% (3.15 million tons K20) was produced in West Germany and France, 25% (2.1 million tons K20) in the in the U.S. and an estimated 32% (2.7 million tons K20) in the U.S.S.R. and East Germany. Virtually all the remainderwas accountedfor by Spain and Israel. (See Table 1).

The Soviet Bloc and the rest of the world constitutetwo generally distinct markets. East Germany and the Soviet Union meet the requirements of the Soviet Bloc countries. The remaining producersmeet most of the requirementsof countriesoutside the Bloc. However, consumptionoutside the Soviet Bloc slightly exceeds production;in 1958/59, it amounted to 6 million tons K20 comparedwith a productionof 5.6 million tons K20. The shortfall is made good by exports from East Germany and the U.S.S.R.

l/ Complete data on potash production and consumptionare available only for fertilizerpotash. Chemical grade potash accounts for about 5% of total potash consumptionin the U.S. and somewhat smaller percentages elsewhere. ANNEX 2 Pae:e2

About 90% of the potash consumed by countriesoutside the Soviet Bloc is accounted for by Western Europe, the Urited States and Japan, which consumed respectively 53%, 32% and 7% of the total in 1958/59. Western Europe and the United States each had a net surplus of production over con- sumption of about 200,000 tons K20 in 1958/59, but exports from both regions to other regions considerablyexceed these net surpluses. (See Table 2)

Western European potash consumptionhas been increasingmore rapidly than productionsince 1954/55, and the net regional surplus declined from 525,000 tons K20 in that year to 240,000 tons K20 in 1958/59.]! In that same year, however, the Western European producers exported close to 600,000 tons K20. 2/ 3/ The differenceis largely accounted for by imports from East Germany and the U.S.S.R. and, to a minor extent, Israel. The Western European producers export potash to all parts of the world, in- cluding the U.S. (See Tables 3-5 and 7)

Since 1955/56, U.S. potash productionhas been equal to or in excess of consumption. However, because U.S. potash is produced in the west (over 90% near Carlsbad, New Mexico and the balance in Utah and California) the U.S. has always imported potash from Europe for use on the east coast, where European potash can be delivered at a lower price than U.S. potash. A quantity equal to the imports plus the net surplus, if any, is exported. The principal markets for the U.S. are Canada, Latin America and Japan, but U.S. potash is exported also to other Far Eastern countries, in particular Taiwan and the Philippines,the Union of South Africa and Oceania. (See Tables 6 and 7)

Israel exports the bulk of its output. In the last two years, its major market has been Western Europe, in particularItaly, the U.K. and the Netherlands,but it has also sold potash to Japan, other Far Eastern countries and Africa. (See Table 8)

Because the Soviet Bloc and countriesoutside the Bloc constitute distinct markets, and because data on productionand consumptionin Soviet Bloc countries are neither complete nor reliable, this study will concern itself primarilywith the market prospects in countries outside the Soviet Bloc. Account will be taken, however, of the potential contributions from East Germany and the U.S.S.R. to the supplies of the countriesoutside the B;loc.

]j The net surplus for the region rose to an estimated 310,000 tons K20 in 1959/60. / Exports to non-CEEC countries,as reported by OEEC. The export data given in Tables 3-8 refer to potash materials. Commercialpotash fer- tilizer materials have varying K20 contents. The average for all potash materials sold by European producers is probably around 55%, 'cr the U.S., it is probably around 60%. / OEEC's preliminaryestimate of exports to non-OEEC countries in 1959/60 was 760,000 tons K20. ANNEX2 Page 3

Growthof Potash Consumption

In the twenty years between 1938 and 1958/59, consumption of fertilizer potash in countries outside the Soviet Bloc has increased threefold, from two to six million tons K2 0. Consumption has risen sub- stantially in all regions, but patterns of growth have varied from country to country.

U.S. consumption increased more than fivefold over the period 1938 to 1958/59. The bulk of the increase occurred during the 1940's and early 1950's; from 1953/54 to 1957/58 there was very little increase in consumption. In 1958/59, however, growth was resumed, and censumption in- creased by 8% that year. Preliminary figures indicate that there was at least as great an increase in 1959/60. Western European consumption increased only a little over two- fold between 1938 and 1958/59, but the modesty of the increase is attri- butable to the war. Since 1947/48, when consumption regained the prewar level, growth has been steady and substantial. Although there has been some slowing up since 1953/54, the increase between that year and 1959/60 is equivalent to 5.5% per year on the average. In the last three years, the increase has amounted on the average to over 5% per year.

Japanese consumption increased fourfold in the period 1938-1958/59, with the bulk of the rise occurring in the early 1950's. Japan was slower than Western Europe to regain its prewar level of consumption of 140,000 tons K2 0, and consumption was below that level up to 1950/51. Between that year and 1955/56, however, consumption almost trebled, rising from 140,000 tons to 385,000 tons K20. Available data for consumption represent apparent rather than actual consumption (i.e. they do not take account of fluctuations in stocks) and they show wide fluctuations in the following years. The average for the three years (1956/57-1958/59) is a little over 400,000 tons K2 0, which would seem to indicate that growth has slowed down in recent years.

In all other regions outside the Soviet Bloc, the increase in consumption over the period 1938-1958/59 has approached the fivefold in- crease shown by the United States, but since 1953/54, growth in these regions has been much more rapid than in the three majorconsuming areas.

Rates of growth in consumption for countries or groups of coun- tries outside the Soviet Bloc since 1938 and for the shorter period since :L953/54 are given below. To minimize the influence of short-term fluctua- tions averages for 1952/53-1954/55 and for 1956/57-1958/59 are used instead of figures for 1953/54 and 1958/59. For countries other than the major consumers, the averages for 1956/57-1958/59 may understate actual consump- -tion in those years. Where reports are late in coming in, the FAQ follows the practice of assuming that consumption has remained at the level reached in the latest year for which data are available. Late reports are most common in the minor consuming countries, and since consumption in these countries has been rising rapidly, the FAQ assumption is likely to lead to understatements. (Further details are given in Table 9) ANI'-EX2 Page 4

Averaae Annual Increase Consumption, 1938 to Average Average Average Average 1952/53-1954/55 1952/53- 1956/57- 1956/57- to Average 1938 1954/55 1958/59 1958/59 1956/57-1958/59 - - -- '000 tons K20 ------Per Cent - - - - -

Western Europe 1,380 2,345 3,020 4.0 6.5 United States 360 1,640 1,800 8.3 2.3 Japan 112 300 400 6.5 7.4 Canada 21 74 79 6.8 1.6 Other America 11 80 140 13.6 15.6 Asia (excluding Japan) 27 58 108 7.2 16.8 Africa 20 47 73 6.7 11.3 Oceania 13 31 56 7.6 15.9

Total 1.945 4.580 _680 5.5 5.5

Consumption Prospects

Estimates are given below of probable rates of growth in potash consumptionin countriesor groups of countries over the period 1956/57- 1958/59 to 1966/67 when the Israeli project is expected to reach full pro- duction. The average for the three years 1956/57-1958/59was used as a basis foIr the projectioninstead of the single year 1958/59 in order to minimize the effect of short-termfluctuations. Since estimatesare already available for'1959/60 consumptionin Western Europe and the U.S., actual developments between 1956/57-1958/59and 1959/60 provide some check on the estimatesof growth rates for the longer period. In making the estimates,account was taken of the recent rates of growth shown above, of the adequacy of present levels of consumptionand of economic and social factors that may be expected to promote or inhibit growth. The following sections discuss the considera- tions underlying the estimates. Estimated Rates Average of Increase Estimated Consumption to 1966/67- Consumption 1956/57-1958/59 1966/67 1969/70 1966/67 1969/70 ('000 tons K20) (Per Cent) 1(000 tons K20)

Western Europe 3,020 4 3 4,300 4,700 United States 1,800 4.5 3 2,675 2,925 Japan 400 5 3 620 680 Canada 79 4.5 3 120 130 Other America 140 10 8 330 415 India 14 (33.5)/ (10)1/ 150 200 Other Asia 94 10 8 220 275 Africa 73 10 8 170 215 Oceania 56 10 8 130 165

Total 5,680 8 715 9 700

17 Based on estimates of consumptiondiscussed later. Note: Totals in this annex are rounded and contain productionfrom unlisted countries. ANNEX2 Page 5

Western Europe. The level of consumptionin Western Europe is relativelyhigh, but there is considerablevariation from country to country. At the end of the scale are Belgium, with a consumptionof close to 90 kgs. per ha. of agriculturalland, West Germany (73 kgs.), the Netherlands (66 kgs.) and Denmark (57 kgs.). At the other end are Ireland (12 kgs.), Italy (6.6 kgs.) and Spain, Portugal and Greece (2-3 kgs.). (See Table 10)

Increasesin the consumptionof countriesat the upper end of the scale in recent years have been modest, and little further increase is ex- pected in the next few years. However, there is considerableroom for growth in consiu-ptionin countriesnow cons-uming20-35 kgs. per ha. of agri- cu:Lturalland as well as in the countrieswith a very low level of consumption. Included among the countries consuming20-35 kgs. are the United Kingdom and France which accoiunted for 12% and 22% respectively of total Western European consumption in 1958/59. A substantial increase in their consumption would have a significant effect on consumption growth in the region as a whole.

Groeth prospects in the United Kingdom are good. Consumptionir the United Kingdom rose from 20.3 to 34.5 kgs. per ha. bet-ween1953/54 and 1959/60 or over 9% per year on the average. The rapid rise in use of fertilizers was part of the improvementin farming techniques,encouraged by government price supports. Use of fertilizerswas encouragedby subsidieson nitrogen and phosphates;increased use of one fertililzerminkes necessary increased use of the others to maintain soil balance? and is promoted in England by the fact that the comm.n practice is to apply m2wd fertilizer. No change in British agriculturalpolicies is in sigh1)-i,and fertilizer consumptionis generally expected to continue growing. A particularly promising field are England's grasslanids,where the use of fertllizersis just starting.

Potash consumptionin France is modest,(only23 kgs. per ha.) par- ticularly since France is a major potash producer, and consumptionincreased little from 1956/57 to 1959/60. This relativelylow consumptionis attri- butable to the fact that France's large area of agriculturalland and rela- tively low population density have provided little incentive for intensive farming. The situation seems ripe for a change, however. With France's current high rate of industrial growth, it may be expected that there will be a movement of the rural population to the cities, and a greater use by the reduced agriculturallabor force of all technicalaids, includingfer- tilizer, to meet the growing demands of an increasinglyprosperous population. If, as is also possible, the developmentof the Common Market results in an increased demand for French agricultural products in other Common Market countries,French consumptionof fertilizermight increase very rapidly in the next few years.

In the Western European countrieswhere consumptionis still modest-- Ireland and the Mediterraneancountries--consumption could obviously rise substantially,and may be expected to do so once the process starts. In at least two countries, that process appears to have begun. In Ireland, con- sumption rose from 8 to 12 kgs. per ha. of agriculturalland between 1953/54 and 1959/60; the plan of the government to expand agriculturalproduction should lead to further rapid growth. In Italv, where consumption has already risen from 3.5 kgs. in 1956/57 to 6.6 kgs. in 1959/60, the initiation of domestic production on a large scale should make for continued rapid growth. ANNEX 2 Page 6

It does not seem unreasonable,therefore, to assumethat Western Europeanconsumption of potashwill increaseby 4% per year over the pro- jectionperiod. This compareswith an increaseof 6.5% per year over the period1952/53-1954/55 to 1956/57-1958/59.In the first few years of the projectionperiod, consumption has risenby over 5% per year and forecasts by nationalexperts indicate an expectedincrease in WesternEuropean con- sumptionof another5% in 1960/61.1) For the remainderof the decade,it isEassumed that growthwill amountto only 3% per year.

UnitedStates consumption of potashis low comparedto that of WesternEurope (5.5kgs. per ha. of agriculturalland). However,the average is broughtdown by the inclusionin the land area of the largewheat growing area of the Great Plains,where littleor no fertilizeris used. In the regionswhere fertilizeris used, ratesof applicationare comparableto those in the U.K. In view of the many demonstrationsthat very much higher ratesof applicationwould be economicallyjustified, experts look for a rise irnconsumption. The resumptionof fairlyrapid growth after several years of unchangedconsumption suggest that this view is well founded.

The variations in the rate of growth in recent years make it par- ticularly difficult to estimate future prospects. The rapid growth in con- sumptionthat began in 1957/58has continuedand thereare no indications of a retreatto stagnation.Experts forecast future growth of 4-5% per year. An increaseat a rate of 4% per year from the estimatedlevel for 1959/60 (somethingover 2 milliontons K20) would,because of the rapidgrowth in the past two years,be equivalentto an increaseof 4.5% per year for the projectionperiod. It has been assumedtherefore that over the period 1956/57-1958/59to 1966/67U.S. potashconsumption will grow at a rate of 4.5% per year,declining thereafter to 3% per year. Japaneseconsumption of potashin 1958/59was equivalentto 72 kgs. per ha. of agriculturalland, a level exceededonly by Belgiumand Germany. However,the Japanese figures are not comparable to European or U.S. figures. In Japan,only croplandis classifiedas agriculturalland; thus,only one sixth of the total land area of Japan is consideredto be agriculturalland. In Belgiumand Germanyin contrast,over 55% of the total land area is classi- fied as agricultural land; 40% of the agricultural land in each of these countries is grassland.

Recent developments in Japanese agricultural practice make it seem likely that grasslands will be brought into the agricultural picture and open up a new market for potash. An FAO survey team which in 1960 studied the fertilizer situation in a number of Far Eastern countries attributed the slowing down of growth in Japanese consumption in recent years (which was noted above) to a shift to animal raising, as a result of which fertilizers

1 OEECChemical Products Committee, Report on Fertilizers, 1961 (First Revision December 20, 1960). ANNEX 2 Page 7 have lost ground to feeding stuffs in the farm expenditure pattern. The team noted, however, that "there is a growing awarenessof the possibility of includingfodder plants in the existing crop rotations. In the past, non-arable land has been treated as outside the farm industry. Livestock farming may open this land to modern farming techniques,including the appli- cation of fertilizers. The same applies to the cultivationof sugar beet (grown as a second crop after early paddy) which is being introducedin the crop rotation to an increasing extent." Y/

In response to the FAO team's request, Japanese Government experts and fertilizer interests estimatedthat potash consumptionwould grow by 3% per year between 1958/59 and 1963/64. Because of the fluctuationsin consumptionin recent years that would be equivalentto an increase of almost 4% per year from the projectionbase used in this study (the average for 1956/57-1958/59). For the reasons set forth above, the FAO team noted that this estimate might well prove conservative. Their reservationsseem cogent. The readiness of the Japanese to adopt modern methods in all fields and the Japanese farmers will, as the FAO experts suggestedthey might, begin fer- tilizing grasslands. It seems adequately conservative,therefore, to assume that Japanese consumptionwill increase by 5% per year to 1966/67 and by 3% per year to the end of the 1960's.

Canada. Canadian potash consumptionappears to have paralleled U.S. consumptionin recent years, showing very little increase from 1953/54 to 1957/58, but apparentlyrising rapidly since then. The FAO has not yet published data on Caradian potash consumptionafter 1957/58, but American Potash Institutedata on deliveries to Canada suggest that Canadian consump- tion may have increased even more sharply than U.S. consumptionin 1958/59 and 1959/60. If, as is expected, the large western Canadian potash mines overcome their difficultiesand come into productionin the next year or two, consumptionmay well be stimulatedand increase more rapidly than in the U.S. For the purposes of this study, however, it has been assumed more conservativelythat Canadian potash consumptionwill increase at the same rate as U.S. consumption--i.e.by 4.5% per year over the projectionperiod (1956/57-1958/59to 1966/67) and by 3% per year to the end of the decade.

Other Areas. Although the potential for an increase in potash consumptionin other areas is very great, growth is held back by the poverty of the farmers, their lack of krnowledgeabout modern techniques,inadequate transportationwhich limits access to markets and increases the cost of supplies brought into rural areas, inadequateforeign exchange. Despite these obstacles,there has been a very rapid growth in consumptionin recent years, and the growing concern of the countries likely to contributefunds for developmentand of internationalagencies over the position of the rural population in underdevelopedcountries should, if anything, speed progress. Although all these regions must import potash, the foreign exchange expen- diture is so small comparedwith the potential increase in crop output that shortages of foreign exchange are not likely to be a major obstacle.

FAQ, PreliminaryReport of the Survey of the FertilizerEconomy of the Asia and Far East Region, Rore, 1960, p.67. ANNEX2 Page 8

In Latin America, consumptionincreased by close to 16% per year over the period 1952/53-1954/55to 1956/57-1958/59. Awareness of the value of fertilizeris leading several countriesto undertake the productionof nitrogen. The resulting increase in nitrogen consumptionis bound to stimu- late increased use of other fertilizers. It has seemed adequatelyconserva- tive, therefore,to assume that consumptionof potash will increase by 10% per year to 1966/67, dropping to, say, 8% per year thereafter.

In Asia, the Indian Third Five Year Plan provides for a very sub- stantial increase in fertilizerconsumption by 1966/67, the close of the Plan period. No official target was included in the published Plan, but the target for potash is unofficiallyreported to be 200,000 tons K20; that would represent a tenfold increase compared with 1958/59. There is little question that the quantitiesit is proposed to consume, and even larger quantities,could be used to advantage. The ITdian Ministry of Food and Agriculturehas estimatedrequirements in 1966/67 as 250,000 tons K90; its estimates assume average rates of applicationto crops benefiting from potash. The FAO survey team referred to above considered the assumed rates of applicationconservative, noting that experimentshad indicated that applicationstwo or three times as high would yield economic returns, There is a question, however, whether the reported target can be reached. The FAO mission commentingon an estimate for 1963/64 submitted by the Indian Governmentwhich was in line with a 1966-67 target of 200,000 tons K20, said: "So far as can be ascertained,such growth rates have not been achieved elsewherein the world, even where domestic and foreign exchange conditionswere more favorablethan in India".

The Indian Government expects to make great efforts to increase fertilizerconsumption substantially in order to achieve the massive increase in crop output which it recognizesas essential. It has been highly success- ful in increasingnitrogen consumption (frca 142,000 tons N. in 1955/56 to 257,000 tons N. in 1958/59, and potash consumption,though still small, has growinfrom 6,700 tons K20 `n 1955/56 to 20,000tons K20 in 1958/59). The FAQ survey team was unwilling to pass judgment on the feasibilityof the target set for 1963/64, but it seems likely that although the target of 200,000 tons K20 may not be reached by 1966/67, it could be reached by 1969/70, and that by 1966/67, consumptionmight amount to say 150,000tons K2 0.

Consumptionof potash in Asia (outsideof Japan) rose by 17% per year between1952/53-1954/55 and 1956/57-1958/59. Estirnatss of consumption growth to 1963/64 for countriesaccounting for half the potash consumed in Asia (excludingJapan and Ind.a) given by the FAQ survey team which repre- sent revisions of estimates supplied by governments,to bring them to what the FAQ team considereda feasible level indicate that the team expected consumption in this group of countries to increase by about 10% per year over the period 1958/59-1963/64. This seems an adequately conservative estimate for the whole region for the longer period; it has therefore been assumed that consumptionin this region will increase by 10% per year to 1966/67 and by 8% per year thereafter. ANNEX2 Page 9

Africa. The bulk of Africatspotash consumption is accounted for by the Union of South Africa,Algeria and the Fsderationof Rhodesia and Nyasaland.Only MJoroccoand Mauritius,in addition,consume apprecia- ble quantities.Evcn in the countriesnamed above, consumption is modest and has been increasingrapidly in recentyears. Exceptfor political uncertainties,continued rapid growthwould seem probable. If political calm prevailsand the substantialforeign assistance that could be made availableis forthcoming,there couldbe a considerableexpansion of the area farmedby modernmethods and a more rapid increasein potashconsump- tion than in the recentpast (over11% per year between1952/53-1954/55 and 1956/57-1958/59).In the absenceof any basis for determiningwhat the politicalclimate will be, it has been assumedthat consumptionwill con- tinue to grow rapidly--by10% per year to 1966/67and 8% per year there- after.

Oceania. Australiaand New Zealandare primarilyconsumers of phosphateswhich are produceddomestically. In th.elact half dozen years, however,both countrieshave increasedtheir consumptionof potashrapidly. In New Zealand,virtually all of the potashis appliedto grasslands.In A.ustralia,the largestsingle use of potashis grasslandfertilization, but only 30% is accountedfor; the balanceis used for tobaccoand on inten- sivelyfarmed lands producing a wide varietyof crops. Experimentshave establishedthe value of potashfor pastureimprovement, and a continued rapid growthin its use for that purposeis generallyexpected. Consumption of potashfor otherAustralian crops is also expectedto continuegrowing. It io estimatedthat in the period1956/57-1958/59 to 1966/67,consumption will increaseat a rate of 10% per year (comparedwith 16% between1952/53- 1954/55 and 1956/57-1958/59)and that there will be an increaseof 8% per year thereafter. SupplyProspects

As Table 1 shows,potash production in countriesoutside the Soviet Bloc rose from about 5.2 milliontons K20 in both 1956/57and 1957/58to 5.65 milliontons K20 in 1958/59. In 1959/60, productionmay bave.risen by as guch as 500,000 tons K20--230,000tons K20 in WesternEurope, 260,000 tons K20 in the U.S. and 10,000tons K20 in Israel. Productionin WesternEurope (3.64million tons) was close to capacity,which is reportedto have amounted to 3.89 milliontons as of July 1, 1960. Data on U.S. capacityare not available,but the indicationsare that producerswere workingclose to capacity. Producers'stocks declined from 277,000tons K20 at the end of 1959 to less than 100,000tons K20 at the end of 1960, a bare minimumin view of the fact that these figuresinclude stocks of materialalready sold for springdelivery.

However, there are firm plans to increase capacity substantially, in Canada,the UnitedStates, Italy and Israelin the next few years. AIN,EX2 Page 10

Canada. The greatest potential source of additional potash pro- duction in the Free World today is Saskatchewan,Canada, where large deposits of high-gradepotash mineral were discoveredin the 1940's. Much of the area has been leased to producers,including leading U.S. and European pro- ducers and three propertiesare under development. Unfortunately,the de- posits are about 3,400 ft. deep, and a 200-ft. water bearing formationabout 1,800 ft. down has presenteda serious problem. Work on one of the projects (ContinentalPotash) was stopped at a relatively early stage in 1958; some ground stabilizationwork has been done since then but no completiondate has been announced. The Potash Co. of America completedits mine in late 1958 and produced small quantitiesof potash in 1959, but water seepage forced the mine to shut down in the fall of 1959 and the company has not yet succeeded in making its shaft water-free. InternationalMinerals and Chemical Corporationhas been making a similar effort at its mine, which was originally scheduledfor completionin early 1960. Neither company has yet armounced a completiondate, but it is generallybelieved that they will be successfuland that they should be producing potash by some time in 1962.

The Potash Co. of America plant would have a capacity of 360,000 tons K20. InternationalMinerals' plant would have a capacity at the outset of 250,000 tons K20, but is designed for expansionto twice that size. If the two companies succeed in solving their technicalproblems, Canada could have a capacity of 600,000 tons K20 by 1962 or 1963. This could be in- creased to 850,000 tons K20 within a few years by the expansion of the InternationalMinerals and Chemical Corporationplant and to say 1.1 million tons K20 by the completion of the ContinentalPotash plant. Further expan- sion is more problematical. The Pittsburgh Plate Glass Co. and Armour and Co. recently announced a plan to construct a pilot plant and drill test wells for solution mining of potash, to be followed, if the test proves successful,by the constructionof a large commercialplant. Its completion is, however, probably years away. The developmentof other properties also seems likely to wait since, as is indicated below, prospectiveexpansion in North America is likely to raise production considerablyabove North American consumption.

United States. The grade of Carlsbad ore has been declining steadily (from 20.5% K20 on the average in 1950-54 to 18.6% in 1959) and mining has been growing more difficult and costlier. It was for this reason that U.S. producers turned so eagerly to Saskatchewan. When U.S. consumption began to rise again in 1958/59 and the Canadian properties failed to come into operation, existing properties in the U.S. were expanded to permit pro- duction of an estimated2.38 million tons K20 in 1959/60 compared with 1.94 million tons K20 in 1956/57. In addition, in the fall of 1960, Texas Gulf Sulphur, a newcomer to potash production announced that it would begin dsevelopmentof a large recently delineated high-grade potash deposit at Moab, Utah. Planned capacity is 625,000 tons K20, and completion is sche- duled for 1962. AYNEX2 Page 11

Two other projects that may be regarded as firm would add about 100,000tons K20 to U.S. capacity. An expansionnow in progress at the Trona, California plant of the American Potash & Chemical Corporationwould add about 50,000 tons K20. A new shaft now being sunk at the Carlsbad pro- perty of Duval Sulphur mainly to provide easier access to the ore body would probably also result in a small increase in capacity.

Other prospectsare more problematical. The Farm Chemical Resources Development Corporation (owned jointly by the Farmers' Union and Kerr McGee) has done a little developmentwork on a property near Carlsbad for a plant which was tentatively planned to have a capacity of about 175,000 tons K20. Southwest Potash has begun building a potassium nitrate plant at Vicksburg whose completion may make necessary some expansion of its Carlsbad facili- ties. National Potash, which has been buying potash mineral from Southwest under a five-year contract may have to develop a reserve it bought in 1957 if Southwest can no longer provide it with potash when that contract expires, On the other hand, it has been believed for some years that as soon as additional supplies from other sources became available, the Carlsbad producers would take the opportunity to make a necessary cut in production to stretch the useful life of this area. It was estimatedabove that consumptionof potash in the U.S. and Ctnada might amount to 2.8 million tons K2 0 by 1966/67. Assuming that all the Canadian projects discussed above, the Texas Gulf Sulphur Moab plant and the twrominor U.S. projects now nearing completion come into productionbefore that date but that other expansions would be balanced by cut-backs, and making allowance for the fact that about 5% of the increasewould be used for chemical grade potash, capacity in the U.S. could rise to 4.1 million tons K20 by 1966/67 (2,365,000tons K20 in 1959/60 plus 95% of the prospec- tive additions of 1,875,000 tons K20). This would be considerablyin excess of prospectiveconsumption. About 1,260,000 tons K20 would come in by 1962 (the two first Canadian projects, Texas Gulf Sulphur'splant and the two minor U.S. projects). The additional Canadian projects would probably not be undertaken if the North American producers are not able to market their potash abroad.

Western Europe. The only firm projects to expand production in Western Europe are three projects in SicilZ, financed by the IBRD which would have a total capacity initially of 210,000 tons K20 and of 280,000 tons K20 b;ythe mid 1960's. If there were no other increase in capacity in Western Europe, its total capacity would amount to 4.16 million tons K20 (3.88mil- lion tons K20 as of July 1, 1960 plus 28O,000 tons K20 from Italy) and would fall short of projecteddemand of 4.3 million tons K20.

Expansion possibilitiesin West Germany and France are limited. Both present much the same picture as Carlsbad. Ore grade is declining. Modernizationis needed not only to maintain present production but to per- mit production of higher grade potash for which demand is increasing. Pro- duction at existing Spanish mines cannot be increased,but a new deposit has been lecated which could yield another 250,000 tons K20 if it were de- veloped. While it is altogetherpossible that the older European producers would not attempt to increase their capacity, but rely on larger imports AN'NEX2 Page 12 from Eastern Europe and Israel to enable them to continue supplyingtheir existing foreign markets, it seems more prudent to assume that they will increase their production by say 250-350,000tons K20. This would give them a net surplus position in 1966/67 of 100-200,000tons K20, compared with their net surplus in 1958/59 of 230,000 tons K20.

Israel. The Dead Sea project would, as noted above, increase Israeli production by 280,000 tons K20 to 360,000 tons K20.

Free World Demand/SupplyBalance

The figures given below compare the projected estimatesof world demand for fertilizer potash with the estimates of supply set forth above.

Estimated Estimated Production Consumption Capacity 1966/67 1969/70 1966/67 ('000 tons K20) (0000 tons K20)

Western Europe 4,300 4,700 4,400 - 4,500 UnitedStates 2,675 2,925 3,065 Japan 620 680 - Canada 120 130 570 - 1,185 OtherAmerica 330 415 India 150 200 - Other Asia 220 275 36 Africa 170 215 - Oceania 130 165 __-

Total 8,715 98705 8,395 - 9,110

/ This includes potash from Israel only. There is a possibility of producing potash in Jordan and the rehabilitationof a prewar plant at the north end of the Dead Sea has been studied, but no firm plans have been reported.

The figures given above suggest that there should be no serious imbalance between Free World demand for and supply of potash by 1966/67. Assuming a modest increase in Western European production capacity, in- creases in U.S. capacity from the completion of Texas Gulf Sulphur's project and the two minor projects now nearing completion,with any other increases offset by cutbacks at Carlsbad,and the completionof only the two Canadian projects expected within the near future, Free World supply would fall short of demand by 400,000 tons K20, or roughly the current amount of the short- fall now apparently covered by importo from the Soviet Bloc. As was stated above, any further expansion of Canadian capacity would probably not be undertaken until the North American producers had found it possible to expand their exports. ANNEX 2 Page 13

The characterof the potash industry increasesthe probability that balance will be preserved. Not only are the number of countries pro- ducing potash limited, but the number of producers is also limited, and the industry has always been tightly controlled. Before the first World War, productionwas concentratedin Germany, and sales were controlledby a cartel. The transfer of the Alsatian mines to France after the war ended the German monopoly, but by 1926, control had been reestablishedby an agreement between the French and German producers on the division of markets. The entrance of new producers broke their control temporarily,but after a few years of price competition,the Franco-Germansyndicate came to terms with the new producers- Spain, Poland, Palestine and even the U.S.S.R. Japan, which imported potash for resale to China, was brought into the agreement in 1937. Relationswith the U.S. industry, where production began during World War I and reached significantproportions in the late 1920's,were more complex, but by the early 1930's, American producers, too, had entered into agreementswith the cartel.

The internationalorganization of the industry was disruptedagain by the second World War, but the West German and French producerswho also control Spanish productionhave reestablishedtheir control over European supplies. An investigationof the British fertilizer industry by the Monopolies Commissionin 1959 found that the 80% of British potash supplies, all of which are imported, coming from the three Western European producers, are impwrted by a single firm, Potash Ltd. The Commissionconcluded that "the suppliers in the three countriesconcerned are the principal natural source of the potash required by the United Kingdom . . . . but the channel- ing of all their supplies through Potash, Ltd. is, of course, a result of concerted arrangementsbetween them".

The European producers have indicated a willingness to cooperate with the Italian and Israeli producers in promoting sales of potash and there is reason to believe that there are tacit understandingsto permit these new producers to enter markets. Particularlyin view of the fact that their expansionpossibilities are limited, they are more likely to aim at preserving an orderly market than to seek to expand production more than is justified by the growth in demand.

North American potash is produced by eight companies,six at Carlsbad,who produce over 90% ot the total U.S. output and two smaller producers in California and Utah. Texas Gulf Sulphur would become the ninth U.S. producer. The two Canadian projects that would come in first are pro- jects of Carlsbad companies. There is no price competition among the pro- ducers in the North American market--prices for the season are announced by one company and followed by the others. Prices of European potash are lower within an area of roughly 100 miles from the eastern aeaboard than the ex works price of U.S. potash plus freight, but neither has attempted to push the boundaries back by price competition. ANMEX2 Page 14

There is reportedto be pricecompetition between the European and U.S. producerson foreignmarkets, but competitionis describedas generally friendly. Competition for foreign markets is likely to be inten- sifiedwhen the two Canadianprojects and TexasGulf Sulphur'splant come into productionin 1962 or 1963,but this is more likelyto lead to restraint rather than to unrestrainedfurther expansion, for the American,like the WesternEuropean producers, have showna preferencefor orderlymarkets ratherthan for expansionunjustified by risingdemand.

The SovietBloc

What is the likelihoodthat SovietBloc exportswould alter this picture? Unfortunately,there is littlebasis for arrivingat a judgment. East Germany'splans call for an increasein productionto 202 milliontons K20 by 1965, comparedwith an estimated1.65 milliontons K20 in 1958/59. U.S.S.R.plans call for a treblingof production(estimated by the U.S. Bureauof Mines at 1.05 milliontons K20 in 1958/59). In both cases, the expansionsfar exceedgrowth in recentyears. Both countriespresumably have the potashresources to make theseplanned expansions possible, although bo-bh have been expandingproduction only by very modestamounts in recent years. A new Russianplant is reportedto be nearingcompletion, but the programas a whole is reportedlybehind schedule. Moreover, the extensive Russiandeposits near Soli Kamokare reportedto presentdifficulties because of swampyconditions. Even if they were able to achievea considerable(if less than planned)expansion there is considerableroom for an increasein consumptionin the SovietBloc's perenially disappointing agriculture. In the absenceof a reliablebasis for estimatinghow much potashcould be made arailableto the Free World by the SovietBloc, it does not seem unreasonable to assumethat the quantitywill changelittle. PotentialMarkets for IsraeliPotash

If Free World demandfor and supplyof potashdevelop as has been es-timated,the Dead Sea Works shouldhave no difficultyin disposingof their increasedoutput. Becauseof the world-widecharacter of the potashmarket, the requirementsof individualcountries can be met from severalsources, andlthe presentpattern of trademay be alteredto meet changedconditions. A reviewof the existingpattern may serve,however, to indicatehow Israeli potashcould fit into the world picture.

As has been notedabove, from 1954/55to 1958/59consumption in WesternEurope increased more rapidlythan production,and the net surplus for the regionfell from 540,000tons K20 to 240,000tons K20 (290,000tons K2() in 1959/60). However,at leastuntil 1958, the latestyear for which exportdata are availablefor all the WesternEuropean producers, exports to other continentsdeclined little after 1956. Therewas, however,a small increasein exportsto the U.S. and availabilitiesfor other marketsde- clined. ANNEX 2 Page 15

The decline in Western European availabilitiesfor non-European markets other than the U.S. was made good by the U.S. whose exports in- creased from about 100,000 tons a year in the five years 1950-54 to 460,000 tons in 1958 and 520,000 tons in 1959.1J The bulk of the increasewas accounted for by Japan, but there were also increases in sales to Brazil, tc,the Philippines and Taiwan, to the Union of South Africa and to Oceania.

U.S. exports are limited to Canada and South America, Japan and other Far Eastern countries, southern Africa and Oceania. Western Europe also supplies all these markets--itsshare equals that of the United States in Latin America and exceeds it in Japan and Oceania--andit is by far the dominant supplier of Africa and Asia outside of the Far East as well as in Western Europe. It clearly has a competitiveadvantage over the U.S. in the latter markets, and a strong competitiveposition in all other markets. Israel's freight advantage over Western Europe would give it an even stronger competitiveposition as compared with the U.S. in all markets except Latin America.

As a result of the great expansion of North American production capacity, the exportable surplus of North America would grow substantially. The U.S. may be expected to take a commanding position in Latin America and the Far East and to increase its penetrationof Africa and Oceania. The Dead Sea Works should be well able to compete, however, except in Latin Anerica and possibly Oceania.

Israeli sales to Western Europe may also grow. If Western European demand for and supply of potash develop as indicated, the net surplus for export outside the continentwill grow little, if at all. A reductionin exports to Latin America and a further reduction in exports to the Far East, including Japan, may not suffice to enable them to meet the growing demand in markets where they have a competitive advantage over the U.S., including the U.S. eastern seaboard. The maintenance of these established markets may depend on increased imports into Western Europe from Eastern Europe and Israel. Although exports from Israel to Italy, now its principalWestern European market, should decline once Italian production is established,the Dead Sea Works is also exporting to the U.K., the Netherlandsand Sweden. The United Kingdom may be expected to continue importingfrom Israel. Be- cause West German, French and Spanish potash coming into the United Kingdom is channeled through one company, potash consumersunwilling to depend upon Potash, Ltd. for their suppliesmust seek them from other sources.

Potash Prices

After declining steadily during the 1950's to 1959/60, the price of U.S. potash was increased for the 1960/61 season from 34.50 to 37.50 per unit K20. a! Several large producershave announced an increase to

/ It should be noted that the export data given in Tables 3-8 and referred to above relate to potash materials and not to their K20 content, and cover chemical as well as fertilizer grade potash. g/ Price during January-May (the main purchasing months of the year) for standard muriate in bulk at Carlsbad. Lower prices prevail in the off season, and prices ranged from 300 to 34.5¢ per unit K20 in 1959/60 and from 330 to 37.50 in 1960/61. ANIEX 2 Page 16

40 per unit K20 V for 1961/62. It is not yet certain that these in- creases will be adopted; if the rest of the trade does not follow, the companies that announced the increaseswill probably rescind them.

U.S. export prices are also believed to have grown firm. Export prices are negotiatedwith individualbuyers, but it is reported that for the first time in severalyears, U.S. exporterswere asking and obtaining domestic prices plus freight.

The strengtheningof prices is undoubtedlyattributable to the improvementin demand for potash. Nevertheless,it seems unlikely that prices will fall below the level reached before the recent increases. There is no indicationthat the cost of bringing in new capacity or pro- duction costs are declining. Indeed, the difficulty encounteredby the Canadian producershave shown that Canadian productionis likely to be costlier than was anticipated. Once the new North American capacity sche- duled for completion in 1962 comes in, there may be some weakening in prices, but, on the basis of their record, the North American producers seem more likely to build up stocks and cut back production than to imperil the price structure by pushing their exports too aggressively. Further expansion will probably wait on the growth of demand.

Although figures on the costs and profits of the European pro- ducers are not available, figures on British prices suggest that the Dead Sea Works should be easily able to compete at present prices. The study of the British potash industryby the Monopolies Commission,published July 1959, brought out that the price c.i.f. U.K. ports charged by Potash, Ltd., the leading importer of potash into Great Britain consistedof the following items: 1) the price paid to the supplier (f.o.b.or f.a.s.);2) freight, insurance,dock charges, etc*; and 3) Potash Ltd.'s margin (I4% of the c.i.f. selling price).

Figures submitted to the Monopolies Commissionby Potash, Ltd. showed that in January-April1958, its buying price was lower than the domestic price charged to the most favored buyers in France by $3.97 per ton and in West Germany by $3.70 per ton. Only in Spain which accounts for less than 10% of the total potash output of Western Europe did Potash, Ltd.'s buying price exceed the domestic price charged to the most favored buyer (by $1.40 per ton). Potash, Ltd.ts arrangementswith the suppliersensure that its buying price is as low as that of any other foreign purchaser of potash; the contracts specify that the suppliers shall not have sold potash salts for shipment during the relevant season to other European countries at prices below those mentioned in the contracts,and provide that if sales should take place at lower prices to other European countries, the prices to Potash, Ltd. would be reduced accordingly. Moreover, in order to compete with East German potash, Potash, Ltd. has been granting increasinglylarge rebates for quantity purchases.

/ The proposed increases amount to 2.5¢ per unit K20 only for purchases made in the main purchasingmonths. Only 2¢ per unit K20 increases were proposed for the other months of the year. ANNEX2 Page 17

Thus, British prices appear to have been as low in 1958/59 as the prices in any other Western European countries (allowingfor differencesin freight). In 1958/59, the Monopolies Commissionestimated that the British price of potash was about $42.25 per long ton.

Gross price of potash (60% K20) in bulk, c.i.f.ports of entry L47.74 Less seasonal reductions ($1.12-3.36per ton) Ave. 2.00 Quantity rebates ($2.10 per ton for 200-599 tons K20 to $5.88 per ton for 125,000 tons X20 and over) Est. 3.50

$42.24

Based on past experience,the charges for freight from Israel to Great Britain, insurance and unloading, etc., should not run over $10 per ton. On this basis, Dead Sea potash could have competed in British markets irn1958/59 (and since British prices are as low as prices in any other EuLropeancountry) if sold at around $30 per ton f.o.b. Current prices are, of course, higher. It seems unlikely that potash prices will fall below the 1958/59 level. TABLE 1

World Production of Commercial Potash Fertilizers (Thousand metric tons K201

19_V 1946147 19S0L51 19S2 1952L53 1953/54 1954/51sis7 19571/5 1 195759 52

Western Europe 1,438 1,449 1,5291/ France 582 596 912 867 898 952 1,137 1.188 1,307 1,624 1,708 1,8461/ Western Germany 7112_ 279 1,012 1,198 1,299 1,450 1,635 1,630 1,678 3 121! Italy - - 1 2 2 4 2 2 2 3 Spain 262! 165 ,2 166 210 39 25 262 2664 Total WT2 1.Z40 L2.100 2.270 2.370 230 3.000 3.100 8

North America 1,764 2,112 2,375k4 United States 288 813 1,188 1,251 1,483 1,600 1,652 1,699 1,943 Canada - - - - - ___ - 1,940_2LI Total 290 81, 1940 1 05- 1.0 20 20 South America 10/ 10 20 20 - - 20 20 20

Asia -.- l216/ Israel - _6 - __ 20 30 Total - _0 _41 _ 10

World (excluding Soviet Bloc) 1,650 1,906 3,300 3,500 3,900 4,200 4,700 4,850 5,250 5,200 5,605

Soviet Bloc 1,6501/ Eastern Ggrany 1,1501 4711/ 1,2001/ 1,40011 1,5009/ 1,5001 1,5002/ 1,5521! 1,556?1 1,6041/ 1,000 1,050 U.S.S.R. L I - 375 435 540 790 890 945

Source, FAO Production Yearbook, except where indicated.

Note: Totals from FAO Yearbook do not equal sum of reported production in listed countries because (1) they include small production in some unlisted countries, and (2) are rounded. 1 Data from OEEC - Chemical Products Committee - Report on the Fertilizer Situation 1959/60 (lst Revision) December 20, 1960. 2/ Unofficial estimate. j/ 1939 4/ EstimatesfromU.S. Bureau of Mines, Mineral Industry Surveys - U.S. Potash, July 1, 1959 - June 30, 1960. / Data are for Palestine. Estimatesfromdata supplied by Dead Sea Works for fiscal year April - March. / Estimates from U.S. Bureau of Mines, Minerals Yearbook refer to calendar years ending in the second year listed; i.e. figure entered for 1946/47 is for the calendar year 1947.

WI TABLE 2 World Consumption of Cou2 rcial Potash ertilizer (exclddi Soyiet Bloc)

Thousand etric tons K2 0 1938 1946/47 1950/51 1951/52 1952/53 1953/54 1954/55 1955/56 1956/57 1957/58 1958/59 !MZ6l Western Europe

Austria 10 9 27 39 28 37 50 44 69 77 82 84 Belgium - Luxembourg 61 74 102 148 137 149 140 154 163 150 158 156 Denmark 46 50 103 130 153 152 145 157 169 160 168 175 Finland 16 23 31 42 47 52 49 56 70 57 48 512 France 306 350 390 411 371 451 493 581 580 685 705 686 West Germany 604 3N0W 659 723 771 830 8592/ 847 879 986 1,004 1,046 Greece 4 3 10 4 3 6 4J 4 8 7 8 7 Iceland - - 1 1 1 1 2 3 2 2 2 2 Ireland 8 8&/ 21 20 24 37 38 38 48 52 53 56 Italy 18 9 19 26 35 38 47 57 60 69 79 112 Netherlands 120 68 155 160 158 162 146 165 152 151 146 153 Norvay 22 24 41 45 48 47 48 49 54 44 44 45 Portugal 1 5 5 6 3 7 72/ 10 10 10 10 10 Spain 28 16 35/- 55 47 75 69 82 85 90 90 78 Sweden 55 44 54 63 68 74 83 87 100 85 79 92 Switzerland 8 13 13 17 19 19 21 22 22 27 40 40 United Kingdom 75 122 230 172 235 256 259 312 343 354 382 432 Yugoslavia - _ 4 2 5 _19_ 14 23 2/0 67 101 2 2 2 Total 1,382 1,118 1,900 2.064 2,153 2.412 2.474 2,6 2.840 3,65 1. 5

U.S. and Canada

United States (including Puerto Rico and Hawaii) 357 780 1,311 1,434 1,578 1,661 1,691 1,701 1,758 1,756 1,892 Canada 21 47 57 66 71 77 75 106 75 77 85M' Total 827 1,368 1.500 9 1.7387 1,.833 12977

Other America Mexico and Central America 1 12 25 25 302/ 322/ 31 42 4622 52 532 Brazil (lo 7 12 142/ 16 24 41 41 59_/ 59- 59- Other South America 20 19 16 21 27 30 2/ 12/ 3 Total 11 26 57 58 62 77 99 113 136 143 143

Asia

Japan 113 55 93 140 210 325 372 386 450 321 435 India (27 (22 (27 (50 3 5 (68 7 8 13 20 Other Asia (7 SO 6 102 86 95 Total 140 77 120 190 260 440 460 S602 550

Africa

Algeria 11 n.a. 16 13 9 122/ 12 13-/ 20 22 n.a,2 Union of South Africa 3 3 8 8 9 12- 22 22 20 24 2 Other Africa 6 20 6 9 12 26 26 2S 20 34 n.a. Total 20 02 30 30 30 S 60 6 0 80 80

Oceania

Australia 6 6 8 10 9 13 16 23 22 31 28 New Zealand 7 3 7 12 11 20 25 21 18 4 Total 13 9 --- 15 22 20 31 41 44 40 -- 66 62

World (excluding Soviet Bloc) 1,944 2,080 3,490 3,864 4,174 4,690 4,880 5,175 5,469 5,597 5,977

Source: FAO Production Yearbook except where indicated.

]J Data from OEEC - Chemical Products Committee - Report on the Fertilizer Situation 1959/60 (First Revision) December 20, 1960. 2/ Estimates by FAO. 2! Estimates by IBRD.

-D 2

Ho>e V TABLE3 Cutiao etnto Exports of Potash Materials from West uera. Countries of Destination (Thousnd tric t_n)

1950 1951 1952 1953 1954 1955 1956 _58 19 59 North America

United States 76.3 !85.9 77.3 46.7 82.6 94.7 104.3 103.0 120.3 155.7 Canada 5.8 6.5 5.8 19.6 22.2 33.3 24.6 2o.4 19.6 21.6 Puerto Rico - - 10.6 2.7 2.1 2.0 1.2 0 21.1 Total 4 130.1T I34

Sooth America

Brazil - 11.1 1.7 7 23.5 141.1 30.3 25.2 26.1 15.4 Colombia - - - 1.5 9.1 4.5 3.0 - 0.5 - Dominican Republic - 1.S 1 3.0 5.0 6.3 Total - T.7=7 w 77 T

Austria - 10.8 35.2 43.9 38.2 30.0 26.6 31.4 40.0 Belgiu.Luxs%bourg 8.1 17.5 132.0 147.4 134.8 90.9 152.9 150.1 - 124.7 123.1 Demark 1.1 51.7 136.7 198.1 228.6 147.1 250.7 209.2 142.7 196.14 Greece 7.0 12.0 - - 3.0 2.0 7.3 10.7 2.6 5.0 Ireland 1.2 17.5 10.8 17.4 32.7 39.9 29.2 14.2 16.5 25.4 Italy 9.1 1.3.5 7.6 25.8 19.7 30.2 37.3 34.1 35.5 34.9 Netherland 0.3 6.6 191.9 196.9 214.5 152.5 194.6 167.2 170.7 153.6 Norwa - - - 19.4 4.0 6.o 5.2 2.5 8.5 2.8 Poland _ _ - - - - - 15.0 - - Swedmn 0.3 - 10.7 56.7 50.y 39.7 65.7 29.8 28.3 26.0 Switzerland 6.5 3.3 16.5 19.0 17.5 18.4 23.6 27.0 32.3 28.5 United Kingdom 96.2 103.5 114.8 235.8 175.7 199.9 222.0 147.9 189.4 209.2 Yugoslavia - - - 8.1 18.1 30.0 43.8 94.7 1.2 Total IW6 95 3.1 79. 1,66n 92. 7 xC

Asia

Cylon 2.6 4.3 0.8 0.9 3.1 6.2 12.1 8.9 10.3 12.6 India - 5.4 0.6 2.0 4.8 7.9 12.3 11.4 8.1 6.4 Indonesia 4.2 1.5 - 1.8 1.4 3.5 2.4 2.5 2.1 8.2 Japan 127.0 85.6 49.7 182.2 191.1 187.0 234.2 138.3 149.1 128.0 rorea, Republic of 2.4 - 6.5 - 8.5 15.1 6.o 3.8 7.2 n.a. Malaya - - - 1.0 1.9 3.8 1.7 5.1 5.5 8.2 Taiwan - 17.5 _ - 1.2 10.4 5.1 15.7 7.5 19.5 Turkey rTotal 13] ± 23;., 7 XB 7

Africa

Federation of Rhodesia and Nyaala ) 1.9 11.9 4.9 10.0 14.5 18.3 13.9 13.5 11.1 13.7 Union of South Africa ) * 24.3 25.5 13.2 17.8 18.8 Total I5;12; 0 ;;

Oceania

Anstrall - 2.2 5.6 9.5 8.4 19.9 16.6 21.3 27.4 New Zealand 2.7 1.8 15.0 6 1 13.1 18 25.8 Total - . M752 IN 9417

Other Countries 17.3 18.6 26.7 18.1 37.9 16.9 21.4 40.8 30.4 58.4 Grand Total 367.3 574.2 830.2 1,276.3 1,382.6 1,280.4 1,602.5 1,369.2 1,253.6 1,392.0

Source: U.S. Bureau of Hines, Mionrals yearbook. Cmpiled from Customs Returns of West GerRany. t/ 1950 snd 1951 include chloride and sulfate only. 1952 through 1959 include crude salts, chloride, sulfate, iagnesiug sulfate end beet ash. Ii ANNEX 2 Page 21

TABLE 4

Exportsof PotashMaterials!/ from France,by Countriesof Destination (Thousandmetric tons

195O 1951 1952 1S 195S 1956 1957 1958

North America United States 50.4 67.3 63.8 49.7 26.0 60.4 58.1 50.6 94.5 Canada 24.7 19.9 19.0 31.0 10.4 28.8 13.9 27.7 26.1 Cuba 9.4 5.6 8.2 - 2.9 - - 13.6 5.2 Martinique _ - 70 6.4 5.9 Total 84.5 92.9 91.0 80.7 39.3 89.2 79.1 98.2 131.7

South America Brazil 18.8 16.6 15.3 41.6 22.0 11.2 9.9 22.9 17.0 Colombia - 1 - 4.7 - - 6.4 2.5 TotaL 18.8 27.4 18.2 41.6 26.7 11.2 9.9 29.3 19.5

Europe Austria 16.7 16.9 13.0 6.o 7.9 11.6 27.3 26.6 31.5 Belgium-Luxembourg 152.9 96.0 168.3 131.0 149.2 115.6 159.4 169.4 194.3 Denmark 52.2 25.2 15.3 11.4 12.7 6.4 11.9 53.5 31.0 Finland - 8.9 9.2 3.3 3.9 7.1 6.1 3.2 6.6 Ireland - - 3.3 30.2 25.6 27.3 33.0 37.0 39.2 Italy 31.6 30.3 17.6 22.4 35.2 43.7 52.4 52.8 60.1 Netherlands 223.2 177.2 206.4 188.9 139.3 136.3 165.3 131.7 148.5 Norway 27.1 11.3 16.0 10.3 11.3 14.3 16.1 15.1 15.2 Sweden 44.9 19.7 24.2 69.2 13.6 34.2 37.6 45.2 30.3 Switzerland 28.0 27.1 25.2 29.4 30.7 36.9 39.5 49.4 57.2 United Kingdom 188.8 155.0 119.6 156.4 234.8 189.5 270.0 253.6 243.8 Yugoslavia 0.2 6.5 4.6 8.6 0.1 - 5.0 10.8 - Total 765.7 574.1 622.69 iT7F7: 66. 622.8 823.6 87458.0 857.7

Asia Ceylon 12.0 19.2 8.9 21.4 28.2 21.5 23.8 19.3 21.1 China (includingTaiwan) 6 0 9.1 29.6 28.8 8.22/ India 2:.4o/ _ 4.6 9.4 9. 9.4 11.5 5.5 Japan 78.2 45.4 54.5 141.2 162.2 144.6 220.3 127.7 169.8 Turkey - - _3 - - 10.8 0.6 - Total 98.6 77.8 3-4 1 217.0 185.0 293.9 187.8 204.6 Africa Algeria 19.9 22.9 14.8 15.6 19.1 14.9 15.2 16.6 20.5 Morocco,Southern Zone - 10.0 8.1 6.9 - 11.1 2.5 4.0 9.4 Rhodesiaand Nyasaland, Federation of - - - - 2.5 7.3 15.7 Union of South Africa - - 7.9 5.4 3.32 8.0 6.o 15.7 10.4 Total 19.9 32.9 30.8 27.9 22.4 33.8 2971 43.7 56.0 Oceania Australia ) 25.3 10.1 14.2 8.7 10.7 10.4 7.9 25.3 31.1 New Zealand ) 8.6 15.6 8.S 16. .1 15.3 20.3 Total 25.3 18.7 29.8 17.2 20.6 2.9 24.9 40. 51.4

Other Countries 64.1 54.2 34.5 41.1 59-5 59.2 62.2 84.1 64.5 GrandTotal l.076.8 877.9 890.4 1.042.8 1,049.9 1,028.1 1,319.8 1.331.8 1,385.4

Source: U.S. Bureau of Mines, MineralsYearbook. Compiledfrom CustomsReturns of France.

If Includessalts, carbonate,chloride and nitrateof potash. 2/ Plus Burma. 3/ Taiwan only. ANNEX2 Page 22

TABLE5

Exports of Potash Materials from Spain, by Countriesof Destination (thousand metric tons)

1950 1951 1952 15 1 1956 1957 1958

North America

United States 29.4 80.1 39.5 36.6 17.9 24.2 16.4 52.6 27.2

Europe

Belgium-Luxembourg 44.2 43.6 49.4 67.8 52.7 34.2 57.7 48.6 34.2 Ireland 5.0 4.9 5.0 4.8 - 4.1 0.9 1.2 0.6 Italy - 13.6 9.4 13.2 13.6 16.9 17.6 20.1 18.4 Netherlands 5.4 3.8 9.1 8.3 19.9 14.9 11.5 23.3 13.7 Norway 10.4 12.1 8.3 7.3 21.0 23.2 36.8 53.9 54.9 Portugal 8.0 10.0 7.9 6.4 7.9 9.4 16.0 17.9 13.0 United Kingdom 57.L.4 36 42.5 54.2 22.3 28.5 L. 66.3 52.8

Total 130.4 123.4 131.8 162.0 137.4 131.3 184.8 231.4 187.6

Asia

Japan 18.3 39.2 19.3 50.1 89.2 81.1 54.2 37.4 40.0

Others 9.1 7.3 25.9 2.4 - 5.0 - 7.3 9.8

Grand Total 187.1 250.0 216.4 251.0 244.5 241.6 255.4 328.7 264.7

Source: U.S. Bureau of Mines, iffnerals Yearbook. Compiledfrom CustomsReturn of Spain. ANNEX2 Page 23 TABLE 6

Exports of Potash Materials from the United States. by Countries of Destination (Thousand metric tons)

195-0 19S-1 22 2 25 2 19_S6 197 95 Y9 NorthAmerica Canada 63.0 72.3 72.0 66.o 70.5 78.0 90.1 83.7 88.8 73.2 Cube 15.4 9.0 10.5 8.4 7.6 19.1 23.8 18.5 16.9 8.9 Mexico 4.7 3.5 2.4 2.2 4.4 7.2 7.9 10.0 14.3 15.4 OtherNorth America 3-4 I.L 0.9 0.3 1.5 1.3 2i6 2.9 .L 2.0 Total 86.5 86.2 84.9 76.8 84.0 105.7 124.3 115.1 123.4 99.5 South America Brasil 14.1 17.6 3.9 o.6 16.0 24.6 20.7 17.0 51.9 52.9 OtherSouth America _1_2 3.2 o,8 0.9 1.L 6.L 2.8 7.0 1.1 2.L Total 1 7 .4 20.8 £4.7 1.6 17.4 29.1 23.5 24.0 53.0 55.3 Europe 0.6 3.4 0.8 0.1 3.4 1.2 o.6 0.7 4.3 12.7 Asia Japan - - - - 54.6 177.6 257.9 218.2 248.9 Korea,Republic of - - - - - 0.1 6.0 6.o 0.3 2.1 Philippines 1.0 0.9 0.8 1.4 1.6 0.1 2.4 2.4 13.1 7.5 Taiwan 0.1 - - - - - 12.5 - 18.7 25.3 Other Asia 0.5 0.5 _0. 0.1 0.1 0.1 0.7 0.1 0.1 0.1 Total 1.6 1.4 0.9 1.5 1.7 54.9 199,2 266.5 250.3 283.9 Africa Union of South Africa - 0.3 0.1 - - 0.1 - - 16.2 23.0 OtherAfrica 0.1 Total - 0.3 0.1 - - 0.1 - - 16.3 28.3

Oceania _ 0.2 - - - 17.1 12.8 17.8 12.5 38.8

GrandTotal 106.3 112.7 91.5 80.0 106.5 208.0 360.7 424.1 459.6 518.6

Sourcei U.S. Bureauof Mines,Minerals Yearbook Compiledfrom Customs Returns, published by U.S. Bureauof the Census. ANNEX2 Page 24

TABLE 7

Exports of Potash Materials from Western Europe and the United States (Bulk weight in thousandtons)

1 9 55 1 9 5 6 1 9 5 7 1 9 5 8 Western Western Western Western Markets Europe U.S.A. Europe U.S.A. Europe U.S.A. Europe U.S.A.

Western Europe 1,549 1 2,071 1 2,008 1 1,830 4

No.& So.America U.S. 179 - 178 - 207 - 241 - Canada 62 78 39 90 48 84 46 89 Othars 60 57 55 53 83 55 72 88 Total 301 135 272 148 338 139 359 177 Asia Japan 413 55 508 178 303 258 359 218 Other 87 - 127 22 107 8 76 32 Total 500 55 635 200 410 266 435 250

Africa 77 - 65 - 71 - 85 16

Oceania 42 17 50 13 71 18 91 12

Others 81 - 83 132 _ 104 _ Grand Total 2.550 208 3.177 II6 3.030 424 2.904 460

Notet Exports from Western Europe represent sum of exports from Germany, France and Spain. ANNEX2 Page 25

TABLE 8

Exports of Potash Materials from Israel (Thousand Metric Tons)

1958/59 1959/60 Western Europe

Belgium 2.0 4.3 Italy 30.4 39.9 Netherlands 7.6 15.7 Norway 1.0 - Sweden 0.6 6.9 Switzerland 1.0 4.2 United Kingdom 13.3 13.0

Total 55.9 84.0

South America 4.5 0.3

Asia

Ceylon 3.2 Japan 17.1 11.3 Taiwan 10.2 - Philippines - 1.5

Total 30.5 12.8

Africa 1.1 4.3

Australia

Grand Total 92.0 101.4

Source: Data submitted by Dead Sea Works, Ltd. ANNEX2 Page 26

TABLE9

Changes in World ConsUmption of Potash, by Regions

Average Annual Increases 1952/53- Consumption 1938 1954/55 Average Average to Average to Average 1952/53- 1956/57- 1956/57- 1956/57- 1938 1954255_ 1958/59 1958/59 1958/59 (Thousandmetric tons K20) (Per cent) Western Europe Austria 10 38 76 10.7 19.9 Belgium-Luxembourg 61 142 157 4.9 2.5 Denmark 46 150 166 6.7 2.5 Finland 16 49 58 6.8 4.3 Franoe 306 438 657 3.9 10.7 West Germany 604 820 956 2.3 3.9 Greece 4 5 8 3.5 12.5 Iceland - 1 2 - 19.9 Ireland 8 33 51 9.7 11.5 Italy 18 40 69 6.9 14.6 Netherlands 120 155 150 1.11 Norway 22 48 47 3.9 - Portugal 1 6 10 12.2 13.6 Spain 28 64 88 5.9 8.3 Sweden 55 75 88 2.4 4.1 Switzerland 8 20 30 6.8 10.7 United Kingdom 75 250 360 8.2 9.5 Yugoslavia 13 48 - 38.5 Total 1,382 2,346 3,020 4.0 6.5

United Statesand Canada United States (including Puerto Rico and Hawaii) 357 1,643 1,802 8.4 2.3 Canada 21 74 79 6.8 1.6 Total 378 1,718 1,881 8.3 2.3

Other America Mexico and CentralAmerica 1 31 51 21.3 13.3 Brazil ) 10 27 59 15.8 21.5 Other South America ) 21 31 10.2 Total 11 79 141 13.6 15.6

Asia Japan 113 302 402 6.5 7.4 India ) 27 ) 58 14 ) 7.2 )16.8 Other Asia ) ) 949.1 Tcotal 140 360 510 6.7 9.1

Africa Algeria 11 11 n.a. - - Union of South Africa 3 14 24 11.0 14.4 Other Africa 6 Li n.a. - - Total 20 47 73 6.7 11.3

Oceania Australia 6 13 27 7.8 20.0 New Zealand 7 19 29 7. 11.1 Total 13 31 56 7.6 15.9

Grand Total 1,.944 4,581 5,6l 5.5 5.5 Table 10 Consumption of Potash Fertilizers l/ in Kg. per Ha. of Agricultural Land -

1953/54 1954/55 1955/56 1956/57 1957/58 1958/59 1959/60

Austria 12.8 17.6 15.2 24.0 26.8 28.5 29.6 Belgium 82.0 77.9 85.9 92.0 83.7 88.6 85.9 Denmark 51.6 47.5 51.5 55.2 52.3 55.0 57.1 France 16.6 18.0 20.2 20.1 23.0 23.7 22.9 Germany 58.2 60.2 59.3 61.6 69.3 70.6 73.0 Greece 1.0 1.2 1.1 2.1 2.0 2.3 2.0 Iceland 25.0 29.7 28.1 28.8 31.9 33.3 28.2 Ireland 7.8 8.1 8.0 10.0 11.0 11.0 11.9 Italy 2.2 2.7 3.4 3.5 4.1 4.7 6.6 Luxembourg 36.9 33.3 38.6 36.4 40.0 42.8 44.9 Netherlands 69.9 63.0 71.7 65.7 65.7 63.4 66.1 Norway 47.4 47.0 48.1 53.9 43.2 42.9 44.5 Portugal 1.3 1.4 1.7 1.9 1.9 2.2 2.2 Spain n.a. 3.0 3.3 3.9 4.1 4.3 3.5 Sweden 19.3 21.9 22.6 26.1 22.5 21.6 24.2 Switzerland 16.0 17.6 18.5 18.5 22.7 33.7 33.7 United Kingdom 20.3 20.4 24.7 27.3 28.2 30.0 34.5 Average OEEC 18.3 18.6 19.6 20.6 19.6 20.1 20.9 United States 4.7 5.0 Japan 71.6

1/ Crop land, temporary grasslandand permanent grassland, excluding rough grazings.

Source: OEEC - Fertilizers Production, Consumption, Prices and Trade in Europe and U.S.A., 1957-60;Statistical Annexes Reprint, 1956-61, FAD, Production Yearbook, 1959 (for Japan). THE DEADSEA WORKS,LTD.

Income Forecasts (I '000)

Year ending March 31, 196_1 1962 1963 1964 1965 1966 1967 1968 1ig9 1970

Sales F.O.B. after Selling Commission 8,119 15,592 20,585 21,285 29,385 37,485 41,345 41,345 41,345 57,545 Export Premium 2,207 4,239 5,443 5,543 8,177 10,811 12,355 12,355 12,355 17,875 Other Income 833 - 176 876 1,385 1 414 1,41 1,414 1 414 Total Revenues 11,159 19,831 26,028 27,004 38,438 49,681 55,11 55,114 55,114

Manufacturing Cost 3,597 8,945 12,109 12,409 15,316 15,316 15,316 15,316 15,316 18,320 General Expenses 910 2,000 2,251 2,251 2,881 3,511 3,511 3,511 3,511 4,456 Transport Expense 1,860 2,358 3,427 3,436 4,536 6.111 5,904 5,904 5,904 8,415 Royalties - - - - 1,408 1,858 2,140 2,140 2,140 3,088 Depreciation 2,675 300 3.360 3360 5 770 8,379 8,379 8,379 8,379 9.703 Total Operating Expenses 9,042 16,303 21,1476 29,911 35,175 35,250 35,250 35,250 43,982

Income before Interest and Income Taxes i 3,528 5,548 8,527 2,ll7 14,506 19,864 19,864 19,864 32,852

Interest and Commitment Fees: 5% Debentures (due 2002) 98 98 98 98 98 98 98 98 98 98 Bank of America Loan - 360 1,080 1,080 1,080 1,026 810 594 378 162 IBRD Loan - 450 1,236 1,914 2,588 2,588 2,542 2,354 2,155 1,944 Mortgages 5 4 4 4 3 3 3 2 2 2 Short and Medium-term Loans 426 700 268 688 793 577 204 50 50 50 Junior Debentures - 589 589 589 589 589 589 589 589 589 Government (at 5 3/4% after 1961) 1,194 - - 93 124 124 124 124 124 124 Ordinary Shares - 1,013 _1,3 1,350 1,35 0 --- Total Interest Costs 1,723 3,214 4,625 5,816 6,625 5,005 4,370 3,811 2,396 Less: Interest Capitalized during Construction - 810 2,316 2.9 3,668 - Interest Charged to Income 1,723 2,404 2,309 2,822 2,957 5,005 47° 3,811 3,396 2,969

Taxable Income 1, 394 2 2,572 2,726 5,570 9,501 15,494 16,468 29,883 Corporate Income Tax - - - 108 2,660 4,338 4,495 4,611 11,409

Income after Taxes 394 1,124 2,572 2,726 5,462 6,841 11,156 11,558 11,85? 18,474 Plus: Interest Payment from Dead Sea Magnesite Co. - - - 468 540 497 434 369 300 227 Interest Received on Dead Sea Works Cash Balances - 749 1,237 383 137 - -

Net Income 394 1,124 3,321 4,431 6.385 7,475 11,590 11,927 12,157 18,701

Net Income after Taxes plus Interest Charged to Income 2,117 3,528 5,630 7,253 9,342 - - - Interest Coverage excluding Interest Capitalized 1.2 1.5 2.4 2.6 3.2 - - - -

Net Income after Taxes plus Total Interest 2,117 4,338 7,946 10,247 13,010 12,480 15,960 15,738 15,553 21,670 Interest Coverage including Interest Capitalized 1.2 1.3 1.7 1.8 2.0 2.5 3.7 4.1 4.6 7.3

Net Income after Taxes plus Interesti/ and Depreciation 4,792 7,338 11,306 13,607 18,780 2C,859 24,339 24,117 23,932 31,373 Debt Service 1/ 2,329 5,042 4,631 5,821 6,631 8,610 9,566 10,735 10,515 10,292 Debt Service Coverage/ 2.1 1.5 2.4 2.3 2.8 2.4 2.5 2.2 2.3 3.0

Including interest capitalized during construction. i Includes IE 833,000 transferred from reserves. ME MA SEAwA)BX. LTD. Cashnbw Forecats

C*Mtroction Tear Ending NArch31, 1 -19s6215 19661 1 1 12k2

not Icow before Interest and Yhooe Taxs 1,264 3,528 4,86 5,548 8,52? 22,484 14,506 19,86 19,864 19,864 32,852 laterest received fom Doad Sea Magnesite Co, _ - _ 46B 54 1,008 497 434 369 300 227 naterest roeived on Deposits 749 1,237 383 2 369 137 - Depreciation 2,6,75 3;000 3,360 3,360 5,770 18,16 S,379 8,379 6,)79 8,37g 9,703 Proceeda of Short-tern Loan - * 4,20 1050 I4,7 - Proceeds of .edfu-ter% a 1,Sl9 - - _-__ Procod of -teg rm 14as 16 covornt ;t 2,078 __ 1,620 4 21 IOR _ 91WO 9,000 13,500 13o50° 45,000- Bank of America - 18,000 - 18,000 Increase in 3hare Capital 2?,000 2-7,000 _ _ _ _ Repayment of Loan by Dead Sa Ragswsite W. 484 _44 1.011 1.- _ 3 4 _601281 Total Sourees 12,314 60,528 17,990 29*933 30,794 145,331 24,530 29,751 29,751 29,751 44,063

Plied Asse - Project 2,21Z 11,222 21,1?6 z8,856 17,14? 80,613 . _ 10,90? 10,90? Fixed Assts - Anilliary and Other 3,786 4,814 2,400 - . 11,000- - - Fixed Assets - Unrelated to Pro3et 487 - _ _ letames t in B tromiCoepowids, Ltd. 540 - westtent in Dead Sea M&7nesiteCO, 88 578 8,622 2,412 _ 11A7001 Rhnnig1-in Expenses _ 226 - - 226 quipeent enevis - 500 5°0 500 500 2,00 500 500 500 500 1,000 lncrease in Inyantorlee ) 1,263 -_ 1,280 1120 3,663 - . 1,800 - Increase in Required Cash and Reconlables 1,310 3.605 6?3 2,260 5,616 12,134 6,32 1,625 49 2,749 (3,111) Interest nd Comitment Jeeat 5 Debentures due 2002 96 9S ga 98 98 392 98 98 98 g8 98 lRD Loan 169 899 1,575 2,251 4,894 2,588 2,588 2,449 2,256 2,051 Bank of America loan - 90 1.080 1,080 1,080 3,330 1,080 864 6b 432 216 l*rtfac - '4 4 4 3 15 3 3 2 2 2 M and Short-term Lean 425 700 268 688 793 2,449 5?7 204 50 50 50 JunlorDebtntures 589 589 589 589 2,356 589 589 589 589 589 Ooveritunt. 1,194 - - 93 124 217 124 124 124 124 124 Ordinary Shares - - 1,013 1,350 1,350 3,713 1,350 _ - - Asorisations IND Loan -190 , 3,319 3,513 3,718 san of America Loan _ - 3,600 3,600 3,600 3,600 3,600 6 5 6 5 6 22 5 6 5 £ 5 Conrneent 9009 - - - - .. - - rAeuction of bediua-tern Debt 600 1,823 _ - 1,823 iRction of Current Liabilities 1,206 4,077 - - 4,07? 4,300 3,127 - - InROMeTUAS 108 108 2,660 4,338 4,495 4,611 11,409 Arrearson "A' Stares - - 574 574 55? 574 574 Dvidenis on Or4nary Shames 2,160 2,160 _ 4,320 Divideoe on 'Al Shares - 2,448 2.448 - __ &6 Total Application. 12,314 30,33 37,328 40,790 30,768 145,292 24,569 24,438 32,017 31,811 29,541

Cash Scrpiue for Year 30,225 (19,338) (10,857) 9 (39) 5,313 (2,266) (z,060) 14,522 Cah Surplus 4t 8eginmng of Year - 30,2Z5 10,867 30 39 - 5,313 3,047 987 Cash Surplus at End of Yaar - 30,225 10,887 30 39 - 5,313 3,047 987 15,509

.TV !~ea amountsin 1961. tJ lInludes It 1,892,00 borrowed in 1961. f Except in 1961, all loans from Govermentame relending of interest received oa Junior Debentures. THE DEADSEA WORKS.LTD.

Balar.ce5he-t Forecast-

As at March 31, 1961 1962 1963 1964 1965 1966 1967 1968 1969 1972

ASSETS

Cash and Marketable Securities 253) 6,499 7,172 9,432 15,048 21,569 23,194 23,243 25,992 22,881 AccountsReceivable 2,641) Inventories 1,807 3,070 3,070 4,350 5,470 5,470 5,470 5,470 7,270 7,270 Prepayments, deposits and sundries S7_ 573 573 553S71 573 573 __32573573 TatalCurrent Assets 5,274 10,142 10,815 14,355 21,091 27,612 29,237 29,286 333,835

Additional Assets _ 30,225 10,887 30 39 - 5,313 3,047 987 15,509

Stores, Spare Parts, Tools, etc. 2,936 2,936 2,936 2,936 2,936 2,936 2,936 2,936 2,936 2,936 Investment in Subsidiaries - 1,118 9,740 12,152 11,668 10,657 9,583 8,444 7,236 5,955 Other Investments 346 346 346 346 346 346 346 346 346 346

Gross Fined Assets 47,458 65,230 91,4226 123,772 145,087 145,587 146,087 1 5 7 ,494 168,901 169,901 Less; Reserve for Depreciation 6,366 66 12,72 16 086 215 38 614 46 5,372 65,079 Net Fixed Assets 41,02 5 5,64 7,69 2 107,473 110,501 113,529 104,826

Adjustment Re ulting from Write-ap of Certain Loans 1,973 1,973 1,973 1,973 1,973 1,973 1,973 1,973 1,973 1,973 Intangibles / 1,697 1,697 1,697 1,697 1,697 1,697 1,697 1,697 1,697 1,697 Development Expenses on Present Plant 4,419 4,419 4,419 4,419 4,419 4,419 4,419 4,419 4,419 4,419

Total Assets 57.73? 1 121.509 145,594 167.400 164,992 162,977 162,649 166,958 160,389

LIA&ILITThS

Short-term bank loar - Bank Le-.i and other 6,754 2,677 2,677 6,877 7,92? 3,627 500 50i 500 500 Banh overdrafts lt3 1h5 lt 168 168 168 168 168 168 168 Accounts Payable 4,D1P 4,007 4,037 4,087 4,087 4,087 4,087 4,087 4,087 4,o87 Accrued Interest - 551 8&- 1,227 1,564 1,510 1,410 1,261 1,156 945 Current Portion of Lon-t-erm L-ht 6 6 3,605 5,196 6,924 7,119 7,323 4,478 Other 3iZ 312 312 112 312 312 312 312 312 312 Acoraed Dividends; Nev Shares _ 1,013 1,350 1,350 1,350 2,160 2,160 2,160 4,320 2,160 Government - 972 2,268 3,564 4,860 6,447 5,961 5,475 7,062 4,503 16 410 644 878 1,16S 1,077 989 1126 el Others .7,71 _ Total Current Liabilities l1,32 9,1 9,96~~~~~~-Y212,165 3 24,75 24, 22,599 22,071 26,154 Median-tern Debt 1,823 ------Long-term Debt: 5% Debentures (due 2002) 1,966 1,966 1,966 1,966 1,966 1,966 1,966 1,966 1,966 1,966 Sank of America Loan - 18,002 18,000 18,000 18,000 14,400 10,800 7,200 3,600 - IBRD Loan - 9,000 18,000 31,500 45,000 45,000 43,410 40,091 36,578 32,860 Mortgages 124 119 113 108 102 97 91 86 80 75 Junior Debentures- 11,778 11,778 11,778 11,778 / 11,778 11,778 11,778 11,778 11,778 Government 38.735 2 17 17 1 637 3,227 __1.227 3 227 1 22Z 3,227 3,227 Total Long-term Debt 40,825 40,880 49,874 64,989 60,073 76,468 71,272 ,4,348 57,229 49,906 Less: Amount due aithin one year 5 6 S 6 3,605 5.i96 6924 7.119 7,023 4,478 40,820 48 4d,89 , 76,468 71,272 64,8 57,229 49,906 45,428

Reserves 309 309 309 309 309 309 309 309 309 309 Share Capital: Ordinary - 27,000 27,000 27,000 27,000 27,000 27,000 27,000 27,000 27,000 -Ae 3 660 30 600 30 600 30,600 30,600 30,600 30,600 30,600 30,600 30,600 Surplus N201) ?225) 1,566 4,467 8,272 11,139 18,121 25,440 32,989 47,082

Total Liabilities and D1.ity 57,737 108,520 121,509 145,594 167,400 164,992 162,977 162,649 166,958 168.922

Ratios: Current A-set/C-urre,t Lcbiiltis -/ C.-7:1 4.05:1 1.78:1 0.79:1 0.85:1 1.12:1 1.29:1 1.33:1 1.29:1 1.71:1 Onbt/Eq0ity 92; 42:58 4t:54 51:49 54:46 51:49 4c:54 41:59 36:64 30:70

1/ Including Tocc-ltati-c an- rioer -oce-rg in Old. rojoot. 2/ Represents debt to iovrcvnmt lior t, ror- ioatOoc. 7' Includes Ir ,05: .i1(.hi,h hih pi-i e-rs 0 . -r =-t

ASSUMPTIONSFOR FINANCIAL FORECASIS

1. The DSWwould be able to borrow IL 63,000,000 of long-term funds (a) If, 45,000,000 from the Bank for 15 years from October 1, 1961 including a grace period of 5 years at an interest rate of 5 3/4%, with a commitment fee of 3/4 of 1%. Debt service is based on even semi-annual instalments due April 1, and October 1. The first repayment would be October 1, 1966. The initial interest payments are based on the following assumed disbursement schedule: January 1, 1962 - IL 9,000,000; April 1, 1962 - If 9,000,000; April 1, 1963 - IS 13,500,000; and 1964 - IS 13,500,000; (b) It 18,000,000 from the Bank of America for 8 years from January l, 1962 including a grace period of 4 years, at an interest rate of 6%, with a commitment fee of It 90,000 payable January 1, 1962. Amortization of capital is based on equal annual instalments of IL 3,600,000 due December 31. The first repay- ment would be December 31, 1965. The initial interest payment is based on an assumed disbursement of IL 18,000,000 on January 1, 1962.

2. The reorganization described in para. 21 is assumed to have been effective as of April 1, 1961.

3. The export premium shown in the financial forecasts have been cal- cuLated on the assumption that foreign exchange costs as a percentage of total revenues would be the same percentage assumed by DSW.

4. It has been assumed that dividends on the "A" Shares would be de- clared if earned but not paid during the construction period, and arrears would be paid off subsequent to the construction period according to the pro- visions of the Articles of Association. It is probable that such dividends wi;ll be paid but the Government has agreed to relend any such dividends with interest at the IBRD rate and repayment in five annual installments starting in 1970.

5. No provision has been made in any of the forecasts for writing off the Development Expenses on the Present Plant on the March 31, 1961 balance sheet, as it was not known how this would be settled but a total write-off is desirable as soon as profits permit.

6. Running-in expenses for table salt and part of the bromine and bromine derivatives would be capitalized. In the potash project production waEs taken in gradually increasing quantities instead. The production of bromine and bromine derivatives also was increased gradually.

7. DSWcost estimates for the existing potash plant are based on a production forecast and budget of 165,000 metric tons for the fiscal year 1962. As from 1963 forecasts were based on a production of 190,000 tons p.a. , and all variable costs have been increased proportionately. ANNEX6 Page 2

8. The estimatesof potash production by the new project facilities for the years ending March 31, 1965, 1966, 1967 are 150,000; 300,000 and 400,000 tons respectively(37.5%, 75.0% and 100% of new capacity). MAanu- facturing costs and general expensesfor the latter two years were taken at the same cost. Royaltieswere calculatedon all products on the basis of 5% of the adjusted (as defined in the concession)ex-works price. As agreed with the Government,royalties will be charged as from the year 1965.

9. Depreciationallowances calculated by DSW are based on generally accepted rates. The overall rate amounts to about 7.7% annually.

10. Transport expenses for potash and magnesia have been assumed to be It 13 per ton in 1963 and in 1964; If 10.50 in 1965 and 1966 and IS 8.37 from 1967 onwards. The decrease in price is assumed due to the increase in quantities and to the improvementof transportfacilities and to the expected installationsin the then completed port of Ashdod.

11. "AdditionalAssets" are defined as cash or other assets readily convertibleinto cash, not immediatelyrequired in the business.

12. Tonnage sales of ethylene dibromide (EDB) and dibromo-chloropropane (DBCP) are assumed at the same rate as the production tonnages in the fore- casts. However, sales of elementalbromine are assumed at 2,400 tons p.a. with the balance used to produce EDB, DBCP,and 2,000 t.p.a. for the Bromine Compounds Plant.

13. Bromine Compounds Company, Ltd., is not consolidated in the fore- casts. DSW's equity investment (through DSB) of IL 540,000 in this subsid- iary is included in funds required by DSW for the project (para. 45). Divi- dends (beforepayment of corporate tax on the income by BCC) from BCC are included in Other Income (Annex 3) in the following amounts (IS '000): 1964 - 100; 1965 - 300; 1966 and years thereafter- 800. These amounts are shown before payment of corporatetaxes because the tax law permits transfers from subsidiariesto parent without corporate tax.

14. DSW's interest in Dead Sea Magnesite Company is not consolidated in the forecasts. DSW's equity investmentof It 2,700,000and a loan of It 9,000,000 (describedin 15 below) to the Magnesite Company are included in funds required by DSW for the project (para. 45). Dividends (before payment of corporate tax on the income by Dead Sea Magnesite) from Dead Sea Magnesite are included in Other Income (Annex 3) in the following amounts (IS '000): 1964 - 76; 1965 - 576; 1966 - 585; 1967 and thereafter - 614.

15. The DSW would make a loan of IL 9,000,000 to the Dead Sea Magnesite Company for 10 years from October 1, 1961, including a grace period of three years, at an interest rate of 6% with no commitment fee. Debt servicewould be based on even semi-annualinstalments due April 1 and October 1. The first repayment date would be October 1, 1964. The initial interest payments are based on assumed disbursementsof IL 6,588,000 on October 1, 1962 and IL 2,412,000 on April 1, 1963. The interest payments on this loan are shown as a separate item in Annex 3 as the company has an agreement with the Govern- ment that these payments will not be subject to tax. ANNEX 6 Page 3 16. At March 31, 1961, the companyhad accumulatedlosses amounting to about It 12 million which can be carried forward for tax purposes. The forecastsindicate that this amountwould exemptthe companyfrom any pay- ment of corporatetaxes until 1965. After that year the company'scorporate taxes are computedon the basis of the normal28% rate.

17. Israelalso has a 25% incometax on profitdeclared after deduction of corporatetaxes. This tax is distributedbetween "dividends declared" and'fetainedprofits" and insofaras the companyis concerned,depends upon the amountof dividendsdistributed. As an "approvedenterprise" the company will be exemptby law from the paymentof the 25% incometax duringthe "periodof benefits",which is normallythe five years beginningwith the first profitable year, but which may be extended. For tax purposesan "approved enterprise" may charge depreciation at two, and in some cases two and one-half times the normal rate (used in these forecasts) for the first five years the facilitiesare used. As the forecastsindicate the "period of benefits"for the 590,000ton potashplant will expirein 1969, the income from that plant (butnone of the incomefrom the additional300,000 tons of the second stage)in 1970 is assumedto be subjectto the 25% incometax.

18. During the period of construction it was assumed that the cash sur- plus would be deposited with financial institutions, guaranteeing a net interest rate of 5 3/4% after taxes and linking the principal to the U.S. dollar or to other indices. It was further assumed that the interest would be paid, after the close of the fiscalyear, on the averagebalance on depositduring the fiscalyear.

19. The prices of all products except for potash from the existing plant were taken at approximately 10% below their present level. The price of potash from the existing plant 190,000 t.p.a. was taken at $33 per ton fob (presentprice), whereas the additionalquantities from the new project are taken at $30 per ton. The price is equalizedfrom 1966/67,when the full quantitiesof potashfrom the new projectare available.

20. Costsof productionof existingplants (i.e.existing potash plant and bromineplant) include 7.5% contingencyfor an expected rise in the level of costswithin the comingyear and furthercontingency of 6% to cover probablefuture increases. Costs of productionin the new plants(potash, salt and magnesia)include a 6% contingencyonly.

21. It has been assumedthat a further increase in potash production in the new project(additional 300,003 t.p.a.) will be possiblein 1970 after two years of construction.The cost of this additionalexpansion is esti- mated at IS 26,300,000which the forecastindicates should be availablefrom the company'sown funds providedno dividendsare paid on 1968 income.

22. The salesof potashinclude about 6,000 tons sold on the local marketat pricesslightly higher than thoseassumed for externalsales and also includesabout It 200,000from salesof industrialsalt producedin the presentplant. ANMEX6 Page 4

23. In general, working capital requirements,which were originally calculatedcm the basis of needs for cash, receivablesand inventories,are now based on the productioncosts (excludingdepreciation) of the following number of weeks of annual production: potash - 18; table salt - 16; bromine and derivatives - 6; and magnesia - 8.

24. The repayment of short-term borrowings in 1966 and 1967 is assumed to be made at the end of the year.

25. Interest on bank overdrafts has not been included in the forecasts.

26. Dividend payments at the rate of 8% on share capital have been assumed on earnings in 1966 and thereafter, except in 1968 in order to meet the costs of expansion wholly from self-generated funds. UNITEDARAB REPUBLIC

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