ReportNo. 482-TUN CK,CULATINGCOPY F\0G P Appraisalof ro esRETURUiED TO REPORTS D£ CO GafsaPhosphate Project Public Disclosure Authorized Tunisia______(In Two Volumes) RETURN TO Volume 1: Main Report REPORTS DESK July12, 1974 WPITHSEK Industrial Projects Department ONE WEEK Notfor PublicUse Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Documentof InternationalBank for Reconstructionand Development IntemnationalDevelopment Association
This report was preparedfor oThicaluse only by the BankGroup. it mnaynot be pub)ished. quoted or cited without Bank Groupauthorization. The Bank Group does not acceptrespOn- sibilitv for the accuracyor completenessof the report. VOLUMEI
CURRENCYEQUIVAIENTS WEIGHTSAND MEAS Except iwhere otherwise indicated, AUl units are metric aU figures are quoted in U.S. Dollars (US$) and for Tunisian 1 Metric Ton = 1,000 Kilograms (kg) Dinars (DT) 1 Metric Ton = 2,205 Pounds 1 Kiloneter (km) - 0.62 PtLles September 1973 - February 1974 1 Meter = 39.3 Inches 1 Dinar = 2.27 US Dollar 1 US Dollar = o.4 Dinar
ABBEIATIONS ANDACRNYMS BPL Bone phosphate of Lima. It is the equivalent of Tricalcium Phosphate content in rook phosphate or o.46 units of P205. BTS Tomes Brutes Tri6es Seohes - gross sorted dry tons. CERPIOS Osntre d'Etudes et de Recherches des Phosphates Mineraux - Paris. CIP§IOS C pagnie Nouvele des Phosphates dii Djobel M'Dilla GAPSA Compagnie des Phosphates et da Chmin de For de aafsa IQa Indastries xixques Mahgrebines NPK NPK Tnisian Fertilizer Coapay Sim Sociat Iradustrialo d'Aoide Phoaphorique et d'Irgrais SNCFT Sooi6t6 Nationals des Chemins de Fer Tonisiens SMFtEMINESSociAt Francaise d'Etudes Minilrea - Paris SOIRAH Socito Guenobloise d'Etudes Hydrauliques STEC Sooi6tg Tunisionne d'Engrais Chfgiques STeo Sooi6t6 Tunisienne del Electrioit6 et du Gaz STPH0S Soc1iAt Tunisionne diEsploitation Fhosphat±bre 3TIPC Socift6 Tunisieen Indutriele de Produits Chbiuques et d'Engrais
FISCAL AR OF GAS OCMPANY
January 1 - December 31
Industrial Projeoto Department Ju2y 12, 1974 TUNISIA
APPRAISAL OF THE GAFSA PHOSPHATE PROJECT
Table of Contents
VOLUME I
Page Ho.
SUMMARY AND CONCLUSIONS ...... i - iii
I. INTRODUCTION ...... 1
II. THE GAFSA COMPANY ...... 1
A. History ...... 1 B. Organization and Management ...... 2 C. Operations ...... , 2 D. Manpower ...... 5 E. Past Performance and Financial Results . . 5 F. Recent Financial Position ...... 6
III. THE MARKET FOR PHOSPHATE ROCK. 7
A. International Supply and Demand ...... 7 B. Phosphate Price Structure and Evolution ... * ...... 8 C. The Market for Tunisian Phosphate Rock ...... 8 D. Marketing ...... 9
IV. THE SEHIB PROJECT ...... 10
A. Technical Description ...... 11 B. Ecology ...... 13 C. Organization and Management ...... 13 D. Implementation and Production Schedules ...... 15
V. SEHIB PROJECT - CAPITAL COST, FINANCING PLAN AND PROCUREMENT.. 16
A. Capital Cost ...... 16 B. Working Capital ...... 17 C. Financing Plan ...... 17 D. Procurement and Disbursement ...... 18
This report was prepared by Messrs. R. L. Bosson, M. Diop and A. Weber (consultant) and Miss M. Haug of the Industrial Projects Department. TABLE OF CONTENTS (Cont'd)
Page No.
VI. FINANCIAL ANALYSIS OF THE SEHIB PROJECT ...... 19
A. Revenue and Production Costs Projections .. 19 B. Financial Projections ...... 20 C. Financial Rate of Return .21 D. Break-Even Point Analyses ...... 21 E. Major Risks ...... 21
VII. MODERNIZATION PROGRAM ...... 22
A. Objectives ...... 22 B. Implementation ...... 23 C. Capital Cost and Financing Plan ...... 23 D. Benefits ...... 25
VIII. FINANCIAL ANALYSIS OF THE GAFSA COMPANY ...... 25
A. Future Profitability ...... 25 B. Debt Service Coverage and Auditing ...... 27
IX. ECONOMIC JUSTIFICATIONS ...... 27
A. Economic Rate of Return of the Project .... 27 B. Foreign Exchange Effect ...... 27 C. Impact on Employment and Working Conditions 28
X. AGREEMENTS ...... 28
MAPS: IBRD 10003 Tunisia - Mining and Power IBRD 10273 Tunisia - GAFSA Company Mines
VOLUME II -
ANNEXES
1. Glossary of Technical Terms
2-1 The CAFSA Company - History 2-2 - Organlzation and Management 2-3 - Geology and Ore Reserves 2-4 - Mines
1/ Volume II containing the detailed Annexes is available on request. TABLE OF CONTENTS (Cont'd)
2-5 - Plants 2-6 - Infrastructure 2-7 - Manpower 2-8 - Historical Income Statements 2-9 - Historical Balance Sheets
3-1 The Market 3-2 The Tunisian Phosphate Industry
4-1 Sehib Project - Technical Description 4-2 - Organization and Management 4-3 - Implementation Schedule
5-1 Sehib Project - Capital Cost Estimates 5-2 - Working Capital Requirement 5-3 - Equipment and Services to be Financed by the Bank 5-4 - Disbursement Schedule
6-1 Sehib Project - Assumptions for Financial Projections 6-2 - Operating Cost Projections 6-3 - Projected Income Statements 6-4 - Projected Source and Application of Funds 6-5 - Financial Rate of Return and Sensitivity Tests 6-6 - Break-even Point Analysis
7-1 Modernization Program - Technical Description 7-2 - Management and Implementation 7-3 - Capital Cost Estimates 7-4 - Production and Operating Cost Projections
8-1 The GAFSA Company - Projected Income Statements 8-2 - Projected Source and Application of Funds 8-3 - Projected Balance Sheets
9-1 Economic Rate of Return Calculations and Sensitivity Tests 9-2 Foreign Exchange Effects
MAPS: IBRD 10003 TUNISIA - Mining and Power IBRD 10273 TUNISIA - GAFSA Company Mines
TUNISIA
APPRAISAL OF THE GAFSA PHOSPHATE PROJECT
SUMMARY AND CONCLUSIONS i. In mid-1972, the Government of Tunisia asked the Bank to assist in the expansionof the phosphate rock mining and beneficiationfacilities of the majority State-ownedCompagnie des Phosphates et du Chemin de Fer de Gafsa (GAFSA),in southern Tunisia some 230 km west of the port of Sfax. The Company'soperations and investmentplans were reviewed by Bank missions in November 1972 and April 1973 and it was concluded that GAFSA would have to carry out additional preparatorywork; take several organizational,administra- tive and financialsteps; and define more clearly the plans for improving its existing operations,before a Bank loan could be considered. Less than a year thereafter,GAFSA with the support of the Government had advanced with this work to a point which allowed an appraisaloT the project in February 1974. ii. This report appraises the proposed Sehib project as one part of the Company'smajor expansion and modernizationprogram to be undertaken during 1974-1978. The Sehib project, which is based on ore reserves sufficient for more than 20 years production,involves developing a new undergroundmine em- ploying the longwallmethod, with an annual output of 2 million tons of phos- phate rock upgraded by washing to produce 1.6 million tons per year of market- able product for export; the project includes all necessary auxiliary facilities such as for water and power supply, workshops, offices and housing and some minor roads. In addition STEG, the public power company, will provide the needed electricitysupply and SNCFT, the national railways, a 13 km spur line, additional rolling stock and some upgrading of the main line to Sfax to handle the increased productionfrom both Sehib and GAFSA's modernizationprogram. iii. The modernizationprogram is to improve the efficiency and safety, lower the costs and increase the profitabilityof GAFSA's phosphate production from four of its existing mines which are all in the same general area as the new Sehib mine arndwhich have been suffering from lack of investmentover the past 20 years. The program is also to increasemine output by about 20% to reach a level of close to 3.9 million tons per year of saleable product by 1977. While the Bank has been asked to participateonly in the Sehib project and the modernizationprogram is not directly linked to it, the Bank from the outset has considered all these investmentplans in their entirety and as absolutely essential for improving the Company's financial viabilitywhich-- until the recent sharp rise in phosphate prices--hadbeen poor.
iv. Production and sales of phosphate rock in the world have generally been closely in line with one another during the 1960's but towards the end of 1972 a serious shortage developed, resulting in a draw down and deplet- ion of stocks and price hikes in late 1973 of between two and three times for - ii -
Florida and North African rock respectively. Phosphate rock will be in short supply over the next couple of years but supply is likely to balance demand from 1977 onward, with future rock equilibriumprices expected to settle at about 20 to 30% below the January 1974 price levels. GAFSA accounts for 95X of Tunisian rock productionof which, despite the planned expansionover the next few years, a decreasingproportion will be available for exports. This is on account of the expansion plans of the local producers of fertilizers and phosphoricacid, which by 1978 will take more than 45% of GAFSA's output. At least in the short and medium-term,there is every indicationthat Tunisian phosphate sales will be restrictedby productionand not by insIfficient market outlets.
v. Total financing required for the Sehib project, includinginterest during constructionand working capital, is estimated at DT 28.8 million (US$64.2 million), 70% of which is needed in foreign exchange. The project would be financed by the proposed Bank loan of US$23 million equivalentand the Company's internallygenerated cash (US$41.2million). GAFSA itself would thus make a major contributionto the financingof the project. The Bank loan would be made to GAFSA, cover approximately52% of the project's foreign ex- change cost and finance imported equipment and spares to be procured according to Bank Guidelines. The loan would be for 15 years including3 years of grace, at an assumed interest rate of 7-1/4% plus a guarantee fee of 1-3/4%, bringing the total cost to GAFSA to 9%. vi. Project costs are based on price levels in February 1974 and contain reasonablecontingencies. Nevertheless,should a project cost overrun occur and the Company be unable to meet it out of its own cash flow, the Government has agreed to provide such funds as may be necessary to assutrespeedy comple- tion of the project. A similar overrun guaranteewas agreed for completion of the modernizationprogram. This program is expected to cost DT 23.0 mil- lion (US$51.3 million) and be financed by a US$11.5 million equity increase provided by the Government;a US$6.9 million loan from the Kuwait Fund (at 8% interest,for 12 years including 2 years grace) and the remainder (US$32.9 million) from GAFSA's internal cash generation. The scope of the program is not as yet as precisely defined as that of the Sehib project and costs may thereforebe subject to change as further studies could dictate some altera- tions in the program. vii. Overall responsibilityfor project implementationwill rest with the Company, with constructionto be carried out under the supervisionof HEURTEY supportedby SOFREMINES,two well-knownFrench consultantfirms, which have also played a major role in project preparationand preliminaryengineering. Conversionfrom constructionto the operationalphase will be gradual,with productionbuilding up as the mine is being developed. The major changeover will come with completionof the washing plant, scheduled for mid 1977, at which time controlwill pass from the project manager (Heurtey)to GAFSA's operating staff. At testing and start-up of both mining and surface instal- lations, Heurtey and equipment supplierswill assist the Company's staff. A major training effort forms part of the project. These arrangementsare satisfactory. - iii - viii. The managementand performanceof the Company have suffered in the past from successiveorganizational changes and lack of motivation,initiative and cost consciousnessof workers and staff. GAFSA, which employs about 10,000 people, has been having a chronic shortage of mine face workers but an over- supply of non-productivelabor which inflates labor cost. The partial mechani- sation of the mines, togetherwith GAFSA's new manpower reductionand training program (in toto a net reductionin employmentfor about 860 people over 5 years is envisaged),is designed to improveworking conditionsand productivity,hence competitiveness. This is the reflectionof the Company'sdetermined efforts to improve its effectivenessand further steps are being taken to strengthen the planning function and coordinationwithin the Company. ix. The Sehib project has an estimatedfinancial rate of return of 25% assuming a future price for Tunisian phosphaterock of US$25/toa, fob Sfax in 1977 and is forecast to produce phosphaterock at operatingcosts 10-15% lower than GAFSA's existingmines. The project'seconomic rate of return is 28% with a drop below 16% being unlikely. Annual net foreign exchangebenefits from the project are expected to reach approximatelyUS$55 million at full productionalmost equal to the total foreign exchange portion of the capital cost. Although close to 70% of the Company's investmentduring 1974-78will be financed by internal cash generation,GAFSA's long-term financialposition is strong and no liquidityproblems are foreseen even for early years of operation. x. However, the project also has definite risks, the major one being the future developmentof phosphateprices. As noted previously,the current high prices are not expected to continue. This report assumes a level in 1977 of 30% below January 1974 prices,; however, if a more severe drop of say 40% were to occur, it would start to adverselyaffect the Company's financial position. However, were such price drop in fact to take place in 1977 it would be equivalentto a decline in real terms to a level about 15% below the price levels of the late 1960's that clearlydid not give the phosphate industry worldwide enough of a return to expand capacity in line with market demand. While such a price decline is thereforeunlikely, it is nonetheless true that, since Tunisian costs of producingphosphate are above those of its two major North African competitors(Morocco and Spanish Sahara) primarily on account of its lower rock quality and geologicalformation, it would be Tunisia that would first feel the effects of any such price squeeze. This makes execution of the Sehib project and the modernizationprogram, therefore, a matter of highest priority and urgency. xi. Based on the agreementsreached, as summarizedat the end of this report, the project is suitable for a Bank loan equivalent to US$23 million.
I. INTRODUCTION
1.01 In mid-1972, the Government of Tunisia asked the Bank to assist in its efforts to rationalize the Tunisian phosphate sector and more specifically in the modernization and expansioinof the mining facilities operated by the Compagnie des Phosphates et du Chemin de Fer de Gafsa (GAFSA). To this end a mission visited Tunisia in November 1972, to conduct a preliminary review of the sector and the Company. The findings and recommendations were forwarded to the Government in a report in February 1973.
1.02 On the basis of these recommendations, a second mission visited Tunisia in April 1973 to ascertain in precise terms the assistance required. Particular attention was paid to the desirability of opening a new mine at Sehib (taps IBRD 10003 and 10273) as a major step in the rationalization of GAFSA's operations and in the development of the overall phosphate sector. It was concluded that attainment of these goals should include all GAFSA production facilities and required strengthening of GAFSA's management, planning and control. A report covering the marketing, technical, financial, organizational, management and planning aspects of the Company was prepared and transmitted to the Government and GAFSA in May 1973.
1.03 Significant progress on implementation of these recommendations which included reorganization, establishment of a planning function, and formulation of a modernization program for the existing facilities, permitted appraisal in early 1974. Between February 18 and March 3, 1974 a mission coisisting of Messrs. Bosson (Chief), Diop and Miss Haug of the Industrial Projects Depart- ment and Mr. Weber, a mining engineer of the Kreditanstalt fur Wiederaufbau who has had considerable earlier experience with GAFSA's operations, visited Paris and Tunisia to appraise the project which consists of the Sehib mine and beneficiating facilities. A glossary of technical terms is given in Annex 1.
II. THE GAFSA COMPANY
A. Ihistory
2.01 The GAFSA Company was formed in 1887 as a "Societe Anonyme" with headquarters in Paris. In 1960 after Independence, the private shareholders voted unanimously to offer the Tunisian Government a 50% equity participation. The Government accepted and paid the required DT 2.5 million between 1961-64. As a result of several subsequent adjustments, the Government since June 1974 holds 98% of the share capital. In 1962, the company headquarters were trans- ferred from Paris to Tunis, and after a short move to Gafsa in 1968, are now again established in Tunis. A more detailed description of the Company's history is contained in Annex 2-1. - 2-
B. Organizationand Management
2.02 After several years of organizationaland personnel changes, the Company's organizationalstructure has been consolidatedunder Mr. T. Amira, a mining engineer and experienced administratorwho became General Manager in 1960. Annex 2-2 further discusses the Company's legal position, organization and management and gives an organizationchart. Recruitment and retention of qualified and experiencedTunisian personnel for the area continues to be a problem which the Company has been trying to overcome by offering to all employeeshigher salaries and better work conditions; it also employs expatriateson fixed term contracts.
2.03 Spurred by its poor financial performancein the past, the Company is making a determined effort to improve its managerial effectiveness: cost accountingand inventory control have been introduced; the Modernization Program has been formulated;and new mine developments(Sehib, Kef Eschfair) are under way. The Production Department, the major unit within the organiza- tion, has been reorganizedunder a new manager. As a result a better coordina- tion among the operating units, increased staff motivation and productivity consciousnesshave been achieved. Several functions such as training,safety, budget control and planning have been expanded.
2.04 With the formulationof the ModernizationProgram and the activities of the DevelopmentDepartment, GAFSA has initiated some planning,but the Company is still far from attemptingan integratedor even adequately coordi- nated planning approach. The Company has agreed to (i) present to the Bank for its review, annually updated 5-year investmentprograms for all its operations,and (ii) review with the Bank not later than July 1, 1975 the specific steps it intends to undertake to improve project and corporate fi- nancial analysis within GAFSA, and thereafterimplement such plan of action.
C. Operations
2.05 The Company operates four long establishedmines, and has four other deposits in various stages of development. The extracted phosphate rock with grades between 58 and 65% BPL is processed in 4 washing plants and 3 air classificationplants, before being shipped by rail to Sfax some 230 km distant for export and fertilizermanufacture and to Gabes (300 km) for domestic phosphoricacid and fertilizermanufacture. Pertinent data for these facilitiesare presented in the following table: -3-
GAFSACompany Performance Data (1973)
Production Ore Mine Mine Method of (1973) Grade Life Personnel Mine Extraction (000 tons (7.BPL (Yieara) BTS) of BTS) A. Mines
Existing Mines
Metlaoui 576 56-59 10 1,092 Underground room and pillar Moulares 862 61-65 3 1,670 " " Redeyef 1,2514 62 7 1,670 " M'DiUa 800 60-62 30 1,741 it Small Surface Deposits 930 55 3 - ,/ Open-pit Mines Under Development
M'Rata (Start-up in 300 60-65 20 240 Underground sub- 1972) level stoping Sehib (Trial stage) 144 60-62 20 212 Underground long- wall Kef Eschfair (Study) - 55 30 - Open-pit Total 4,866 6,625
B. Processing Plants
Rated 1973 Weight Plant Capacity Production RecoverY Personnel (000 tons) (000 ts Saleable Saleable Washeries
Metlaoui I 250 225 65.2 76 Metlaoui II 550-600 513 75.4 78 Metlaoui III 500-600 464 76.8 73 M'Dilla 300 217 78.7 67 Air-Classification
Moulares 600 617 68.5 65 Redeyef 850-900 791 61e9 65 M'Dilla 450-500 446 60.9 68
Total 3,500-3,750 3,273 1,192
1/ Subcontracted to a local contractor. - 4 -
2.06 Ore Resources (Annex 2-3): The Company has presentlyproven and probable (recoverable)ore reserves of about 120 million tons and another 56 million tons of possible reserves which are more than sufficientfor 20 years operation at the projected productionrates as indicatedby the indi-idualmine lives in the above table. In addition, deposits yet to be precisely outlined,are estimated to be adequate for at least a further 20 years. It is important to note that these reserves are low grade compared to those of the major phosphate rock producers,such as Morocco, the USA and USSR.
2.07 Mines (Annex 2-4): Except for the small open-pit operation carried out by a subcontractor,all existing mines are shallow underground extending not more than 150 meters below the surface, using room and pillar methods with manual loading. These methods are inefficient,productivity is low, working conditionsare poor, supervisionis inadequateas are safety proce- dures and costs are high. The sub-level stoping being employed at M'Rata and the proposed longwall method at Sehib, the two new mines under develop- ment, are both much more efficient and safe methods, with vastly improved working conditions. The Kef Eschfair deposit now under study will be mined by low-cost open-pit methods.
2.08 ProcessingPlants (Annex 2-5): Hand sorting, washing and air classificationare the three simple enrichmenttechniques currently in use at GAFSA. Washing effects a grade increase of about 5% BPL with a 65-75% weight recovery,whereas the air classificationresults in only a 2% BPL grade increase with a 60-65% weight recovery. The plants are in a fair to poor state of repair and lack of control and measuring devices make it dif- ficult to evaluate plant efficiency. The use of high sulphur fuels in the dryers and the absence of dust control equipment provides very poor working conditions. The intended improved maintenanceand control form part of the ModernizationProgram and will lead to better performanceand working condi- tions.
2.09 Infrastructure(Annex 2-6): Transport between the mines and processingplants is by the Company's own rail, conveyors and trucks. The poor state of repair of these facilitiesforms a bottleneck in operationsand further investmentis required. Transport to Sfax and Gabes is carried out by the State railway company SNCFT, which has almost reached full capacity with the existing equipment. GAFSA has one month's storage capacity avail- able at the port, with facilitiesfor loading up to 25,000 dwt ships. However, shipments are generallymade in smaller vessels as dictated by size of the facilitiesat the receiving port. No additional investmentis required in port facilities. Water is supplied from wells located in the area and except for Sehib and M'Dilla is more than adequate to meet expected future require- ments; this is also true for the power supplied by the state power company (STEG) although new transformerand transmissionfacilities will be required to meet GAFSA's needs. Maintenance is conductedby undergroundcrews and in workshops located at each mine. Poor maintenancehas in the past led to significantloss of production;hence, improvementis necessary. Moves to centralizethe workshops and improve warehousingoperations are already underway. -5-
D. Manpower
2.10 The Company'slabor situation and policy as well as past and future manpower requirementsare discussed in Annex 2-7. The major labor problems are (i) lack of underground face workers, and (ii) an oversupply of nonproductiveworkers resulting in low productivities. To attract sufficient miners and decrease the present level of absenteeism (20-40%),the GAFSA Company has taken steps to revise the salary structure to include special incentives,improve working and safety conditionsunderground, introduce on-the-job training,and mechanize the existing mines. To reduce the over- supply of nonproductiveworkers GAFSA has (i) restrictednew employmentto meet short-term requirementsand transfersfrom undergroundjobs; (ii) regulated closely new hiring practices;and (iii) plans to introducea system of early retirement. A recent manpower study (Annex 2-7) indicatesa net man- power surplus of 860 men during the 1974-79 period; this projection takes into account new employment created by Sehib and M'Rata as well as manpower reductionsdue to mechanization,rationalization, natural attritionand the closing of Moulares. To ensure an orderly transition,GAFSA agreed to submit annually to the Bank for comment, (i) a plan of action setting forth measures to be taken in respect of manpower reduction; (ii) a detailed training pro- gram and (iii) an expansion program of the social and health facilitiesfor the labor force. In addition, the Governmenthas undertaken to conduct a regional developmentstudy to seek means for rational employmentof new job seekers (para 9.04).
E. Past Performanceand Financial Results
2.11 GAFSA's financialand operating history has been poor since 1967 (Annex 2-8) and during this period it was only in 1972 that mine production surpassed the 1966 output. The Company's net income dropped from DT 1.7 mil- lion in 1966 to a record loss of nearly DT 4 million in 1972. The following table gives some principal indicatorsof operations and income of the Company since 1970.
The GAFSA Company - Sales and Earnings, 1970-1974 (DT millions)
1970 1971 1972 1973 1974 (Projected)
Sales Volume (million tons) 2.59 3.08 3.13 3.13 3.44 Net Sales 10.3 13.7 13.3 14.6 57.6 Direct Operating Costs 10.6 11.9 12.4 14.5 16.8 Net Income (loss) before Taxes(3.67) (3.06) (3.96) (3.7) 34.1 Cash Generation before Taxes (2.22) (1.20) (2.18) (2.23) 36.2 Net Income (loss) as % of Net Sales (36) (23) (34) (25) 59 The basic reasons for GAFSA's substantial losses have been: the declining prices for phosphate rock during the 1960's and early seventies (Annex 3-1); the 1972 US dollar devaluations;subsidized prices to one domestic consumer, which have now been removed; GAFSA's high productionscosts and the virtual absence of cost saving investmentsfor nearly two decades; sharp increases in railway tariffs; and a 30% production shortfall in 1969 due to floods in southern Tunisia. As a result of the recent more than tripling of phosphate rock prices and to a lesser extent increased production,but not due to decreases of GAFSA's unit costs, the Company is expected to realize in 1974 a net income before taxes of DT 34.1 million.
F. Recent Financial Position
2.12 Balance sheets for the past 5 years (1968-72)are given in Annex 2-9 and those since 1970 are summarizedbelow:
The GAFSA Company - Summary of Balance Sheets (DT millions)
1970 1971 1972 1973 1974 (Projected)
Assets
Surplus Cash - - - - 26.2 Current Assets 10.9 11.4 12.2 8.3 9.0 Nat Fixed Assets 11.6 12.7 13.3 13.7 15.0 Other Assets 4.7 4.0 4.5 5.6 5.2
Total 27.2 28.1 30.0 27.6 55.4
Liabilities
Current Liabilities 17.2 17.3 20.5 11.6 5.6 Other Liabilities .2 .2 .2 1.9 1.9 Long-TermDebt 2.4 3.2 5.9 12.0 4.6 Net Capital 7.4 7.4 3.4 2.1 43.3
27.2 28.1 30.0 27.6 55.4
Net Working Capital (6.3) (5.9) (8.3) (3.3) 3.4 Current Ratio 0.64 0.66 0.60 0.71 1.6 Debt/Equity Ratio 24:76 30:70 64:36 85:15 10:90
2.13 GAFSA's past poor position is clearly reflected in a lack of work- ing capital and the unfavorabledebt/equity ratio. To cover part of the cash losses, the Government as majority shareholder,increased GAFSA's equity by DT 1.35 million in 1970 and DT 3.0 million in 1971. In order to place the Company on a sound financialbasis and to permit implementationof the Sehib -7- project and other urgently needed investments,the Governmentis undertaking a finincialconsolidation of GAFSA which includesa DT 5 million equity sub- scriptionand the conversionof a loan of DT 6.5 million into equity. This combinedwith the forecast after-tax profit for 1974 of DT 19.8 million, is expected to put the Company in a strong capital position at the end of 1974 with a debt/equityratio of 10/90 (ChapterVIII).
III. THE MARKET FOR PHOSPHATE ROCK
3.01 The world supply and demand for phosphate rock, its price structure and the specific market for Tunisian rock are discussedat length in Annex 3-1. The structureof the Tunisian phosphate industry, its contributionto the country's economyand future developmentprospects are given in Annex 3-2. Attentionis also drawn to the appraisal of the Maroc-Phosphoreproject 1/ which describes the interrelatedmarket for phosphoricacid. The following gives only a brief summary of the major conclusions.
A. InternationalSupply and Demand
3.02 World reserves of phosphaterock are estimated at more than 120 billion tons of saleable concentrates- more than 100 years supply. Morocco holds 38% of these reserves, Spanish Sahara 225, the USSR 13%, the USA 11%, and Tunisia 4%. The USA, the USSR and Morocco alone accounted for about 80% of the 1972 world productionof 89.0 million tons; Tunisia accountedfor 3.7% or 3.3 million tons.
3.03 Over the period 1960-1972,world productionof phosphaterock grew o9,average at 77%/yearreaching the 89.0 million tons just noted; world trade grew at 6%/yearreaching 44 million tons in 1972; and consumptionat 7.3%/year attaining91.0 million tons in that year.
3.04 Productionand sales of phosphaterock were generally closely in line with one another during the 1960-70 period; however, small supply surpluses in the late 1960's and early 1970's turned into a tight supply position by late 1972 and a serious shortageby late 1972, resulting in a draw-down and depletionof stocks, and a sharp rise in prices. The projectedsupply-demand position is indicatedin the following table: World Supply and Demand of Phosphate Rock (milliontons) 1970 1972 1973 1975 1977 1980 Production 81.1 89.0 97.0 115.1 129.5 166.0 Consumption 81.0 91.3 100.8 115.1 129.4 155.1 ProductionSurplus (Deficit) 0.1 (2.3) (3.8) - 0.1 10.9
Source: British Sulphur Corporationand Bank estimates.
1/ "Appraisalof the Maroc-PhosphorePhosphoric Acid and Mono-Ammonium Phosphate Project' dated April, 1974. (ReportNo. 351 MOR). - 8 -
Additional capacity for 1974-76 is expected to keep in line with additional demand taking into account restocking requirementsand, in 1977 and beyond, additionalnew capacitiesare expected to ease the tight supply situation and to lead to a return to more rational market behavior, with a potential excess of productionover consumption,of 5-10%, - a situation similar to, but not as severe as in, the late 1960's.
B. Phosphate Price Structure and Evolution
3.05 During the 1966-72 period, surplus capacity in the world encouraged the concessionof substantialdiscounts of up to 20% of the listed price. In 1973, prices increased steadily until in November 1973 prices announced for 1974 jumped 2 times for Florida rock, and about 3 times in the cases of Morocco and Tunisia. FollowingMorocco's lead, GAFSA increased the price of 65/68 BPL phosphate rock from a 1973 average of US$10-11 to $36/ton fob Sfax, effective January 1974, for all contracts,foreign as well as domestic. The price for 60/62 BPL ground rock for direct applicationincreased to US$32/ton fob Sfax. On July 1, 1974 the prices were further increased to an average of US$42/ton fob Sfax and US$38/ton for 65/68 BPL rock and 60/62 BPL rock, respectively.
3.06 It is estimated that world phosphate rock supply and demand are likely to balance from 1977 onwards, with future rock equilibriumprices stabilizingat about 20% to 30% below the January 1974 price levels, increas- ing thereafterat a rate close to the prevailingworld inflation rate. On this basis, the Tunisian 65/68 BPL grades which account for 90% of GAFSA's total sales, are expected to stabilize at a price of about US$25/ton in current terms in 1977 and to increase thereafterwith general inflation. The estimated future price for 60/62 BPL is US$20/ton fob Sfax. With the present uncertainty of the phosphate supply situation it is difficult to predict future prices with much measure of confidence;nevertheless present predictionsof the prices from a variety of sources are reasonablyconsistent.
C. The Market for Tunisian Phosphate Rock
3.07 Besides another small phosphate rock producer, STEPHOS, which is wholly Government-ownedand which accounts for about 5% of Tunisian supply, the GAFSA Company is the sole producer of rock in Tunisia. The following table shows how Tunisian productionof phosphate rock, its share of world production, and its domestic sales and exports are expected to develop between now and 1980. - 9 -
Production,Sales and Market Share of Tunisian Phosphate Rock: 1973-1978 (in '000 tons)
1973 1975 1978 (actual) Production GAFSA 3,300 3,800 5,500 STEPHOS /1 250 250 250
Total 3,550 4,050 5,750
Demand by Domestic Processing Industry 1,116 1,500-1,8002,100-2,500 Available for Exports 2,280 2,450-2,7503,250-3,650 World Demand 97,000 115,100 155,000 Production as % of World Demand 3.7% 3.6% 3.7% Exports as % of Production 64.0% 57-64% 44-56%
/1 Under GAFSA management.
The above table indicatesthat Tunisian production of phosphate rock will keep its share of expected world demand for rock, but that domestic offtake of rock for the productionof fertilizer and phosphoric acid will increase rapidly and will thus reduce the share of Tunisian rock available for export.
3.08 Consideringthe expansionplans of the local producers of fertilizers and phosphoricacid who produce mainly for export, it is expected that in 1978 about 50% of GAFSA's saleable rock will be disposed of domesticallyand there- f,re enjoys, for all practical purposes, a captive market. As to the remainder which will have to be exported, Tunisian rock is considered the world's best phosphate for direct applicationbecause of its softness, high reactivity and solubility. In 1972, GAFSA supplied about 0.8 million tons of rock for direct application- about one-fourth of its sales - out of a total world market of 1.5 million tons for this type of rock. The future of the ground phosphatemarket is promising. Many of the other export markets are also considered captive because of plants designed for the lower grade Tunisian rock and long-standingarrangements. In the short to medium term, therefore, there is every indicationthat Tunisian phosphate sales will be restricted by production and not by insufficientmarket outlets.
D. Marketing
3.09 The marketing function is directed through the Marketing Department in Tunis. A marketing office has been maintained in Paris for its contacts with the European and Asian buyers. The Company relies on agents for sales to Bulgaria,Yugoslavia, Austria and Greece. In January 1974 all long-term and fixed-term contractswith domestic as well as internationalcustomers were denounced by the Government and GAFSA. The new sales contracts were valid only - 10 - for six months but were renewed for a further six month period in June with price increasesof about US$8/ton. All domestic customers and those from clearing and nonclearingcountries are put on the same footingwith only one prire being quoted for all customers. Internationalbuyers must pay for their purchases in hard currenciesand assume the full foreign exchange risks. Presently the major buyers of GAFSA phosphate are:
Major Buyers of Tunisian Rock (1973)
000 tons Z
A. Exports
Countrieswith ConvertibleCurrencies
France 513 15 Greece 265 8 Others 669 20 Sub-Total 1 ,447 43
Clearing Countries
Czechoslovakia 243 7 Bulgaria 205 8 Others 314 8 Sub-Total 762 23
B. Domestic Sales
SIAPE 451 13 ICM 371 11 NPK 274 8 Others 57 2 Sub-Total 1,153 34
TOTAL 3,362 100
IV. THE SEHIB PROJECT
4.01 The investmentsthat the GAFSA Company intends to carry out in the next few years can be divided into two parts: (l) the Sehib project and (ii) the ModernizationProgram. While the Bank has been asked to participate only in the Sehib project and the two project portions are not physically interrelated,the Bank has from the outset looked at them together and has consideredthem of equal importance,since both are essential for improving the Company's financialviability. This is of particularimportance in the - 11 - longer run if internationalcompetition in phosphateswere to bring down phos- phate prices below the level presentlyexpected. Should that occur, Tunisia with its relativelylow grade of rock (other than that for direct application) is more vulnerablethan for example the Moroccan productionwhich benefits from rock of higher quality. The Sehib project, its implementationand fi- nancial analysisare discussedbelow.
A. TechnicalDescription
4.02 A detailed technicaldescription and evaluationof the project is presented in Annex 4-1. Essentially,the project includes the installation of new mining and treatmentfacilities with all necessary infrastructureand utilities,based on the extractionof the Sehib-Djellabiadeposit, for an annual mine productionof 2.0 million tons BST, or 1.6 million tons of market- able ore after washing.
i. The Mine
4.03 The Sehib - Djellabiadeposit contains 38 million tons of proven mineable reserves which have been conservativelyestimated and assure an operatinglife of 20 years. The mining method selected is that of the "long- wall"; it combines a high extractionrate with maximum safety and is used widely in coal mines around the world and particularlyin Western Europe. While a more mechanizedmethod than previouslyemployed at the Company'smines, the longwallwill effect vast improvementsin the undergroundworking conditions over those experiencedin the other GAFSA mines using the traditionalroom and pillar methods. Annual productionof 2 million tons will be provided from 4 longwall faces, each capable of producingat full capacity 450,000 to 50n,000 tons, plus 100,000 to 150,000 tons from annual mine development. It is not expected that full mine output will be reached until 1980.
4.04 In selecting the longwall method, GAFSA has conducted extensivefull scale trials with the extractionof more than 450,000 tons from 2 panels in Sehib between 1970 and 1974. These trials demonstratedthe technicalviability of the longwallmethod but pointed out the roof problems prevalentin Sehib, and the need to modify the equipmentfor use there. As the next step, a second longwall system incorporatingthe modificationsindicated in the first trial is to be installedin late 1974 at the expense of the equipmentmanufacturers, for a two month trial. The equipmentmanufacturers are sufficientlyconfident to offer roof control and productionperformance guarantees, which if not met, give GAFSA the option to return the equipment free of charge. While there is some technicalrisk involved in using the longwall method, this has been mini- mized by the extensive trials, and the equipmentshould have little difficulty reaching and even exceeding the productiontarget of 2 million tons per year. The major limitationwill be in the training of the operating crews, hence, the expected slow build-up to full production. - 12 -
2. ProcessingPlant and Auxiliary Facilities
4.05 The proposed beneficiationmethod is based on the classical grinding, sc_eening and washing process, used over the last 20 years for upgrading the GAFSA phosphate. Here the particularprocessing method selected, such as: washing, air classification,and calcinationis very important. The Company, therefore,made its choice only after extended semi-industrialtests with Sehib ore and the selection can be supported on both technicaland economic grounds. The new beneficiationplant will incorporatethe latest technical improvements and controls so that its efficiencyand performanceare expected to be much superior to the existing plants. An 80% weight recovery is planned and should be possible given careful control and maintenanceof the plant.
4.06 As shown in Annex 4-1, Chart 1, the beneficiationplant will be some 6 km away from the mine. This is the optimal location taking into account the topographyof the area and the already existing and newly to be provided infrastructureinvestments. The surface installations,therefore, include a conveyor system between the mine and the plant site and also provide adequate storage facilities,open and covered, for run of mine ore and con- centrates respectively;service and repair shops for the maintenanceof surface and undergroundequipment; and offices at the plant site.
3. Infrastructure
4.07 The required infrastructurewill include the provision of water, road and power connectionsand housing, all financed by GAPSA as part of the project as well as power supply and rail facilitieswhich will be provided by the state-ownedcompanies (Societe TunisienneAe 1' Electriciteet du Gaz (STEG) and Societe Nationale des Chemins de Fer Tunisiens (SNCFT))respectively.
4.08 An adequate source of water is known to exist at Gouifla, located 32 km southwestof the plant, and its exploitationwill require new pumping, pipeline and electrical transmissioninstallations. The water is considered too saline for agriculturaluse and the Ministry of Agriculturehas given assurancesthat GAFSA will be granted a concessionto exploit the water. Before applying for the concession,however, GAFSA is exploring the technical feasibilityof two alternativesources with potentiallylower costs. The Governmenthas undertaken to grant such a concessionagreement to GAFSA by July 1, 1975. An existing 9 km dirt road connectingSehib with M'Dilla will be upgraded into an all-weatherroad, and a new road (7 km) constructed between the mine and the plant site. Practically the entire personnel for Sehib can be accommodatedin the neighboring township of M'Dilla with no need for additionalhousing, except for 100 units which will be constructed in M'Dilla for the supervisorystaff. Rail transportationwill be provided for the workers by the Company. Sufficientpower generationcapacity is available from STEG (para. 4.07) but additional transmissionand transformer facilitiesare needed for the project; these also will be GAFSA's responsi- bility. Engineeringand design work is almost complete. - 13 -
4.09 A 13 km rail spur line from M'Dilla to the Sehib plant; up to 450 additionalore cars; minor upgradingof the Metlaoui-Sfaxtrack; and some additionallocomotives will be necessary to service GAFSA's increasedoutput. The ore cars have been ordered and the necessary financing (US$4million) will be availablefrom the African DevelopmentBank (ADB). Design and specifica- tions of the Sehib spurline and the rehabilitationof the existing track has been completedand ADB is currently consideringfinancing this railway sub- project estimated to cost US$6.9 million. To ensure timely implementation of thE railway component,SNCFT will carry them out in accordancewith an implementationschedule to be agreed with the Bank by December 31, 1974. The Governmenthas also agreed to provide funds required for the timely carrying out of the railway component in case ADB should not make availablethe residual financingrequired.
B. Ecology
4.10 The Sehib project itself poses no major ecologicalproblems. The deposit and the plant are located in a desert area some 250 km from the coast, and some 30 km from the closest oasis. The land is not used for agricultural purposes and the lack of adequate and suitablewater make it unlikely that it could be so developed in the future.
4.11 The longwallmining method results in caving, and subsidenceof the surface over the deposit by half to one meter; but no structureor infrastruc- ture facilitiesoverlie the deposit. Waste products from the washing plant are in two forms: (a) coarse marl which is stockpiledadjacent to the plant site; and (b) the sludge containingfine marl and phosphatewhich will be dumped in the seasonal river basin. The nature of the marl, the arid climate 3-i lack of water make forestationof the tailing dumps impractical. The slimes are dumped in a secluded area and pose no safety hazard. During the dry season, the slimes are dried out but during tilerains part of the deposit is washed downstream. This, however, creates no adverse effect. The only other discharge from the plant is that from the dryer stack. Adequate dust collectionequipment will be installedto collect fines and other particulate matter.
C. Organizationand Management
4.12 A more detailed descriptionof the organizationand management during constnrctionof the Sehib project (includingan OrganizationChart) and its subsequentoperation is containedin Annex 4-2.
Coonstruction Phase
4.13 Constructionof the Selhibproject will be carried out under the supervisionof Heurtey, a French consultingfirm, which will provide the project manager and supportingengineers. Overall responsibilityfor project implementationwill be through the DevelopmentDepartment of GAFSA to which - 14 -
Heurtey will report. Heurtey conducted the feasibilitystudy of the project and prepared preliminaryengineering. Under a new contract expected to be signed in July 1974 Heurtey will complete the detailed engineeringand sup rvise procurement,in addition to on site supervision,of both underground and surface installations. While Heurtey is fully qualified to supervise constructionand installationof the surface facilities,and handle the bidding procedures,it will need assistance for supervisionof both underground developmentand equipment installation. In addition to the use of GAFSA's own staff, SOFREMINES,an internationallywell known French mining consulting finm, will also provide assistance as it did for the feasibilitystudy. Assuranceshave been obtained that such assistancewill be obtained promptly.
2. OperationalPhase
4.14 Conversion from constructionto the operationalphase will be gradual, with mine productionbuilding up from that of the trial longwall to be installed in early 1975 to the four longwall faces planned for late 1976/ early 1977. The major changeoverwill come with the completionof the washing plant, sched- uled for mid 1977. At that time the operationalorganization (Annex 4-2) will become effective,and control will pass from the project manager (Heurtey)to the GAFSA operating staff. At start-up and testing of both mining and surface installations,the constructionengineers and manufacturers'representatives will assist GAFSA's operationalstaff; this will be specified in the equipment purchase contracts.
3. Personnel Requirements, Staffing and Training
4.15 As indicated in the organizationchart (Annex 4-2), the project will employ 660 people at full production,428 for the undergroundoperation, 93 in the washing plant and materials handling facilities, 131 for services and maintenance,and 20 for administration.
4.16 An important aspect of the project is the need for undergroundand maintenancepersonnel with skill levels considerablyhigher than those needed for the Company'sother operations. For mining, on-the-jobtraining has been implementedfor the last 2 years and the 150 men now employed undergroundat Sehib on production,development and maintenancehave all been well exposed to the new operating techniquesunder the supervisionof foreign experts. These men will be distributedto the new installations,to help provide on-the-job training to the new, carefully selected miners from the other GAFSA mines. This, combined with technical dry-run training on the surface under the direction of Westfalia (the German face equipmentmanufacturer), should ensure an adequate- ly prepared undergroundwork force. Training of the surface personnelwill be carried out on-the-jobunder the dir2ction of the GAFSA training center with the assistanceof CERPHOS and Heurtey, and should not pose any problem because of the similarityto the surface installationsat the other GAFSA mines. - 15 -
4.17 The more critical areas come with the staffing of the senior adminis- trative posts and underground supe!rvisors.Of the required 9 top engineering positionsonly 2 people (supervis:ingthe trial longwall)have so far been assigned posts. At least 2 more of these positionswill have to be filled with senior engineerswith considerableexperience. They may be obtained from the Company's other operations,or as foreign experts on contract. The remaining engineers can be more junior and the Company should have no problem recruitingthem. A very vital element will be the undergroundforemen. Here, people with extensivelongwall experienceare needed. These are not avail- able in Tunisia and will have to be recruited abroad. GAFSA has made tenta- tive arrangementsto second these people from the French State Mining Company on a contract basis. GAFSA has agreed to prepare and implementa staffing plan for its Sehib facilitiesin consultationwith the Bank.
D. Implementationand ProductionSchedules
4.18 Preliminaryengineering and design has been completedand detailed engineeringstarted in Mid-1974. At the same time, Heurtey has begun the preparationof the tender documents for internationalcompetitive bidding; these were previouslydone in 1970 and merely require some relativelyminor modifications. It is expected that advertisingfor the projectwill be completedby September/October1974, prequalificationcompleted by December 1974, invitationsto bid issued in January/February1975 and bid evaluation for the major equipmentpackages take place between March and July 1975. Civil works for the surface plant are to be started in the second quarter of 1975, and the plant is scheduled for commissioningin the third quarter of 1977 (Annex 4-3).
..19 Undergrounddevelopment is underway and preparationof the first panel is expected to be completedby late 1974. As mentioned in para 4.04 the first (trial) longwallwill be installed in early 1975 with the other three starting up at 2-3 month intervalsbetween mid-1976 and early 1977. With this schedule, the build-up of the project's phosphaterock production is expected to be as follows:
Build-up of Output of the Sehib Mine
1974 1975 1976 1977 1978 1979 1980
Mine Output ('000 tons BTS) 340 760 950 1,540 1,790 1,960 2,020
This schedule reflects low productivityof the longwall faces in the early years of operation,primarily due to lack of operator experience,building up to full capacity only in 1980. This is a conservativebut realistic target. - 16 -
V. SEHIB PROJECT - CAPITAL COST, FINANCING PLAN ANI PROCUREMENT
A. Capital Cost
5.01 Capital costs for the developmentof the Sehib mine during the period 1974-1977are detailed in Annex 5-1 and are summarizedbelow.
Sehib - Summary of Capital Cost (1974-1977)
-----DT million------US$ million---- Local Foreign Total Local Foreign Total %
Civil Construction 2.70 - 2.70 6.02 - 6.02 9.4 Mine Development .74 .24 0.98 1.65 0.54 2.19 3.4 Equipment 1.26 12.00 13.26 2.80 26.76 29.56 46.0 Infrastructure 0.74 1.08 1.82 1.65 2.40 4.05 6.8 Transport & Erection 0.78 0.66 1.44 1.74 1.51 3.25 5.1 Duties & Taxes 0.32 - 0.32 0.70 - 0.70 1.1 Preoperating& Engineering Expenses 0.40 0.87 1.27 0.89 1.93 2.82 4.3
Sub-Total 6.93 14.86 21.79 15.45 32.14 48.59 75.6
Physical Contingencies 0.54 1.32 1.86 1.20 2.94 4.14 6.5 Price Escalation 0.86 2.32 3.18 1.92 5.16 7.08 11.1
TOTAL FIXED ASSETS - 8.33 18.50 26.83 18.57 41.24 59.81 93.2
IncrementalWorking Capital 0.61 0.25 0.86 1.36 .55 1.91 3.0
PROJECT COST -- 8.94 18.75 27.69 19.93 41.79 61.72 96.2 Interest during Construction - 1.09 1.09 - 2.52 2.52 3.8
TOTAL FINANCING REQUIRED 8.94 19.84 28.78 19.93 44.31 64.24 100.0
5.02 The project scope and design were reviewed in September 1973 and capital cost estimatesobtained from suppliers'quotations received between December 1973 and February 1974 for orders for late 1974, including the prevailingadministrative fee of 2.5% on the c.i.f. value (Tunisianborder) of importedequipment. These prices reflect the effect of the large increases in energy cost and include a 40% price escalationover mid 1973 prices. Civil works are based on inquiries among potentialTunisian contractorsobtained in February 1974 and include a 20% price escalationover mid 1973 prices. - 17 -
The transportand erection costs reflectHeurtey's recent experiencein Tunisia, while the estimate for pre-operatingcost and engineeringexpenses is based on the price quotationof February 1974 for the consultingcontract with Heurtey. Physical contingenciesof 10% of the civil works, mine development, equipment and infrastructurecost have been added. Further, the cost estimate includes annual price increasescf 10% per annum for locally procured items and civil works and 13% per annum for imported goods and services. Since project preparationand engineeriigare well advanced the physical contingency should be adequate to cover errors and changes in project design. Also GAFSA has already placed orders for one longwallmachine, the single most expensive piece of equipment,and intends to place orders for most of the remaining undergroundequipment and surfaco installationsby late 1974/early1975. Consequently,the price escalationsare expected to be adequate,and the overall estimatesconsidered realistic.
B. Working Capital
5.03 Incrementalworking capital for Sehib during the 1974-1977period is estimatedat DT 858,000 (US$1.9million) in 1976 prices as detailed, together with the assumptionsmade, in Annex 5-2.
C. FinancingPlan
5.04 Financing required for the project during 1974-1977of DT 28.77 million (US$64.24million) including incrementalworking capital and interest during constructionis expected to be covered as follows:
Sehib - Financing Plan
DT million US$ million
GAFSA Internal Cash Generation 18.8 41.2 64%
IBRD loan 10.0 23.0 36%
28.8 64.2 100%
GAFSA itself would thus make a major contributionto the financing of the project, with the Bank loan to cover the remainderof the financingrequire- ments, or about 52% of the project's estimatedforeign exchange expenditures of US$44.3 million. It is proposed that the Bank loan be for 15 years in- cluding 3 years grace, at an assumed interest rate of 7-1/4% plus a 1-3/4% guarantee fee to be paid to the Government.
5.05 The financialprojections for the GAPSA Company as a whole indicate that the Company ought to have enough retained earnings to cover any reason- able project cost overrun and also have a sound liquidityposition at the end of construction. Nevertheless,the Governmenthas agreed to provide any additionalfunds needed - whether local or foreign and irrespectiveof whether - 18 - the need for such funds is caused by a cost overrun or shortfallin internal cash generation--to:(a) complete the Sehib project; and (b) meet the require- ments of the ModernizationProgram (paras.7.05, 8.04).
D. Procurementand Disbursement
5.06 All equipmentand machinery--independentof whether or not fi- nanced by the Bank--willbe procured through internationalcompetitive tender followingBank guidelines. Domestic supplierswill be given a preferenceof 15% or the applicablecustoms duty, whichever is the lower, in bid evaluation. An exception is the longwall face equipmentand the drifting equipment,which however will not be financedby the Bank. Because of the special nature of the long#all equipmentand the need to standardize and adapt it to Sehib's specificmine conditions,it will be purchased from Westfalia (Germany)--themanufacturer supplying identicalequipment for the trial phase. The drifting equipmentwill be supplied by Austria for purposes of standardization. A detailed list of the items, all to be imported, to be financed by the Bank loan is given in Annex 5-3 and summarizedbelow:
Allocation of the Bank Loan
US$ million Mine and Surface Conveyor System 6.0
Washing Plant, Dryers, Stockpileand MiscellaneousSurface Facilities 14.5
Unallocated 2.5
23.0
All civil works will be carried out by Tunisian contractorsselected after local bidding.
5.07 The Bank will disburse against 100% c.i.f. value. The disbursement schedule for the Bank loan is shown in Annex 5-4 and summarizedbelow. It is based on estimates of order placements,payment schedulesand expected delivery times for equipmentand spare parts in line with the construction schedule.
1975 1976 1977 (US$ Million)
EstimatedDisbursements 6.8 15.2 1.0 - 19 -
VI. FINANCIAL ANALYSIS OF THE SEHIB PROJECT
A. Revenue and Production Costs Projections
6.01 Detailed assumptionsfor the financialprojections and operating costs are contained in Annexes 6-1 and 6-2 and the assumed build-up of re- venues is shown in Annex 6-3. The forecasts are based on a realisticperiod between start-up of the mine and surface facilities in mid 1977 and full productionof 2 million tons (BTS) in 1980, taking into account possible initial training and operationalproblems 1/. The Sehib output of 65/68 BPL ore, one of the highest of GAFSA's operations,is likely to be exported at an estimated average export price f.o.b. Sfax in 1976/77 of US$25/ton of washed rock (in 1977 prices), equivalent to US$24.1/tonafter the customary 3.5% rebates. This price has been escalated at 3% per annum for the rest of the forecast period (up to 1985).
6.02 Operating costs have been estimatedby Heurtey on the basis of projectedmaterial, fuel, energy, consumableand spare parts consumption as well as personnel requirementsfor each production unit of the Sehib facilities. All costs have been taken at late 1973 rates and adjusted for actual and possible further changes prior to start-up and general price escalationvarying between 3% and 12% per year as shown in Annex 6-1. These costs are considered realistic.
6.03 Unit operating costs at full production,excluding depreciation,in- terest and finished products' transport and handling are detailed in Annex 6-2 and summarizedbelow at late 1973 and 1976 prices.
Sehib - Unit Operating Costs at Full Production (in DT/ton of washed ore)
At late 1973 At 1976 Prices % Prices %
Wages ard Salaries 0.32 19 0.35 16 Materials and Supplies 0.71 43 0.88 40 Electricity 0.22 13 0.24 11 Fuel 0.16 9 0.44 20 AdministrativeExpenses 0.25 16 0.29 13
1.66 100 2.20 100
1/ Production and revenues of Sehib before the start-up of the washing plant are included in the projectionsfor the M'Dilla mine center (Annexes 6-1, 6-2). - 20 -
The operating costs (at 1973 prices) are low compared to those of the exist- ing mines which average DT 2.9/ton of washed ore (Annex 2-6), but are still 5-10% above other comparableNorth African producers,primarily on account of Lhe lower grade of ore, the higher weight recovery losses and less favor- able geologicalconditions. About half of the above operating costs are fixed.
6.04 Traisport and handling costs to Sfax of DT 1.0-1.2/tonhave been assumed for the 1974-75 period. Thereafterlikely tariff increaseshave been taken into account in the financialanalysis as detailed in Annex 6-1.
B. FinancialProjections
6.05 Detailed income and cash flow forecastsover the first nine years of operation are shown in Annexes 6-3 and 6-4 aid summarizedbelow:
Sehib - Selected Operating and Income Indicators (DT million)
1977 1978 1979 1980 1982 1985
Sales Volume /1 (million tons) 1.2 1.4 1.6 1.6 1.6 1.6 Net Revenues 12.7 15.4 17.8 19.1 21.0 24.3 Operating Profit 4.9 7.1 8.7 9.5 11.4 13.4 % of Revenues 38 46 50 52 54 55 Net Income before Taxes 4.0 6.3 8.0 8.9 10.9 13.0 Net Income after Taxes 4.0 6.3 8.0 8.9 6.5 7.8 % of Revenues 31 41 45 47 31 32 Cash Generation 7.1 9.4 11.1 12.1 9.0 10.6 Unit Cost fob Sfax (DT/ton) 7.0 6.4 6.3 6.4 6.5 7.1
/1 Washed ore.
6.06 The projectionsshow profits from the beginning of operations. The Company benefits from an exemption of all major taxes until 1981, so that net income after taxes decreases significantlythereafter. However, Sehib's net cash generationafter taxes will be sufficientto cover debt service, the substantial investmentfor replacementand extending the workings to the adjacent Djellabiadeposit expected in 1981, and additionallywill provide GAFSA with an annual cash surplus of DT 4-8 million during the 1977-84 period. A 1977 unit cost f.o.b. Sfax of DT 7.0/ton for the Sehib ore is projected; it is expected to decrease to DT 6.3 when close to full productionis reached in 1979. This compares favorablywith the average cost of DT 7.4 per ton and DT 7.9 per ton, in 1977 and 1979, respectively,which is estimated for GAFSA's existing mines after modernization(Annex 8-1). - 21 -
C. FinancialRate of Return
6.07 The project provides an incrementalfinancial rate of return of 25% at real prices. The assumptionsfor the calculationand the incrementalcost/ benefit streams are given in Annex 6-5. An analysishas been carried out to determine the sensitivityof the project's rate of return to various changes in basic assumptions. The results of the sensitivityanalysis are shown in Annex 6-5 and summarizedbelow.
Sehib - SensitivityTests on Financ:ialRate of Return
Case Description Rate of Return/%
1 Base Case 25 2 6 Month ConstructionDelay 23 3 Capital Cost Increase 20% 22 4 Operating Cost Increase 20% 24 5 Sales Revenue Decrease 10% 22 6 Sales Revenue Decrease 40% 7 7 Combinationof 2, 3, 4 and 5 12
Although the project continues to show high financialreturns under possible operating cost increasesof 10-20%, a drop of sales revenues by 40%, i.e., a drop of phosphateprices to US$20/ton in 1977 prices (or US$15/ton in 1974 prices) would make the developmentof the Sehib mine a marginal project. However, in the light of the market analysis (paras. 2.05-8) such an event is improbable. It would in fact mean that if such a price drop were to occur in, say, 1977 it would be equivalentto a decline in real terms of about 1%Z vis-a-vis the price levels of the late 1960's that clearly did not give the phosphate industry worldwide enough of a return to expand capacity in line with market demand. Even under extreme adverse conditions of increased constructionand operating costs, constructiondelays and a small decline in prices, the financial return still remains at an acceptablelevel. Therefore the financialrisk of the Sehib project is acceptable.
D. Break-Even Point Analyses
6.08 The profit break-even point decreases slightly from an annual pro- duction of 625,000 tons of washed ore in 1978, the second year after start-up, to 600,000 tons (37% of full production) in 1980. The cash break-even point is even lower, since the Sehib project will be 64% equity financed; it starts with 366,000 tons in 1978 and declines further thereafter.
E. lMajorRisks
6.09 The risks of the project fall under three categories: market, pro- duction, and infrastructure. - 22 -
6.10 There is little risk in finding a market for Sehib's output; how- ever, a major element of uncertaintylies in the future price of phosphate rock. As noted previously the currently high prices are not expected to continue and there is a general consensuswithin the industry that, as supply more adequatelybalances demand again in 1977, prices will drop. The new price level and subsequentdevelopments are difficult to determine at this time. This report assumes a level in 1977 of 30% below early 1974 prices and subsequentannual increases of 3%. It is possible, although not likely, that a more severe drop of 40% or even 50% below early 1974 prices could occur, which then would seriously affect the Company's financialposition. Under those conditionsthe Company would be able to service its debt satis- factorily but might be forced to postpone modernizationand replacementof some operating assets.
6.11 Extensive testing has been conducted on the mining method. Never- theless it is in the nature of such undergroundmining operations that it cannot be said with certainty that the capacity mine productionof 2 million tons/yearcan in fact be obtained on a sustainedbasis, although in terms of the theoreticalcapacity of the equipment it should be possible to even exceed this extractionrate by a significantmargin. Roof control and labor training problems could lead to loss of productionand it is for these reasons that only a slow productionbuild-up has been assumed. Furthermore,although no major technicalproblems are expected in the beneficiationplant, the assumed recovery rate of 80% may not be achieved. Nevertheless,a 75% rate would be the minimum attainableeven under adverse conditionsand this would still not seriously affect earnings.
6.12 As to infrastructure,adequate steps have been taken for the pro- vision of water. Power also is not expected to present a problem. On the other hand, it has taken the Governmentand SNCFT a long time to prepare an investmentproposal and obtain financing for the needed railway infrastructure. Failure to observe the required timetable for the start execution of the works could create a bottleneck during the early years of operation of Sehib, especiallywith the projected increasedproduction from the modernizationof the existing mines.
VII. MODERNIZATIONPROGRAM
A. Objectives
7.01 A detailed description of the modernizationprogram and its objec- tives is given in Annex 7-1. The overall purpose of this program is to im- prove the efficiencyand safety, lower the costs and increase the profitability of GAFSA's phosphate productionwhich has suffered from lack of investment for the past 20 years. The program was started in 1971, but on an ad-hoc basis, and it was only in 1973 at the request of the Bank that a fully in- tegrated investmentplan was prepared and documented. The major components of the program are: . - 23 -
(a) Mines: improvingworking conditions,ventilation and safety; mechanizationof extractionand haulage operations;and expand- ing capacity;
(b) TreatmentPlants: process modificationand equipmentreplacement to increase efficiencyand capacity of the washing and air clas- sificationplants;
(c) Infrastructure: replacingand upgradingthe railway rolling stock and track; upgradingworkshops and materials handling facilities;and
(d) Social Facilities: expansion and upgrading of housing.
The modernizationprogram will also provide for productionincreases of about 20% to an output of close to 3.9 million tons of saleableproduct by 1977 from GAFSA's mines other than Sehib.
B. Implementation
7.02 A more detailed descriptionof how the program will be implemented is contained in Annex 7-2. It was started in 1971 when SOFREMINES(France) was entrustedwith the responsibilityof studying and improvingthe under- ground working conditions. In 1973 SOGREAH (France)was engaged to review and overhaul the washing plants. However, the first major step to coordinate the modernizationprogram came with the reorganizationof the Production Departmentin mid-1973 incorporatinga planning function,instituting planning responsibilitiesat the productionunit level and setting up a new unit to identify projects, coordinateplanning, conduct studies and implementthe different projects of the modernizationprogram. This was followedby the preparationof a preliminarymodernization plan and course of action. While this unit has shown drive and enthusiasmin pursuing its new functions,its staffing is still incompleteand additionalqualified and experiencedper- sonnel are required if the program is to proceed on schedule. GAESA has agreed to take the necessary steps to strengthenits staff for planning and implementingthe modernizationprogram.
C. Capital Cost and Financing Plan
7.03 Annex 7-3 gives detailed capital cost estimatesfor the moderniza- tion program which are summarizedbelow: - 24 -
ModernizationProgram - Summaryof Capital Cost (1974-78)
Local Foreign Total Local Foreign Total x PDTmillion ------US$ million----
Civil Construction 3.3 - 3.3 7.4 - 7.4 14 Equipment 1.1 7.0 8.1 2.4 15.6 18.0 35 General Services 0.2 2.0 2.2 0.4 4.5 4.9 9
Sub-Total 4.6 9.0 13.6 10.2 20.1 30.3 58
Transportand Erection 1.0 0.7 1.7 2.2 1.6 3.8 7 Duties and Taxes 0.3 - 0.3 0.7 _ 0.7 2
Sub-Total 5.9 9.7 15.6 13.1 21.7 34.8 67
Physical Contingencies 0.5 1.1 1.6 1.1 2.5 3.6 7 Price Escalation 1.6 3.8 5.4 3.5 8.5 12.0 24
TOTAL FIXED ASSETS 8.0 14.6 22.6 17.7 32.7 50.4 98
Interestduring construction - 0.4 0.4 - 0.9 0.9 2
TOTAL FINANCINGREQUIRED 8.0 15.0 23.0 17.7 33.6 51.3 100
7.04 The capital costs have been estimatedby GAFSA's ProductionDepart- ment in cooperation with SOFREMINES,SOGREAH and CERPHOS, French consulting firms which have been providing continuing technical assistance to GAFSA, and are based on 1973 quotations of potential suppliersand recent experience with civil constructioncosts in southern Tunisia. Adequate price escalation in line with that for the Sehib project and physical contingencieshave been applied to account for: (i) the early stage of preparationof some components of the program, and (ii) the long implementationschedule which foresees placing orders for some of the equipmentonly in 1976. The program costs will be subject to change as further studiesmay dictate some alterationsin its content.
7.05 The estimatedDT 23.0 million (US$51.3)financing required for ex- ecution of the program (1974-78)is to be coveredby: (i) a DT 5.0 million equity increase provided by the Government; (ii) DT 3.0 million loan from the Kuwait Fund; and (iii) DT 15.0 million from GAFSA's internal cash generation. As has been pointed out earlier the modernizationprogram is essentialfor GAFSA to become a financiallyviable phosphateproducer again, particularly when rock prices decrease from theic presentlyhigh level. GAFSA has under- taken to carry out the program. The Government has agreed to make any addi- tional funds required available to GAFSA to complete the program. - 25 -
D. Benefits
7.06 The effects of the program, the resulting productionbuild-up in the different mines affected (Redeyef,Metlaoui, M'Dilla and M'Rata) and operating costs are discussed in Annex 7-4. The major benefits of the pro- gram are: (a) mine output will increaseby about 20%; (b) beneficiationplant recoverieswill increase 2-4%; (c) with improved efficiencyof mining and processing,operating costs will drop by 10-30% in the mines, and 10-20% in the plants; (d) interplant transportand communicationbottlenecks will be eliminated;(e) working conditions and safety practiceswill be improved; and (f) skill levels will be upgraded and labor productivityraised throughout the operations. Because of the preliminarystage of some of the program aspects, exact quantificationof the benefits is difficult. Nevertheless, tentative estimatesof the net effect of the program are included in the income and cash flow projectionsof the Company as a whole as presented in the following chapter.
VIII. FINANCIAL ANALYSIS OF THE GAFSA COMPANY
A. Future Profitability
8.01 Detailed projectionsof financial statementsare shown in Annexes 8-1, 8-2 and 8-3 and selected items are summarizedbelow: - 26 -
The GAFSA Company - Selected Financial Indicators/1 (DT million - current prices)
Sept. 1973 1974 1975 1976 1977 1979 1982 1985 (Actual)
Sales Volume (million tons) Sehib Mine - - - 0.14 1.23 1.57 1.60 1.60 Existing Mines 3.12 3.44 4.00 4.25 4.06 4.06 4.06 4.06
Total 3.12 3.44 4.00 4.39 5.29 5.63 5.66 5.66
Net Sales 14.6 57.6 60.1 53.3 54.4 60.2 68.0 73.2 OperatingProfit (3.5) 32.9 31.1 21.9 15.8 16.8 19.2 17.3 % of Revenues - 57 52 41 29 28 28 24
Net Income after taxes (3.6) 34.1 32.2 22.7 17.5 18.0 20.4 19.8 Surplus Cash - 26.2 18.1 1.9 10.8 15.8 12.3 9.9 Unit cost f.o.b. Sfax (DT/ton) - 7.3 7.4 7.5 7.4 7.9 8.8 9.9 Current Ratio 0.7 1.6 1.8 2.1 2.2 2.1 2.1 2.0 Debt/Equity Ratio 85:15 10:90 10:90 15:85 13:87 9:91 5:95 3:97
/1 The projectionsdo not take into account the costs and benefits of the Kef Eschfair mine project which is scheduled to be implementedduring 1977-1980.
8.02 For the first time since 1966 GAFSA is expected to realize in 1974 a positive net income estimated at DT 34.1 million. It will decline to DT 17.5 million in 1977 due to the projected drop in phosphate prices and increasedcurrent operating costs, in particularrailroad tariffs. The cost reducing effect of the modernizationprogram is illustratedby the constant unit cost fob Sfax of DT 7.4 per ton for the 1975-77 period despite infla- tionary cost increases of 4-8% per annum. The importanceof the contribution of the existing mines to GAFSA's operationscan be judged from the fact that at full productionof Sehib, these mines will still contributeabout 71% of sales although less than 60% of operating profit.
8.03 GAFSA's capital position remains satisfactorythroughout the life of the loan, because of the Government'snew equity contributionin 1974 and high annual earnings projections. At present, the net working capital level with a current ratio of 0.7 is unsatisfactory,and GAFSA's accounts payable are excessive,accounting for as much as its annual operating costs. This situation should be rectifiedwith the high cash generationof 1974. To maintain GAFSA's sound financialstructure, agreementwas reached that the Company would at all times maintain a debt-equityratio not exceeding 55:45 and a current ratio of not less than 1.3:1. GAFSA also agreed not to distribute dividends,other than a dividend provided for by its statutes, unless full provision has first been made for the investmentneeds of both Sehib and the modernizationprogram in addition to meeting the current ratio test. - 27 -
8.04 In addition,GAFSA agreed to consult the Bank before making invest- ments in any year exceeding: (i) US$5 million (other than for Sehib, the modernizationprogram and normal renewals),until the Sehib project and the modernizationprogram have been completed;and (ii) US$15 million thereafter.
B. Debt Service Coverage and Auditing,
8.05 Long-termdebt service coverage is good and illustratesthe Company's relative independencefrom outside financingsources after completionof the Sehib project and the modernizatiknprogram. Consistentlyduring the life of the loan net cash generation after corporate taxes is expected to cover at least three times and up to 10 times GAFSA's interest and principalrepayment obligations.
8.06 GAFSA's annual financialstatements have been audited by the Cabinet Bouricha,a well-known Tunisian auditing firm. Auditing methods followed correspondto Bank requirements. The Company will continue to be auditedby the Cabinet Bouricha or another independentauditing firm acceptable to the Bank.
IX. ECONOIIC JUSTIFICATIONS
A. Economic Rate of Return of the Project
9.01 The economic rate of return of the project is 28%. Even with a 20% increase in capital and operating costs and a 6 month delay in project & art-up the return declines only to 16%. In the unlikely event tiat prices in 1977 drop 40% below those assumed (i.e., to US$15/ton f.o.b. Sfax in 1977 prices) or alternativelyproduction level drops by 40%, the rate of return will fall to 8-9%. The detailed return calculationsand sensitivitytests are given in Annex 9-1.
B. Foreign Exchange Effect
9.02 The net export earnings from Sehib reach DT 17-19 million (US$39- 43 million) per year after the project attains full capacity in 1980. The total foreign exchange component of the capital costs will thereforebe recoveredwithin two years of project start-up, and thereafter the annual net foreign exchange earningswill equal this component. In addition, the modernizationprogram will allow increased sales from the existing operations, to the extent of DT 12-15 million (US$27-34million) per year, almost equal to the total foreign exchange cost of the program. While much of this increase will not be exported as rock but will be processed locally into phosphoric acid and fertilizerfor export as higher value products, it is evident that the modernizationprogram too will have a major impact on export earnings (Annex 9-2). - 28 -
C. Impact on Employmentand Working Conditions
9.04 The working and safety conditions in the Sehib mine will be a vast improvementover the conditionsin the existing mines. This has been reflec- ted during the trials by a major drop in the rate of absenteeismof face workers from 20-35% in the other mines to about 2% in Sehib. Similarly the modernizationprogram is expected to have a major impact on underground working conditions. The work environment,including transportfacilities to and from work, will improve, underground temperaturesand humidity will be lowered, work will be less arduous, and the atmosphere improved by reducing dust and gaseous content. Both jrojects require the upgrading of skill levels from laborers through to the undergroundand plant supervisorsand an impor- tant part of them is the improvementin safety conditionsand awareness. The Sehib project will create employment for 650 people but the modernization program will necessitatereducing the existing labor force after natural attritionby 860 people (Annex 2-7) over the 1974-79 period. On a short-term basis, the Company plans to effect the reduction by early retirement,re- training and temporaryemployment until opening of the Kef Eschfair mine. With a view to the long-term, however, because of the lack of apparent employ- ment opportunitieswithin the region, the Government has undertaken to carrv out a regional developmentstudy to seek means for rational employmentof new job seekers.
X. AGREEMENTS
10.01 The Loan Agreement and GuaranteeAgreement will record the following major agreements and assurances:
(a) GAFSA will submit to the Bank annually for its review an updated five-year investmentprogram for all its operations including the modernizationprogram (para. 2.04);
(b) GAFSA will by July 1, 1975 submit to the Bank for its review a plan of action to improve its project and corporatefinan- cial analysis methods and thereafterimplement such plan of action (paras. 2.04 and 7.02);
(c) GAFSA will submit annually to the Bank for its comments,and thereafter implement,a plan of action setting out detailed measures to be taken in respect of man-power reduction; a detailed training program; and a program for the expansion of social and health facilities (para. 2.10); - 29 -
(d) the Governmentwill by July 1, 1975 grant to GAFSA a concessionfor water supply for Sehib (para. 4.08);
(e) SNCFT will carry out the railway works required in accordancewith a timetable to be agreed with the Bank by December 31, 1974 (para. 4.09);
(f) the Governmentwill provide funds promptly as needed to ensure completionof the railway works (para. 4.09);
(g) engineeringconsultants acceptable to the Bank will be employed to supervise constructionof the Sehib project (para. 4.13);
(h) GAFSA will, in consultationwith the Bank, prepare and implement a staffing plan for the Sehib facilities (paras.4.14 and 4.17);
(i) the Governmentwill provide any funds necessary to complete the Sehib project (para. 5.05);
(j) GAFSA will strengthenits staff for planning and implementing the ModernizationProgram (para. 7.02);
(k) the Governmentwill provide any funds necessary to complete the Modernizationprogram (paras. 5.05 and 7.05);
(1) GAFSA will maintain a current ratio of 1.3 and will not dis- tribute dividendsunless full provision is first made for the investmentneeds of both Sehib and the ModernizationProgram (para. 8.03);
(m) GAFSA will not incur debt if this would raise the Company's debt/equity ratio above 55:45 (para. 8.03);
(n) GAFSA will consult the Bank before making investmentsin any year exceeding: (i) US$5 million (other than for Sehib, the modernizationprogram and normal renewals),until the Sehib project and the modernizationprogram have been completed;and (ii) US$15 million thereafter (para. 8.04);
(o) GAFSA will have its accounts audited by an independentauditor acceptable to the Bank (para. 8.06); and
(p) the Government will carry out a regional development study of the Gafsa area (para. 9.04).
10.02 With these agreements and assurances the project forms a suitable basis for a loan to GAFSA equivalent to US$23 million, for 15 years including a 3 year grace period. Industrial Projects Department July 12, 1974
IBRD 10003R MARCH 19T4 TUNISIA- GAFSA PHOSPHATEPROJECT MINING,POWER
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