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 It may not be published nor mayit be quotedas ropresentingthe Bank'sviews.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.